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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to ____
Commission file number 1-12986
INTERLOTT TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 31-1297916
(State of incorporation) (I.R.S. Employer
Identification Number)
10830 Millington Court, Cincinnati, Ohio 45242
(Address of principal executive offices, including zip code)
(513) 792-7000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- --------------------------------- -----------------------------------------
Common Stock, $.01 Par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-----
The aggregate market value of the Registrant's outstanding Common Stock held by
non-affiliates of the Registrant on March 25, 1998 was $10,312,500. There were
3,210,000 shares of Common Stock outstanding as of March 25, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1997 Annual Report are incorporated by reference in
Part II hereof. Portions of the Registrant's Proxy Statement for the 1998 Annual
Meeting of Stockholders to be held on May 7, 1998 are incorporated by reference
in Part III hereof.
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INTERLOTT TECHNOLOGIES, INC.
Annual Report On Form 10-K
For the Fiscal Year Ended December 31, 1997
Table of Contents
<TABLE>
<CAPTION>
Item Page
Number Number
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<S> <C> <C>
PART I
1. Business......................................................................................... 3
2. Properties....................................................................................... 23
3. Legal Proceedings................................................................................ 23
4. Submission of Matters to a Vote of Security Holders.............................................. 24
4(A). Executive Officers of the Registrant............................................................. 24
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 25
6. Selected Financial Data.......................................................................... 25
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 26
7(A). Quantitative and Qualitative Disclosure About Market Risk ....................................... 26
8. Financial Statements and Supplementary Data...................................................... 26
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 26
PART III
10. Directors and Executive Officers of the Registrant............................................... 26
11. Executive Compensation........................................................................... 27
12. Security Ownership of Certain Beneficial Owners and Management................................... 27
13. Certain Relationships and Related Transactions................................................... 27
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................. 27
SIGNATURES......................................................... 30
INDEX OF FINANCIAL STATEMENT SCHEDULES............................. S-1
INDEX OF EXHIBITS.................................................. E-1
</TABLE>
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PART I
ITEM 1. BUSINESS
General
In addition to historical information, this report and the Company's 1997 Annual
Report include forward looking statements and information based on management's
beliefs, plans, expectations and assumptions and on currently available
information. The words "expect," "anticipate," "intend," "plan," "believe,"
"seek," "estimate" and similar expressions used in this report and the 1997
Annual Report are intended to identify forward looking statements, although this
report and the 1997 Annual Report also contains other forward looking
statements. The forward looking statements in this report are not guarantees of
future performance and involve certain risks, uncertainties and assumptions,
many of which are beyond the Company's control. Such factors include
particularly, but are not limited to, the level of market acceptance of ITVMs
and PCDMs generally as well as the demand for the Company's ITVMs and PCDMs. As
a result of the various risks, uncertainties and assumptions underlying the
forward looking statements in this report and the 1997 Annual Report, the
Company's future actions, financial condition, results of operations and
stockholder values could differ materially from any forward looking statement
made by the Company. All written or oral forward looking statements
attributable to the Company are expressly qualified in their entirety by the
cautionary statements that explain or qualify the foward looking statements.
Interlott Technologies, Inc. (the "Company") is engaged primarily in the design,
manufacture, sale, lease and service of instant winner lottery ticket vending
machines ("ITVMs"). ITVMs are used by public lotteries operated by states and
foreign public entities to dispense instant winner lottery tickets primarily in
retail locations such as supermarkets and convenience stores. An instant lottery
commonly is played by players scratching off a latex coating from a pre-printed
ticket or tearing pull-tabs from a pre-printed ticket to determine the outcome
of the game. The Company's ITVMs dispense instant lottery tickets without the
assistance of an employee of the lottery instant ticket retailer or agent,
thereby permitting the retailer or agent to sell tickets without disrupting the
normal duties of its employees.
The Company's ITVMs dispense scratch-off instant lottery tickets using a
dispensing process that incorporates the Company's patented "burster
technology." The Company believes that this burster technology is superior to
any other ITVM scratch-off dispensing technology on the market and considers it
to be a key to its marketing efforts and the ITVM procurement decisions of the
various lotteries. The Company is unaware of any competitor that incorporates a
substantially equivalent or superior scratch-off dispensing mechanism in its
ITVMs. To dispense pull-tab instant lottery tickets, the Company has developed
an ITVM that incorporates a patented dispensing technology which is different
than the burster technology but that is also believed by the Company to be
superior to any other currently available pull-tab dispensing technology. ITVMs
that dispense pull-tab tickets are sometimes referred to herein as "pull tab
vending machines" or "PTVMs." The term "ITVM" includes both scratch-off vending
machines and PTVMs unless the context indicates otherwise.
As of December 31, 1997, the Company had sold or leased 12,414 ITVMs under
agreements with 22 different state lotteries and six foreign jurisdictions, or
their licensees or contractors. The Company was awarded four of the five
domestic ITVM contracts that were awarded in 1996 and five of the six contracts
that were awarded in 1997. Additionally, lotteries in eight states and eight
foreign jurisdictions currently are testing the Company's ITVMs or have
requested the Company to provide ITVMs for testing.
The Company continually seeks to enhance its existing product lines and develop
new products. The Company has developed a prepaid phone card dispensing machine
("PCDM") that enables providers of long distance telephone service to dispense
prepaid telephone calling cards in retail locations without the assistance of an
employee of the retailer. The dispensing process used in the Company's PCDM
incorporates the same patented technology used in the Company's PTVM, and the
Company believes that this dispensing technology is superior to any other PCDM
dispensing technology on the market. Sales of the Company's PCDMs began in the
latter part of 1995, and as of December 31, 1997, the Company had sold or leased
a total of 695 PCDMs. PCDM revenues in 1996 and 1997 represented 2% and 2.5% of
total revenues, respectively.
The Company was incorporated on February 20, 1990 under the laws of Ohio and was
reincorporated under the laws of Delaware on March 18, 1994. In April 1994, the
Company completed an initial public offering of Common Stock, and the Company's
Common Stock now trades on the American Stock Exchange under the symbol "ILI."
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Industry Overview
ITVMS
The popularity and success of lotteries has increased worldwide in
recent years, and the popularity of instant lotteries has increased at a rate
that is greater than that of lotteries generally. Currently 37 states and the
District of Columbia operate lotteries as compared to 29 states as of June 30,
1989, and 37 states and the District of Columbia currently operate instant
lotteries as compared to 28 states as of June 30, 1989. The Company believes
that factors contributing to the rapid growth in the popularity and success of
instant ticket games, which now comprise 45% of total lottery sales in the
United States as compared to 24% in 1989, include more sophisticated marketing
techniques, the introduction of new state instant ticket lotteries, a broader
appeal among lottery consumers and increased technological advances in the
distribution of instant tickets.
ITVMs were first deployed to serve the instant lottery market in 1991,
and the market for ITVMs has grown rapidly in subsequent years. The number of
installed ITVMs has increased from approximately 900 in 2 states in 1991 to
approximately 24,100 in 31 states, the District of Columbia and eight foreign
jurisdictions as of December 31, 1997. Three states and four foreign
jurisdictions currently are testing or preparing to test ITVMs in the field, and
the Company believes that several other states and foreign jurisdictions are
considering the use of ITVMs. Additionally, because states that utilize ITVMs
typically introduce the ITVMs into the instant ticket distribution system in
stages (preferring to test retail reception to a limited initial deployment of
ITVMs before fully committing funds to the deployment of a significantly larger
number of ITVMs), the Company believes that states currently utilizing ITVMs
represent a growing market for the Company's ITVMs.
Although the Company believes that sales of instant lottery tickets and
the use of ITVMs will continue to increase, any decline in the popularity of
instant lottery games or in the market acceptance of ITVMs, as well as any other
event that results in a decrease in leasing or purchasing ITVMs by lotteries,
would have a material adverse effect on the Company. The Company's ability to
generate additional revenues and earnings will depend upon the continuation of
existing leases of ITVMs, orders for additional ITVMs by the lotteries that
currently utilize ITVMs, the implementation of programs that use ITVMs to
distribute tickets in the six additional states as well as foreign jurisdictions
that have instant ticket lotteries, and the approval of lotteries by the
remaining states and foreign jurisdictions. Future orders of ITVMs by lotteries
will depend in large part on continued market acceptance of ITVMs, of which
there can be no assurance. Accordingly, there can be no assurance that any
significant number of jurisdictions will implement or expand lottery programs
that utilize ITVMs.
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PCDMS
Like instant lottery tickets, the use of prepaid telephone calling
cards also has grown significantly in the past few years. Prepaid telephone
calling cards enable callers to make long distance calls at rates that typically
are lower than the rates ordinarily charged for credit card or collect long
distance telephone calls. This factor, together with the usage control that
results from the pre-established value of the card, is perceived as a distinct
value of the card and is believed to be responsible for the popularity of
prepaid telephone calling cards.
The use of PCDMs as a method of distribution of prepaid telephone
calling cards has paralleled the market acceptance of the card. PCDMs are now
being used successfully to sell prepaid telephone calling cards in truck stops,
military bases, convenience stores, airports, and numerous other types of retail
locations. The Company believes that the sale of prepaid long distance calling
cards and the use of PCDMs are in the very early stages of market development in
the United States and anticipates the continued development of the market.
However, any decline in the popularity of prepaid telephone calling cards or in
the market acceptance of PCDMs would limit the Company's ability to generate
revenues and earnings from its PCDMs. There can be no assurance that the Company
will be able to develop successfully the market for its PCDMs.
Business Strategy
The Company's business strategy involves the following elements:
- Expansion of the Company's ITVM into new domestic and
international markets. Lotteries are becoming increasingly
aware of the success of ITVMs in increasing instant ticket
revenues, and many domestic and international jurisdictions
are currently testing and evaluating ITVMs. In the United
States, the Company currently is testing or preparing for
testing of ITVMs for lotteries in Idaho, Indiana and West
Virginia. Internationally, the Company currently is testing or
preparing for testing of ITVMs for lotteries in Costa Rica,
France, Quebec and Switzerland. The Company plans to expand
further into new and existing lottery jurisdictions by
expanding its marketing efforts and lowering the cost
associated with the procurement of its ITVMs. The Company also
intends to continue to aggressively market its ITVM products
and services to its existing customers to encourage expanded
use of ITVMs in existing distribution systems.
- PCDM market penetration. The Company has made only an initial
and limited penetration of the PCDM market to date, but the
Company is actively seeking to become a significant presence
in the PCDM market in the United States. The Company believes
that its ITVM has a reputation for quality, performance and
reliability, and the Company intends to capitalize on this
reputation in marketing its PCDM to providers of long distance
telephone services. The Company also intends to demonstrate to
such providers the advantages which its PCDM affords to the
retailers that sell prepaid telephone calling cards, which in
turn should lead to increased sales of prepaid calling cards
by such providers. To this end, the Company is working closely
with several providers of long distance telephone service to
expand the use of PCDMs in the distribution of prepaid
telephone calling cards. Four such providers are currently
testing or preparing to test the Company's PCDM. The Company
also intends to aggressively market its PCDM products to its
existing customers and to expand its marketing efforts to both
the providers and resellers of long distance services, as well
as to market its PDCMs to retailers of prepaid telephone
cards.
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- Continued product innovation and technological advances.
Management believes that the Company's products are more
technologically advanced than the products of its competitors
and that the technological superiority of the Company's ITVM
is a principal reason for its success to date. To further
expand the Company's market opportunities, the Company
continually seeks to enhance its existing products and develop
complementary products that offer the superior operating
performance of its ITVMs and PCDMs. For example, the Company
has developed a compact, no-frills PCDM to address the needs
of those customers who do not desire a full-service machine.
The Company also has enhanced its software to interact with
currency acceptors of foreign currency and display messages in
foreign languages. Finally, the Company has improved its
on-line communications system.
- Manufacturing efficiencies. The Company continually seeks to
enhance its manufacturing operations to improve its gross
margins and overall profitability. The Company believes that
through design refinements and continued higher production
volumes, it will continue to achieve lower manufacturing costs
by receiving more favorable terms from vendors.
- Develop dispensing devices for other markets. The Company
intends to expand its existing product lines by developing new
dispensing devices for markets other than lotteries. For
example, the Company is developing and testing a device which
dispenses stored value "smart" cards for possible use by the
financial services industry to the extent that consumer use of
smart cards develops in the future.
Products
The ITVM
In 1987, the Company's former President and current Vice Chairman,
Edmund F. Turek, developed the technology for what the Company believes to be
the first automated ITVM. This burster dispensing technology is a key component
of the Company's ITVM for scratch-off instant lottery tickets and is protected
by a patent that the Company acquired from Mr. Turek's family-owned corporation.
See "Patents, Trademarks, and Copyrights" below.
The Company's ITVMs automatically dispense instant lottery tickets upon
payment from the user. Unlike the products of some of the Company's competitors,
the burster technology in the Company's ITVMs automatically separates one
scratch-off instant ticket from another along the perforations between tickets
to help prevent tearing of the tickets or scarring of the latex on the tickets.
The Company's burster technology, which the Company believes to be the most
technologically advanced scratch-off dispensing system in the ITVM industry,
also enables the Company's ITVM to dispense and account for virtually any known
type of scratch-off instant lottery ticket, allowing the use of a wide range of
sizes, shapes, paper stocks or perforations, without the intervention of a
lottery retailer or agent. This feature allows lotteries to purchase virtually
any known type of scratch-off instant ticket from their instant ticket
manufacturer without having to request from the manufacturer major alterations
in the ticket perforations. For example, the Company's ITVM, unlike the products
of the Company's competitors, can dispense recyclable scratch-off tickets
without tearing or scarring the tickets. The Company believes that lotteries
will increasingly require the use of recyclable tickets in their ITVMs. This
feature also is particularly beneficial to foreign lottery jurisdictions that
may use non-standard sizes, shapes and paper stocks. In addition, the ITVM for
scratch-off tickets is faster than manual sales of scratch-off tickets as the
ITVM's entire dispensing process is completed in less than 1.5 seconds once the
ticket selector button has been pushed.
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The Company's ITVMs for scratch-off tickets have a proven record of
reliability. Based on an analysis of actual field service data regarding the
dispensing of approximately 55 million scratch-off instant tickets by the
Company's ITVMs during a 48 week period, the Company determined that the Mean
Time Between Failure of these ITVMs is approximately 3.78 years and that the
Mean Time to Repair is approximately 15 minutes. The data indicated that these
ITVMs dispense an average of 392,800 scratch-off instant tickets between
failures. The Company believes that it has developed an ITVM that has proven to
be reliable and that requires less maintenance than the products of its
competitors. The Company believes that the reliability of its ITVM and the lower
maintenance requirements distinguish the Company's ITVM for scratch-off tickets
from those of its competitors.
See "Competition" below.
The Company's ITVMs for scratch-off tickets have the capacity to
dispense tickets from one to twelve different bins. Because each bin can
dispense tickets of different sizes, paper stocks and price levels, lotteries
can sell scratch-off tickets for up to twelve different instant winner games
with a single ITVM. The ITVM can accommodate up to 12,000 tickets in the
twelve-game unit and can dispense all tickets in the bin without manual
intervention. When all of the tickets in a bin have been dispensed, tickets can
be easily reloaded by an employee of the retailer or agent. This is in contrast
to the products of the Company's competitors, which the Company believes require
the retailer or other agent to tape the last few tickets in each bin to the next
pack of tickets provided by the retailer or other agent. The ability of the
Company's ITVM to dispense every ticket in each bin not only facilitates the
ticket reloading process but also enhances the accuracy of the inventory and
accounting functions.
All of the Company's ITVMs accept bills in $1, $2, $5, $10 and $20
denominations and, in some applications, accept foreign currency. The size of
the Company's ITVMs for scratch-off tickets varies from 69 inches tall, 28
inches wide and 24 inches deep for a twelve-game unit to 19.75 inches tall, 15.5
inches wide and 20.5 inches deep for a countertop unit.
All models are anchored to the floor or counter. The ITVMs typically
are custom designed to meet any color and other appearance specifications that a
lottery may desire. All models are Underwriters Laboratory ("UL(R)") listed and
Federal Communications Commission ("FCC") approved, which ensures that the ITVM
has passed nationally recognized safety standards and stringent requirements
designed to preclude machine damage and personal injury due to non-approved
components, devices, installation or application. The Company was the first
manufacturer of ITVMs to obtain UL(R) listing and FCC approval for its ITVMs.
Each ITVM is standardized with an information display that provides the
player with easy-to-read instructions on how to use the machine and gives the
lottery retailer or agent the ability to read sales reports without printing the
report. The ITVM can be ordered with a "BETA BRITE(R)" multi-color LED sign
mounted on the top of the ITVM which is intended to increase attention to the
machine and thereby increase ticket sales. The BETA BRITE(R) sign is programmed
at the Company's manufacturing facility and can display any message the lottery
may desire. The BETA BRITE(R) also may be programmed by the retailer or agent or
can be programmed from the lottery headquarters by utilizing the Company's
optional modem communications system. The Company currently is utilizing the
BETA BRITE(R) on ITVMs installed throughout Arizona, Colorado, Florida, Georgia,
Idaho, Indiana, New Hampshire, New Mexico and Rhode Island.
For security and durability purposes, each of the Company's ITVM
cabinets is manufactured with 16 gauge and 11 gauge steel. The surface of the
ITVM is coated with durable and fade resistant paints. The display windows are
fabricated from a flame resistant, high impact polycarbonate sheet material.
This material is shatter resistant, and to date to the knowledge of the Company,
none of the Company's installed ITVMs has had a polycarbonate window broken or
shattered. Additionally, to the knowledge of the Company, the cabinets have not
had any fading, marring, scratching, chipping or rusting. All of the
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Company's ITVMs are manufactured with high security locks which are coded to
prevent unauthorized duplication, and each ITVM is keyed separately, except for
ITVMs deployed in Maryland where the Lottery desired a master key system. For
further security, each of the Company's bill acceptor units must be accessed
with a key unique to the particular acceptor unit.
All of the Company's ITVMs for scratch-off tickets utilize copyrighted
software that can supply up to eleven different reports for accounting and
inventory purposes. These reports can provide to the lottery and its retailers
or agents a complete summary of daily sales, weekly sales, total sales, sales by
game, current status of the machine, inventory of the product currently in the
ITVM, the last three transactions of the ITVM and other types of information.
The software system allows for a simple diagnostic test to identify any
malfunction of the ITVM. The diagnostic mode communicates various information
such as ticket size setting, status of electronics, status of each game and
other information concerning the system software. The Company's ITVM software
system may be programmed to the detail specifications of the specific lottery.
In 1995, the Company completed the development of a common electronic
system to be incorporated in all of the Company's equipment, providing
efficiency in development of common software as well as cost efficiencies in
acquiring electronic components.
To dispense pull-tab instant lottery tickets, the Company's PTVM uses
the same technology, design and specifications as are incorporated in the
Company's PCDM. The Company's PCDM is described in detail below.
THE PCDM
Like the Company's ITVM for scratch-off tickets, the key component of
the Company's PCDM is the dispensing technology. The Company has the exclusive
right to the use of this patented dispensing technology, which it acquired from
a company owned by Kazmier J. Kasper, a director of the Company. See "Item 13.
Certain Relationships and Related Transactions."
Similar to the Company's ITVM for scratch-off tickets, the Company's
PCDM automatically dispenses prepaid telephone calling cards upon payment from
the user. Unlike the products of some of the Company's competitors, the
dispenser technology in the Company's PCDMs automatically pulls one prepaid
telephone calling card from the bottom of the stack of cards without the jamming
that is associated with other dispensing processes. The Company's dispensing
technology, which the Company believes to be the most technologically advanced
dispensing system in the PCDM industry, also enables the Company's PCDM to
dispense and account for virtually any known thickness of calling card without
the intervention of the retailer. In addition, the PCDM is faster than manual
sales of prepaid telephone calling cards as the PCDM's entire dispensing process
is completed in less than 3 seconds once the selector button has been pushed.
The Company's PCDMs have the capacity to dispense cards from two to six
different bins. The PCDM can accommodate up to 2,400 cards in the six bin unit
and can dispense all prepaid telephone calling cards in the bin without manual
intervention. When all of the cards in a bin have been dispensed, cards easily
can be reloaded by an employee of the retailer. The ability of the Company's
PCDM to dispense every card in each bin not only facilitates the card reloading
process but also enhances the accuracy of the inventory and accounting
functions.
All of the Company's PCDMs accept bills in $1, $2, $5, $10 and $20
denominations and, in some applications, accept foreign currency. The size of
the Company's PCDMs varies from 66 inches tall, 26 inches wide and 19 inches
deep for a 6-bin dispenser unit to 22 inches tall, 14 inches wide and 10 inches
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deep for a countertop unit. All models are anchored to the floor or counter,
except that the two bin model may be mounted on an optional pedestal. All models
are UL(R) listed and FCC approved. Each PCDM is standardized with an information
display that provides the user with easy-to-read instructions on how to use the
machine and gives the retailer the ability to read sales reports without
printing the report.
For security and durability purposes, each of the Company's PCDM
cabinets is manufactured with 16 gauge and 11 gauge steel. The surface of the
PCDM is coated with durable and fade resistant paints. The display windows are
fabricated from a flame resistant, high impact polycarbonate sheet material. To
the knowledge of the Company, the cabinets have not had any fading, marring,
scratching, chipping or rusting. All of the Company's PCDMs are manufactured
with high security locks that are coded to prevent unauthorized duplication, and
each PCDM is keyed separately. For further security, each of the Company's bill
acceptor units must be accessed with a key unique to the particular acceptor
unit.
All of the Company's PCDMs utilize copyrighted software that can supply
up to nine different reports for accounting and inventory purposes. These
reports can provide retailers a complete summary of daily sales, weekly sales,
total sales, sales by bin, current status of the machine, inventory of the
product currently in the PCDM, the last three transactions of the PCDM and other
types of information. The software system allows for a simple diagnostic test to
identify any malfunction of the PCDM.
Marketing and Sales
ITVMS
The Company markets its ITVMs to both domestic and international
lotteries and their licensees or prime contractors. The Company attends lottery
and gaming trade shows, maintains personal contact with lottery officials
through its sales force of five employees and advertises in trade publications
to increase its presence in the lottery industry.
The focus of the Company's marketing strategy is on the superior
performance and reliability of its ITVMs, as well as continued competitive
pricing. Information developed through actual field use and product field tests
demonstrates that a significant factor in increasing instant ticket sales is the
reliability of the ITVM. Increased maintenance visits impair the ITVM "uptime,"
which in turn reduce ticket sales. The Company believes that its ITVMs, based on
actual field performance and product testing, are the most reliable and
technologically superior in the industry. Management believes that actual field
demonstrations comparing the Company's ITVM with those of its competitors is the
Company's best method of marketing. The Company has been awarded contracts to
provide ITVMs for nine of the last 11 state lotteries that have requested bid
proposals and five of the six domestic ITVM contracts that were awarded in 1997.
The Company's ITVMs require preventive maintenance only twice a year.
The ITVM "downtime" resulting from this semi-annual preventive maintenance
averages approximately 20 minutes. On the other hand, the Company's principal
competitor, On-Point Technology Systems, Inc. ("On-Point"), for example,
recommends that preventive maintenance be performed on its ITVMs once a month.
All of the Company's existing contracts which require the Company to provide
preventive maintenance on its ITVMs provide for semi-annual preventive
maintenance.
To further increase the likelihood of receiving ITVM orders from
lotteries, the Company intends to offer additional and more flexible financing
alternatives to the lotteries. The Company believes that many state lotteries,
due to budget considerations, cannot afford the high capital costs required to
purchase ITVMs. However, if the Company can provide attractive variations of its
standard and percentage lease financing options for the lotteries, the lotteries
can more affordably deploy ITVMs. The Company believes that these types of
financing alternatives will prove to be increasingly popular.
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The Company's ability to generate additional revenues and earnings from
deployments of its ITVMs will depend upon continued market acceptance of ITVMs.
The Company intends to expand its marketing presence with the retail grocers
associations, convenience store operators associations, retail stores at both
the corporate and store levels, and other types of corporate or association
member entities to familiarize these groups with the Company's ITVM. These
retailers are the lotteries' distribution system for all scratch-off and
pull-tab lottery tickets, and management believes that increased exposure to
lottery retailers will be a significant factor in the Company's ability to
expand the market for its lottery products. As the distribution system for all
lottery products, lottery retailers may advise the lotteries with regard to such
matters as new lottery products, improved marketing strategy and improved
product distribution. In many lottery jurisdictions, retailer advisory boards
provide input to the lotteries on various issues affecting the lottery. While
the lotteries must abide by the established procurement laws of their respective
jurisdictions in selecting an ITVM manufacturer, the lotteries may solicit the
opinions of the lottery retailers concerning the ITVMs under consideration by
the lottery because the retailers are directly affected by the selection
decision. The Company believes that retailers' opinions may be a significant
factor in a customer's decision regarding which manufacturer's ITVM to deploy in
its instant ticket distribution system.
The Company will continue to participate in cooperative service
arrangements with other lottery suppliers as the lotteries increasingly rely on
these types of arrangements. These arrangements allow lotteries to reduce their
operating costs while increasing lottery revenues. Additionally, these
arrangements allow for a more efficient means for contracting products and
services. The Company's ITVMs are deployed in Georgia and West Virginia pursuant
to cooperative service arrangements between the Company and Scientific Games,
Inc., which is a primary contractor for the Georgia and West Virginia Lotteries,
and were deployed in New Jersey pursuant to a purchase agreement between the
Company and GTECH Corporation, which is the on-line supplier to the New Jersey
Lottery. Under these arrangements, the Company supplies ITVMs to Scientific
Games, Inc. for use in Georgia and West Virginia and supply ITVMs to GTECH
Corporation for use in New Jersey. The Company is responsible for installing,
servicing and maintaining the ITVMs in Georgia but is not required to provide
preventive maintenance or servicing for the ITVMs supplied for use in West
Virginia and New Jersey. Management believes that the deployment of the
Company's ITVMs in Georgia, West Virginia and New Jersey resulted in part from
the Company's cooperative service arrangements with Scientific Games, Inc. and
GTECH Corporation and that such cooperative service arrangements will prove to
be increasingly attractive to both domestic and international lotteries in the
future.
PCDMS
The Company has been marketing its PCDMs since late 1995 and to date
has employed a marketing strategy that is similar to the strategy that it has
used successfully to market its ITVMs. The focus of the Company's marketing
strategy is on the superior performance and reliability of its PCDMs as well as
on competitive pricing. The Company markets its PCDMs to both domestic and
international providers of long distance telephone service. The Company attends
telecommunications trade shows, maintains personal contact with
telecommunications companies through its sales force of two employees and
advertises in trade publications to increase its presence in the
telecommunications industry.
The Company's ability to generate additional revenues and earnings from
the deployment of its PCDMs will depend upon continued market acceptance of
PCDMs. The Company intends to expand its marketing presence with the retail
grocers associations, convenience store operators associations, retail stores at
both the corporate and store levels, and other types of corporate or association
member entities to familiarize these groups with the Company's PCDM. These
retailers are the distribution system for prepaid telephone calling cards, and
management believes that increased exposure to PCDM retailers will be a
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<PAGE> 12
significant factor in the Company's ability to expand the market for its PCDM
products. To further increase the likelihood of receiving PCDM orders from
sellers of prepaid telephone calling cards, the Company intends to offer
additional and more flexible financing alternatives.
Contracts
ITVMS
General. The Company's lottery contracts typically are entered into
following a competitive bidding process. Once a lottery has determined to
utilize ITVMs in its distribution network, the lottery usually will request
proposals from ITVM providers. Lotteries within the United States typically
follow a procedure whereby the lottery issues a Request for Proposal ("RFP") to
determine the contract award for installation of ITVMs. The RFP generally seeks
information concerning each company's products, cost of the products or services
to be provided, quality of management, experience in the industry and other
factors that the lottery may deem material to a contract award. The RFP also may
specify product criteria and other qualifications or conditions that must be
satisfied, such as UL(R) listing and FCC approval of the ITVM and in-state or
minority supplier requirements. Generally, an evaluation committee comprised of
key lottery staff members appraise the proposals based on an established point
system, and the contract is awarded to the company with the most points.
The nature of the RFP process varies from jurisdiction to jurisdiction.
The length of time that a lottery might take to award a contract can be
difficult to predict, and delays in the contract award process are frequent and
unpredictable. Additionally, the point system or the weighing of the various
points varies from jurisdiction to jurisdiction, which often makes it difficult
for the bidding companies to determine the relative importance of the various
factors to be considered by the evaluation committee. In certain cases the
contract award is challenged by the losing bidder, which can result in
protracted legal proceedings for all parties.
The Company offers lotteries a choice of three types of contracts: (i)
Standard Lease Agreements; (ii) Sales Agreements; and (iii) Percentage Lease
Agreements. ITVM lease revenues as a percentage of the Company's total revenues
were 47.3%, 63.3% and 67.3% in 1995, 1996 and 1997, respectively.
The Standard Lease Agreements provide that the lottery will pay a fixed
monthly price per machine for a specific period of time. These agreements
typically specify a number of years for the initial contract term with
additional option periods at the election of the lottery. The lottery may award
a separate service contract for the maintenance of the machines, incorporate the
cost of service into the established monthly lease price or perform machine
service themselves. The lotteries also may select a similar type of arrangement
as described above to procure the necessary supply of replacement parts for the
ITVMs.
As noted above, the lease payments provided for in the typical Standard
Lease Agreement are fixed in most cases during the term of the agreement, and
these agreements typically permit the lottery to order additional ITVMs at any
time during the lease term. If the lottery orders a significant number of ITVMs
near the end of the lease term, the Company would have to incur significant
manufacturing costs but may receive lease payments for only a relatively short
period of time through the remainder of the lease term. However, the Company
believes that it is more likely that the lottery would elect to extend the lease
term rather than return the ITVMs after only a short period of use.
Additionally, the Company is unable to pass along to the lottery any increase in
its manufacturing and service costs during the term of the typical Standard
Lease Agreement. In the case of a Standard Lease Agreement which provides for a
short initial term (such as one year) with an option for the lottery to extend
the lease term for additional one-year periods, if the lottery does not extend
the initial lease term, the Company might incur a loss on the manufacture of the
ITVMs leased to the lottery under the initial lease agreement.
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<PAGE> 13
Sales Agreements typically provide that the lottery will buy a certain
number of ITVMs over a specific period of time. Under the Sales Agreement, the
lottery generally pays for the ITVMs when delivered and has complete ownership
of the ITVMs. The lottery usually will contract with a vendor to maintain and
service the ITVMs, although some lotteries provide the maintenance and service
with their own service staffs. The lottery generally will enter into a parts
replacement contract with the vendor for replacement parts.
All types of the ITVM contracts typically contain stringent
installation, performance and maintenance requirements. Failure to perform the
contract requirements may result in significant liquidated damages or contract
termination. The Company has various contract performance standards to which it
must adhere. To date, the Company has satisfied all of its contractual
installation, performance and maintenance requirements and therefore has not had
any contracts terminated by any lotteries.
The Company's lottery contracts also typically require the Company to
indemnify the lottery, its officers and retailers for any liabilities arising
from the operation of the ITVMs or any services provided by the Company. The
Company typically is required to obtain liability insurance, fidelity insurance
and performance and litigation bonds to protect itself and the lottery from
potential liability. No such indemnification or insurance claims have ever been
asserted against the Company.
The Company's contracts generally have an initial term of one to five
years with options to extend the duration of the contracts for periods of
between one and five years. The option extensions generally are at the lottery's
discretion and are exercised under the same terms and conditions as the original
contract. As of December 31, 1997, the initial term of nine of the Company's
contracts had expired, and in each case, the lottery exercised its option to
extend the term. The Company's contracts with lotteries, like most other types
of state contracts, typically permit a lottery to terminate the contract upon 30
days written notice for any reason. Upon termination of a lease contract, the
lottery would return the leased equipment to the Company. It is uncertain,
however, whether the Company would be able to re-lease or sell any ITVMs that
may be returned to the Company following the expiration or cancellation of a
lease. To date, no lottery has terminated its contract with the Company. Upon
termination of a contract, the lottery may award new contracts through a
competitive bid process.
As noted above, the Company believes that 31 states and the District of
Columbia utilize ITVMs in some manner as part of their instant ticket
distribution system. The Company's ITVMs have been deployed in 22 of those
states as well as five foreign jurisdictions, and three additional states and
four foreign jurisdictions currently are testing the Company's ITVMs or have
requested that the Company provide ITVMs for testing. Set forth below is certain
information regarding the Company's contract status and the number of Company
ITVMs sold or leased in each of these jurisdictions as of December 31, 1997. All
of the Company's existing contracts, except for the contract with the Maryland
Lottery, have provisions that allow the lotteries to order additional ITVMs in
the future.
<TABLE>
<CAPTION>
Type of No. of ITVMS
State Status of Contract Award Contract Sold or Leased
- ----- ------------------------ -------- --------------
<S> <C> <C> <C>
Arizona Awarded in October 1993; Standard Lease/ 222
renewed through June 1998, Maintenance
with a six month renewal
at the option of the lottery
Colorado Awarded in June 1996; renewed Standard Lease/ 487
</TABLE>
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<PAGE> 14
<TABLE>
<S> <C> <C> <C>
through June 2000 Maintenance
District of Columbia Awarded December 1997; Standard Lease 10
expires December 1998
Florida Awarded September 1996 Standard Lease 500
expires June 1998 with two
one-year renewals at the option
of the lottery
Georgia (1) Awarded in May 1993; Standard Lease/ 502
renewed through May 2003 Maintenance
Idaho Purchases made by purchase Sales 185
orders in May and August 1995,
August 1996 and August 1997
Indiana Awarded in July 1995; Standard Lease 690
expires in October 1997, with
two one-year renewal at the
option of the lottery; first renewal
option has been exercised
Iowa Awarded in August 1994; Standard Lease/ 531
expires in December 1998, Maintenance
with two one-year renewals
at the option of the lottery
Kansas Awarded May 1997; expires Standard Lease 50
May 2000 with five one-year
renewals at the option of
the lottery
Kentucky Awarded in June 1991; Sales 912
renewed through February
1998, with two subsequent
one-year extensions at
the option of the lottery
Maine Awarded in July 1995; expires Standard Lease/ 200
in July 1998, with two one-year Maintenance
extensions at the
lottery's option
Maryland Awarded in September 1993; Sales/Maintenance 301
expires in September 1998;
additional contract awarded
that expires June 2003
Minnesota Awarded in December 1996; Standard Lease/ 10
expires three years from Maintenance
</TABLE>
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<PAGE> 15
<TABLE>
<S> <C> <C> <C>
acceptance of each ITVM,
with two one-year renewals at
the option of the lottery
New Hampshire Awarded in August 1994; Standard Lease 250
renewed through June 2000
New Jersey (2) Purchase order received in Sales 200
December 1996
New Mexico Awarded May 1997; expires Standard Lease 200
May 2002, with five one-year
renewals at the option of the
lottery
New York (3) Awards of purchase contracts Sales/ 2,554
made in May 1992 and January Maintenance/
January 1993; deployment Standard Lease
completed in June 1992 and
February 1993, respectively;
initial one-year purchase and
three-year maintenance contract
entered into in March 1995, with
a one-year renewal option by the
lottery; initial five-year lease
contract awarded in January
1997 for up to 1,000 units,
with a one-year renewal option
as mutually agreed
Ohio Awarded in January Standard Lease/ 1,726
1992; extended in June 1993 and Maintenance
June 1995; expired in June 1997;
new contract awarded April 1997;
extended through June 1999, with
two two-year extensions at the
option of the lottery
Oregon Purchase orders issued in May Sales 520
1995 and January 1997
Rhode Island (4) Awarded in June 1994; Standard Lease/ 170
renewed through June 1998, Maintenance
with one one-year renewal
at the option of the lottery
Texas Awarded in January 1995; Standard Lease/ 1,424
renewed through February Maintenance
1999, with a one-year renewal
at the option of the lottery
</TABLE>
-14-
<PAGE> 16
<TABLE>
<S> <C> <C> <C>
West Virginia (3) Awarded in May 1992; Sales 55
initial deployment completed in
June 1992; additional units
deployed in April 1994
Barcelona, Spain (5) Awarded in February 1994; Standard Lease 11
additional units deployed in
October 1995
Brazil Purchase order received in Sales 4
October 1996
Iceland Purchase orders issued in Sales 31
January and October 1997
Israel Purchase order issued in Sales 40
July 1997
Western Australia Purchase order received in Sales 8
May 1995 ------
Total Sold or Leased 11,793
</TABLE>
- --------------------
(1) The Company's contract is for the lease of ITVMs to Scientific Games,
Inc., the primary contractor for the Georgia Lottery. In September
1994, the Company and Scientific Games, Inc. agreed to convert the
contract from a Percentage Lease Agreement to a Standard Lease
Agreement.
(2) The Company's contract is for the sale of 200 ITVMs to GTECH
Corporation for use by the New Jersey Lottery, which were delivered in
1997.
(3) The Company's contract was for the sale of ITVMs to Scientific Games,
Inc. for use by the New York and West Virginia Lotteries. The Company
is not the sole manufacturer of ITVMs for the New York Lottery. The
Company entered into a sales/maintenance contract in March 1995
directly with the New York Lottery, including maintenance of ITVMs
previously provided. The West Virginia Lottery also currently is
conducting field tests on the Company's PTVM.
(4) Effective October 1, 1995, the Company and the Rhode Island Lottery
agreed to convert the contract from a Percentage Lease Agreement to a
Standard Lease Agreement.
(5) The Company's contract is with Entitat Autonomas, which provides
lottery services to various Spanish lotteries.
--------------
Substantially all of the Company's revenues are derived from its
contracts with a limited number of state lottery authorities or their
representatives for the lease, sale or service of ITVMs. During 1994 and 1995,
contracts with the Ohio Lottery, the New York Lottery and Scientific Games, Inc.
(the primary contractor for the Georgia Lottery) accounted for 83.3% and 72.9%,
respectively, of the Company's revenues, and during 1996, contracts with the New
York Lottery, the Ohio Lottery and the Texas Lottery
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<PAGE> 17
accounted for 67.6% of the Company's revenues. During 1997, no single contract
accounted for more than 20% of the Company's revenues.
PCDMS
Unlike the competitive bidding process applicable to the lotteries'
awards of ITVM contracts, purchasers of PCDMs typically do not issue RFPs or
otherwise mandate a competitive bidding process. Information regarding the
Company and its PCDM, and information regarding a telephone company's product
needs and criteria and other qualifications or conditions that must be
satisfied, typically is exchanged on a less formal basis in sales presentations
and subsequent meetings between representatives of the Company and
representatives of the telephone company. Due to the often complex and highly
structured organization of some telephone companies, the length of time that a
company might take to decide whether to select the Company's PCDM can be
difficult to predict and, similar to the lotteries' contract award process,
delays in PCDM selection decisions can be frequent and unpredictable.
Unlike the Company's experience in the ITVM industry in which a lottery
typically enters into a lease or sales contract with the successful bidder, most
purchasers of the Company's PCDMs to date have ordered PCDMs solely through
purchase orders rather than contracts, although several customers entered into a
lease agreement for PCDMs. Like contracts with the lotteries, however, these
purchase orders may contain stringent installation, performance and service
requirements. As of December 31, 1997, the Company had sold 658 PCDMs and had 37
PCDMs under lease.
Manufacturing Process
The manufacturing process consists of purchasing component parts,
assembling the ITVMs and PCDMs and then testing the final products. Generally,
the Company's machines use components which are built to Company specifications
and are available from multiple sources. The Company has a strict policy of
product procurement that emphasizes quality, satisfactory inventory of raw
materials, and cost. The Company has a primary vendor and secondary suppliers
for most of its components, and the Company typically has been able to obtain
adequate supplies of required components on a timely basis from its suppliers
or, when necessary, from alternative sources of supply. However, certain
important components, such as components of the Company's ITVM burster and PCDM
dispensing mechanisms and its bill acceptor mechanism, currently are purchased
from a single source. The purchase of components from single-source suppliers
subjects the Company to certain risks, including the continued availability of
suppliers, price increases, potential quality assurance problems and lead time
considerations. Because other suppliers exist that can duplicate these
components should the Company elect or be forced to use a different supplier,
the Company does not believe that any such change in suppliers would result in
the termination of a production contract. However, the Company could experience
a delay of 30 to 60 days in the production of machines should it elect or be
forced to use other suppliers for these components. Such a delay adversely could
affect the Company's ability to make timely deliveries of machines and to obtain
new contracts. The single-source supplier of certain components of the Company's
burster mechanism, PTVM dispensing mechanism and PCDM dispensing mechanism is
Algonquin Industries, Inc. Kazmier J. Kasper, a director of the Company, is the
President and owner of Algonquin Industries. See "Item 13. Certain Relationships
and Related Transactions."
The Company assembles the components utilizing a core group of
manufacturing employees and, on an as needed basis, contracting with employment
agencies for appropriately trained manufacturing labor. The use of temporary,
contract manufacturing labor gives the Company the flexibility to meet the
production schedules required by large orders.
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<PAGE> 18
The Company's Quality Control Department has responsibility for
measuring quality levels and overseeing appropriate corrective action in all
areas of the business. This includes supplier performance, in-house
manufacturing and field performance. The Quality Control Department is
responsible for measuring part, operator and assembly quality performance at all
stages of the production process, stopping the assembly line or stopping
shipments if necessary to assure that quality standards are met. The Quality
Control Department also is responsible for measuring vendor product quality and
taking appropriate actions, including rejection and disposition of substandard
material. The Quality Control Department also is responsible for vendor quality
system evaluation and vendor disqualification if necessary to ensure superior
product quality.
The Company's manufacturing facility is located in Cincinnati, Ohio and
has the capacity to produce and provide inventory for approximately 250 machines
per week. The Company believes that this facility is suitable and adequate for
its current and anticipated manufacturing needs at the present time.
Research And New Product Development
Since its inception, the Company has developed many of the
technological advancements used in the ITVM industry. The Company believes that
its ITVM was the first to obtain UL(R) listing and FCC approval. The Company
also believes that it was the first to (i) manufacture and deliver ITVMs under a
lease contract agreement, (ii) offer a "random play" push button selector option
through which the ITVM rather than the player randomly selects the game to be
played and (iii) receive patent protection for the technology used in its ITVM
burster dispensing mechanism.
The Company currently employs three engineers and two technicians for
research and development but currently subcontracts the majority of its research
and development projects to independent contractors to reduce costs. The
Company's copyrighted software is upgraded continually to meet the different
demands of the various lotteries. In many instances, after an ITVM feature has
been developed for a specific lottery, it is incorporated into the product line
as a standard feature of the machine. The Company retains proprietary rights in
all such developments.
The Company's ITVM may be purchased with an optional modem
communication system which allows lotteries to gather sales data from each ITVM
on an hourly, daily, weekly or monthly basis, depending on the needs of the
customer. This data includes the daily or weekly sales totals and breakdown of
these totals by game, including the total tickets sold. The Company has
developed software to enable each ITVM equipped with the system to communicate
to the host system automatically if there is a malfunction with the ITVM, thus
greatly enhancing the Company's ability to provide prompt service for the ITVM.
The Company has developed software to enable an ITVM equipped with the system to
communicate with the host computer if a ticket bin is empty, which allows the
lottery to call the retailer or agent and inform them of the situation.
Additionally, by utilizing this system with the optional BETA BRITE(R) message
display, the lottery can change the message display on any or all of its ITVMs.
The Company has incorporated its patented pull-tab lottery ticket
dispensing mechanism into a combination ITVM which also contains the Company's
patented burster mechanism. The Company currently has six combination ITVMs
under lease to the Iowa Lottery. The pull-tab dispensing mechanism also has been
incorporated into the Company's PCDMs, and the Company believes that the ability
of the mechanism to dispense a variety of thicknesses of prepaid telephone
calling cards significantly differentiates the Company's PCDMs from those of its
competitors.
In an effort to expand its product lines into new markets, the Company
is developing and testing a device which dispenses stored value "smart cards."
This product may be marketed in the future to the financial services industry to
the extent that consumer use of smart cards develops in the future.
-17-
<PAGE> 19
Research and development expenditures were $145,310, $665,449 and
$545,039 for 1995, 1996, and 1997, respectively. The Company expects that its
research and development efforts for the foreseeable future will be conducted by
both Company employees and independent contractors.
Customer Service and Product Repair
Typically, the Company or its subcontractors install and service the
machines purchased or leased by the Company's customers. The Company also
provides maintenance of the ITVMs leased or sold to certain lotteries.
Additionally, the Company provides part replacement, repair and technical
services for various customers that have leased or purchased the Company's ITVMs
and PCDMs. Service is provided to the retailers by the Company's staff of
trained service technicians and dispatchers after a customer's representative
informs the Company of the problem via the Company's toll-free telephone service
line. The service dispatcher either resolves the matter over the telephone or
immediately dispatches one of the Company's service technicians to the machine's
location. The modular design and manufacturing standards of the Company's
machines enable the Company to conduct any necessary repairs and maintenance
quickly and efficiently. The Company estimates that meantime for all repairs is
less than 15 minutes after the Company's service technician arrives at the
machine's location.
The Company believes, based on actual data collected from various
customers that have installed the Company's ITVMs and PCDMs, that the Company's
machines have experienced substantially fewer mechanical problems and machine
failures than machines currently sold by other industry participants. The
Company also believes that the superior performance of its ITVMs and PCDMs will
assist in the increased acceptance of these products among lotteries and
providers of long distance telephone service.
The Company generally grants a 360-day repair or replacement warranty
covering all parts and components of its machines. However, the warranty period
may vary depending on the bid specifications. In certain circumstances the
Company may warrant the product for the complete life of the contract. In these
instances the contract generally will be a lease with the Company retaining
ownership of the machine. Provisions for estimated warranty costs are recorded
at the time of sale and are periodically adjusted to reflect actual experience.
See Note 1 of Notes to Financial Statements contained in the Company's 1997
Annual Report, which is filed as Exhibit 13 to this report.
Patents, Trademarks and Copyrights
The Company currently has four U.S. patents and five pending patent
application relating to its ITVMs and has filed disclosure documents with the
United States Patent and Trademark Office ("PTO"), all as described below.
The Company owns by assignment U.S. Patent No. 4,982,337 entitled
"System for Distributing Lottery Tickets." The assignment is recorded at the
PTO. This patent is for the Company's burster technology, which is the key
component of the Company's ITVM. The patent expires no later than December 31,
2007. The Company believes this patent is essential to the Company's business.
Additionally, the Company has developed an improvement to the burster technology
disclosed in this patent and has U.S. and international patent applications
pending on these improvements.
The Company has developed a new system designed specifically for retail
sale of lottery tickets and other items at the retail point of sale. The system
utilizes the Company's burster technology and includes other modular and
distributed components that can be adapted for use at the point of sale. The
Company has a pending patent application at the PTO on this technology.
-18-
<PAGE> 20
The Company was issued U.S. Patent No. 5,330,185 on July 19, 1994 for
the "Method and Apparatus for Random Play of Lottery Games." This patent expires
no later than March 30, 2013 and has been assigned to the Company, and the
assignment is recorded at the PTO. The technology disclosed in this patent
allows a lottery game user to select a random play button as opposed to
selecting a specific game of a multiple game ITVM. Once the random play button
is pressed, the ITVM selects the game to be played based upon a random number
generation algorithm, thereby adding another element of chance to the lottery
ticket purchase. The Company believes that this patent gives the Company a
competitive advantage over other manufacturers that do not have ITVMs with
similar capabilities. The patent for the random play feature is considered
important but not essential to the Company's business.
The Company was issued U.S. Patent No. 5,472,247 on December 5, 1995,
for a "Multi-Point High Security Locking Mechanism for Lottery Machines." This
patent expires no later than July 18, 2014 and has been assigned to the Company,
and the assignment is recorded at the PTO. Because of the threat of break-in and
theft of cash and lottery tickets contained within the ITVMs, the machines must
be secured against unauthorized break-in or theft. The technology disclosed in
this patent is a locking mechanism which provides a number of resistance points,
all of which function to impede the unauthorized opening of a door located on
the chassis of the Company's ITVM. The patent for the multi-point, high security
locking mechanism is considered important but not essential to the Company's
business.
The Company was issued U.S. Design Patent No. 376,621 on December 17,
1996 for the Company's double-game countertop ITVM. This patent expires no later
than December 17, 2010 and has been assigned to the Company, and the assignment
is recorded at the PTO. The Company believes that this patent is important but
not essential to the Company's business.
The Company has submitted an Information Disclosure Document to the PTO
for the purpose of identifying technology relating to its "Software Release
Control and Data Security for ITVMs." The technology allows secure remote
transmissions of software updates and operations data between the ITVM and the
Company or the respective lottery. The invention also includes a key management
system to control the keys used to encrypt data sent to and decrypt the data
received at the ITVM. The Disclosure Document was filed on April 28, 1993.
The dispensing technology used in the Company's PTVM and PCDM was
developed by Algonquin Industries, Inc. and is licensed to the Company pursuant
to an exclusive license agreement with Algonquin Industries. Algonquin
Industries has been granted U.S. Patent No. 5,335,822 for this mechanism. Under
the terms of the license agreement, the Company is the sole entity entitled to
use this technology on its ITVMs. See "Item 13. Certain Relationships and
Related Transactions."
The Company currently uses operating software to perform all functions
required to dispense and account for instant lottery tickets and prepaid
telephone calling cards. This software is a stand-alone program which does not
require any other software to operate. The software is designed to allow updates
to be made quickly and inexpensively. The software was designed by Future
Designs, a subcontractor to the Company, and employees of the Company. Future
Designs has assigned all of its right, title and interest in and to the software
to the Company. The Company intends to continue to develop software using both
employees and subcontractors who agree to assign the copyright to developed
software to the Company.
The Company has obtained federal registration in the United States of
the following trademarks: INTERLOTT, INTERLOTT and design, and INSTANT SUCCESS.
The Company also has obtained registration of the trademark INTERLOTT in
Benelux, Hungary, Mexico and Spain. The Company does not deem the trademarks to
be critical to the future of its business.
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<PAGE> 21
The Company enforces a policy requiring all of its employees and
subcontractors to execute confidentiality and proprietary rights agreements at
the commencement of their employment or contract for service with the Company.
The agreements generally provide that all inventions or discoveries and all
confidential information developed or made known to the employees or
subcontractors during the term of their employment or contract for service will
be assigned to the Company and will be kept confidential and not disclosed to
third parties.
There can be no assurance that current or future patents and other
intellectual property rights of the Company will afford meaningful protection of
the Company's competitive position. Furthermore, the Company's competitors may
have filed patent applications for, or have been issued patents relating to,
products or technologies competitive with or superior to those of the Company.
The scope and validity of others' patents, the extent to which the Company or
its suppliers may be required to obtain licenses thereunder, and the
availability and cost of any such licenses are unknown, and there is no
assurance that the necessary licenses could be obtained on terms or conditions
which would not have a material adverse effect upon the Company. If the
Company's intellectual property rights are violated, the costs of litigation
could be significant and could divert funds that otherwise would have been
available for other purposes. Moreover, litigation concerning the alleged
violation of intellectual property rights is inherently uncertain, and the
claims and counterclaims that might be asserted against the Company, if
successful, could have a material adverse effect upon the Company's financial
condition and business operations.
Competition
Competition in the markets for the Company's ITVM and PCDM is based on
a number of factors, including technological features, product quality and
reliability, price, compatibility, ease of installation and use, marketing and
distribution capabilities, product delivery time, and service and support. The
Company is aware of four manufacturers of ITVMs and approximately forty
manufacturers of PCDMs in the United States, and competition among these
manufacturers is intense. Of the four ITVM competitors, the Company has the
largest share of the ITVM market in the United States, followed by On-Point and
two smaller manufacturers. The Company is not aware of any published data
regarding market shares in the PCDM industry. The Company believes that of the
forty PCDM competitors, Opal Manufacturing Co. has the largest PCDM market share
in the United States, but there is no clear indication of the market shares of
the remaining companies.
In addition, the ITVM and PCDM markets are relatively new markets that
have grown rapidly, and additional domestic and foreign manufacturers, some of
which have substantially greater resources and experience than the Company, may
elect to enter these markets. The instant ticket market also may face
competition from other types of lottery and gaming products, including
particularly on-line lottery products. The long distance telephone market
similarly may face competition from other types of communications products,
including facsimile, e-mail and other on-line products.
The Company believes that its patented dispensing technologies make its
ITVM and PCDM dispensing mechanisms technologically superior to the dispensing
mechanisms of its competitors and that this is a significant competitive
advantage for the Company. The Company also believes that its products have
earned a strong reputation for their performance, reliability and cost
effectiveness. To remain competitive, the Company believes that it will need to
continue to incorporate new technological developments into its existing
products and to develop new products, as well as to maintain a competitive price
for its products. These efforts, together with the Company's continuing sales
and marketing efforts, will be critical to the Company's future success.
Although the Company believes that its current successes, coupled with its
history of continued product enhancement and cost reduction, will enable it to
compete favorably with its competitors, there can be no assurance that the
Company will be able to maintain or improve its competitive position in the ITVM
and PCDM markets.
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<PAGE> 22
Government Regulation
ITVMS
Lotteries are not permitted in the various states and jurisdictions of
the United States unless expressly authorized by legislation in the subject
jurisdiction. Similarly, the commencement of ITVM sales and leasing in new
jurisdictions requires authorizing legislation and implementing regulations at
the state level. The Company cannot predict the nature of the regulatory process
in any jurisdiction that may authorize the purchase and lease of ITVMs in the
future. Any such regulatory process may be burdensome to the Company or its key
personnel and stockholders and could include requirements that the Company would
be unable to satisfy.
Currently, 37 states and the District of Columbia have enacted
legislation to allow for the operation of a lottery, and 32 of these
jurisdictions utilize ITVMs in some manner as part of their instant ticket
distribution process. The operation of the lotteries in each of these
jurisdictions is strictly regulated. The formal rules and regulations governing
lotteries vary from jurisdiction to jurisdiction but typically authorize the
lottery, create the governing authority, dictate the prize structure, establish
allocation of revenues, determine the type of games permitted, detail
appropriate marketing structures, specify procedures for selecting vendors and
define the qualifications of lottery personnel. No assurance can be given that
there will not be an adverse change in the lottery laws of any jurisdiction in
which the Company does business. Although the Company believes that it is
unlikely that states which have enacted legislation that expressly authorize the
use of ITVMs will adopt legislation in the foreseeable future that prohibits the
use of ITVMs, there can be no assurance that such legislation will not be
adopted in one or more jurisdictions in the foreseeable future.
To ensure the integrity of the lottery, state laws provide for
extensive background investigations of each of the lottery's vendors and their
affiliates, subcontractors, officers, directors, employees and principal
stockholders. These investigations generally require detailed disclosure on a
continuous basis with respect to the vendors, affiliates, subcontractors,
officers, directors, employees and principal shareholders and, in the event the
lottery deems any of such persons to be unsuitable, the lottery may require the
termination of such persons. The failure of any such persons associated with the
Company to obtain or retain approval in any jurisdiction could have a material
adverse effect on the Company. Generally, regulatory authorities have broad
discretion when granting such approvals. Although the Company has never been
disqualified from a lottery contract as a result of a failure to obtain any such
approvals, no assurance can be given that such approvals will be obtained or
retained in the future.
The Federal Gambling Devices Act of 1962 (the "Act") makes it unlawful,
with certain exceptions, for a person or entity to transport any gambling
devices across interstate lines unless that person or entity has first
registered with the United States Department of Justice. Although the Company
believes that it is not required to register under such Act, the Company has
voluntarily registered under the Act and intends to renew its registration
annually. The Act also imposes various record keeping and equipment
identification requirements. Violation of the Act may result in seizure or
forfeiture of equipment, as well as other penalties.
The Company may retain governmental affairs representatives in various
jurisdictions of the United States to monitor legislation, advise the Company on
contract proposals, and assist with other issues that may affect the Company.
The Company believes it has complied with all applicable state regulatory
provisions relative to disclosure concerning the activities of itself and its
advisors. The Company is not dependent on any such representative for any
material contract.
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<PAGE> 23
International jurisdictions that operate lotteries also impose strict
regulations. International regulations may vary from those in the United States.
Additionally, international regulations frequently impose restrictions on
foreign corporations doing business within the specific jurisdiction. As a
result, the Company may contract with local representation or align itself with
a local partner when pursuing international contracts.
Laws and regulations of individual states and countries are subject to
change. The failure to comply with such laws and regulations could have an
adverse impact on the operations of the Company.
PCDMs
The Company is not aware of any federal, state or local regulations
that apply to the manufacture, lease or sale of PCDMs.
Backlog
The Company's backlog of ITVMs committed for production as of December
31, 1997 was approximately $4,250,000, which was equal to the total base lease
payments or sales value for the 847 ITVMs that were committed for production but
had not been shipped to the Maryland and Ohio Lotteries as of December 31, 1997.
See "Lottery Contracts." At December 31, 1996, the backlog of ITVMs committed
for production was approximately $1,097,400, which was equal to the total base
lease payments or sales value for the 460 ITVMs that were committed for
production but had not been shipped to the Colorado, Indiana, New York and Texas
Lotteries as of December 31, 1996. It is anticipated that substantially all of
the Company's backlog at December 31, 1997 will be shipped on or before June 30,
1998. The Company had no backlog of PCDMs committed for production at December
31, 1997.
The Company has entered into various lease or sales agreements that
permit the lotteries, at their sole option, to lease or purchase up to a total
of 1,100 additional ITVMs as of December 31, 1997. However, the Company does not
include in backlog ITVMs that may be sold or leased under existing contracts
unless the Company has received a firm order for the ITVMs. Due to the
relatively large size of individual orders, the small number of customers and
the long sales cycle of the lottery industry, management considers backlog to be
an indicator of current activity and not necessarily predictive of future
orders.
Employees
The Company utilizes a work force of full-time employees supported from
time to time by temporary or contract manufacturing and engineering personnel.
As of December 31, 1997, the Company had 128 full-time employees, of which 50
were manufacturing employees, 7 were engineering employees, 55 were service
employees and 16 were executives or senior managers. Nine of the executives and
senior managers were devoted to sales and seven were devoted to management and
administration. The Company intends to increase sales and marketing personnel
during 1998 through the addition of two employees, to increase engineering
personnel through the addition of one employee and to increase management and
administrative personnel through the addition of three employees.
The Company's business requires that it continue to attract and retain
additional personnel with a variety of skills, especially with engineering and
marketing expertise. Significant competition exists for such personnel, and
there can be no assurance that the Company will be able to attract and retain
personnel with the skills and experience needed to achieve and manage growth.
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<PAGE> 24
No Company employees are represented by any union, and the Company
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company's manufacturing and distribution facilities currently are
located in a facility containing approximately 35,000 square feet of leased
space in Cincinnati, Ohio. The facility is comprised of approximately 5,000
square feet of office space and approximately 30,000 square feet of
manufacturing space with the capacity to produce and provide inventory for
approximately 250 machines per week. The lease is for a fixed term through
December 31, 1999.
Effective January 1, 1997, the Company entered into a lease for a
second facility containing approximately 11,750 square feet of space located a
very short distance from the current facility in Cincinnati. The second facility
serves as the executive office of the Company housing the executive,
administrative, sales, engineering and service personnel. The lease for the
second facility also expires on December 31, 1999. The Company believes that
these two facilities are suitable for and adequate to support its operations for
the foreseeable future.
The Company also leases approximately 1,000 square feet of warehouse
and office space in Alpharetta, Georgia for the purpose of storing and repairing
ITVMs used in connection with the Georgia Lottery. Scientific Games, Inc.
provides this space to the Company at no cost under the terms of the Company's
contract with Scientific Games. The lease is effective for the entire term of
the contract, which has an initial term that expires in May 1998. See "Item 1.
Business -- Contracts -- ITVMs." The Company believes that this facility is
suitable for and adequate to support its operations for the Georgia Lottery.
ITEM 3. LEGAL PROCEEDINGS
In January 1996, the Company filed a lawsuit now pending in the United
States District Court for the Southern District of Ohio against Lottery
Enterprises, Inc. ("LEI," which subsequently changed its name to On-Point
Technology Systems, Inc.) to collect sums that the Company alleges are owed to
it under an Agreement in Principle dated March 23, 1995, relating to the
Company's potential acquisition of LEI by merger (the "Transaction"). The
parties did not consummate the Transaction. The Agreement in Principle required
LEI to reimburse the Company's reasonable out-of-pocket expenses incurred in
connection with the Transaction in the event the parties failed to execute a
definitive merger agreement within 120 days of March 23, 1995, and the primary
reason that the parties did not execute a definitive merger agreement was other
than a breach of the Agreement in Principle by the Company. The Agreement in
Principle also required LEI to pay the Company a "breakup fee" in the event
that, within one year after the termination or abandonment of the Transaction by
LEI, LEI entered into a binding commitment to engage in a recapitalization, debt
issuance or working capital financing other than in the ordinary course of
business, and the primary reason for the termination or abandonment of the
Transaction was other than termination or breach of the Agreement in Principle
by the Company. The Company seeks the reimbursement of approximately $241,000 in
out-of-pocket expenses and a breakup fee of approximately $988,000.
LEI denied any liability to the Company and also asserted counterclaims
against the Company seeking unspecified money damages exceeding $500,000. LEI
claimed that the Company competed unfairly with LEI and wrongfully interfered
with LEI's business by misrepresenting LEI's financial condition to the
Pennsylvania state lottery agency and by utilizing information about LEI
received during the due diligence conducted in connection with the Transaction.
LEI also claimed that it is entitled to
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<PAGE> 25
recover from the Company unspecified costs and expenses that it incurred in
connection with the Transaction and sought a declaration from the Court that it
is not obligated to pay the Company a breakup fee under the Agreement in
Principle.
The Court granted partial summary judgment in the Company's favor on
the Complaint, ruling that within one year after the Transaction was abandoned
or terminated, LEI did enter into a recapitalization, debt issuance or working
capital financing other than in the ordinary course of business. The Court left
open the question whether LEI abandoned or terminated the Transaction (as
opposed to the Company), which will be determined at trial. The Court also left
open the question of whether LEI is obligated to reimburse the out-of-pocket
expenses incurred by the Company in connection with the Transaction. The Court
also has granted summary judgment in the Company's favor on LEI's counterclaims
for unfair competition and tortious interference.
The Company is unable to predict the likelihood of success on its
remaining claims or on LEI's counterclaim. The Company is seeking approximately
$240,000 in out-of-pocket expenses and $988,000 on its claim for the breakup
fee, but is unable to predict how much, if any, of any judgment would be
collectible. The Company also is unable to predict whether LEI will prevail on
its counterclaims and, if so, the amount of damages that LEI might recover
against the Company. The Company also is unable to predict the amount of any
settlement that might be agreed upon by the parties in the future or the timing
of any such events. However, the Company believes that LEI's remaining
counterclaims are without merit and that any amount of any damages that
ultimately may be awarded to LEI would not have a material adverse effect on the
business, operations or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted by the Company to a vote of its stockholders
during the fourth quarter ended December 31, 1997.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below, in accordance with General Instruction G(3) to Form
10-K and Instruction 3 to Item 401(b) of Regulation S-K, is certain information
regarding the executive officers of the Company.
L. Rogers Wells, Jr., age 60, is Chairman of the Board and Chief
Executive Officer of the Company and has been the principal stockholder of the
Company since purchasing 80% of the Common Stock of the Company in September
1992. Mr. Wells served as a director of the Company from September 1992, and as
Chairman of the Board and Chief Executive Officer of the Company from October
1993, until his resignation from these positions in October 1994. He was
re-elected to these positions in February 1995. Additionally, Mr. Wells owns
American Materials, Incorporated, which assembles and distributes automobile and
truck components and serves as a regional warehousing and distribution center
for various businesses. Mr. Wells also owns International Investments, Inc.
("III"), which invests in and provides financing to various businesses,
including the Company. See "Item 13. Certain Relationships and Related
Transactions." Mr. Wells has been active in various other industries, including
manufacturing, mining, explosives and banking. From 1987 through 1991, Mr. Wells
served as Secretary of Finance and Administration for the Commonwealth of
Kentucky, and from 1989 through 1991 served as Secretary to the Governor's
Executive Cabinet. During his tenure as Secretary of Finance and Administration,
Mr. Wells served as Chairman of various finance and development authorities,
including the Kentucky Rural Economic Development Authority, the Kentucky
Infrastructure Authority and the Kentucky Housing Corporation.
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<PAGE> 26
Edmund F. Turek, age 71, served as President and a director of the
Company from February 1990 until May 1997 and served as Chairman of the Board
and Chief Executive Officer of the Company from February 1990 to September 1992.
In May 1997, Mr. Turek became Vice Chairman of the Company and continued to
serve as a director. Mr. Turek began to develop the Company's ITVM in 1987 and
has guided the product through six generations to the current model. Mr. Turek
was Vice President of Peripheral Products in the computer division of SCI
Systems, Inc. from 1984 to 1989 where he developed business opportunities in the
commercial market for the design and manufacture of computer products. From 1953
to 1984, Mr. Turek held management, product development and operations positions
with various companies in the computer and aerospace industries.
David F. Nichols, age 36, has been President of the Company since May
1997 and was named a director in December 1997. Mr. Nichols served as Senior
Vice President of Sales and Marketing of the Company from August 1994 to May
1997 and as Vice President-Operations of the Company from March 1993 until
August 1994. From December 1991 to December 1992, he was Executive Director of
the Board of Tax Appeals of the Commonwealth of Kentucky. From March 1990 to
December 1991, he was Principal Assistant to the Secretary of Finance and
Administration for the Commonwealth of Kentucky, and from March 1989 to March
1990, he was Principal Assistant to the Kentucky Office for Social Security. In
these two capacities, he advised senior agency officials on policies, programs
and operations of the agency and served as a liaison with the state legislature
and other elected officials. From June 1988 to December 1988, he was Deputy
Director of the Kentucky Democratic Party.
Jerome J. Cain, age 53, has been Chief Financial Officer of the Company
since 1992. From 1979 until 1991, he was Vice President-Finance and
Administration of American Sign and Marketing Services, Inc., a sign
manufacturing company. From 1972 to 1979, he was Controller of Lockwood
Manufacturing Company, a sheet metal fabricating company. Mr. Cain also served
as an auditor and management consultant with Coopers & Lybrand, certified public
accountants. Mr. Cain is a certified public accountant.
Thomas W. Stokes, age 34, has been Vice President of the Company since
May 1997. Mr. Stokes served as Director of Operations from January 1996 to May
1997 and as Purchasing Manager from March 1993 to December 1995. From 1988 to
1992, he served as unit controller for a food management company.
The executive officers of the Company are appointed by and serve at the
discretion of the Board of Directors.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Information relating to the market for holders of and dividends paid on
the Company's Common Stock is set forth under the caption "Corporate Data and
Shareholder Information" on the inside back cover page of the Company's 1997
Annual Report. Such information is incorporated herein by reference. The 1997
Annual Report is filed as Exhibit 13 to this report.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company for each year of the five-year
period ended December 31, 1997 are set forth under the caption "Selected
Financial Data" on page 7 of the 1997 Annual Report. Such financial data are
incorporated herein by reference.
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<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
A discussion of the financial condition and results of operations of
the Company at and for the dates and periods covered by the financial statements
set forth in the 1997 Annual Report is set forth under the caption "Management's
Discussion and Analysis" on pages 7 through 9 of the 1997 Annual Report. Such
discussion is incorporated herein by reference.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Company and the independent
auditors' report thereon, which are set forth on pages 9 through 16 of the 1997
Annual Report, are incorporated herein by reference:
Balance Sheets at December 31, 1996 and 1997
Statements of Operations for each of the years in the three-year period
ended December 31, 1997
Statements of Stockholders' Equity (Deficit) for each of the years in
the three-year period ended December 31, 1997
Statements of Cash Flows for each of the years in the three-year period
ended December 31, 1997
Notes to Financial Statements
The supplementary financial information required to be provided by Item
302 of Regulation S-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Within the two-year period ended December 31, 1997 and subsequently,
the Company had no change in independent accountants or disagreements with
independent accountants on accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors of the Company is set forth under
the captions "Proposal 1 -- Election of Directors -- Nominees" and "Proposal 1
- -- Election of Directors -- Information Regarding Nominees and Continuing
Directors" in the Company's Proxy Statement for its 1998 Annual Meeting of
Stockholders to be held on May 7, 1998. Such information is incorporated herein
by reference. Pursuant to Instruction 3 to Item 401(b) of Regulation S-K and
General Instruction G(3) to Form 10-K, information relating to the executive
officers of the Company is set forth in Part I, Item 4(A) of this report under
the caption "Executive Officers of the Registrant." Information regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, by directors and executive officers of the Company and beneficial
owners of more than 10% of the Company's Common Stock is set forth under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement referred to in this Item 10 above. Such information is incorporated
herein by reference.
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<PAGE> 28
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth under the
captions "Proposal 1 -- Election of Directors -- Director Compensation" and
"Executive Compensation" in the Proxy Statement referred to in Item 10 above.
Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of the Company's Common Stock as of
December 31, 1997 by certain persons is set forth under the captions "Voting --
Principal Stockholders" and "Proposal 1 -- Election of Directors -- Information
Regarding Nominees and Continuing Directors" in the Proxy Statement referred to
in Item 10 above. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and transactions between
the Company and certain of its affiliates is set forth under the caption
"Certain Transactions" in the Proxy Statement referred to in Item 10 above. Such
information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of This Report.
1. Financial Statements
The following financial statements of the Company and
the independent auditors' report thereon are included
in the Company's 1997 Annual Report and are
incorporated by reference in Item 8 hereof:
Balance Sheets at December 31, 1996 and 1997
Statements of Income for each of the years in the
three-year period ended December 31, 1997
Statements of Stockholders' Equity for each of the
years in the three-year period ended December 31,
1997
Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1997
Notes to Financial Statements
2. Financial Statement Schedules
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<PAGE> 29
The following financial statement schedule and the
independent auditors' report thereon are set forth beginning
on page S-1 of this report:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in
the applicable accounting regulations of the Securities and
Exchange Commission have been omitted because such schedules
are not required under the related instructions or are
inapplicable or because the information required is included
in the financial statements or notes thereto.
3. Exhibits
The following exhibits are filed with or incorporated
by reference in this report. Where such filing is made by
incorporation by reference to a previously filed registration
statement or report, such registration statement or report is
identified in parentheses. The Company will furnish any
exhibit upon request to Jerome J. Cain, Chief Financial
Officer of the Company, 10830 Millington Court, Cincinnati,
Ohio 45242. There is a charge of $.50 per page to cover
expenses of copying and mailing.
3.1 Certificate of Incorporation of the Company, as
amended, including Certificate of Designation of
Series A Preferred Stock (Exhibit 3.1 to the
Company's Registration Statement on Form S-1, No.
33-75142).
3.2 Bylaws of the Company (Exhibit 3.2 to the Company's
Registration Statement on Form S-1, No. 33-75142).
4.1 Promissory Note of the Company dated September 22,
1992 to Baumgartner & Brucher Radiology Associates,
Inc. Profit Sharing Plan for the benefit of Thomas E.
Turek, M.D. (Exhibit 4.2 to the Company's
Registration Statement on Form S-1, No. 33-75142).
4.2 Promissory Note of the Company dated September 22,
1990 to Mr. Thomas Goila (Exhibit 4.3 to the
Company's Registration Statement on Form S-1, No.
33-75142).
4.3 Loan Agreement dated October 29, 1997 between the
Company and Mercantile Business Credit Inc. - filed
herewith.
4.3(a) Revolving Credit Note dated October 29, 1997 between
the Company and Mercantile Business Credit Inc. -
filed herewith.
4.3(b) Security Agreement dated October 29, 1997 between the
Company and Mercantile Business Credit Inc. - filed
herewith.
4.3(c) Patent, Trademark and License Security Agreement
dated October 29, 1997 between the Company and
Mercantile Business Credit Inc. - filed herewith.
10.1 Assignment of United States Letters Patent from BLM
Resources, Inc. to the Company with respect to United
States Patent No. 4,982,337, "System for Distributing
Lottery Tickets" (Exhibit 10.5 to the Company's
Registration Statement on Form S-1, No. 33-75142).
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<PAGE> 30
10.2 Pull-Tab Manufacturing and License Agreement between
Algonquin Industries, Inc., Kazmier Kasper and the
Company dated as of January 13, 1994 (Exhibit 10.6 to
the Company's Registration Statement on Form S-1, No.
33-75142).
10.3 Lease Agreement dated January 14, 1991 by and between
Gallenstein & Gallenstein and the Company related to
the Company's premises located at 6665 Creek Road,
Cincinnati, Ohio 45242 (Exhibit 10.7 to the Company's
Registration Statement on Form S-1, No. 33-75142).
10.3(a) Addendum dated May 2, 1994 to Lease Agreement dated
January 14, 1991 (Exhibit 10.7) by and between
Gallenstein & Gallenstein and the Company related to
the Company's premises located at 6665 Creek Road,
Cincinnati, Ohio 45242 (Exhibit 10.7(a) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.4 Management Contracts and Compensatory Plans
(a) 1994 Stock Incentive Plan (Exhibit 10.24 to
the Company's Registration Statement on Form
S-1, No. 33-75142).
(b) 1994 Directors Stock Incentive Plan (Exhibit
10.25 to the Company's Registration
Statement on Form S-1, No. 33-75142).
(c) Employment Agreement effective February 1,
1995 between L. Rogers Wells, Jr. and the
Company - filed herewith.
11 Statement Regarding Computation of Per Share Earnings
- filed herewith.
13 1997 Annual Report - filed herewith. (1)
23 Consent of KPMG Peat Marwick LLP - filed herewith.
24 Powers of Attorney - filed herewith.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K. No Current Reports on Form 8-K were filed by
the Company during the quarter ended December 31, 1997.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
(1) Except for portions of the 1997 Annual Report that are
expressly incorporated by reference into this Annual Report on Form 10-K, the
1997 Annual Report is furnished to the Commission solely for the information of
the Commission and not deemed to be "filed" with the Commission for purposes of
the Securities Exchange Act of 1934, as amended.
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<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 27, 1998.
INTERLOTT TECHNOLOGIES, INC.
(Registrant)
By: /s/ L. Rogers Wells, Jr.
-------------------------------------------------
L. Rogers Wells, Jr.
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 27, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- ------
<S> <C>
/s/ L. Rogers Wells, Jr. Chairman of the Board and Chief Executive Officer
- ---------------------------------------
L. Rogers Wells, Jr.
/s/ Edmund F. Turek Vice Chairman and Director
- ---------------------------------------
Edmund F. Turek
/s/ David F. Nichols President and Director
- ---------------------------------------
David F. Nichols
John J. Wingfield* Director
- ---------------------------------------
John J. Wingfield
/s/ H. Jean Marshall Director
- ---------------------------------------
H. Jean Marshall
Gary S. Bell* Secretary, Treasurer and Director
- ---------------------------------------
Gary S. Bell
Kazmier J. Kasper* Director
- ---------------------------------------
Kazmier J. Kasper
/s/ Jerome J. Cain Chief Financial and Accounting Officer
- ---------------------------------------
Jerome J. Cain
*By: /s/ L. Rogers Wells, Jr.
-----------------------------------
L. Rogers Wells, Jr.
as attorney-in-fact
</TABLE>
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<PAGE> 32
INDEX OF FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.......................................... S-2
Schedule II - Valuation and Qualifying Accounts......................... S-3
</TABLE>
S-1
<PAGE> 33
[KPMG LETTERHEAD]
Independent Auditor's Report
The Board of Directors
Interlott Technologies, Inc.:
Under date of February 28, 1998, we reported on the balance sheets of
Interlott Technologies, Inc. as of December 31, 1996 and 1997, and the related
statements of income, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997, as contained in the 1997
annual report to stockholders. These financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K for the
year 1997. In connection with our audits of the aforementioned financial
statements, we also audited the related financial statement schedule as listed
in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Louisville, Kentucky
February 28, 1998
S-2
<PAGE> 34
INTERLOTT TECHNOLOGIES, INC.
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------------------------------------------------------------------------------
ADDITIONS
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts
- -------------------------------------------------------------------------------------------------------------------
1995 55,150 145,000 0 98,537 101,613
- -------------------------------------------------------------------------------------------------------------------
1996 101,613 57,500 0 43,688 115,425
- -------------------------------------------------------------------------------------------------------------------
1997 115,425 52,500 0 74,425 93,500
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
S-3
<PAGE> 35
INTERLOTT TECHNOLOGIES, INC.
INDEX OF EXHIBITS
The following exhibits are filed with or incorporated by reference in
this report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration statement
or report is identified in parenthesis.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
3.1 Certificate of Incorporation of the Company, as amended,
including Certificate of Designation of Series A
Preferred Stock (Exhibit 3.1 to the Company's
Registration Statement on Form S-1, No. 33-75142).
3.2 Bylaws of the Company (Exhibit 3.2 to the Company's
Registration Statement on Form S-1, No. 33-75142).
4.1 Promissory Note of the Company dated September 22, 1992 to
Baumgartner & Brucher Radiology Associates, Inc. Profit
Sharing Plan for the benefit of Thomas E. Turek, M.D.
(Exhibit 4.2 to the Company's Registration Statement on
Form S-1, No. 33-75142).
4.2 Promissory Note of the Company dated September 22, 1990
to Mr. Thomas Goila (Exhibit 4.3 to the Company's
Registration Statement on Form S-1, No. 33-75142).
4.3 Loan Agreement dated October 29, 1997 between the
Company and Mercantile Business Credit - filed herewith.
4.3(a) Revolving Credit Note dated October 29, 1997 between the
Company and Mercantile Business Credit - filed herewith.
4.3(b) Security Agreement dated October 29, 1997 between the
Company and Mercantile Business Credit - filed herewith.
4.3(c) Patent, Trademark and License Security Agreement dated
October 29, 1997 between the Company and Mercantile
Business Credit - filed herewith.
10.1 Assignment of United States Letters Patent from BLM
Resources, Inc. to the Company with respect to United
States Patent No. 4,982,337, "System for Distributing
Lottery Tickets" (Exhibit 10.5 to the Company's
Registration Statement on Form S-1, No. 33-75142).
</TABLE>
E-1
<PAGE> 36
<TABLE>
<S> <C> <C>
10.2 Pull-Tab Manufacturing and License Agreement between
Algonquin Industries, Inc., Kazmier Kasper and the
Company dated as of January 13, 1994 (Exhibit 10.6 to
the Company's Registration Statement on Form S-1, No.
33-75142).
10.3 Lease Agreement dated January 14, 1991 by and between
Gallenstein & Gallenstein and the Company related to the
Company's premises located at 6665 Creek Road,
Cincinnati, Ohio 45242 (Exhibit 10.7 to the Company's
Registration Statement on Form S-1, No. 33-75142).
10.3(a) Addendum dated May 2, 1994 to Lease Agreement
dated January 14, 1991 (Exhibit 10.7) by and between
Gallenstein & Gallenstein and the Company related to the
Company's premises located at 6665 Creek Road, Cincinnati,
Ohio 45242 (Exhibit 10.7(a) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
10.4 Management Contracts and Compensatory Plans
(a) 1994 Stock Incentive Plan (Exhibit 10.24 to
the Company's Registration Statement on
Form S-1, No. 33-75142).
(b) 1994 Directors Stock Incentive Plan (Exhibit
10.25 to the Company's Registration Statement
on Form S-1, No. 33-75142).
(c) Employment Agreement effective February 1, 1995
between L. Rogers Wells and the Company - filed
herewith.
11 Statement Regarding Computation of Per Share Earnings - filed herewith.
13 1997 Annual Report - filed herewith. (1)
23 Consent of KPMG Peat Marwick LLP - filed herewith.
24 Powers of Attorney - filed herewith.
27 Financial Data Schedule - (for SEC use only).
</TABLE>
(1) Except for portions of the 1997 Annual Report that are expressly
incorporated by reference into this Annual Report on Form 10-K, the 1997 Annual
Report is furnished to the Commission soley for the information of the
Commission and not deemed to be "filed" with the Commission for purposes of the
Securities Exchange Act of 1934, as amended.
E-2
<PAGE> 1
EXHIBIT 4.3
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement") is made and entered into this
29th day of October, 1997, by and between INTERLOTT TECHNOLOGIES, INC., a
Delaware corporation ("Borrower"), and MERCANTILE BUSINESS CREDIT INC., a
Missouri corporation ("Lender").
WITNESSETH:
WHEREAS, Borrower has applied for a revolving credit loan from Lender
in an aggregate principal amount of up to $15,000,000.00; and
WHEREAS, Lender is willing to make said revolving credit loan to
Borrower upon, and subject to, the terms, provisions and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrower and Lender hereby mutually covenant and agree as follows:
SECTION 1. DEFINITIONS.
1.01 Definitions. In addition to the terms defined elsewhere in this
Agreement or in any Exhibit or Schedule hereto, when used in this Agreement, the
following terms shall have the following meanings (such meanings shall be
equally applicable to the singular and plural forms of the terms used, as the
context requires):
Account Debtor shall mean any Person who is and/or may become obligated
to Borrower under or on account of any of the Accounts.
Accounts shall mean all trade accounts receivable of Borrower for goods
sold or services rendered by Borrower which have been invoiced by Borrower.
Accounts shall not include any amounts due Borrower under or in respect of any
Leases.
Affiliate shall mean any Person (a) which directly or indirectly
through one or more intermediaries controls, is controlled by or is under common
control with Borrower or any Subsidiary, (b) which directly or indirectly
through one or more intermediaries beneficially owns or holds or has the power
to direct the voting power of Five Percent (5%) or more of any class of capital
stock of Borrower or any Subsidiary, (c) which has Five Percent (5%) or more of
any class of its capital stock (or, in the case of a Person which is not a
corporation, Five Percent (5%) or more of its equity interest) beneficially
owned or held, directly or indirectly, by Borrower or any Subsidiary or (d) who
is a director, officer or employee of Borrower or any Subsidiary. For purposes
of this definition, "control" shall mean the power to direct the management and
policies of a Person, directly or indirectly, whether through the ownership of
voting securities, by contract or otherwise.
Attorneys' Fees shall mean the reasonable value of the services (and
costs, charges and expenses related thereto) of the attorneys (and all
paralegals, accountants and other staff employed by such attorneys) employed by
Lender from time to time (a) in connection with the negotiation, preparation,
execution, delivery, amendment, modification, extension, renewal, administration
and/or enforcement of this Agreement and/or any of the other Transaction
Documents, (b) in connection with the preparation, negotiation or execution of
any waiver or consent with respect to this Agreement or any of the other
Transaction Documents, (c) in connection with any Default or Event of Default
under this Agreement, (d) to represent Lender in any litigation, contest,
dispute, suit or proceeding, or to commence, defend or intervene in any
litigation, contest, dispute, suit or proceeding, or to file any petition,
complaint, answer, motion or other pleading or to take any other action in or
with respect to any litigation, contest, dispute, suit or proceeding (whether
instituted by Lender, Borrower or any other Person and whether in bankruptcy or
otherwise) in any way or respect relating to this Agreement or any of the other
Transaction Documents, Borrower, any other Obligor, any Subsidiary, any
Collateral or any Third Party Collateral, (e) to protect, collect, lease, sell,
take possession of or liquidate any Collateral or any Third Party Collateral,
(f) to attempt to enforce any security interest in or other Lien upon any
<PAGE> 2
Collateral or any Third Party Collateral or to give any advice with respect to
such enforcement and/or (g) to enforce any of the rights or remedies of Lender
to collect any of the Borrower's Obligations.
Borrower's Obligations shall mean any and all indebtedness (principal,
interest, fees, collection costs and expenses, and other amounts), liabilities
and obligations of Borrower to Lender evidenced by or arising under this
Agreement, the Revolving Credit Note, any of the other Transaction Documents
and/or any other agreement, document or instrument heretofore, now or hereafter
executed and delivered by Borrower to Lender, in each case whether now existing
or hereafter arising, absolute or contingent, joint and/or several, secured or
unsecured, direct or indirect, expressed or implied in law, contractual or
tortious, liquidated or unliquidated, at law or in equity, or otherwise, and
whether created directly or acquired by Lender by assignment or otherwise, and
any and all costs of collection and/or Attorneys' Fees incurred or to be
incurred in connection therewith.
Borrowing Base shall have the meaning ascribed thereto in Section 2.01
(b).
Borrowing Base Certificate shall have the meaning ascribed thereto in
Section 2.01 (c).
Borrowing Notice shall have the meaning ascribed thereto
in Section 2.02(a).
Capital Expenditure shall mean any expenditure which, in accordance
with GAAP, is required to be capitalized on the balance sheet of the Person
making the same. For purposes of this Agreement, Capital Expenditures shall not
include expenditures for items held for sale or lease by Borrower.
Capitalized Lease shall mean any lease of Property, whether real and/or
personal, by a Person as lessee which in accordance with GAAP is required to be
capitalized on the balance sheet of such Person.
Capitalized Lease Obligations of any Person shall mean, as of the date
of any determination thereof, the amount at which the aggregate rental
obligations due and to become due under all Capitalized Leases under which such
Person is a lessee would be reflected as a liability on a balance sheet of such
Person in accordance with GAAP.
CERCLA shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986, 42 U.S.C. ss.ss. 9601 et seq., and as the same
may from time to time be further amended.
Change of Control Event shall mean each and every issue, sale, transfer
or other disposition, directly or indirectly, of shares of capital stock of
Borrower which, after giving effect thereto, results in (a) the Principal
Shareholders legally or beneficially owning or controlling in the aggregate less
than Thirty Percent (30%) (by number of votes) of the Voting Stock of Borrower
and (b) any Person or group of Persons acting in concert (other than the
Principal Shareholders) legally or beneficially owning or controlling in the
aggregate more than Twenty Percent (20%) (by number of votes) of the Voting
Stock of Borrower.
Code shall mean the Internal Revenue Code of 1986, as amended, and any
successor statute of similar import, together with the regulations thereunder,
in each case as in effect from time to time. References to sections of the Code
shall be construed to also refer to any successor sections.
Collateral shall mean any Property or assets of Borrower which now or
at any time hereafter secure the payment or performance of any of the Borrower's
Obligations.
Collateral Report shall have the meaning ascribed thereto in Section
3(a) of the Security Agreement.
Consolidated Debt shall mean, as of the date of any determination
thereof, all Debt of Borrower and its Subsidiaries as of such date (excluding
any Subordinated Debt), determined on a consolidated basis and in accordance
with GAAP.
-2-
<PAGE> 3
Consolidated Debt to Consolidated EBITDA Ratio shall mean, as of
the last day of any fiscal quarter of Borrower, the ratio of (A) Consolidated
Debt as of such day to (B) Consolidated EBITDA for the four (4) consecutive
fiscal quarter period of Borrower ending on such day.
Consolidated EBITDA shall mean, for the period in question, the sum of
(a) Consolidated Net Income during such period plus (b) to the extent deducted
in determining Consolidated Net Income, the sum of (i) Consolidated Interest
Expense during such period, plus (ii) all provisions for any Federal, state,
local and/or foreign income taxes made by Borrower and its Subsidiaries during
such period (whether paid or deferred) plus (iii) all depreciation and
amortization expenses of Borrower and its Subsidiaries during such period, all
determined on a consolidated basis and in accordance with GAAP.
Consolidated Interest Coverage Ratio shall mean, for the period in
question, the ratio of (a) Consolidated EBITDA during such period to (b)
Consolidated Interest Expense during such period, all determined on a
consolidated basis and in accordance with GAAP.
Consolidated Interest Expense shall mean, for the period in question,
without duplication, all gross interest expense of Borrower and its Subsidiaries
(including, without limitation, all commissions, discounts and/or related
amortization and other fees and charges owed by Borrower and its Subsidiaries
with respect to letters of credit, the net costs associated with interest swap
obligations of Borrower and its Subsidiaries, capitalized interest expense, the
interest portion of Capitalized Lease Obligations and the interest portion of
any deferred payment obligation) during such period, all determined on a
consolidated basis and in accordance with GAAP.
Consolidated Net Income shall mean the after-tax net income (or loss)
of Borrower and its Subsidiaries for the period in question, determined on a
consolidated basis and in accordance with GAAP, but excluding from the
definition of Consolidated Net Income any extraordinary gains and/or losses and
any gains and/or losses from the sale or other disposition of assets other than
in the ordinary course of business, all determined in accordance with GAAP.
Consolidated Net Worth shall mean, as of the date of any determination
thereof, the amount of the capital stock accounts (net of treasury stock, at
cost and excluding the aggregate par value of all issued and outstanding shares
of Series A Preferred Stock of Borrower) of Borrower and its Subsidiaries as of
such date plus (or minus in the case of a deficit) the surplus and retained
earnings of Borrower and its Subsidiaries as of such date, all determined on a
consolidated basis and in accordance with GAAP.
Consolidated Tangible Net Worth shall mean, as of the date of any
determination thereof, the sum of (a) Consolidated Net Worth as of such date
minus (b) the book value of all Intangible Assets of Borrower and its
Subsidiaries as of such date, all determined on a consolidated basis and in
accordance with GAAP.
Default shall mean any event or condition the occurrence of which
would, with the lapse of time or the giving of notice or both, become an Event
of Default as defined in Section 6 hereof.
Debt of any Person shall mean, as of the date of determination thereof,
the sum of, without duplication, (a) all Indebtedness of such Person for
borrowed money, plus) (b) all Indebtedness of such Person which has been
incurred in connection with the purchase or other acquisition of Property or
assets (other than unsecured trade accounts payable incurred in the ordinary
course of business), plus (c) all Capitalized Lease Obligations of such Person
plus (d) all Guarantees by such Person of Debt of others plus (e) in the case of
Borrower, the aggregate par value of all issued and outstanding shares of Series
A Preferred Stock of Borrower.
Distribution in respect of any corporation shall mean: (a) dividends or
other distributions (other than stock dividends and stock splits) on or in
respect of any of the capital stock of such corporation; and (b) the redemption,
repurchase or other acquisition of any capital stock of such corporation or of
any warrants, rights or other options to purchase any such capital stock (except
when solely in exchange for such stock).
Domestic Business Day shall mean any day except a Saturday, Sunday or
legal holiday observed by Lender or by commercial banks in St. Louis, Missouri.
- 3 -
<PAGE> 4
Eligible Accounts shall mean all Accounts other than: (a) Accounts
which remain unpaid for more than ninety (90) days after their invoice dates and
Accounts which are not due and payable within ninety (90) days after their
invoice dates; (b) Accounts owing by a single Account Debtor, including a
currently scheduled Account, if Twenty-Five Percent (25%) or more of the balance
owing by said Account Debtor upon said Accounts is ineligible pursuant to clause
(a) above; (c) Accounts with respect to which the Account Debtor is a
shareholder or partner of Borrower or an Affiliate of Borrower; (d) Accounts
with respect to which payment by the Account Debtor is or may be conditional and
Accounts commonly known as bill and hold Accounts or Accounts of a similar or
like arrangement; (e) Accounts with respect to which the Account Debtor is not a
resident or citizen of or otherwise located in the United States of America,
unless such Accounts are backed in full by an irrevocable letter of credit in
form and substance satisfactory to Lender issued by a domestic commercial bank
acceptable to Lender; (f) Accounts with respect to which the Account Debtor is
the United States of America or any department, agency or instrumentality of the
United States of America, unless such Accounts are duly assigned to Lender in
accordance with all applicable governmental and regulatory rules and regulations
(including, without limitation, the Federal Assignment of Claims Act of 1940, as
amended, if applicable) so that Lender is recognized by the Account Debtor to
have all of the rights of an assignee of such Accounts; (g) Accounts with
respect to which the Account Debtor is any state of the United States or any
department, agency or instrumentality of any state of the United States if such
state or such department, agency or instrumentality is subject to or entitled to
the benefits of any law, rule, regulation or ordinance which prohibits,
restricts, impose conditions upon or requires notice to or consent of such state
or such department, agency or instrumentality for or with respect to the
assignment of, or the grant of a security interest in or lien on, any Accounts
owed by such state or such department, agency or instrumentality, unless such
Accounts are duly assigned to Lender in accordance with all such applicable
laws, rules, regulations and ordinances so that Lender is recognized by the
Account Debtor to have all of the rights of an assignee of such Accounts; (h)
Accounts with respect to which Borrower is or may become liable to the Account
Debtor for goods sold or services rendered by such Account Debtor to Borrower,
but only to the extent of such Borrower's then aggregate liability to such
Account Debtor (i.e. the excess of the aggregate face amount of Accounts of such
Account Debtor over the aggregate liability of Borrower to such Account Debtor
shall constitute an Eligible Account unless otherwise excepted under this
definition of Eligible Accounts); (i) Accounts with respect to which the goods
giving rise thereto have not been shipped and delivered to and accepted as
satisfactory by the Account Debtor thereof or with respect to which the
services performed giving rise thereto have not been completed and accepted as
satisfactory by the Account Debtor thereof; (j) Accounts with respect to which
possession and/or control of the goods sold giving rise thereto is held,
maintained or retained by Borrower (or by any agent or custodian of Borrower)
for the account of or subject to further and/or future direction from the
Account Debtor thereof; (k) Accounts arising from a consignment sale, a "sale on
approval" or a "sale or return"; (l) Accounts as to which Lender, at any time or
times hereafter, determines in good faith, in -accordance with Lender's
customary business practices exercised in a commercially reasonable manner, that
the prospects of payment or performance by the Account Debtor is or will be
impaired in any material respect; (m) Accounts of an Account Debtor to the
extent, but only to the extent, that the same exceed a credit limit determined
at any time or times hereafter by Lender in good faith in accordance with
Lender's customary business practices exercised in a commercially reasonable
manner; (n) Accounts with respect to which the Account Debtor is located in the
State of New Jersey, the State of Minnesota or the State of West Virginia;
provided, however, that such restriction shall not apply if Borrower (i) has
filed and has effective (A) in respect of Account Debtors located in the State
of New Jersey, a Notice of Business Activities Report with the State of New
Jersey Division of Taxation for the then current year, (B) in respect of Account
Debtors located in the State of Minnesota, a Minnesota Business Activity Report
with the Minnesota Department of Revenue for the then current year or (C) in
respect of Account Debtors located in the State of West Virginia, a West
Virginia Business Activity Report with the West Virginia Department of Tax and
Revenue for the then current year, as applicable, or (ii) is otherwise exempt
from such reporting requirements under the laws of such State(s); and (o)
Accounts which are not subject to a first priority perfected security interest
in favor of Lender.
Eligible Inventorv shall mean all Inventory of Borrower which consists
of raw materials or finished goods (specifically excluding any Inventory of
Borrower which consists of work-in-process) other than: (a) any Inventory which
is Subject to Lease or has ever been Subject to Lease (this clause (a) shall not
exclude Inventory which was but is not currently Subject to Lease and which has
been reconditioned and put into Borrower's parts Inventory); (b) any Inventory
which is obsolete; (c) any Inventory which Lender has in good faith determined,
in accordance with Lender's customary business practices exercised in a
commercially
- 4 -
<PAGE> 5
reasonable manner, is unacceptable due to age, type, category, quality and/or
quantity; (d) any inventory which is not located in the continental United
States of America; (e) any Inventory which is not located at the chief executive
office of Borrower, one of the locations listed on Exhibit A to the Security
Agreement or another location with respect to which Borrower has complied with
all of the requirements of Section 2(h) of the Security Agreement; and (f) any
Inventory which is not subject to a first priority perfected security interest
in favor of Lender.
Eligible Lease shall mean a Lease which (a) is a lease of one or more
instant lottery vending machines, prepaid phone card dispensing machines and/or
smart card dispensing machines (and not a maintenance-only contract) which are
located in the United States of America and (b) as of the applicable date of
determination, meets all of the following requirements: (i) the lessee under
such Lease is (A) the United States of America or any state of the United States
or any department, agency or instrumentality of any of the foregoing or (B) a
Person who is a resident or citizen of or otherwise located in the United States
of America and whose creditworthiness is reasonably acceptable to Lender (as
determined from time to time by Lender); (ii) no payment due Borrower under such
Lease (other than disputed payments aggregating less than $50,000.00) is more
than (A) one hundred twenty (120) days past due if the lessee under such Lease
is the United States of America or any state of the United States or any
department, agency or instrumentality of any of the foregoing or (B) ninety (90)
days past due if the lessee under such Lease is not the United States of America
or a state of the United States or a department, agency or instrumentality of
any of the foregoing; (iii) no other default or event of default under such
Lease has been declared by Borrower or the applicable lessee(s); (iv) the
lessee(s) under such Lease have not asserted any defenses, claims, counterclaims
or set-offs against Borrower under or in respect of such Lease which,
individually or in the aggregate, involve an amount in excess of $50,000.00; (v)
it arises from a bona fide lease of the instant lottery vending machines,
prepaid phone card dispensing machines and/or smart card dispensing machines
covered thereby, is the legal, valid, binding and enforceable obligation of the
lessee(s) thereunder and is in full force and effect and has not been
terminated; (vi) such Lease complies with all applicable Federal, state and
local laws, rules and regulations; (vii) such Lease is not subject to any
defenses, claims, counterclaims or set-offs against Lender, including, without
limitation, those resulting from acts or omissions of Borrower or its agents,
which, individually or in the aggregate, involve an amount in excess of
$50,000.00; (viii) such Lease (or an independent instrument executed by the
applicable lessees)) expressly provides that all amounts (whether for rent or
otherwise) from time to time payable to Borrower under such Lease are assignable
by Borrower to Lender consistent with the terms of the Security Agreement
(provided, however, that in order to permit Borrower time to obtain such
consents, this clause (viii) shall not apply during the period commencing on the
date of this Agreement and ending January 28, 1998); (ix) the Lease, the
payments thereunder and the related Inventory are not subject to any security
interest or other Lien except in favor of Lender under the Security Agreement;
and (x) Borrower holds good title to the Lease and the payments due thereunder,
Lender has a perfected security interest in such Lease and all payments due
thereunder and the perfected security interest of Lender in such Lease and the
payments due thereunder is a first priority security interest.
Eligible Lease Payments shall mean, with respect to each Eligible
Lease, as of any date, the aggregate minimum base rental payments (excluding any
percentage rental payments) due or to become due under such Eligible Lease for
instant lottery vending machines, prepaid phone card dispensing machines and/or
smart card dispensing machines delivered to and accepted by the lessee(s) under
such Eligible Lease on or prior to such date during the shorter of (a) the
period commencing on such date and ending eighteen (18) months thereafter and
(b) the remaining term of such Lease (determined without giving effect to any
renewal or extension terms exercisable at the option of the lessee(s) which have
not been exercised by such lessee(s)).
Environmental Claim shall mean any administrative, regulatory or
judicial action, judgment, order, consent decree, suit, demand, demand letter,
claim, Lien, notice of noncompliance or violation, investigation or other
proceeding arising (a) pursuant to any Environmental Law or governmental or
regulatory approval issued under any such Environmental Law, (b) from the
presence, use, generation, storage, treatment, Release, threatened Release,
disposal, remediation or other existence of any Hazardous Substance, (c) from
any removal, remedial, corrective or other response action pursuant to an
Environmental Law or the order of any governmental or regulatory authority or
agency, (d) from any third party seeking damages, contribution, indemnification,
cost recovery, compensation, injunctive or other relief in connection with a
Hazardous Substance or arising from alleged injury or threat of injury to
health, safety, natural resources or the
- 5 -
<PAGE> 6
environment or (e) from any Lien against any Property owned, leased or operated
by Borrower or any Subsidiary in favor of any governmental or regulatory
authority or agency in connection with a Release, threatened Release or disposal
of a Hazardous Substance.
Environmental Law shall mean any international, Federal, state or local
statute, law, rule, regulation, order, consent decree, judgment, permit,
license, code, covenant, deed restriction, common law, treaty, convention,
ordinance or other requirement relating to public health, safety or the
environment, including, without limitation, those relating to Releases,
discharges or emissions to air, water, land or groundwater, to the withdrawal or
use of groundwater, to the use and handling of polychlorinated biphenyls or
asbestos, to the disposal, treatment, storage or management of hazardous or
solid waste, Hazardous Substances or crude oil, or any fraction thereof, to
exposure to toxic or hazardous materials, to the handling, transportation,
discharge or release of gaseous or liquid Hazardous Substances and any rule,
regulation, order, notice or demand issued pursuant to such law, statute or
ordinance, in each case applicable to any of the Property owned, leased or
operated by Borrower or any Subsidiary or the operation, construction or
modification of any such Property, including, without limitation, the following:
CERCLA, the Solid Waste Disposal Act, as amended by the Resource Conservation
and Recovery Act of 1976 and the Hazardous and Solid Waste Amendments of 1984,
the Hazardous Materials Transportation Act, as amended, the Federal Water
Pollution Control Act, as amended by the Clean Water Act of 1976, the Safe
Drinking Water Control Act, the Clean Air Act of 1966, as amended, the Toxic
Substances Control Act of 1976, the Occupational Safety and Health Act of 1970,
as amended, the Emergency Planning and Community Right-to-Know Act of 1986, the
National Environmental Policy Act of 1975, the Oil Pollution Act of 1990 and any
similar or implementing state or local law, and any state or local statute and
any further amendments to these laws providing for financial responsibility for
cleanup or other actions with respect to the Release or threatened Release of
Hazardous Substances or crude oil, or any fraction thereof and all rules,
regulations, guidance documents and publication promulgated
thereunder.
ERISA shall mean the Employee Retirement Income Security Act of 1974,
as amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA shall be construed to also refer to any successor sections;
ERISA Affiliate shall mean any corporation, trade or business that is,
along with Borrower or any Subsidiary, a member of a controlled group of
corporations or a controlled group of trades or businesses, as described in
Sections 414(b) and 414(c), respectively, of the Code or Section 4001 of ERISA.
Eurodollar Business Day shall mean any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.
Event of Default shall have the meaning ascribed thereto in Section 6.
Exchange Act shall mean the Securities Exchange Act of 1934, as
amended.
GAAP shall mean generally accepted accounting principles at the time in
the United States.
Guarantee by any Person shall mean any obligation (other than
endorsements of negotiable instruments for deposit or collection in the ordinary
course of business), contingent or otherwise, of such Person guaranteeing, or in
effect guaranteeing, any Indebtedness, liability, dividend or other obligation
of any other Person (the "primary obliger") in any manner, whether directly or
indirectly, including, without limitation, all obligations incurred through an
agreement, contingent or otherwise, by such Person: (a) to purchase such
Indebtedness or obligation or any Property or assets constituting security
therefor, (b) to advance or supply funds (i) for the purchase or payment of such
Indebtedness or obligation, (ii) to maintain working capital or other balance
sheet condition or otherwise to advance or make available funds for the purchase
or payment of such Indebtedness or obligation, (iii) to lease property or to
purchase securities or other property or services primarily for the purpose of
assuring the owner of such Indebtedness or obligation of the ability of the
primary obliger to make payment of the Indebtedness or obligation or (iv)
otherwise to assure the owner of the Indebtedness or obligation of the primary
obliger against loss in respect thereof. For the purposes of all computations
made under this Agreement, a Guarantee in respect of any Indebtedness for
borrowed money
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<PAGE> 7
shall be deemed to be Indebtedness equal to the then outstanding principal
amount of such Indebtedness for borrowed money which has been guaranteed or such
lesser amount to which the maximum exposure of the guarantor shall have been
specifically limited, and a Guarantee in respect of any other obligation or
liability or any dividend shall be deemed to be Indebtedness equal to the
maximum aggregate amount of such obligation, liability or dividend or such
lesser amount to which the maximum exposure of the guarantor shall have been
specifically limited. Guarantee when used as a verb shall have a correlative
meaning.
Hazardous Substance shall mean any hazardous or toxic material,
substance or waste, pollutant or contaminant which is regulated under any
Environmental Law or any other statute, law, ordinance, rule or regulation of
any local, state, regional, Federal or international authority having
jurisdiction over any of the Property owned, leased or operated by Borrower or
any Subsidiary or its use, including, without limitation, any material,
substance or waste which is: (a) defined as a hazardous substance under Section
311 of the Federal Water Pollution Control Act (33 U.S.C. ss.ss.1317), as
amended; (b) regulated as a hazardous waste under Section 1004 or Section 3001
of the Federal Solid Waste Disposal Act, as amended by the Resource Conservation
and Recovery Act (42 U.S.C. ss. ss.6901 et seq.), as amended; (c) defined as a
hazardous substance under Section 101 of the Comprehensive Environmental
Response, Compensation and Liability Act (42 U.S.C. ss. ss.9601 et seq.), as
amended; or (d) defined or regulated as a hazardous substance or hazardous waste
under any rules or regulations promulgated under any of the foregoing statutes.
Indebtedness shall mean, with respect to any Person, without
duplication, all indebtedness, liabilities and obligations of such Person which
in accordance with GAAP are required to be classified upon a balance sheet of
such Person as liabilities of such Person, and in any event shall include all
(a) obligations of such Person for borrowed money or which have been incurred in
connection with the purchase or other acquisition of Property or assets, (b)
obligations secured by any Lien on, or payable out of the proceeds of or
production from, any Property or assets owned by such Person, whether or not
such Person has assumed or become liable for the payment of such obligations,
(c) indebtedness, liabilities and obligations of third parties, including joint
ventures and partnerships of which such Person is a venturer or general partner,
recourse to which may be had against such Person, (d) obligations created or
arising under any conditional sale or other title retention agreement with
respect to Property acquired by such Person, notwithstanding the fact that the
rights and remedies of the seller, lender or lessor under such agreement in the
event of default are limited to repossession or sale of such Property, (e)
Capitalized Lease Obligations of such Person, (f) indebtedness, liabilities and
obligations of such Person under Guarantees and (f) unpaid reimbursement
obligations of such Person with respect to letters of credit issued for the
account of such Person.
Intangible Assets shall mean all patents, trademarks, service marks,
copyrights, trade names, goodwill (including any amounts, however designated,
representing the cost of acquisition of business and investments in excess of
the book value thereof), prepaid expenses, deferred tax assets (net of any
deferred tax liabilities), unamortized debt discount and expense, unamortized
deferred charges, deferred research and development costs, any write-up of asset
value after the date of this Agreement, non-competition covenants, signing
bonuses and any other assets treated as intangible assets under GAAP.
Interest Period shall mean with respect to each LIBOR Loan:
(a) initially, the period commencing on the date of such
Revolving Credit Loan and ending one (1), two (2) or three (3) months
thereafter (or such other period agreed upon in writing by Borrower and
Lender), as Borrower may elect in the applicable Borrowing Notice; and
(b) thereafter, each period commencing on the last day of the
immediately preceding Interest Period applicable to such Revolving
Credit Loan and ending one (1), two (2) or three (3) months thereafter
(or such other period agreed upon in writing by Borrower and Lender),
as Borrower may elect pursuant to Section 2.04;
provided that:
(c) subject to clauses (d) and (e) below, any Interest Period
which would otherwise end on a day which is not a Eurodollar Business
Day shall be extended to the next succeeding Eurodollar
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<PAGE> 8
Business Day unless such Eurodollar Business Day falls in another
calendar month, in which case such Interest Period shall end on the
immediately preceding Eurodollar Business Day;
(d) subject to clause (e) below, any Interest Period which
begins on the last Eurodollar Business Day of a calendar month (or on a
day for which there is no numerically corresponding day in the calendar
month at the end of such Interest Period) shall end on the last
Eurodollar Business Day of a calendar month; and
(e) no Interest Period shall extend beyond the last day of the
Revolving Credit Period.
Inventory shall mean all personal property owned by Borrower and held
for sale or lease, valued at the lower of cost or market in accordance with
GAAP.
Investment shall mean any investment by Borrower or any Subsidiary in
any Person, whether payment therefor is made in cash or capital stock of
Borrower or any Subsidiary, and whether such investment is by acquisition of
stock or Indebtedness, or by loan, advance, transfer of property out of the
ordinary course of business, capital contribution, equity or profit sharing
interest, extension of credit on terms other than those normal in the ordinary
course of business or otherwise.
Lease shall mean a lease agreement entered into by Borrower, as lessor,
in the ordinary course of business with a Person who is not an Affiliate of
Borrower or any Subsidiary.
Lease Payments shall mean all rents and other sums payable to or
receivable by Borrower from the lessee(s) under or pursuant to the provisions of
the Leases, whether as rent, late fees, interest, casualty payments, indemnity
payments, liquidated or unliquidated damages or otherwise.
Lender's Revolving Credit Commitment shall mean the sum of
$15,000,000.00.
Letter of Credit shall mean each commercial and/or standby letter of
credit issued for the account of Borrower with respect to which Lender has
agreed to indemnify the issuer of such letter of credit in accordance with
Section 2.06 of this Agreement; and Letters of Credit shall mean all of the
foregoing.
LIBOR Base Rate shall mean, with respect to the applicable Interest
Period, (a) the LIBOR Index Rate for such Interest Period, if such rate is
available or (b) if the LIBOR Index Rate cannot be determined, the average
(rounded upward, if necessary, to the next higher 1/100 of 1%) of the
respective rates per annum of interest at which deposits in dollars are offered
to Mercantile Bank National Association (or its successor) in the London
interbank market by two (2) Eurodollar dealers of recognized standing, selected
by Mercantile Bank National Association (or its successor) in its sole
discretion, at such time on the date two (2) Eurodollar Business Days before the
first day of such Interest Period as Mercantile Bank National Association (or
its successor) in its sole discretion elects, for delivery on the first day of
the applicable Interest Period for a number of days comparable to the number of
days in such Interest Period and in an amount approximately equal to the
principal amount of the LIBOR Loan to which such Interest Period is to apply.
LIBOR Index Rate shall mean, with respect to the applicable Interest
Period, the rate per annum (rounded upwards, if necessary, to the next higher
1/100 of 1%) for deposits in U.S. Dollars for a period equal to such Interest
Period, which appears on the Telerate Page 3750 as of 9:00 a.m. (St. Louis time)
on the day two (2) Eurodollar Business Days before the commencement of such
Interest Period.
LIBOR Loan shall mean any Revolving Credit Loan bearing interest at the
LIBOR Rate.
LIBOR Margin shall mean Two Percent (2%) per annum.
LIBOR Rate shall mean (a) the quotient of the (i) LIBOR Base Rate
divided by (ii) one minus the applicable LIBOR Reserve Percentage plus (b) the
LIBOR Margin. The LIBOR Rate shall be adjusted automatically on and as of the
effective date of any change in the LIBOR Reserve Percentage.
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<PAGE> 9
LIBOR Reserve Percentage shall mean for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor), for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in St. Louis, Missouri with respect to "Eurocurrency liabilities"
(or in respect of any other category of liabilities which includes deposits by
reference to which the interest rate on LIBOR Loans is determined or any
category of extensions of credit or other assets which include loans by a
non-United States office of Mercantile Bank National Association (or its
successor) to United States residents).
Lien shall mean any interest in Property securing an obligation owed
to, or a claim by, a Person other than the owner of the Property, whether such
interest is based on common law, statute or contract, including, without
limitation, any security interest, mortgage, deed of trust, pledge,
hypothecation, judgment lien or other lien or encumbrance of any kind or nature
whatsoever, any conditional sale or trust receipt, any lease, consignment or
bailment for security purposes and any Capitalized Lease. The term "Lien" shall
include reservations, exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictions, leases and other title exceptions and
encumbrances affecting Property.
Material Adverse Effect shall mean (a) a material adverse effect on the
Properties, assets, liabilities, business, operations, prospects, income or
condition (financial or otherwise) of Borrower and its Subsidiaries taken as a
whole, (b) material impairment of Borrower's ability to perform any of its
obligations under this Agreement, the Revolving Credit Note or any of the other
Transaction Documents or (c) material impairment of the enforceability of the
rights of, or benefits available to, Lender under this Agreement, the Revolving
Credit Note or any of the other Transaction Documents.
Moody's shall mean Moody's Investors Service, Inc.
Multi-Employer Plan shall mean a "multi-employer plan" as defined in
Section 4001(a)(3) of ERISA which is maintained for employees of Borrower, any
Subsidiary or any ERISA Affiliate or to which Borrower, any Subsidiary or any
ERISA Affiliate has contributed in the past or currently contributes.
Obligor shall mean Borrower and each other Person who is or shall at
any time hereafter become primarily or secondarily liable on any of the
Borrower's Obligations or who grants Lender a Lien upon any of the Property or
assets of such Person as security for any of the Borrower's Obligations;
provided, however, that neither an Account Debtor on an Account nor a lessee
under a Lease shall be deemed to be an Obligor solely because such Person is
such an Account Debtor or lessee.
Occupational Safety and Health Laws shall mean the Occupational Safety
and Health Act of 1970, as amended, and any other Federal, state or local
statute, law, ordinance, code, rule, regulation, order or decree regulating,
relating to or imposing liability or standards of conduct concerning employee
health and/or safety, as now or at any time hereafter in effect.
Patent, Trademark and License Security Agreement shall mean that
certain Patent, Trademark and License Security Agreement dated the date hereof
and executed by Borrower in favor of Lender, as the same may from time to time
be amended, modified, extended or renewed.
PBGC shall mean the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
Pension Plan shall mean a "pension plan," as such term is defined in
Section 3(2) of ERISA, which is established or maintained by Borrower, any
Subsidiary or any ERISA Affiliate, other than a Multi-Employer Plan.
Permitted Liens shall mean any of the following:
(a) Liens on Property or assets of a Subsidiary to secure
obligations of such Subsidiary to Borrower;
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<PAGE> 10
(b) Liens for property taxes and assessments or governmental
charges or levies and Liens securing claims or demands of mechanics and
materialmen, provided payment thereof is not at the time required by
Section 5.01(d) and/or 5.01(e);
(c) Liens (other than any Liens imposed by ERISA) incidental
to the conduct of business or the ownership of Properties and assets
(including Liens in connection with worker's compensation, unemployment
insurance and other like laws, warehousemen's and attorneys' liens and
statutory landlords' liens) and Liens to secure the performance of
bids, tenders or trade contracts, or to secure statutory obligations,
surety or appeal bonds or other Liens of like general nature incurred
in the ordinary course of business and not in connection with the
borrowing of money or the purchase or other acquisition of Property;
provided in each case the obligation secured is not overdue or, if
overdue, is being contested in good faith by appropriate actions or
proceedings being diligently conducted and for which adequate reserves
in accordance with GAAP have been set aside;
(d) minor survey exceptions or minor encumbrances, easements
or reservations, or rights of others for rights-of-way, utilities and
other similar purposes, or zoning or other restrictions as to the use
of real properties, which are necessary or desirable for the conduct of
the activities of Borrower and its Subsidiaries or which customarily
exist on properties of corporations engaged in similar activities and
similarly situated and which do not in any event materially impair the
use of such real properties in the operation of the business of the
Borrower and its Subsidiaries;
(e) Liens existing as of the date of this Agreement and listed
on Schedule 4.12 attached hereto;
(f) purchase money Liens granted to a Person financing a
Capital Expenditure permitted by Section 5.02(m) of this Agreement so
long as (i) the Lien granted is limited to the specific fixed assets
acquired and the proceeds thereof, (ii) the aggregate principal amount
of Debt secured by the Lien is not more than the acquisition cost of
the specific fixed assets on which the Lien is granted and (iii) the
transaction does not violate any other provision of this Agreement;
(g) Capitalized Leases permitted by Section 5.02(m) of this
Agreement; and
(h) the rights of a lessee under a Lease to the Inventory
subject to such Lease.
Person shall mean any individual, sole proprietorship, partnership,
joint venture, limited liability company, trust, unincorporated organization,
association, corporation, institution, entity or government (whether national,
Federal, state, county, city, municipal or otherwise, including, without
limitation, any instrumentality, division, agency, body or department thereof).
Prime Loan shall mean any Revolving Credit Loan bearing interest at the
Prime Rate.
Prime Rate shall mean the interest rate announced from time to time by
Mercantile Bank National Association (or its successor) as its "prime rate"
(which rate shall fluctuate as and when said prime rate shall change). Borrower
acknowledges that such "prime rate" is a reference rate and does not necessarily
represent the lowest or best rate offered by Lender or Mercantile Bank National
Association to its customers.
Principal Shareholders shall mean and include (a) L. Rogers Wells, (b)
the spouses, lineal descendants and spouses of the lineal descendants of one or
more of the individuals listed in clause (a) above, (c) the estates of one or
more of the individuals listed in clauses (a) or (b) above and (d) trusts
established solely for the benefit of one or more of the individuals listed in
clauses (a) or (b) above.
Property shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible. Properties shall
mean the plural of Property. For purposes of this Agreement, Borrower and each
Subsidiary shall be deemed to be the owner of any Property which it has acquired
or holds subject to a conditional sale agreement, financing lease or other
arrangement pursuant to which title to the Property has been retained by or
vested in some other Person for security purposes.
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<PAGE> 11
Rate of Dilution of Borrower's Accounts shall mean the value of all
non-cash credits to Borrower's Accounts (including, without limitation, bad debt
expense) during the twelve (12) month period immediately preceding the date of
calculation divided by Borrower's sales during said period. The Rate of Dilution
shall be calculated by Lender in connection with each of its collateral
examinations of the Borrower's Accounts (which calculation shall be conclusive
in the absence of manifest error), and the Rate of Dilution as so calculated by
Lender shall be and remain the applicable Rate of Dilution until the next
collateral examination is performed by Lender. If the Rate of Dilution at the
time of any calculation thereof has increased or decreased from the prior
calculation thereof, then Lender shall adjust the advance rate for Accounts used
in the Borrowing Base accordingly.
RCRA shall mean the Solid Waste Disposal Act, as amended by the
Resource Conservation and Recovery Act of 1976 and Hazardous and Solid Waste
Amendments of 1984, 42 U.S.C. SS.SS. 6901 et seq., and any future amendments.
Regulation D shall mean Regulation D of the Board of Governors of the
Federal Reserve System, as amended.
Regulatory Change shall mean if (a) Regulation D or (b) after the date
hereof, the adoption of any applicable law, rule or regulation, or any change
therein, or any change in the interpretation or administration thereof by any
governmental or regulatory authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by Lender with
any request or directive (whether or not having the force of law) of any such
governmental or regulatory authority, central bank or comparable agency shall
(i) subject Lender to any tax, duty or other charge with respect to any of the
LIBOR Loans, the Revolving Credit Note or Lender's obligation to make, maintain
or fund any of the LIBOR Loans, or shall change the basis of taxation of
payments to Lender of the principal of or interest on any of the LIBOR Loans or
any other amounts due under this Agreement in respect of any of the LIBOR Loans
or its obligation to make, maintain or fund any of the LIBOR Loans (except for
taxes on or changes in the rate of tax on the overall net income of Lender) or
(ii) impose, modify or deem applicable any reserve (including, without
limitation, any reserve imposed by the Board of Governors of the Federal Reserve
System), special deposit, capital or similar requirement against assets of,
deposits with or for the account of, or credit extended or committed to be
extended by, Lender or shall, with respect to Lender or the London interbank
market, impose, modify or deem applicable any other condition affecting any of
the LIBOR Loans, the Revolving Credit Note or Lender's obligation to make,
maintain or fund any of the LIBOR Loans.
Release shall mean any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping or disposing into
the environment, including, without limitation, the abandonment or discarding of
barrels, drums, containers, tanks and/or other receptacles containing (or
containing traces of) any Hazardous Substance.
Reportable Event shall have the meaning given to such term in ERISA.
Restricted Investment shall mean any Investment, or any expenditure or
any incurrence of any liability to make any expenditure for an Investment, other
than:
(a) loans and/or advances by any Subsidiary to Borrower which
are subordinated in writing to the payment of the Borrower's
Obligations in form and substance satisfactory to Lender;
(b) direct obligations of the United States of America or any
instrumentality or agency thereof, the payment of which is
unconditionally guaranteed by the United States of America or any
instrumentality or agency thereof (all of which Investments must mature
within twelve (12) months from the time of acquisition thereof);
(c) Investments in readily marketable commercial paper which,
at the time of acquisition thereof by Borrower or any Subsidiary, is
rated A-1 or better by S&P and P-1 or better by Moody's and which
matures within 270 days from the date of acquisition thereof, provided
that the issuer of such
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<PAGE> 12
commercial paper shall, at the time of acquisition of such commercial
paper, have a senior long-term debt rating of at least A by S&P and
Moody's;
(d) negotiable certificates of deposit or negotiable bankers
acceptances issued by Mercantile Bank National Association or any other
bank or trust company organized under the laws of the United States of
America or any state thereof, which bank or trust company (other than
Mercantile Bank National Association to which such restrictions shall
not apply) is a member of both the Federal Deposit Insurance
Corporation and the Federal Reserve System and is rated B or better by
Thompsons Bank Watch Service (all of which Investments must mature
within twelve (12) months from the time of acquisition thereof);
(e) repurchase agreements, which shall be collateralized for
at least 102% of face value, issued by Mercantile Bank National
Association or any other bank or trust company organized under the laws
of the United States or any state thereof, which bank or trust company
(other than Mercantile Bank National Association to which such
restrictions shall not apply) is a member of both the Federal Deposit
Insurance Corporation and the Federal Reserve System and is rated B or
better by Thompsons Bank Watch Service (all of which Investments must
mature within twelve (12) months from the time of acquisition thereof);
(f) Investments existing as of the date hereof as described in
Schedule 4.18 attached hereto, and any future retained earnings in
respect thereof; and
(g) loans or advances in the usual and ordinary course of
business to officers and/or employees of Borrower or a Subsidiary for
business expenses in the aggregate principal amount of up to $25,000.00
at any one time outstanding.
Revolving Credit Loan and Revolving Credit Loans shall have the
meanings ascribed thereto in Section 2.01 (a).
Revolving Credit Note shall have the meaning ascribed thereto in
Section 2.03.
Revolving Credit Period shall mean the period commencing on the date of
this Agreement and ending October 29, 2000; provided, however, that
notwithstanding the foregoing, (a) so long as no Default or Event of Default
under this Agreement has occurred and is then continuing, the Revolving Credit
Period shall be automatically extended for subsequent successive one (1) year
periods unless Borrower or Lender provides written notice to the other at least
sixty (60) days prior to the expiration of the then current period that it does
not wish to extend the Revolving Credit Period (in which event the Revolving
Credit Period shall expire at the end of the then current period) and (b) the
Revolving Credit Period shall end on the date of the termination of this
Agreement by Borrower or Lender (Lender may terminate this Agreement prior to
the end of the Revolving Credit Agreement only if an Event of Default under this
Agreement has occurred and is continuing).
S&P shall mean Standard and Poor's Ratings Group.
Security Agreement shall mean that certain Security Agreement dated the
date hereof and executed by Borrower in favor of Lender, as the same may from
time to time be amended, modified, extended or renewed.
Subject To Lease shall mean, with respect to any Inventory, that such
Inventory has been delivered to a lessee by Borrower, and accepted by such
lessee, under the terms of a Lease.
Subordinated Debt shall mean, as of the date of any determination
thereof, the aggregate principal amount of all Debt of Borrower outstanding as
of such date which is subordinated in writing (either by its terms or pursuant
to a subordination agreement) to the payment and priority of all of the
Borrower's Obligations in form and substance satisfactory to Lender.
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<PAGE> 13
Subsidiary shall mean any corporation of which more than Fifty Percent
(50%) of the issued and outstanding capital stock entitled to vote for the
election of directors (other than by reason of default in the payment of
dividends) is at the time owned directly or indirectly by Borrower or any
Subsidiary.
Telerate Page 3750 shall mean the display designated as "Page 3750" on
the Telerate Service (or such other page as may replace Page 3750 on that
service or such other service as may be nominated by the British Bankers'
Association as the information vendor for the purpose of displaying British
Bankers' Association Interest Settlement Rates for U.S. Dollar Deposits).
Third Party Collateral shall mean any Property or assets of any Obligor
other than Borrower which now or at any time hereafter secure the payment or
performance of any of the Borrower's Obligations.
Total Revolving Credit Outstandings shall mean, as of any date, the sum
of (a) the aggregate principal amount of all Revolving Credit Loans outstanding
as of such date, plus (b) the aggregate undrawn face amount of all Letters of
Credit outstanding as of such date.
Transaction Documents shall mean this Agreement, the Revolving Credit
Note, the Security Agreement, the Patent, Trademark and License Security
Agreement and all other agreements, documents and instruments heretofore, now or
hereafter delivered to Lender with respect to or in connection with or pursuant
to this Agreement, any Revolving Credit Loans made hereunder or any of the other
Borrower's Obligations, and executed by or on behalf of Borrower, all as the
same may from time to time be amended, modified, extended or renewed.
Unused Availability shall mean, as of any date, the sum of (a) the
lesser of (i) the Lender's Revolving Credit Commitment as of such date or (ii)
the Borrowing Base as of such date minus (b) the Total Revolving Credit
Outstandings as of such date.
Voting Stock shall mean, with respect to any corporation, any shares of
stock of such corporation whose holders are entitled under ordinary
circumstances to vote for the election of directors of such corporation
(irrespective of whether at the time stock of any other class or classes shall
have or might have voting power by reason of the happening of any contingency).
Welfare Plan shall mean a "welfare plan" as such term is defined in
Section 3(1) of ERISA, which is established or maintained by Borrower, any
Subsidiary or any ERISA Affiliate, other than a Multi-Employer
Plan.
1.02 Accounting Terms and Determinations. Except as otherwise specified
in this Agreement, all accounting terms used in this Agreement shall be
interpreted, all accounting determinations under this Agreement shall be made
and all financial statements required to be delivered under this Agreement shall
be prepared in accordance with GAAP as in effect from time to time, applied on a
basis consistent (except for changes approved by Lender and by Borrower's
independent certified public accountants) with the most recent audited financial
statements of Borrower delivered to Lender.
SECTION 2. THE REVOLVING CREDIT LOANS.
2.01 Revolving Credit Loans.
(a) Subject to the terms and conditions of this Agreement, during the
Revolving Credit Period of this Agreement, and so long as no Default or Event of
Default under this Agreement has occurred and is continuing, Lender hereby
agrees to make such loans (individually, a "Revolving Credit Loan" and
collectively, the "Revolving Credit Loans") to Borrower as Borrower may from
time to time request pursuant to Section 2.02(a) or 2.02(b). Each Revolving
Credit Loan under this Section 2.01 (a) which is a LIBOR Loan shall be for an
aggregate principal amount of at least $1,000,000.00 or any larger multiple of
$1,000,000.00. The aggregate principal amount of Revolving Credit Loans which
Lender shall be required to have outstanding under this Agreement at any one
time shall not exceed the sum of (i) the lesser of (A) the Lender's Revolving
Credit Commitment or (B) the Borrowing Base minus (ii) the aggregate undrawn
face amount of all outstanding Letters of Credit. Subject to the terms and
conditions of this Agreement, Borrower may borrow, repay and reborrow
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<PAGE> 14
such sums from Lender, provided, however, that in no event may the Total
Revolving Credit Outstandings on any given day exceed the lesser of (a) the
Lender's Revolving Credit Commitment as of such day or (b) the Borrowing Base as
of such day. All Revolving Credit Loans not paid prior to the last day of the
Revolving Credit Period, together with all accrued and unpaid interest thereon,
shall be due and payable on the last day of the Revolving Credit Period.
(b) For purposes of this Agreement, the "Borrowing Base" shall mean the
sum of:
(i) (A) Eighty-Five Percent (85%) if the Rate of Dilution of
Borrower's Accounts is less than or equal to Five Percent (5%), (B)
Eighty Percent (80%) if the Rate of Dilution of Borrower's Accounts is
greater than Five Percent (5%) but less than or equal to Eight Percent
(8%), (C) Seventy-Five Percent (75%) if the Rate of Dilution of
Borrower's Accounts is greater than Eight Percent (8%) but less than or
equal to Ten Percent (10%) or (D) such percentage as Lender may
determine in its sole and absolute discretion if the Rate of Dilution
of Borrower's Accounts is greater than Ten Percent (10%), of the face
amount of all then existing Eligible Accounts (less maximum discounts,
credits and allowances which may be taken by or granted to Account
Debtors in connection therewith and/or adjustments for reserves and
allowances deemed appropriate by Lender in its good faith discretion
exercised in accordance with its customary business practices and in a
commercially reasonable manner to protect Lender with respect to the
repayment of the Borrower's Obligations); plus
(ii) the lesser of (A) Fifty Percent (50%) of the Eligible
Inventory of Borrower, valued at the lower of cost or market in
accordance with GAAP or (B) $2,500,000.00; plus
(iii) Sixty-Five Percent (65%) of the aggregate amount of all
Eligible Lease Payments of Borrower; provided, however, that in no
event may the aggregate amount of all Eligible Lease Payments of
Borrower which are due from lessees who are not the United States of
America or a state of the United States or a department, agency or
instrumentality of any of the foregoing exceed the sum of $500,000.00.
Notwithstanding any provision contained in this Section 2.01 (b) to the
contrary, Lender may at any time and from time to time, in its sole and absolute
discretion, loan to Borrower more than the above stated percentage of Eligible
Accounts, more than the above stated percentage of the value of Eligible
Inventory and/or more than the above stated percentage of Eligible Lease
Payments, without notice to Borrower; provided, however, that no such
over-advance shall establish a custom or course of dealing or entitle Borrower
to any subsequent over-advance under the same or different circumstances.
Lender reserves the right at any time and from time to time in its good
faith discretion, exercised in a commercially reasonable manner to protect
Lender with respect to the repayment of the Borrower's Obligations, to increase
or decrease the percentage advance rates on Eligible Accounts, Eligible
Inventory and/or Eligible Lease Payments specified in this Section 2.01(b) upon
seven (7) days' prior written notice to Borrower.
(c) Borrower shall deliver to Lender on the date of execution of this
Agreement (calculated as of August 31, 1997) and on the first (1st) day of each
month thereafter during the Revolving Credit Period (provided, however, that if
any Default or Event of Default under this Agreement occurs or if the Unused
Availability of Borrower is ever less than $ 1,500,000.00, Borrower shall
deliver such Borrowing Base Certificates to Lender on at least one (1) Domestic
Business Day during each week (or at such other intervals as Lender shall
require from time to time)), a borrowing base certificate in the form of Exhibit
A attached hereto and incorporated herein by reference (or in such other form as
Lender shall require from time to time) (each, a "Borrowing Base Certificate")
setting forth:
(i) the Borrowing Base and its components as of the end of
the immediately preceding Domestic Business Day;
(ii) the aggregate principal amount of all Revolving Credit
Loans outstanding as of the end of the immediately preceding Domestic
Business Day;
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<PAGE> 15
(iii) the aggregate undrawn face amount of all Letters of
Credit outstanding as of the end of the immediately preceding Domestic
Business Day; and
(iv) the difference, if any, between the Borrowing Base and
the sum of the Total Revolving Credit Outstandings as of the end of the
immediately preceding Domestic Business Day.
The Borrowing Base shown in such Borrowing Base Certificate (subject to
adjustment for collections of Accounts received by Lender since the date of such
Borrowing Base Certificate) shall be and remain the Borrowing Base hereunder
until the next Borrowing Base Certificate is delivered to Lender, at which time
the Borrowing Base shall be the amount shown in such subsequent Borrowing Base
Certificate. Each Borrowing Base Certificate shall be certified as to truth and
accuracy by the chairman, chief executive officer, president, chief financial
officer or chief accounting officer of Borrower. Borrower shall have the right
to submit Borrowing Base Certificates to Lender more frequently than from time
to time required by Lender.
(d) If at any time the Total Revolving Credit Outstandings are greater
than the Borrowing Base as shown on the most recent Borrowing Base Certificate,
Borrower shall be required to, upon oral or written demand by Lender,
immediately repay the Revolving Credit Loans and/or surrender for cancellation
the outstanding Letters of Credit, in either case in an amount sufficient to
reduce the amount of the Total Revolving Credit Outstandings to the amount of
the Borrowing Base.
(e) Borrower may not have outstanding and Lender shall not be obligated
to make more than ten (10) LIBOR Loans at any one time.
2.02 Procedure for Borrowing. (a) Borrower shall give oral or written
notice (a "Borrowing Notice") to Lender by 10:00 a.m. (St. Louis time) on the
Domestic Business Day of each Prime Loan, and by 10:00 a.m. (St. Louis Time) at
least three (3) Eurodollar Business Days before each LIBOR Loan, specifying:
(i) the date of such Revolving Credit Loan, which shall be a
Domestic Business Day in the case of a Prime Loan and a Eurodollar
Business Day in the case of a LIBOR Loan,
(ii) the aggregate principal amount of such Revolving Credit
Loan,
(iii) whether such Revolving Credit Loan is to be a Prime Loan
or a LIBOR Loan, and
(iv) in the case of a LIBOR Loan, the duration of the initial
Interest Period applicable thereto, subject to the provisions of the
definition of Interest Period.
(b) In addition to Revolving Credit Loans requested by Borrower
pursuant to Section 2.02(a) above, Borrower hereby irrevocably requests and
authorizes Lender, without any other request or authorization from Borrower and
without any notice to Borrower, to automatically make a Prime Loan to Borrower
at the end of each Domestic Business Day on which any checks are presented for
payment on Borrower's controlled disbursement account (Account No. 1005008600)
at Mercantile Bank National Association (the "Controlled Disbursement Accounts),
by crediting the amount of such Prime Loan, which shall be in an amount equal to
the aggregate amount of all checks presented for payment on the Controlled
Disbursement Account on such Domestic Business Day, to the Controlled
Disbursement Account. Notwithstanding the foregoing, Borrower acknowledges and
agrees that Lender has no obligation to make any Revolving Credit Loan requested
under this Section 2.02(b) if (i) after giving effect to such Revolving Credit
Loan the Total Revolving Credit Outstandings would be greater than the lesser of
(A) the Lender's Revolving Credit Commitment or (B) the Borrowing Base or (ii)
any applicable condition set forth in Section 3 has not been satisfied.
(c) A Borrowing Notice for a LIBOR Loan shall not be revocable by
Borrower.
(d) Subject to the terms and conditions of this Agreement, provided
that Lender has received the Borrowing Notice, Lender shall (unless any
applicable condition specified in Section 3 has not been satisfied) make any
Revolving Credit Loan requested by Borrower pursuant to Section 2.02(a) above to
Borrower by crediting the amount of such Revolving Credit Loan to an account of
Borrower at Mercantile Bank National
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<PAGE> 16
Association or such other bank as may from time to time be acceptable to Lender,
not later than 2:30 p.m. (St. Louis time) on the Domestic Business Day or
Eurodollar Business Day, as the case may be, specified in said Borrowing Notice.
(e) If Lender makes a new Revolving Credit Loan hereunder on a day on
which Borrower is required to or has elected to repay all or any part of an
outstanding Revolving Credit Loan, Lender shall apply the proceeds of the new
Revolving Credit Loan to make such repayment and only an amount equal to the
difference (if any) between the amount being borrowed and the amount being
repaid shall be made available by Lender to Borrower as provided in subsection
Id) of this Section, or remitted by Borrower to Lender as provided in Section
2.11, as the case may be.
(f) Borrower hereby irrevocably authorizes Lender to rely on
telephonic, telegraphic, telecopy, telex or written instructions of any
individual identifying himself or herself as one of the individuals listed on
Schedule 2.02(f) attached hereto (or any other individual from time to time
authorized to act on behalf of Borrower pursuant to a resolution adopted by the
Board of Directors of Borrower and certified by the Secretary of Borrower and
delivered to Lender) with respect to any request to make a Revolving Credit Loan
or a repayment hereunder, and on any signature which Lender believes to be
genuine, and Borrower shall be bound thereby in the same manner as if such
person were actually authorized or such signature were genuine. Borrower also
hereby agrees to indemnify Lender and hold Lender harmless from and against any
and all claims, demands, damages, liabilities, losses, costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses)
relating to or arising out of or in connection with the acceptance of
instructions for making Revolving Credit Loans or repayments hereunder.
2.03 Revolving Credit Note. (a) The Revolving Credit Loans of Lender to
Borrower shall be evidenced by a Revolving Credit Note of Borrower dated the
date hereof and payable to the order of Lender in the principal amount of
$15,000,000.00, which Revolving Credit Note shall be in substantially the form
of Exhibit B attached hereto and incorporated herein by reference (as the same
may from time to time be amended, modified extended or renewed, the "Revolving
Credit Note").
(b) Lender shall record in its books and records the date, amount, type
and maturity of each Revolving Credit Loan made by it and the date and amount of
each payment of principal and/or interest made by Borrower with respect thereto.
The books and records of Lender showing the account between Lender and Borrower
shall be admissible in evidence in any action or proceeding and shall, absent
manifest error, constitute prima facie proof of the items therein set forth.
2.04 Duration of Interest Periods and Selection of Interest Rates. (a)
The duration of the initial Interest Period for each LIBOR Loan shall be as
specified in the applicable Borrowing Notice. Borrower shall elect the duration
of each subsequent Interest Period applicable to such LIBOR Loan and the
interest rate to be applicable during such subsequent Interest Period (and
Borrower shall have the option (i) in the case of any Prime Loan, to elect that
such Revolving Credit Loan become a LIBOR Loan and the Interest Period to be
applicable thereto, and (ii) in the case of any LIBOR Loan, to elect that such
Revolving Credit Loan become a Prime Loan), by giving notice of such election to
Lender by 10:00 a.m. (St. Louis time) on the Domestic Business Day of, in the
case of the election of the Prime Rate, and by 10:00 a.m. (St. Louis time) at
least three (3) Eurodollar Business Days before, in the case of the election of
the LIBOR Rate, the end of the immediately preceding Interest Period applicable
thereto, if any; provided, however, that notwithstanding the foregoing, in
addition to and without limiting the rights and remedies of Lender under Section
6 hereof, so long as any Default or Event of Default under this Agreement has
occurred and is continuing, Borrower shall not be permitted to renew any LIBOR
Loan as a LIBOR Loan or to convert any Prime Loan into a LIBOR Loan.
(b) If Lender does not receive a notice of election for a Revolving
Credit Loan pursuant to Section 2.04(a) above within the applicable time limits
specified therein, Borrower shall be deemed to have elected to pay such
Revolving Credit Loan in whole pursuant to Section 2.10 on the last day of the
current Interest Period with respect thereto and to reborrow the principal
amount of such Revolving Credit Loan on such date as a Prime Loan.
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<PAGE> 17
2.05 Interest Rates. (a) So long as no Event of Default under this
Agreement has been declared by Lender and is continuing, each Prime Loan shall
bear interest prior to maturity at a rate per annum equal to the Prime Rate
(fluctuating as and when the Prime Rate shall change). So long as any Event of
Default under this Agreement has been declared by Lender and is continuing, each
Prime Loan shall bear interest prior to maturity at a rate per annum equal to
Four Percent (4%) over and above the Prime Rate (fluctuating as and when the
Prime Rate shall change). Interest on Prime Loans shall be payable monthly in
arrears on the first (1st) day of each month, commencing on the first such date
after such Prime Loan is made, and at the maturity of the Revolving Credit Note,
whether by reason of acceleration or otherwise. From and after the maturity of
the Revolving Credit Note, whether by reason of acceleration or otherwise, each
Prime Loan shall bear interest payable on demand until paid at a rate per annum
equal to Four Percent (4%) over and above the Prime Rate (fluctuating as and
when the Prime Rate shall change).
(b) So long as no Event of Default under this Agreement has been
declared by Lender and is continuing, each LIBOR Loan shall bear interest on the
outstanding principal amount thereof for each Interest Period applicable thereto
at a rate per annum equal to the applicable LIBOR Rate. So long as any Event of
Default under this Agreement has been declared by Lender and is continuing, each
LIBOR Loan shall bear interest on the outstanding principal amount thereof for
each Interest Period applicable thereto at a rate per annum equal to Four
Percent (4%) over and above the applicable LIBOR Rate. Interest on the LIBOR
Loans shall be payable for each Interest Period on the last day thereof and at
the maturity of the Revolving Credit Note, whether by reason of acceleration or
otherwise. From and after the maturity of the Revolving Credit Note, whether by
reason of acceleration or otherwise, each LIBOR Loan shall bear interest payable
on demand until paid at a rate per annum equal to Four Percent (4%) over and
above the Prime Rate (fluctuating as and when the Prime Rate shall change).
(c) Subject to and in accordance with the provisions of this Agreement,
Lender shall determine the interest rate applicable to each Revolving Credit
Loan hereunder and its determination thereof shall be conclusive in the absence
of manifest error.
2.06 Letters of Credit. Lender may, in its sole and absolute
discretion, provide indemnification for the payment of letters of credit issued
at the request and for the account of the Borrower by financial institutions
acceptable to Lender. No Letter of Credit shall have a term extending beyond the
last day of the Revolving Credit Period. In no event may (a) the aggregate
undrawn face amount of all outstanding Letters of Credit exceed the sum of
$500,000.00 or (b) the Total Revolving Credit Outstandings exceed the lesser of
(i) the Lender's Revolving Credit Commitment or (ii) the Borrowing Base. In
consideration of Lender's indemnification with respect to such Letter(s) of
Credit, Borrower hereby agrees to pay Lender a nonrefundable indemnity fee at
the rate of Two and One-Half Percent (2-1/2%) per annum on the aggregate undrawn
face amount of all Letters of Credit which are outstanding for the account of
Borrower, which indemnity fee shall be (i) computed on a daily basis, (ii)
payable monthly in arrears on the first (1st) day of each month and (iii)
calculated on an actual day, 360-day year basis. Said indemnity fee shall be in
addition to any fees charged by the issuers of such Letters of Credit. In the
event of any payment by Lender on or in respect of its indemnity obligations
with respect to a Letter of Credit, Borrower agrees to pay Lender in immediately
available funds at the time of such payment an amount equal to the amount of
such payment. In the event any payment is made by Lender on or in respect of its
indemnity obligations with respect to a Letter of Credit prior to Lender's
receipt of payment from Borrower, such payment by Lender shall constitute a
request by Borrower for a Revolving Credit Loan under Section 2.01 (a) above
(and Lender may make such Revolving Credit Loan to Borrower regardless of
whether such Revolving Credit Loan would otherwise be permitted under the
requirements of Sections 2.01 of this Agreement) and the proceeds of such
Revolving Credit Loan shall be retained by Lender and applied by Lender to the
payment of any amounts owed by Borrower to Lender under this Section 2.06.
Notwithstanding any provision contained in this Agreement to the
contrary: (a) if any Letters of Credit remain outstanding on the last day of the
Revolving Credit Period or, if earlier, the date of the termination of this
Agreement, Borrower shall, on or before 12:00 noon (St. Louis time) on the last
day of the Revolving Credit Period or, if earlier, the date of the termination
of this Agreement, (i) surrender the originals of the applicable Letter(s) of
Credit to Lender for cancellation or (ii) provide Lender with cash collateral
(or other collateral acceptable to Lender in its sole and absolute discretion)
in an amount at least equal to the aggregate
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<PAGE> 18
undrawn face amount of all Letter(s) of Credit which remain outstanding at such
time and execute and deliver to Lender such agreements as Lender may require to
grant Lender a first priority perfected security interest in such cash or other
collateral; and (b) upon the occurrence of any Event of Default under this
Agreement (including, without limitation, Borrower's failure to comply with the
requirements of clause (a) above), at Lender's option and without demand or
further notice to Borrower, an amount equal to the aggregate undrawn face amount
of all Letter(s) of Credit then outstanding shall be deemed (as between Lender
and Borrower) to have been paid or disbursed by Lender under its indemnity
obligations to the issuing bank(s) (notwithstanding that such amounts may not in
fact have been so paid or disbursed by Lender), and a Revolving Credit Loan to
Borrower in such amount to have been made and accepted by Borrower, which
Revolving Credit Loan shall be immediately due and payable. In lieu of the
foregoing, at the election of Lender, Borrower shall, upon Lender's demand, (i)
deliver to Lender cash, or other collateral acceptable to Lender in its sole and
absolute discretion, having a value, as determined by Lender, at least equal to
aggregate undrawn face amount of all outstanding Letters of Credit and (ii)
execute and deliver to Lender such agreements as Lender may require to grant
Lender a first priority perfected security interest in such cash or other
collateral. Any such collateral and/or any amounts received by Lender in payment
of the Revolving Credit Loan made pursuant to this Section 2.06 shall be held by
Lender in a separate account at Mercantile Bank National Association (or its
successor) appropriately designated as a cash collateral account in relation to
this Agreement and the Letters of Credit and retained by Lender as collateral
security for the payment of the Borrower's Obligations. Cash amounts delivered
to Lender pursuant to the foregoing requirements of this Section 2.06 shall be
invested, at the request and for the account of Borrower, in investments of a
type and nature and with a term acceptable to Lender. Such amounts, including in
the case of cash amounts invested in the manner set forth above, any investment
realized thereon, may, at Lender's option, be applied by Lender to reimburse
Lender for any amounts paid by Lender in respect of its indemnity obligations
with respect to the Letters of Credit, or if no such indemnity payments are
required to the payment of such other of the Borrower's Obligations as Lender
shall determine. Any amounts remaining in any cash collateral account
established pursuant to this Section 2.06 after the payment in full of all of
the Borrower's Obligations and the expiration or cancellation of all of the
Letters of Credit shall be returned to Borrower (after deduction of Lender's
reasonable expenses, if any).
2.07 Method of Making Interest and Other Payments; Application of
Payments. Lender may, at its option, deem interest and other amounts payable
under this Agreement (other than the principal balance of the Revolving Credit
Loans) to be paid by causing a Revolving Credit Loan to be made to Borrower in
such amount(s). Solely for the purpose of calculating interest earned by Lender,
payment by or for the account of Borrower shall be applied by the Lender on
account of the Borrower's Obligations on the first (1st) Domestic Business Day
after a deposit of funds is made in the amount of that payment in Lender's
operating account at Mercantile Bank National Association or to such other
operating account at such other financial institution as Lender shall designate.
Deposits received after 3:00 p.m. (St. Louis time) shall be deemed to have been
received or deposited on the following Domestic Business Day.
2.08 Fees.
(a) Borrower hereby agrees to pay Lender a nonrefundable
commitment fee in the amount of $25,000.00 prior to or
contemporaneously with the execution of this Agreement, receipt of
which fee is hereby acknowledged by Bank.
(b) Borrower hereby agrees to pay Lender a nonrefundable
origination fee in the amount of $75,000.00 contemporaneously with the
execution of this Agreement.
(c) Borrower hereby agrees to pay Lender a nonrefundable
anniversary fee in the amount of $15,000.00 on each October 29 during
the Revolving Credit Period commencing October 29, 1998.
(d) During the Revolving Credit Period, Borrower hereby agrees
to pay Lender a minimum monthly fee of $30,000.00 (the "Minimum Monthly
Fee"), which Minimum Monthly Fee shall be reduced by the aggregate
amount of accrued interest actually paid by Borrower with respect to
the Revolving Credit Loans during such month and which Minimum Monthly
Fee shall be payable monthly in arrears on the first (1st) day of each
month commencing December 1, 1997, and on the last day of the Revolving
Credit Period.
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<PAGE> 19
(e) Borrower hereby agrees to pay Lender a quarterly
collateral examination fee in the amount of $2,500.00 payable on the
date hereof and every three (3) months thereafter during the Revolving
Credit Period. In addition to said quarterly collateral examination
fee, Borrower hereby agrees to reimburse Lender upon demand for any
reasonable out-of-pocket costs and expenses incurred by Lender in
connection with any collateral examination conducted by Lender (Lender
agrees that the maximum amount of such out-of-pocket costs and expenses
for which it will seek reimbursement from Borrower will not exceed the
sum of $1,000.00 per collateral examination or $4,000.00 per calendar
year so long as no Default or Event of Default under this Agreement has
occurred and is continuing).
(f) If Borrower fails to make any payment of any principal of
or interest on any Revolving Credit Loan within ten (10) days after the
date the same shall become due and payable, whether by reason of
maturity, acceleration or otherwise, in addition to all of the other
rights and remedies of Lender under this Agreement and at law or in
equity, Borrower shall pay Lender on demand with respect to each such
late payment a late fee in an amount equal to the greater of $100.00 or
Five Percent (5%) of the amount of each such late payment.
2.09 Early Termination and Early Termination Fee. Borrower may elect to
terminate this Agreement at any time. Borrower hereby agrees that in the event
that Lender or Borrower elects to terminate this Agreement (including, without
limitation, any termination by Lender as a result of the occurrence of an Event
of Default under this Agreement), Borrower will pay to Lender the total of the
following: (a) any amount of interest accrued through the date of termination
with respect to the outstanding Borrower's Obligations; and (b) the outstanding
Borrower's Obligations.
2.10 Early Payments. (a) Borrower may, upon notice to Lender specifying
that it is paying the Prime Loans, prepay without penalty or premium the Prime
Loans in whole or in part at any time or from time to time by paying the
principal amount to be paid.
(b) Borrower may, upon at least one (1) Eurodollar Business Day's
prior notice to Lender specifying that it is paying the LIBOR Loans, prepay any
or all of its LIBOR Loans in whole, or in part in amounts aggregating
$1,000,000.00 or any larger multiple of $1,000,000.00, by paying the principal
amount to be paid together with all accrued and unpaid interest thereon to and
including the date of payment and any funding losses and other amounts payable
under Section 2.12; provided, however, that in no event may Borrower make a
partial payment of LIBOR Loans which results in the total outstanding LIBOR
Loans with respect to which a given Interest Period applies being greater than
$0.00 but less than $1,000,000.00.
(c) A notice of payment pursuant to this Section shall not be
revocable by Borrower.
2.11 General Provisions as to Payments. Borrower shall make each
payment of principal of, and interest on, the Revolving Credit Loans and of fees
and all other amounts payable by Borrower under this Section 2, not later than
3:00 p.m. (St. Louis time) on the date when due to Lender at its address
referred to in Section 7.07. Any such payment received by Lender after 3:00 p.m.
(St. Louis time) shall be deemed to have been paid on the next succeeding
Domestic Business Day. Whenever any payment of principal of, or interest on, the
Revolving Credit Loans or of fees shall be due on a day which is not a Domestic
Business Day, the date for payment thereof shall be extended to the next
succeeding Domestic Business Day. If the date for any payment of principal is
extended by operation of law or otherwise, interest thereon, at the then
applicable rate, shall be payable for such extended time.
2.12 Funding Losses. Notwithstanding any provision contained in this
Agreement to the contrary, if Borrower makes any payment of principal with
respect to any LIBOR Loan Pursuant to Sections 2 or 6 or otherwise) on any day
other than the last day of an Interest Period applicable thereto, or if Borrower
fails to borrow or pay any LIBOR Loan after notice has been given to Lender in
accordance with Sections 2.02, 2.04 or 2.10(b) by Borrower, Borrower shall
reimburse Lender on demand for any resulting losses and expenses incurred by it,
including, without limitation, any losses incurred in obtaining, liquidating or
employing deposits from third parties and any loss of margin for the period
after any such payment, provided that Lender shall
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<PAGE> 20
have delivered to Borrower a certificate as to the amount of such losses and
expenses, which certificate shall be conclusive in the absence of manifest
error.
2.13 Basis for Determining Interest Rate Inadequate or Unfair. If with
respect to any Interest Period:
(i) deposits in dollars (in the applicable amounts) are not
being offered to Lender in the relevant market for such Interest
Period, or
(ii) the LIBOR Rate as determined by Lender in good faith will
not adequately and fairly reflect the cost to Lender of maintaining or
funding the LIBOR Loans for such Interest Period,
Lender shall forthwith give notice thereof to Borrower, whereupon until the
circumstances giving rise to such suspension no longer exist, (a) the
obligations of Lender to make LIBOR Loans shall be suspended and (b) Borrower
shall repay in full the then outstanding principal amount of each of the LIBOR
Loans together with all accrued and unpaid interest thereon, on the last day of
the then current Interest Period applicable to such Revolving Credit Loan.
Concurrently with repaying each such LIBOR Loan pursuant to this Section,
Borrower may borrow a Prime Loan in an equal principal amount from Lender, and,
if Borrower so elects, Lender shall make such a Prime Loan to Borrower.
2.14 Illegality. If, after the date of this Agreement, the adoption of
any applicable law, rule or regulation, or any change therein, or any change in
the interpretation or administration thereof by any governmental or regulatory
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by Lender with any request or directive
(whether or not having the force of law) of any such governmental or regulatory
authority, central bank or comparable agency shall make it unlawful or
impossible for Lender to make, maintain or fund its LIBOR Loans to Borrower,
Lender shall so notify Borrower. Upon receipt of such notice, Borrower shall
repay in full the then outstanding principal amount of each of the LIBOR Loans,
together with all accrued and unpaid interest thereon to the date of prepayment
and any funding losses and other amounts due under Section 2.12, on either (a)
the last day of the then current Interest Period applicable to such LIBOR Loan
if Lender may lawfully continue to maintain and fund the LIBOR Loans to such day
or (b) immediately if Lender may not lawfully continue to fund and maintain the
LIBOR Loans to such day. Concurrently with repaying each LIBOR Loan, Borrower
may borrow a Prime Loan in an equal principal amount from Lender, and, if
Borrower so elects, Lender shall make such a Prime Loan to Borrower.
2.15 Increased Cost. (a) If any Regulatory Change occurs and the result
of any such Regulatory Change is to increase the cost to (or in the case of
Regulation D, to impose a cost on or increase the cost to) Lender of making,
maintaining or funding any LIBOR Loan, or to reduce the amount of any sum
received or receivable by Lender under this Agreement or under the Revolving
Credit Note with respect thereto, by an amount deemed by Lender, in its good
faith judgment, to be material, and if Lender is not otherwise fully compensated
for such increase in cost or reduction in amount received or receivable by
virtue of the inclusion of the reference to "LIBOR Reserve Percentage" in the
calculation of the interest rate applicable to LIBOR Loans, then, within fifteen
(15) days after notice by Lender to Borrower together with a copy of the
official notice of the applicable change in law (if applicable) and a work sheet
showing how the increase in cost or reduction in amount received or receivable
was calculated, Borrower shall pay Lender, as additional interest, such
additional amount or amounts as will compensate Lender for such increased cost
or reduction. Lender will promptly notify Borrower of any event of which it has
knowledge, occurring after the date hereof, which will entitle Lender to
compensation pursuant to this Section. The determination by Lender under this
Section of the additional amount or amounts to be paid to it hereunder shall be
conclusive in the absence of manifest error. In determining such amount or
amounts, Lender may use any reasonable averaging and attribution methods.
(b) If Lender demands compensation under this Section, Borrower may at
any time, upon at least two (2) Domestic Business Days' prior notice to Lender,
repay in full its then outstanding LIBOR Loans from Lender, together with all
accrued and unpaid interest thereon to the date of prepayment and any funding
losses and other amounts due under Section 2.12. Concurrently with repaying such
LIBOR Loans, Borrower may borrow from Lender a Prime Loan in an amount equal to
the aggregate principal amount of such LIBOR Loans, and, if Borrower so elects,
Lender shall make such a Prime Loan to Borrower.
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<PAGE> 21
2.16 Prime Loans Substituted for Affected LIBOR Loans. If notice has
been given by Lender pursuant to Sections 2.13 or 2.14 or by Borrower pursuant
to Section 2.15 requiring the LIBOR Loans to be repaid, then, unless and until
the circumstances giving rise to such repayment no longer apply, all Revolving
Credit Loans which would otherwise be made by Lender to Borrower as LIBOR Loans
shall be made instead as Prime Loans. Lender shall promptly notify Borrower if
and when the circumstances giving rise to such repayment no longer apply.
2.17 Capital Adequacy. If Lender shall have determined in good faith
that the adoption after the date of this Agreement of any applicable law, rule,
regulation or guideline regarding capital adequacy, or any change therein, or
any change after the date of this Agreement in the interpretation or
administration thereof by any governmental or regulatory authority, central bank
or comparable agency charged with the interpretation or administration thereof,
or compliance by Lender with any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency, has or will have the effect of reducing the rate of return on
Lender's capital in respect of its obligations under this Agreement with respect
to the Revolving Credit Loans to a level below that which Lender could have
achieved but for such adoption, change or compliance (taking into consideration
Lender's policies with respect to capital adequacy), then from time to time
Borrower shall pay to Lender upon demand such additional amount or amounts as
will compensate Lender for such reduction. All determinations made in good faith
by Lender of the additional amount or amounts required to compensate Lender in
respect of the foregoing shall be conclusive in the absence of manifest error.
In determining such amount or amounts, Lender may use any reasonable averaging
and attribution methods.
2.18 Survival of Indemnities. All indemnities and all provisions
relating to reimbursement to Lender of amounts sufficient to protect the yield
to Lender with respect to the Revolving Credit Loans, including, without
limitation, Sections 2.12, 2.13, 2.14, 2.15 and 2.17 hereof, shall survive the
payment of the Revolving Credit Loans and the other Borrower's Obligations and
the termination of this Agreement.
2.19 Discretion of Lender as to Manner of Funding. Notwithstanding any
provision contained in this Agreement to the contrary, Lender shall be entitled
to fund and maintain its funding of all or any part of the LIBOR Loans in any
manner it elects, it being understood, however, that for purposes of this
Agreement all determinations hereunder (including, without limitation, the
determination of Lender's funding losses and expenses under Section 2.12) shall
be made as if Lender had actually funded and maintained each LIBOR Loan through
the purchase of deposits having a maturity corresponding to the maturity of the
applicable Interest Period relating to the applicable LIBOR Loan and bearing an
interest rate equal to the applicable LIBOR Rate.
2.20 Computation of Interest. Interest on Prime Loans hereunder shall
be computed on the basis of a year of 360 days and paid for the actual number of
days elapsed (including the first day but excluding the last day). Interest on
LIBOR Loans shall be computed on the basis of a year of 360 days and paid for
the actual number of days elapsed, calculated as to each Interest Period from
and including the first day thereof to but excluding the last day thereof.
SECTION 3. PRECONDITIONS TO REVOLVING CREDIT LOANS.
3.01 Initial Revolving Credit Loan. Notwithstanding any provision
contained in this Agreement to the contrary, Lender shall have no obligation to
make the initial Revolving Credit Loan under this Agreement unless Lender shall
have first received:
(a) this Agreement and the Revolving Credit Note, each executed by a
duly authorized officer of Borrower;
(b) the Security Agreement (which must be in form and substance
satisfactory to Lender) and such Uniform Commercial Code financing statements
and other documents as Lender may require in connection therewith, each executed
by a duly authorized officer of Borrower;
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<PAGE> 22
(c) the Patent, Trademark and License Security Agreement (which must be
in form and substance satisfactory to Lender) and such Uniform Commercial Code
financing statements and other documents as Lender may require in connection
therewith, each executed by a duly authorized officer of Borrower;
(d) a copy of resolutions of the Board of Directors of Borrower, duly
adopted, which authorize the execution, delivery and performance of this
Agreement, the Revolving Credit Note and the other Transaction Documents,
certified by the Secretary of Borrower;
(e) a copy of the Certificate of Incorporation of Borrower, including
any amendments thereto, certified by the Secretary of State of the State of
Delaware;
(f) a copy of the By-Laws of Borrower, including any amendments
thereto, certified by the Secretary of Borrower;
(g) an incumbency certificate, executed by the Secretary of Borrower,
which shall identify by name and title and bear the signatures of all of the
officers of Borrower executing any of the Transaction Documents;
(h) certificates of corporate good standing of Borrower issued by the
Secretaries of State of the States of Delaware and Ohio;
(i) an opinion of counsel of Taft, Stettinius & Hollister, outside
counsel to Borrower, in form and substance satisfactory to Lender and Lender's
counsel;
(j) the initial Borrowing Base Certificate required by Section 2.01(c)
and the initial Collateral Report required by Section 3(a) of the Security
Agreement;
(k) the Borrowing Notice required by Section 2.02(a), if applicable;
and
(l) evidence of the proper filing of UCC-1 Financing Statements
perfecting first priority security interests in favor of Lender in all of the
Collateral;
(m) UCC-3 Termination Statements for all UCC-1 Financing Statements
filed of record against Borrower other than UCC-1 Financing Statements relating
to Permitted Liens;
(n) evidence satisfactory to Lender of the insurance required by this
Agreement and the other Transaction Documents together with loss payable
endorsements in form and substance satisfactory to Lender, duly executed by the
insurance company;
(o) copies of all financial statements and other Exhibits and Schedules
required by this Agreement and the other Transaction Documents; and
(p) a letter of direction from Borrower with respect to the
disbursement of the proceeds of the initial Revolving Credit Loans under this
Agreement;
(q) such mortgagee, bailee, landlord or warehousemen's waivers as
Lender may deem necessary regarding locations at which Collateral is or will be
stored or otherwise located;
(r) a pay-off letter from Princeton Capital Finance Corporation in form
and substance satisfactory to Lender;
(s) evidence satisfactory to Lender that, after the pay-off of
Princeton Capital Finance Corporation, Borrower has Unused Availability of at
least $500,000.00;
(t) the results of reference, record, background and credit checks
(including Equifax Reports) on the senior management of Borrower, which results
must be satisfactory to Lender;
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<PAGE> 23
(u) a consent in form and substance satisfactory to Lender, duly
executed by Algonquin Industries, Inc. and Kazmier Kasper with respect to
Borrower's granting Lender a security interest in the pull-tab manufacturing and
license agreement dated January 13, 1994, by and among Algonquin Industries,
Inc. and Kazmier Kasper, as licensors, and Borrower, as licensee, regarding a
pull-tab ticket mechanism;
(v) letter agreements in form and substance satisfactory to Lender,
duly executed by each bonding company which has issued a bond for the account of
Borrower in favor a lessee under a Lease; and
(w) such other agreements, documents, instruments and certificates as
Lender may reasonably request.
3.02 All Revolving Credit Loans. Notwithstanding any provision
contained in this Agreement to the contrary, Lender shall have no obligation to
make any Revolving Credit Loan under this Agreement unless:
(a) Lender shall have received a current Borrowing Base Certificate as
required by Section 2.01(c) and a current Collateral Report as required by
Section 3(a) of the Security Agreement;
(b) if such Revolving Credit Loan is requested by Borrower pursuant to
Section 2.02(a), Lender shall have received a Borrowing Notice for such
Revolving Credit Loan;
(c) on the date of and immediately after such Revolving Credit Loan,
no Default or Event of Default under this Agreement shall have occurred and be
continuing;
(d) no material adverse change in the Properties, assets, liabilities,
business, operations, prospects, income or condition (financial or otherwise) of
Borrower and its Subsidiaries taken as a whole shall have occurred since the
date of this Agreement and be continuing; and
(e) all of the representations and warranties of Borrower contained in
this Agreement and in the other Transaction Documents shall be true and correct
in all material respects on and as of the date of such Revolving Credit Loan as
if made on and as of the date of such Revolving Credit Loan.
Each request for a Revolving Credit Loan by Borrower under this
Agreement (whether pursuant to Section 2.02(a) or 2.02(b) or otherwise) shall be
deemed to be a representation and warranty by Borrower on the date of such
Revolving Credit Loan as to the facts specified in clauses (c), (d) and (e) of
this Section 3.02.
SECTION 4. REPRESENTATIONS AND WARRANTIES.
Borrower hereby represents and warrants to Lender that:
4.01 Corporate Existence and Power. Borrower and each Subsidiary: (a)
is duly incorporated, validly existing and in good standing under the laws of
the jurisdiction of its incorporation; (b) has all requisite corporate powers
required to carry on its business as now conducted; (c) has all requisite
governmental and regulatory licenses, authorizations, consents and approvals
required to carry on its business as now conducted, except such licenses,
authorizations, consents and approvals the failure to have could not reasonably
be expected to have a Material Adverse Effect; and (d) is qualified to transact
business as a foreign corporation in, and is in good standing under the laws of,
all states in which it is required by applicable law to maintain such
qualification and good standing except for those states in which the failure to
qualify or maintain good standing could not reasonably be expected to have a
Material Adverse Effect.
4.02 Corporate Authorization. The execution, delivery and performance
by Borrower of this Agreement, the Revolving Credit Note and the other
Transaction Documents are within the corporate powers of Borrower and have been
duly authorized by all necessary corporate action.
4.03 Binding Effect. This Agreement, the Revolving Credit Note and the
other Transaction Documents have been duly executed and delivered by Borrower
and constitute the legal, valid and binding obligations of Borrower enforceable
in accordance with their respective terms, except as such enforceability
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<PAGE> 24
may be limited by bankruptcy, insolvency or other similar laws affecting
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
4.04 Financial Statements. Borrower has furnished Lender with the
following financial statements, identified by the chief financial officer of
Borrower: (a) a balance sheet and the statements of income, retained earnings
and cash flows of Borrower as of and for the fiscal year ended December 31,
1996, all audited by Borrower's independent certified public accountants, which
financial statements have been prepared in accordance with GAAP consistently
applied; and (b) an unaudited balance sheet and statements of income, retained
earnings and cash flows of Borrower as of and for the fiscal quarter ended June
30, 1997, certified by the chief financial officer of Borrower as being true and
correct to the best of his or her knowledge and as being prepared in accordance
with GAAP consistently applied (subject to normal year-end adjustments and the
absence of footnotes). Borrower further represents and warrants to Lender that
(a) said balance sheets and their accompanying notes fairly present the
condition of Borrower as of the dates thereof, (b) there has been no material
adverse change in the condition or operation, financial or otherwise, of
Borrower since June 30, 1997, and (c) Borrower did not have any direct or
contingent liabilities which were not disclosed on said financial statements or
the notes thereto (to the extent such disclosure is required by GAAP).
4.05 Litigation. Except as disclosed on Schedule 4.05 attached hereto,
there is no action or proceeding pending or, to the knowledge of Borrower,
threatened against or affecting Borrower or any Subsidiary before any court,
arbitrator or any governmental, regulatory or administrative body, agency or
official which, if adversely determined against Borrower or any Subsidiary,
could reasonably be expected to have a Material Adverse Effect. Neither Borrower
nor any Subsidiary is in default with respect to any order, writ, injunction,
decision or decree of any court, arbitrator or any governmental, regulatory or
administrative body, agency or official, a default under which could reasonably
be expected to have a Material Adverse Effect. There are no outstanding
judgments against Borrower or any Subsidiary.
4.06 Pension and Welfare Plans. Each Pension Plan and Welfare Plan
complies in all material respects with ERISA and all other applicable statutes
and governmental and regulatory rules and regulations; no Reportable Event has
occurred and is continuing with respect to any Pension Plan; neither Borrower
nor any Subsidiary nor any ERISA Affiliate has withdrawn from any Multi-Employer
Plan in a "complete withdrawal" or a "partial withdrawal" as defined in Sections
4203 or 4205 of ERISA, respectively; neither Borrower nor any Subsidiary nor any
ERISA Affiliate has entered into an agreement pursuant to Section 4204 of ERISA;
neither Borrower nor any Subsidiary nor any ERISA Affiliate has in the past
contributed to or currently contributes to a Multi-Employer Plan; neither
Borrower nor any Subsidiary nor any ERISA Affiliate has any withdrawal liability
with respect to a Multi-Employer Plan; no steps have been instituted by Borrower
or any Subsidiary or any ERISA Affiliate to terminate any Pension Plan; no
condition exists or event or transaction has occurred in connection with any
Pension Plan, Multi-Employer Plan or Welfare Plan which could result in the
incurrence by Borrower or any Subsidiary or any ERISA Affiliate of any material
liability, fine or penalty; and neither Borrower nor any Subsidiary nor any
ERISA Affiliate is a "contributing sponsor" as defined in Section 4001 (a)(13)
of ERISA of a "single-employer plan" as defined in Section 4001 (a)(15) of ERISA
which has two or more contributing sponsors at least two of whom are not under
common control. Except as disclosed on the consolidated financial statements of
Borrower and its Subsidiaries delivered by Borrower to Lender, neither Borrower
nor any Subsidiary nor any ERISA Affiliate has any liability with respect to any
Welfare Plan.
4.07 Tax Returns and Payment. Borrower and its Subsidiaries have filed
all Federal, state, local and other income and other tax returns which are
required to be filed and have paid all taxes which have become due pursuant to
such returns and all other taxes, assessments, fees and other governmental
charges upon Borrower and its Subsidiaries and upon their respective Properties,
assets, income and franchises which have become due and payable by Borrower or
any of its Subsidiaries, except those wherein the amount, applicability or
validity are being contested by Borrower or any such Subsidiary by appropriate
proceedings being diligently conducted in good faith and in respect of which
adequate reserves in accordance with GAAP have been established. There is no
proposed, asserted or assessed tax deficiency against Borrower or any of its
Subsidiaries which, if adversely determined, could reasonably be expected to
have a Material Adverse Effect.
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<PAGE> 25
4.08 Subsidiaries. Borrower has no Subsidiaries other than as
identified on Schedule 4.08 attached hereto, as the same may from time to time
be amended, modified or supplemented as provided herein. Schedule 4.08 attached
hereto correctly sets forth, for each Subsidiary, the number of shares of each
class of common and preferred stock authorized for such Subsidiary, the number
of outstanding and the percentage of the outstanding shares of each such class
owned, directly or indirectly, by Borrower or one or more of its Subsidiaries.
All of the issued and outstanding capital stock of each Subsidiary is duly
authorized, validly issued and fully paid and nonassessable. Except as disclosed
on Schedule 4.08 attached hereto, neither Borrower nor any of its Subsidiaries,
individually or collectively, owns or holds, directly or indirectly, any capital
stock or equity security of, or any equity interest in, any corporation or
business other than Borrower's Subsidiaries. Borrower may at any time amend,
modify or supplement Schedule 4.08 by notifying Lender in writing of any changes
thereto, including any formation, acquisition, merger or liquidation of
Subsidiaries or any change in the capitalization of any Subsidiary, in each
case, in accordance with the terms of this Agreement, and thereby the
representations and warranties contained in this Section 4.08 shall be amended
accordingly so long as such amendment, modification or supplement is made within
thirty (30) days after the occurrence of any such changes in the facts stated
therein and that such changes reflect transactions that are permitted under this
Agreement.
4.09 Compliance With Other Instruments; None Burdensome. Neither
Borrower nor any Subsidiary is a party to any contract or agreement or subject
to any charter or other corporate restriction which could reasonably be expected
to have a Material Adverse Effect and which is not disclosed on Borrower's
financial statements heretofore submitted to Lender; none of the execution and
delivery by Borrower of the Transaction Documents, the consummation of the
transactions therein contemplated or the compliance with the provisions thereof
will violate any law, rule, regulation, order, writ, judgment, injunction,
decree or award binding on Borrower, or any of the provisions of the Certificate
or Articles of Incorporation or By-Laws of Borrower or any of the provisions of
any indenture, agreement, document, instrument or undertaking to which Borrower
is a party or subject, or by which Borrower or any Property or assets of
Borrower is bound, or conflict with or constitute a default thereunder or result
in the creation or imposition of any Lien pursuant to the terms of any such
indenture, agreement, document, instrument or undertaking (other than in favor
of Lender pursuant to the Transaction Documents). No order, consent, approval,
license, authorization or validation of, or filing, recording or registration
with, or exemption by, any governmental, regulatory, administrative or public
body or authority, or any subdivision thereof, or any other Person is required
to authorize, or is required in connection with, the execution, delivery or
performance of, or the legality, validity, binding effect or enforceability of,
any of the Transaction Documents, except for any consents required under the
Leases to permit the grant of a security interest in Borrower's rights
thereunder to Lender and the assignment of the Lease Payments due thereunder to
Lender.
4.10 Other Debt. Guarantees and Capitalized Leases. Except as disclosed
on Schedule 4.10 attached hereto, neither Borrower nor any Subsidiary is a
borrower, guarantor or obligor with respect to, or a lessee under, any Debt,
Guarantees or Capitalized Leases. Borrower may at any time amend, modify or
supplement Schedule 4.10 by notifying Lender in writing of any changes thereto,
and thereby the representations and warranties contained in this Section 4.10
shall be amended accordingly so long as such amendment, modification or
supplement is made within thirty (30) days after the occurrence of any such
changes in the facts stated therein and that such changes reflect transactions
that are permitted under this Agreement.
4.11 Labor Matters. Neither Borrower nor any Subsidiary is a party to
any labor dispute which could reasonably be expected to have a Material Adverse
Effect. There are no strikes or walkouts relating to any labor contract to which
Borrower or any Subsidiary is subject. Hours worked and payments made to the
employees of Borrower and its Subsidiaries have not been in violation of (a) the
Fair Labor Standards Act or (b) any other applicable law dealing with such
matters, the violation of which could reasonably be expected to have a Material
Adverse Effect. All payments due from Borrower or any Subsidiary, or for which
any claim may be made against any of them, in respect of wages, employee health
and welfare insurance and/or other benefits have been paid or accrued as a
liability on their respective books.
4.12 Title to Property. Borrower and each Subsidiary is the sole and
absolute owner of, or has the legal right to use and occupy, all Property it
claims to own or which is necessary for Borrower or such
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<PAGE> 26
Subsidiary to conduct its business, and all of such Property is free and clear
of all Liens other than Permitted Liens. Borrower and its Subsidiaries enjoy
peaceful and undisturbed possession in all material respects under all leases
under which they are operating as lessees.
4.13 Regulation U. Borrower is not engaged principally, or as one of
its important activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulation U of The
Board of Governors of the Federal Reserve System, as amended) and no part of the
proceeds of any Revolving Credit Loan will be used, whether directly or
indirectly, and whether immediately, incidentally or ultimately (i) to purchase
or carry margin stock or to extend credit to others for the purpose of
purchasing or carrying margin stock, or to refund or repay indebtedness
originally incurred for such purpose or (ii) for any purpose which entails a
violation of, or which is inconsistent with, the provisions of any of the
Regulations of The Board of Governors of the Federal Reserve System, including,
without limitation, Regulations G, U, T or X thereof, as amended. If requested
by Lender, Borrower shall furnish to Lender a statement in conformity with the
requirements of Federal Reserve Form U-1 referred to in Regulation U.
4.14 Multi-Employment Pension Plan Amendments Act of 1980. Borrower and
each Subsidiary is in compliance with the Multi-Employer Pension Plan Amendments
Act of 1980, as amended ("MEPPAA"), and has no liability for pension
contributions pursuant to MEPPAA.
4.15 Investment Company Act of 1940; Public Utility Holding Company Act
of 1935. Borrower is not an "investment company" as that term is defined in, and
is not otherwise subject to regulation under, the Investment Company Act of
1940, as amended. Borrower is not a "holding company" as that term is defined
in, and is not otherwise subject to regulation under, the Public Utility Holding
Company Act of 1935, as amended.
4.16 Patents, Trademarks, Copyrights. Licenses, Etc. Except as
disclosed on Schedule 4.16 attached hereto, neither Borrower nor any Subsidiary
has any patents, patent applications, patent rights, trademarks, trademark
applications, trademark rights, copyrights or licenses which are material to the
business of Borrower or any Subsidiary. Borrower may at any time amend, modify
or supplement Schedule 4.16 by notifying Lender in writing of any changes
thereto, and thereby the representations and warranties contained in the first
sentence of this Section 4.16 shall be amended accordingly so long as such
amendment, modification or supplement is made within thirty (30) days after the
occurrence of any such changes in the facts stated therein and that such changes
reflect transactions that are permitted under this Agreement. Borrower and each
Subsidiary possesses all necessary patents, patent rights, trademarks, trademark
rights, trade names, trade name rights, copyrights and licenses to conduct its
business without conflict with any patent, patent right, trademark, trademark
right, trade name, copyright or license of any other Person.
4.17 Environmental and Safety and Health Matters. Except as disclosed
on Schedule 4.17 attached hereto: (i) the operations of Borrower and each
Subsidiary comply with all applicable Environmental Laws and all applicable
Occupational Safety and Health Laws, the violation or noncompliance with which
could reasonably be expected to have a Material Adverse Effect; (ii) none of the
operations of Borrower or any Subsidiary are subject to any Environmental Claim
or any judicial, governmental, regulatory or administrative proceeding alleging
the violation of any Occupational Safety and Health Law, which, if adversely
determined, could reasonably be expected to have a Material Adverse Effect;
(iii) none of the operations of Borrower or any Subsidiary is the subject of any
Federal or state investigation evaluating whether any remedial action is needed
to respond to any Release of Hazardous Substances or any unsafe or unhealthful
condition at any premises owned, leased or operated by Borrower or such
Subsidiary; (iv) neither Borrower nor any Subsidiary has filed any notice under
any Environmental Law or Occupational Safety and Health Law indicating or
reporting (A) any past or present spillage, leakage or Release into the
environment of, or treatment, storage or disposal of, any Hazardous Substance or
(B) any unsafe or unhealthful condition at any premises owned, leased or
operated by Borrower or such Subsidiary; and (v) neither Borrower nor any
Subsidiary has any material contingent liability in connection with (A) any
spillage, disposal or Release into the environment of, or otherwise with respect
to, any Hazardous Substances or (B) any unsafe or unhealthful condition at any
premises owned, leased or operated by Borrower or such Subsidiary.
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<PAGE> 27
4.18 Investments. Neither Borrower nor any Subsidiary has any
Restricted Investments.
4.19 No Default. No Default or Event of Default under this Agreement
has occurred and is continuing. There is no existing default or event of default
under or with respect to any indenture, contract, agreement, lease or other
instrument to which Borrower or any Subsidiary is a party or by which any
Property of Borrower or any Subsidiary is bound or affected, a default under
which could reasonably be expected to have a Material Adverse Effect. Borrower
and each Subsidiary of Borrower has and is in full compliance with and in good
standing with respect to all governmental permits, licenses, certificates,
consents and franchises necessary to continue to conduct its business as
previously conducted by it and to own or lease and operate its Properties as now
owned or leased by it, the failure to have or noncompliance with which could
reasonably be expected to have a Material Adverse Effect, and, to the best of
Borrower's knowledge, none of said permits, certificates, consents or franchises
contain any term, provision, condition or limitation more burdensome than such
as are generally applicable to Persons engaged in the same or similar business
as Borrower or such Subsidiary, as the case may be. Neither Borrower nor any
Subsidiary of Borrower is in violation of any applicable statute, law, rule,
regulation or ordinance of the United States of America, of any state, city,
town, municipality, county or of any other jurisdiction, or of any agency
thereof, a violation of which could reasonably be expected to have a Material
Adverse Effect.
4.20 Disclosure. Neither this Agreement nor any of the Exhibits or
Schedules hereto nor any certificate or other data furnished to Lender in
writing by or on behalf of Borrower or any Subsidiary in connection with the
transactions contemplated by this Agreement contains any untrue or incorrect
statement of a material fact. To the best knowledge of Borrower, there is no
fact peculiar to Borrower or any of its Subsidiaries which presently has a
Material Adverse Effect or in the future (so far as Borrower can now foresee)
could reasonably be expected to have a Material Adverse Effect, which has not
heretofore been disclosed in writing by Borrower to Lender.
SECTION 5. COVENANTS.
5.01 Affirmative Covenants of Borrower. Borrower covenants and agrees
that, so long as Lender has any obligation to make any Revolving Credit Loan
under this Agreement, any Letter of Credit remains outstanding or any of the
Borrower's Obligations remain unpaid, unless the prior written consent of Lender
is obtained:
(a) Information. Borrower will deliver to Lender:
(i) as soon as available and in any event within one hundred
twenty (120) days after the end of each fiscal year of Borrower,
consolidated and consolidating balance sheets of Borrower and its
Subsidiaries as of the end of such fiscal year and the related
consolidated and consolidating statements of income, retained earnings
and cash flows for such fiscal year, setting forth in each case, in
comparative form, the figures for the previous fiscal year, all such
financial statements to be prepared in accordance with GAAP
consistently applied and reported on by and accompanied by the
unqualified opinion of KPMG Peat Marwick LLP or other independent
certified public accountants selected by Borrower and reasonably
acceptable to Lender; provided, however, that delivery within the time
period specified above of copies of the Annual Report on Form 10-K of
Borrower for such fiscal year as filed with the Securities and Exchange
Commission (together with Borrower's annual report to shareholders, if
any, prepared pursuant to Rule 14a-3 under the Exchange Act) together
with the accountant's certificate described above shall be deemed to
satisfy the requirements of this Section 5.01 (a)(i) with respect to
delivery of the audited consolidated financial statements referred to
above;
(ii) as soon as available and in any event within forty-five
(45) days after the end of the first three (3) fiscal quarters of each
fiscal year of Borrower, consolidated and consolidating balance sheets
of Borrower and its Subsidiaries as of the end of such fiscal quarter
and the related consolidated and consolidating statements of income,
retained earnings and cash flows for such fiscal quarter and for the
portion of Borrower's fiscal year ended at the end of such fiscal
quarter, setting forth in each case in comparative form, the figures
for the corresponding fiscal quarter and the corresponding portion of
Borrower's previous fiscal year, all in reasonable detail and
satisfactory in form to Lender and certified
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<PAGE> 28
(subject to normal year-end adjustments and footnote disclosures) as to
fairness of presentation, GAAP and consistency by the chief financial
officer of Borrower; provided, however, that delivery within the time
period specified above of copies of the Quarterly Report on Form 10-Q
of Borrower for such fiscal quarter as filed with the Securities and
Exchange Commission shall be deemed to satisfy the requirements of this
Section 5.01 (a)(ii) with respect to consolidated financial statements;
(iii) as soon as available and in any event within forty-five
(45) days after the end of each fiscal month of Borrower which is not
the end of a fiscal quarter or fiscal year of Borrower, consolidated
and consolidating balance sheets of Borrower and its Subsidiaries as of
the end of such fiscal month and the related consolidated and
consolidating statements of income, retained earnings and cash flows
for such fiscal month and for the portion of Borrower's fiscal year
ended at the end of such fiscal month, setting forth in each case in
comparative form, the figures for the corresponding fiscal month and
the corresponding portion of Borrower's previous fiscal year, all in
reasonable detail and satisfactory in form to Lender;
(iv) simultaneously with the delivery of each set of
financial statements referred to in Sections 5.01 (a)(i) and (ii)
above, a certificate of the chief financial officer of Borrower (or
such other officer of Borrower as shall be reasonably acceptable to
Lender) in the form attached hereto as Exhibit C and incorporated
herein by reference, accompanied by supporting financial work sheets
where appropriate, (A) evidencing Borrower's compliance with the
financial covenants contained in Sections 5.01 (o) and 5.02(m) of this
Agreement, (B) stating whether there exists on the date of such
certificate any Default or Event of Default and, if any Default or
Event of Default then exists, setting forth the details thereof and the
action which Borrower is taking or proposes to take with respect
thereto and (C) certifying that all of the representations and
warranties of Borrower contained in this Agreement and in the other
Transaction Documents are true and correct in all material respects on
and as of the date of such certificate as if made on and as of the date
of such certificate;
(v) promptly upon transmission thereof, one copy of (A)
each financial statement, report, notice or proxy statement sent by
Borrower or any Subsidiary generally to its stockholders or to its
creditors (other than Borrower or another Subsidiary) and (B) each
regular or periodic report, each registration statement (without
exhibits except as expressly requested by Lender), and each prospectus
and all amendments thereto filed by Borrower or any Subsidiary with the
Securities and Exchange Commission (or any governmental body or agency
succeeding to the functions of the Securities and Exchange Commission)
and of each press release and other statement made available generally
by Borrower or any Subsidiary to the public concerning developments
that are material;
(vi) promptly upon receipt thereof, any reports (including,
without limitation, any management reports) submitted to Borrower or
any Subsidiary (other than reports previously delivered pursuant to
Sections 5.01(a)(i) above) by independent accountants in connection
with any annual, interim or special audit made by them of the books of
Borrower or any Subsidiary;
(vii) within fifteen (15) days after the end of each fiscal
month of Borrower, (i) an accounts receivable aging of Borrower
indicating which Accounts are less than 30, 30 to 60, 60 to 90 and 90
days or more past the invoice date and including, if requested by
Lender, a listing of the names and addresses of all applicable Account
Debtors and (B) a summary of accounts payable of Borrower showing which
accounts payable are current, up to 30, 30 to 60, 60 to 90 and 90 days
or more past due and including, if requested by Lender, a listing of
the names and addresses of applicable creditors, all in form and detail
reasonably satisfactory to Lender and certified as being true, correct
and complete by the chief financial officer of Borrower;
(viii) at such intervals as Lender may request (but not more
often than monthly so long as no Default or Event of Default under this
Agreement has occurred and is continuing and Borrower has Unused
Availability of at least $1,500,000.00), such information and reports
regarding Borrower's Inventory as Lender may from time to time request,
all in form and detail reasonably satisfactory to Lender and certified
as being true, correct and complete by the chief financial officer of
Borrower;
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<PAGE> 29
(ix) at such intervals as Lender may request (but not more
often than monthly so long as no Default or Event of Default under this
Agreement has occurred and is continuing and Borrower has Unused
Availability of at least $1,500,000.00), such information and reports
regarding the Leases, the Eligible Leases, the Lease Payments and the
Eligible Lease Payments as Lender may from time to time request, all in
form and detail reasonably satisfactory to Lender and certified as
being true, correct and complete by the chief financial officer of
Borrower;
(x) within ten (10) days after the execution thereof, a copy
of each Lease and of each amendment, modification, extension, renewal,
termination or cancellation of any Lease;
(xi) as soon as available and in any event within thirty (30)
days before the beginning of each fiscal year of Borrower, consolidated
and consolidating balance sheet, income statement and cash flow
projections for Borrower and its Subsidiaries for such fiscal year on a
month-by-month basis, all in form and detail reasonably acceptable to
Lender; and
(xii) with reasonable promptness, such further information
regarding the business, affairs and financial condition of Borrower or
any Subsidiary as Lender may from time to time reasonably request.
Lender is hereby authorized to deliver a copy of any financial
statement or other information made available by Borrower or any Subsidiary to
any regulatory authority having jurisdiction over Lender, pursuant to any
request therefor.
(b) Payment of Debt; Performance of Lease Obligations. Borrower will,
and it will cause each of its Subsidiaries to, (i) pay and discharge any and all
Debt payable or Guaranteed by Borrower or such Subsidiary, as the case may be,
and any interest or premium thereon, when due (whether by scheduled maturity,
required prepayment, acceleration, demand or otherwise) in accordance with the
agreement, document or instrument relating to such Debt or Guarantee and (ii)
faithfully perform, observe and discharge all covenants, conditions and
obligations which are imposed upon Borrower or such Subsidiary, as the case may
be, by any and all agreements, documents, instruments and indentures evidencing,
securing or otherwise relating to such Debt or Guarantee. Borrower will
faithfully perform, observe and discharge all covenants, conditions, obligations
and duties which are imposed upon Borrower under or in connection with the
Leases.
(c) Maintenance of Books and Records; Consultations and Inspections.
Borrower will, and it will cause each of its Subsidiaries to, maintain books and
records in accordance with GAAP and in which full, true and correct entries
shall be made of all dealings and transactions in relation to its business and
activities. Borrower will, and it will cause each of its Subsidiaries to, permit
Lender (and any Person appointed by Lender to whom Borrower does not reasonably
object) to discuss the affairs, finances and accounts of Borrower and each
Subsidiary with the officers of Borrower and each Subsidiary, all at such
reasonable times and as often as Lender may from time to time reasonably
request. Borrower will also permit, and will cause each of its Subsidiaries to
permit, inspection of its Properties, books and records by the Lender during
normal business hours and at other reasonable times upon at least one (1)
Domestic Business Day's prior oral or written notice from Lender to Borrower
(provided, however, that no such notice need be given by Lender if any Default
or Event of Default under this Agreement has occurred and is continuing).
Borrower will reimburse Lender upon demand for ail reasonable costs and expenses
incurred by Lender in connection with any such inspection conducted by Lender
while any Default or Event of Default under this Agreement has occurred and is
continuing. Borrower irrevocably authorizes Lender to, if any Default or Event
of Default under this Agreement has occurred and is continuing, communicate
directly with its independent public accountants and irrevocably authorizes and
directs such accountants to disclose to Lender any and all information with
respect to the business and financial condition of Borrower and its Subsidiaries
as Lender may from time to time reasonably request in writing (with a copy of
such request to be sent to Borrower).
(d) Payment of Taxes. Borrower will, and it will cause each of its
Subsidiaries to, duly file all Federal, state and local income tax returns and
all other tax returns and reports of Borrower or such Subsidiary, as the case
may be, which are required to be filed and duly pay and discharge promptly all
taxes, assessments and other governmental charges imposed upon it or any of its
Property; provided, however, that neither Borrower nor any Subsidiary shall be
required to pay any such tax, assessment or other governmental charge
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the payment of which is being contested in good faith and by appropriate
proceedings being diligently conducted and for which adequate reserves in
accordance with GAAP have been provided, except that Borrower or such
Subsidiary, as the case may be, shall pay or cause to be paid all such taxes,
assessments and governmental charges forthwith upon the commencement of
proceedings to foreclose any Lien which is attached as security therefor, unless
such foreclosure is stayed by the filing of an appropriate bond in a manner
reasonably satisfactory to Lender.
(e) Payment of Claims. Borrower will, and it will cause each of its
Subsidiaries to, promptly pay and discharge (i) all trade accounts payable in
accordance with usual and customary business practices (but in no event later
than thirty (30) days after the due date thereof) and (ii) all claims for work,
labor or materials which if unpaid might become a Lien upon any of its Property
or assets; provided, however, that neither Borrower nor any Subsidiary shall be
required to pay any such account payable or claim the payment of which is being
contested in good faith and by appropriate proceedings being diligently
conducted and for which adequate reserves in accordance with GAAP have been
provided, except that Borrower or such Subsidiary, as the case may be, shall pay
or cause to be paid all such accounts payable and claims forthwith upon the
commencement of proceedings to foreclose any Lien which is attached as security
therefor, unless such foreclosure is stayed by the filing of an appropriate bond
in a manner reasonably satisfactory to Lender.
(f) Corporate Existence. Borrower will, and it will cause each of its
Subsidiaries to, do all things necessary to (i) preserve and keep in full force
and effect at all times its corporate existence and all permits, licenses,
franchises and other rights material to its business and (ii) be duly qualified
to do business and be in good standing in all jurisdictions where the nature of
its business or its ownership of Property requires such qualification except for
those jurisdictions in which the failure to qualify or be in good standing could
not reasonably be expected to have a Material Adverse Effect.
(g) Maintenance of Property. Borrower will, and it will cause each of
its Subsidiaries to, at all times, preserve and maintain all of the Property
used or useful in the conduct of its business in good condition, working order
and repair, ordinary wear and tear excepted.
(h) Compliance with Laws, Regulations, Etc. Borrower will, and it will
cause each of its Subsidiaries to, comply with any and all laws, ordinances and
governmental and regulatory rules and regulations to which Borrower or such
Subsidiary, as the case may be, is subject (including, without limitation, all
Occupational Safety and Health Laws and all Environmental Laws) and obtain any
and all licenses, permits, franchises and other governmental and regulatory
authorizations necessary to the ownership of its Properties or to the conduct of
its business, which violation or failure to obtain could reasonably be expected
to have a Material Adverse Effect.
(i) Environmental Matters. Borrower shall give Lender prompt written
notice of (i) any Environmental Claim or any other action or investigation with
respect to the existence or potential existence of any Hazardous Substances
instituted or threatened with respect to Borrower or any Subsidiary or any of
the Properties or facilities owned, leased or operated by Borrower or any
Subsidiary which, if determined adversely to Borrower or any Subsidiary, could
reasonably be expected to have a Material Adverse Effect and (ii) any condition
or occurrence on any of the Properties or facilities owned, leased or operated
by Borrower or any Subsidiary which constitutes a violation of any Environmental
Laws, the violation of which could reasonably be expected to have a Material
Adverse Effect or which gives rise to a reporting obligation or requires removal
or remediation under any Environmental Laws. Within thirty (30) days after the
giving of any such notice, Borrower shall deliver to Lender Borrower's plan with
respect to removal or remediation and Borrower agrees to take all action which
is reasonably necessary in connection with such action, investigation, condition
or occurrence in accordance with such plan with due diligence and to complete
such removal or remediation as promptly as possible and in all events within the
time required by any Environmental Laws or any other applicable law, rule or
regulation. Borrower shall promptly provide Lender with copies of all
documentation relating thereto, and such other information with respect to
environmental matters as Lender may request from time to time.
(j) ERISA Compliance. If Borrower, any Subsidiary or any ERISA
Affiliate shall have any Pension Plan, Borrower, such Subsidiary or such ERISA
Affiliate, as the case may be, shall comply with all requirements
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<PAGE> 31
of ERISA relating to such Pension Plan, the violation of or noncompliance with
which could reasonably be expected to have a Material Adverse Effect. Without
limiting the generality of the foregoing, Borrower will not, and it will not
cause or permit any Subsidiary or any ERISA Affiliate to:
(i) permit any Pension Plan maintained by Borrower, any
Subsidiary or any ERISA Affiliate to engage in any nonexempt
"prohibited transaction," as such term is defined in Section 4975 of
the Code;
(ii) permit any Pension Plan maintained by Borrower, any
Subsidiary or any ERISA Affiliate to incur any "accumulated funding
deficiency", as such term is defined in Section 302 of ERISA, 29 U.S.C.
ss. 1082, whether or not waived;
(iii) terminate any Pension Plan in a manner which could
result in the imposition of a Lien on any Property of Borrower, any
Subsidiary or any ERISA Affiliate pursuant to Section 4068 of ERISA, 29
U.S.C. ss. 1368; or
(iv) take any action which would constitute a complete or
partial withdrawal from a Multi-Employer Plan within the meaning of
Sections 4203 or 4205 of Title IV of ERISA.
Notwithstanding any provision contained in this Section 5.01(j) to the
contrary, an act by Borrower or any Subsidiary shall not be deemed to constitute
a violation of this Section 5.01(j) unless the Lender determines in good faith
that said action, individually or cumulatively with other acts of Borrower and
its Subsidiaries, has or could reasonably be expected to have a Material Adverse
Effect.
(k) Notices. Borrower will notify Lender in writing of any of the
following within three (3) Domestic Business Days after learning of the
occurrence thereof, describing the same and, if applicable, the steps being
taken by the Person(s) affected with respect thereto:
(i) the occurrence of any Default or Event of Default under
this Agreement;
(ii) the occurrence of any default or event of default by
Borrower, any other Obligor or any Subsidiary under any note,
indenture, loan agreement, mortgage, deed of trust, security agreement,
lease or other similar agreement, document or instrument to which
Borrower, any other Obligor or any Subsidiary, as the case may be, is a
party or by which it is bound or to which it is subject;
(iii) the institution of any litigation, arbitration
proceeding or governmental or regulatory proceeding affecting Borrower,
any other Obligor or any Subsidiary, whether or not considered to be
covered by insurance, in which the prayer or claim for relief seeks
recovery of an amount in excess of $100,000.00 (or, if no dollar amount
is specified in the prayer or claim for relief, in which there is a
reasonable likelihood of recovery of an amount in excess of
$100,000.00) or any form of equitable relief;
(iv) the entry of any judgment or decree against Borrower,
any other Obligor or any Subsidiary;
(v) the occurrence of a Reportable Event with respect to any
Pension Plan; the filing of a notice of intent to terminate a Pension
Plan by Borrower, any ERISA Affiliate or any Subsidiary; the
institution of proceedings to terminate a Pension Plan by the PBGC or
any other Person; the withdrawal in a "complete withdrawal" or a
"partial withdrawal" as defined in Sections 4203 and 4205,
respectively, of ERISA by Borrower, any ERISA Affiliate or any
Subsidiary from any Multi-Employer Plan; or the incurrence of any
material increase in the contingent liability of Borrower or any
Subsidiary with respect to any "employee welfare benefit plan" as
defined in Section 3(1) of ERISA which covers retired employees and
their beneficiaries;
(vi) the occurrence of any material adverse change in the
Properties, assets, liabilities, business, operations, prospects,
income or condition (financial or otherwise) of Borrower, any other
Obligor or any Subsidiary;
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<PAGE> 32
(vii) any change in the name of Borrower, any other Obligor
or any Subsidiary;
(viii) any proposed opening, closing or other change of any
place of business of borrower, any other obligor or any Subsidiary;
(ix) any material change in Borrower's or any Subsidiary's
line(s) of business;
(x) the occurrence of any Change of Control Event; and
(xi) any notices required to be provided pursuant to other
provisions of this Agreement and notice of the occurrence of such other
events as Lender may from time to time reasonably specify.
(l) Insurance. Borrower will, and it will cause each of its
Subsidiaries to, insure all of its Property of the character usually insured by
corporations engaged in the same or similar businesses similarly situated,
against loss or damage of the kind customarily insured against by such
corporations, unless higher limits or coverage are reasonably required in
writing by Lender, and carry adequate liability insurance and other insurance of
a kind and in an amount generally carried by corporations engaged in the same or
similar businesses similarly situated, unless higher limits or coverage are
reasonably required in writing by Lender; provided, however, that Borrower shall
not be required to maintain casualty insurance on Inventory which is in the
possession of a lessee under a Lease. All insurance required by this Section
5.01(1) shall be with insurers rated A-XI or better by A.M Best Company (or
accorded a similar rating by another nationally or internationally recognized
insurance rating agency of similar standing if A.M. Best Company is not then in
the business of rating insurers or rating foreign insurers) or such other
insurers as may from time to time be reasonably acceptable to Lender. All such
insurance may be subject to reasonable deductible amounts. Simultaneously with
each delivery of financial statements under Section 5.01 (a)(i), Borrower shall
deliver to Lender a certificate of an officer of Borrower specifying the details
of all insurance then in effect and evidence of the payment of all premiums
therefor. UNLESS BORROWER PROVIDES EVIDENCE OF THE INSURANCE COVERAGE REQUIRED
UNDER THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS, LENDER MAY PURCHASE
INSURANCE AT BORROWER'S EXPENSE TO PROTECT LENDERS INTEREST IN THE COLLATERAL.
THIS INSURANCE MAY, BUT NEED NOT, PROTECT BORROWER'S INTERESTS. THE COVERAGE
THAT LENDER PURCHASES MAY NOT PAY ANY CLAIM THAT BORROWER MAY MAKE OR ANY CLAIM
THAT IS MADE AGAINST BORROWER IN CONNECTION WITH THE COLLATERAL. BORROWER MAY
LATER CANCEL ANY INSURANCE PURCHASED BY LENDER, BUT ONLY AFTER PROVIDING
EVIDENCE THAT BORROWER HAS OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT AND
THE OTHER TRANSACTION DOCUMENTS. IF LENDER PURCHASES INSURANCE FOR THE
COLLATERAL, BORROWER WILL BE RESPONSIBLE FOR THE COSTS OF THAT INSURANCE,
INCLUDING THE INSURANCE PREMIUM, INTEREST AND ANY OTHER CHARGES LENDER MAY
IMPOSE IN CONNECTION WITH THE PLACEMENT OF INSURANCE, UNTIL THE EFFECTIVE DATE
OF THE CANCELLATION OR EXPIRATION OF THE INSURANCE. THE COSTS OF THE INSURANCE
MAY BE ADDED TO THE BORROWER'S OBLIGATIONS. THE COSTS OF THE INSURANCE MAY BE
MORE THAN THE COST OF INSURANCE BORROWER MAY BE ABLE TO OBTAIN ON ITS OWN.
(m) Further Assurances. Borrower will execute and deliver to Lender, at
any time and from time to time, any and all further agreements, documents and
instruments, and take any and all further actions which may be required under
applicable law, or which Lender may from time to time reasonably request, in
order to effectuate the transactions contemplated by this Agreement and the
other Transaction Documents.
(n) Accountant. Borrower will give Lender prompt notice of any change
of Borrower's independent certified public accountants and a statement of the
reasons for such change. Borrower shall at all times utilize independent
certified public accountants reasonably acceptable to Lender.
(o) Financial Covenants.
(i) Maximum Consolidated Debt to Consolidated EBITDA Ratio.
Borrower will have and maintain a Consolidated Debt to Consolidated
EBITDA Ratio of not more than 2.0 to 1.0 as of the last day of each
fiscal quarter of Borrower commencing with the fiscal quarter of
Borrower ended September 30, 1997.
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<PAGE> 33
(ii) Minimum Consolidated Tangible Net Worth. Borrower will
keep and maintain a Consolidated Tangible Net Worth plus Subordinated
Debt in an amount not less than (i) $9,200,000.00 as of the last day of
each fiscal quarter of Borrower ending during the period commencing
September 30, 1997, and ending December 30, 1997, (ii) $9,450,000.00 as
of the last day of each fiscal quarter of Borrower ending during the
period commencing December 31, 1997, and ending December 30, 1998,
(iii) $9,950,000.00 as of the last day of each fiscal quarter of
Borrower ending during the period commencing December 31,1998, and
ending December 30, 1999, and (iv) $10,450,000.00 as of the last day of
each fiscal quarter of Borrower ending on or after December 31, 1999.
(iii) Minimum Consolidated Interest Coverage Ratio. Borrower
will have and maintain a Consolidated Interest Coverage Ratio of at
least 5.0 to 1.0 for each period of four (4) consecutive fiscal
quarters of Borrower commencing with the four (4) consecutive fiscal
quarter period ended September 30, 1997.
(p) Lease Consents. Borrower will use its best efforts to obtain from
each lessee under a Lease which is in existence on the date of this Agreement a
written consent expressly providing that all amounts (whether for rent or
otherwise) from time to time payable to Borrower under such Lease are assignable
by Borrower to Lender consistent with the terms of the Security Agreement.
Borrower will use its best efforts to cause each Lease executed after the date
of this Agreement (or an independent instrument executed by the applicable
lessee(s)) to contain a provision expressly providing that all amounts (whether
for rent or otherwise) from time to time payable to Borrower under such Lease
are assignable by Borrower to Lender consistent with the terms of the Security
Agreement.
5.02 Negative Covenants of Borrower. Borrower covenants and agrees
that, so long as Lender has any obligation to make any Revolving Credit Loan
under this Agreement, any Letter of Credit remains outstanding or any of the
Borrower's Obligations remain unpaid, unless the prior written consent of Lender
is obtained:
(a) Limitation on Indebtedness. Borrower will not, and it will not
cause or permit any of its Subsidiaries to, incur or be obligated on any
Indebtedness, either directly or indirectly, by way of Guarantee, suretyship or
otherwise, other than:
(i) the Borrower's Obligations;
(ii) unsecured trade accounts payable and other normal
accruals incurred in the ordinary course of business which are not more
than thirty (30) days past due (provided, however, that neither
Borrower nor any Subsidiary shall be required to pay any such account
payable or other accrual the payment of which is being contested in
good faith and by appropriate proceedings being diligently conducted
and for which adequate reserves in accordance with GAAP have been
provided, except that Borrower or such Subsidiary, as the case may be,
shall pay or cause to be paid all such accounts payable and accruals
forthwith upon the commencement of proceedings to foreclose any Lien
which is attached as security therefor, unless such foreclosure is
stayed by the filing of an appropriate bond in a manner reasonably
satisfactory to Lender);
(iii) Indebtedness under performance bonds issued for the
account of Borrower and for the benefit of lessees under Leases so long
as no amount owed by Borrower under or in respect of any such
performance bond is past due;
(iv) Indebtedness existing as of the date of this Agreement
and listed on Schedule 5.10 attached hereto (nothing contained in this
Agreement is intended to prohibit Borrower from making payments
required to be made to the holders of the promissory note of Borrower
dated September 22, 1992, and payable to the order of Thomas Turek,
M.D. in the original principal amount of $400,000.00 and/or the
promissory note of Borrower dated September 25, 1992, and payable to
the order of Thomas L. Goila in the original principal amount of
$79,000.00 in accordance with the terms of such promissory notes so
long as such payments do not violate or result in the violation of any
of the financial covenants contained in Section 5.01(o) of this
Agreement);
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<PAGE> 34
(v) Subordinated Debt;
(vi) purchase money Indebtedness incurred solely to finance
Capital Expenditures permitted by, and Capitalized Lease Obligations
permitted by, Section 5.02(m) of this Agreement; and
(vii) other Indebtedness not otherwise permitted by this
Section 5.02(a) in an amount not to exceed $100,000.00 in the aggregate
at any one time outstanding for Borrower and all of its Subsidiaries.
(b) Limitation on Liens. Borrower will not, and will not cause or
permit any of its Subsidiaries to, create, incur or assume, or suffer to be
incurred or to exist, any Lien on any of its or their Property or assets,
whether now owned or hereafter acquired, or upon any income or profits
therefrom, except for Permitted Liens.
(c) Consolidation, Merger, Sale of Assets, Etc.
(i) Borrower will not, and it will not cause or permit any
Subsidiary to, directly or indirectly merge or consolidate with or into
any other Person or permit any other Person to merge into or with or
consolidate with it.
(ii) Borrower will not, and will not cause or permit any of
its Subsidiaries to, (A) sell, assign, lease, transfer, abandon or
otherwise dispose of any of its Property or assets (including, without
limitation, any shares of capital stock of a Subsidiary owned by
Borrower or another Subsidiary) or (B) issue, sell or otherwise dispose
of any shares of capital stock of any Subsidiary, except for (1) sales
or leases of Inventory in the ordinary course of business (which does
not include a sale, transfer or lease of Inventory in partial or total
satisfaction of any Indebtedness), (2) sales of fixed assets which are
obsolete, worn-out or otherwise not used or useable in the ordinary
course of its business, so long as the net proceeds thereof are used
solely to purchase replacement fixed assets or assets of comparable
quality or to pay or prepay Debt of Borrower or such Subsidiary, as the
case may be, and (3) other sales of fixed assets which are not used or
useable in the ordinary course of its business, so long as the gross
sale proceeds from all such asset sales by Borrower and its
Subsidiaries does not exceed $25,000.00 in the aggregate in any fiscal
year.
(d) Sale and Leaseback Transactions. Borrower will not, and it will not
cause or permit any of its Subsidiaries to, enter into any arrangement, directly
or indirectly, whereby Borrower or such Subsidiary shall in one or more related
transactions sell, transfer or otherwise dispose of any Property owned by
Borrower or such Subsidiary to any Person and then rent or lease, as lessee,
such Property or any part thereof for a period or periods which in the aggregate
would exceed twelve (12) months from the date of commencement of the lease term.
(e) Sale or Discount of Accounts or Chattel Paper. Borrower will not,
and it will not cause or permit any of its Subsidiaries to, sell or discount any
of its notes or accounts receivable, any of its chattel paper or any of its
Leases, other than discounts of Eligible Accounts permitted by Section 3(f) of
the Security Agreement and other than ordinary course settlements of Accounts
which are not Eligible Accounts in an amount not to exceed $10,000.00 in any one
instance.
(f) Transactions with Affiliates. Borrower will not, and it will not
cause or permit any of its Subsidiaries to, enter into or be a party to any
transaction or arrangement with any Affiliate (including, without limitation,
the purchase from, sale to or exchange of Property with, or the rendering of any
service by or for, any Affiliate), except in the ordinary course of business and
pursuant to the reasonable requirements of Borrower's or such Subsidiary's
business and upon fair and reasonable terms no less favorable to Borrower or
such Subsidiary than would be obtained in a comparable arm's-length transaction
with a Person not an Affiliate.
(g) Changes in Nature of Business. Borrower will not, and it will not
cause or permit any of its Subsidiaries to, engage in any business if, as a
result, the general nature of the business which would then
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<PAGE> 35
be engaged in by Borrower and its Subsidiaries, considered as a whole, would be
substantially changed from the general nature of the business engaged in by
Borrower and its Subsidiaries as of the date of this Agreement, which is the
business of the manufacture and distribution of instant lottery vending
machines, prepaid phone card dispensing machines and stored value card
dispensing machines.
(h) Fiscal Year. Borrower will not, and it will not cause or permit any
of its Subsidiaries to, change its fiscal year.
(i) Stock Redemptions and Distributions. Borrower will not, and it will
not cause or permit any of its Subsidiaries to, declare or incur any liability
to make any Distribution in respect of the capital stock of Borrower or the
capital stock of such Subsidiary, as the case may be, except that so long as no
Default or Event of Default under this Agreement has occurred and is continuing
or is created thereby or would result therefrom, (i) Borrower shall be permitted
to redeem shares of its Series A Preferred Stock as and when required by the
provisions thereof as in effect on the date of this Agreement and (ii) if no
shares of Series A Preferred Stock of Borrower are issued and outstanding,
during each fiscal year of Borrower, Borrower shall be permitted to declare and
pay cash dividends on its capital stock and/or redeem shares of its capital
stock for cash so long as the aggregate amount paid or committed to be paid by
Borrower in connection with such dividends and/or redemptions does not exceed an
amount equal to Twenty-Five Percent (25%) of the Consolidated Net Income of
Borrower during the immediately preceding fiscal year of Borrower.
(j) Pension Plans. Borrower will not, and it will not cause or permit
any of its Subsidiaries to, (a) permit any condition to exist in connection with
any Pension Plan which might constitute grounds for the PBGC to institute
proceedings to have such Pension Plan terminated or a trustee appointed to
administer such Pension Plan or (b) engage in, or permit to exist or occur, any
other condition, event or transaction with respect to any Pension Plan which
could result in the incurrence by Borrower, any Subsidiary or any ERISA
Affiliate of any material liability, fine or penalty.
(k) Subordinated Debt. Borrower will not make any payments of
principal, interest or other amounts on or with respect to any of its
Subordinated Debt to the extent prohibited by the subordination provisions
governing the same.
(l) Restricted Investments. Borrower will not, and it will not cause or
permit any of its Subsidiaries to, directly or indirectly, make any Restricted
Investments.
(m) Capital Expenditures and Capitalized Leases. Borrower will not, and
it will not cause or permit any of its Subsidiaries to, make any Capital
Expenditure or enter into any Capitalized Lease if the sum of (i) the aggregate
amount of all Capital Expenditures (including the Capital Expenditure in
question) made by Borrower and its Subsidiaries during any fiscal year of
Borrower plus (ii) the aggregate amount of all rental and other payments in
respect of Capitalized Leases (including the Capitalized Lease in question) made
or required to be made by Borrower and its Subsidiaries during such fiscal year
of Borrower would exceed $200,000.00.
(n) Maximum Officer Compensation. Borrower will not cause or permit the
aggregate amount of salaries, consulting fees, bonuses and/or other compensation
(other than dividends and amounts paid in redemption of capital stock to the
extent, if any, permitted by Section 5.02(i) of this Agreement) paid or
committed to be paid by Borrower to all of the shareholders, directors and/or
officers of Borrower (taken as a group) during any fiscal year of Borrower to
exceed One Hundred Twenty-Five Percent (125%) of the aggregate amount of
salaries, consulting fees, bonuses and/or other compensation (other than
dividends and amounts paid in redemption of capital stock to the extent, if any,
permitted by Section 5.02(i) of this Agreement) paid by Borrower to all of the
shareholders, directors and/or officers of Borrower (taken as a group) during
the immediately preceding fiscal year of Borrower.
(o) Subsidiaries. Borrower will not, and it will not cause or permit
any of its Subsidiaries to, create, form or acquire any Subsidiaries.
5.03 Use of Proceeds. Borrower covenants and agrees that (i) the
proceeds of the Revolving Credit Loans will be used solely for the working
capital and general corporate purposes of Borrower, (ii) no part of
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<PAGE> 36
the proceeds of any Revolving Credit Loan will be used in violation of any
applicable law, rule or regulation and (iii) no part of the proceeds of any
Revolving Credit Loan will be used, whether directly or indirectly, and whether
immediately, incidentally or ultimately (A) to purchase or carry margin stock or
to extend credit to others for the purpose of purchasing or carrying margin
stock, or to refund or repay indebtedness originally incurred for such purpose
or (B) for any purpose which entails a violation of, or which is inconsistent
with, the provisions of any of the Regulations of The Board of Governors of the
Federal Reserve System, including, without limitation, Regulations G, U, T or X
thereof, as amended.
SECTION 6. EVENTS OF DEFAULT.
If any of the following (each of the following herein sometimes called
an "Event of Default") shall occur and be continuing:
6.01 Borrower shall fail to pay any of the Borrower's Obligations as
and when the same shall become due and payable, whether by reason of demand,
maturity, acceleration or otherwise, and any such failure shall remain
unremedied for five (5) days;
6.02 Any representation or warranty of Borrower made in this Agreement,
in any other Transaction Document to which Borrower is a party or in any
certificate, agreement, instrument or statement furnished or made or delivered
pursuant hereto or thereto or in connection herewith or therewith, shall prove
to have been untrue or incorrect in any material respect when made or effected;
6.03 Borrower shall fail to perform or observe any term, covenant or
provision contained in Section 5.01 (c), Section 5.01 (k), Section 5.01 (1),
Section 5.01 (m), Section 5.01 (o)(iii), Section 5.02 or Section 5.03;
6.04 Borrower shall fail to perform or observe any term, covenant or
provision contained in Sections 2.01 (d) or 5.01 (f) and any such failure shall
remain unremedied for five (5) days after the earlier of (i) written notice of
default is given to Borrower by Lender or (ii) any officer of Borrower obtaining
knowledge of such default;
6.05 Borrower shall fail to perform or observe any term, covenant or
provision contained in Sections 5.01(o)(i) or 5.01 (o)(ii) and any such failure
shall remain unremedied for five (5) days after the earliest of (i) written
notice of default is given to Borrower by Lender, (ii) any officer of Borrower
obtaining knowledge of such default or (iii) completion of Borrower's financial
statements for the applicable period;
6.06 Borrower shall fail to perform or observe any other term, covenant
or provision contained in this Agreement (other than those specified in Sections
6.01, 6.02, 6.03, 6.04 or 6.05 above) and any such failure shall remain
unremedied for fifteen (15) days after the earlier of (i) written notice of
default is given to Borrower by Lender or (ii) any officer of Borrower obtaining
knowledge of such default;
6.07 This Agreement or any of the other Transaction Documents shall at
any time for any reason cease to be in full force and effect or shall be
declared to be null and void by a court of competent jurisdiction, or if the
validity or enforceability thereof shall be contested or denied by Borrower, or
if the transactions completed hereunder or thereunder shall be contested by
Borrower or if Borrower shall deny that it has any further liability or
obligation hereunder or thereunder;
6.08 Borrower, any other Obligor or any Subsidiary shall (i)
voluntarily commence any proceeding or file any petition seeking relief under
Title 11 of the United States Code or any other Federal, state or foreign
bankruptcy, insolvency, receivership, liquidation or similar law, (ii) consent
to the institution of, or fail to contravene in a timely and appropriate manner,
any such proceeding or the filing of any such petition, (iii) apply for or
consent to the appointment of a receiver, trustee, custodian, sequestrator or
similar official of itself or of a substantial part of its Property or assets,
(iv) file an answer admitting the material allegations of a petition filed
against itself in any such proceeding, (v) make a general assignment for the
benefit of creditors, (vi) become unable, admit in writing its inability or fail
generally to pay its debts as they become due or (vii) take any corporate or
other action for the purpose of effecting any of the foregoing;
- 36 -
<PAGE> 37
6.09 (i) An involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking relief in
respect of Borrower, any other Obligor or any Subsidiary, or of a substantial
part of the Property or assets of Borrower, any other Obligor or any Subsidiary,
under Title 11 of the United States Code or any other Federal, state or foreign
bankruptcy, insolvency, liquidation or similar law and such proceeding or
petition shall continue undismissed for thirty (30) consecutive days or an order
or decree approving or ordering any proceeding or petition shall continue
unstayed and in effect for thirty (30) consecutive days; (ii) the appointment of
a receiver, trustee, custodian, sequestrator or similar official of Borrower,
any other Obligor or any Subsidiary or of a substantial part of the Property or
assets of Borrower, any other Obligor or any Subsidiary, and such appointment
shall continue in effect for thirty (30) consecutive days or an order or decree
approving or ordering any such appointment shall continue unstayed and in effect
for thirty (30) consecutive days; or (iii) the entry of any order or decree
approving or ordering any winding-up or liquidation of Borrower, any other
Obligor or any Subsidiary, and any such order or decree shall continue unstayed
and in effect for thirty (30) consecutive days;
6.10 Any "Event of Default" (as defined therein) shall occur under or
within the meaning of the Security Agreement;
6.11 The Patent, Trademark and License Security Agreement shall at any
time for any reason cease to be in full force and effect or shall be declared to
be null and void by a court of competent jurisdiction, or if the validity or
enforceability thereof shall be contested or denied by Borrower, or if Borrower
shall deny that it has any further liability or obligation thereunder or if
Borrower shall fail to comply with or observe any of the terms, provisions or
conditions contained in the Patent, Trademark and License Security Agreement and
any such failure shall remain unremedied for fifteen (15) days after the earlier
of (i) written notice of default is given to Borrower by Lender or (ii) any
officer of Borrower obtaining knowledge of such default;
6.12 Borrower, any other Obligor or any Subsidiary shall be declared by
Lender to be in default on, or pursuant to the terms of, (i) any other present
or future obligation to Lender, including, without limitation, any other loan,
line of credit, revolving credit, guaranty or letter of credit reimbursement
obligation, or (ii) any other present or future agreement purporting to convey
to Lender a Lien upon any Property or assets of Borrower, such other Obligor or
such Subsidiary, as the case may be;
6.13 The occurrence of any default or event of default under or within
the meaning of any agreement, document or instrument evidencing, securing,
guaranteeing the payment of or otherwise relating to any Debt of Borrower, any
other Obligor or any Subsidiary (other than the Borrower's Obligations) having
an aggregate outstanding principal balance in excess of $100,000.00 which is not
cured within any applicable cure or grace period (if any);
6.14 Borrower, any other Obligor or any Subsidiary shall have a
judgment entered against it by a court having jurisdiction in the premises and
such judgment shall not be appealed in good faith or satisfied by Borrower, such
other Obligor or such Subsidiary, as the case may be, within thirty (30) days
after the entry of such judgment;
6.15 The occurrence of a Reportable Event with respect to any Pension
Plan; the filing of a notice of intent to terminate a Pension Plan by Borrower,
any ERISA Affiliate or any Subsidiary; the institution of proceedings to
terminate a Pension Plan by the PBGC or any other Person; the withdrawal in a
"complete withdrawal" or a "partial withdrawal" as defined in Sections 4203 and
4205, respectively, of ERISA by Borrower, any ERISA Affiliate or any Subsidiary
from any Multi-Employer Plan; or the incurrence of any material increase in the
contingent liability of Borrower or any Subsidiary with respect to any "employee
welfare benefit plan" as defined in Section 3(1) of ERISA which covers retired
employees and their beneficiaries;
6.16 The institution by Borrower, any ERISA Affiliate or any Subsidiary
of steps to terminate any Pension Plan if, in order to effectuate such
termination, Borrower, such ERISA Affiliate or such Subsidiary, as the case may
be, would be required to make a contribution to such Pension Plan, or would
incur a liability or obligation to such Pension Plan, in excess of $100,000.00;
or the institution by the PBGC of steps to terminate any Pension Plan;
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<PAGE> 38
6.17 The occurrence of any Change of Control Event; or
6.18 The occurrence of any default or event of default on the part of
Borrower under or within the meaning of any of the Leases which is declared by
the lessee(s) under such Lease and is not cured by Borrower or waived by such
lessee(s) within thirty (30) days after the declaration of such default and
which could reasonably be expected to have a Material Adverse Effect;
THEN, and in each such event (other than an event described in Sections
6.08 or 6.09), Lender may declare that its obligation to make Revolving Credit
Loans under this Agreement has terminated, whereupon such obligation of Lender
shall be immediately and forthwith terminated, and Lender may further declare
the entire outstanding principal balance of and all accrued and unpaid interest
on the Revolving Credit Note and all of the other Borrower's Obligations to be
forthwith due and payable, whereupon all of the unpaid principal balance of and
all accrued and unpaid interest on the Revolving Credit Note and all of such
other Borrower's Obligations shall become and be immediately due and payable,
without presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived by Borrower, and Lender may exercise any and all
other rights and remedies which it may have under any of the other Transaction
Documents or under applicable law; provided, however, that upon the occurrence
of any event described in Sections 6.08 or 6.09, Lender's obligation to make
Revolving Credit Loans under this Agreement shall automatically terminate and
the entire outstanding principal balance of and all accrued and unpaid interest
on the Revolving Credit Note and all of the other Borrower's Obligations shall
automatically become immediately due and payable, without presentment, demand,
protest or further notice of any kind, all of which are hereby expressly waived
by Borrower, and Lender may exercise any and all other rights and remedies which
it may have under any of the other Transaction Documents or under applicable
law. If any Default or Event of Default under this Agreement has occurred and is
continuing, in addition to all of Lender's other rights and remedies under this
Agreement and the other Transaction Documents and at law or in equity, Lender
shall have the right, in its sole and absolute discretion, to (a) reduce the
amount of the Lender's Revolving Credit Commitment, (b) create reserves and/or
allowances against Unused Availability, Eligible Accounts, Eligible Inventory
and/or Eligible Lease Payments and/or (c) reduce the advance rates against
Eligible Accounts, Eligible Inventory and/or Eligible Lease payments set forth
in the definition of the Borrowing Base.
SECTION 7. GENERAL.
7.01 No Waiver. No failure or delay by Lender in exercising any right,
remedy, power or privilege hereunder or under any other Transaction Document
shall operate as a waiver thereof; nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right, remedy, power or privilege. The remedies provided herein and in the
other Transaction Documents are cumulative and not exclusive of any remedies
provided by law. Nothing herein contained shall in any way affect the right of
Lender to exercise any statutory or common law right of banker's lien or
set-off.
7.02 Right of Set-Off. Upon the occurrence and during the continuance
of any Event of Default, Lender is hereby authorized at any time and from time
to time, without notice to Borrower (any such notice being expressly waived by
Borrower) and to the fullest extent permitted by law, to set-off and apply any
and all deposits (general or special, time or demand, provisional or final) at
any time held by Lender and any and all other indebtedness at any time owing by
Lender to or for the credit or account of Borrower against any and all of the
Borrower's Obligations irrespective of whether or not Lender shall have made any
demand hereunder or under any of the other Transaction Documents and although
such obligations may be contingent or unmatured. Lender agrees to promptly
notify Borrower after any such set-off and application made by Lender, provided,
however, that the failure to give such notice shall not affect the validity of
such set-off and application. The rights of Lender under this Section 7.02 are
in addition to any other rights and remedies (including, without limitation,
other rights of set-off) which Lender may have. Nothing contained in this
Agreement or any other Transaction Document shall impair the right of Lender to
exercise any right of set-off or counterclaim it may have against Borrower and
to apply the amount subject to such exercise to the payment of indebtedness of
Borrower unrelated to this Agreement or the other Transaction Documents.
7.03 Cost and Expenses. Borrower agrees, whether or not any Revolving
Credit Loan is made hereunder, to pay Lender upon demand for (i) all
out-of-pocket costs and expenses and all Attorneys' Fees
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<PAGE> 39
incurred by Lender in connection with the preparation, documentation,
negotiation, execution and/or administration of this Agreement, the Revolving
Credit Note and/or any of the other Transaction Documents, (ii) all recording,
filing and search fees and expenses incurred by Lender in connection with this
Agreement and the other Transaction Documents, (iii) all out-of-pocket costs and
expenses and all Attorneys' Fees incurred by Lender in connection with the (A)
the preparation, documentation, negotiation and execution of any amendment,
modification, extension or renewal of this Agreement, the Revolving Credit Note
and/or any of the other Transaction Documents, (B) the preparation of any waiver
or consent hereunder or under any of the other Transaction Documents or (C) any
Default or Event of Default or alleged Default or Event of Default hereunder,
(iv) if an Event of Default occurs, all out-of-pocket costs and expenses and all
Attorneys' Fees incurred by Lender in connection with such Event of Default and
collection and other enforcement proceedings resulting therefrom and (v) all
other Attorneys' Fees incurred by Lender relating to or arising out of or in
connection with this Agreement or any of the other Transaction Documents.
Borrower further agrees to pay or reimburse Lender for any stamp or other taxes
which may be payable with respect to the execution, delivery, recording and/or
filing of this Agreement, the Revolving Credit Note or any of the other
Transaction Documents. All of the obligations of Borrower under this Section
7.03 shall survive the satisfaction and payment of the Borrower's Obligations
and the termination of this Agreement.
7.04 Environmental Indemnity. Borrower hereby agrees to indemnify
Lender and hold Lender harmless from and against any and all losses,
liabilities, damages, injuries, costs, expenses and claims of any and every kind
whatsoever (including, without limitation, court costs and attorneys' fees and
expenses) which at any time or from time to time may be paid, incurred or
suffered by, or asserted against, Lender for, with respect to or as a direct or
indirect result of the violation by Borrower or any Subsidiary of any
Environmental Laws; or with respect to, or as a direct or indirect result of the
presence on or under, or the Release from, properties owned, leased or operated
by Borrower and/or any Subsidiary in the conduct of their respective businesses
into or upon any land, the atmosphere or any watercourse, body of water or
wetland, of any Hazardous Substances or any other hazardous or toxic waste,
substance or constituent or other substance (including, without limitation, any
losses, liabilities, damages, injuries, costs, expenses or claims asserted or
arising under the Environmental Laws); and the provisions of and undertakings
and indemnification set out in this Section 7.04 shall survive the satisfaction
and payment of the Borrower's Obligations and the termination of this Agreement.
7.05 General Indemnity. In addition to the payment of expenses pursuant
to Section 7.03, whether or not the transactions contemplated hereby shall be
consummated, Borrower hereby agrees to indemnify, pay and hold Lender and any
holder(s) of the Revolving Credit Note, and the officers, directors, employees,
agents and affiliates of Lender and such holder(s) (collectively, the
"Indemnities") harmless from and against any and all other liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, claims,
costs, expenses and disbursements of any kind or nature whatsoever (including,
without limitation, the reasonable fees and disbursements of counsel for such
Indemnities in connection with any investigative, administrative or judicial
proceeding commenced or threatened, whether or not such Indemnitees shall be
designated a party thereto), that may be imposed on, incurred by or asserted
against the Indemnitees, in any manner relating to or arising out of this
Agreement, any of the other Transaction Documents or any other agreement,
document or instrument executed and delivered by Borrower or any other Obligor
in connection herewith or therewith, the statements contained in any commitment
letters delivered by Lender, Lender's agreement to make the Revolving Credit
Loans hereunder or the use or intended use of the proceeds of any Revolving
Credit Loan hereunder (collectively, the "indemnified liabilities"); provided
that Borrower shall have no obligation to an Indemnitee hereunder with respect
to indemnified liabilities arising from the gross negligence or willful
misconduct of that Indemnitee as determined by a court of competent jurisdiction
in a final nonappealable order. To the extent that the undertaking to indemnify,
pay and hold harmless set forth in the preceding sentence may be unenforceable
because it is violative of any law or public policy, Borrower shall contribute
the maximum portion that it is permitted to pay and satisfy under applicable law
to the payment and satisfaction of all indemnified liabilities incurred by the
Indemnitees or any of them. The provisions of the undertakings and
indemnification set out in this Section 7.05 shall survive satisfaction and
payment of the Borrower's Obligations and the termination of this Agreement.
7.06 Authority to Act. Lender shall be entitled to act on any notices
and instructions (telephonic or written) believed by Lender in good faith to
have been sent or delivered by any person authorized to act on
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<PAGE> 40
behalf of Borrower pursuant hereto, regardless of whether such notice or
instruction was in fact delivered by a person authorized to act on behalf of
Borrower, and Borrower hereby agrees to indemnify Lender and hold Lender
harmless from and against any and all losses and expenses, if any, ensuing from
any such action.
7.07 Notices. Any notice, request, demand, consent, confirmation or
other communication hereunder shall be in writing and delivered in person or
sent by telecopy or registered or certified mail, return receipt requested and
postage prepaid, to the applicable party at its address or telecopy number set
forth on the signature pages hereof (with a copy, in the case of notices sent to
Borrower, to be sent to John McCoy, Esq., Taft, Stettinius & Hollister, 1800
Star Bank Center, 425 Walnut Street, Cincinnati, Ohio 45202), or at such other
address or telecopy number as any party hereto may designate as its address for
communications hereunder by notice so given. Such notices shall be deemed
effective on the day on which delivered or sent if delivered in person or sent
by telecopy, or on the third (3rd) Domestic Business Day after the day on which
mailed, if sent by registered or certified mail.
7.08 Consent to Jurisdiction: Waiver of Jury Trial. BORROWER
IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY MISSOURI STATE
COURT OR ANY UNITED STATES OF AMERICA COURT SITTING IN THE EASTERN DISTRICT OF
MISSOURI, AS LENDER MAY ELECT, IN ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT. BORROWER HEREBY
IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT TO SUCH SUIT, ACTION OR PROCEEDING
MAY BE HELD AND DETERMINED IN ANY OF SUCH COURTS. BORROWER IRREVOCABLY WAIVES,
TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH BORROWER MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING
BROUGHT IN ANY SUCH COURT, AND BORROWER FURTHER IRREVOCABLY WAIVES ANY CLAIM
THAT SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT
IN AN INCONVENIENT FORUM. BORROWER HEREBY EXPRESSLY WAIVES ALL RIGHTS OF ANY
OTHER JURISDICTION WHICH BORROWER MAY NOW OR HEREAFTER HAVE BY REASON OF ITS
PRESENT OR SUBSEQUENT DOMICILES. BORROWER AUTHORIZES THE SERVICE OF PROCESS UPON
BORROWER BY REGISTERED MAIL SENT TO BORROWER AT ITS ADDRESS SET FORTH IN SECTION
7.07. BORROWER AND LENDER HEREBY IRREVOCABLY WAIVE THE RIGHT TO TRIAL BY JURY
WITH RESPECT TO ANY ACTION IN WHICH BORROWER AND LENDER ARE PARTIES RELATING TO
OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER
TRANSACTION DOCUMENTS.
7.09 Governing Law. This Agreement, the Revolving Credit Note and all
of the other Transaction Documents shall be governed by and construed in
accordance with the substantive laws of the State of Missouri (without reference
to conflict of law principles).
7.10 Amendments and Waivers. Any provision of this Agreement, the
Revolving Credit Note or any of the other Transaction Documents may be amended
or waived if, but only if, such amendment or waiver is in writing and is signed
by Borrower and Lender.
7.11 References; Headings for Convenience. Unless otherwise specified
herein, all references herein to Section numbers refer to Section numbers of
this Agreement, all references herein to Exhibits "A", "B" and "C" refer to
annexed Exhibits "A", "B" and "C" which are hereby incorporated herein by
reference and all references herein to Schedules 2.02(f), 4.05, 4.08, 4. 10, 4.
12, 4. 16, 4.1 7 and 4.18 refer to annexed Schedules 2.02(f), 4.05, 4.08, 4.10,
4.12, 4.16, 4.17 and 4.18 which are hereby incorporated herein by reference. The
Section headings are furnished for the convenience of the parties and are not to
be considered in the construction or interpretation of this Agreement.
7.12 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of Borrower and Lender and their
respective successors and assigns, except that Borrower may not assign or
otherwise transfer any of its rights or delegate any of its obligations under
this Agreement.
7.13 NO ORAL AGREEMENTS; ENTIRE AGREEMENT. ORAL AGREEMENTS OR
COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT
OF A DEBT, INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT, ARE NOT ENFORCEABLE.
TO PROTECT BORROWER AND LENDER FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY
AGREEMENTS REACHED BY BORROWER
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<PAGE> 41
AND LENDER COVERING SUCH MATTERS ARE CONTAINED IN THIS AGREEMENT AND THE OTHER
TRANSACTION DOCUMENTS, WHICH AGREEMENT AND OTHER TRANSACTION DOCUMENTS ARE A
COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENTS BETWEEN BORROWER AND LENDER,
EXCEPT AS BORROWER AND LENDER MAY LATER AGREE IN WRITING TO MODIFY THEM. This
Agreement: embodies the entire agreement and understanding between the parties
hereto and supersedes all prior agreements and understandings (oral or written)
relating to the subject matter hereof.
7.14 Severability. In the event any one or more of the provisions contained in
this Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
7.15 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.16 Resurrection of the Borrower's Obligations. To the extent that Lender
receives any payment on account of any of the Borrower's Obligations, and any
such payment(s) or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, subordinated and/or required to be repaid
to a trustee, receiver or any other Person under any bankruptcy act, state or
Federal law, common law or equitable cause, then, to the extent of such
payment(s) received, the Borrower's Obligations or part thereof intended to be
satisfied and any and all Liens upon or pertaining to any Property or assets of
Borrower and theretofore created and/or existing in favor of Lender as security
for the payment of such Borrower's Obligations shall be revived and continue in
full force and effect, as if such payment(s) had not been received by Lender and
applied on account of the Borrower's Obligations.
7.17 Independence of Covenants. All of the covenants contained in this
Agreement and the other Transaction Documents shall be given independent effect
so that if a particular action, event or condition is prohibited by any one of
such covenants, the fact that it would be permitted by an exception to, or
otherwise be in compliance within the provisions of, another covenant shall not
avoid the occurrence of a Default or Event of Default if such action is taken,
such event occurs or such condition exists.
7.18 Subsidiary Reference. Any reference in this Agreement to a Subsidiary of
Borrower, and any financial definition, ratio, restriction or other provision of
this Agreement which is stated to be applicable to Borrower and its Subsidiaries
or which is to be determined on a "consolidated" or "consolidating" basis, shall
apply only to the extent Borrower has any Subsidiaries and, where applicable, to
the extent any such Subsidiaries are consolidated with Borrower for financial
reporting purposes in accordance with GAAP.
7.19 Compliance with Usury Laws. It is the intent of Borrower and
Lender in the execution and performance of this Agreement, the Revolving Credit
Note and the other Transaction Documents to contract in strict compliance with
any and all applicable usury laws, including conflicts of law concepts,
governing the Revolving Credit Loans. In furtherance thereof, Lender and
Borrower stipulate and agree that none of the terms and provisions contained in
this Agreement, the Revolving Credit Note or any of the other Transaction
Documents shall ever be construed to create a contract to pay, as consideration
for the use, forbearance or detention of money, interest at a rate in excess of
the highest rate permitted by applicable law (the "Highest Lawful Rate") and
that for purposes hereof "interest" shall include the aggregate of all charges
which constitute interest under such laws that are contracted for, charged or
received under this Agreement, the Revolving Credit Note or any of the other
Transaction Documents; and in the event that, notwithstanding the foregoing,
under any circumstances the aggregate amounts taken, reserved, charged, received
or paid on the Revolving Credit Loans include amounts which by applicable law
are deemed interest which would exceed the Highest Lawful Rate, then such excess
shall be deemed to be a mistake and Lender shall credit the same on the
principal balance of the Revolving Credit Loans hereunder (or if all of the
Borrower's Obligations shall have been paid in full, refund said excess to
Borrower). In the event of demand for payment of the Revolving Credit Note
and/or any of the other Borrower's Obligations by Lender, or in the event of any
required or permitted prepayment, then such consideration that constitutes
interest may never include more than the Highest Lawful Rate and any excess
interest, if any, provided for in this Agreement, the Revolving Credit Note or
otherwise shall be canceled automatically as of the date of such acceleration or
prepayment and, if theretofore paid, shall be credited against the principal
balance of the Revolving Credit Loans hereunder (or, if all of the Borrower's
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<PAGE> 42
Obligations shall have been repaid in full, refunded to Borrower). The
provisions of the section shall control over all other provisions of this
Agreement, the Revolving Credit Note and/or the other Transaction Documents
which may be in apparent conflict herewith.
IN WITNESS WHEREOF, Borrower and Lender have executed this Loan Agreement
this 29th day of October, 1997.
INTERLOTT TECHNOLOGIES, INC.
By /s/ Jerome J. Cain
----------------------------
Title: Chief Executive Officer
------------------------
By /s/ L. Rogers Wells
----------------------------
Title: Chief Executive Officer
------------------------
10830 Millington Court
Cincinnati, Ohio 45242
Attention: Chief Executive Officer and Chief
Financial Officer
Telecopy number:(513) 792-7001
--------------
MERCANTILE BUSINESS CREDIT INC.
By /s/ Marian H. Kammerer
----------------------------
Title: Vice President
------------------------
100 South Brentwood Boulevard
Suite 500
St. Louis, Missouri 63105
Attention: Senior Credit Officer
Telecopy number: (314) 579-8480
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<PAGE> 43
SCHEDULE 2.02(f)
Authorized Individuals
L. Rogers Wells
David F. Nichols
Jerome J. Cain
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<PAGE> 44
SCHEDULE 4.05 - LITIGATION
In January 1996, Borrower filed a civil action in the Court of Common
Pleas for Hamilton County, Ohio against Lottery Enterprises, Inc. ("LEI") to
collect sums allegedly owed to it under an agreement in principle with LEI. That
action has been removed to Federal Court, and is styled International Lottery,
Inc. v. Lottery Enterprises, Inc. Case No. C-1-96-205, United States District
Court, Southern District of Ohio, Western Division. Borrower's claims under the
agreement in principle arose in connection with a potential merger transaction
between Borrower and LEI in 1995 that was not consummated. The agreement in
principle provided for the reimbursement of Borrower's expenses by LEI, and the
payment by LEI of a break-up fee to Borrower, under certain circumstances. LEI
has denied Borrower's allegations, and has asserted counterclaims against
Borrower for breach or contract, unfair competition, and tortious interference
with its business, seeking damages in excess of $500,000.
Westwood Fabrication & Sheetmetal, Inc. filed suit against Borrower in
the Montgomery County, Ohio Court of Common Pleas on May 6, 1997. Westwood
alleges that Borrower has failed to pay for merchandise (ITVM dispensing machine
cabinets) valued at $36,910. Borrower admits that it ordered the cabinets.
However, Borrower denies that it is obliged to pay for the cabinets, which were
defective. Borrower has made a counterclaim for $40,454, which represents the
costs incurred by Borrower as a result of Westwood's delivery of defective
cabinets. Discovery in the case has not been completed. The case is set for
trial on February 3,1998. [Please note that Borrower is listing the Westwood
litigation in the interest of full disclosure and that Borrower does not
consider the amount in controversy in this matter to be material.]
Default judgment against Borrower in Forms Plus Inc. v.
Interlott, Inc. in the amount of $779.63
Default judgment against Borrower in Blue Chip Fasteners v. Interlott,
Inc. in the amount of $1,091.39
<PAGE> 45
SCHEDULE 4.08
Subsidiaries
NONE
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<PAGE> 46
SCHEDULE 4.10 - OTHER DEBT, GUARANTIES AND CAPITAL LEASES
Promissory Note of Borrower payable to the order of Thomas E.
Turek, M.D. in the principal sum of $400,000.00 dated
September 22, 1992.
Amended and Restated Promissory Note of Borrower payable to
the order of Thomas L. Goila in the principal sum of
$79,000.00 dated September 25, 1992.
1,335,000 issued and outstanding shares of the Borrower's
Series A Preferred Stock. The Borrower's preferred stock is
nonparticipating and has no rights to dividends. The holders
of the preferred stock are entitled to sell to the Borrower
all of their shares of preferred stock at a price of $1.00 per
share upon (i) the payment of all debts of the Borrower
outstanding as of September 25, 1992, (ii) the reporting by
the Borrower of retained earnings of at least $1,000,000
determined in accordance with generally accepted accounting
principles, and (iii) the payment in full by the Borrower of a
promissory note in the original amount of $400,000 to Thomas
E. Turek.
The Borrower may, at its discretion, redeem all or part of the
outstanding preferred stock at any time. The redemption price
for the preferred stock is $1.00 per share and may be payable
in the form of a promissory note.
<PAGE> 47
SCHEDULE 4.12 - EXISTING LIENS
Lien by the Ohio Bureau of Employment Services dated April 3, 1992
filed with the Hamilton County Recorder's Office for unpaid unemployment
compensation in the amount of $273.00.
Personal Property Tax Lien dated December 15, 1992 filed with the
Hamilton County Recorder's Office in the amount of $315.83.
<PAGE> 48
SCHEDULE 4.16 - PATENTS. TRADEMARKS. COPYRIGHTS AND LICENSES
Patents
<TABLE>
<S> <C>
5,472,247 Multipoint high security locking mechanism for lottery machines
5,330,185 Method and apparatus for random play of lottery games
D376,621 Double game ticket vending machine
4,982,337 System for distributing lottery tickets
</TABLE>
Trademarks
Reg. No. 1,949,978 - Instant Success
Reg. No. 1,822,517 - Interlott (word only)
Reg. No. R1840378 - Interlott (word and design)
Copyrights
None
Licenses
Pull-tab manufacturing and license agreement among Algonquin Industries, Inc.,
Kazmier Kasper and Borrower dated January 13, 1994 regarding a pull-tab ticket
mechanism.
<PAGE> 49
SCHEDULE 4.17
Environmental and Health and Safetv Matters
NONE
-49-
<PAGE> 50
SCHEDULE 4.18
Existing Investments
NONE
-50-
<PAGE> 51
EXHIBIT A
BORROWING BASE CERTIFICATE
This Borrowing Base Certificate is delivered pursuant to Section 2.01 (c)
of that certain Loan Agreement dated October 29, 1997, by and among Interlott
Technologies, Inc. ("Borrower") and Mercantile Business Credit Inc. ("Lender"),
as the same may from time to time be amended, modified, extended or renewed (the
"Loan Agreement"). All capitalized terms used and not otherwise defined herein
shall have the respective meanings ascribed to them in the Loan Agreement.
Borrower hereby represents and warrants to Lender that the following
information is true and correct as of ___________, 19___:
<TABLE>
<S> <C> <C>
1. 85% of face amount of Eligible Accounts of Borrower $
-------------
2. 50% of Eligible Inventory of Borrower, valued in accordance with GAAP $
-------------
3. Inventory Sublimit $ 2,500,000.00
4. Inventory Availability (Lesser of Item 2 or Item 3)
--------------
5. 65% of Eligible Lease Payments $
--------------
6. Borrowing Base (Sum of Item 1 plus Item 4 plus Item 5) $
---- ---- --------------
7. Lender's Revolving Credit Commitment $15,000,000.00
8. Borrower's Maximum Availability (Lesser of Item 6 or Item 7) $
--------------
9. Aggregate principal amount of outstanding Revolving Credit Loans $
--------------
10. Aggregate undrawn face amount of outstanding Letters of Credit $
--------------
11. Total Outstandings [Sum of Item 9 plus Item 10] $
---- --------------
12. Borrowing Availability Excess (Deficit) [Item 8 minus Item 11] $
-----
(Negative amount represents mandatory repayment) --------------
</TABLE>
If Item 12 above is negative, this Certificate is accompanied by the
mandatory repayment required by Section 2.01(d) of the Loan Agreement.
This Borrowing Base Certificate is dated the_______ day of________, 19___.
INTERLOTT TECHNOLOGIES, INC.
By:
------------------------------------------------
Title:
---------------------------------------------
-51-
<PAGE> 52
EXHIBIT B
REVOLVING CREDIT NOTE
$15,000,000.00 St. Louis, Missouri
October 29, 1997
FOR VALUE RECEIVED, on the last day of the Revolving Credit Period, the
undersigned, INTERLOTT TECHNOLOGIES, INC., a Delaware corporation ("Borrower"),
hereby promises to pay to the order of MERCANTILE BUSINESS CREDIT INC., a
Missouri corporation ("Lender"), the principal sum of Fifteen Million Dollars
($15,000,000.00), or such lesser sum as may then constitute the aggregate unpaid
principal amount of all Revolving Credit Loans made by Lender to Borrower
pursuant to the Loan Agreement referred to below. The aggregate principal amount
of Revolving Credit Loans which Lender shall be committed to have outstanding
under this Note at any one time shall not exceed Fifteen Million Dollars
($15,000,000.00), which amount may be borrowed, paid, reborrowed and repaid, in
whole or in part, subject to the terms and conditions of this Note and of the
Loan Agreement referred to below.
Borrower further promises to pay to the order of Lender interest on the
unpaid principal balance from time to time outstanding under this Note on the
dates and at the rates set forth in the Loan Agreement referred to below. All
payments received by Lender under this Note shall be allocated among the
principal, interest, collection costs and expenses and other amounts due under
this Note as follows: (a) so long as no Event of Default under the Loan
Agreement has occurred and is continuing, as directed by Borrower; and (b) so
long as any Event of Default under the Loan Agreement has occurred and is
continuing, in such order and manner as Lender shall elect. The amount of
interest accruing under this Note shall be computed on an actual day, 360-day
year basis.
All payments of principal and interest under this Note shall be made in
lawful currency of the United States at the office of Lender situated at 100
South Brentwood Boulevard, Suite 500, St. Louis, Missouri 63105, or at such
other place as the holder of this Note may from time to time designate in
writing.
Lender shall record in its books and records the date and amount of each
Revolving Credit Loan made by it to Borrower and the date and amount of each
payment of principal and/or interest made by Borrower with respect thereto;
provided, however, that the obligation of Borrower to repay each Revolving
Credit Loan made to Borrower under this Note shall be absolute and
unconditional, notwithstanding any failure of Lender to make any such
recordation or any mistake by Lender in connection with any such recordation.
The books and records of Lender showing the account between Lender and Borrower
shall be admissible in evidence in any action or proceeding and shall constitute
prima facie proof of the items therein set forth in the absence of manifest
error.
Subject to the terms of the Loan Agreement referred to below, Borrower
shall have the right to prepay all at any time or any portion from time to time
of the unpaid principal of this Note prior to maturity, without penalty or
premium.
This Note is the Revolving Credit Note referred to in that certain Loan
Agreement dated the date hereof by and between Borrower and Lender (as the same
may from time to time be amended, modified, extended or renewed, the "Loan
Agreement"). The Loan Agreement, among other things, contains provisions for
acceleration of the maturity of this Note upon the occurrence of certain stated
events and also for prepayments on account of the principal of this Note and
interest on this Note prior to the maturity of this Note upon the terms and
conditions specified therein. All capitalized terms used and not otherwise
defined in this Note shall have the respective meanings ascribed to them in the
Loan Agreement.
This Note is secured by, among other things, that certain Security
Agreement dated the date hereof and executed by Borrower in favor of Lender (as
the same may from time to time be amended, modified, extended or renewed, the
"Security Agreement") and that certain Patent, Trademark and License Security
Agreement dated the date hereof and executed by Borrower in favor of Lender (as
the same may from time to time be amended, modified, extended or renewed, the
"Patent, Trademark and License Security
<PAGE> 53
Agreement"), to which Security Agreement and Patent, Trademark and License
Security Agreement reference is hereby made for a description of the security
and a statement of the terms and conditions upon which this Note is secured.
If any Event of Default under the Loan Agreement shall occur and be
continuing, then Lender's obligation to make additional Revolving Credit Loans
under this Note may be terminated in the manner and with the effect as provided
in the Loan Agreement and the entire outstanding principal balance of this Note
and all accrued and unpaid interest thereon may be declared to be immediately
due and payable in the manner and with the effect as provided in the Loan
Agreement.
In the event that any payment of any principal of or interest on this Note
is not paid when due, whether by reason of maturity, acceleration or otherwise,
and this Note is placed in the hands of an attorney or attorneys for collection
or for foreclosure of the Security Agreement or the Patent, Trademark and
License Security Agreement, or if this Note is placed in the hands of an
attorney or attorneys for representation of Lender in connection with bankruptcy
or insolvency proceedings relating hereto, Borrower promises to pay to the order
of Lender, in addition to all other amounts otherwise due hereon, the costs and
expenses of such collection, foreclosure and representation, including, without
limitation, reasonable attorneys' fees and expenses (whether or not litigation
shall be commenced in aid thereof). All parties hereto severally waive
presentment for payment, demand for payment, protest, notice of protest and
notice of dishonor.
This Note shall be governed by and construed in accordance with the
substantive laws of the State of Missouri (without reference to conflict of law
principles).
INTERLOTT TECHNOLOGIES, INC.
By:
-----------------------------------------
Title:
--------------------------------------
By:
-----------------------------------------
Title:
--------------------------------------
-2-
<PAGE> 54
EXHIBIT C
__________, 19____
Mercantile Business Credit Inc.
100 South Brentwood Boulevard
Suite 500
St. Louis, Missouri 63105
Attention: Senior Credit Officer
Ladies and Gentlemen:
Reference is hereby made to that certain Loan Agreement dated October 29,
1997, by and between you and the undersigned, as the same may from time to time
amended, modified, extended or renewed (the "Loan Agreement"). All capitalized
terms used and not otherwise defined herein shall have the respective meanings
ascribed to them in the Loan Agreement.
Borrower hereby certifies to Lender that as of the date hereof:
(a) all of the representations and warranties of Borrower contained in the
Loan Agreement and in the other Transaction Documents are true and correct in
all material respects on and as of the date hereof as if made on and as of the
date hereof;
(b) no violation or breach of any of the affirmative covenants of Borrower
contained in the Loan Agreement has occurred and is continuing;
(c) no violation or breach of any of the negative covenants of Borrower
contained in the Loan Agreement has occurred and is continuing;
(d) no Default or Event of Default under or within the meaning of the Loan
Agreement has occurred and is continuing;
(e) the financial statements of Borrower [and its subsidiaries] delivered
to you with this letter are true, correct and complete and have been prepared in
accordance with GAAP consistently applied [(subject to normal year-end
adjustments and absence of footnotes)]; and
(f) the financial covenant information set forth in Schedule 1 to this
letter is true and correct.
Very truly yours,
INTERLOTT TECHNOLOGIES, INC.
By:
------------------------------------
Title:
---------------------------------
-53-
<PAGE> 55
SCHEDULE 1
Financial Covenant Information as
as of , 19
-----------------
<TABLE>
<S> <C> <C>
Financial Covenant Actual Required
- ------------------ ------ --------
</TABLE>
-54-
<PAGE> 1
EXHIBIT 4.3(a)
REVOLVING CREDIT NOTE
$15,000,000.00 St. Louis, Missouri
October 29, 1997
FOR VALUE RECEIVED, on the last day of the Revolving Credit Period, the
undersigned, INTERLOTT TECHNOLOGIES, INC., a Delaware corporation ("Borrower"),
hereby promises to pay to the order of MERCANTILE BUSINESS CREDIT INC., a
Missouri corporation ("Lender"), the principal sum of Fifteen Million Dollars
($15,000,000.00), or such lesser sum as may then constitute the aggregate unpaid
principal amount of all Revolving Credit Loans made by Lender to Borrower
pursuant to the Loan Agreement referred to below. The aggregate principal
amount of Revolving Credit Loans which Lender shall be committed to have
outstanding under this Note at any one time shall not exceed Fifteen Million
Dollars ($15,000,000.00), which amount may be borrowed, paid, reborrowed and
repaid, in whole or in part, subject to the terms and conditions of this Note
and of the Loan Agreement referred to below.
Borrower further promises to pay to the order of Lender interest on the
unpaid principal balance from time to time outstanding under this Note on the
dates and at the rates set forth in the Loan Agreement referred to below. All
payments received by Lender under this Note shall be allocated among the
principal, interest, collection costs and expenses and other amounts due under
this Note as follows: (a) so long as no Event of Default under the Loan
Agreement has occurred and is continuing, as directed by Borrower; and (b) so
long as any Event of Default under the Loan Agreement has occurred and is
continuing, in such order and manner as Lender shall elect. The amount of
interest accruing under this Note shall be computed on an actual day, 360-day
year basis.
All payments of principal and interest under this Note shall be made in
lawful currency of the United States at the office of Lender situated at 100
South Brentwood Boulevard, Suite 500, St. Louis, Missouri 63105, or at such
other place as the holder of this Note may from time to time designate in
writing.
Lender shall record in its books and records the date and amount of each
Revolving Credit Loan made by it to Borrower and the date and amount of each
payment of principal and/or interest made by Borrower with respect thereto;
provided, however, that the obligation of Borrower to repay each Revolving
Credit Loan made to Borrower under this Note shall be absolute and
unconditional, notwithstanding any failure of Lender to make any such
recordation or any mistake by Lender in connection with any such recordation.
The books and records of Lender showing the account between Lender and Borrower
shall be admissible in evidence in any action or proceeding and shall constitute
prima facie proof of the items therein set forth in the absence of manifest
error.
Subject to the terms of the Loan Agreement referred to below, Borrower
shall have the right to prepay all at any time or any portion form time to time
of the unpaid principal of this Note prior to maturity, without penalty or
premium.
This Note is the Revolving Credit Note referred to in that certain Loan
Agreement dated the date hereof by and between Borrower and Lender (as the same
may from time to time be amended, modified, extended or renewed, the "Loan
Agreement"). The Loan Agreement, among other things, contains provisions for
acceleration of the maturity of this Note upon the occurrence of certain stated
events and also for prepayments on account of the principal of this Note and
interest on this Note prior to the maturity of this Note upon the terms and
conditions specified therein. All capitalized terms used and not otherwise
defined in this Note shall have the respective meanings ascribed to them in the
Loan Agreement.
This Note is secured by, among other things, that certain Security
Agreement dated the date hereof and executed by Borrower in favor of Lender (as
the same may from time to time be amended, modified, extended or renewed, the
"Security Agreement") and that certain Patent, Trademark and License Security
Agreement dated the date hereof and executed by Borrower in favor of Lender (as
the same may from time to time be amended, modified, extended or renewed, the
"Patent, Trademark and License Security Agreement"), to which Seucrity
Agreement and Patent, Trademark and License Security Agreement reference
<PAGE> 2
is hereby made for a description of the security and a statement of the terms
and conditions upon which this Note is secured.
If any Event of Default under the Loan Agreement shall occur and be
continuing, then Lender's obligation to make additional Revolving Credit Loans
under this Note may be terminated in the manner and with the effect as provided
in the Loan Agreement and the entire outstanding principal balance of this Note
and all accrued and unpaid interest thereon may be declared to be immediately
due and payable in the manner and with the effect as provided in the Loan
Agreement.
In the event that any payment of any principal of or interest on this Note
is not paid when due, whether by reason of maturity, acceleration or otherwise,
and this Note is placed in the hands of an attorney or attorneys for collection
or for foreclosure of the Security Agreement of the Patent, Trademark and
License Security Agreement, or if this Note is placed in the hands of an
attorney or attorneys for representation of Lender in connection with bankruptcy
or insolvency proceedings relating hereto, Borrower promises to pay to the order
of Lender, in addition to all other amounts otherwise due hereon, the costs and
expenses of such collection, foreclosure and representation, including, without
limitation, reasonable attorneys' fees and expenses (whether or not litigation
shall be commenced in aid thereof). All parties hereto severally waive
presentment for payment, demand for payment, protest, notice of protest and
notice of dishonor.
This Note shall be governed by and construed in accordance with the
substantive laws of the State of Missouri (without reference to conflict of law
principles).
INTERLOTT TECHNOLOGIES, INC.
By /s/ Jerome J. Cain
----------------------------
Title: Chief Executive Officer
------------------------
By /s/ L. Rogers Wells
----------------------------
Title: Chief Executive Officer
------------------------
-2-
<PAGE> 1
Exhibit 4.3(b)
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement") is made this 29th day of
October, 1997, by INTERLOTT TECHNOLOGIES, INC., a Delaware corporation
("Borrower"), in favor of MERCANTILE BUSINESS CREDIT INC., a Missouri
corporation ("Lender").
WITNESSETH:
WHEREAS, Borrower and Lender are herewith entering into that certain
Loan Agreement dated the date hereof (as the same may from time to time be
amended, modified, extended or renewed, the "Loan Agreement"; all capitalized
terms used and not otherwise defined in this Agreement shall have the
respective meanings ascribed to them in the Loan Agreement); and
WHEREAS, as a condition precedent to Lender entering into the Loan
Agreement, Lender has required that Borrower execute and deliver this Agreement
to Lender; and
WHEREAS, in order to induce Lender to enter into the Loan Agreement,
Borrower has agreed to execute and deliver this Agreement to Lender;
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrower hereby covenants and agrees with Lender as follows:
1. Grant of Security Interest. For value received, Borrower
hereby grants Lender a security interest in and lien on all of Borrower's now
owned and existing and hereafter created, acquired or arising right, title and
interest in, to and under the following described property, wherever located
(collectively, the "Collateral"):
(a) all accounts, accounts receivable, lease payments,
rental payments, lease rights, contract rights, documents, instruments
and other forms of obligation and other rights to the payment of
money, and all goods whose sale, lease, rental or other disposition by
Borrower have given rise to accounts and have been returned to or
repossessed or stopped in transit by Borrower;
(b) all inventory of Borrower, wherever located, whether
under lease, in transit, held by others for Borrower's account,
covered by warehouse receipts, purchase orders and/or contracts, or in
the possession of any lessees, renters, carriers, forwarding agents,
truckers, warehousemen, vendors or other Persons, including, without
limitation, all raw materials, work in process, finished goods,
supplies, goods, incidentals, office supplies and packaging and
shipping materials;
(c) all chattel paper of any kind or nature whatsoever,
including, without limitation, all leases, rental agreements,
installment sale agreements, conditional sale agreements and other
chattel paper relating to or arising out of the sale, rental, lease or
other disposition of any of the Collateral;
(d) all general intangibles of any kind or nature
whatsoever, including, without limitation, all patents, trademarks,
copyrights and other intellectual property, and all applications for,
registrations of and licenses of the foregoing, and all computer
software, product specifications, trade secrets, licenses, trade
names, service marks, goodwill, tax refunds and rights to tax refunds;
(e) all goods, machinery, equipment, motor vehicles,
trucks, tractors, trailers, appliances, furniture, furnishings, tools,
dies, jigs and other tangible personal property and all accessories
and parts relating thereto;
<PAGE> 2
(f) all monies, reserves, deposits, certificates of
deposit and deposit accounts and interest or dividends thereon,
securities, cash, cash equivalents and other property now or at any
time or times hereafter in the possession or under the control of
Lender or any bailee of Lender;
(g) all books, records, computer records, computer
disks, ledger cards, programs and other computer materials, customer
and supplier lists, invoices, orders and other property and general
intangibles at any time evidencing or relating to any of the
Collateral;
(h) all accessions to any of the property described
above and all substitutions, renewals, improvements and replacements
of and additions thereto; and
(i) all proceeds, including, without limitation,
proceeds which constitute property of the types described in (a), (b),
(c), (d), (e), (f), (g) and/or (h) above and any rents and profits of
any of the foregoing items, whether cash or noncash, immediate or
remote, including, without limitation, all income, accounts, contract
rights, general intangibles, chattel paper, notes, drafts,
acceptances, instruments and other rights to the payment of money
arising out of the sale, rental, lease, exchange or other disposition
of any of the foregoing items (provided, however, that nothing
contained herein or in any financing statement shall be deemed to
permit or assent to any such disposition other than (i) the sale or
lease of inventory in the ordinary course of business (which does not
include any sale or other transfer or lease of inventory in partial or
total satisfaction of any Indebtedness) and (ii) other sales and
dispositions permitted by the Loan Agreement), and insurance proceeds,
and all products, of (a), (b), (c), (d), (e), {f), (g) and/or (h)
above, and any indemnities, warranties and guaranties payable by
reason of loss or damage to or otherwise with respect to any of the
foregoing items;
to secure the payment of (i) any and all of the present and future Borrower's
Obligations, (ii) any and all present and future indebtedness, liabilities and
obligations of Borrower under this Agreement, (iii) any and all other
indebtedness, liabilities and obligations of Borrower to Lender of every kind
and character, now existing or hereafter arising, absolute or contingent, joint
or several or joint and several, otherwise secured or unsecured, due or not
due, direct or indirect, expressed or implied in law, contractual or tortious,
liquidated or unliquidated, at law or in equity, or otherwise, and whether
heretofore or hereafter incurred or given by Borrower as principal, surety,
endorser, guarantor or otherwise, and whether created directly or acquired by
Lender by assignment or otherwise and (iv) any and all costs of collection and
reasonable attorneys' fees and expenses incurred by Lender upon the occurrence
of an Event of Default under this Agreement, in collecting or enforcing payment
of any such indebtedness, liabilities or obligations or in preserving,
protecting or realizing on the Collateral hereunder or in representing Lender
in connection with bankruptcy or insolvency proceedings (hereinafter
collectively referred to as the "Secured Obligations").
2. Representations and Covenants of Borrower. Borrower hereby
represents and warrants to Lender, and covenants and agrees with Lender, that:
(a) Borrower is and will remain a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware;
(b) Borrower has full corporate power and authority to
borrow money and obtain other extensions of credit from Lender and to
grant to Lender the security interest in the Collateral hereby stated
to be granted;
(c) the officer(s) of Borrower executing this Agreement
have been duly elected and qualified and have been duly authorized and
empowered to execute, deliver and perform the terms of this Agreement
on behalf of Borrower;
- 2 -
<PAGE> 3
(d) the execution, delivery and performance of this
Agreement by Borrower do not and will not violate any of the terms or
provisions of the Certificate of Incorporation or By-Laws of Borrower;
(e) the execution, delivery and performance of this
Agreement by Borrower do not and will not violate any law, rule,
regulation, order, writ, judgment, injunction, decree, determination
or award presently in effect having applicability to Borrower or the
terms of any of the Leases or any other indenture, agreement,
document, instrument or undertaking to which Borrower is a party or by
which it or any of its Properties is bound;
(f) Borrower's chief executive office and the location
of the only office where it keeps its books and records respecting the
Collateral is that given at the end of this Agreement and all other
places of business of Borrower are listed on Exhibit A attached hereto
and incorporated herein by reference;
(g) unless otherwise consented to in writing by Lender:
(i) all of the Collateral (other than any Collateral consisting of
Inventory which is in the possession of a lessee under a Lease, is in
transit to a lessee under a Lease or is stored for a period of thirty
(30) days or less at a warehouse located in one of the jurisdictions
listed on Exhibit B attached hereto and incorporated herein by
reference while in the process of being delivered to a lessee under a
Lease) (A) is and will be kept solely at Borrower's chief executive
office or at one of the other locations of Borrower listed on Exhibit
A attached hereto and incorporated herein by reference (if mobile
equipment or equipment of a type normally used in more than one
location, remaining there when not in use), (B) is not of a type
normally used in more than one state and will not be so used, (C) will
not be attached or affixed in any manner to or become a part of any
real estate or other personal property apart from other items of the
Collateral and (D) is in the exclusive possession and control of
Borrower; and (ii) all of the Collateral consisting of Inventory which
is in the possession of a lessee under a Lease (A) is and will be kept
solely within one of the jurisdictions listed on Exhibit B attached
hereto and incorporated herein by reference and (B) will not be
attached or affixed in any manner to or become a part of any real
estate or other personal property apart from other items of the
Collateral;
(h) Borrower will not (i) change the location of its
chief executive office, (ii) change the location of any of its other
places of business, (iii) change the location of any of the Collateral
(other than any Collateral which is in the possession of a lessee
under a Lease) or permit the location of any of the Collateral (other
than any Collateral which is in the possession of a lessee under a
Lease) to be changed from Borrower's chief executive office or one of
the other locations listed on Exhibit A attached hereto and
incorporated herein by reference or (iv) establish any additional
places of business or additional locations at which any of the
Collateral (other than any Collateral which is in the possession of a
lessee under a Lease) is stored, kept or processed, unless (A)
Borrower gives Lender thirty (30) days prior written notice of the
same and (B) prior to making any such change or establishing any such
new location, Borrower executes and/or obtains and delivers to Lender
any and all additional financing statements and/or amendments thereto,
mortgagee waivers, bailee waivers, landlord waivers, warehousemen
waivers and other agreements, documents or notices as may be
reasonably required by Lender (provided, however, so long as no Event
of Default and no event which with the passage of time or the giving
of notice or both would constitute an Event of Default under this
Agreement has occurred and is continuing, Lender agrees that it will
not require warehouseman waivers from warehouses which store Inventory
which is in the process of being delivered to lessees under Leases for
periods of thirty (30) days or less); and Borrower will not cause or
permit any of the Collateral which is in the possession of a lessee
under a Lease to be located at a location which is not within one of
the jurisdictions listed on Exhibit B attached hereto and incorporated
herein by reference unless (A) Borrower gives Lender thirty (30) days
prior written notice of the same and (B) prior to causing or
permitting any such change or any such new location, if such
collateral location is in the United States of America, Borrower
executes and delivers to Lender any and all additional financing
statements and/or
- 3 -
<PAGE> 4
amendments thereto as may be necessary or as Lender may reasonably
request to perfect Lender's security interest in such Collateral. In
addition, Borrower covenants and agrees that if any Event of Default
or any event which with the passage of time or the giving of notice or
both would constitute an Event of Default under this Agreement has
occurred and is continuing or if the aggregate book value of all
Inventory and other Collateral located outside of the United States of
America exceeds the sum of $500,000.00, if requested by Lender,
Borrower will promptly execute and/or obtain and deliver to Lender any
and all agreements, documents and/or instruments as may be necessary
or as Lender may reasonably request to perfect or protect Lender's
security interest in and lien on any Inventory or other Collateral
which is located outside of the United States of America;
(i) Borrower is, or, as to Collateral acquired after the
date hereof, will be, the sole and absolute owner of all of the
Collateral, free and clear of any and all Liens and claims of any kind
or nature whatsoever other than the security interest granted hereby
and other Permitted Liens, and Borrower will defend the Collateral
against all claims and demands of all persons at any time claiming the
same or any interest therein;
(j) no financing statement (other than any filed on
behalf of Lender and any filed with respect to Permitted Liens)
covering any of the Collateral is or will be on file in any public
office at any time during the term of this Agreement;
(k) Borrower will not, without the prior written consent
of Lender, sell, transfer, lease or otherwise dispose of or offer to
dispose of any of the Collateral or any interest therein other than
(i) sales and leases of inventory by Borrower in the ordinary course
of its business (which does not include any sale or other transfer or
lease of inventory in partial or total satisfaction of any
Indebtedness) and (ii) other sales, transfers, leases and dispositions
permitted by the Loan Agreement;
(l) Borrower will at all times keep (or cause the
lessee(s) under the applicable Lease to keep) all of the Collateral
consisting of inventory, goods, machinery, equipment and/or other
tangible personal property in good order and repair (ordinary wear and
tear excepted), excepting any loss, damage or destruction which is
fully covered by proceeds of insurance, and will not use any of the
Collateral or permit any of the Collateral to be used in violation of
any law, rule, regulation, ordinance or insurance policy;
(m) Borrower will pay when due (or cause the lessee(s)
under the applicable Lease to pay when due) all taxes and assessments
on the Collateral or for its use or operation or upon this Agreement
or any of the Secured Obligations or with respect to the perfection of
any security interest hereunder;
(n) Borrower will at all times keep all of the
Collateral of an insurable nature insured against loss, damage, theft
and other risks, in such amounts and companies and under policies in
such form, all as shall be required under Section 5.01(l) of the Loan
Agreement; provided, however, that the foregoing shall not require
Borrower to maintain such insurance on any Collateral which is in the
possession of a lessee under a Lease. All insurance required by this
Section 2(n) shall be with insurers rated A-XI or better by A.M. Best
Company (or accorded a similar rating by another nationally or
internationally recognized insurance rating agency of similar standing
if A.M. Best Company is not then in the business of rating insurers or
rating foreign insurers) or such other insurers as may from time to
time be reasonably acceptable to Lender. Such policies of insurance
shall contain an endorsement acceptable to Lender naming Lender as
loss payee as its interests may appear. Such endorsement, or an
independent instrument furnished to Lender, shall provide that the
insurance companies will give Lender at least thirty (30) days written
notice before any such policy or policies of insurance shall be
amended or cancelled and that no act or default of Borrower, any
lessee(s) under any Lease or any other Person shall affect the right
of Lender to recover under such policy or policies of insurance in the
event of any loss of or damage to any of the Collateral. Borrower
hereby
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<PAGE> 5
directs all insurers under such policies of insurance to pay all
proceeds payable thereunder directly to Lender as its interest may
appear. So long as no Event of Default under this Agreement and no
event which with the passage of time or the giving of notice or both
would constitute an Event of Default under this Agreement has occurred
and is continuing, all insurance proceeds received by Lender on
account of any loss of or damage to any of the Collateral consisting
of machinery, equipment, motor vehicles and/or other tangible personal
property (other than Inventory), after deducting therefrom the
reasonable charges and expenses paid or incurred in connection with
the collection and disbursement of said proceeds, may, at the option
of Borrower, either be used and applied for the sole purpose of paying
the cost of repair, restoration or replacement of the Collateral
damaged or destroyed, or be applied to the payment of the Secured
Obligations in such order as directed by Borrower. All insurance
proceeds received by Lender on account of any loss of or damage to any
of the other Collateral (including, without limitation, any of the
Collateral consisting of Inventory), after deducting therefrom the
reasonable charges and expenses paid or incurred in connection with
the collection and disbursement of said proceeds, shall be applied to
the payment of the Secured Obligations in such order and manner as
Lender may elect unless otherwise consented to in writing by Lender.
If any Event of Default under this Agreement or any event which with
the passage of time or the giving of notice or both would constitute
an Event of Default under this Agreement has occurred and is
continuing, all insurance proceeds received or held by Lender on
account of any loss of or damage to any of the Collateral, after
deducting therefrom the reasonable charges and expenses paid or
incurred in connection with the collection and disbursement of said
proceeds, shall be applied to the payment of the Secured Obligations
in such order and manner as Lender may elect unless otherwise
consented to in writing by Lender. Borrower irrevocably makes,
constitutes and appoints Lender (and all officers, employees or agents
designated by Lender) as Borrower's true and lawful attorney (and
agent-in-fact) to, if any Event of Default under this Agreement or any
event which with the passage of time or the giving of notice or both
would constitute an Event of Default under this Agreement has occurred
and is continuing or if Borrower fails to do upon the demand of
Lender, (i) make, settle and adjust claims under such policies of
insurance, (ii) endorse the name of Borrower on any check, draft,
instrument or other item of payment of the proceeds of such policies
of insurance and (iii) make all determinations and decisions with
respect to such policies of insurance. In the event Borrower at any
time or times hereafter shall fail to obtain or maintain any of the
policies of insurance required above or to pay any premium in whole or
in part relating thereto, then Lender, without waiving or releasing
any obligation or default by Borrower hereunder, may at any time or
times thereafter (but shall be under no obligation to do so) obtain
and maintain such policies of insurance and pay such premium and take
any other action with respect thereto which Lender deems advisable
(and if Lender takes any of the foregoing actions it will give
Borrower oral or written notice thereof within five (5) Domestic
Business Days after the taking of such action). All sums so disbursed
by Lender, including, without limitation, reasonable attorneys' fees,
court costs, expenses and other charges relating thereto, shall be
part of the Secured Obligations, payable by Borrower to Lender on
demand;
(o) Borrower will permit (and it will use its best
efforts to cause the lessees under the Leases to permit) Lender to
examine and inspect the Collateral or any part thereof, wherever
located, at any reasonable time or times upon at least one (1)
Domestic Business Day's prior oral or written notice from Lender to
Borrower (provided, however, that no such notice need be given by
Lender if any Event of Default or any event which with the passage of
time or the giving of notice or both would constitute an Event of
Default under this Agreement has occurred and is continuing);
(p) Borrower has not during the past five (5) years
conducted business under any names other than "International Lottery,
Inc.", "Interlott Technologies, Inc." and "Interlott". Borrower does
not now and will not at any time during the term of this Agreement
conduct business under any name other than the name "Interlott
Technologies, Inc." and Borrower will not change its name or adopt or
use any fictitious business name or trade name (other than
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<PAGE> 6
the trade name "Interlott") without giving thirty (30) days prior
written notice of the same to Lender;
(q) if any of the Accounts is evidenced by a promissory
note or other "instrument" (as defined in the Uniform Commercial Code
or other applicable law), Borrower will, unless Lender otherwise
agrees in writing, endorse such promissory note or other instrument
"Pay to the order of Mercantile Business Credit Inc." and deliver the
original(s) of such promissory note or other instrument to Lender;
(r) if any Event of Default under this Agreement or any
event which with the passage of time or the giving of notice or both
would constitute an Event of Default under this Agreement has occurred
and is continuing, if requested by Lender, Borrower will immediately
(i)) conspicuously mark each original of each Lease with the following
legend "THIS LEASE HAS BEEN ASSIGNED BY INTERLOTT TECHNOLOGIES, INC.
TO MERCANTILE BUSINESS CREDIT INC. PURSUANT TO A SECURITY AGREEMENT
DATED OCTOBER 29, 1997, AS AMENDED" and deliver a copy of each Lease
(as so marked) to Lender and/or (ii) deliver possession of all
originals of each of the Leases to Lender, as requested by Lender;
(s) if any Event of Default under this Agreement or any
event which with the passage of time or the giving of notice or both
would constitute an Event of Default under this Agreement has occurred
and is continuing, if requested by Lender, Borrower will immediately
assign to Lender (pursuant to Uniform Commercial Code assignments in
recordable form) all Uniform Commercial Code financing statements
relating to Inventory which is then Subject to a Lease and which have
been signed by the lessee(s), as debtor(s), in favor of Borrower, as
secured party;
(t) Borrower will from time to time, at its own expense,
execute, deliver and file such financing and continuation statements
and such amendments thereto under the Uniform Commercial Code or other
applicable law in each jurisdiction where Borrower or any of the
Collateral may be located and such other agreements, documents and
instruments and do such other acts and things as may be necessary or
as Lender may from time to time reasonably request, to establish and
maintain a valid and perfected first priority security interest in the
Collateral in favor of Lender to secure the payment of the Secured
Obligations, including, without limitation, the execution and filing
of applications for certificates of title naming Lender as first
lienholder and the delivery of the originals of such certificates of
title to Lender. Borrower hereby authorizes Lender to file one or more
financing or continuation statements or amendments thereto relating to
all or any part of the Collateral without the signature of Borrower
where permitted by law; provided, however, that nothing in this
Agreement shall relieve Borrower of its obligation to file all
necessary financing and continuation statements and amendments thereto
under the Uniform Commercial Code or other applicable law in each
jurisdiction where Borrower or any of the Collateral may be located in
order to perfect and protect the security interest granted to Lender
under this Agreement. In addition, Borrower covenants and agrees that
with respect to Accounts with respect to which the Account Debtor is
the United States of America, any state of the United States or any
other governmental body or any department, agency or instrumentality
of any of the foregoing, if requested by Lender, Borrower will take
such action and execute, deliver and file such agreements, documents
and instruments as may be necessary or as Lender may reasonably
request to insure that such Accounts are duly assigned to Lender in
compliance with all applicable governmental requirements (including,
without limitation, the Federal Assignment of Claims Act of 1940, as
amended, if applicable) so that Lender is recognized by the Account
Debtor to have all of the rights of an assignee of such Accounts;
(u) Borrower will reimburse Lender upon demand for (i)
all costs and expenses incident to perfecting, maintaining or
terminating the security interest granted hereby, including filing and
recording fees, fees for obtaining and transferring certificates of
title, all taxes and all other out-of-pocket fees and expenses
(including, without limitation, all reasonable
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<PAGE> 7
attorneys' fees and expenses) paid or incurred by Lender in
connection with any of the foregoing and (ii) all costs and expenses,
including, without limitation, reasonable attorneys' fees and
expenses, incurred by Lender in seeking to collect or enforce any
rights under this Agreement or incurred by Lender in seeking to
collect or enforce any of the Secured Obligations, all of which costs
and expenses shall constitute a part of the Secured Obligations and be
payable by Borrower to Lender on demand;
(v) based on the locations of Borrower's offices and
places of business and the location of the Collateral (including,
without limitation, any Collateral which is in the possession of a
lessee under a Lease), Exhibit C attached hereto and incorporated
herein by reference sets forth a complete list of all of the filing
offices where financing statements must be filed in order to perfect
Lender's security interest in the Collateral (other than any
Collateral consisting of Inventory which is located outside of the
United States of America) to the extent such security interest can be
perfected by the filing of financing statements under the Uniform
Commercial Codes of the applicable state(s); and
(w) this Agreement shall not transfer to or impose upon
Lender or subject Lender to any of the obligations, duties,
warranties, covenants, undertakings or liabilities of Borrower to any
Person under the terms of any of the Leases, and this Agreement shall
not affect, modify, relieve or release Borrower from any of its
obligations, duties, warranties, covenants, undertakings and/or
liabilities under the terms of any of the Leases, it being understood
that, notwithstanding this Agreement, all of such obligations, duties,
warranties, covenants, undertakings and liabilities of Borrower under
or with respect to the Leases shall be and remain enforceable by the
parties thereto against, and only against, Borrower and not against
Lender, it being further understood that this Agreement is executed as
security for the Secured Obligations, and that Lender has not assumed
and shall not be deemed to have assumed any of the Leases or any
obligation, duty or liability of Borrower thereunder.
3. Representations and Covenants of Borrower re: Accounts,
Inventory and Other Collateral. Borrower hereby represents and warrants to
Lender, and covenants and agrees with Lender, that:
(a) Borrower will provide Lender with a written report
on the first (1st) day of each month (provided, however, that if any
Event of Default or any event which with the passage of time or the
giving of notice or both would constitute an Event of Default under
this Agreement occurs or if the Unused Availability of Borrower is
ever less than $1,500,000.00, Borrower shall deliver such Collateral
Reports to Lender on at least one (1) Domestic Business Day during
each week (or at such other intervals as Lender shall require from
time to time)), in the form of Exhibit D attached hereto and
incorporated herein by reference reflecting activity of Borrower up to
and including the preceding Domestic Business Day (each, a "Collateral
Report") describing, in the form required by the Collateral Report the
information required to be delivered pursuant to the Collateral
Report. In addition, if any Event of Default or any event which with
the passage of time or the giving of notice or both would constitute
an Event of Default under this Agreement occurs or if the Unused
Availability of Borrower is ever less than $1,500,000.00, if requested
by Lender, Borrower shall execute and deliver to Lender, at such
intervals as requested by Lender, (i) schedules identifying all
Accounts and all Lease Payments created or acquired by Borrower
subsequent to the immediately preceding Collateral Report and all
amounts collected by Borrower on Accounts and Lease Payments
subsequent to the immediately preceding Collateral Report, (ii)
schedules of Inventory specifying Borrower's cost of Inventory and of
Eligible Inventory and such other matters and information relating to
Inventory and Eligible Inventory as Lender may from time to time
request and (iii) copies of any other reports or information, in a
form and with such specificity as is reasonably satisfactory to
Lender, concerning Accounts, Inventory, Eligible Leases, Lease
Payments and any other Collateral requested by the Lender, including,
without limitation, but only if specifically requested by Lender,
copies of all invoices prepared in connection with any Accounts;
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<PAGE> 8
(b) With respect to Accounts scheduled, listed or
referred to on the initial Collateral Report or on any subsequent
Collateral Report, Borrower represents and warrants to Lender that,
except as otherwise disclosed on the applicable Collateral Report: (i)
they are genuine, in all respects what they purport to be and are not
evidenced by a judgment; (ii) they represent undisputed, bona fide
transactions completed in accordance with the terms and provisions
contained in the invoices and other documents related thereto; (iii)
the amounts thereof shown on the applicable Collateral Report are
actually and absolutely owing to Borrower and are not contingent for
any reason; (iv) no payments have been or shall be made thereon except
payments immediately delivered to Lender pursuant to Section 4 of this
Agreement; (v) there are no setoffs, counterclaims or disputes existing
or asserted with respect thereto and Borrower has not made any
agreement with any Account Debtor thereof for any deduction therefrom
except a discount or allowance allowed by Borrower in the ordinary
course of its business for prompt payment; (vi) to the best of
Borrower's knowledge, there are no facts, events or occurrences which
in any way impair the validity or enforcement thereof or tend to reduce
the amount payable thereunder from the amount thereof as shown on the
applicable Collateral Report; (vii) to the best of Borrower's
knowledge, all Account Debtors thereof have the capacity to contract
and are solvent; (viii) the goods sold and/or services furnished giving
rise thereto are not subject to any Lien or claim except that of
Lender; (ix) Borrower has no knowledge of any fact or circumstance
which would impair the validity or collectibility thereof; (x) to the
best of Borrower's knowledge, there are no proceedings or actions which
are threatened or pending against any Account Debtor thereof which
might result in any material adverse change in its financial condition;
and (xi) all of such Accounts are subject to a first priority perfected
security interest in favor of Lender;
(c) With respect to Lease Payments scheduled, listed or
referred to on the initial Collateral Report or on any subsequent
Collateral Report, Borrower represents and warrants to Lender that,
except as otherwise disclosed on the applicable Collateral Report: (i)
they are genuine, in all respects what they purport to be and are not
evidenced by a judgment; (ii) they arise out of an Eligible Lease;
(iii) the amounts thereof shown on the applicable Collateral Report are
actually and absolutely owing to Borrower and are not contingent for
any reason; (iv) no payments have been or shall be made thereon except
payments immediately delivered to Lender pursuant to Section 4 of this
Agreement; (v) there are no setoffs, counterclaims or disputes existing
or asserted with respect thereto and Borrower has not made any
agreement with any lessee for any deduction therefrom; (vi) to the best
of Borrower's knowledge, there are no facts, events or occurrences
which in any way impair the validity or enforcement thereof or tend to
reduce the amount payable thereunder from the amount thereof as shown
on the applicable Collateral Report; (vii) to the best of Borrower's
knowledge, the applicable lessee(s) have the capacity to contract and
are solvent; (viii) the Inventory leased under the applicable Eligible
Lease is not subject to any Lien or claim except that of Lender; (ix)
Borrower has no knowledge of any fact or circumstance which would
impair the validity or collectibility thereof; (x) to the best of
Borrower's knowledge, there are no proceedings or actions which are
threatened or pending against the applicable lessee(s) which might
result in any material adverse change in its financial condition; and
(xi) all of such Lease Payments are subject to a first priority
perfected security interest in favor of Lender;
(d) Any officers, employees or agents of Lender shall
have the right, at any time or times hereafter, in the name of Lender
or Borrower or in the name of a nominee of Lender, to verify the
validity, amount or any other matter relating to any Accounts or any
Lease Payments by mail, telephone, telegraph or otherwise. All
reasonable costs, fees and expenses relating thereto incurred by
Lender (or for which Lender becomes obligated) during the continuation
of any Event of Default or any event which with the passage of time or
the giving of notice or both would become an Event of Default under
this Agreement shall become part of the Secured Obligations and be
payable by Borrower to Lender on demand;
(e) Borrower will at all times maintain a record of
Accounts and Lease Payments at its chief executive office, keeping
correct and accurate records itemizing and describing the
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<PAGE> 9
names and addresses of Account Debtors and lessees, relevant invoice
numbers, shipping dates and due dates, collection histories and Account
and Lease Payment agings, all of which records shall be available
during such Borrower's usual business hours at the request of any of
Lender's officers, employees or agents upon at least one (1) Domestic
Business Day's prior oral or written notice from Lender to Borrower
(provided, however, that no such notice need be given by Lender if any
Event of Default or any event which with the passage of time or the
giving of notice or both would constitute an Event of Default under
this Agreement has occurred and is continuing). Borrower will cooperate
fully with Lender and its officers, employees and agents who shall have
the right at any time or times during Borrower's normal business hours
to inspect the Accounts, the Lease Payments and the records with
respect thereto upon at least one (1) Domestic Business Day's prior
oral or written notice from Lender to Borrower (provided, however, that
no such notice need be given by Lender if any Event of Default or any
event which with the passage of time or the giving of notice or both
would constitute an Event of Default under this Agreement has occurred
and is continuing). Borrower will conduct a review (or cause its
independent certified public accountants to conduct a review) of its
bad debt reserves and collection histories at least once each year and
promptly following such review shall supply Lender with a report in a
form and with such specificity as may be reasonably satisfactory to
Lender concerning such review of the Accounts and the Lease Payments
(which report may consist of a management letter from Borrower's
independent certified public accountants if such accountants conducted
such bad debt reserve review);
(f) Unless Lender notifies Borrower in writing that
Lender suspends any one or more of the following requirements,
Borrower will: (i) within three (3) Domestic Business Days after
Borrower's learning thereof, inform Lender, in writing, of any
material delay in Borrower's performance of any of its obligations to
any Account Debtor with respect to any Eligible Account in an amount
in excess of $10,000.00 and of any assertion of any claims, offsets or
counterclaims in an amount in excess of $10,000.00 by any Account
Debtor with respect to any Eligible Account and of any allowances,
credits and/or other monies in an amount in excess of $10,000.00
granted by Borrower to any Account Debtor with respect to any Eligible
Account; (ii) within three (3) Domestic Business Days after Borrower's
learning thereof, inform Lender, in writing, of any material delay in
Borrower's performance of any of its obligations to any lessee with
respect to any Eligible Lease and of any assertion of any claims,
offsets or counterclaims in excess of $10,000.00 by any lessee with
respect to any Eligible Lease Payment(s) and of any allowances,
credits and/or other monies in an amount in excess of $10,000.00
granted by Borrower to any lessee with respect to any Eligible Lease
Payment; (iii) not, without the prior written consent of Lender,
permit or agree to any extension, compromise or settlement or make any
change or modification of any kind or nature with respect to any
Eligible Account or any Eligible Lease Payment, including any of the
terms relating thereto, if (A) such extension, compromise, settlement,
change or modification involves an amount in excess of $10,000.00 or
(B) after giving effect to such extension, compromise, settlement,
change or modification (and the effect of the same on the current
Borrowing Base), Borrower has Unused Availability of less than $1.00;
(iv) within three (3) Domestic Business Days after Borrower's receipt
or learning thereof, furnish to and inform Lender of all material
adverse information relating to the financial condition of any Account
Debtor who in the aggregate owes Borrower more than $10,000.00 or any
lessee under an Eligible Lease who in the aggregate owes Borrower more
than $10,000.00; and (v) within three (3) Domestic Business Days after
Borrower's learning thereof, notify Lender in writing which of its
then existing Accounts involving an amount in excess of $10,000.00 are
no longer Eligible Accounts and which of its then existing Lease
Payments involving an amount in excess of $10,000.00 are no longer
Eligible Lease Payments;
(g) From and after the occurrence of any Event of
Default under this Agreement and so long as such Event of Default is
continuing, Lender shall have the right, in its sole and absolute
discretion, without notice thereof to Borrower: (i) to notify any or
all Account Debtors that the Accounts have been assigned to Lender and
that Lender has a security interest
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<PAGE> 10
therein; (ii) to notify any or all lessees that the Leases and the
Lease Payments have been assigned to Lender and that Lender has a
security interest therein; (iii) to direct any or all Account Debtors
to make all payments due from them to Borrower upon the Accounts
directly to Lender; (iv) to direct any or all lessees to make all
Lease Payments due from them to Borrower directly to Lender; and (v)
to enforce payment of and collect, by legal proceedings or otherwise,
the Accounts and the Lease Payments in the name of Lender and/or
Borrower;
(h) Borrower will, at its own expense, use commercially
reasonable efforts to collect, as and when due, all amounts due with
respect to the Accounts and the Lease Payments;
(i) Promptly upon Borrower's receipt thereof, Borrower
will deliver or cause to be delivered to Lender, with appropriate
endorsement and assignment to vest title, with full recourse to
Borrower, and possession in Lender, all instruments and chattel paper
which Borrower now owns or may at any time or times hereafter acquire;
(j) With respect to Inventory scheduled, listed or
referred to in any report to Lender, Borrower represents and warrants
to Lender that, except as otherwise disclosed in such reports: (i)
such Inventory is located at Borrower's chief executive office, one of
the other locations of Borrower listed on Exhibit A attached hereto
and incorporated herein by reference, one of the jurisdictions listed
on Exhibit B attached hereto and incorporated herein by reference or
another location with respect to which Borrower has complied with all
of the requirements of Section 2(h) of this Agreement; (ii) Borrower
has good, indefeasible and merchantable title to such Inventory and
such Inventory is not subject to any Lien or claim whatsoever except
for the security interest granted to Lender under this Agreement and
except for Permitted Liens; (iii) such Inventory is of good and
merchantable quality, free from any defects (except for Inventory
Subject to Lease which is subject to normal wear and tear); (iv) such
Inventory is not subject to any licensing, patent, royalty, trademark,
trade name or copyright agreements with any third parties; (v) subject
to any rights of lessees in any Inventory Subject to Lease, the
completion of manufacture and sale or other disposition of such
Inventory by Lender following an Event of Default will not require the
consent of any Person and will not constitute a breach or default
under any contract or agreement to which Borrower is a party or to
which any of the Inventory is subject; (vi) such Inventory has not
been produced in violation of the Fair Labor Standards Act and is not
subject to the so-called "hot goods" provision contained in Title 29
U.S.C. ss.215(a)(1); and (vii) such Inventory is not on consignment
with Borrower;
(k) Borrower will at all times maintain an inventory
system keeping correct and accurate records itemizing and describing
the kind, type, quality and quantity of Inventory and of Eligible
Inventory, Borrower's cost therefor and daily withdrawals therefrom
and additions thereto, all of which records shall be available during
Borrower's usual business hours at the request of any of Lender's
officers, employees or agents upon one (1) Domestic Business Day's
prior oral or written notice from Lender to Borrower (provided,
however, that no such notice need be given by Lender if any Event of
Default or any event which with the passage of time or the giving of
notice or both would constitute an Event of Default under this
Agreement has occurred and is continuing). Borrower will cooperate
fully with Lender and its officers, employees and agents who shall
have the right at any time or times to inspect the Inventory and the
records with respect thereto during Borrower's usual business hours
and at other reasonable times and upon one (1) Domestic Business Day's
prior oral or written notice from Lender to Borrower (provided,
however, that no such notice need be given by Lender if any Event of
Default or any event which with the passage of time or the giving of
notice or both would constitute an Event of Default under this
Agreement has occurred and is continuing). Borrower will conduct such
physical counts of all or any portion of its Inventory as Lender may
from time to time reasonably request (but Lender will not request more
than one physical count per calendar year so long as no Event of
Default and no event which with the passage of time or the giving of
notice or both would constitute an Event of Default under this
Agreement has occurred and is continuing) and will supply Lender with
a report in a form and with such
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<PAGE> 11
specificity as may be satisfactory to the Lender concerning any
physical count of any or all of the Inventory of Borrower (whether
such count was requested by Lender or not); and
(l) Lender shall not be responsible for (unless Lender takes
possession of the Inventory after the occurrence of an Event of Default
under this Agreement, and then only to the extent directly caused by
Lender's gross negligence or wilful misconduct as determined by a court
of competent jurisdiction in a final, nonappealable order): (i) the
safekeeping of any of the Inventory; (ii) any loss or damage to any of
the Inventory; (iii) any diminution in the value of any of the
Inventory; or (iv) any act or default of any carrier, warehouseman,
bailee, forwarding agency or any other Person. As between Borrower and
Lender, all risk of loss, damage, destruction or diminution in value of
the Inventory shall be borne by Borrower. Borrower will not sell any
Inventory to any customer on approval or on any other basis which
entitles the customer to return, or which may obligate Borrower to
repurchase, such Inventory. From and after the occurrence of any Event
of Default under this Agreement and so long as any such Event of
Default is continuing, Lender, in its sole and absolute discretion, may
require that Inventory be stored with a bailee, warehouseman or similar
party and warehouse receipts therefor be issued in Lender's name and be
delivered to Lender. Borrower agrees to do whatever acts are required
to effectuate the foregoing.
4. Lockbox and Blocked Account. Borrower hereby agrees to
establish and maintain throughout the term of this Agreement a lock box (a
"Lock Box") in Borrower's name with Mercantile Bank National Association or
another bank (a "Collecting Bank") which is acceptable to Lender (subject to
irrevocable instructions acceptable to Lender as hereinafter set forth) to
which Borrower shall direct all Account Debtors to directly remit all payments
on Accounts and all lessees to directly remit all Lease Payments and in which
Borrower shall on each Domestic Business Day deposit all cash payments made for
Inventory and other cash payments constituting proceeds of Collateral in the
identical form in which such payment was made, whether by cash, check or
otherwise. Lender understands that there will be a transition period between
the time Borrower notifies its Account Debtors and lessees to make payments
directly to the Lock Box (which notification Borrower agrees to make within
three (3) Domestic Business Days after the date of this Agreement) and the time
such Account Debtors and lessees will make payments directly to the Lock Box and
Lender acknowledges and agrees that Princeton Capital Finance Company's
agreement to promptly remit to Lender all payments made by such Account Debtors
and lessees to the lock box maintained by Borrower with Core States Bank will
satisfy the requirements of the immediately preceding sentence during such
transition period. In addition, Borrower hereby agrees to establish and maintain
throughout the term of this Agreement a depository account at its Collecting
Bank (a "Blocked Account"). The Collecting Bank shall acknowledge and agree, in
a manner satisfactory to Lender, that all payments made to the Lock Box and the
Blocked Account are the sole and exclusive property of Lender and that the
Collecting Bank has no right of setoff against the Lock Box or the Blocked
Account and that all such payments, whether by cash, check, wire transfer or any
other instrument, made to such Lock Box or Blocked Account or otherwise received
by Borrower and whether on the Accounts or the Lease Payments or as proceeds of
any other Collateral or otherwise are and will be the sole and exclusive
property of Lender. Borrower shall irrevocably instruct the Collecting Bank to
on a daily basis on each Domestic Business Day (i) transfer all payments or
deposits to Borrower's Lock Box into Borrower's Blocked Account and (ii) all
funds in the Blocked Account of Borrower shall be transferred (by way of debit,
ACH debit, wire transfer or other means, as directed by Lender) on a daily basis
on each Domestic Business Day to an account of Lender at Mercantile Bank
National Association or such other bank as Lender may from time to time specify
in writing to be applied by Lender to the payment of the Secured Obligations as
follows: (a) so long as no Event of Default under this Agreement has occurred
and is continuing, as directed by Borrower and (b) so long as any Event of
Default under this Agreement has occurred and is continuing, in such order and
manner as Lender may elect. Lender agrees that, so long as no Event of Default
and no event which with the passage of time or the giving of notice or both
would constitute an Event of Default under this Agreement has occurred and is
continuing, if the application of funds received by Lender from the Blocked
Account would result in the prepayment of a LIBOR Loan, Borrower may, at its
option, invest such funds in a cash collateral account at Mercantile Bank
National Association (pursuant to documentation acceptable to Lender granting
Lender a first
- 11 -
<PAGE> 12
priority perfected security interest in such account and the proceeds thereof)
until the expiration of the Interest Period for such LIBOR Loan. Borrower shall
have no right to withdraw any funds out of the Lock Box and/or the Blocked
Account. Borrower, and each of its Affiliates, employees, agents and/or other
Persons acting for or in concert with Borrower, shall, acting as trustee for
Lender, receive, as the sole and exclusive property of Lender, any monies,
checks, notes, drafts and any other payments relating to and/or proceeds of
Accounts, Lease Payments and/or other Collateral which come into the possession
or under the control of Borrower or any Affiliates, employees, agents or other
Persons acting for or in concert with Borrower, and immediately upon receipt
thereof, Borrower or such Persons shall cause the same to be deposited into
Borrower's Lock Box on each Domestic Business Day.
5. Additional Actions by Lender. Lender, at its option, may from
time to time perform any agreement of Borrower hereunder which Borrower shall
fail to perform and take any other action which Lender in good faith deems
necessary for the maintenance or preservation of any of the Collateral or its
interest therein (including, without limitation, the discharge of taxes or
liens of any kind against the Collateral or the procurement of insurance or the
payment of warehousing charges, landlord's bills or other charges or the
performance of any of Borrower's obligations under the Leases), and Borrower
agrees to forthwith reimburse Lender for all reasonable costs and expenses
incurred by Lender in connection with the foregoing, together with interest
thereon at a rate per annum equal to the lesser of (i) Four Percent (4%) over
and above the Prime Rate (fluctuating as and when the Prime Rate changes) and
(ii) the highest rate of interest allowed by applicable law, from the date
incurred until reimbursed by Borrower. Lender may for the foregoing purposes
act in its own name or that of Borrower and may also so act for the purposes of
adjusting, settling or cancelling any policy of insurance on the Collateral or
endorsing any draft received in connection therewith, in payment of a loss or
otherwise, for all of which purposes Borrower hereby grants to Lender its power
of attorney, irrevocable during the term of this Agreement.
6. Defaults. The occurrence of any of the following events or
conditions shall constitute an "Event of Default" under this Agreement: (a)
non-payment of any principal of, interest on or other amount with respect to
any of the Secured Obligations within five (5) days after the same shall first
become due and payable, whether by reason of demand, maturity, acceleration or
otherwise; (b) default by Borrower in the due performance or observance of any
of the terms, provisions, covenants or agreements contained in Sections 2(h),
2(i), 2(j), 2(k), 2(n), 2(o), 2(p), 2(r), 2(s), 3(e), 3(f), 3(l) or 4 of this
Agreement; (c) default by Borrower in the due performance or observance of any
of the terms, provisions, covenants or agreements contained in Sections 2(g),
2(q), 3(a) or 3(i) of this Agreement and any such default shall remain
unremedied for five (5) days after the earlier of (i) written notice of default
is given to Borrower by Lender or (ii) any officer of Borrower obtains
knowledge of such default; (d) default by Borrower in the due performance or
observance of any of the other terms, provisions, covenants or agreements
contained in this Agreement and any such default shall remain unremedied for
fifteen (15) days after the earlier of (i) written notice of default is given
to Borrower by Lender or (ii) any officer of Borrower obtains knowledge of such
default; (e) any representation or warranty made by Borrower in this Agreement
shall prove to be untrue or incorrect in any material respect when made or
deemed made; or (f) any "Event of Default" (as defined therein) shall occur
under or within the meaning of the Loan Agreement.
7. Remedies. Upon the occurrence and during the continuation of
any Event of Default under this Agreement: (a) notwithstanding any provision
contained in the Loan Agreement or any of the other Transaction Documents to
the contrary, Lender may, at its option, declare that the obligation of Lender
to make Revolving Credit Loans under the Loan Agreement has terminated,
whereupon such obligation of Lender shall be immediately and forthwith
terminated, and Lender may, at its option, declare the entire outstanding
principal balance of and all accrued and unpaid interest on the Revolving
Credit Note and all of the other Secured Obligations to be forthwith due and
payable, whereupon all of the unpaid principal balance of and all accrued and
unpaid interest on the Revolving Credit Note and all of the other Secured
Obligations shall become and be immediately due and payable, without
presentment, demand, protest or further notice of any kind, all of which are
hereby expressly waived by Borrower; (b) whether or not any or all of the
Secured Obligations are declared to be forthwith due and payable, Lender shall
have the right to take immediate possession of the Collateral covered hereby,
- 12 -
<PAGE> 13
and, for that purpose may pursue the same wherever said Collateral may be
found, and may enter upon any of the premises of Borrower with or without force
or process of law, wherever said Collateral may be or may be supposed to be,
and search for the same, and, if found, take possession of and remove and sell
and dispose of said Collateral, or any part thereof; (c) Lender may, at its
option, notify any Account Debtor with respect to any Account to make all
payments under the Accounts directly to Lender and demand, collect, receipt
for, settle, compromise, adjust, sue for, foreclose and realize on the Accounts
and all amounts due under the Accounts as Lender may determine; (d) Lender may,
at its option, notify any lessee under a Lease to make all Lease Payments under
such Lease directly to Lender and demand, collect, receipt for, settle,
compromise, adjust, sue for, foreclose and realize on the Lease Payments and
all other amounts due under the Leases as Lender may determine; (e) Lender may,
at its option, exercise such of the other rights and remedies accruing to a
secured party under the Uniform Commercial Code of the relevant state or states
and any other applicable law upon default by a debtor as Lender may elect; and
(f) Lender may, at its option, enter, with or without process of law and
without breach of the peace, any premises where the books and records of
Borrower pertaining to the Accounts, the Lease Payments or any of the other
Collateral are or may be located, and without charge or liability on the part
of Lender therefor seize and remove said books and records from said premises
or remain upon said premises and use the same for the purpose of collecting,
preparing and disposing of the Collateral and/or for the purpose of identifying
and locating any of the Collateral. Borrower shall, upon Lender's request,
assemble the Collateral and make the Collateral available to Lender at any
place designated by Lender which is reasonably convenient to Borrower.
8. Foreclosure. Foreclosure on the Collateral covered hereby may
be had at public or private sale or sales, disposing of such portion or
portions of the Collateral at each such sale, for cash or on credit, on such
terms, at such place or places, and with or without the Collateral being
present at such sale, all as Lender in its sole and absolute discretion shall
determine from time to time. In the case of public sale, notice thereof shall
be deemed and held to be adequate and reasonable if such notice shall appear
three (3) times in a newspaper published in the City or County wherein the sale
is to be held, the first such publication being at least ten (10) days before
such sale and the last such publication being not more than three (3) days
before such sale. In the case of a private sale, notice thereof shall be deemed
and held to be adequate and reasonable if such notice shall be mailed to
Borrower at its last known address at least ten (10) days before such sale. The
enumeration of these methods of notice shall not be deemed or construed to
render unreasonable any other method of notice which would otherwise be
reasonable under the circumstances.
9. Application of Proceeds and Deficiency. Lender may apply the
net proceeds of any sale, lease or other disposition of any of the Collateral
or of any other collection of the proceeds of any of the Collateral, after
deducting all costs and expenses of every kind incurred therein or incidental
to the retaking, holding, preparing for sale, selling, leasing or the like of
the Collateral on Borrower's premises, or elsewhere, or in any way related to
Lender's rights hereunder including, without limitation, reasonable attorneys'
fees and expenses, court costs, bonds and other legal expenses, insurance,
security guard and alarm expenses incurred in connection with the holding of
the Collateral, advertisements of sale of the Collateral, and rental and
utilities expense on the premises or elsewhere in connection with storage and
sale of the Collateral) to the payment, in whole or in part, of the Secured
Obligations, whether due or not due, absolute or contingent, and only after
payment by Lender of any other amounts required by any existing or future
provision of law (including Section 9-504(1)(c) of the Uniform Commercial Code
or any comparable statutory provision of any jurisdiction in which any of the
Collateral may at the time be located) need Lender account to Borrower for the
surplus, if any. The proceeds of any sale(s), lease(s) or other disposition(s)
of any of the Collateral and/or of any collection(s) of any of the Collateral
shall be applied by Lender in the following order: (1) first, to the payment of
all costs, expenses, liabilities and advances made or incurred by Lender in
connection with the collection and enforcement of the Secured Obligations and
the sale or other realization upon the Collateral; provided, however, that
nothing herein is intended to relieve Borrower of its obligation to pay such
costs, expenses, liabilities and advances; (2) second, to the payment of the
Secured Obligations in such order and manner as Lender, in its discretion, may
elect; and (3) third, to the payment of any surplus remaining after the payment
of the amounts mentioned, to Borrower or to.
- 13-
<PAGE> 14
whomsoever may be lawfully entitled thereto. Borrower shall remain liable to
Lender for the payment of any deficiency, with interest.
10. Lender's Care of Collateral. Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral in
its possession if it takes such action for that purpose as Borrower requests in
writing, but failure of Lender to comply with any such request shall not of
itself be deemed a failure to exercise reasonable care, and no failure of
Lender to preserve or protect any rights with respect to such Collateral
against prior parties shall be deemed a failure to exercise reasonable care in
the custody or preservation of such Collateral.
11. Amendments; Waivers; Remedies Cumulative. No delay on the
part of Lender in the exercise of any right hereunder shall operate as a waiver
thereof and no single or partial exercise by Lender of any right shall preclude
other or further exercise thereof or the exercise of any other right. Each and
every right granted to Lender hereunder, under the Loan Agreement and under the
other Transaction Documents, or at law or in equity, shall be deemed cumulative
and may be exercised from time to time. Lender shall not by any act, delay,
omission or otherwise be deemed to have waived any of its rights or remedies
hereunder and no waiver whatsoever shall be valid unless in writing and signed
by Lender and then only to the extent therein set forth. A waiver by Lender of
any right or remedy hereunder on any one occasion shall not be construed as a
bar to any right or remedy which Lender would otherwise have on any future
occasion. This Agreement may not be amended except by a writing duly signed by
Borrower and Lender. The headings of the paragraphs hereof shall not be
considered in the construction or interpretation of this Agreement.
12. Irrevocable Power of Attorney. Borrower hereby irrevocably
makes, constitutes and appoints Lender (and all Persons designated by Lender)
as the true and lawful agent and attorney-in fact of Borrower with full power
of substitution to: (a) if any Event of Default under this Agreement has
occurred and is continuing, (i) demand payment of the Accounts and the Lease
Payments, (ii) enforce payment of the Accounts and the Lease Payments by legal
proceedings or otherwise, (iii) exercise all of Borrower's rights and remedies
with respect to proceedings brought to collect any Account or Lease Payment,
(iv) sell or assign any Account or Lease Payment upon such terms, for such
amount and at such time or times as Lender deems advisable, (v) settle, adjust,
compromise, extend or renew any Account or Lease Payment, (vi) discharge and
release any Account or Lease Payment, (vii) prepare, file and sign Borrower's
name on any proof of claim in bankruptcy or other similar document against an
Account Debtor or a lessee under a Lease, (viii) have access to any lockbox or
postal box into which Borrower's mail is deposited, (ix) notify the postal
authorities of any change of the address for delivery of Borrower's mail to an
address designated by Lender, and open all mail addressed to Borrower for the
purpose of collecting Accounts and Lease Payments and the proceeds of any other
Collateral (with all other mail to be promptly returned to Borrower) and (x) do
all acts and things which are necessary, in Lender's sole discretion, to
fulfill the Borrower's obligations under this Agreement; and (b) at any time,
(i) take control in any manner of any item of payment or proceeds of any
Account or Lease Payment or any other Collateral, (ii) have access to the
Lockbox, (iii) endorse Borrower's name upon any items of payment or proceeds
thereof and deposit the same in the Lender's account on account of the Secured
Obligations, (iv) endorse Borrower's name upon any chattel paper, document,
instrument, invoice or similar document or agreement relating to any Account or
Lease Payment or any goods pertaining thereto, (v) execute in Borrower's name
and on Borrower's behalf any financing statements and/or continuations thereof
and/or amendments thereto under the Uniform Commercial Code or other applicable
law in any jurisdiction where Borrower or any of the Collateral may be located,
(vi) endorse Borrower's name on any verification of Accounts or Lease Payments
and notices thereof to Account Debtors and lessees and (vii) do any and all
things necessary and take such actions in the name and on behalf of Borrower to
carry out the intent of this Agreement, including, without limitation, the
grant of the security interest granted under this Agreement and to perfect and
protect the security interest granted to Lender in respect to the Collateral
and Lender's rights created under this Agreement. Borrower agrees that neither
Lender nor any of its agents, designees or attorneys-in-fact will be liable for
any acts of commission or omission (other than for acts of commission or
omission which constitute gross negligence or willful misconduct as determined
by a court of competent jurisdiction in a final, nonappealable order), or for
any error of judgment or
- 14 -
<PAGE> 15
mistake of fact or law in respect to the exercise of the power of attorney
granted under this Section. The power of attorney granted under this Section
shall be irrevocable during the term of this Agreement.
13. Notices. All notices provided for in this Agreement shall be
in writing and shall be deemed to have been given when delivered personally or
when deposited in the United States mail, registered or certified mail, return
receipt requested and postage prepaid, addressed as follows, or to such other
address as may hereafter be designated in writing by the respective parties
hereto: if to Lender to 100 South Brentwood Boulevard, Suite 500, St. Louis,
Missouri 63105, Attention: Senior Credit Officer, and if to Borrower, to the
address of the chief executive office of Borrower listed at the end of this
Agreement and to the attention of Borrower's Chief Executive Officer and Chief
Financial Officer, and with a copy to John J. McCoy, Esq., Taft, Stettinius &
Hollister, 1800 Star Bank Center, 425 Walnut Street, Cincinnati, Ohio 45202.
14. Applicable Law and Severability. It is the intention of the
parties hereto that this Agreement is entered into pursuant to the provisions
of the Uniform Commercial Code as it is in force in the State of Missouri (the
"UCC"). Any applicable provisions of the UCC, not specifically included herein,
shall be deemed a part of this Agreement in the same manner as if set forth
herein at length; and any provisions of this Agreement that might in any manner
be in conflict with any provision of the UCC shall be deemed to be modified so
as not to be inconsistent with the UCC. In all respects this Agreement and all
transactions, assignments and transfers hereunder, and all the rights of the
parties, shall be governed as to validity, construction, enforcement and in all
other respects by the substantive laws of the State of Missouri (without
reference to conflict of law principles); provided, however, that the
perfection, priority and enforcement of the security interest created by this
Agreement on any Property located in any jurisdiction other than the State of
Missouri shall in all respects be governed, construed, applied and enforced in
accordance with the substantive laws of the applicable jurisdiction. To the
extent any provision of this Agreement is not enforceable under applicable law,
such provision shall be deemed null and void and shall have no effect on the
remaining portions of this Agreement.
15. Successors and Assigns: Other Secured Obligations; Duration
of Security Interest. This Agreement shall be binding upon Borrower and shall
inure to the benefit of Lender and its successors and assigns. Borrower may not
assign any of its rights or delegate any of its obligations under this
Agreement. This Agreement shall continue in full force and effect and the
security interest granted hereby and all of the representations, warranties,
covenants and agreements of Borrower hereunder and all of the terms, conditions
and provisions hereof relating thereto shall continue to be fully operative
until such time as (a) Borrower shall have paid or caused to be paid, or
otherwise discharged, all of the Secured Obligations and (b) there shall be no
remaining commitment or obligation of Lender to advance funds, make loans or
extend credit to Borrower under the Loan Agreement, any of the other
Transaction Documents or otherwise. Borrower expressly agrees that to the
extent a payment or payments to Lender, or any part thereof, are subsequently
invalidated, declared to be void or voidable or set aside and are required to
be repaid to a trustee, custodian, receiver or any other party under any
bankruptcy act, state or federal law, common law or equitable cause, then to
the extent of such payment or repayment, the obligation or part thereof
intended to be satisfied shall be revived and continued in full force and
effect as if said payment had not been made.
16. Consent to Jurisdiction; Waiver of Jury Trial. BORROWER
IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY MISSOURI STATE
COURT OR ANY UNITED STATES OF AMERICA COURT SITTING IN THE EASTERN DISTRICT OF
MISSOURI, EASTERN DIVISION, AS LENDER MAY ELECT, IN ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. BORROWER HEREBY
IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT TO SUCH SUIT, ACTION OR
PROCEEDING MAY BE HELD AND DETERMINED IN ANY OF SUCH COURTS. BORROWER
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH
BORROWER MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT,
ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT, AND BORROWER FURTHER
IRREVOCABLY WAIVES ANY CLAIM THAT SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN
ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. BORROWER
- 15 -
<PAGE> 16
NOW OR HEREAFTER HAVE BY REASON OF ITS PRESENT OR SUBSEQUENT DOMICILES.
BORROWER AUTHORIZES THE SERVICE OF PROCESS UPON BORROWER BY REGISTERED MAIL
SENT TO BORROWER AT ITS ADDRESS SET FORTH IN SECTION 13. BORROWER AND LENDER
IRREVOCABLY WAIVE THE RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY ACTION IN
WHICH BORROWER AND LENDER ARE PARTIES RELATING TO OR ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT.
IN WITNESS WHEREOF, Borrower has executed this Security Agreement this 29th
day of October, 1997.
IN THE EVENT ANY OF THE SECURED OBLIGATIONS ARE PAYABLE ON DEMAND, NEITHER THIS
AGREEMENT NOR ANYTHING CONTAINED HEREIN SHALL BE DEEMED TO ALTER OR IMPINGE
UPON THE DEMAND CHARACTER OF SUCH OBLIGATION.
INTERLOTT TECHNOLOGIES, INC. ("Borrower")
By /s/ Jerome J. Cain
----------------------------
Title: Chief Executive Officer
------------------------
By /s/ L. Rogers Wells
----------------------------
Title: Chief Executive Officer
------------------------
Address of Chief Executive Office of
Borrower and Location of Books and Records of
Borrower:
10830 Millington Court
Cincinnati, Ohio 45242
Accepted this 29th day of October, 1997.
MERCANTILE BUSINESS CREDIT INC.
By /s/ Marian H. Kammerer
----------------------------
Title: Vice President
------------------------
-16-
<PAGE> 17
EXHIBIT A
Additional Locations of Places of Business of Borrower
6665 Creek Road
Cincinnati, Ohio 45242
- 17 -
<PAGE> 18
EXHIBIT B
Permissible Collateral Locations
State of Ohio
State of Arizona
State of Colorado
State of Florida
State of Georgia
State of Indiana
State of Iowa
State of Kansas
State of Maine
State of Maryland
State of Minnesota
State of New Hampshire
State of New Mexico
State of New York
State of Rhode Island
State of Texas
Argentina
Brazil
Buenos Aries
Chile
Costa Rica
Mexico
Israel
Ireland
Iceland
Denmark
Norway
Spain
Western Australia
Quebec, Canada
Switzerland
- 18 -
<PAGE> 19
EXHIBIT C
UCC Filing Offices
Ohio Secretary of State
Hamilton County, Ohio
Arizona Secretary of State
Colorado Secretary of State
Florida Secretary of State
Georgia Secretary of State
Indiana Secretary of State
Iowa Secretary of State
Kansas Secretary of State
Maine Secretary of State
Maryland Secretary of State
Minnesota Secretary of State
New Hampshire Secretary of State
New Mexico Secretary of State
New York Secretary of State
Rhode Island Secretary of State
Texas Secretary of State
- 19 -
<PAGE> 20
EXHIBIT D
[Form of Collateral Report]
- 20 -
<PAGE> 21
EXHIBIT 10.10
EXHIBIT D
<TABLE>
<CAPTION>
Mercantile Business Credit, Inc.
COLLATERAL REPORT Report No. Date(Mo., DAY & YEAR)
-----------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
COMBINED ACCOUNTS RECEIVABLE/INVENTORY ACTIVITY
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Accounts Receivable Balance
(From line 8 of Previous Report) $
- -------------------------------------------------------------------------------------------------------------------------
2. Add: Sales Assignments FROM (MO., DAY, YEAR) TO (MO., DAY, YEAR)
/ / / /
- --------------------------------------------------------------------------------------------------
3. Other Adjustments
- -------------------------------------------------------------------------------------------------------------------------
4. Total Additions (Line 2 + Line 3) $
- -------------------------------------------------------------------------------------------------------------------------
5. Less: Collection Reports No(s). GROSS
($ ) Net Cash
--------------- Deductions
Over payments
- --------------------------------------------------------------------------------------------------
6. Less: Other Credits ($ )
- -------------------------------------------------------------------------------------------------------------------------
7. Total Deductions (Line 5 + Line 6) ($ )
- -------------------------------------------------------------------------------------------------------------------------
8. Total Accounts Receivable $
(Line 1 + Line 4 - Line 7)
- -------------------------------------------------------------------------------------------------------------------------
9. Less: Ineligible Accounts ($ )
- -------------------------------------------------------------------------------------------------------------------------
10. Total Eligible Accounts Receivable $
- -------------------------------------------------------------------------------------------------------------------------
11. Beginning Inventory Value $
(from Line 15 Previous Report)
- -------------------------------------------------------------------------------------------------------------------------
12. Add: Purchases for Period FROM (MO., DAY, YEAR) TO (MO., DAY, YEAR)
/ / / /
- --------------------------------------------------------------------------------------------------
13. Other Adjustments
- --------------------------------------------------------------------------------------------------
14. Less: Cost of Goods Sold % X Line 2 (above)
- -------------------------------------------------------------------------------------------------------------------------
15. Ending Inventory Value $
(Line 11 + 12)-(Line 13 + 14)
- -------------------------------------------------------------------------------------------------------------------------
16. Less: Ineligible Inventory ($ )
- -------------------------------------------------------------------------------------------------------------------------
17. Total Eligible Inventory $
- -------------------------------------------------------------------------------------------------------------------------
18. Accounts Receivable % of Line 10(above) $
Availability
- --------------------------------------------------------------------------------------------------
19. Inventory Availability: % of Line 17(above) $
- --------------------------------------------------------------------------------------------------
20. Eligible Lease Payments at 65% $
- -------------------------------------------------------------------------------------------------------------------------
NOT TO EXCEED
21. Total Availability (Line 18 + Line 19 + 20) $ $
- -------------------------------------------------------------------------------------------------------------------------
22. Beginning Loan Balance $
(Line 26 Previous Report)
- --------------------------------------------------------------------------------------------------
NET
23. Less: Remittances (Deposits) See Line 5, Net Cash ($ )
- --------------------------------------------------------------------------------------------------
24. Advance Requested Since Last Report $
- --------------------------------------------------------------------------------------------------
25. Other Adjustments (ie. Interest, Return Items, Misc. Charges) $
- -------------------------------------------------------------------------------------------------------------------------
26. New Loan Balance
(Line 22 - Line 23 + Line 24 and Line 25) $
- -------------------------------------------------------------------------------------------------------------------------
27. Remaining Availability (line 21 - Line 26) $
- -------------------------------------------------------------------------------------------------------------------------
The undersigned represents and warrants that the foregoing information is true, complete and correct, and the receivables
and inventory reflected herein complies with the representations and warranties set forth in the security agreement and
supplements or amendments, if any, thereto between the undersigned and Mercantile Business Credit, Inc.
- -------------------------------------------------------------------------------------------------------------------------
COMPANY BY DATE
- -------------------------------------------------------------------------------------------------------------------------
LOCATION TITLE
- -------------------------------------------------------------------------------------------------------------------------
CUSTOMER RETURN (White, Yellow, Pink Copies) TO MBCI, KEEP GOLDENROD (PT 4) FOR YOUR RECORDS
</TABLE>
<PAGE> 1
EXHIBIT 4.3(c)
PATENT, TRADEMARK AND LICENSE SECURITY AGREEMENT
THIS PATENT, TRADEMARK AND LICENSE SECURITY AGREEMENT (this
"Agreement") is made and entered into as of the 29th day of October, 1997, by
INTERLOTT TECHNOLOGIES, INC., a Delaware corporation ("Borrower"), in favor of
MERCANTILE BUSINESS CREDIT INC., a Missouri corporation ("Lender").
WITNESSETH:
WHEREAS, Borrower and Lender are herewith entering into that certain
Loan Agreement dated the date hereof (as the same may from time to time be
amended, modified, extended or renewed, the "Loan Agreement"; all capitalized
terms used and not otherwise defined in this Agreement shall have the
respective meanings ascribed to them in the Loan Agreement); and
WHEREAS, as a condition precedent to Lender entering into the Loan
Agreement, Lender has required that Borrower execute and deliver this Agreement
to Lender; and
WHEREAS, in order to induce Lender to enter into the Loan Agreement,
Borrower has agreed to execute and deliver this Agreement to Lender; and
WHEREAS, this Agreement is being executed in connection with and in
addition to that certain Security Agreement dated the date hereof and executed
by Borrower in favor of Lender, as the same may from time to time be amended,
modified, extended or renewed, pursuant to which Borrower has granted Lender a
security interest in, among other things, all accounts, inventory, general
intangibles, machinery, equipment, books, records, goodwill, patents,
trademarks and licenses now owned or hereafter acquired by Borrower and all
proceeds thereof;
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrower hereby covenants and agrees with Lender as follows:
1. Grant of Security Interest. For value received, Borrower
hereby grants Lender a security interest in all of Borrower's right, title and
interest in, to and under the following described property, whether now owned
and existing or hereafter created, acquired or arising:
(a) all patents and patent applications, and the inventions and
improvements described and claimed therein, including, without limitation, each
patent and patent application listed on Schedules A and B, respectively,
attached hereto and incorporated herein by reference (as the same may be
amended pursuant hereto from time to time) and (i) the reissues, divisions,
continuations, renewals, extensions and continuations-in-part thereof, (ii) all
income, damages and payments now and hereafter due or payable under or with
respect thereto, including, without limitation, damages and payments for past
or future infringements thereof, (iii) the right to sue for past, present and
future infringements thereof and (iv) all rights corresponding thereto
throughout the world (all of the foregoing patents and patent applications
together with the items described in clauses (i) through (iv) of this
subsection (a) are hereinafter collectively referred to herein as the
"Patents");
(b) all trademarks, service marks, trademark or service mark
registrations, trade names, trade styles, trademark or service mark
applications and brand names, including, without limitation, common law rights
and each trademark and trademark application listed on Schedules C and D,
respectively, attached hereto and incorporated herein by reference (as the same
may be amended pursuant hereto from time to time); and (i) renewals or
extensions thereof, (ii) all income, damages and payments now and hereafter due
or payable with respect thereto, including, without limitation, damages and
payments for past or future infringements thereof, (iii) the right to sue for
past, present and future infringements thereof and (iv) all rights
corresponding thereto throughout the world (all of the foregoing trademarks,
trade names, service marks and applications and registrations thereof together
with the items described in clauses (i) through (iv) of this subsection (b) are
hereinafter collectively referred to herein as the "Trademarks");
<PAGE> 2
(c) the license(s) listed on Schedule E attached hereto and
incorporated herein by reference and all other license agreements (to the
extent such license agreements may be assigned without violating the terms of
any such license agreement) with respect to any of the Patents or any of the
Trademarks or any other patent, trademark, service mark or any application or
registration thereof or any other trade name or trade style between Borrower
and any other party, whether Borrower is licensor or licensee (all of the
forgoing license agreements and Borrower's rights thereunder are hereinafter
collectively referred to as the "Licenses");
(d) the goodwill of Borrower's business connected with and
symbolized by the Trademarks; and
(e) all proceeds, including, without limitation, proceeds which
constitute property of the types described in (a), (b), (c) and (d) above and
any rents and profits of any of the foregoing items, whether cash or noncash,
immediate or remote, and insurance proceeds, and all products of (a), (b), (c)
and (d) above, and any indemnities, warranties and guaranties payable by reason
of loss or damage to or otherwise with respect to any of the foregoing items;
to secure the payment of any and all of the present and future Borrower's
Obligations (hereinafter collectively referred to "Secured Obligations").
2. Representations, Warranties and Covenants of Borrower.
Borrower hereby represents and warrants to Lender, and covenants and agrees
with Lender, that:
(a) all United States patents owned by Borrower as of the date of
this Agreement are listed on Schedule A attached hereto;
(b) all United States patent applications of Borrower as of the
date of this Agreement are listed on Schedule B attached hereto;
(c) all United States trademarks owned by Borrower as of the date
of this Agreement are listed on Schedule C attached hereto;
(d) all United States trademark applications of Borrower as of
the date of this Agreement are listed on Schedule D attached hereto;
(e) all Licenses to which Borrower is a party as of the date of
this Agreement are listed on Schedule E attached hereto;
(f) to the best of Borrower's knowledge, all of the Patents,
Trademarks and Licenses are subsisting and have not been adjudged invalid or
unenforceable, in whole or in part, and are not at this time the subject of any
challenge to their validity or enforceability;
(g) to the best of Borrower's knowledge, each of the Patents,
Trademarks and Licenses is valid and enforceable;
(h) to the best of Borrower's knowledge, no claim has been made
that the use of any of the Patents, Trademarks or Licenses does or may violate
the rights of any third person;
(i) to the best of Borrower's knowledge, no claims for patent
infringement have been commenced in connection with any of the Patents;
(j) to the best of Borrower's knowledge, no claims for trademark
infringement have been commenced in connection with any of the Trademarks;
(k) Borrower is the sole and exclusive owner of the entire and
unencumbered right, title and interest in and to each of the Patents,
Trademarks and Licenses, free and clear of any and all liens, charges and
encumbrances, including, without limitation, any and all pledges, assignments,
licenses, registered user
- 2 -
<PAGE> 3
agreements, shop rights and covenants by Borrower not to sue third persons,
excluding only security interests granted to Lender;
(l) Borrower has the unqualified right to enter into this
Agreement and perform its terms;
(m) Borrower has used, and will continue to use for the duration
of this Agreement, proper statutory notice in connection with its use of the
Patents, Trademarks and Licenses;
(n) Borrower has the exclusive, royalty-free right and license to
use the Patents and Trademarks and agrees not to transfer any rights or
interest in any of the Patents, Trademarks or Licenses during the term of this
Agreement;
(o) Borrower will not amend, modify or terminate (or consent or
agree to any amendment, modification or termination of) any of the Licenses
without the prior written consent of Lender, which consent shall not be
unreasonably withheld; and
(p) Borrower has no notice of any suits or actions commenced or
threatened with reference to any of the Patents, Trademarks or Licenses.
3. Inspection Rights; Product Quality. Borrower will permit
inspection of its facilities which manufacture, inspect or store products sold
under any of the Patents, Trademarks and/or Licenses and inspection of the
products and records relating thereto by Lender during normal business hours
and at other reasonable times upon at least one (1) Domestic Business Day's
prior oral or written notice from Lender to Borrower (provided, however, that
no such notice need be given by Lender if any Event of Default under the Loan
Agreement has occurred and is continuing). Borrower will reimburse Lender upon
demand for all reasonable costs and expenses incurred by Lender in connection
with any such inspection conducted by Lender while any Default or Event of
Default under the Loan Agreement has occurred and is continuing. Borrower
agrees (i) to maintain the quality of any and all products in connection with
which the Trademarks are used, consistent with commercially reasonable
practices and (ii) to provide Lender, upon Lender's reasonable request from
time to time, with a certificate of any officer of Borrower certifying
Borrower's compliance with the foregoing.
4. Further Assurances. Borrower covenants and agrees that, until
(i) all of the Secured Obligations have been paid in full, (ii) Lender has no
further commitment or obligation to make any additional loans or advances or
other extensions of credit to Borrower under the Loan Agreement or otherwise
and (iii) the Loan Agreement has been terminated, it will not enter into any
agreement (for example, a license or sublicense agreement) which is
inconsistent with Borrower's obligations under this Agreement or the Loan
Agreement, without the prior written consent of Lender and Borrower covenants
and agrees that it will not take any action or permit any action to be taken by
others subject to its control, including licensees to the extent subject to
Borrower's control, or fail to take any action, which could affect the validity
or enforcement of the rights transferred to Lender under this Agreement.
Borrower further covenants and agrees that at any time and from time to time,
at the expense of Borrower, Borrower will promptly execute and deliver to
Lender any and all further instruments and documents and take any and all
further action that may be necessary, or that Lender may reasonably request, in
order to perfect and protect the security interest granted hereby with respect
to the Patents, Trademarks and Licenses or to enable Lender to exercise its
rights and remedies hereunder with respect to the same.
5. Additional Patents, Trademarks and Licenses. If Borrower
shall (i) become aware of any existing Patents, Trademarks or Licenses of which
Borrower has not previously informed Lender, (ii) obtain rights to any new
patentable inventions, Patents, Trademarks or Licenses or (iii) become entitled
to the benefit of any Patents, Trademarks or Licenses which benefit is not in
existence on the date hereof, the provisions of this Agreement shall
automatically apply thereto and Borrower shall give Lender prompt written
notice thereof.
6. Modification by Lender. Borrower authorizes Lender to modify
this Agreement by amending Schedules A, B, C, D and E to include any future
patents and patent applications, any future trademarks, service marks,
trademark or service mark registrations, trade names, and trademark or service
applications, and
- 3 -
<PAGE> 4
any future licenses, covered by Paragraphs 1 and 5 hereof, without the
signature of Borrower if permitted by applicable law.
7. Use of Patents, Trademarks and Licenses. So long as no Event
of Default under the Loan Agreement has occurred and is continuing, Borrower
may use the Patents and Trademarks and exercise its rights under the Licenses
in any lawful manner not inconsistent with this Agreement on and in connection
with products sold or leased by Borrower, for Borrower's own benefit and
account and for none other.
8. Default. If any Event of Default under the Loan Agreement
shall have occurred and be continuing, Lender shall have, in addition to all
other rights and remedies given it by this Agreement, those allowed by law and
the rights and remedies of a secured party under the Uniform Commercial Code as
enacted in any jurisdiction in which the Patents, Trademarks and Licenses may
be located and, without limiting the generality of the foregoing, Lender may
immediately, without demand of performance and without other notice (except as
set forth next below) or demand whatsoever to Borrower, all of which are hereby
expressly waived, and without advertisement, sell at public or private sale or
otherwise realize upon, all or from time to time any of the Patents, Trademarks
(together with the goodwill of Borrower associated therewith) or Licenses, or
any interest which Borrower may have therein, and after deducting from the
proceeds of sale or other disposition of the Patents, Trademarks or Licenses
all costs and expenses (including, without limitation, all expenses for
brokers' fees and all reasonable attorneys' fees and expenses), shall apply the
residue of such proceeds toward the payment of the Secured Obligations in such
order and manner as Lender may in its discretion elect. Notice of any sale or
other disposition of any of the Patents, Trademarks or Licenses shall be given
to Borrower at least five (5) business days before the time of any intended
public or private sale or other disposition of such Patents, Trademarks and/or
Licenses is to be made, which Borrower hereby agrees shall be reasonable notice
of such sale or other disposition. At any such sale or other disposition,
Lender or any holder of any of the Secured Obligations may, to the extent
permissible under applicable law, purchase the whole or any part of the
Patents, Trademarks or Licenses sold, free from any right of redemption on the
part of Borrower, which right is hereby waived and released. Borrower agrees
that upon the occurrence and continuance of any Event of Default under the Loan
Agreement, the use by Lender of the Patents, Trademarks and Licenses shall be
worldwide, and without any liability for royalties or other related charges
from Lender to Borrower. If an Event of Default under the Loan Agreement shall
occur and be continuing, Lender shall have the right, but shall in no way be
obligated, to bring suit in its own name to enforce any and all of the Patents,
Trademarks and Licenses, and, if Lender shall commence any such suit, Borrower
shall, at the request of Lender, do any and all lawful acts and execute any and
all proper documents required by Lender in aid of such enforcement and the
Borrower shall promptly, upon demand, reimburse and indemnify Lender for all
costs and expenses (including, without limitation, reasonable attorneys' fees
and expenses) incurred by Lender in the exercise of its rights under this
Agreement.
9. Termination of Agreement. At such time as (i) Borrower shall
pay all of the Secured Obligations in full, (ii) Lender shall have no further
commitment or obligation to make any additional loans or advances or other
extensions of credit to Borrower under the Loan Agreement or otherwise and
(iii) the Loan Agreement shall be terminated, this Agreement shall terminate
and Lender shall, at Borrower's expense, execute and deliver to Borrower all
instruments as may be necessary or proper to extinguish Lender's mortgage on
and security interest in, and to reassign, retransfer and reconvey to Borrower,
the Patents, Trademarks and Licenses, subject to any disposition thereof which
may have been made by Lender pursuant hereto.
10. Expenses. Any and all fees, costs and expenses of whatever
kind or nature, including, without limitation, the reasonable attorneys' fees
and expenses incurred by Lender in connection with the preparation of this
Agreement and all other documents relating hereto and the consummation of this
transaction, the filing or recording of any documents (including all taxes in
connection therewith) in public offices, the payment or discharge of any taxes,
counsel fees, maintenance fees, encumbrances or other amounts in connection
with protecting, maintaining or preserving the Patents, Trademarks and/or
Licenses, or in defending or prosecuting any actions or proceedings arising out
of or related to the Patents, Trademarks and/or Licenses, shall be borne and
paid by Borrower on demand by Lender and until so paid shall be added to the
principal amount of the Secured Obligations and shall bear interest at a rate
per annum equal to the lesser of Four Percent (4%) over and above the Prime
Rate (which interest rate shall fluctuate as and when the Prime Rate shall
change) or the highest rate of interest allowed by law from the date incurred
until reimbursed by Borrower.
- 4 -
<PAGE> 5
11. Preservation of Patents, Trademarks and Licenses. Borrower
shall, consistent with Borrower's reasonable determination of how most
effectively to protect and conduct its business in a commercially reasonable
manner, (i) file and prosecute diligently any patent, trademark or service mark
applications pending as of the date hereof or hereafter, {ii) make application
on unpatented but patentable inventions and on trademarks and service marks and
(iii) preserve and maintain all rights in the Patents, Trademarks and Licenses.
Any expenses incurred in connection with Borrower's obligations under this
Section 11 shall be borne by Borrower.
12. Lender Appointed Attorney-ln-Fact. If any Event of Default
under the Loan Agreement shall have occurred and be continuing, Borrower hereby
authorizes and empowers Lender to make, constitute and appoint any officer or
agent of Lender as Lender may select, in its sole discretion, as Borrower's
true and lawful attorney-in-fact, with the power to endorse Borrower's name on
all applications, documents, papers and instruments necessary for Lender to use
the Patents, Trademarks and Licenses, or to grant or issue any exclusive or
non-exclusive license under the Patents, Trademarks and Licenses to anyone
else, or necessary for Lender to assign, pledge, convey or otherwise transfer
title to or dispose of the Patents, Trademarks and Licenses to anyone else.
Borrower hereby ratifies all that such attorney shall lawfully do or cause to
be done by virtue hereof. This power of attorney is coupled with an interest
and shall be irrevocable for the duration of this Agreement.
13. No Waiver. No course of dealing between Borrower and Lender,
nor any failure to exercise, nor any delay in exercising, on the part of
Lender, any right, power or privilege hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.
14. Severabilitv. The provisions of this Agreement are severable,
and if any clause or provision shall be held invalid and unenforceable in whole
or in part in any jurisdiction, then such invalidity or unenforceability shall
affect only such clause or provision, or part thereof, in such jurisdiction,
and shall not in any manner affect such clause or provision in any other
jurisdiction, or any other clause or provision of this Agreement in any
jurisdiction.
15. Amendments. This Agreement is subject to amendment or
modification only by a writing signed by Borrower and Lender, except as
provided in Paragraph 6 above.
16. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of Borrower and Lender and their respective successors
and assigns, except that Borrower may not assign or delegate any of its rights
of obligations under this Agreement.
17. Governing Law. The validity and interpretation of this
Agreement and the rights and obligations of the parties hereto shall be
governed by and construed in accordance with the Federal laws of the United
States of America and the substantive laws of the State of Missouri (without
reference to conflict of law principles).
- 5 -
<PAGE> 6
IN WITNESS WHEREOF, Borrower and Lender have executed this Patent,
Trademark and License Security Agreement as of the 29th day of October, 1997.
INTERLOTT TECHNOLOGIES, INC. ("Borrower")
By /s/ Jerome J. Cain
----------------------------
Title: Chief Executive Officer
------------------------
By /s/ L. Rogers Wells
----------------------------
Title: Chief Executive Officer
------------------------
MERCANTILE BUSINESS CREDIT INC. ("LENDER")
By /s/ Marian H. Kammerer
----------------------------
Title: Vice President
------------------------
-6-
<PAGE> 7
CERTIFICATE OF ACKNOWLEDGEMENT
STATE OF OHIO )
)
COUNTY OF HAMILTON )
On this 28th day of October, 1997, before me personally appeared L.
Rogers Wells, to me personally known, who, being by me duly sworn, did say that
he is the CEO of INTERLOTT TECHNOLOGIES, INC., a Delaware corporation, and that
said instrument was signed on behalf of said corporation by authority of its
Board of Directors; and said L. Rogers Wells acknowledged said instrument to be
the free act and deed of said corporation.
IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my
official seal in the County and State aforesaid, the day and year first above
written.
/s/ Frederick H. Rikes
(Seal) -----------------------
Notary Public
Frederick H. Rikes
My Commission Expires: 12/7/97. Notary Public, State of Ohio
My Commission Expires Dec. 7, 1997
STATE OF MISSOURI )
)
CITY OF ST. LOUIS )
On this 29th day of October, 1997, before me personally appeared
Jerome J. Cain, to me personally known, who, being by me duly sworn, did say
that he is the CFO of INTERLOTT TECHNOLOGIES, INC., a Delaware corporation, and
that said instrument was signed on behalf of said corporation by authority of
its Board of Directors; and said Jerome J. Cain acknowledged said instrument to
be the free act and deed of said corporation.
IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my
official seal in the City and State aforesaid, the day and year first above
written.
CHRISTINE BLISSENBACH
Notary Public - Notary Seal
(Seal) STATE OF MISSOURI
City of St. Louis /s/ Christine Blissenbach
My Commission Expires: November 11, 2000 -------------------------
Notary Public
My Commission Expires:________.
-7-
<PAGE> 8
STATE OF MISSOURI )
)
CITY OF ST. LOUIS )
On this 29th day of October, 1997, before me appeared Marian Kammerer,
to me personally known, who, being by me duly sworn, did say that he is a Vice
President of MERCANTILE BUSINESS CREDIT INC., a Missouri corporation, and that
said instrument was signed on behalf of said corporation, by authority of its
Board of Directors; and said Marian Kammerer acknowledged said instrument to be
the free act and deed of said corporation.
IN TESTIMONY WHEREOF, I have hereunto set my hand, and affixed my
official seal in the City and State aforesaid, the day and year first above
written.
CHRISTINE BLISSENBACH
Notary Public - Notary Seal
(Seal) STATE OF MISSOURI
City of St. Louis /s/ Christine Blissenbach
My Commission Expires: November 11, 2000 -------------------------
Notary Public
My Commission Expires:________.
-8-
<PAGE> 9
SCHEDULE A
United States Patents
<TABLE>
<CAPTION>
Patent No. Date Issued Inventor Description
- ---------- ----------- -------- -----------
<S> <C> <C> <C>
5,472,247 12/5/95 Gavin M. Monson Multi-point high security
locking mechanism for lottery
machines
5,330,185 7/19/94 L. Rogers Wells Method and apparatus for
random play of lottery games
D376,621 12/17/96 L. Rogers Wells Double game ticket vending
machine
4,982,337 1/1/91 Robert L. Burr System for distributing
lottery tickets
</TABLE>
-9-
<PAGE> 10
SCHEDULE B
United States Patent Applications
<TABLE>
<CAPTION>
Patent Application No. Date Filed Description
- ---------------------- ---------- -----------
<S> <C> <C>
*PCT/US97/05761 4/7/91 Improved Lottery Ticket Dispenser
*International patent application designating the United States.
</TABLE>
-10-
<PAGE> 11
SCHEDULE C
United States Trademarks
<TABLE>
<CAPTION>
Registration No. Registration Date Mark Registered
- ---------------- ----------------- ---------------
<S> <C> <C>
1,949,978 1/23/96 Instant Success
1,822,517 2/22/94 Interlott (word and design)
R1840378 6/21/94 Interlott (word)
</TABLE>
-11-
<PAGE> 12
SCHEDULE D
United States Trademark Applications
Registration No. Registration Date Mark Registered
- ---------------- ----------------- ---------------
None
-12-
<PAGE> 13
SCHEDULE E
Licenses
Pull-tab manufacturing and license agreement among Algonquin Industries, Inc.,
Kazmier Kasper and Borrower dated January 13, 1994 regarding a pull-tab ticket
mechanism.
-13-
<PAGE> 1
EXHIBIT 10.4 (c)
EMPLOYMENT AGREEMENT
BETWEEN
L. ROGERS WELLS, JR.
AND
INTERNATIONAL LOTTERY, INC.
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of the 1st day of February,
1995, by and between INTERNATIONAL LOTTERY, INC., WELLS, JR., a resident of the
Commonwealth of Kentucky (hereinafter referred to as the "Employee").
WITNESSETH:
WHEREAS, the Employer desires to employ the Employee in an executive
management capacity upon the terms and conditions hereinafter set forth, and
the Employee is willing to enter into this Employment Agreement (the
"Agreement") with respect to his employment upon the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and
obligations contained herein, the Employer hereby employs the Employee and the
Employee hereby accepts employment upon the terms and conditions hereinafter
set forth:
1. TERM OF AGREEMENT. The term of this Agreement shall be for a
period of three (3) years from the date of this Agreement, unless this
Agreement is terminated prior to the expiration of said period as hereinafter
provided. The term of employment may be extended by mutual written agreement
of the Employer and the Employee.
2. DUTIES OF EMPLOYEE. It is anticipated that the Employee shall be
employed in the capacity of Chairman of the Board of Directors and Chief
Executive Officer, reporting directly to the Board of Directors of the Employer,
in the execution of his duties and that the duties will include authority for
management, financial, personnel, and project decisions to the extent granted by
the Board of Directors. The Employee shall not, during his employment by the
Employer, unless otherwise agreed to in advance in writing by the Employer, seek
or accept any other activities which are detrimental to the business of the
Employer.
3. CASH COMPENSATION. For the services rendered by the Employee under
this Agreement, the Employer shall pay the Employee annual gross salary in the
amount of One Hundred fifty thousand Dollars ($150,000.00), payable at least
monthly, during the term Agreement according to the policies of the Employer
than in effect.
4. BENEFITS
(a) EXPENSE REIMBURSEMENT. The Employee shall be reimbursed for
travel and other expenses incurred for benefit of the Employer and in accord
with the current Employer expense reimbursement policy.
(b) GROUP INSURANCE. The Employee shall be entitled to the
standard group health and life insurance package provided to employees by the
Employer under the policies, terms and conditions in effect at the time.
<PAGE> 3
(c) Other Employee Benefits. The Employee shall participate in such
other employee benefit plans as may be authorized and adopted from time to time
by the Employer, including personal leave, holidays, professional insurance, if
any, and all other fringe benefits, provided however, that the Employee must
meet any and all eligibility provisions required under such other employee
benefit plans.
5. Termination of Agreement. The Agreement shall terminate upon the
occurrence of one of the following events:
(a) Termination for Cause. The Employer may terminate the Agreement
and the employment relationship for "cause," by serving fifteen (15) days
prior written notice to the Employee. For purposes hereof, "cause" for
termination shall be deemed to include determination by the Board of Directors
of the Employer that Employee has; (i) refused or materially failed to perform
his duties hereunder; (ii) breached any provision of this Agreement; (iii) has
committed any act of fraud, misappropriation or embezzlement against the
Employer; (iv) engaged in conduct or activities materially damaging to the
business of the Employer (with the understanding that neither conduct nor
activities pursuant to the Employee's exercise of his good faith business
judgement nor unintentional physical damage to any property of the Employer by
the Employee shall be grounds for such a determination by the Board) and that
such conduct continues for a period of fifteen (15) days after written notice
by the Employer to the Employee; and (v) been convicted of any felony or any
act or offense involving moral turpitude federal, state, or local law.
(b) Voluntary Termination by Employee. The Employee shall have the
right to terminate the Agreement and his employment relationship, and resign
his positions with the Employer, upon thirty (30) days' prior written notice.
(c) Disability or Death of Employee. In the event of total and
permanent disability or the death of Employee, the Agreement shall terminate as
of the date of such death or disability. For this purpose, "total and
permanent disability" shall mean a determination of the inability of Employee,
due to mental and/or physical conditions, to perform the majority of his
duties of his position with the Employer, for a continuous period of sixty
(60) days.
(d) Expiration. The Agreement shall terminate at the end of the
term specified in Section 1, if it has not earlier terminate due to the reason
described in subsection (a) through (c) above.
6. Rights Upon Termination. Upon termination of this Agreement,
Employer shall pay all compensation to Employee pursuant to Section 3 hereof
that is due and payable prior to and including the effective date of such
termination. Upon termination of employment hereunder, the Employee shall be
entitled to those employee benefits normally provided to employees of the
Employer upon their termination of employee benefits normally provided to
employees of the Employer upon their termination of employment, as may be
applicable from time to time, and no further compensation shall be paid
pursuant to this Agreement.
-2-
<PAGE> 4
7. Attorneys' Fees. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which he or it may be entitled.
8. Products, Notes and Records. All memoranda, notes, records, and other
documents, made or complied by Employee or made available to him during the term
of this Agreement concerning the business of Employer, including, without
limitation, all technical data, billing information, bidding data and other
technical material of Employer, shall be Employer's property and shall be
delivered to Employer within ten (10) days after termination of this Agreement.
9. Covenant Not to Compete.
(a) General Covenant Not to Compete. In consideration of the
Employer's employment of the Employee, Employee hereby covenants and agrees
that, during the period of his employment with the Employer and for a period of
one (1) year after termination of employment (whether for cause or by voluntary
termination), he will not, without the Employer's consent, directly or
indirectly, compete with the Employer by:
(i) performing the duties of an officer, manager, owner,
director, consultant, partner, salesman or stockholder (except as a stockholder
less than 5% interest in a corporation which is traded on a national exchange or
over-the-counter), in or for any business entity engaged in direct competition
with the Employer, or
(ii) perform activities or duties substantially similar or
related to the functions, activities or duties performed by Employee for the
Employer from time to time for any business entity engaged in direct competition
with the Employer.
A business entity shall be considered to be "in direct competition" with
the Employer if it is engaged in the design, sale, manufacture, distribution,
servicing or repairing of machinery or equipment used for or in connection with
the distribution of lottery tickets or any other business that Employer engages
in as of the date the Employee terminates employment with the Employer.
The restrictions in this Section will apply to all functions, activities
and duties performed in a Restricted Territory, or performed for or on behalf of
any business which is located in or does business in a Restricted Territory,
regardless of where Employee actually performs such functions, activities or
duties. "Restricted Territory" means:
(a) Any state within the United States, or any other country or
political or geographic subdivision thereof, in which Employer has submitted a
bid to function as a contractor or subcontractor furnishing or maintaining
lottery ticket machines within the twelve months immediately proceeding
Employee's termination of employment.
-3-
<PAGE> 5
The parties expressly agree and acknowledge that the nature of Employer's
business is unique, in that Employer's services are furnished on a state-wide,
or region-wide, or in some instances country-wide basis, and that therefore the
restrictions herein are reasonable and necessary of for the protection of
Employer's legitimate business interests.
(b) Covenant Related to Customers. Employee will not in any way, directly
or indirectly, except as an employee of the Employer, solicit, divert or take
away, or attempt to solicit, divert to take away, the business of any of the
customers of the Employer which were served or solicited by Employee for the
Employer during the term of his/her employment, or any of the prospective
customers of the Employer that Employee served or solicited for the Employer
within one (1) year prior to the termination of his/her employment, for the
purpose of selling to any such customer or prospective customer any product or
service substantially similar to any product or service that was offered by the
Employer during his employment.
Employee will not directly or indirectly attempt or seek to cause any of
the foregoing customers or prospective customers of the Employer to refrain
from maintaining or acquiring from or through the Employer any product or
service that was offered by the Employer during his employment and will not
assist any other person to do so.
(c) Covenant Related to Other Employee. Employee will not solicit for
employment, directly or through or on behalf of any other party, any persons who
are then employees of the Employer, or induce or attempt to induce the
termination of any such person's employment with the Employer.
10. Confidentiality and Nondisclosure. Employee acknowledges and agrees
that, during the term of this Agreement, he will have access to trade secrets
and other confidential information unique to Employer's business and that the
disclosure or unauthorized use of such trade secrets or confidential information
by Employee will injure Employer's business. Therefore, Employee agrees that he
will not, at any time during or after the term of this Agreement, use, reveal or
divulge any trade secrets or any other confidential information which while not
trade secrets or information unique to Employer's business, is highly
confidential and constitutes a valuable asset of Employer by reason of the
material investment of Employer's time and money in the production of such
information. Employee agrees that during the term of this Agreement and for a
period of three (3) years therefore, he will not use, reveal or divulge any
general confidential and customer information.
11. Miscellaneous.
(a) The Agreement may not be modified except by an agreement in
writing executed by the parties.
(b) The Agreement contains the entire understanding of the parties
relating to the subject matter contained herein.
-4-
<PAGE> 6
(c) All notices required to be given under the Agreement shall be
given in writing by personal delivery or by first class mail.
(d) The invalidity or unenforceability of any provision hereof shall
not affect the validity or enforceability of any other provision.
(e) Upon termination of the Agreement, the Agreement and its terms
and conditions shall be deemed terminated for all purposes, except of the
surviving covenants and provisions set forth herein. Upon termination of this
Agreement, if Employee continues in employment with the Employer, Employee shall
be deemed a common law employee subject to all policies and procedures of the
Employer, applicable to Employee as one of its personnel, as adopted from time
to time.
12. Property of Employer. The Employee acknowledges that from time to time
in the course of providing services pursuant to this Agreement he shall have the
opportunity to inspect and use certain property, both tangible and intangible,
of the Employer and the Employee hereby agrees that said property shall remain
the exclusive property of the Employer and the Employee shall have no right or
proprietary interest in such property, whether tangible or intangible,
including, without limitation, the employer's customer and supplier lists,
contract forms, books of account, computer programs and similar property.
13. Notice, Monetary Damages and Equitable Relief.
(a) The Employee acknowledges that the services to be rendered by him
are of special, unique, unusual, extraordinary and intellectual character, which
gives them a peculiar value and the loss of which cannot reasonably or
adequately be compensated in damages in an action at law; and that a breach by
him of any of the provisions contained in this Agreement will cause the Employer
irreparable injury and damage. The Employee further acknowledges that he
possesses unique skills, knowledge and ability and that any material breach of
the provisions of this Agreement would be extremely detrimental to the Employer.
By reason thereof, the Employee agrees that the Employer shall be entitled, in
addition to any other remedies it may have under this Agreement or otherwise, to
injunctive and other equitable relief to prevent or curtail any breach of this
Agreement by him.
(b) The Employer and the Employee agree that in the event of a breach
of the provisions of this Agreement by the Employee, that Employer shall give
the Employee written notice of such breach and may terminate the Agreement
pursuant to Section 5 hereof. In the event of a breach by affiliates shall be
entitled to recover full monetary damages for such breach and shall have a right
of set off against any sums or property owing to Employee, under this or any
other agreement.
14. Successors Bound: Assignability. The Agreement shall be binding upon
the Employer and the Employee, their respective heirs, executors, administrators
or successors in interest, including without limitation,
-5-
<PAGE> 7
any corporation into which the Employer may be merged or by which it may be
acquired. The Agreement is nonassignable except that the Employer's rights,
duties and obligations under this Agreement may be assigned to its acquiror in
the event the Employer is merged, acquired or sells substantially all of its
assets.
15. Severability. In the event that any one or more of the provisions of
this Agreement or any word, phrase, clause, sentence or other portion thereof
shall be deemed to be illegal or unenforceable for any reason, such provision or
portion thereof shall be modified or deleted in such a manner so as to make this
Agreement as modified legal and enforceable to the fullest extent permitted
under applicable law.
16. Entire Agreement. This Agreement constitutes the entire Agreement
between the parties hereto with regard to the subject matter hereof, and there
are not agreements, understandings, specific restrictions, warranties or
representations relating to said subject matter between the parties other than
those set forth herein or herein provided for. Neither this Agreement nor any
provision hereof may be changed, waived, discharged or terminated orally, but
only by an agreement in waiver, discharge or termination is sought.
17. Prior Agreements. This Agreement supersedes and replaces in its
entirety any and all other employment or compensation agreements entered into
between the Employer and the Employee prior to the date of this Agreement,
including (but not limited to) that certain Employment Agreement dated April 27,
1979, and that certain Employment Agreement dated May 1, 1982, and that certain
Compensation and Benefits Agreement between the Employer and the Employee dated
June 5, 1990 and that certain Employment Agreement dated April 21, 1994.
18. Governing Law. The terms of this Agreement shall be governed by and
construed in accordance with the laws of the State of Ohio.
-6-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
"EMPLOYER"
INTERNATIONAL LOTTERY, INC.
By: /s/ Gary S. Bell
------------------------------------
Chairman, Compensation Committee
By: /s/ Gary S. Bell - /s/
------------------------------------
Secretary Counsel
"EMPLOYEE"
/s/ L. Rogers Wells, Jr.
----------------------------------------
L. Rogers Wells, Jr.
-7-
<PAGE> 1
EXHIBIT 11
INTERLOTT TECHNOLOGIES, INC.
COMPUTATION OF EARNING PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <S> <C> <C>
Weighted average common
shares outstanding during
the period 3,210,000 3,210,000 3,210,000 3,210,000
Net income 436,709 $ 726,384 $1,451,654 $1,320,597
Net income per share $ 0.14 $ 0.13 $ 0.45 $ 0.41
Assuming full dilution:
Weighted average common
shares outstanding during
the period 3,210,000 3,210,000 3,210,000 3,210,000
Assuming exercise of
options 4,870 2,000 2,661 2,000
Weighted average common
shares outstanding as
adjusted 3,214,870 3,212,000 3,212,661 3,212,000
Net income $ 436,709 $ 726,384 $1,451,654 $1,320,597
Earning per common share
assuming full dilution $ 0.14 $ 0.13 $ 0.45 $ 0.41
</TABLE>
<PAGE> 1
ANNUAL REPORT
PHOTO: Woman on phone holding phone card
PHOTO: Woman holding VISA(R) cash card
PHOTO: Man holding lottery tickets
VISIT OUR WEBSITE...
WWW.INTERLOTT.COM
PHOTO: Hand removing phone card from PCDM
PHOTO: Hand removing smart card from SCDM
PHOTO: Hand removing Instant Ticket from ITVM
TO DISTRIBUTE
DISPENSING TECHNOLOGIES
THE SCIENCE OF TECHNICAL PROCESSES
<TABLE>
<CAPTION>
Table of Contents
- -----------------------------------------------------------
<S> <C>
To Our Stockholders 1
- -----------------------------------------------------------
Lottery 3
- -----------------------------------------------------------
Phone Card and Other Card Markets 4
- -----------------------------------------------------------
International Markets 6
- -----------------------------------------------------------
Selected Financial Data 7
- -----------------------------------------------------------
Management's Discussion & Analysis 7
- -----------------------------------------------------------
Financial Statements 10
- -----------------------------------------------------------
Corporate Data & Stockholder Information 17
- -----------------------------------------------------------
</TABLE>
[INTERLOTT TECHNOLOGIES, INC. LOGO]
<PAGE> 2
inside front cover/1 3/26/98 4:09 PM Page 1
During the first quarter of 1997, the Board of Directors of International
Lottery, Inc. voted to change the name of the Company to Interlott Technologies,
Inc. to better reflect and communicate our expertise with high technology
dispensing devices for an unlimited variety of applications. Current trends in
product line interest indicate imminent shifts from the present income revenue
breakdown of [ ] 87% Lottery, [ ]3% Phone Card, [ ]9% Service Contracts, and [ ]
less than 1% other interests, to a more balanced distribution of revenue
sources.
Interlott Technologies, Inc. (dba Interlott) designs, manufactures, sells,
leases and services dispensing machines for the lottery, telecommunications and
financial services industries. Interlott is the leading provider of Instant
Ticket Vending Machines (ITVMs) and Pull Tab Vending Machines (PTVMs) for U.S.
and international lotteries. Interlott continues to offer a full line of Phone
Card Dispensing Machines (PCDMs) and Smart Card Vending Machines (SCDMs), as
well.
PHOTO:
Thomas W. Stokes
Jerome J. Cain, and
David F. Nichols
To our Stockholders:
PHOTO:
Portrait of L. Rogers
Wells, Jr.
Dear Fellow Stockholders:
I am pleased to report that 1997 was a continuation of our growth as a premier
provider of dispensing technologies. We continue to broaden our leading position
in the lottery industry, while expanding our presence in the high potential
telephone market and experiencing substantial growth in interest and activity
in the international marketplace. All of these activities have combined to
provide strong financial results.
Pre-tax income more than doubled on a 3% revenue increase illustrating the value
of our emphasis on leasing rather than selling our dispensing equipment. Cash
flow from operations (net income plus depreciation and amortization) increased
to a new high of $5,595,062 or $1.74 per share. The 10% increase in net income
is significant when the tax rate of 40% for 1997 is compared to the tax benefit
rate of 17% in 1996.
During 1997, we deployed machines, under leases to Florida, Kansas, and New
Mexico, in addition to deploying machines under a new lease contract to Ohio.
Also, during 1997 we were chosen to provide machines to the District of Columbia
Lottery and were awarded the new contract for additional machines to be provided
to the Maryland Lottery. In total, we are now the vendor of choice in 22 of 32
U.S. lotteries employing vending technology for their instant/scratch-off ticket
program.
The majority of machines deployed in 1997 were our twelve bin instant ticket
vending machines, which provide the retailer with a greater variety of tickets
being sold through our vending technology while using less floor space than our
previous eight game models. We also provided to the Kansas Lottery our new pull
tab/break open ticket dispensing equipment, and early results indicate that this
machine continues the success in increasing sales that our other models have
provided to the lotteries.
International interest in our vending technology increased during 1997, with
machines being shipped to Denmark, Iceland, Ireland, and Israel. We fully
anticipate continued growth in the international marketplace during 1998 and
beyond.
During 1997 the popularity of prepaid telephone cards expanded significantly
with sales of the cards in the U.S. reaching $1 billion and industry
expectations of a market in the U.S. for the cards exceeding $2.5 billion by the
year 2000. We believe that this industry expansion will drive the demand for
dispensing technology similar to the growth in the lottery industry.
In 1997 the Company changed its name to Interlott Technologies, Inc. to reflect
the Company's growing diversity as a provider of leading-edge dispensing
technologies for a variety of industries worldwide. In 1998 our goal will be to
accelerate the growth of our new markets, while further developing our core
lottery business, leveraging Interlott's position as a premier provider of
dispensing technology and products. We will continue to place an emphasis on
leasing rather than selling equipment to build on our annuity of future
revenues which should enhance profitability and stockholder value.
In May, I was proud to announce that our Board of Directors appointed David F.
Nichols president of the Company. He replaced Edmund F. Turek, our founder and
a great contributor to the development of Interlott, who now serves as vice
chairman. I can think of no one more qualified than David to run our day-to-day
operations. He spearheaded our entry into many of our new markets and was a
leader in cultivating our lottery business.
On behalf of management and our Board of Directors, I would like to express our
appreciation for the continued support of Interlott's employees, customers,
vendors, and stockholders. I look forward to reporting upon further progress in
1998.
/s/ L. Rogers Wells, Jr.
Sincerely,
L. Rogers Wells, Jr.
Chairman of the Board and
Chief Executive Officer
1
[PAGE] 2
*PHOTO:
OH 12 game ITVM
WI 8 game ITVM and
KS 8 game PTVM
<PAGE> 3
LOTTERY
Sales of instant scratch-off tickets constitute nearly 50% of the revenue earned
by U.S. lotteries annually. But with over-the-counter sales, the popularity and
profitability of instants has been overshadowed by the time consuming
transactions, lack of security, and labor-intensive accounting incurred by
retailers. Interlott's ITVM revolutionized instant ticket sales when introduced
in 1990, and our complete product line continues to multiply sales nearly a
decade later. Interlott ITVMs showcase up to twelve instant games while
providing complete security and detailed sales reports to lottery retailers. Our
patented bursting mechanism, which cleanly separates each ticket from the
fanfolded ticket pack without cutting or tearing, is the key feature that sets
Interlott's ITVMs apart from the competition. Twenty-two of the 32 states
that utilize ITVMs designate Interlott as their vendor of choice.
PHOTO: Interlott's patented burster
Successful ticket sales, ITVM reliability, and efficient maintenance resulted in
several new contract awards, contract renewals, and additional ITVM orders
during 1997. Interlott sold or leased ITVMs to four new states while receiving
substantial orders for additional equipment from eight existing customers. The
Ohio Lottery has leased Interlott ITVMs since early in 1992. During this time,
more than 300 million tickets have been dispensed through our ITVMs, returning
over $85 million to the state after payouts and administrative costs. The
Florida Lottery kicked off 1997 with the installation of 500 twelve game ITVMs
statewide. Players enjoyed the new convenience so much that instant sales shot
up 22% over 1996 figures.
Success stories like these have prompted lotteries such as Kansas, Iowa and
Indiana to look to ITVMs to promote slower moving, lower margin lottery products
such as pull tabs or break open tickets. Interlott offers the most compact and
efficient PTVMs available to date. In the first weeks after installation of just
50 PTVMs, Kansas' pull tab sales were boosted by over $100,000, an increase of
over 50%. All indications are that other states will follow suit in 1998.
Through technological innovation, we continue to focus on expansion of equipment
features, reduction of floor space required, and attraction of the greatest
number of players. The Ohio Lottery has been the first in the nation to take
advantage of the dial-up modem capabilities of our ITVMs. Each newly installed
ITVM is capable of calling up the central host system to transmit detailed daily
and lifetime sales data. The lottery is able to analyze this valuable
information on an ongoing basis to determine not only what types of locations
are best for instant sales, but specifically which games are the most popular.
PHOTO: Interlott 12 game ITVM
Installing the first 500 new Interlott 12 game ITVMs in Florida during the first
quarter of 1997 sent positive shock waves from retailer locations straight to
the lottery's profit column.
PHOTO: Interlott PTVM advertisement
State lotteries are amazed to find that boosting pull tab sales is as easy as
installing an Interlott PTVM along side of an Interlott ITVM. Our advertisement
supports this growing trend.
GRAPH: Percentage of lotteries that utilize ITVMs
69% of the U.S. lotteries that utilize ITVMs designate Interlott as their vendor
of choice.
PHOTO: Service representative pushing keypad
The majority of our lottery customers also have service contracts with us to
provide preventative maintenance and on-site repair. These contracts accounted
for 9% of overall revenue in 1997.
PHOTO: Man and woman viewing chart on computer screen
The dial-up modem capability of our ITVMs provides invaluable up-to-the-minute
sales data to lotteries for detailed marketing analysis.
<PAGE> 4
PHONECARD
AND OTHER CARD MARKETS
If 1997's rising interest in PCDMs is any indication of future market potential,
then Interlott's patience is in line for a payoff. More frequent inquiries and
test machine orders are leading to a steady increase in purchased or leased
PCDMs, more notably by the top four telecommunications companies but also by
many start-up phone card companies which have built revenue and reputation from
over-the-counter sales. Sales to these younger companies represent more than
half of Interlott's PCDM sales in 1997. It is becoming almost imperative for
long distance carriers to offer PCDMs to their vendors as viable solutions to
security and administrative concerns connected with handling this higher priced,
profitable product.
Since their introduction to the U.S. in the early 1990's, prepaid phone cards
have received measurable success with annual growth rates of more than 33%.
Industry estimates for 1998 revenues are ranging from $750 million to $1.3
billion, with sales predicted to reach $2.5 billion by the year 2000. With the
increased installation of PCDMs, the effect on overall sales figures is becoming
more apparent, as shown in the charts below. Paralleling our position as of 1992
with the growth level of ITVMs in the lottery industry, we anticipate
significant growth in PCDM sales. We did it before and we believe we can do it
again.
PHOTO: Montage of plastic cards
OTHER CARD MARKETS
Our unique, patented ShurShuttle(R) dispensing mechanism dispenses individual
paper or plastic cards of any thickness without jamming. The beauty of this
mechanism is that it can be "housed" in any secure cabinet for installation in
virtually any environment where the need for card vending becomes apparent:
public transit and parking cards, theme park debit cards, and smart cards for
closed systems such as military bases and college campuses. In such locations
where smart cards can be used for nearly all purchases and transactions, the
initial investment in vending and validation equipment is necessary and
immediately appreciated. Familiarity with such systems in these environments is
paving the way for comfortable acceptance of the smart card, as we steadily move
toward a society less dependent on cash.
In contrast, an antiquated phone system in Europe coupled with the high cost of
processing credit card transactions, has forced Europeans to accept and use
smart cards as cash on a daily basis, while Americans have been slower to
embrace the idea. Several ongoing tests are being conducted across the country.
Interlott remains the only VISA(R) certified provider of smart card dispensing
machines. With U.S. sales of smart cards expected to approach $600 million by
the year 2000, up from merely $15 million in 1996, we wait patiently for the
market to catch up with our advanced technology.
PHOTO: Speedway DC4 PCDM
PCDM sales to start-up phone card companies, which are finding it necessary to
provide secure, dependable dispensing solutions for their vendors, increased
dramatically in 1997.
PHOTO: King's Island DC2 PCDM
Several card vending test studies are being conducted in controlled, closed
environments. Results will be evaluated closely by all those involved.
PHOTO: Close-up of ShurShuttle(R) mechanism
Any paper or plastic card can be efficiently dispensed by means of our patented
ShurShuttle(R) dispensing technology for a limitless variety of end users.
PHOTO: CPC2 PCDM
The Interlott CPC2 was engineered and designed for use at retail checkouts
where counter space is at a premium.
PHOTO: Woman removing card from SCDM
Interlott is the only VISA(R) certified provider of smart card dispensing
machines.
<PAGE> 5
PHOTO: Woman holding phone card talking on phone in front of both a DC4 and DC2
PCDM
INTERNATIONAL
MARKETS
The year 1997 was one of realization for foreign markets, both in the lottery
and the telecommunications industries. ITVMs were proven to be very successful
tools in selling instant lottery tickets in the U.S. This success was recognized
by the 50 or more international lotteries that also market instant tickets.
Simply stated, in the early years, the Interlott sales team had to knock on
their doors to present the benefits and features of our ITVM and PCDM lines. In
contrast, the end of 1997 found lotteries from all corners of the world knocking
on our door with inquiries about every aspect of our product lines and
performance results.
Iceland, Ireland, Norway, and Spain have purchased equipment and are witnessing
very positive sales results. Post-test contracts are currently being negotiated
with several other countries. Quebec in early 1998 became the first of our
Canadian neighbors to award Interlott a contract for the purchase of ITVMs. The
economic status of the progressive Western European lotteries is nearly a mirror
image of those in the U.S. Interest by Western European lotteries in ITVMs,
therefore, is extremely keen.
The stabilizing of economies in South American countries has been very positive
for Interlott. In late 1996, Interlott entered into an agreement with Garza
Argentina to manufacture PCDMs for distribution throughout South America. This
agreement to participate with a leading fabrication firm in South America allows
Interlott to distribute our product throughout the region at a more favorable
cost to Interlott. Desire for Interlott's proprietary dispensing technology is
expanding worldwide, particularly in the telecommunications and financial
services industries. This interest, combined with the growing popularity of
public lotteries in many foreign countries, should enhance the international
market opportunities available to Interlott in the future.
PHOTO: Iceland 6 game ITVM
Six game ITVMs are working to increase instant ticket sales in Iceland.
PHOTO: Telerj 2 bin PCDM
PCDMs have been distributed throughout South America.
PHOTO: 8 game ITVM for Israel
The National Lottery of Israel has received an initial order of ITVMs.
<PAGE> 6
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Year Ended
- ----------------------------------------------------------------------------------------------------------
Dec.31 Dec. 31 Dec. 31 Dec. 31 Dec. 31
1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
- ----------------------------------------------------------------------------------------------------------
Machine sales $ 3,688,528 40,650 9,746,339 5,596,698 4,567,441
- ----------------------------------------------------------------------------------------------------------
Machine leases 3,335,420 6,093,528 9,132,132 11,766,623 12,828,823
- ----------------------------------------------------------------------------------------------------------
Other 199,785 250,442 435,137 1,235,368 1,669,160
- ----------------------------------------------------------------------------------------------------------
Net revenues 7,223,733 6,384,620 19,313,608 18,598,689 19,065,424
- ----------------------------------------------------------------------------------------------------------
Net income (loss) 276,907 (932,100) 1,987,219 1,320,597 1,451,654
- ----------------------------------------------------------------------------------------------------------
Net income (loss) per share(1) 0.13 (0.32) 0.62 0.41 0.45
- ----------------------------------------------------------------------------------------------------------
Depreciation and amortization 1,028,844 1,884,855 2,982,547 3,902,387 4,143,408
- ----------------------------------------------------------------------------------------------------------
Leased ITVMs, less
accumulated depreciation 4,556,743 8,392,946 10,779,929 10,940,398 14,740,642
- ----------------------------------------------------------------------------------------------------------
Total assets 10,236,989 15,020,321 20,483,686 20,992,733 24,874,884
- ----------------------------------------------------------------------------------------------------------
Total debt 10,750,614 5,398,103 9,040,784 7,715,140 12,545,661
- ----------------------------------------------------------------------------------------------------------
Redeemable preferred stock 1,335,000 1,335,000 1,335,000 1,335,000 1,335,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
MANAGEMENT'S DISCUSSION & ANALYSIS
The words "expect", "anticipate", "intend", "plan", "believe", "seek",
"estimate" and similar expressions used in this report are intended to identify
forward-looking statements, although this report also contains other
forward-looking statements. Any forward-looking statements in this report are
made pursuant to the "safe harbor" provisions of the Private Securities
Litigation Act of 1995. Investors are cautioned that actual results may differ
substantially from such forward-looking statements. Forward-looking statements
involve risks and uncertainties including, but not limited to, continued
acceptance of the Company's products and services in the marketplace,
competitive factors, new products and technological changes, dependence upon
third party vendors, a limited number of customers, political and other
uncertainties related to customer purchases, and other risks detailed in the
Company's periodic filings with the Securities and Exchange Commission.
OVERVIEW
The Company's revenue base consists of (i) payments from ITVM and PCDM leases,
(ii) sales of ITVMs and PCDMs, (iii) and to a lesser extent, sales of parts for
ITVMs and PCDMs and service agreements. The Company emphasizes leasing rather
than selling ITVMs to lotteries when possible. Leases provide the Company with a
consistent revenue stream, opportunities to generate income on financing, and
the potential to deploy a greater number of ITVMs within a lottery's budget due
to the lower initial cash outlay required by the lottery. Leasing ITVMs also
gives the lotteries the flexibility to enhance their ITVMs in the future with
new technology from the Company. On the other hand, leasing ITVMs requires the
Company to invest capital or otherwise finance the manufacture of ITVMs, unlike
sales of ITVMs which result in the receipt of payment in full upon delivery of
the ITVMs. When the Company sells ITVMs, the Company generally is able to
manufacture and deliver the ITVMs and receive full payment for them before it
must pay for the materials used to manufacture the ITVMs. Nevertheless, the
Company believes that the advantages of leasing ITVMs as described above,
justify the initial capital investment or financing costs required to
manufacture ITVMs for lease.
For similar reasons, the Company emphasizes leasing rather than selling PCDMs to
providers of prepaid telephone cards. As with ITVMs, the Company believes that
the benefits to the Company of leasing PCDMs warrant the initial capital
investment required to manufacture PCDMs. However, the great majority of the
PCDMs deployed to date, have been sold rather than leased.
The Company historically has experienced fluctuations in its financial results
due to its dependence upon a relatively small number of customers, and the
unpredictable nature, timing and results of the lotteries' contract bid and
award process. The Company's revenues and capital expenditures can vary
significantly from period to period because the Company's sales cycle may be
relatively long and because the amount and timing of revenues and capital
expenditures depend on factors such as the amount and timing of awarded
contracts, changes in customer budgets and demands, and general economic
conditions. Operating results may be affected by the lead time sometimes
required for business opportunities to result in signed lease or sales
agreements, working capital requirements associated with manufacturing ITVMs
pursuant to new orders, increased competition and the extended time that may
elapse between the award of a contract and the receipt of revenues from the sale
or lease of ITVMs.
RESULTS OF OPERATIONS
The table at right presents selected financial information derived from the
Company's statements of income expressed as a percentage of revenues for the
years indicated.
<TABLE>
<CAPTION>
Year Ended
----------------------------
Dec. 31 Dec. 31 DEC. 31
1995 1996 1997
<S> <C> <C> <C>
Revenues
- --------------------------------------------------------------------------------
Machine sales 50.5% 30.1% 24.0%
- --------------------------------------------------------------------------------
Machine leases 47.3 63.3 67.3
- --------------------------------------------------------------------------------
Other 2.2 6.6 8.7
- --------------------------------------------------------------------------------
Total revenues 100.0 100.0 100.0
- --------------------------------------------------------------------------------
Cost of revenues, excluding depreciation 52.3 47.6 41.5
- --------------------------------------------------------------------------------
Depreciation 14.7 20.3 20.8
- --------------------------------------------------------------------------------
Gross margin 33.0 32.1 37.7
- --------------------------------------------------------------------------------
Selling, general and administrative expenses 18.3 18.6 18.3
- --------------------------------------------------------------------------------
Research and development costs .8 3.6 2.9
- --------------------------------------------------------------------------------
Operating income 13.9 9.9 16.5
- --------------------------------------------------------------------------------
Interest expense, net 3.6 3.8 3.7
- --------------------------------------------------------------------------------
Income before income taxes 10.3 6.1 12.8
- --------------------------------------------------------------------------------
Income taxes -- (1.0) 5.2
- --------------------------------------------------------------------------------
Net income 10.3% 7.1% 7.6%
- --------------------------------------------------------------------------------
</TABLE>
SUMMARY QUARTERLY FINANCIAL DATA
Quarterly financial data for the years ended December 31, 1997 and 1996 shown
here (in thousands, except for per share data).
<TABLE>
<CAPTION>
1996 FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $4,544 5,324 4,089 4,642
- --------------------------------------------------------------------------------
Gross profit 1,521 1,601 1,392 1,449
- --------------------------------------------------------------------------------
Net earnings 166 435 288 432
- --------------------------------------------------------------------------------
Basic earnings per share 0.05 0.14 0.09 0.13
- --------------------------------------------------------------------------------
Diluted earnings per share 0.05 0.13 0.09 0.13
- --------------------------------------------------------------------------------
<CAPTION>
1997 FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $4,164 6,931 3,841 4,129
- --------------------------------------------------------------------------------
Gross profit 1,232 2,478 1,527 1,941
- --------------------------------------------------------------------------------
Net earnings 30 777 208 437
- --------------------------------------------------------------------------------
Basic earnings per share 0.01 0.24 0.06 0.14
- --------------------------------------------------------------------------------
Diluted earnings per share 0.01 0.24 0.06 0.13
- --------------------------------------------------------------------------------
</TABLE>
The Company recognized revenues from foreign sources of $44,332, $60,961 and
$431,714 for the years ended December 31, 1995, 1996, and 1997, respectively.
7
<PAGE> 7
1996 COMPARED TO 1997
Total revenues increased by $466,735 or 3% from $18,598,689 in 1996 to
$19,065,424 in 1997, due primarily to a $1,062,200 increase in lease revenues
accompanied by a $433,792 increase in other revenues offset by a $1,029,257
decrease in sales of ITVMs and PCDMs. Revenues from leases increased by 9% from
$11,766,623 in 1996 to $12,828,823 in 1997, resulting from the continuation of
leases in nine states with the addition of leases in three states, and the
renewal of a lease in another state which had reached the conclusion of the
original term. Revenues from sales decreased by 18% from $5,596,698 in 1996 to
$4,567,441 in 1997, as a result of a decrease from 1,254 ITVMs and PCDMs sold in
1996 to 821 ITVMs and PCDMs sold in 1997. The decrease of units sold was
partially offset by a greater number of higher priced units sold in 1997 as
compared to those sold in 1996. The total number of ITVMs and PCDMs under lease
increased to 6,834 in 1997 as a result of deployment of 1,547 units, offset by
the retirement of 833 units. Lease revenues were 63% and 67% of total revenues
for 1996 and 1997, respectively. Revenues from sales of ITVMs and PCDMs were 30%
and 24% of total revenues in 1997 and 1996, respectively. Other revenues
increased by 35% from $1,235,368 in 1996 to $1,669,160 in 1997 as ITVMs were
deployed in one additional state and machines deployed prior to 1997, generated
revenue for the entire year.
Cost of revenues for machine sales and other decreased 28% from $6,052,763 in
1996 to $4,378,669 in 1997. This decrease reflects the 35% decrease in number of
machines sold in 1997, offset by the higher cost of the higher priced units sold
in 1997. Cost of revenues for leased ITVMs and PCDMs, excluding depreciation,
increased 26% from $2,839,162 in 1996 to $3,584,017 in 1997. The increase in
cost of leased revenues was the result of higher warranty parts costs and higher
personnel and subcontractor costs related to the larger number of machines
deployed during 1997. Cost of lease revenues, excluding depreciation, includes
all costs of preventative maintenance and warranties under various service
agreements for all ITVMs leased by the Company.
Depreciation of ITVMs and PCDMs increased by 4% from $3,744,065 in 1996 to
$3,924,244 in 1997. The increase was lower than the related increase in number
of ITVMs and PCDMs, as certain units had been fully depreciated by the end of
1996.
Selling, general and administrative expenses increased 1% from $3,461,364 in
1996 to $3,492,020 in 1997. Selling, general and administrative expenses as a
percentage of revenues, decreased slightly from 19% in 1996 to 18% in 1997.
Research and development costs decreased by 18% from $665,449 in 1996 to
$545,039 in 1997. This decrease resulted from the wind-down of major projects
such as the SCDM. The Company maintains its philosophy of using contractors as
the primary source of research and development efforts, allowing the Company to
focus its expenditures on the technical expertise necessary to accomplish the
specific project.
Operating income increased by 71% from $1,835,886 in 1996 to $3,141,435 in 1997.
This increase resulted from the continuing benefit of revenues derived from
machines deployed in prior periods, including machines which had been fully
depreciated, combined with the control of operating expenses.
Net interest expense decreased by 1% from $708,289 in 1996 to $701,381 in 1997.
The decrease reflects the increased interest income associated with the first
lease which has been recognized as a sales type lease rather than an operating
lease. To a lesser extent, interest expense was affected by the reduced interest
rate of the new credit facility entered into in October 1997.
The significant change in income taxes resulted from the Company having used
available loss carryovers in 1996 and as a result, incurring taxes at an
effective tax rate of 40% in 1997.
As a result of the above factors, the Company's net income increased by 10% from
$1,320,597 in 1996 to $1,451,654 in 1997.
1995 COMPARED TO 1996
Total revenues decreased by $714,919 or 4% from $19,313,608 in 1995 to
$18,598,689 in 1996, due primarily to a $4,149,641 decrease in sales of ITVMs
and PCDMs, offset by a $2,634,491 increase in lease revenues and a $800,231
increase in other revenues. Revenues from sales of ITVMs and PCDMs decreased by
43% from $9,746,339 in 1995 to $5,596,698 in 1996 corresponding to a decrease of
910 units from 2,164 ITVMs sold in 1995 to 1,103 ITVMs and 151 PCDMs sold in
1996. Lease revenues increased by 29% from $9,132,132 in 1995 to $11,766,623 in
1996, due to leases of ITVMs to the Arizona, Colorado, Georgia, Indiana, Iowa,
Maine, New Hampshire, Ohio, Rhode Island, and Texas lotteries. The total number
of ITVMs under lease increased by 1,043, or 21%, from 5,072 at December 31, 1995
to 6,115 at December 31, 1996. As a percent of total revenues, lease revenues
were 47% and 63%, while sales revenues were 50% and 30%, in 1995 and 1996,
respectively. The increase in lease revenues and decrease in sales revenues from
1995 to 1996 is due primarily to the cumulative effect of the incremental
revenue from machines deployed under leases in 1996 added to continuing revenues
from machines deployed under leases in 1995 and prior, combined with the
decrease in the number of units sold in 1996, as compared to the number of units
sold in 1995. This trend reflects the Company's emphasis on leasing of
equipment. Other revenues increased by $800,231 from $435,137 in 1995 to
$1,235,368 in 1996, a 184% increase. This increase is the result of the
continued maintenance revenues from ITVMs deployed under the Maryland and New
York contracts and sales of replacement parts to the Kentucky, Oregon, and West
Virginia lotteries.
Cost of revenues for machine sales and other decreased by $2,055,814, or 25%,
from $8,108,577 in 1995 to $6,052,763 in 1996. This decrease reflects a 42%
decrease in units from 1995 to 1996, partially offset by an increase in the
number of higher priced units sold during 1996. Cost of revenues for leased
ITVMs, excluding depreciation, increased by $846,909 from $1,992,253 in 1995 to
$2,839,162 in 1996, a 43% increase. As a percentage of lease revenues, cost of
revenues for leased ITVMs, excluding depreciation, increased from 22% in 1995 to
24% in 1996. The 27% increase in cost of revenues of leased equipment from 1995
to 1996 was primarily due to an increase in warranty parts cost and service
subcontract costs resulting from the greater number of machines deployed. Cost
of lease revenues, excluding depreciation, includes all costs of preventive
maintenance and warranties under various service agreements for all ITVMs leased
by the Company.
Depreciation of ITVMs and PCDMs increased by $902,786 from $2,841,279 in 1995 to
$3,744,065 in 1996, an increase of 32%. This increase resulted from the
additional leased ITVMs and PCDMs deployed in 1996, as well as the full year of
depreciation on ITVMs and PCDMs deployed in 1995 and prior years.
Selling, general and administrative expenses decreased slightly from $3,541,302
in 1995 to $3,461,364 in 1996, a decrease of $79,938 or 2%. Selling, general and
administrative expenses, as a percentage of revenues, increased slightly from
18% in 1995 to 19% in 1996.
Research and development costs increased by $520,139, or 358%, from $145,310 in
1995 to $665,449 in 1996. This increase reflected the continuing development of
the Company's SCDM and the initial development of two variations of the
Company's ITVM dispensing technology to meet the perceived needs of the lottery
industry. The increased expenditures were primarily amounts paid to contractors,
in line with the Company philosophy that the use of contractors does not commit
the Company to continuing expenses at the completion of the project.
Operating income decreased by $849,000 or 32%, from $2,684,887 in 1995 to
$1,835,886 in 1996. When revenue is recognized as a sale, the entire gross
margin is recognized in the period of shipment, whereas the recognition of
revenue as a lease spreads the recognition of the gross margin over the life of
the lease. The decrease in operating income from 1995 to 1996 reflects the
decrease in gross margin resulting from an increase in the revenues reported as
leases from 47% of revenues in 1995 to 63% of revenues in 1996 and the decrease
of revenues reported as sales from 50% of revenues in 1995 to 30% of revenues in
1996. The increase reflects slightly higher average borrowings in 1996 as
compared to 1995, offset by slightly lower interest rates.
8
<PAGE> 8
The Company reported an income tax benefit for 1996 as compared to no tax
provision in 1995. This benefit results from the recognition of the value of
future net operating loss carryovers, offset by the current provision for taxes
on corporate income.
As a result of the above factors, the Company's net income decreased by $666,622
or 34%, from $1,987,219 in 1995 to $1,320,597 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased 34% from $5,446,262 in 1996
to $7,281,457 in 1997. Net cash used in investing activities increased 129% from
$3,952,392 in 1996 to $9,069,836 in 1997. Net cash provided by financing
activities increased by 232% from net cash used by financing activities of
$1,352,644 in 1996 to net cash provided by financing activities of $1,742,864 in
1997.
The Company's liquidity and capital resources are directly impacted by its
decision to use leasing as a means to market its ITVMs and PCDMs. Leasing
generally offers the Company better gross margins than direct sales agreements.
However, leasing inherently requires more capital and a longer term payout than
sales. As of December 31, 1997, the Company had a total of 7,034 ITVMs and PCDMs
under operating and sales type leases.
At December 31, 1996 and 1997, the Company had working capital deficits of
$989,430 and $4,328,068, respectively. These deficits reflect the classification
of the Company's revolving credit facility as a current debt due to the revolver
clause of the facility.
At December 31, 1997, the Company was indebted to Mercantile Business Credit,
Inc. (MBC) in the aggregate principal amount of $8,978,036 pursuant to a
revolving credit agreement entered into as of October 29, 1997. The facility
permits the Company to borrow through October, 2000 with two one year extensions
to October 2002, up to $15,000,000 at the prime interest rate. Borrowings under
this facility are collateralized by all of the assets of the Company and
assignment of proceeds from lease agreements. No cash dividends may be declared
or paid until the Company has retired debt owed to two stockholders and the
preferred stock of the Company. At December 31, 1997, the Company had $6,021,964
available under this agreement.
At December 31, 1997, the Company also was indebted to stockholders in the
aggregate principal amount of $479,000 incurred to finance the manufacture of
ITVMs. See Note 7 of Notes to Financial Statements.
The Company's capital expenditures totaled $3,952,392 and $9,069,836 for 1996
and 1997, respectively. These amounts include $3,904,534 and $8,710,315 for the
manufacture of machines leased during the respective periods. Other expenditures
represent machinery and equipment costs for expanded office capacity. The
Company had no material commitments for additional capital expenditures as of
December 31, 1997 other than for the manufacture of ITVMs and PCDMs for future
lease.
At December 31, 1997, the Company had estimated tax net operating loss
carryforwards of approximately $1,200,000, which are available to offset future
federal taxable income, if any, through 2009. The use of these carryforwards is
subject to certain annual limitations due to ownership changes in 1992.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 130 defines comprehensive income
as the change in equity (net assets) of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources. The
Statement requires comprehensive income to be reported in a financial statement
that is displayed with the same prominence as other financial statements. This
statement is effective for fiscal years beginning after December 15, 1997. The
Company does not expect the implementation of the Statement to have a material
effect on the financial statements.
SFAS No. 131 changes the way public companies report information about segments
of their business in their annual financial statements and requires them to
report selected segment information in their quarterly report to shareholders.
The Statement requires that companies disclose segment data based on how
management makes decisions about allocating resources to segments and measuring
their performance. The Statement is effective for fiscal years beginning after
December 15, 1997. The Company does not expect the implementation of this
Statement to have a material effect on the financial statements.
IMPACT OF THE YEAR 2000
Like any other company, advances and changes in available technology can
significantly impact the business and operations of the Company. For example, a
challenging problem exists as many computer systems worldwide do not have the
capability of recognizing the year 2000 or the years thereafter. No easy
technological "quick fix" has yet been developed for this problem. The Company
presently believes that by converting to new software, which is scheduled for
completion in 1998, the Year 2000 problem will not pose significant operational
problems for the Company's computer systems. There can be no assurance, however,
that the systems of other companies on which the Company's systems rely also
will be timely converted or that any such failure to convert by another company
would not have an adverse effect on the Company's systems.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
We have audited the accompanying balance sheets of Interlott Technologies, Inc.
as of December 31, 1996 and 1997, and the related statements of income,
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interlott Technologies, Inc.,
as of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the years in the three year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Louisville, Kentucky
February 26, 1998
9
<PAGE> 9
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ------------------------------------------------------------------------------------------------
Current assets:
- ------------------------------------------------------------------------------------------------
Cash $ 188,586 143,071
- ------------------------------------------------------------------------------------------------
Accounts receivable, less allowance for doubtful accounts of
$115,425 in 1996 and $93,501 in 1997 3,217,019 2,918,092
- ------------------------------------------------------------------------------------------------
Investment in sales type lease, current portion -- 216,485
- ------------------------------------------------------------------------------------------------
Inventories 5,086,547 4,051,495
- ------------------------------------------------------------------------------------------------
Prepaid expenses 154,254 147,450
================================================================================================
Total current assets 8,646,406 7,476,593
================================================================================================
Property and equipment:
- ------------------------------------------------------------------------------------------------
Leased machines 20,872,885 25,718,832
- ------------------------------------------------------------------------------------------------
Machinery and equipment 318,360 519,388
- ------------------------------------------------------------------------------------------------
Building and leasehold improvements 195,225 265,854
- ------------------------------------------------------------------------------------------------
Furniture and fixtures 36,495 124,359
================================================================================================
21,422,965 26,628,433
- ------------------------------------------------------------------------------------------------
Less accumulated depreciation and amortization (10,192,638) (11,382,120)
================================================================================================
11,230,327 15,246,313
================================================================================================
Investment in sales type lease, less current portion -- 1,051,011
- ------------------------------------------------------------------------------------------------
Product development rights, net of accumulated amortization
of $440,000 in 1996 and $513,333 in 1997 660,000 586,667
- ------------------------------------------------------------------------------------------------
Deferred tax asset 456,000 252,300
================================================================================================
$ 20,992,733 $ 24,612,884
================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------
Current liabilities:
- ------------------------------------------------------------------------------------------------
Notes payable to financial institutions $ 7,230,171 8,978,036
- ------------------------------------------------------------------------------------------------
Current installments of long-term debt 5,641 968
- ------------------------------------------------------------------------------------------------
Accounts payable 924,213 1,142,065
- ------------------------------------------------------------------------------------------------
Accounts payable - related parties 306,529 328,960
- ------------------------------------------------------------------------------------------------
Accrued expenses 1,067,532 1,254,182
- ------------------------------------------------------------------------------------------------
Income taxes payable 101,750 100,450
================================================================================================
Total current liabilities 9,635,836 11,804,661
================================================================================================
Long-term debt, excluding current installments 328 --
- ------------------------------------------------------------------------------------------------
Notes payable - related parties 479,000 479,000
================================================================================================
Total liabilities 10,115,164 12,283,661
================================================================================================
Series A, preferred stock, $.01 par value, $1.00 stated value,
20,000,000 shares authorized; 1,335,000 shares issued and
outstanding in 1996 and 1997 1,335,000 1,335,000
================================================================================================
Stockholders' equity:
- ------------------------------------------------------------------------------------------------
Common stock, $.01 par value, 20,000,000 shares authorized;
3,210,000 shares issued and outstanding in 1996 and 1997 32,100 32,100
- ------------------------------------------------------------------------------------------------
Additional paid-in capital 10,376,017 10,376,017
- ------------------------------------------------------------------------------------------------
Accumulated (deficit) earnings (865,548) 586,106
================================================================================================
Total stockholders' equity 9,542,569 10,994,223
- ------------------------------------------------------------------------------------------------
Commitments and contingent liabilities $ 20,992,733 24,612,884
================================================================================================
</TABLE>
See accompanying notes to financial statements.
10
<PAGE> 10
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1995 1996 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
- -------------------------------------------------------------------------------------------------
Machine sales $ 9,746,339 5,596,698 4,567,441
- -------------------------------------------------------------------------------------------------
Machine leases 9,132,132 11,766,623 12,828,823
- -------------------------------------------------------------------------------------------------
Other 435,137 1,235,368 1,669,160
=================================================================================================
19,313,608 18,598,689 19,065,424
=================================================================================================
Cost of revenues:
- -------------------------------------------------------------------------------------------------
Machines sales and other 8,108,577 6,052,763 4,378,669
- -------------------------------------------------------------------------------------------------
Machine leases 4,833,532 6,583,227 7,508,261
=================================================================================================
12,942,109 12,635,990 11,886,930
=================================================================================================
Gross margin 6,371,499 5,962,699 7,178,494
=================================================================================================
Operating expenses:
- -------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 3,541,302 3,461,364 3,492,020
- -------------------------------------------------------------------------------------------------
Research and development costs 145,310 665,449 545,039
=================================================================================================
Total operating expenses 3,686,612 4,126,813 4,037,059
=================================================================================================
Operating income 2,684,887 1,835,886 3,141,435
=================================================================================================
Other income (expense):
- -------------------------------------------------------------------------------------------------
Interest expense (714,765) (718,642) (747,008)
- -------------------------------------------------------------------------------------------------
Interest income 17,097 10,353 45,627
=================================================================================================
(697,668) (708,289) (701,381)
=================================================================================================
Income before income taxes 1,987,219 1,127,597 2,440,054
- -------------------------------------------------------------------------------------------------
Income taxes -- (193,000) 988,400
=================================================================================================
Net income $ 1,987,219 1,320,597 1,451,654
=================================================================================================
Basic and diluted net income per share $ .62 .41 .45
=================================================================================================
</TABLE>
See accompanying notes to financial statements.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Years ended December 31, 1995, 1996 and 1997
- ------------------------------------------------------------------------------------------------------
Common Stock Additional (Accumulated
----------------------- Paid-in Deficit)
Shares Amount Capital Retained Earnings Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994 3,202,598 $ 32,026 10,307,961 (4,173,364) 6,166,623
- ------------------------------------------------------------------------------------------------------
Issuance of common stock 7,402 74 68,056 -- 68,130
- ------------------------------------------------------------------------------------------------------
Net income -- -- -- 1,987,219 1,987,219
======================================================================================================
Balances at December 31, 1995 3,210,000 32,100 10,376,017 (2,186,145) 8,221,972
- ------------------------------------------------------------------------------------------------------
Net income -- -- -- 1,320,597 1,320,597
======================================================================================================
Balances at December 31, 1996 3,210,000 32,100 10,376,017 (865,548) 9,542,569
- ------------------------------------------------------------------------------------------------------
Net income -- -- -- 1,451,654 1,451,654
======================================================================================================
Balances at December 31, 1997 3,210,000 $ 32,100 10,376,017 586,106 10,994,223
======================================================================================================
</TABLE>
See accompanying notes to financial statements.
11
<PAGE> 11
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1996 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
- --------------------------------------------------------------------------------------------------------------
Net income $ 1,987,219 1,320,597 1,451,654
- --------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash provided by operating activities:
- --------------------------------------------------------------------------------------------------------------
Depreciation and amortization 2,982,547 3,902,387 4,143,408
- --------------------------------------------------------------------------------------------------------------
Principal portion of sales type lease received -- -- 164,194
- --------------------------------------------------------------------------------------------------------------
(Increase) decrease in deferred income taxes -- (456,000) 203,700
- --------------------------------------------------------------------------------------------------------------
Gain on sale of equipment under sales type lease -- -- (447,915)
- --------------------------------------------------------------------------------------------------------------
(Increase) decrease in accounts receivable (2,078,058) 607,423 298,927
- --------------------------------------------------------------------------------------------------------------
(Increase) decrease in inventories (1,409,852) (605,391) 1,035,052
- --------------------------------------------------------------------------------------------------------------
(Increase) decrease in prepaid expenses (189,157) 183,152 6,804
- --------------------------------------------------------------------------------------------------------------
Decrease in other assets 214,242 -- --
- --------------------------------------------------------------------------------------------------------------
(Decrease) increase in accounts payable (49,079) (100,288) 217,852
- --------------------------------------------------------------------------------------------------------------
(Decrease) increase in accounts payable - related parties (204,161) 306,416 22,431
- --------------------------------------------------------------------------------------------------------------
Increase in accrued expenses 86,705 206,216 186,650
- --------------------------------------------------------------------------------------------------------------
(Decrease) increase in income taxes payable -- 101,750 (1,300)
==============================================================================================================
Net cash provided by operating activities 1,340,406 5,466,262 7,281,457
==============================================================================================================
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
- --------------------------------------------------------------------------------------------------------------
Cost of leased machines (5,228,262) (3,904,534) (8,710,315)
- --------------------------------------------------------------------------------------------------------------
Purchases of property and equipment (100,781) (47,858) (359,521)
- --------------------------------------------------------------------------------------------------------------
Receipts from collateral bonds 250,000 -- --
==============================================================================================================
Net cash used in investing activities (5,079,043) (3,952,392) (9,069,836)
==============================================================================================================
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
- --------------------------------------------------------------------------------------------------------------
Change in notes payable to financial institutions 7,051,156 (1,320,985) 1,747,865
- --------------------------------------------------------------------------------------------------------------
Repayments of long-term debt (3,296,975) (4,659) (5,001)
- --------------------------------------------------------------------------------------------------------------
Repayment of notes payable to related parties, net (111,500) -- --
==============================================================================================================
Net cash provided by (used in) financing activities 3,642,681 (1,325,644) 1,742,864
==============================================================================================================
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (95,956) 188,226 (45,515)
- --------------------------------------------------------------------------------------------------------------
Cash at beginning of year 96,316 360 188,586
- --------------------------------------------------------------------------------------------------------------
Cash at end of year $ 360 188,586 143,071
==============================================================================================================
- --------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
- --------------------------------------------------------------------------------------------------------------
Interest paid $ 696,718 643,822 671,515
- --------------------------------------------------------------------------------------------------------------
Income taxes paid $ -- -- 631,610
==============================================================================================================
</TABLE>
See accompanying notes to financial statements.
12
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1995, 1996, and 1997
1. Summary of Significant Accounting Policies
a. Business Description
Interlott Technologies, Inc. (the Company), as renamed in June 1997,
formerly International Lottery, Inc., was incorporated in February 1990
under the laws of Ohio and was reincorporated under the laws of
Delaware on March 18, 1994 and does business under the name Interlott.
The Company designs, manufactures, leases, sells and services vending
machines for use in connection with public lotteries operated by states
and foreign public entities, as well as for use by providers of prepaid
telephone cards.
b. Operating and Sales Type Leases
Depending on the specific terms contained in the lease agreement, the
lease is either classified as an operating lease or capitalized as a
sales type lease, in accordance with Statement of Financial Accounting
Standards (SFAS)No. 13, Accounting for Leases, as amended.
The net investment in operating leases consists of leased machines,
which is carried at cost, less the amount depreciated to date.
Operating lease revenue consists of the contractual lease payments and
is recognized ratably over the lease term. Expenses are principally
depreciation of the leased machines (see note 1d).
The net investment in sales types lease consists of the present value
of the future minimum lease payments. Sales type lease revenue consists
of the profit earned on the sale of the leased machines and interest
earned on the present value of the lease payments. Interest revenue is
recognized as a constant percentage return on the net investment. Any
future losses related to lease cancellations would be recorded in the
period such losses become known and estimable.
c. Inventories
Inventories consist of parts and supplies, and vending machines
assembled or in the process of assembly. Inventories are stated at the
lower of cost or market, with cost determined using standard costing
which approximates the first-in, first-out method.
d. Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated on the straight-line method over the estimated
useful lives of the assets to the Company's estimate of the assets,
residual values as follows:
<TABLE>
----------------------------------------------------------------------
<S> <C>
Leased machines 5 years
Machinery and equipment 10 years
Furniture and fixtures 5 years
----------------------------------------------------------------------
</TABLE>
Leasehold improvements are amortized on the straight-line method over
the lease term. Amortization of assets held under leasehold
improvements is included with depreciation expense.
e. Product Development Rights
Product development rights represent the exclusive rights to certain
patents and other related manufacturing technologies to manufacture and
assemble the instant ticket vending machines. The asset is amortized on
the straight-line method over fifteen years, which represents the lower
of the remaining life of the patents or the estimated remaining life of
the technology currently in use. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the asset balance over its remaining life can be
recovered through undiscounted future cash flows of the Company. The
amount of the asset impairment, if any, is measured based on projected
discounted operating cash flows using a discount rate reflecting the
Company's average cost of funds. The assessment of the recoverability
of the asset will be impacted if estimated future operating cash flows
are not achieved.
f. Income Taxes
The Company accounts for income taxes using the asset and liability
method. Pursuant to this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under this method, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the rate change
enactment date.
g. Disclosure About Fair Value of Financial Instruments
SFAS No. 107, Disclosure About Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between
willing parties. The carrying amounts as of December 31, 1997 of cash,
accounts receivable, accounts payable, accounts payable - related
parties, accrued expenses and income taxes payable approximate fair
value due to the short maturity of these investments. The carrying
amount of notes payable and notes payable-related parties approximate
fair value, as such borrowings bear interest at the Company's current
rates for such type of instruments.
h. Stock Incentive Plans
Prior to January 1, 1996, the Company accounted for its stock incentive
plans in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted SFAS No. 123, Accounting for Stock-Based Compensation,
which permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123.
i. Warranty Costs
Provision for estimated warranty costs on machines sold is recorded at
the time of sale and periodically adjusted to reflect actual
experience.
j. Research and Development Costs
Research and development costs are charged to expense in the year
incurred.
k. Earnings Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128 Earnings
Per Share, which simplifies the standards for computing earnings per
share. There was no material impact on the Company's previously
reported annual or interim period earnings per share, as a result of
the adoption. Basic earnings per share is based upon the weighted
average number of common shares outstanding. Diluted earnings per share
is based upon the weighted average number of common shares outstanding,
including the effects of all dilutive potential common shares
outstanding.
l. Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
13
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Investment in Sales Type Lease
The Company leases 200 instant ticket vending machines (ITVMs) to one
state lottery under a sales type lease that commenced in May, 1997. The
components of the net investment in sales type lease as of December 31,
1997 are as follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------------
<S> <C>
Minimum lease payments receivable $1,851,200
Less unearned revenue on lease payments receivable 583,704
-----------------------------------------------------------------------
1,267,496
Less current portion 216,485
-----------------------------------------------------------------------
Investment in sales type lease, less correct portion $1,051,011
-----------------------------------------------------------------------
</TABLE>
Future minimum lease payments to be received by the Company under this
sales type lease are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
--------------------------------------------------------------------------
<S> <C>
1998 $ 427,200
1999 427,200
2000 427,200
2001 427,200
2002 142,400
--------------------------------------------------------------------------
$1,851,200
--------------------------------------------------------------------------
</TABLE>
3. Inventories
Inventories at December 31, 1996 and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
-----------------------------------------------------------------------
<S> <C> <C>
Finished goods $1,634,657 1,155,808
Work in process 322,515 82,162
Raw materials and supplies 3,129,375 2,813,525
-----------------------------------------------------------------------
Total inventories $5,086,547 4,051,495
-----------------------------------------------------------------------
</TABLE>
4. Leased Machines
At December 31, 1996 and 1997, the Company leased 6,071 and 6,834 ITVMs
to 10 and 14 state lotteries respectively, under operating leases. The
leases generally provide for the lotteries to make monthly or quarterly
payments for rentals of the ITVMs over various lease terms. The
components of the net investment in operating leases, which includes
estimated residual values, as of December 31, 1996 and 1997 are as
follows:
<TABLE>
1996 1997
-----------------------------------------------------------------------
<S> <C> <C>
Leased machines $20,872,885 25,718,832
Less accumulated depreciation 9,932,487 10,978,370
-----------------------------------------------------------------------
$10,940,398 14,740,462
-----------------------------------------------------------------------
</TABLE>
Future minimum lease payments to be received by the Company under
operating leases are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
-----------------------------------------------------------------------
<S> <C>
1998 $12,234,467
1999 4,242,160
2000 1,039,380
-----------------------------------------------------------------------
$17,516,007
-----------------------------------------------------------------------
</TABLE>
5. Notes Payable
In September 1995, the Company entered into a revolving credit facility
with a financial institution that permitted the Company to borrow
through September 1998 up to $12,500,000 at the prime interest rate
plus 1.0% (9.25% at December 31, 1996). Draws against this facility
were made in the form of demand notes. The Company paid an annual
commitment fee of .25% on the unused portion of the commitment and a
monthly usage fee equal to .25% of the highest outstanding balance
during each month. Borrowings under this agreement were collateralized
by all assets of the Company and assignment of proceeds from lease
agreements. At December 31, 1996, the Company had borrowings of
$7,230,171 outstanding under this credit facility. This borrowing was
retired with proceeds from the new borrowing entered into in October,
1997.
In October, 1997, the Company entered into a revolving credit facility
with a financial institution that permits the Company to borrow through
October, 2000 up to $15,000,000 at the prime interest rate (8.50% at
December 31, 1997). Initial proceeds from the note were used to retire
the prior revolving credit facility. In conjunction with the
establishment of the facility the Company opened a lockbox and
controlled disbursement account with the bank parent of the financial
institution. All lockbox receipts are recorded as payments against the
facility and presented checks are recorded as draws on the facility.
Borrowings under this credit facility are collateralized by all of the
assets of the Company and assignment of proceeds from lease agreements.
At December 31, 1997, the Company had borrowings of $8,978,036
outstanding with additional borrowings of $6,021,964 available under
the facility.
6. Long-Term Debt
Term note payable to a bank with final payment due February 20, 1998,
payable in monthly installments of $448, including interest at a rate
of 7.99% per annum. The note is collateralized by automotive equipment.
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
$5,969 968
Less current installments 5,641 968
Long term debt, excluding current installments $ 328 --
</TABLE>
7. Notes Payable - Related Parties
The Company has the following notes payable to related parties at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
-----------------------------------------------------------------------
<S> <C> <C>
Note payable to a stockholder due in annual
installments equal to twenty-five percent (25%) of
the net profits, if any, of the Company from its
business operations as reported in the Company's
annual financial statements prepared in accordance
with generally accepted accounting principles. The
payments shall begin on the first business day of
the fourth month of the Company's fiscal year, for
income tax purposes, immediately following (1) the
payment of all debts of the Company outstanding as
of September 25, 1992 and (2) the posting by the
Company of retained earnings of at least $1,000,000
determined in accordance with generally accepted
accounting principles, and continue on the same day
each year until the principal and unpaid interest
is paid in full. The note bears interest at the
prime rate of Chase Manhattan Bank of New York
(8.50% at December 31, 1997). The note is
unsecured. $400,000 400,000
Note payable to a stockholder due and limited to
twenty-five percent (25%) of the net profits of the
Company, if any, from its business operations as
reported in the Company's annual financial
statements prepared in accordance with generally
accepted accounting principles. The payments shall
begin on the first business day of the fourth month
of the Company's first year, for income tax
purposes, immediately following (1) the payments of
all debts of the Company outstanding as of
September 25, 1992; (2) the posting by the Company
of retained earnings of at least $1,000,000
determined in accordance with generally accepted
accounting principles; and (3) payment in full of
principal and interest due by the Company to a
stockholder in the amount of $400,000. The note
does not provide for any interest and is unsecured. 79,000 79,000
-----------------------------------------------------------------------
479,000 479,000
Less current portion -- --
-----------------------------------------------------------------------
$479,000 479,000
-----------------------------------------------------------------------
</TABLE>
14
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. Income Taxes
Income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------------------------------
1995 1996 1997
------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ -- 200,000 557,400
State and local -- 63,000 156,000
Deferred
Federal -- (456,000) 275,000
State and local -- -- --
------------------------------------------------------------------------
Total $ -- (193,000) 988,400
------------------------------------------------------------------------
</TABLE>
A reconciliation of income tax expense (benefit) in relation to the
amounts computed by application of the U.S. federal income tax rate of
34% to pretax income follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------------------------
1995 1996 1997
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax expense at the
statutory rate $ 676,000 383,000 830,000
Increase (reduction) in income taxes resulting from:
Change in the beginning-of-the-year balance of the
valuation allowance for the deferred tax assets
allocated to income tax expense. (713,000) (672,000) --
Amortization of product development rights 25,000 25,000 --
State and local taxes, net of federal benefit -- 63,000 103,000
Other 12,000 8,000 55,400
----------------------------------------------------------------------------------------
Total $ -- (193,000) 988,400
----------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1997 are presented below:
<TABLE>
<CAPTION>
1996 1997
---------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Bad debt allowance $ 39,000 32,000
Warranty costs 12,000 9,000
Net operating loss carryforwards 510,000 400,000
Other, net (105,000) 73,300
---------------------------------------------------------------------
Total gross deferred tax assets 456,000 514,300
---------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment, principally
due to differences in depreciation $ -- 127,000
Investment in sales type lease -- 135,000
---------------------------------------------------------------------
Total gross deferred tax liabilities -- 262,000
---------------------------------------------------------------------
Net deferred tax asset $456,000 252,300
---------------------------------------------------------------------
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future income and tax
planning strategies in making this assessment.
At December 31, 1997, the Company has net operating loss carryforwards
for Federal income tax purposes of approximately $1,200,000 which are
available to offset future Federal taxable income, if any, through
2009. However, due to an ownership change on September 25, 1992,
utilization of these carryforwards is subject to certain annual
limitations.
9. Redeemable Preferred Stock
The Company's preferred stock is nonparticipating and has no rights to
dividends. The holders of the preferred stock are entitled to sell to
the Company all of their shares of preferred stock at a price of $1.00
per share upon (i) the payment of all debts of the Company outstanding
as of September 25, 1992, (ii) the reporting by the Company of retained
earnings of at least $1,000,000 determined in accordance with generally
accepted accounting principles, and (iii) the payment in full by the
Company of a promissory note in the original amount of $400,000 to a
related party. Due to the redemption feature of the preferred stock, it
has been classified separately from stockholders' equity in the
Company's balance sheet.
The Company may, at its discretion, redeem all or part of the
outstanding preferred stock at any time. The redemption price for the
preferred stock is $1.00 per share and may be payable in the form of a
promissory note.
10. Stock Incentive Plans
In March 1994, the Company and its Board of Directors approved and
adopted the Company's 1994 Stock Incentive Plan and the Company's 1994
Directors' Stock Incentive Plan (collectively, the Plans), which became
effective at the date of the initial public offering. The Plans provide
for the issuance of up to 260,000 shares of common stock to officers,
employees, consultants and other supporters of the Company and up to
60,000 shares of common stock to nonemployee directors of the Company.
Stock options are granted with an exercise price equal to the stock's
fair market value at the date of grant. Options may be exercised
subject to a vesting schedule which provides for the vesting each year
for a period of four years subject to the recipient's continued
employment or service to the Company, and must be exercised within 10
years after that date.
As permitted by SFAS No. 123, the Company applies the intrinsic value
method prescribed by APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation
cost has been recognized in the accompanying statements of income.
A summary of the status of the Company's stock option plans as of
December 31, 1995, 1996, and 1997 and the changes therein for the years
then ended is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 49,975 $ 11.50 131,725 $ 9.66 147,225 $ 9.38
Granted 81,750 8.54 15,500 7.00 27,000 8.00
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- 3,350 11.50
----------------------------------------------------------------------------------------------------
Outstanding at end of year 131,725 9.66 147,225 9.38 170,875 9.12
----------------------------------------------------------------------------------------------------
Options exercisable at year-end 14,494 10.79 46,926 10.05 79,660 .77
----------------------------------------------------------------------------------------------------
Weighted-average fair value of
options granted during the year $ 6.22 5.11 5.82
----------------------------------------------------------------------------------------------------
</TABLE>
Had compensation cost for options granted during 1995, 1996 and 1997
been determined consistent with the fair value methodology of SFAS No.
123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts presented below:
<TABLE>
<CAPTION>
1995 1996 1997
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $1,987,219 1,320,597 1,451,654
Pro forma 1,898,908 1,307,807 1,324,003
Earnings per share As reported .62 .41 .45
Pro forma .59 .41 .41
---------------------------------------------------------------------------
</TABLE>
15
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is recognized over the
options' vesting period of four years and compensation cost for options
granted prior to January 1, 1995 is not considered.
The fair value of options granted during 1995, 1996 and 1997 for
purposes of the accompanying pro forma disclosures is estimated on the
grant date using the Black-Scholes option-pricing model with the
following weighted-average assumptions: no dividends paid, as it has
been the Company's policy not to declare or pay dividends since its
initial public offering in 1994 and the Company does not anticipate
paying dividends in the foreseeable future; expected volatility of 52%,
52% and 56%, respectively based on the calculated volatility of the
Company's stock since its initial public offering; risk-free rates of
return of 7.46%, 6.66% and 5.86%, respectively; and expected lives of
10 years.
Information about stock options outstanding at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------
Range Weighted-Avg.
of Remaining Weighted-Avg. Weighted-Avg.
Exercise Number Contractual Exercise Number Exercisable
Prices Outstanding Life Price Exercisable Price
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.50 - 8.63 124,250 8.0 yrs $ 8.23 44,691 $ 8.41
11.50 46,625 6.3 yrs 11.50 34,969 11.50
-------------------------------------------------------------------------------------
170,875 7.5 yrs $ 9.12 79,660 $ 9.77
-------------------------------------------------------------------------------------
</TABLE>
11. Earnings Per Share
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Net Per
Income Shares Share
1995 (Numerator) (Denominator) Amount
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Net earnings available to common stock $1,987,219 3,210,000 .62
-----------------------------------------------------------------------------------------------
Diluted earnings per share:
Effect on dilutive securities stock options -- (2,413)
Earnings available to common stock-holders
and assumed conversions $1,987,219 3,207,587 .62
-----------------------------------------------------------------------------------------------
1996
-----------------------------------------------------------------------------------------------
Basic earnings per share:
Net earnings available to common stock $1,320,597 3,210,000 .41
-----------------------------------------------------------------------------------------------
Diluted earnings per share:
Effect on dilutive securities stock options -- 2,000
Earnings available to common stock-holders
and assumed conversions $1,320,597 3,212,000 .41
-----------------------------------------------------------------------------------------------
1997
-----------------------------------------------------------------------------------------------
Basic earnings per share:
Net earnings available to common stock $1,451,654 3,210,000 .45
-----------------------------------------------------------------------------------------------
Diluted earnings per share:
Effect on dilutive securities stock options -- 2,661
Earnings available to common stock-holders
and assumed conversions $1,451,654 3,212,661 .45
-----------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 131,725, 49,925, and 129,725 shares of common stock
were outstanding in 1995, 1996 and 1997, respectively, but were not
included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of
common shares.
12. Noncash Investing Activities
The Company wrote-off approximately $2,900,000 in fully depreciated
leased machines in 1997. Such machines were returned to the Company
upon lease expiration. The Company intends to use parts from these
machines in the manufacturing of future machines.
13. Related Party Transactions
Accounts payable - related parties are $306,529 and $328,960 at
December 31, 1996 and 1997, respectively, and represent management fees
and expenses payable to a company owned 100% by the majority
stockholder and parts expenses payable to an entity which is owned by a
director.
Amounts expensed related to the company owned by the majority
stockholder were $135,566, $73,321 and $36,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
The entity owned by a director supplies the Company with certain parts
for its dispensing mechanisms. In addition, on January 13, 1994, the
Company entered into a manufacturing and license agreement with this
entity pursuant to which the Company purchased an exclusive license to
make, use and sell pull-tab lottery ticket dispensing mechanisms
produced by this entity. The Company had purchases from this entity
which were charged to cost of revenues of approximately $1,848,000,
$1,986,000 and $2,996,000 for the years ended December 31, 1995, 1996
and 1997, respectively.
Interest expense arising from notes payable-related parties amounted to
$97,018, $33,085 and $33,714 for the years ended December 31, 1995,
1996 and 1997, respectively.
14. Customer and Supplier Concentrations
A significant portion of the Company's revenues are derived from a
limited number of state lottery authorities or their representatives
for the lease, sale or service of instant ticket vending machines. For
the years ended December 31, 1995, 1996 and 1997, one customer
generated 55%, 45% and 29%, respectively, of the machine lease
revenues. In addition, single state contracts generated 67%, 69% and
32% of the machine sales revenues for the years ended December 31,
1995, 1996 and 1997, respectively. Future revenue from machine sales is
dependent upon winning awards in a competitive bidding process.
The Company currently purchases certain components used in its vending
machines, including components used in its burster mechanism and its
bill acceptor mechanism, from single suppliers. The purchase of
components from outside suppliers on a sole source basis subjects the
Company to certain risks, including the continued availability of
suppliers, price increases and potential quality assurance problems.
Because other suppliers exist that can duplicate these components
should the Company elect or be forced to use a different supplier, the
Company does not believe that any such change in suppliers would result
in the termination of a production contract. However, the Company could
experience a delay of 30 to 60 days in the production of vending
machines should it elect or be forced to use other suppliers for these
components. Any delay of more than 30 to 60 days could adversely affect
the Company's ability to make timely deliveries of vending machines and
to obtain new contracts.
15. Lease Commitments
The Company leases its office and manufacturing facilities under
noncancelable operating leases. The leases expire on December 31, 1999,
and require lease payments of $50,000 and $91,000 a year, respectively
through expiration. Total rent expense under these leases approximated
$91,000, $91,000 and $141,000 for the years ended December 31, 1995,
1996 and 1997 respectively.
*Total future minimum lease payment requirements under this lease are
as follows:
<TABLE>
<CAPTION>
Year ending December 31,
-----------------------------------------------------------------------
<S> <C>
1998 $141,000
1999 141,000
-----------------------------------------------------------------------
$282,000
-----------------------------------------------------------------------
</TABLE>
16. Commitments and Contingent Liabilities
As of December 31, 1997, the Company had outstanding purchase
commitments for raw materials of approximately $5,853,000, of which
$5,320,000 and $505,000 are used in the manufacturing of instant ticket
and prepaid telephone card vending machines, respectively. Management
intends to utilize these commitments as machines are produced. While
the market for instant ticket vending machines has been proven, the
prepaid telephone card market is new and difficult to predict. If the
prepaid telephone card market does not prove successful for the
Company, management is of the opinion that this will not have a
material adverse effect on the Company's financial position or results
of operations.
16
<PAGE> 16
Inside back cover 3/26/98 4:43 PM Page 1
CORPORATE DATA & STOCKHOLDER INFORMATION
HEADQUARTERS
- ---------------------------------
Interlott Technologies, Inc.
10830 Millington Court
Cincinnati, OH 45242
(513) 792-7000
INVESTOR INQUIRIES
- ---------------------------------
Chief Financial Officer
10830 Millington Court
Cincinnati, OH 45242
(513) 792-7000
REGISTRAR AND TRANSFER AGENT
- ---------------------------------
First Union National Bank
230 South Tryon Street
Charlotte, NC 28288-1154
CORPORATE COUNSEL
- ---------------------------------
Alston & Bird LLP
Atlanta, Georgia
Taft, Stettinius & Hollister LLP
Cincinnati, Ohio
INDEPENDENT AUDITORS
- ---------------------------------
KPMG Peat Marwick LLP
Louisville, Kentucky
The Company's Common Stock has been traded to the American Stock Exchange under
the symbol "ILI" since the Company's initial public offering of Common Stock in
April 1994. Prior to the initial public offering, there was no established
trading market for the Company's Common Stock. The following tables show the
high and low closing sale prices per share for the Common Stock as reported by
the American Stock Exchange for the periods indicated:
<TABLE>
<CAPTION>
1996 HIGH LOW
<S> <C> <C>
- --------------------------------------------------
First Quarter $ 11 8
- --------------------------------------------------
Second Quarter 12 3/4 10 1/2
- --------------------------------------------------
Third Quarter 11 6 1/2
- --------------------------------------------------
Fourth Quarter 8 5/8 6 13/16
- --------------------------------------------------
1997 HIGH LOW
- --------------------------------------------------
First Quarter $ 8 1/8 6 5/8
- --------------------------------------------------
Second Quarter 8 1/4 6 1/2
- --------------------------------------------------
Third Quarter 10 11/16 6 7/8
- --------------------------------------------------
Fourth Quarter 10 5/8 7 5/8
- --------------------------------------------------
</TABLE>
At March 24, 1998, there were approximately 71 stockholders of record and an
unknown number of beneficial owners holding stock in nominee or "street" name.
The Company has paid no cash dividends on its Common Stock and currently
intends to retain all future earnings for use in the development of its
business.
DIRECTORS
- --------------------------------
L. Rogers Wells, Jr.
Chairman of the Board and
Chief Executive Officer
Edmund F. Turek
Vice Chairman
Gary S. Bell
Secretary and Treasurer
Kazmier J. Kasper
President, Algonquin Industries, Inc.
a manufacturer of metal and machined parts
H. Jean Marshall
Project Director for the City of Cincinnati
David F. Nichols
President
John J. Wingfield
Manager, A.G. Edwards & Sons, Inc., Louisville
an investment banking company
OFFICERS
- --------------------------------
L. Rogers Wells, Jr.
Chairman of the Board and
Chief Executive Officer
David F. Nichols
President
Edmund F. Turek
Vice Chairman
Gary S. Bell
Secretary and Treasurer
Thomas W. Stokes
Vice President of Operations
Jerome J. Cain
Chief Financial Officer
FORM 10-K: A copy of the Company's 1997 Annual Report on Form 10-K, as filed
with the Securities and Exchange Commission, is available, without exhibits,
free of charge to stockholders. Requests should be addressed to:
Stockholder Relations
Interlott Technologies, Inc.
10830 Millington Court
Cincinnati, OH 45242
The 1998 Annual Meeting will be held at The Holiday Inn Cincinnati North located
at I-275 and Route 42, on May 7, 1998 at 10:00 am, local time.
<PAGE> 1
[KPMG PEAT MARWICK LLP LETTERHEAD]
Consent of Independent Auditors
The Board of Directors
Interlott Technologies, Inc.:
We consent to incorporation by reference in the Registration Statement No.
333-08999 on Form S-3 of Interlott Technologies, of our report dated
February 28, 1998, relating to the balance sheets of Interlott Technologies
Inc. as of December 31, 1996 and 1997, and the related statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997, and the related schedule, which report appears
in the 1997 annual report to stockholders, which is incorporated by reference
in December 31, 1997 Form 10-K of Interlott Technologies, Inc.
KPMG PEAT MARWICK LLP
Louisville, Kentucky
March 27, 1998
<PAGE> 1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that the undersigned constitutes and
appoints L. Rogers Wells, Jr. and Jerome J. Cain and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Interlott Technologies, Inc. for the fiscal year ended
December 31, 1997, and any and all amendments thereto, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and the American Stock Exchange, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
This 30th day of March, 1998.
/s/ John J. Wingfield
---------------------
John J. Wingfield
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that the undersigned constitutes and
appoints L. Rogers Wells, Jr. and Jerome J. Cain and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Interlott Technologies, Inc. for the fiscal year ended
December 31, 1997, and any and all amendments thereto, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and the American Stock Exchange, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
This 30th day of March, 1998
/s/ Gary S. Bell
------------------------------
Gary S. Bell
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that the undersigned constitutes and
appoints L. Rogers Wells, Jr. and Jerome J. Cain and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Interlott Technologies, Inc. for the fiscal year ended
December 31, 1997, and any and all amendments thereto, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and the American Stock Exchange, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
This 30th day of March, 1998
/s/ Kazmier J. Kasper
------------------------------
Kazmier J. Kasper
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERLOTT
TECHNOLOGIES, INC.'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997<F1>
<PERIOD-END> DEC-31-1997
<CASH> 143
<SECURITIES> 0
<RECEIVABLES> 2,918<F2>
<ALLOWANCES> 0<F2>
<INVENTORY> 4,051
<CURRENT-ASSETS> 7,477
<PP&E> 26,628
<DEPRECIATION> 11,382
<TOTAL-ASSETS> 24,875
<CURRENT-LIABILITIES> 11,805
<BONDS> 479
1,335
0
<COMMON> 32
<OTHER-SE> 10,994
<TOTAL-LIABILITY-AND-EQUITY> 24,875
<SALES> 4,567
<TOTAL-REVENUES> 19,065
<CGS> 0
<TOTAL-COSTS> 15,924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 701
<INCOME-PRETAX> 2,440
<INCOME-TAX> 988
<INCOME-CONTINUING> 1,452
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,452
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
<FN>
<F1>AMOUNTS INAPPLICABLE OR NOT DISCLOSED AS A SEPARATE LINE ON THE CONDENSED
BALANCE SHEETS AND STATEMENT OF OPERATIONS ARE REPORTED AS 0 HEREIN.
<F2>NOTES AND ACCOUNTS RECEIVABLE - TRADE ARE REPORTED NET OF ALLOWANCES FOR
DOUBTFUL ACCOUNTS IN THE CONDENSED BALANCE SHEETS.
</FN>
</TABLE>
