SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-21852
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
(Name of small business issuer in its charter)
Delaware 94-3123210
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1265 Naperville Drive, Romeoville, Illinois 60446, (630) 759-7666
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None.
Securities registered to Section 12(g) of the Exchange Act: Common
Stock, $0.001 par value; Redeemable Common Stock Purchase Warrants;
and Units, each Unit consisting of one share of Common Stock, $0.001
par value, and one Redeemable Common Stock Purchase Warrant.
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past twelve
months (or for such 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
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
The Registrant's revenues for the fiscal year ended September 30,
1997 totaled $9,568,352
As of January 12, 1998, the aggregate market value of the voting
stock held by non-affiliates of the Registrant (assuming for this
purpose that only directors, officers, and stockholders holding 5%
or more of the Common Stock, of the Registrant are
affiliates of the Registrant), based on the average of the closing
bid and asked prices on that date, was approximately $1,379,858.
As of January 12, 1998, there were 19,580,879 shares of Common
Stock outstanding.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format: Yes No X
<PAGE>
INDEX TO FORM 10-KSB
of
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC. Page
PART I
ITEM 1. DESCRIPTION OF BUSINESS 1
ITEM 2. DESCRIPTION OF PROPERTY 6
ITEM 3. LEGAL PROCEEDINGS 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS 7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
ITEM 7. FINANCIAL STATEMENTS F-1
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT 12
ITEM 10. EXECUTIVE COMPENSATION 14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 16
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 18
ITEM 13. EXHIBITS, LISTS AND REPORT ON FORM 8-K 20
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
The Business
Franklin Ophthalmic Instruments Co., Inc., a Delaware
corporation (the "Company"), sells and services high-quality
examination instruments and equipment used in examination rooms of
ophthalmologists, optometrists, medical organizations and clinics.
The Company currently distributes over 2,000 products from over 40
manufacturers.
The Industry
According to the National Eye Institute, the annual cost to
society of eye disorders, visual impairments and blindness exceeds $5
billion. Disorders of the eye represent one of the most widespread
health care conditions in the world today. It has been estimated
that more than 67% of the world's population suffers from one or more
treatable eye disorders. The most common of these disorders are
cataracts, glaucoma and refractive error. (Source: U.S. Ophthalmic
Diagnostic Instruments & Intraocular Lens Market, Theta Corporation,
February 1991.)
Based upon information provided by Optometry Today, publishers
of an industry leading trade publication, there are over 50,000
ophthalmologists and optometrists in the United States engaging in
general practice and a variety of sub-specialties, including retina
and vitreous, glaucoma, neuro, ocularplastics, pediatric, cataract,
cornea and refractive surgery. Practitioners provide services
through private individual practices, private group practices,
private multi-specialty clinics, hospitals, universities and
governmental agencies.
The suppliers of products and services within the ophthalmic
industry fall into the following categories: (i) ophthalmic
diagnostic equipment firms (the category in which the Company falls);
(ii) optical (glasses, frames, and contact lenses)
manufacturing/fabricating and distribution firms; (iii) surgical
manufacturing and distribution firms; and (iv) pharmaceutical
manufacturing and distribution firms. Many firms in the industry do
business in more than one of the above categories.
<PAGE>
A majority of the Company's sales are comprised of products that
can be characterized as "capital purchases," and users strongly
scrutinize each instrument according to its price and operational
efficiency. Customers often do not expect to pay list price. In
addition, many of the products are very durable, making for a long
replacement cycle. Users also take advantage of refurbished units.
Despite the foregoing, the Company believes that growth in the
marketplace will result from innovations in equipment development and
the aging of the population in the United States. According to a
report by Frost & Sullivan, the ophthalmic diagnostic marketplace is
expected to grow at an annualized rate between 5 and 10% per year
through the year 2000. The projected growth is expected as a result
of clinical acceptance of new technologies and such technologies
becoming more affordably priced. In addition, end users that have
been postponing purchases of traditional equipment are expected to
replace existing devices with the latest technology during the period
of projected growth. (Source: U.S. Ophthalmic Diagnostic Equipment
Markets, Frost and Sullivan, 1994.). A study by Foster Higgins
National Survey of Employer-Sponsored Health Plans (presented in the
November 1997 issue of the Vision Council of America Planner)
predicts that the number of Americans over the age of 65 will grow
from 33 million to nearly 80 million by the year 2050. The Company
believes that such aging of the population will create not only a
need for additional diagnostic equipment, but also for diagnostic
equipment that allows the practitioner to more efficiently see a
greater volume of patients.
None of the data sources cited in this section is associated
with the Company.
Principal Products and Services
Chairs and Stands. A mandatory component of any ophthalmic
examination room is the chair in which the patient will sit and/or
lie while being examined. There are several types of chairs, which
may adjust automatically or manually to allow for several patient
positions for different examinations or surgical procedures.
Instrument stands provide for one or an array of examination
instruments to be available to the examiner at the patient
examination chair through use of counterbalanced articulating arms.
The Company distributes chairs and instrument stands manufactured by
Reliance Medical Products ("Reliance") and Marco Ophthalmic Inc.
("Marco Ophthalmic").
Ophthalmic Workstations. The ophthalmic workstation primarily
consists of a station allowing for the adaptation of certain
instrumentation and for the control of electrical functions
(illumination and instrument controls) in an examination room. The
Company currently is a systems integrator of such workstations and
customizes the material for such products to meet the specifications
of the ophthalmic practitioner.
<PAGE>
Slit Lamps. A slit lamp is used for examinations of all
portions of the eye. It projects a slit of light onto the eye itself
(slit illumination), which can then be viewed at variable
magnifications and illuminations. Although the slit lamp is
primarily utilized by ophthalmic practitioners, many hospitals are
also equipped with slit lamps. The slit lamp can be expanded by
adding photographic adaptations and/or digital applications through
the use of video or digital cameras, which allow the user to receive
hard copy information or transmit data through phone lines. The
Company sells slit lamps manufactured by Haag-Streit Service, Inc.
("Haag-Streit"), Marco Ophthalmic, Nikon Inc. Instrument Group
("Nikon") and Reichert Ophthalmic Instruments, a division of Leica
Inc. ("Reichert/Leica").
Refractors. A refractor, also known as a phoroptor, is used for
exact diagnosis of a person's "refraction acuity." The refractor
determines exactly how well a person sees without glasses and what
prescription lenses are required to correct that person's vision. A
refractor can be categorized as manual (an instrument where lenses
are manually adjusted to the patient's needs) or automated (an
instrument utilizing microprocessor technology and infrared light to
determine a person's refractive error). As automated refractors
become more approachable in price and continue to allow for increased
efficiencies in diagnosing refractive error, there is a gradual
tendency to up-grade to automated technology. In addition, automated
refractors provide for hard copy print-outs of refractive
measurements and/or provide the ability for the practitioner to
transfer refractive measurements to computers through networking.
The Company sells manual phoroptors manufactured by Reichert/Leica
and Marco Ophthalmic, and automated refractors manufactured by Canon
U.S.A., Inc. ("Canon") and Nikon.
Retinal/Fundus Cameras. A retinal or fundus camera is an
instrument with optical components that allows the user to capture
images primarily through the posterior portion of the eye utilizing
various fields of view and magnifications. Retinal cameras are
classified as either mydriatic or non-mydriatic. The non-mydriatic
type is utilized without dilation of the patient's pupil and is
primarily used for general diagnostic purposes. Mydriatic cameras
are used in conjunction with a fluid which causes full dilation of
the pupil and allows for larger fields of view for the observation of
problems, including tissue degeneration and vein enlargement and/or
hemorrhages. Mydriatic cameras offer versatile photographic
applications, including external and color fundus photography,
fluorescein photography and stereo photography. Images are acquired
from retinal/fundus cameras by using film (35mm or Polaroid film),
video and/or digital cameras. The Company sells retinal/fundus
cameras manufactured by Canon and Nikon.
Tonometers. The tonometer measures intra-ocular pressure, a
measure for the incidence of glaucoma. Tonometers are either manual
or automated (utilizing micro-processor technology). The Company
distributes manual tonometers manufactured by Clement-Clarke, Inc.,
Haag-Streit and Nikon. The Company distributes automated tonometers
manufactured by Keeler Instruments, Reichert/Leica and Mentor
Corporation ("Mentor").
<PAGE>
Keratometers. A keratometer measures the curvature of a
patient's cornea. Keratometers are either manual or automated.
Automated keratometers utilize micro-processor technology and allow
for hard copy print-outs of measurements and/or the transfer of
information digitally into a computer. Automated keratometers are
also available with a combined autorefraction capability (see
"Refractors"), which allows for dual functionality. The Company
distributes manual keratometers manufactured by Reichert/Leica and
Marco Ophthalmic. The Company distributes automated keratometers
manufactured by Canon and Nikon.
Lensometers. The lensometer is used to measure the curvature of
prescribed lenses in order to verify that the lens is appropriate
prior to dispensing. Lensometers may be manual or automated. Manual
lensometers require greater knowledge of the process and more time
for measurements. Automatic lensometers utilize microprocessor
technology and allow for hard copy print-outs of measurements and/or
the transfer of information digitally. The Company distributes
manual and automatic lensometers manufactured by Marco Ophthalmic,
Nikon and Reichert/Leica.
Projection Systems. The Company distributes a range of
projection systems which project acuity testing characters
(arrangements of letters, numbers and/or symbols) onto a screen in an
examination room, including projection systems of standard manual
type projectors, automated projectors which utilize microprocessor
technology and infrared controls, and projection systems utilizing
computer monitors to display the aforementioned testing characters.
The Company distributes projection systems manufactured by
Reichert/Leica and Marco Ophthalmic, and automated systems by
Reichert/Leica, Marco Ophthalmic, Mentor and Nikon.
Used and Refurbished Equipment. The Company also purchases, and
acquires through trade-in, used equipment. After the equipment is
checked and, if required, refurbished, the equipment is then re-
marketed, providing customers with a lower-priced alternative to new
equipment.
Other. In addition to the above, the Company sells other items
such as hand held diagnostic instruments, diagnostic and laser
lenses, charts, disposables and parts.
Technical Service and Support. Approximately 75% of the
Company's personnel are trained to provide technical service and
support for ophthalmic instrumentation. As technology in the
ophthalmic marketplace continues to evolve, the Company believes that
its ability to provide technical service and support will result in a
competitive advantage in the marketplace.
<PAGE>
Marketing
Sales Representatives. At September 30, 1997, the Company
maintained a sales and service force of approximately 22
representatives in locations throughout the United States. It is the
sales/service representative's responsibility to follow-up on sales
leads provided as a result of past business, marketing efforts and
referrals from manufacturers of the equipment that the Company sells.
Sales and service personnel are required to complete formal training
sponsored by ophthalmic manufacturers and the Company in order to
maintain familiarity with the latest technical developments.
Direct Mail. Beginning in October, 1996, the Company
reintroduced its use of direct mailing of catalogs as a method of
marketing the equipment and services that the Company provides. The
Company had ceased using such a catalog in approximately May, 1995
due to the Company's attention to the reorganization of its
operations and fiscal constraints. Since its reintroduction, the
Company has mailed approximately 36,000 catalogs to potential
customers.
Trade Shows. The Company attends and exhibits at approximately
15 trade shows or conventions per year including regional and
national shows and conventions (including those sponsored by the
American Academy of Ophthalmology, American Academy of Optometry and
Vision Expo-East & West). The Company has recently reduced the
number of trade shows it attends in comparison to past years in
response to what the Company believes is a trend in the industry for
its customers to attend fewer of the local trade shows in favor of
the larger meetings that offer more training sessions, industry
updates and larger displays of technology.
Customers
The end-user marketplace in the United States for ophthalmic
instruments is comprised of different classifications of eye
practitioners and a diverse base of institutional private and public
health care providers. Sales of the Company are divided approximately
equally among the following classifications.
The Ophthalmologist. The ophthalmologist is a medical doctor
specializing in the diagnosis, treatment and care of the eye and
related systems. The ophthalmologist may prescribe glasses, contact
lenses and medication and perform surgical procedures.
The Optometrist. An optometrist is a licensed doctor trained in
the diagnosis of refractive errors and the diagnosis (and the
treatment in some procedures) of diseases of the eye.
Other Customers. In addition to the eye-care professionals
described above that work in individual and group practices, the
Company sells to hospitals, hospital groups, medical clinics, health
maintenance organizations, surgical centers, universities, teaching
colleges, and various state and federal agencies. The Company has
also sold product to non-ophthalmic related providers including ear,
nose and throat practitioners, dermatologists and plastic surgeons.
Such sales, however, comprise a small portion of the Company's
revenues and the Company does not currently market its products
directly to such providers.
<PAGE>
History
The Company was incorporated under the laws of the State of
Delaware in November 1992 for the purpose of reincorporating Franklin
Ophthalmic Instruments Co., Inc., a California corporation ("FOI-
California") in the State of Delaware. FOI-California, was
incorporated under the laws of the State of California in September
1990. Effective January 1993, FOI-California was merged with and
into the Company, thereby effecting said reincorporation in the State
of Delaware. Unless otherwise indicated, references made hereinafter
to the Company include FOI-California.
FOI-California was incorporated for the purpose of acquiring the
ophthalmic instrument distribution division of Franklin Optical
Company ("Franklin Optical"), which was incorporated in the State of
California in 1932. Franklin Optical's primary business was
operating retail locations in California and Hawaii which dispensed
prescription eyeglasses and contact lenses. Franklin Optical also
operated an ophthalmic instrument distribution division. In June
1990 and September 1990, respectively, Franklin Optical sold its two
lines of business in separate transactions. The ophthalmic
instrument distribution division was purchased by the Company. The
retail dispensing business was sold by Franklin Optical to a third
party and continues to operate in California as Franklin Optical
Company. Franklin Optical Company is not affiliated with the
Company.
In July 1993, the Company completed its initial public offering
(the "Initial Public Offering") of 1,437,500 Units (the "Units") at
an initial offering price of $4.00 per Unit. Each Unit consisted of
one share of Common Stock and one warrant to purchase a share of
Common Stock at an exercise price of $5.00 per share through July
1998 (collectively, the "Class A Warrants").
In January 1994, the Company acquired certain of the assets and
assumed certain of the liabilities of Progressive Ophthalmic
Instruments, Inc., a Florida corporation ("POI"). Shortly
thereafter, the Company relocated its operations from Hayward,
California to Jacksonville, Florida, where POI was located. In July
1994, the Company acquired all of the issued and outstanding shares
of common stock of Midwest Ophthalmic Instruments, Inc., an Illinois
corporation ("MOI"). MOI initially operated as a wholly-owned
subsidiary and was eventually merged into the Company in March 1995.
Shortly after the acquisition, the Company relocated its operations
to Romeoville, Illinois.
Pursuant to or in connection with an agreement dated April 1,
1995 among the Company, Robert A. Davis (the Company's former chief
executive officer, chief financial officer, president and a
director), and certain partnerships and a trust in which Mr. Davis
has an interest, and Michael J. Carroll, James J. Urban and Brian M.
Carroll (the "Separation Agreement"), Mr. Davis and Mr. Dallas Talley
(another director of the Company), resigned their positions with the
Company and Messrs. Michael Carroll and James Urban were elected to
fill vacancies on the Company's Board of Directors (the "Board of
Directors").
<PAGE>
In January 1995, the new management of the Company commenced
its attempt to restructure the Company's operations around the MOI
operations acquired by the Company in July 1994, and the Company
commenced operating under the trade name Franklin.MOI. Also as part
of the restructuring efforts, the Hayward, California facility, the
Lawrenceville, Georgia facility and the Jacksonville, Florida
facility were closed. Additionally, the Company instituted
throughout its sales force compensation structures and other policies
similar to those historically used by MOI, which included: (i) the
use of sales quotas and scheduling requirements; (ii) a commission
structure that contained lower base and higher incentive components;
(iii) greater accountability for expenses and inventory; and (iv)
limits on competitive activities. As a result of the aforementioned
changes, approximately 50% of the Company's prior sales
representatives terminated their representation of the Company or
were dismissed. Some but not all of these representatives have been
replaced and, as a result, the Company lost representation in certain
geographic areas or with certain accounts previously serviced by it.
Since the close of the Company's 1996 fiscal year, the Company
has completed a restructuring of its bank debt, restructured certain
of its trade debt and raised additional equity capital in two
private placements. Management of the Company is shifting its
attention from financial restructuring to more actively seeking sales
growth through the distribution of a direct mail catalog and the
addition of sales/service personnel. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--Liquidity and Capital Resources and Outlook."
Competition
The distribution of ophthalmic instruments is competitive.
The Company has historically competed on the basis of price,
service, promptness of delivery, reputation and relationship with
customers. The distribution of ophthalmic instruments has
historically been accomplished by numerous small, owner-operated
distributors located in significant population centers in the
country. These distributors sell and service most well-known
brands of equipment in relatively small geographical areas and
often have long-established relationships with strong loyalties
from their clientele. Other than Lombart Instrument Company of
Norfolk, Virginia (the largest ophthalmic instrument distributor
in the United States) and Essilor Inc. of Greensboro, North
Carolina (a company whose primary business is the fabrication of
lenses used in eyewear), the Company believes that there is no
other ophthalmic distributor with greater sales volume than the
Company. Other than Lombart Instrument Company, the Company believes
that there is no other company with greater geographical coverage
than the Company.
Backlog
The Company previously experienced delays in filling customer
Orders as a result of cash flow constraints and reduced credit limits
from its suppliers. With the completion of the restructuring, and
Assuming continuing cooperation from its suppliers, the Company is
no longer experiencing any significant backlog.
<PAGE>
Employees
As of September 30, 1997, the Company employed 32 full-time
employees, including 6 management personnel, 4 in accounting &
operations, and 22 sales and service representatives. The Company
considers its relationship with its employees satisfactory and is not
a party to any collective bargaining agreement.
Government Regulations
The Company has no knowledge of any governmental regulations
which materially adversely affect its business operations.
Environmental Protection Compliance
The Company has no knowledge of any federal, state or local
environmental compliance regulations which affect its business
activities. The Company has not expanded any capital to comply with
environmental protection statutes, and does not anticipate that such
expenditures will be necessary in the future.
Item 2. Description of Property
The Company maintains all executive, administrative, operational
and inventory distribution functions in a 19,000 square foot building
located in Romeoville, Illinois, a suburb of Chicago, Illinois. The
building is rented pursuant to a lease at a rate of $10,240 per month
and which will expire on April 30, 2001. The Company also maintains
a facility in Jacksonville, Florida which the Company subleases to
tenants. The lease and the sublease on the facility in Florida are
scheduled to expire in October 1999. The monthly rental under the
lease is $5,425 and the sublease which is currently $4,501.
The Company owns no real estate and does not intend to invest in
real estate or interests in real estate, real estate mortgages, or
securities of or interests in persons primarily engaged in real
estate activities for the foreseeable future.
Item 3. Legal Proceedings
On December 5, 1996, the Company filed a complaint against the
accounting and auditing firm of Marinelli & Scott (the Company's
predecessor accounting and auditing firm) in the United States
District Court for the Northern District of Illinois, Eastern
Division (Docket No. 96C 7982), alleging professional
malpractice/negligence arising in connection with auditing and
accounting services performed by Marinelli & Scott. The Company is
seeking damages in excess of $50,000.
Except for such lawsuit, the Company is not aware of any
material pending or threatened litigation to which the Company is or
would be a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the year ended September 30, 1997, no matters were placed
before the stockholders of the Company for consideration.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Units, Common Stock and Class A Warrants are
quoted on the OTC Electronic Bulletin board and are traded under the
symbols FKLNU, FKLN, and FKLNW, respectively. The Company has
outstanding additional warrants to purchase Common Stock which are
not publicly traded. See Note 6 to the Financial Statements
contained elsewhere herein.
The following table sets forth, for the periods indicated, the
reported high and low bid and asked price quotations for the Units,
Common Stock and Class A Warrants for the fiscal years ended
September 30, 1996, and 1997. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not
represent actual transactions.
Common Stock Class A Warrants
Bid ($) Asked ($) Bid ($) Asked($)
Period of Quote High Low High Low High Low High Low
Fiscal 1996:
First Quarter 5/8 1/8 1 7/32 3/100 1/100 3/50 7/200
Second Quarter 3/4 5/32 7/8 7/32 2/25 1/100 1/10 7/200
Third Quarter 11/16 15/1 27/32 7/16 9/50 7/200 3/10 11/200
Fourth Quarter 1-7/25 1/4 1-3/10 11/25 17/100 6/100 23/100 1/10
Fiscal 1997:
First Quarter 1-3/8 3/8 1-5/8 7/16 1/5 1/2 13/50 7/100
Second Quarter 7/8 5/16 1 17/50 9/100 3/100 1/10 7/100
Third Quarter 11/25 1/4 47/100 27/100 1/20 1/50 7/100 7/200
Fourth Quarter 1/2 1/4 3/5 7/25 3/100 3/100 2/50 2/50
Units
Bid Asked
High Low High Low
Fiscal 1996:
First Quarter 1/4 1/8 7/8 7/16
Second Quarter 9/16 1/8 1-1/2 7/16
Third Quarter 1/2 1/2 5/8 1/2
Fourth Quarter 1 1/4 1-3/4 3/4
Fiscal 1997
First Quarter 1-1/4 1/4 1-15/16 7/8
Second Quarter 13/16 1/4 1-1/4 7/8
Third Quarter 1/2 1/4 1-3/16 1/2
Fourth Quarter 1/2 7/25 22/25 63/100
At January 12, 1998, there were 208 holders of record of
Common Stock and 82 holders of record of Class A Warrants. The
foregoing is based in part upon information furnished by Continental
Stock Transfer and Trust Company, New York, New York, the transfer
agent for the Company's Common Stock and warrant agent for the Class
A Warrants.
<PAGE>
There have been no cash dividends paid in fiscal years 1996 and
1997. The Company's Agreement with Harris Trust and Savings Bank
("Harris Bank") includes a covenant prohibiting the distribution of
dividends by the Company without the consent of Harris Bank. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN
OF OPERATION--Liquidity and Capital Resources" and Notes 2 and 3 to
the Financial Statements contained elsewhere herein.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
During fiscal 1997, the Company completed restructuring that
began during fiscal 1995 with the consolidation
of the Company's facilities into Romeoville, Illinois
(the location of MOI) and a change in management that included the
appointment of the Company's current CEO, COO and CFO. The
restructuring was completed when the Company: (1) completed a
private placement of 2,400,500 units comprised of two shares of
Common Stock and one common stock purchase warrant entitling the
holder to purchase one share of Common Stock at $1.00 per share
within a specified period (collectively, the 'Warrants'), for
an aggregate price of $1,200,250; (2) reached agreement with its
primary lender, Silicon, in which $3,175,104 in debt owed by the
Company to Silicon was converted into 2,088,884 shares of the
Company's Common Stock; and (3) reached agreements with certain
trade creditors pursuant to which such trade creditors: (i)
converted an aggregate of approximately $533,000 owed to them
into shares of Common Stock at a price of $1.52 per share; (ii)
forgave trade debt in the amount of approximately $201,000; and (iii)
accepted certain promissory notes (having a maturity date up to
twenty-four months from the date thereof and an applicable interest
rate of 10%) in payment of additional trade debt totaling $335,000.
See Description of Securities _ Class Band Class C Warrants and Notes
2, 3 and 5 of the Financial Statements included elsewhere herein.
In connection with the restructuring, the Company increased sales
and marketing efforts by increasing its sales representation in
locations from which the Company had previously withdrawn and
reintroducing the direct mailing of catalogs describing the products
and services provided by the Company. The Company attributes an
increase of 27% and 30% in sales during the third and fourth quarters
of fiscal 1997, respectively, over the prior year's comparable
quarters to the above referenced increase in sales and marketing
efforts.
In addition, subsequent to fiscal 1997, the Company was able to
replace its former credit facility with Silicon with a new credit
facility with Harris Trust and Savings Bank which increased the
Company's credit line from $1.8 million to $2.5 million and the
extended of the term of the Company's line of credit to March 31,
2000. See Notes 2 and 3 to the Financial Statements contained
elsewhere herein.
<PAGE>
Results of Operations
Sales increased by $1,098,358 or 13% from $8,469,994 in fiscal
1996 to $9,568,352 for the year ended September 30, 1997. The
previously discussed completion of the financial restructuring during
the first quarter of fiscal 1997 enabled the Company to increase
marketing efforts and expand its sales/service which resulted in
sales increases of $513,386 (a 27% increase) and $623,942 (a 30%
increase) during the third and fourth quarters of fiscal 1997,
respectively versus the prior year's third and fourth quarters were
the dominant reasons for the overall increase in sales.
The Company's gross margin on sales increased from $2,102,251
for fiscal 1996 to $2,675,269 for the fiscal year ended September 30,
1997 primarily as a result of the increase in sales. Gross margin as
a percentage of sales increased from 24.8% in fiscal 1996 to 28% in
fiscal 1997. The increase in gross margin as a percentage of sales
for the fiscal year ended September 30, 1997 is primarily
attributable to the rebate programs the Company was able to achieve
as a result of increases in sales during the latter part of fiscal
1997, the Company's continued dependence on service revenue, the
Company's sales of private labeled products which have historically
provided for greater margins, and the completion of the Company's
financial restructuring which provided the Company with greater
financial ability to purchase greater quantities at lower costs.
Selling, general and administrative ("SG&A") expenses decreased
from $3,147,600 in fiscal 1996 to $2,572,419 in fiscal 1997.
Although salaries for sales/service representatives increased by
approximately 70% from $90,903 during the fourth quarter of fiscal
1996 to $154,637 during the fourth quarter of fiscal 1997 as a result
of the addition of new sales/service representatives, the Company was
able to reduce SG&A primarily due to the completion of the Company's
financial restructuring which among other things, reduced expenses
attributed to professional fees.
Amortization and depreciation expense decreased from $427,955
for the fiscal year ended September 30, 1996 to $307,797 for the
fiscal year ended September 30, 1997. The decrease is primarily
attributable to the elimination of amortization expense that the
Company incurred during fiscal 1996 pertaining to the acquisition of
certain software rights.
Interest Expense decreased from $737,942 for fiscal 1996 to
$150,612 for fiscal 1997. The decrease in interest is primarily
attributable to the conversion of: i) approximately $3.2 million owed
to Silicon; ii) the conversions to equity and/or write-offs of over
$735,000 of trade debt; and iii) conversions of approximately
$300,000 in certain 9% notes and notes to related parties.
In connection with the above conversion of debt to equity by
Silicon, the Company recorded an accrued restructuring charge of
$145,125 which also served to reduce the interest expense reported
from November 1996 through July of 1997.
<PAGE>
As a result of the foregoing factors, the Company reported
positive earnings before interest, taxes, depreciation and
amortization ("EBITDA") and extraordinary items for the fiscal year
ended September 30, 1997 of $102,850 versus a loss of $1,043,302 for
the prior fiscal year. Although the Company does not represent that
the EBITDA is a substitute for GAAP based financials, the Company
believes that it is a good measurement of the Company's progress
given the amount of income that is offset by amortization expense
primarily associated with the acquisition of Midwest Ophthalmic
Instruments Co., Inc which took place during the fourth quarter of
fiscal 1994. With interest, taxes, depreciation and amortization
included, and a gain from restructuring of $2,871,513, the Company
reported net earnings of $2,515,954 for the fiscal year ended
September 30, 1997 versus a net loss of $1,977,939 for the prior
fiscal year. As a result of the above, the Company reported a net
earnings per share of $.15 for the fiscal year ended September 30,
1997 versus a net loss per share of $.25 for the prior fiscal year.
Liquidity and Capital Resources
Cash flow from operations was a negative $1,039,368 and a
positive $51,980 in fiscal 1997 and 1996 respectively. The
$1,091,348 decrease was primarily attributed to increases in accounts
receivable, inventory and prepaid expenses to support the Company's
growth, and a reduction of customer deposits and accounts payable.
The Company financed the negative cash flows with the proceeds of
private placements of securities during the quarters ended December
31, 1996 and June 30, 1997. See Notes 3 and 5 to the Financial
Statements included elsewhere herein.
Until December 30, 1997, the Company's principal credit facility
had been a revolving credit facility with Silicon. The line of
credit, which was secured by essentially all of the Company's assets,
initially provided for borrowings of up to $4,000,000, limited to (i)
80% of the amount of eligible accounts receivable; and (ii) the
lesser of $1,500,000 or 50% of the book value of eligible
inventories, reduced by trade accounts payable. The line of credit
provided for the payment of interest monthly at the rate of 1% over
the bank's prime rate for borrowings collateralized by accounts
receivable and 3% over the bank's prime rate for borrowings
collateralized by inventory. The line of credit was scheduled to
mature on February 5, 1995. See Note 3 to the Financial Statements
Statements included elsewhere herein.
The Amended Agreement with Silicon provided a line of credit to
the Company with advances against the line of credit for the lower of
$1.8 million or the amounts supported by a formula derived borrowing
base. The borrowing base was equal to (i) 80% of the amount of
eligible accounts receivable and (ii) 50% of eligible inventories or
$1,000,000. The lending rate on the Amended Agreement was 2% over
Silicon's prime rate and was payable on a monthly basis.
<PAGE>
During August 1997, the Company and Silicon agreed to an
extension of the line of credit to September 30, 1997, which maturity
date could be further extended by the Company to February 28, 1998
upon payment of a fee to Silicon and as long as the Company was not
in default under the Amended Agreement. The interest rate charged
under the Revised Agreement was increased to 3% over Silicon's prime
lending rate, increasing to 4% over Silicon's prime lending rate if
the Company was still indebted to Silicon at January 1, 1998. In
addition the Revised Agreement provided for a loan fee that was
payable as follows: (i) $4,000 upon effectiveness of the Revised
Agreement; (ii) $6,000 on September 30, 1997 if the Company elected
to extend the maturity of the line of credit to February 28, 1998;
and (iii) $8,000 on January 1, 1998 in the event that the Company
remained indebted to Silicon at such date. The Revised Agreement
provided that the Company would be deemed to be in default if it
failed to (i) have a net profit of at least one dollar for each of
the Company's fiscal quarters, and (ii) have an operating profit of
at least one dollar for the Company's fiscal year ending September
30, 1997. For purposes of the Revised Agreement only, operating
profit was defined as the Company's earnings before interest, taxes,
depreciation, and amortization.
On December 30, 1997, the Company reached agreement with Harris
Trust and Savings Bank ("Harris Bank") of Chicago, Illinois on an
Amended and Restated Loan and Security Agreement ("Harris Loan
Agreement") in which Harris purchased from Silicon all of Silicon's
rights, title and interest in the Company's Revised Agreement with
Silicon. The agreement provides for credit facilities comprised of
a Revolving Credit Note for an amount up to $2,200,000 ("Revolving
Note") and a Secured Promissory Note in the amount of $300,000
("Promissory Note"). The Revolving Note is secured by all of the
Company's assets, and provides for a line of credit comprised of a
borrowing base equal to the sum of (i) 80% of the amount of eligible
accounts receivable and (ii) the lesser of 50% of eligible
inventories or $1,000,000. The Revolving Note expires on March 31,
2000.
The Promissory Note provides for a loan of $300,000 in which
principal payments of $3,750 are to commence on February 1, 1998 and
continue through March 1, 2000. On March 31, 2000, a final principal
payment equal to the entire unpaid principal balance hereof, together
with any and all amounts due under the Promissory Note.
In addition, under the terms of the Harris Loan Agreement, the
Company will have the option of borrowing rates on the Revolving Note
and the Promissory Note based on either Harris Bank's Commercial
Prime Rate plus .5% or the London Interest Based Rate ("LIBOR") plus
3%. The Company was also charged a one time loan origination fee of
$15,000. The terms of the loan also include the the personal
guarantees of Messrs. Michael J. Carroll, James J. Urban, and Brian
M. Carroll, the Company's CEO, COO and CFO respectively, for an
amount not to exceed $200,000.
<PAGE>
The Harris Loan Agreement includes certain financial covenants
as follows: (1) a Consolidated Adjusted Tangible Net Worth such that
the Consolidated Tangible Net Worth increases (i) by $200,000 during
the period from October 1, 1997 to September 30, 1998, (ii) by
$250,000 during the period from October 1, 1998 to September 30, 1999
and (iii) by $250,000 during the period form October 1, 1999 to
September 30, 2000; (2) a net book value equal to or greater than
$1,450,000 ; and (3) during each fiscal quarter of each Fiscal year
show a fixed charge ratio, as defined, of 1.4:1 for the Company's
fiscal year ending September 30, 1998 and a ratio of 2.0:1
thereafter.
Outlook
The Company intends to grow in the future through the addition
of outside sales/service representatives, particularly in more
heavily-populated markets in which it currently does not have
representation, and the continued distribution of its recently
reintroduced direct mail catalog. Based on the Company's experience
in distributing catalogs for over 10 years (including the experience
of an acquired company), the Company believes that the catalog will:
(i) supplement the direct sales/service representative(s); (ii)
provide sales in territories not geographically represented by the
Company; (iii) educate the marketplace as to the latest technology;
(iv) enhance the Company's name-recognition in the ophthalmic
marketplace; and (v) provide an overall source of advertising for the
Company.
The Company believes that certain growth opportunities exist for
the Company due to the aging of the population and the continued
development of automated/computerized equipment (see "DESCRIPTION OF
THE BUSINESS--The Industry") as well as the increase in the large
health care organizations versus individual or small group practices.
The number of Americans covered by health care organizations
increased to 63.3 million people in mid-1996, from 47.3 million in
mid-1994, representing an increase from 18% to 24% of the U.S.
population. (Source: November 1997 issue of Vision Council of
America). As a result, the Company believes that there will be a
greater need for ophthalmic instrument companies that can provide
sales and service on a national basis. Given the Company's recent
increase in geographical coverage, the Company believes that it is
one of only a few companies in the industry that would be in a
position to fulfill the expanded sales and service requirements of
such organizations.
The Company is currently unable to raise capital through the
issuance of additional shares of Common Stock or warrants, options or
other securities exercisable for or convertible into shares of Common
Stock because of an insufficiency in the number of authorized shares
of Common Stock. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS." The Company intends to fund its operations and the
expansion of its business through the retention of earnings, if any,
and funds from the Harris Line of Credit.
<PAGE>
Inflation
While inflation has not had a material effect on the Company's
operations in the past, there can be no assurance that the Company
will be able to continue to offset the effects of inflation on the
costs of its products or services through price increases to its
customers without experiencing a redcution in the demand for its
products; or that inflation will not have an overall effect on the
ophthalmic medical instruments market that would have a material
affect on the Company.
Implementation of New Accounting Standards
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings per Share." The new standard
simplifies the standards for computing earnings per share and
requires presentation of two new amounts: basic and diluted earnings
per share. The Company will adopt this standard when it reports its
operating results for the first quarter ending December 31, 1997.
When the Company adopts SFAS No. 128, it expects to report the
following restated eanrings (loss) per share for the fiscal years
ended September 31, as follows:
1997 1996
Basic $.15 ($.25)
Diluted $.15 ($.25)
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income". The new standard
discusses how to report and display is effective for years beginning
after December 15, 1997. When the Company adopts this statement, it
is not expected to have a material impact on the presentation of the
Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information". This standard requires enterprises to report
information about operating segments, their products and services,
geographic areas, and major customers. This standard is effective
for years beginning after December 15, 1997. When the Company
adopts this statement, it is not expected to have a material impact
on the presentation of the Company's financial statements.
<PAGE>
ITEM 7. Financial Statements
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-2
Balance Sheets F-3
Statements of Operations F-5
Statements of Cash Flow F-6
Statements of Stockholders (Deficit) Equity F-7
Notes to the Financial Statements F-8
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
of Franklin Ophthalmic Instruments Co., Inc.
Romeoville, Illinois
We have audited the accompanying balance sheets of Franklin
Ophthalmic Co., Inc. as of September 30, 1996 and 1997 and the
related statements of operations, stockholders' (deficit) equity, and
cash flows for the years then ended. 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
Franklin Ophthalmic Instruments Co., Inc. at September 30, 1996 and
1997, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
Chicago, Illinois
January 9, 1998
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
BALANCE SHEETS
ASSETS
September 30, September 30,
1996 1997
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ - $ -
Accounts receivable, less
allowance for doubtful
accounts of $40,135 and
$23,438, respectively 720,277 851,574
Inventory, less valuation
allowance of $100,000
and $60,000, respectively 1,356,057 1,583,510
Prepaid expenses 19,027 170,787
--------- ---------
Total current assets 2,095,361 2,605,871
--------- ---------
Property and equipment, at cost:
Furniture and equipment 605,638 638,938
Automobiles and trucks 119,193 119,193
Leasehold improvements 109,408 121,915
--------- ---------
834,239 880,046
Less: Accumulated depreciation
and amortization 618,394 707,837
--------- ---------
Total property and equipment 215,845 172,209
--------- ---------
Other assets:
Deposits 13,935 13,903
Intangible assets, net of
accumulated amortization of
$706,623 and $924,978, respectively 2,272,271 2,053,916
--------- ---------
Total other assets 2,286,206 2,067,819
--------- ---------
Total assets $4,597,412 $4,845,899
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
September 30, September 30,
1996 1997
------------- -------------
<S> <C> <C>
Current liabilities:
Bank overdrafts $ 55,597 $ 95,309
Current portion of long-term debt 567,395 157,127
Accounts payable 1,180,475 1,075,382
Notes payable to bank 4,375,304 -
Current portion of capitalized
lease obligations 16,125 18,314
Deposits 429,844 114,839
Accrued liabilities 859,279 259,089
Notes payable to related parties 215,188 -
--------- ---------
Total current liabilities 7,699,207 1,720,060
--------- ---------
Long-term debt:
Notes payable to bank, long term - 1,659,314
Long-term debt, less current portion 93,722 -
Capitalized lease obligations,
less current portion 30,695 12,382
------- ---------
Total long-term debt 124,417 1,671,696
--------- ---------
Total liabilities 7,823,624 3,391,756
--------- ---------
Stockholders' (deficit) equity:
Common stock: $0.001 par value;
authorized 25,000,000 shares;
9,544,810 issued and outstanding
at September 30, 1996 and 19,583,378
issued and outstanding at
September 30, 1997 9,545 19,583
Additional paid-in capital 8,868,577 11,022,940
Accumulated deficit (12,104,334) (9,588,380)
------------ -----------
Total stockholders' (deficit)
equity (3,226,212) 1,454,143
------------ -----------
Total liabilities and
stockholders' (deficit) equity $4,597,412 $4,845,899
============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
STATEMENTS OF OPERATIONS
For the year ended
September 30,
1996 1997
---- ----
<S> <C> <C>
Sales $8,469,994 $9,568,352
Less:
Cost of Sales 6,367,743 6,893,083
Selling, general and
administrative expenses 3,147,600 2,572,419
Amortization and depreciation 427,955 307,797
----------- -----------
Loss from operations (1,473,304) (204,947)
----------- -----------
Other income (expenses):
Interest income 54 -
Interest expense (737,942) (150,612)
Other expense 1,993 -
----------- -----------
Other expense, net (735,895) (150,612)
----------- -----------
Loss before extraordinary item (2,209,199) (355,559)
Extraordinary item, gain
from debt restructuring 231,260 2,871,513
------------ ------------
Net (loss) income $(1,977,939) $2,515,954
============ ============
Loss (income) per common share:
Loss before extraordinary $(0.28) $(0.02)
item
============ ============
Net ( loss) income $(0.25) $0.15
============ ============
Weighted average number
of common shares outstanding 7,854,393 16,719,389
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
STATEMENT OF CASH FLOWS
For the year ended
September 30,
1996 1997
<S> <C> <C>
Cash flows from operating
activities:
Net (loss) income $(1,977,939) $ 2,515,954
Adjustments to reconcile net
(loss) income to net cash used
in operating activities:
Depreciation 103,351 89,443
Amortization 324,604 218,354
Gain from debt restructuring (231,260) (2,871,513)
Professional service performed
in exchange for common stock 312,374 -
Changes in current assets and
liabilities:
Accounts receivable 610,907 (131,297)
Inventory 1,189,883 (227,453)
Prepaid expenses 9,269 (151,759)
Other assets 14,363 32
Deposits 70,083 (315,005)
Accounts payable, trade and
accrued liabilities (373,655) (166,124)
Net cash provided by (used in)
operating activities 51,980 (1,039,368)
--------- -----------
Cash flows from investing activities:
Acquisition of equipment (6,331) (45,807)
--------- -----------
Net cash used in investing activities (6,331) (45,807)
--------- -----------
Cash flows from financing activities:
(Decrease) increase in bank
overdrafts (195,481) 39,712
Payments on capital leases (21,053) (16,124)
(Decrease) in borrowings under
line of credit (20,822) (142,686)
Net proceeds from issuance of
common stock - 1,365,263
Increase (decrease) in long-term debt 4,198 (160,990)
Repayment of debt (27,679) -
Proceeds from issuance of
Promissory notes-related party 215,188 -
--------- ---------
Net cash (used in) provided by
financing activities (45,649) 1,085,175
--------- ---------
Net change in cash - -
--------- ---------
Cash and cash equivalents at
beginning of year - -
--------- ---------
Cash and cash equivalents
end of year $ - $ -
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
STATEMENTS OF STOCKHOLDER'S (DEFICIT) EQUITY
Common stock Total
par value $0.001 Additional Stockholder's
Number of paid-in Equity
shares Amount capital Deficit (deficit)
<S> <C> <C> <C> <C> <C>
BALANCE,
September 30, 1995 7,656,025 $ 7,656 $ 8,240,020 $(10,126,395) $(1,878,719)
Issuance of stock for
services 16,500 17 12,358 - 12,375
Issuance of stock for
services (Note 6) 600,000 600 299,400 300,000
Conversion of
accounts payable
(Note 5) 102,285 102 25,469 25,571
Conversion of
shareholder notes 720,000 720 179,280 180,000
payable (Note 4)
Conversion of 9%
notes (Note 5) 450,000 450 112,050 112,500
Net loss (1,977,939) (1,977,939)
BALANCE, --------- ----- --------- ----------- -----------
September 30, 1996 9,544,810 9,545 8,868,577 (12,104,334) (3,226,212)
Private placements-
quarter ended
12/31/96 (Note 6) 4,801,000 4,801 1,195,449 1,200,250
Conversion of notes
payable (Note 5) 248,684 248 61,923 62,171
Silicon conversion
of bank debt
(Note 2,3,6) 2,088,884 2,089 520,132 522,221
Private placement-
quarter ended
6/30/97 (Note 6) 2,900,000 2,900 577,100 580,000
Offering costs of
private placements (200,241) (200,241)
Net income 2,515,954 2,515,954
--------- ----- --------- ---------- ----------
BALANCE,
September 30, 1997 19,583,378 19,583 11,022,940 (9,588,380) 1,454,143
========== ====== ========== =========== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Business
Franklin Ophthalmic Instruments Co., Inc. (the "Company"),
located in Romeoville, Illinois, is engaged in the national retail
sale of ophthalmic instruments which are marketed to doctors,
hospitals, universities and the military through the use of catalogs
and outside sales representatives. The Company's principal markets
are located in the Midwest, Southeast and the West Coast of the
United States. The Company's operations involve granting credit to
local, regional and national medical practices, hospitals,
universities and to the military. Concentrations of credit risk are
limited by the large number of entities comprising the Company's
customer base and the geographic diversity of the Company's
customers. The Company operates under the trade name "Franklin MOI".
(B) Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(C) Inventories
Inventories consisting of new equipment, used equipment and
parts, are valued at the lower of cost (using the first in first out
method) or market.
(D) Property and Equipment
Property and equipment are recorded at cost. Depreciation is
provided using straight line and accelerated methods over the
estimated useful lives of three to seven years. Leasehold
improvements are amortized on a straight-line basis over the lesser
of the estimated useful lives of the assets or the related lease
terms.
<PAGE>
(E) Intangible Assets
Intangible assets consist primarily of goodwill, which represent
the excess of cost over fair market value of net assets acquired
in the purchase of Midwest Ophthalmic Instruments Co., Inc. ("MOI"),
and are being amortized on the straight line method over 15 years.
It is the Company's policy to periodically evaluate the carrying
value of its operating assets, including goodwill, and to recognize
impairments when the estimated future net operating cash flows to be
generated from the use of the assets are less than their carrying
value. The Company measures impairment of goodwill by the difference
between the carrying value and the estimated discounted cash flows
from the assets.
Amortization expense related to intangible assets was $324,604
for the year ended September 30, 1996 and $218,354 for the year ended
September 30, 1997.
(F) Income Taxes
The Company provides for deferred taxes on the difference
between the financial reporting and tax bases of assets and
liabilities in accordance with Statement of Financial Accounting
Standards No. 109.
(G) Net Income/(Loss) per Share
Net income/(loss) per common share is computed by dividing net
income/(loss) by the weighted average number of common shares
outstanding. Outstanding common stock options, warrants and shares
of common stock issuable upon the conversion of outstanding
convertible debentures have been excluded from the computation of net
loss per share as their effect would be anti-dilutive.
(H) Cash and Cash Equivalents
The Company considers all highly liquid investments that have
maturity of three months or less on the date of purchase to be cash
equivalents.
(I) Financial Instruments
Financial instruments which potentially subject the Company to
concentrations of risk consist principally of accounts receivable.
The accounts receivable are from numerous entities located
throughout the United States and the associated credit risks
are limited. The carrying values reflected
in the balance sheet at September 30, 1997 reasonably approximate the
fair values for accounts receivable and payable.
(J) Revenue Recognition
The Company recognizes revenue and the related costs when
merchandise is shipped.
(K) Advertising
Advertising costs are expensed as incurred and included in
"selling, general and administrative expenses". Advertising expenses
amounted to approximately $44,000 in fiscal 1996 and approximately
$57,000 in fiscal 1997.
<PAGE>
(L) Reclassifications
Certain reclassifications have been made to prior year for
consistency purposes.
(M) Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings per Share." The new standard simplifies the
standards for computing earnings per share and requires presentation
of two new amounts: basic and diluted earnings per share. The
Company will adopt this standard when it reports its operating
results for the first quarter ending December 31, 1997. When the
Company adopts SFAS No. 128, it expects to report the following
restated earnings (loss) per share for the fiscal years ended
September 31, as follows:
1997 1996
Basic $.15 ($.25)
Diluted $.15 ($.25)
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income". The new standard
discusses how to report and display is effective for years beginning
after December 15, 1997. When the Company adopts this statement, it
is not expected to have a material impact on the presentation of the
Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information". This standard requires enterprises to report
information about operating segments, their products and services,
geographic areas, and major customers. This standard is effective
for years beginning after December 15, 1997. When the Company
adopts this statement, it is not expected to have a material impact
on the presentation of the Company's financial statements.
2. RESTRUCTURING
During the first quarter of fiscal 1997, the Company completed a
restructuring that began during fiscal 1995 with the consolidation
of the Company's facilities
into Romeoville, Illinois (the location of MOI) and a change in
management that included the appointment of the Company's
current CEO, COO and CFO. During the fourth quarter of fiscal
1996, the Company reached agreements with Silicon, its primary
trade creditors and certain of its debtholders for the
restructuring of some of the Company's outstanding debt. In
addition, the Company was able to raise $1,200,250 and $580,000
through the private placements of equity in the first and third
quarters of fiscal 1997 respectively.
<PAGE>
Pursuant to the agreement with Silicon, during the first
quarter of fiscal 1997 approximately $3.2 million owing to Silicon
was converted into shares of the Company's Common Stock at a
conversion rate of $1.52 per share and the remaining $1.8 million
owing to Silicon was transferred into a new credit facility. In
connection with the restructuring of trade debt during the fourth
quarter of fiscal 1996 and the first quarter of fiscal 1997: (i)
$533,000 of trade debt was converted to stock in the Company at a
rate of $1.52 per share; (ii) $201,000 was forgiven; and (iii)
approximately $335,000 was converted to promissory notes with terms
of up to 24 months. The debt restructuring resulted in extraordinary
gains of $231,260 and $2,871,513 for the fiscal years ended 1996 and
1997, respectively.
3. NOTES PAYABLE - BANK
Until December 30, 1997, the Company's principal credit facility
had been a revolving credit facility with Silicon. The line of
credit, which was secured by essentially all of the Company's assets,
initially provided for borrowings of up to $4,000,000, limited to (i)
80% of the amount of eligible accounts receivable; and (ii) the
lesser of $1,500,000 or 50% of the book value of eligible
inventories, reduced by trade accounts payable. The line of credit
provided for the payment of interest monthly at the rate of 1% over
the bank's prime rate for borrowings collateralized by accounts
receivable and 3% over the bank's prime rate for borrowings
collateralized by inventory. The line of credit was scheduled to
mature on February 5, 1995. See Note 3 to the Financial Statements
included elsewhere herein.
The Amended Agreement with Silicon provided a line of credit to
the Company with advances against the line of credit for the lower of
$1.8 million or the amounts supported by a formula derived borrowing
base. The borrowing base was equal to (i) 80% of the amount of
eligible accounts receivable and (ii) 50% of eligible inventories or
$1,000,000. The lending rate on the Amended Agreement was 2% over
Silicon's prime rate and was payable on a monthly basis.
<PAGE>
During August 1997, the Company and Silicon agreed to an
extension of the line of credit to September 30, 1997, which maturity
date could be further extended by the Company to February 28, 1998
upon payment of a fee to Silicon and as long as the Company was not
in default under the Amended Agreement. The interest rate charged
under the Revised Agreement was increased to 3% over Silicon's prime
lending rate, increasing to 4% over Silicon's prime lending rate if
the Company was still indebted to Silicon at January 1, 1998. In
addition the Revised Agreement provided for a loan fee that was
payable as follows: (i) $4,000 upon effectiveness of the Revised
Agreement; (ii) $6,000 on September 30, 1997 if the Company elected
to extend the maturity of the line of credit to February 28, 1998;
and (iii) $8,000 on January 1, 1998 in the event that the Company
remained indebted to Silicon at such date. The Revised Agreement
provided that the Company would be deemed to be in default if it
failed to (i) have a net profit of at least one dollar for each of
the Company's fiscal quarters, and (ii) have an operating profit of
at least one dollar for the Company's fiscal year ending September
30, 1997. For purposes of the Revised Agreement only, operating
profit was defined as the Company's earnings before interest, taxes,
depreciation, and amortization.
On December 30, 1997, the Company reached agreement with Harris
Trust and Savings Bank ("Harris Bank") of Chicago, Illinois on an
Amended and Restated Loan and Security Agreement ("Harris Loan
Agreement") in which Harris purchased from Silicon all of Silicon's
rights, title and interest in the Company's Revised Agreement with
Silicon. The agreement provides for credit facilities comprised of
a Revolving Credit Note for an amount up to $2,200,000 ("Revolving
Note") and a Secured Promissory Note in the amount of $300,000
("Promissory Note"). The Revolving Note is secured by all of the
Company's assets, and provides for a line of credit comprised of a
borrowing base equal to the sum of (i) 80% of the amount of eligible
accounts receivable and (ii) the lesser of 50% of eligible
inventories or $1,000,000. The Revolving Note expires on March 31,
2000.
The Promissory Note provides for a loan of $300,000 in which
principal payments of $3,750 are to commence on February 1, 1998 and
continue through March 1, 2000. On March 31, 2000, a final principal
payment equal to the entire unpaid principal balance hereof, together
with any and all amounts due under the Promissory Note.
In addition, under the terms of the Harris Loan Agreement, the
Company will have the option of borrowing rates on the Revolving Note
and the Promissory Note based on either Harris Bank's Commercial
Prime Rate plus .5% or the London Interest Based Rate ("LIBOR") plus
3%. The Company was also charged a one time loan origination fee of
$15,000. The terms of the loan also include the the personal
guarantees of Messrs. Michael J. Carroll, James J. Urban, and Brian
M. Carroll, the Company's CEO, COO and CFO respectively, for an
amount not to exceed $200,000.
<PAGE>
The Harris Loan Agreement includes certain financial covenants
as follows: (1) a Consolidated Adjusted Tangible Net Worth such that
the Consolidated Tangible Net Worth increases (i) by $200,000 during
the period from October 1, 1997 to September 30, 1998, (ii) by
$250,000 during the period from October 1, 1998 to September 30, 1999
and (iii) by $250,000 during the period form October 1, 1999 to
September 30, 2000; (2) a net book value equal to or greater than
$1,450,000 ; and (3) during each fiscal quarter of each Fiscal year
show a fixed charge ratio, as defined, of 1.4:1 for the Company's
fiscal year ending September 30, 1998 and a ratio of 2.0:1
thereafter.
As a result of the agreement with Harris Bank, the Company's
notes payable to bank have been classified as long-term debt at
September 30, 1997.
4. SHORT TERM DEBT - RELATED PARTY
In September 1995, Michael J. Carroll and James J. Urban, the
Company's President/Chief Executive Officer and Senior Vice
President/Chief Operating Officer, respectively, loaned an aggregate
of $100,000 to the Company in exchange for 90-day promissory notes.
In addition, Linda Zimdars, a member of the Company's board of
directors, loaned $100,000 to the Company in exchange for 90-day
promissory notes. The notes to Ms. Zimdars were personally guaranteed
by Messrs. M. Carroll and Urban. The interest rate on the above
notes was 15% per annum. In December 1995, a payment of $10,000 was
made on the note to Messrs. Carroll and Urban and a payment of
$10,000 was made on the note to Ms. Zimdars. In April 1996, the
notes were amended to extend their maturity to July 1, 1996, and in
September 1996, the notes were converted to Common Stock in the
Company at the conversion rate of $.25 per share.
In December 1995, the Company borrowed an additional $280,000
under 60-day promissory notes bearing interest at 6% per annum and
note origination fees of $17,000 (6%). Of the aggregate of $280,000:
(i) $50,000 was borrowed from each of Michael Carroll and James
Urban; (ii) $80,000 was borrowed from Ms. Zimdars; and (iii) $100,000
was borrowed from Tiger Eye Capital , L.L. C. ("Tiger Eye"). The
notes were repaid in February 1996. Tiger Eye had consulting
agreements with the Company which provided for the issuance of
600,000 shares of common stock in connection with the rendering of
investor and public relations services.
In February 1996, the Company borrowed $150,000 from Messrs.
Carroll and Urban, and Ms. Zimdars under 24-day promissory notes
bearing interest at the rate of 1% per annum above the prime lending
rate in effect from time to time. A loan origination fee of 3% was
also paid. Of the aggregate of $150,000, $50,000 was borrowed from
each of Messrs. Carroll and Urban, and Ms. Zimdars. In March 1996, a
payment of $12,500 was made to each of Messrs. Carroll and Urban, and
in May 1996, the balance of the notes to Messrs. Carroll and Urban
were repaid. The note to Ms. Zimdars was repaid in May 1996.
<PAGE>
During August of 1996, the Company borrowed $215,188 from an
individual under a 30 day promissory note bearing interest at 10% per
annum and a note origination fee of 6,450. In October, the note was
converted to 860,752 shares of common stock in the Company as
participation in the Company's Private Placement offering which
commenced on October 1, 1996. In addition, warrants exercisable for
$1.00 were also issued as part of the participation in the
aforementioned Private Placement offering.
5. LONG-TERM DEBT
Long-term debt consists of the following:
September 30,
1996 1997
Notes Payable collateralized by automobiles
and trucks, with interest rates between
4.8% and 9.3%, principal and interest
payable monthly, due on or before
September 1998 $16,161 $ 4,668
9% notes payable 25,000 -
10% trade creditor promissory note payable
monthly through October 1998 540,000 97,421
10% trade creditor promissory note payable
monthly from December 1996 through
November 1998 of which $14,567
represents amounts for deferred interest. 79,956 55,038
--------- -------
Total long-term debt 661,117 157,127
Less current portion 567,395 157,127
--------- ---------
Long-term debt, less current portion $ 93,722 $ -
========= =========
During August of 1996, the Company reached agreement with a
trade creditor in which of the $222,104 owed, $66,631 would be
converted to a 24 month promissory note with simple interest at 10%,
and the balance, $155,473 would be converted into 102,285 shares of
the Company's Common Stock (a conversion rate of $1.52 per share).
In November of 1997, the Company reached agreement with another trade
creditor in which of the $540,000 owed, $162,000 would be converted
into 248,684 shares of the Company's Common Stock (a conversion rate
of $1.52 per share). See Note 6 to the Financial Statements included
elsewhere herein.
In September 1996, in connection with the Company's debt
restructuring, the Company elected to provide a conversion rate on
certain 9% Notes from a private debt issuance during fiscal 1994,
such that the amounts outstanding under the 9% Notes could be
converted at the rate of $.25 per share (the rate at which the
Company commenced a Private Placement of Equity in the Company on
October 1, 1996). In connection with the above, $112,500 was
converted to shares of the Company's common stock at a rate of $.25
per share (the same pro rata price as sold in the Company's private
placement) during the fourth quarter of fiscal 1996.
<PAGE>
The Company believes that the interest rates on its long-term
debt are generally below the rates that would currently be available
for similar debt instruments issued by similar borrowers, and that as
a result, the market value of the Company's long-term debt is less
than the carrying amount. However, a determination of the specific
market value of the Company's long-term debt would involve excessive
costs.
6. STOCKHOLDERS' EQUITY
(A) Common Stock and Common Stock Warrant Transactions (the
"Securities Transactions")
In addition to the securities transactions described in Notes 2,
3, 4 and 5 above, the following occurred during fiscal 1996 and 1997:
In December 1995, the Company entered into a consulting
agreement with Tiger Eye which provides for the rendering of investor
and public relations services. Pursuant to such agreement, Tiger Eye
was entitled to receive 300,000 shares of Common stock: 100,000 of
which were issuable upon execution of the agreement and 33,333 of
which were issuable each month through June 1996. The initial term
of the agreement commenced January 1, 1996. Such agreement was
amended to provide for performance thereunder at such time as the
Company became current in its public reporting under the Exchange
Act.
In July 1996, pursuant to the terms of a consulting agreement,
as amended, between the Company and Tiger Eye, the Company issued
600,000 shares of the Company's common stock to Tiger Eye. As a
result of the above, the Company recorded an expense of $300,000
during the fourth quarter of fiscal 1996.
During the first quarter of fiscal 1997, the Company raised
$1,200,250 of capital through the sale of 2,400,500 Units which were
sold pursuant to a private placement of Units (each Unit consisting
of two shares of common stock and one common stock purchase warrant,
exercisable between 6-18 months after the issuance of such common
stock purchase warrant). The sale of the 2,400,500 Units exceeded
the minimum of 2,000,000 Units required pursuant to the terms of the
private placement, which was conducted by the Company on a "best
efforts" basis and provided for the sale and offer of up to a maximum
of 3,200,000 Units. The amount raised in the private placement,
together with the effectiveness of personal guarantees by Messrs. M.
Carroll, J. Urban and B. Carroll, satisfied all remaining conditions
with Silicon.
<PAGE>
The Company entered into an agreement on April 11, 1997, which
was amended on May 8, May 9, and May 11, 1997 (the "Investment
Agreement"), with Prinz-Franklin L.L.C., an Illinois limited
liability company ("Prinz"), pursuant to which the Company agreed to
sell to Prinz up to 3,000,000 shares of Common Stock at a price of
$0.20 per share. The Investment Agreement granted Prinz piggyback
registration rights
with respect to the shares of Common Stock so purchased. Pursuant to
such piggy-back registration rights, any shares of Common Stock which
Prinz elects to include in a registration statement of the Company
shall be held in escrow during the effective period of such
registration statement until the following conditions are met: (i)
25% of the shares purchased may not be sold or released from escrow
until the closing price of the Company's Common Stock is equal to or
greater than $0.75 per share for five consecutive trading days; and
(ii) the remaining common stock may not be sold or released from
escrow until the closing price of the Company's Common Stock is equal
to or greater than $1.25 per share for five consecutive trading days.
Such escrow restrictions shall terminate at the earlier of the time
the common stock sold to Prinz is exempt under Rule 144 as
promulgated under the Securities Act of 1933, as amended, or one year
from the date of each purchase of the respective shares. In
addition, the Investment Agreement provided for the issuance to Prinz
of warrants to purchase up to 400,000 shares of Common Stock at a
price of $1.00 per share within a period of four years from issuance
of the applicable warrants. During the quarter ended June 30, 1997,
Prinz had purchased 2,900,000 of the shares of Common Stock for
$580,000 and was granted warrants to purchase 400,000 additional
shares of Common Stock. The Investment Agreement also provided for
the appointment of John Prinz to the Board of Directors of the
Company.
In connection with the Company's restructuring of the Silicon
debt during the quarter ended December 31, 1996, the Company agreed
to issue an additional 1,767 shares of Common Stock in August of 1997
to reconcile the amount of interest that was accrued up to the date
of the effectiveness of the Silicon conversion in November of 1996.
<PAGE>
In accordance with anti-dilution rights of Class A Warrants
that were issued during the Company's Initial Public Offering in July
1993, the exercise price for the Class A Warrants has been reduced
from its original level of $5.00 per share of Common Stock to $2.30
per share, and the aggregate number of shares of Common Stock
issuable upon exercise of such warrants has been increased from
2,062,500 to 4,487,740. As a consequence of the increase in the
number of shares issuable upon the exercise of the Class A Warrants,
the Company no longer has sufficient shares of Common Stock
authorized to provide for the exercise of all of the outstanding
common stock purchase warrants and options. To remedy this situation,
Michael J. Carroll and James J. Urban, the Company's chief executive
officer and chief operating officer respectively, have agreed to
surrender to the Company for redemption that number of shares of
Common Stock equal to any such Stock Deficiency up to an aggregate
amount of 2,450,000 shares. In the event that an amount of warrants
is exercised such that a Stock Deficiency is created,the Company will
use the proceeds from such exercise of warrants to fund the buy back
of stock from Messrs. M. Carroll and Urban. The price per share paid
to Messrs. Carroll and Urban will equal the exercise price per share
under the common stock purchase warrants or options the exercise of
which results in such deficiency, with the result that the Company
will receive no net benefit from the exercise of the warrants or
options. Until such shares are redeemed, if at all, they will remain
the property of Messrs. Carroll and Urban, although certificates
representing the shares will be held in the custody of the Company.
The agreement terminates upon the earlier to occur of (i) the
effectiveness of any amendment to the Company's certificate of
incorporation increasing the authorized shares of Common Stock
sufficient to eliminate any potential Stock Deficiency or (ii) the
expiration of a sufficient number of common stock purchase warrants
and/or options in an amount sufficient to eliminate any potential
Stock Deficiency.
<PAGE>
(B) Outstanding Stock Purchase Warrants
Class A Warrants. A total of 2,062,500 Class A Warrants were
issued and outstanding atSeptember 30, 1997. The Class A Warrants
were issued as part of the Units in the Company's Initial Public
Offering. Each Class A Warrant originally entitled the holder
thereof to purchase one share of Common Stock at a price of $5.00 per
share until July 23, 1998. However, the warrant agreement pertaining
to the Class A Warrants (the "Warrant Agreement") contains certain
anti-dilution provisions, which have been triggered by subsequent
sales by the Company of shares of Common Stock at less than "fair
market value" as defined in the Warrant Agreement. These anti-
dilution provisions both reduce the exercise price of the Class A
Warrants and increase the number of shares of Common Stock that may
be purchased on the exercise of the Class A Warrants. As of the
date hereof, the exercise price of the Class A Warrants is $2.30 per
share, and the total number of shares of Common Stock that may be
purchased upon the exercise of all Class A Warrants is 4,487,740.
Each Class A Warrant is redeemable by the
Company, at its option, for $0.10 per warrant, at any time upon
delivery by the Company of 30 days prior written notice, if the
last sale price, or the average of the bid and asked prices, per
share of Common Stock, as reported by the principal exchange on
which the Common Stock is then traded, NASDAQ, the OTC
Electronic Bulletin Board or the National Quotation Bureau
Incorporated, as the case may be, equals or exceeds $6.00 per share
for 20 consecutive trading days ending within 15 days prior to the
date of the notice of redemption. Upon delivery by the Company of
30 days written notice to all holders of the Class A Warrants, the
Company will have the right, subject to compliance with Rule 13e-4
under the Securities Exchange actof 1934, as amended (the 'Exchange
Act'), and the filing of Schedule 13E-4, to reduce the exercise
price and/or extend the term of the Class A Warrants.
Class B and Class C Warrants. A total of 2,156,500 Class
B Warrants and 244,000 Class C were issued and outstanding at
September 30, 1997. The Class B Warrants were issued on November
25, 1996, and the Class C Warrants were issued on December 30, 1996,
each as part of a unit offered in a private placement consisting of
two shares of Common Stock and one common stock purchase
warrant Each Class B Warrant and Class C Warrant entitles the
holder thereof to purchase one share of Common Stock at a price of
$1.00 per share between 6 months and 18 months after the
issuance date. Each Class B Warrant and Class C Warrant is
redeemable by the Company, at its option, for $0.10 per warrant, at
any time after September 30, 1997 upon delivery by the Company of 30
days prior written notice, if the closing bid price per share of
Common Stock, as reported by the principal exchange on which the
Common Stock is then traded, NASDAQ, the OTC Electronic Bulletin
Board or the National Quotation Bureau Incorporated, as the case
may be, equals or exceeds $3.00 per share for 20 consecutive
trading days ending within 15 days prior to the date of the notice of
redemption.
<PAGE>
Other Warrants. In addition to the Class A Warrants, Class
B Warrants and Class C Warrants, there are also outstanding: (a)
44,119 warrants issued to Silicon in connection with certain
renewals or modifications of the Company's lines of credit,
exercisable on or before March 31, 2000 at a price of $0.50 per
share; (b) 400,000 warrants issued to Prinz-Franklin, L.L.C. in
connection with a private placement during the third quarter of
fiscal, with 200,000 exercisable on or before April 10, 2001 and
200,000 exercisable on or before May 10, 2001 at a price of $1.00 per
share, (c) a warrant to purchase 25,000 shares of Common Stock
issued to Linda S. Zimdars, a director of the Company, and a
warrant to purchase 25,000 shares of Common Stock issued to Dwayne
Podgurski, a former employee of the Company, both exercisable at a
price of $1.00 per share until December 1997 and (d) 125,000
warrants issued to the underwriter in connection with the initial
public offering by the Company exercisable at a price of $5.00 per
share until July 23, 1998.
The following sets forth the common stock purchase warrants
outstanding which were exercisable as of September 30, 1997:
Shares Obtainable Per Share Exerciseable
on Exercise Exercise Price Through
44,119 $.50 March 2000
50,000 $1.00 December 1997
2,156,500 $1.00 May 1998
244,000 $1.00 June 1998
4,487,740 $2.30 July 1998
200,000 $1.00 April 2001
200,000 $1.00 May 2001
(C) Stock Options and Stock Appreciation Rights
In February 1993, the Company adopted the Franklin Ophthalmic
Instruments Co., Inc. 1993 Stock Option and Appreciation Rights Plan
(the "1993 Plan") which provides for the grant of options to
officers, directors, employees and consultants to purchase not more
than an aggregate of 200,000 shares of Common Stock. The 1993 Plan
provides for the grant of options intended to qualify as "incentive
stock options" under Section 422 of the Internal Revenue Code, as
amended, as well as options which do not so qualify.
<PAGE>
With respect to qualified options, no option may be granted more
than ten years after the effective date of the 1993 Plan or exercised
more than ten years after the date of grant (five years if the
optionee owns more than ten percent of the Common Stock of the
Company). The option price may not be less than 100 percent of the
fair market value of the Common Stock on the date of the grant (110
percent if the optionee owns more than ten percent of the Common
Stock of the Company). Subject to certain limited exceptions,
options may not be exercised unless, at the time of exercise, the
optionee is in the service of the Company. The options to be granted
under the 1993 Plan included options to purchase shares of Common
Stock pursuant to a formula by which each non-employee director is
granted non-qualified options to purchase 15,000 shares of Common
Stock each year.
In March of 1997, the Company's Board of Directors voted to
eliminate the annual automatic granting of options to non-employee
directors that was established under the 1993 Stock Option Rights and
Appreciation Plan.
The 1993 Plan was subsequently amended in December 1993 and
January 1994 to ensure compliance with federal and state securities
laws, and to permit an option holder to arrange for a "cashless
exercise" wherein an option may be exercised and the common stock
sold on the same day with a portion of the proceeds from the sale
delivered to the Company to pay the exercise price of the option.
These amendments were approved by the shareholders at the annual
shareholders' meeting held on March 11, 1994.
In December 1993, the Company's board of directors, adopted
(subject to shareholder approval which was subsequently obtained) the
Franklin Ophthalmic Instruments Inc., Inc. 1994 Combined Stock Option
and Appreciation Rights Plan (the "1994 Plan"). The 1994 Plan was
also amended to conform with state securities laws. The shareholders
approved the adoption of the 1994 Plan and its amendments at the
annual shareholders' meeting held on March 11, 1994.
The terms and conditions of the 1994 Plan are substantially
identical to those of the 1994 Plan with the following two
significant differences: (i) the number of shares of Common Stock
available to purchase through the grant of options and rights under
the 1994 Plan aggregates 330,000; and (ii) directors who are not also
employees are not eligible to participate in the 1994 Plan.
<PAGE>
The following sets forth the activity for the 1993 Plan and the
1994 Plan for fiscal 1996 and 1997:
1993 Plan 1994 Plan
Shares Exercise Price Shares Exercise Price
Outstanding at
September 30, 1995 90,000 $ .75-4.625 96,000 $2.625-3.19
Fiscal 1996
Granted 30,000 $ .50 - -
Forfeited - - 28,500 $2.625-3.19
Outstanding at
September 30, 1996 120,000 $ .50-4.625 67,500 $2.625-3.19
------- ------------ ------ -----------
Fiscal 1997
Granted - $ - - -
Forfeited - - 14,000 $ 3.19
Outstanding at ------- ------------- ------ -----------
September 30, 1997 120,000 $ .50-4.625 53,500 $2.625-3.19
All outstanding options reflected above are currently exercisable.
Options issued subsequent to January 1, 1996 have been issued to
non-employee directors and are not material under the provisions of
SFAS No. 123.
7. INCOME TAXES
The following sets forth the deferred tax assets and liabilities
resulting from temporary differences between the financial reporting
and tax bases of assets and liabilities:
September 30,
1996 1997
Deductible temporary differences
Net operating loss carryforwards $3,700,000 $2,874,000
Allowance for doubtful accounts 16,000 10,000
Valuation reserve for inventory
obsolescence 40,000 24,000
Valuation allowance for deferred
tax assets (3,756,000) (2,908,000)
----------- -----------
Net deferred tax asset $ - $ -
----------- -----------
The valuation allowance was revised during 1997 as net operating
loss carryforwards were utilized to offset taxable income.
As of September 30, 1997, the Company has net operating loss
carryforwards of $7,100,000 which may be used to reduce taxable income
and income taxes in future years. The availability of certain
operating loss carryforwards to offset future years' taxable income
is subject to certain limitations due to changes in the Company's
ownership during the year ended September 30, 1993. The
carryforwards expire from fiscal 2007 to fiscal 2009.
<PAGE>
8. COMMITMENTS AND CAPITAL LEASE OBLIGATIONS
The Company leases office, warehouse and service facilities
under operating leases through 2001. Rent expense (net of sublease
income) was $157,411 for the year ended September 30, 1996 and
$112,696 for the year ended September 30, 1997.
Future obligations under the non-cancelable operating leases
with initial remaining terms in excess of one year at September 30,
1997 are as follows:
Year Ending Minimum Minimum
September 30, Rental Payments Sublease Income Net
1998 185,955 55,464 130,491
1999 185,955 56,907 129,048
2000 126,522 4,833 121,689
2001 70,653 - 70,653
-------- -------- --------
Total $569,085 $117,204 $451,881
The Company leases equipment under capital lease financing
arrangements. Amortization expense associated with the equipment
leases for the years ended September 30, 1996 and 1997 was $15,974
and $15,794, respectively.
Future minimum capital lease payments are as follows:
Year ending September 30, Amount
------------------------- -------
1998 $21,109
1999 $13,013
-------
Total before interest deduction $34,122
Less amount representing interest $ 3,397
Capital lease obligations $30,725
=======
<PAGE>
9. STATEMENT OF CASH FLOWS
For the year
ended September 30,
1996 1997
---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest $400,846 $331,569
Income taxes $ 3,000 $ -
Supplemental schedule of non-cash
investing and financing activities:
Note payable issued to vendor for
trade debt from inventory purchases $ 66,631 $ -
Common stock issued in connection
with the conversion of debt 318,071 799,138
Common stock for services 312,374 -
----------- ---------
Total non-cash investing and
financing activities $697,076 $799,138
========= ==========
10. RELATED PARTY TRANSACTIONS
The Company has an agreement with a sole proprietorship owned
by a member of the board of directors, to provide consulting services.
Fees paid to this sole proprietorship during fiscal 1996 and 1997
were $21,000 and $24,250 respectively.
11. EMPLOYEE BENEFIT PLAN
The Company established a profit-sharing 401(k) plan in
May 1997, for the benefit of substantially all of its employees.
The plan allows employee contributions under a deferred
compensation arrangement (401 (k)). The plan provides for employer
discretionary profit-sharing contributions. There were no company
contributions for the fiscal year ended September 30, 1997. The year
end for the plan is based on a calendar year.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth the names, ages and positions
held with respect to each director and executive officer of the
Company as of September 30, 1997:
Name Age Position with the Company
Michael J. Carroll 58 President, Chief Executive
Officer and Director
James J. Urban 60 Senior Vice President, Chief
Operating Officer and Director
Brian M. Carroll 34 Vice-President and Chief
Financial Officer
Philip G. Winters 48 Director
Linda S. Zimdars 35 Secretary and Director
John Prinz 35 Director
Michael J. Carroll was appointed President of the Company
effective January 1, 1995. In April 1995, Mr. Carroll was also
appointed Chief Executive Officer and a director of the Company upon
the resignation of Robert A. Davis, the Company's previous President
and Chief Executive Officer. Prior to joining the Company, Mr.
Carroll, along with James J. Urban, was a stockholder/founder of MOI,
until July 1994 when all of the outstanding capital stock of MOI was
acquired by the Company. Mr. Carroll was Vice President and Sales
Manager of MOI. Prior to the organization of MOI in 1982, Mr.
Carroll held various executive positions in ophthalmic instrument and
optical firms including Vice President of House of Vision, Inc. (a
firm in the business of manufacturing optical products and the
distribution of ophthalmic instruments with over 150 locations and
approximately 1,100 employees).
James J. Urban was appointed Senior Vice President and Chief
Operating Officer effective January 1, 1995 and Chairman of the Board
of Directors upon the resignation of Dallas Talley on April 1, 1995.
Prior to joining the Company, Mr. Urban, along with Mr. Michael
Carroll, was stockholder/founder of MOI, until July 1994 when all of
the outstanding capital stock of MOI was acquired by the Company.
Mr. Urban served as President of MOI from its incorporation in 1982.
Prior to the inception of MOI, Mr. Urban held various executive
positions with several ophthalmic instrument distribution companies.
<PAGE>
Brian M. Carroll was appointed Vice President and Chief
Financial Officer effective April 1, 1995. Mr. Carroll was co-
founder of MOI's digital imaging division and Doctors Financial
Services, Inc. ("DFS"). DFS was a finance/leasing company
concentrating in the ophthalmic industry. Mr. Carroll holds a B.A.
degree in finance from Loyola University of Chicago, an M.B.A. degree
in accounting from DePaul University and a J.D. degree from The John
Marshall Law School. Brian M. Carroll is the son of Michael J.
Carroll.
Philip G. Winters has been a director of the Company since
October 1992. Dr. Winters is a dentist and has owned and operated
his own general dentistry practice in San Mateo, California since
1976.
Linda S. Zimdars has been a director and Secretary of the
Company since June 1992. Currently, Ms. Zimdars operates a
management consulting practice specializing in business
reorganization and sales and marketing management. Ms. Zimdars
serves as a consultant to the Company. See "Consulting and Other
Arrangements" below. Prior to 1995, Ms. Zimdars was Vice President
and Branch Manager of Redwood Bank, with whom the Company had a
banking relationship from 1984 until approximately April 1995.
John Prinz became a director of the Company in May, 1997. Mr.
Prinz is the President of Prinz and Associates, a firm specializing
in the restructuring and capitalization of private and public
companies. From 1994 through 1996, Mr. Prinz was a founder and
served as Chief Financial Officer of Cormark, a designer and
manufacturer of interactive displays. During 1995, Mr. Prinz
facilitated a reorganization of Dauphin Technologies, a manufacturer
of hand-held computers, and served as a director of such company.
Between 1988 and 1995, Mr. Prinz worked in the securities business as
a registered person for a subsidiary of Raymond James Securities and
as a broker for Robert W. Baird. Mr. Prinz graduated from the
University of Nebraska with a degree in finance and received a
M.B.A. from Temple University.
Classification of the Board of Directors
To provide for continuity of management, the Board of Directors
is classified into three classes: Class I (Michael J. Carroll),
Class II (James J. Urban and John Prinz) and Class III (Linda S.
Zimdars and Philip G. Winters). Each member of the Board of Directors
serves for a term of three years or until a successor has been
elected and qualified. When the classified Board was established, it
was contemplated that one class of directors would be elected at each
annual meeting of stockholders. Class I directors were expected to
stand for re-election at the annual meeting of shareholders in 1995,
and Class II directors were expected to stand for re-election in
1996. However, given the demands on management's time imposed by
the Recapitalization, no annual meetings were held in 1995 and 1996,
and none is scheduled for 1997. The Company plans to hold its next
annual meeting shortly after the end of fiscal 1997. When the next
annual meeting is scheduled, appropriate arrangements will need to be
made for the election of the various classes of directors.
<PAGE>
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law empowers a
corporation to indemnify its directors and officers and to purchase
insurance with respect to liability arising out of their capacity or
status as directors and officers provided that this provision shall
not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)
arising under Section 174 of the Delaware general Corporation Law, or
(iv) for any transaction from which the director derived
indemnification permitted thereunder shall not be deemed exclusive of
any other rights to which the directors and officers may be entitled
under the corporation's by-laws, any agreement, vote of shareholders
or otherwise. The Company's Certificate of Incorporation eliminates
the personal liability of directors to the fullest extent permitted
by Section 102(b)(7) of the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to
indemnify the officers and directors of the Company for any claim
arising against such persons in their official capacities if such
person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Committees of the Board of Directors
The Board of Directors has established an Audit Committee, an
Executive Compensation Committee and a Stock Option Committee. Mr.
Winters and Ms. Zimdars are the only members of the above referenced
Committees. The Audit Committee recommends to the Board of Directors
independent public accountants for the Company and reviews related
matters. The Executive Compensation Committee reviews and recommends
the compensation of executive officers and key employees. The Stock
Option Committee administers the Company's stock option plans.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), requires the Company's officers and directors,
and persons who own more than ten percent of a registered class of
the Company's equity securities, to file reports of ownership and
changes in ownership of equity securities to file reports
of the Company with the Securities and Exchange Commission (the
"Commission") and NASDAQ. Officers, directors and greater than ten
percent stockholders are required by regulation to furnish the
Company with copies of all Section 16(a) forms that they file.
<PAGE>
Based solely upon a review of the Section 16(a) forms
furnished to the Company pursuant to Rule 16a-3 the Exchange
Act, it is the Company's belief that for the fiscal year ending
September 30, 1997, the following persons did not timely file
Section 16(a) ownership forms. Michael J. Carroll, James J. Urban,
Brian M. Carroll, Michael Cavuoti and Silicon Valley Bank each filed
one late report which reported one transaction. Linda S. Zimdars
filed one late report which reported three transactions. Prinz-
Franklin L.L.C. filed two reports which reported three transactions.
Item 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following sets forth the aggregate cash compensation paid to
the Company's Officers for services rendered to the Company during
the fiscal year indicated. None of the Company's executive officers
who served as such at the end of the last fiscal year earned in
excess of $100,000 during the fiscal years indicated.
Annual Compensation Long Term Compensation
Name and Position Year Salary Bonus Compensation Awards SARS(#) Compensation
Michael J. Carroll 1997 $72,000 - $6,000 - - -
President & Chief 1996 $66,000 - $6,000 - - -
Executive Officer 1995 $78,445 - $6,000 - - -
Stock Option Plans
The Company currently has two stock option plans: (i) the
Franklin Ophthalmic Instruments, Co., Inc. 1993 Stock Option and
Appreciation Rights Plan (the "1993 Stock Option Plan"); and (ii) the
Franklin Ophthalmic Instruments Co., Inc. 1994 Stock Option and
Appreciation Rights Plan (the "1994 Stock Option Plan")
The 1993 Stock Option Plan provides for the grant of options to
officers, directors (including employee and non-employee directors),
employees and consultants to purchase not more than an aggregate of
200,000 shares of Common Stock of the Company. The 1994 Stock Option
Plan is substantially similar to the 1993 Stock Option Plan except
that it provides for the grant of options to officers, directors (who
are also employees), employees and consultants to purchase not more
than an aggregate of 330,000 shares of Common Stock. The 1993 Stock
Option Plan and the 1994 Stock Option Plan (collectively the "Stock
Option Plans" ) provide for: (i) the grant of options intended to
qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended; and (ii) the grant of
options which do not so qualify. As of the date hereof, there are two
employee directors (Messrs. M. Carroll and J. Urban), two non-
employee directors (Dr. Winters and Ms. Zimdars) and 2 additional
employees that are eligible participants in the 1994 Stock Option
Plan. In addition, stock appreciation rights may be granted in
conjunction with the grant of options under the Stock Option Plans.
<PAGE>
Subject to Rule 16b-3 under the Exchange Act, each Stock Option
Plan shall be administered by: (i) the Board of Directors if each
member of the Board of Directors is a "disinterested `person" (as
defined under Rule 16b-3); or (ii) a committee (the "Committee") of
not less than two members of the Board of Directors, each of whom is
a "disinterested person." The Board of Directors or the Committee
generally has the authority, subject to the provisions of the Stock
Option Plans, to determine the individuals to whom and the date on
which discretionary options and rights are to be granted, the number
of shares to be subject to options and rights, the exercise price of
shares subject to options and rights, the terms of any vesting
forfeiture schedule and the other terms and provisions of options and
rights. The 1993 Stock Option Plan and the 1994 Stock Option Plan
are separately administered by the Committee comprised of Linda S.
Zimdars and Philip G. Winters.
While the price at which shares of Common Stock subject to an
option may be purchased shall be determined by the Board of Directors
or the Committee, as applicable, pursuant to the provisions of the
Stock Options Plans, the purchase price of shares of Common Stock
issuable upon exercise of an incentive option must not be less than
100% of the fair market value of such shares on the date such
incentive option is granted and the exercise price of a non-qualified
option shall not be less than 85% of the fair market value of the
Common Stock on the date of grant thereof.
The 1993 Stock Option Plan includes a formula granting (on a
non-discretionary basis) each director in office, who is not also an
employee, on the third Monday in June of each year in which the 1993
Stock Option Plan is in effect, non-qualified options to purchase
15,000 shares of Common Stock at price per share determined by a
formula set forth in the provisions of the 1993 Stock Option Plan
based on the trading price of the Common Stock on the date of grant
of such options. The 1994 Stock Option Plan does not provide a
formula for non-discretionary grants of options.
Pursuant to the formula contained in the 1993 Stock Option Plan,
non-qualified options to purchase an aggregate of 120,000 shares of
Common Stock had been issued as of June 1996 to two non-employee
directors (Dr. Winters and Ms. Zimdars) at exercise prices of $4.00,
$4.625, $.75 and $.50 per share. In March of 1997, the Company's
Board of Directors voted to eliminate the annual automatic granting
of options to non-employee directors that was established under the
1993 Stock Option Rights and Appreciation Plan. Except as set forth
above, no other options or rights were granted prior to the close of
fiscal 1997 under the Stock Option Plans.
<PAGE>
The Board of Directors or the Committee, as applicable, may
require as a condition to the grant of any option or right, that the
grantee enter into a stock option agreement which shall require,
among other things, that with respect to any options granted to
directors or officers, at least six months must elapse from the date
such options are granted to the date on which any share of Common
Stock underlying such options are sold or any right associated with
such option is exercised, unless the Board of Directors or the
Committee, as applicable, otherwise consents in writing. No options
may be granted under the Stock Option Plans more than ten years after
the date of approval of the Stock Option Plans by the stockholders.
Options granted under the Stock Option Plans are not transferable
except upon death. Except for options granted to non-employee
directors under the non-discretionary formula, options may be
exercised only while the option holder is employed by the Company, or
in some cases, within three months of termination of employment.
Options/SAR Grants in Last Fiscal Year
None.
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-
End Option/SAR Values
None.
Employment Agreements
In connection with the purchase of MOI, the Company entered into
employment agreements with Michael J. Carroll, currently President,
Chief Executive Officer and a director of the Company, James J.
Urban, currently Senior Vice President, Chief Operating Officer and a
director of the Company, and Brian M. Carroll, currently Vice
President and Chief Financial Officer. Each such employment agreement
provided for an initial term of three years ending June 29, 1997;
however, in accordance with the agreements, the terms of each
agreement were extended for a period of two years ending June 29,
1999 where upon the agreements may be renewed on a year-to-year
basis. Such agreements also provided that Michael Carroll and James
Urban were to receive salaries of $78,000 per year and Brian Carroll
was to receive a salary of $60,000. Michael Carroll and James Urban
voluntarily reduced their salaries in fiscal 1996 such that each
received an annual salary of $66,000 for such year. Effective
October 1, 1996, their salaries were adjusted to $72,000. Each of
the employment agreements provides for bonuses at the discretion of
the Company and reimbursement of business expenses, and each such
agreement contains a non-compete and confidentiality provision. Such
agreements may be terminated by the Company for "Just Cause" (as such
term is defined in the employment agreements including, without
limitation, violations of the Company's policies and indictment or
conviction for criminal acts) or at the Company's sole discretion (in
which case severance payments must be made by the Company equal to
nine months of salary under the terminated agreement).
<PAGE>
Consulting and Other Arrangements
In September 1996, the Company extended a consulting agreement
with Marketing and Acquisition Concepts ("MAC"), of which Linda S.
Zimdars, a director of the Company, is a principal, providing for
payment by the Company to MAC of consulting fees in exchange for
investor relations and other marketing services. The agreement
expires on or before September 1998 During fiscal years ended
September 30, 1996 and 1997 the Company paid MAC consulting fees plus
expenses of $21,000, and $24,250, respectively.
Remuneration of Directors
Until March 31, 1995, directors who are not employees of the
Company received compensation of $750 per meeting attended. Since
April 1, 1995, all meetings attended by non-employee directors have
not been compensated except for expenses incurred.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
PRINCIPAL SECURITY HOLDERS
The following table sets forth, at September 30, 1997, certain
information with respect to stock ownership of (i) all persons known
by the Company to be beneficial owners of 5% or more of its
outstanding Common Stock, (ii) each of the Company's directors and
executive officers, and (iii) all directors and executive officers as
a group. Unless otherwise indicated, the beneficial owners have
sole voting and investment power over the shares of Common Stock
listed below.
Name and Address of Number of Shares % of Shares of
Beneficial Owner (1) Beneficially Common Stock
Owned (2) Beneficially Owned
Michael J. Carroll 1,551,711 (6) 7.98%
(3)(4)
James J. Urban (3)(4) 1,561,710 (7) 7.98%
Brian M. Carroll (3) 52,105 (8) 0.27%
Philip G. Winters (4) 660,000 (9) 3.37%
Linda S. Zimdars (4) 682,359 (10) 3.48%
Prinz-Franklin L.L.C. 3,300,000 (11) 16.85%
John Prinz (4) (5) 3,300,000 (12) 16.85%
Mickey Cavuoti 2,460,000 (13) 12.56%
Silicon Valley Bank 2,133,003 (14) 10.89%
All Executive
Officers & Directors 7,817,885 39.92%
as a Group (6 Persons)
(1) Michael J. Carroll, James J. Urban, Brian M. Carroll and Linda
S. Zimdars may be contacted at 1265 Naperville Drive,
Romeoville, Illinois 60446. Philip G. Winters may be contacted
at 324 North San Mateo Drive, San Mateo, California 94401.
Prinz-Franklin L.L.C. and John Prinz may be contacted at One
Northfield Plaza, Suite 300, 570 Frontage Road, Northfield,
Illinois 60093.
<PAGE>
(2) Unless otherwise noted, the Company believes that all of such
shares are owned of record by each individual named as
beneficial owner and that such individual has sole voting and
dispositive power with respect to the shares of Common Stock
owned by each of them. Such person's percentage ownership is
determined by assuming that the options or convertible
securities that are held by such person which are exercisable
within 60 days from July 17, 1997 have been exercised or
converted, as the case may be. It does not give effect to the
exercise of: (i) an outstanding option granted to the
underwriter of the Initial Public Offering (or the securities
underlying the same); or (ii) outstanding Class A Warrants.
(3) The named securityholder is an officer of the Company.
(4) The named securityholder is a director of the Company..
(5) The named security holder is sole manager of Prinz Franklin
L.L.C.
(6) Includes: (a) 61,711 shares of Common Stock issued by the
Company in connection with the acquisition of MOI; (b) 125,000
shares of Common Stock issued by the Company in connection with
the Company's execution of a forbearance agreement with Silicon;
(c) 1,100,000 shares of Common Stock issued upon conversion of
$550,000 in debt owed to the noted stockholder in connection
with the Company's acquisition of MOI; (d) 255,000 shares of
Common Stock issued to the noted stockholder in connection with
the conversion of certain promissory notes; and (e) 10,000
shares of Common Stock issuable upon exercise of stock options.
(7) Includes: (a) 71,710 shares of Common Stock issued by the
Company in connection with the acquisition of MOI; (b) 125,000
shares of Common Stock issued by the Company in connection with
the Company's execution of a forbearance agreement with Silicon;
(c) 1,100,000 shares of Common Stock issued upon conversion of
$550,000 in debt owed to the noted stockholder in connection
with the Company's acquisition of MOI; (d) 255,000 shares of
Common Stock issued to the noted stockholder in connection with
the conversion of certain promissory notes; and (e) 10,000
shares of Common Stock issuable upon exercise of stock options.
(8) Includes: (a) 17,105 shares of Common Stock issued to the noted
stockholder in connection with the acquisition of MOI; (b)
20,000 shares of Common Stock and 10,000 Class B Warrants
purchased in a private placement; and (c) 5,000 shares of Common
Stock issuable upon exercise of stock options.
(9) Includes: (a) 60,000 shares of Common Stock issuable upon
exercise of stock options held by Dr. Winters; and (b) 600,000
shares of Common Stock issued to Dr. Winters in connection with
the conversion of a certain convertible promissory note.
<PAGE>
(10) Includes: (a) 597,359 shares of Common Stock issued in
connection with the conversion of certain promissory notes and
otherwise; (b) 60,000 shares of Common Stock issuable upon
exercise of stock options; and (c) 25,000 shares of Common Stock
issuable upon exercise of a warrant.
(11) Includes 2,900,000 shares of Common Stock and 400,000 warrants
to purchase Common Stock at an exercise price of $1.00 per
share.
(12) Includes 2,900,000 shares of Common Stock and 400,000 warrants
to purchase Common Stock owned by Prinz-Franklin over which Mr.
Prinz has voting control.
(13) Includes: (a) 1,640,000 shares of Common Stock issued in
connection with the private placement of securities; and (b)
820,000 shares of Common Stock issuable upon exercise of certain
Class B Warrants.
(14) Includes (a) 2,088,884 shares of Common Stock issued in
conversion of debt and (b) 44,119 shares issuable upon
conversion of common stock purchase warrants exercisable at a
purchase price of $0.50 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During September 1995, Michael Carroll and James Urban loaned an
aggregate of $100,000 to the Company in exchange for a demand
promissory note. In addition, Linda S. Zimdars loaned an aggregate
of $100,000 to the Company in exchange for a demand promissory note.
During September of 1996, the balance due of $90,000 to Messrs.
Carroll and Urban and the balance due of $90,000 to Ms. Zimdars were
converted to Common Stock in the Company at the rate of $.25 per
share (the same price per share as offered in the Company's private
placement of equity that was commenced on October 1, 1996).
In February 1996, the Company borrowed $150,000 from Messrs.
Carroll and Urban, and Ms. Zimdars under 24-day promissory notes
bearing interest at the rate of 1% per annum above the prime lending
rate in effect from time to time. A loan origination fee of 3% was
also paid. Of the aggregate of $150,000, $50,000 was borrowed from
each of Messrs. Carroll and Urban, and Ms. Zimdars. In March 1996, a
payment of $12,500 was made to each of Messrs. Carroll and Urban, and
in May 1996, the balance of the notes to Messrs. Carroll and Urban
were repaid. The note to Ms. Zimdars was also repaid in May 1996.
During August of 1996, the Company borrowed $215,188 from
Michael Cavuoti under a 30-day promissory note bearing interest at
10% per annum and a note origination fee of $6,450.00. In October,
the note was converted to 860,752 shares of common stock in the
Company as participation in the Company's Private Placement offering
which commenced on October 1, 1996. In addition, warrants
exercisable for $1.00 were also issued as part of the participation
in the aforementioned private placement offering.
In April 1997, the Company entered into an agreement with Prinz-
Franklin L.L.C. pursuant to which the Company sold to Prinz shares of
Common Stock and warrants to purchase Common Stock. See Note 6 to
the Financial Statements contained elsewhere herein.
<PAGE>
As a result of the increase in the number of shares issuable
upon the exercise of the Class A Warrants in accordance with certain
anti-dilution rights, the Company no longer has sufficient authorized
shares of Common Stock to provide for the exercise of all of the
outstanding common stock purchase warrants and options ("Stock
Deficiency"). See Note 6 to the Financial Statement included
elsewhere herein. To remedy this situation, Michael J. Carroll and
James J. Urban, the Company's chief executive officer and chief
operating officer respectively, have agreed to surrender to the
Company for redemption that number of shares of Common Stock equal to
any such Stock Deficiency up to an aggregate amount of 2,450,000
shares. In the event that an amount of warrants are exercised such
that a Stock Deficiency would be created, the Company will use the
proceeds from such exercise of warrants to fund the buy back of stock
from Messrs. M. Carroll and Urban. The price per share paid to
Messrs. Carroll and Urban will equal the exercise price per share
under the common stock purchase warrants or options the exercise of
which results in such deficiency, with the result that the Company
will receive no net benefit from the exercise of the warrants or
options. Until such shares are redeemed, if at all, they will remain
the property of Messrs. Carroll and Urban, although certificates
representing the shares will be held in the custody of the Company.
The agreement terminates upon the earlier to occur of (i) the
effectiveness of any amendment to the Company's certificate of
incorporation increasing the authorized shares of Common Stock
sufficient to eliminate any potential Stock Deficiency or (ii) the
expiration of a sufficient number of common stock purchase warrants
and/or options in an amount sufficient to eliminate any potential
Stock Deficiency.
The Company will not permit loans or other transactions between
the Company and the officers, directors, principal shareholders, or
affiliates for other than bona fide business purposes or on terms
less favorable than could be obtained from third parties, unless
approved by a majority of the disinterested directors and the
independent directors, if any, of the Company.
For a discussion of the employment and consulting agreements to
which the Company is a party and payments of consulting and other
fees to executive officers of the Company, see "EXECUTIVE
COMPENSATION" and Notes 4(B) and 12 to the Financial Statements
contained elsewhere herein.
<PAGE>
ITEM 27. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
Exhibit Number Title of Exhibit
2.1 Asset Purchase Agreement, dated January 27, 1994, by and between
Franklin Ophthalmic Instruments Co., Inc. and Progressive
Ophthalmic Instruments, Inc. filed with the Securities and
Exchange Commission (the 'Commission') on February 14, 1994
(File No. 0-21852) as an exhibit to the Company's Current
Report on Form 8-K, dated January 27, 1994, and incorporated
herein by reference.
2.2 Stock Purchase Agreement, dated June 24, 1994, by and
among Franklin Ophthalmic Instruments Co., Inc., Midwest
Ophthalmic Instruments, Inc., Michael J. Carroll and James J.
Urban filed with the Securities and Exchange Commission as an
exhibit to the Company's Current Report on 8-K, dated July 1,
1994 (File No. 0-21852), and incorporated herein by reference.
2.3 Letter Agreement, dated June 29, 1994, by and among Franklin
Ophthalmic Instruments Co, Inc., Midwest Ophthalmic Instruments,
Inc., Michael J. Carroll and James J. Urban filed with the
Securities and Exchange Commission on July 15, 1994 as an
exhibit to the Company's Current Report on Form 8-K (File No.
0-21852) and incorporated herein by reference.
3.1 Articles of Incorporation of Franklin Ophthalmic Instruments
Co., Inc., Delaware (Registrant) filed with the Securities and
Exchange Commission on March 10, 1993 as an exhibit to the
Company's Registration Statement on Form SB-2 (File No. 33-
59340) and incorporated herein by reference.
3.2 Articles of Incorporation of Franklin Ophthalmic Instruments Co,
Inc. (California) filed with the Securities and Exchange
Commission on March 10, 1993 as an exhibit to the Company's
Registration Statement on Form SB-2 (File No. 33-59340) and
incorporated herein by reference.
3.3 Agreement and Plan of Merger Certificate between Franklin
Ophthalmic Instruments Co., Inc. (Delaware) and Franklin
Ophthalmic Instruments Co., Inc. (California) filed with the
Securities and Exchange Commission on March 10, 1993 as an
exhibit to the Company's Registration Statement on Form SB-2
(File No. 33-59340) and incorporated herein by reference.
3.4 Bylaws of Franklin Ophthalmic Instruments Co., Inc. (Registrant)
filed with the Securities and Exchange Commission on March 10,
1993 as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 33-59340) and incorporated herein by
reference.
3.5 Certificate of Stock Designation, Franklin Ophthalmic
Instruments Co., Inc. (Delaware) filed with the Securities and
Exchange Commission on March 10, 1993 as an exhibit to the
Company's Registration Statement on Form SB-2 (File No. 33-
59340) and incorporated herein by reference.
<PAGE>
4.1 Specimen Common Stock Certificate filed with the Securities and
Exchange Commission on June 16, 1993 as an exhibit to the
Company's Registration Statement on Form SB-2 (File No 33-59340)
and incorporated herein by reference.
4.2 Form of Class A Warrant filed with the Securities and Exchange
Commission on June 16, 1993 as an exhibit to the Company's
Registration Statement on Form SB-2 (File No 33-59340) and
incorporated herein by reference.
4.3 Form of Unit Purchase Option Certificate filed with the
Securities and Exchange on March 10, 1993 as an exhibit to the
Company's Registration Statement on Form SB-2 (File No. 33-
59340) and incorporated herein by reference.
4.4 Form of Bridge Lenders' Unit Purchase Warrant filed with the
Securities and Exchange Commission on March 10, 1993 as an
exhibit to the Company's Registration Statement on Form SB-2
(File No. 33-59340) and incorporated herein by reference.
4.5 Form of Warrant Agreement among the Company, J. Gregory and
Company, Inc. and Continental Stock Transfer and Trust Company
filed with the Securities and Exchange Commission on June 16,
1993 as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 33-59340) and incorporated herein by
reference.
4.6 Warrant issued by the Company, to Silicon Valley Bank, filed
with the Securities and Exchange Commission on May 10, 1993 as
an exhibit to the Company's Registration Statement on Form SB 2
(File No. 33-59340) and incorporated herein by reference.
4.7 Warrant, dated January 21, 1994, issued by the Company to
Silicon Valley Bank, filed with the Securities and Exchange
Commission as an exhibit to the Company's Current Report on Form
8-K, dated January 27, 1994 (File No. 0-21852), and incorporated
herein by reference.
4.8 Warrant, dated March 31, 1994, issued by the Company to
Silicon Valley Bank, and corresponding Registration Rights
Agreement, filed with the Securities and Exchange Commission as
an exhibit to the Company's Current Report on Form 8-K, dated
July 1, 1994 (File No. 0-21852), and incorporated herein by
reference.
4.9 Franklin Ophthalmic Instruments Co, Inc. 1994 Stock Option and
Appreciation Rights Plan, filed with the Securities and Exchange
Commission as an exhibit to the Company's Registration Statement
on Form S-8 (File No. 0-21852) and incorporated herein by
reference.
4.10 Franklin Ophthalmic Instruments Co., Inc. 1993 Stock Option
and Appreciation Rights Plan filed with the Securities and
Exchange Commission on March 10, 1993 as an exhibit to the
Company's Registration Statement on Form SB-2 (File No. 33-
59340) and incorporated herein by reference.
<PAGE>
4.11 Promissory Note, dated January 20, 1994, executed by
Franklin Ophthalmic Instruments Co., Inc. in favor of Silicon
Valley Bank filed with the Securities and Exchange Commission on
February 14, 1994 (File No. 0-21852) as an exhibit to the
Company's Current Report on Form 8-K, dated January 27, 1994,
and incorporated herein by reference.
4.12 Warrant to Purchase Common Stock, dated January 21, 1994,
issued by Franklin Ophthalmic Instruments, Inc. to Silicon
Valley Bank and corresponding Antidilution Agreement and
Registration Rights Agreement, filed with the Securities and
Exchange Commission on February 14, 1994 (File No. 0-21852) as
an exhibit to the Company's Current Report on Form 8-K, dated
January 27, 1994, and incorporated herein by reference.
4.13 Form of Non-Negotiable 5% Convertible Promissory Note filed
with the Securities and Exchange Commission on August 12, 1994
as an exhibit to the Company's Post-Effective Amendment No. 1 to
the Registration Statement on Form SB-2 (File No. 33-59340) and
incorporated herein by reference.
4.14 Form of Non-Negotiable 9% Promissory Note filed with the
Securities and Exchange Commission on August 12, 1994 as an
exhibit to the Company's Post-Effective Amendment No. 1 to the
Registration Statement on Form SB-2 (File No. 33-59340) and
incorporated herein by reference.
4.15 Common Stock Purchase Warrants issued by Franklin
Ophthalmic Instruments Co., Inc. in December 1994 to each of
Linda S. Zimdars, an officer and director of the Company, and
Dwayne Podgurski, an employee of the Company filed with the
Securities and Exchange Commission as an exhibit to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1994 (File No. 0-21852) and incorporated herein by
reference.
10.1 Loan documents evidencing loans and/or lines of credit
extended to the Company by Silicon Valley Bank, filed with the
Securities and Exchange Commission on March 10, 1993 as an
exhibit to the Company's Registration Statement on Form SB-2
(File No. 33-59340) and incorporated herein by reference.
10.2 Loan Modification Agreement, dated January 20, 1994,
between Franklin Ophthalmic Instruments Co., Inc. and Silicon
Valley Bank filed as an exhibit to the Company's Current Report
on Form 8-K, dated January 27, 1994, filed with the Commission
on February 14, 1994 (File No. 0-21852) and incorporated herein
by reference.
10.3 Loan Modification Agreement, dated March 31, 1994 between
Franklin Ophthalmic Instruments Co., Inc. and Silicon Valley
Bank filed with the Securities and Exchange Commission on July
15, 1994 as an exhibit to the Company's Form 8-K (File No. 0-
21852) and incorporated herein by reference.
<PAGE>
10.4 Form of Employment between Franklin Ophthalmic Instruments
Co., Inc. and each of Michael J. Carroll and James J. Urban
included as an exhibit to the Stock Purchase Agreement
identified in exhibit to the Stock Purchase Agreement identified
in Exhibit 2.2 above which was filed with the Securities and
Exchange Commission as an exhibit to the Company's Current
Report on Form 8 K, dated July 1, 1994 (File No. 0-21852), and
incorporated herein by reference.
10.5 Consulting Agreement, dated December 1, 1994, between
Franklin Ophthalmic Instruments, Co., Inc. and Marketing and
Acquisition Concepts, a Wisconsin sole proprietorship of which
Linda S. Zimdars, an officer and director of the Company, is the
sole proprietor, filed with the Securities and Exchange
Commission as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended September 30, 1994 (File No. 0-
21852) and incorporated herein by reference.
10.6 Separation Agreement, dated April 1, 1995, by and among the
Company, Robert A. Davis, certain partnerships in which Mr.
Davis is a partner, Michael J. Carroll, and James J. Urban,
filed as an exhibit to the Company's Current Report on Form 8-K
(File No. 0 21852) which was filed with the Securities and
Exchange Commission on May 3, 1995 and incorporated herein by
reference.
10.7 Forms of Letters of Notice to Securityholders relating to
modification of the terms of certain of the Company's
securities, filed as an exhibit to the Company's Current Report
on Form 8-K (File No. 0-21852) which was filed with the
Securities and Exchange Commission on May 3, 1995 and
incorporated herein by reference.
10.8 Amended Loan and Forbearance Agreement, dated April 1,
1995, between the Company and Silicon Valley Bank, filed as an
exhibit to the Company's Current Report on Form 8-K (File No. 0-
21852) which was filed with the Securities and Exchange
Commission on May 3, 1995 and incorporated herein by reference.
10.9 Agreement, dated April 20, 1995, by and among the Company,
Michael J. Carroll and James J. Urban, filed as an exhibit to
the Company's Current Report on Form 8-K (File No. 0-21852)
which was filed with the Securities and Exchange Commission on
May 3, 1995 and incorporated herein by reference.
10.10 Letter of Intent, dated April 27, 1995, between the Company
and Diversified Ophthalmics, Inc., filed as an exhibit to the
Company's Current Report on Form 8-K (File No. 0-21852) which
was filed with the Securities and Exchange Commission on May 3,
1995 and incorporated herein by reference.
10.11 Forms of notice dismissing the firm of Marinelli and Scott
as the Company's independent public accountants and Company's
retaining the firm of BDO Seidman, LLP to serve as its
independent public accountants, filed as an exhibit to the
Company's Amended and Restated Current Report on Form 8-K/A #1,
dated November 27, 1995, which was filed by the Company with the
Securities and Exchange Commission on December 6, 1995 (File No.
0-21852) and is incorporated herein by reference.
<PAGE>
10.12 Form of notice dated September 4, 1996 relating to
agreement between the Company and Silicon Valley Bank, filed as
an exhibit to the Company's Current Report on Form 8-K (File No.
0-21852) which was filed with the Securities and Exchange
Commission on September 6, 1996 and incorporated herein by
reference.
10.13 Form of notice dated September 4, 1996 relating to
agreements between the Company and certain trade vendors, filed
as an exhibit to the Company's Current Report on Form 8-K (File
No. 0-21852) which was filed with the Securities and Exchange
Commission on September 12, 1996 and incorporated herein by
reference.
10.14 Agreement, dated August 20, 1996, between the Company and
Silicon Valley Bank.
10.15 Investment Agreement, dated May 8, 1997 between the Company
and Prinz-Franklin L.L.C., filed as an exhibit to the Company's
Form 10-QSB which was filed with the Securities and Exchange
Commission on May 15, 1997 and incorporated herein by reference.
10.16 Amendment to Investment Agreement, dated May 8, 1997
between the Company and Prinz-Franklin L.L.C., filed as an
exhibit to the Company's Form 10-QSB which was filed with the
Securities and Exchange Commission on May 15, 1997 and
incorporated herein by reference.
10.17 Form of Class B Warrant dated November 25, 1996
10.18 Form of Class C Warrant dated December 30, 1996
10.19 Amendment to Investment Agreement, dated May 11, 1997
between the Company and Prinz-Franklin L.L.C. Second Loan
Modification Agreement., dated August 14, 1997 between the
Company and Silicon Valley Bank.
10.20 Second Loan Modification Agreement, dated August 14,
between the Company and Silicon Valley Bank.
10.21 Letter from Silicon Valley Bank dated August 13, 1997
defining default provision.
10.22 Agreement, dated September 30, 1997, among the Company,
Michael J. Carroll and James J. Urban.
10.23 Agreement dated July 1, 1992 by and between the Company and
Marco Equipment Co.
10.24 Agreement dated January 16, 1995 by and between the Company
and Haag-Streit Services, Inc. and Reliance Medical Products,
Inc.
<PAGE>
10.25* Agreement dated December 30, 1997 between the Company and
Harris Trust and Savings Bank
27* Financial Data Schedule for fiscal year ended September 30, 1997
*Filed herewith.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fiscal
year ended September 30, 1997.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on January 13, 1998.
Franklin Opthalmic Instruments Co.,Inc.
By:/s/ Michael J. Carroll
--------------------------
Michael J. Carroll, President and
Chief Executive Officer
<PAGE>
In accordance with the Exchange Act, this report has been signed
by the following persons on behalf of the Registrant, in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Michael J. President, Chief January 13, 1998
Carroll Executive Officer
------------------- and Director
-------------------
Michael J. Carroll
/s/ James J. Urban Executive Vice January 13, 1998
------------------- President, Chief
------------------- Operating Officer
James J. Urban and Director
/s/ Brian M. Vice President and January 13, 1998
Carroll Chief Financial
------------------- Officer
-------------------
Brian M. Carroll
/s/ Philip G. Director January 13, 1998
Winters
-------------------
-------------------
Philip G. Winters
/s/ Linda S. Secretary and January 13, 1998
Zimdars Director
-------------------
-------------------
Linda S. Zimdars
/s/ John Prinz Director January 13, 1998
-------------------
-------------------
John Prinz
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
Dated: December 30, 1997
$2,500,000
between
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
as Borrower,
and
HARRIS TRUST AND SAVINGS BANK
as Lender
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. GENERAL DEFINITIONS 1
1.1. Defined Terms 1
1.2. Accounting Terms 14
1.3. Other Terms 14
1.4. Certain Matters of Construction 14
SECTION 2. CREDIT FACILITY 15
2.1. Revolving Credit Loans 15
2.2. Term Loan 16
2.3. Manner of Borrowing Revolving Credit Loans 17
2.4. Letters of Credit; LC Guaranties 17
2.5. All Loans to Constitute One Obligation 19
2.6. Loan Account 19
SECTION 3. INTEREST, FEES, TERM AND REPAYMENT 19
3.1. Interest, Fees and Charges 19
3.2. Letter of Credit and LC Guaranty Fees 23
3.3. Term of Agreement 23
3.4. Termination 23
3.5. Payments 24
3.6. Application of Payments and Collections 25
3.7. Statements of Account 26
SECTION 4. COLLATERAL: GENERAL TERMS 26
4.1. Security Interest in Collateral 26
4.2. Lien on Realty 26
4.3. Representations, Warranties and
Covenants -- Collateral 27
4.4. Lien Perfection 27
4.5. Location of Collateral 27
4.6. Insurance of Collateral 28
4.7. Protection of Collateral 28
SECTION 5. PROVISIONS RELATING TO ACCOUNTS 29
5.1. Representations, Warranties and Covenants 29
5.2. Assignments, Records and Schedules of Accounts 30
5.3. Administration of Accounts 30
5.4. Collection of Accounts. 31
5.5. Notice Regarding Disputed Accounts 31
SECTION 6. PROVISIONS RELATING TO INVENTORY 31
6.1. Representations, Warranties and Covenants 31
6.2. Inventory Reports 32
6.3. Returns of Inventory 32
SECTION 7. PROVISIONS RELATING TO EQUIPMENT 33
7.1. Representations, Warranties and Covenants 33
7.2. Evidence of Ownership of Equipment 33
7.3. Records and Schedules of Equipment 33
7.4. Dispositions of Equipment 33
SECTION 8. REPRESENTATIONS AND WARRANTIES 33
8.1. General Representations and Warranties 33
8.2. Reaffirmation 38
8.3. Survival of Representations and Warranties 38
<PAGE>
SECTION 9. COVENANTS AND CONTINUING AGREEMENTS 38
9.1. Affirmative Covenants 38
9.2. Negative Covenants 43
9.3. Specific Financial Covenants 46
SECTION 10. CONDITIONS PRECEDENT 47
10.1. Documentation 47
10.2. Other Conditions 49
SECTION 11. EVENTS OF DEFAULT: RIGHTS AND
REMEDIES ON DEFAULT 49
11.1. Events of Default 49
11.2. Acceleration of the Obligations 51
11.3. Remedies 52
11.4. Remedies Cumulative; No Waiver 53
SECTION 12. MISCELLANEOUS 53
12.1. Power of Attorney 53
12.2. Indemnity 54
12.3. Complete Agreement; Modification of
Agreement; Sale of Interest 54
12.4. Reimbursement of Expenses 55
12.5. Indulgences Not Waivers 56
12.6. Severability 56
12.7. Successors and Assigns 56
12.8. Cumulative Effect; Conflict of Terms 56
12.9. Execution in Counterparts 56
12.10. Notice 56
12.11. Lender's Consent 57
12.12. Demand Obligations 58
12.13. Time of Essence 58
12.14. Entire Agreement 58
12.15. Interpretation 58
12.16. GOVERNING LAW; CONSENT TO FORUM 58
12.17. WAIVERS BY BORROWER 59
EXHIBITS
Exhibit A Form of Revolving Credit Note
Exhibit B Form of Term Note
Exhibit C Borrower's Business Locations
Exhibit D Jurisdictions in Which Borrower is Authorized to do Business
Exhibit E Corporate Names and Predecessors
Exhibit F Patents, Trademarks, Copyrights and Licenses
Exhibit G Capital Structure and Affiliates
Exhibit H Contracts Restricting Borrower's Right to Incur Debts
Exhibit I Litigation
Exhibit J Pension Plans
Exhibit K Labor Contracts
Exhibit L Capitalized Leases
Exhibit M Operating Leases
Exhibit N Form of Compliance Certificate
Exhibit O Form of Borrowing Base Certificate
Exhibit P Permitted Liens
Exhibit Q Leased Premises
Exhibit R Form of Opinion Letter
<PAGE>
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is made
this 30th day December of 1997, by and among FRANKLIN OPHTHALMIC
INSTRUMENTS CO., INC., a Delaware corporation ("Borrower") having its
chief executive office at 1265 Naperville Drive, Romeoville, Illinois
60446, and HARRIS TRUST AND SAVINGS BANK, an Illinois banking
corporating having an office at 111 West Monroe Street, Chicago,
Illinois 60690 ("Lender").
RECITALS
A. Borrower and Silicon Valley Bank ("Silicon Bank") entered
into that certain Amended and Restated Loan and Security
Agreement dated as of August 20, 1996, which amended that
certain Business Loan Agreement dated as of August 20, 1993
between Borrower and Silicon Bank dated as of August 20,
1993 (collectively, the "Old Loan Agreement").
B. Pursuant to that certain Assignment and Assumption (the
"Assignment and Assumption") dated as of December 30, 1997
by and between the Lender and Silicon Bank, Lender
purchased from Silicon Bank all of Silicon Bank's right,
title and interest in the Old Loan Agreement, the "Notes",
the liens on the "Collateral", and the "Loan Documents" (as
such terms are defined in the Assignment and Assumption).
C. Borrower and Lender desire to amend and restate the Old
Loan Agreement.
D. Accordingly, in consideration of the mutual agreements
contained herein, and subject to the terms and conditions
hereof, the parties hereto agree as follows:
I. SECTION GENERAL DEFINITIONS
A. Defined Terms. When used herein, the following terms
shall have the following meanings (terms defined in the singular to
have the same meaning when used in the plural and vice versa):
Account Debtor - any Person who is or may become obligated
under or on account of an Account.
Accounts - all accounts, contract rights, chattel paper,
instruments and documents, whether now owned or hereafter
created or acquired by any Borrower or in which any Borrower now
has or hereafter acquired any interest.
<PAGE>
Adjusted Tangible Assets - all assets except: (i) any
surplus resulting from any write-up of assets subsequent to
September 30, 1997; (ii) deferred assets, other than prepaid
insurance and prepaid taxes; (iii) patents, copyrights,
trademarks, trade names, non-compete agreements, franchises and
other similar intangibles; (iv) goodwill, including any amounts,
however designated on a Consolidated balance sheet of a Person
or its Subsidiaries, representing the excess of the purchase
price paid for assets or stock over the value assigned thereto
on the books of such Person; (v) Restricted Investments;
(vi) unamortized debt discount and expense; (vii) assets located
and notes and receivables due from obligors outside of the
United States of America; and (viii) Accounts, notes and other
receivables due from Affiliates or employees.
Adjusted Tangible Net Worth - at any date means a sum equal
to: (i) the net book value (after deducting related
depreciation, obsolescence, amortization, valuation, and other
proper reserves) at which the Adjusted Tangible Assets of a
Person would be shown on a balance sheet at such date in
accordance with GAAP, plus (ii) Subordinated Debt, minus
(iii) the amount at which such Person's liabilities (other than
capital stock and surplus) would be shown on such balance sheet
in accordance with GAAP, and including as liabilities all
reserves for contingencies and other potential liabilities.
Affiliate - a Person (other than a Subsidiary): (i) which
directly or indirectly through one or more intermediaries
controls, or is controlled by, or is under common control with
Borrower; (ii) which beneficially owns or holds 5% or more of
any class of the Voting Stock of Borrower; or (iii) 5% or more
of the Voting Stock (or in the case of a Person which is not a
corporation, 5% or more of the equity interest) of which is
beneficially owned or held by Borrower or a Subsidiary of
Borrower. For purposes hereof, "control" means the possession,
directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether
through the ownership of Voting Stock, by contract or otherwise.
Agreement - this Loan and Security Agreement.
Average Monthly Loan Balance - the amount obtained by
adding the unpaid balance of Revolving Credit Loans owing by
Borrower to Lender at the end of each day for each day during
the month in question plus the aggregate amount of all
outstanding Letters of Credit and LC Guaranties outstanding at
the end of each day during the month in question and by dividing
such sum by the number of days in such month.
Base Rate - the higher of the prime rate or any other rate
announced in replacement of the prime rate, announced from time
to time by Lender. Such rate would not necessarily be the
lowest interest rate offered by such Lender; and, if the prime
rate for commercial loans is discontinued by Lender as a
standard, a comparable reference rate designated by Lender as a
substitute therefor shall be the Base Rate.
<PAGE>
Base Rate Loan - a Loan that bears interest based on the
Base Rate.
Board - the Board of Governors of the Federal Reserve
System of the United States.
Borrowing Base - as at any date of determination thereof,
an amount equal to the lesser of:
1. the Maximum Revolving Credit Loan; or
1. an amount equal to:
a) eighty percent (80%), or such lesser
percentage as Lender may in its sole and absolute discretion
determine from time to time, of the net amount of Eligible Accounts
outstanding at such date;
PLUS
a) the lesser of (A) One Million Dollars
($1,000,000) or (B) the Inventory Percentage of the value of Eligible
Inventory at such date consisting of raw materials or finished goods,
calculated on the basis of the lower of cost or market with the cost
of raw materials and finished goods calculated on a first-in,
first-out basis;
MINUS (subtract from the lesser of clauses
(a) or (b) above)
1. an amount equal to the sum of (A) the face
amount of all LC Guaranties and Letters of Credit issued by
Lender or any Affiliate of Lender and outstanding at such
date, and (B) any amounts which Lender may be obligated to
pay in the future for the account of any Borrower.
For purposes hereof, the net amount of Eligible Accounts at any
time shall be the face amount of such Eligible Accounts less any and
all returns, rebates, discounts (which may, at Lender's option, be
calculated on shortest terms), credits, allowances or excise taxes of
any nature at any time issued, owing, claimed by Account Debtors,
granted, outstanding or payable in connection with such Accounts at
such time.
Business Day - (i) when used with respect to the LIBOR
Option, shall mean a day on which dealings may be effected in
deposits of United States dollars in the London interbank
foreign currency deposits market and on which the Lender is
conducting business and on which banks may conduct business in
London, England, Chicago, Illinois, and New York, New York and
(ii) when used with respect to the other provisions of this
Agreement, shall mean any day that is not a Saturday, a Sunday
or a day on which banks are required or permitted to be closed
in the State of Illinois.
<PAGE>
Capital Expenditures - expenditures made or liabilities
incurred for the acquisition of any fixed assets or improve-
ments, replacements, substitutions or additions thereto which
have a useful life of more than one year, including the direct
or indirect acquisition of such assets by way of increased
product or service charges, offset items or otherwise and the
principal portion of payments with respect to Capitalized Lease
Obligations.
Capitalized Lease Obligation - any Indebtedness for
Borrowed Money represented by obligations under a lease that is
required to be capitalized for financial reporting purposes in
accordance with GAAP, and the amount of such Indebtedness for
Borrowed Money shall be the capitalized amount of such
obligations determined in accordance with GAAP.
Cash and Cash Equivalents - any assets of Borrower which
are in the form of, or are readily convertible into money,
including without limitation, cash, checks and other demand
negotiable instruments, deposits with any bank or financial
institution (whether as demand deposits, and whether or not
evidenced by certificates of deposit), and readily marketable
securities of any type.
Closing Date - the date on which all of the conditions
precedent in Section 10 are satisfied and the initial Loan is
made hereunder.
Code - the Uniform Commercial Code as adopted and in force
in the State of Illinois, as from time to time in effect.
Collateral - all of the Property and interests in Property
described in Section 4 hereof, and all other Property and
interest in Property that now or hereafter secure the payment
and performance of any of the Obligations.
Commitment Termination Date - the earliest of (i) March 31,
2000, (ii) the date of termination of the commitment to make
further Loans pursuant to Section 3.4 hereof, and (iii) the date
of termination of the commitment to make further Loans pursuant
to Section 11.2 hereof.
Common Stock - shall mean the common stock, $.001 par
value, of Borrower.
Consolidated - the consolidation in accordance with GAAP of
the accounts or other items as to which such term applies.
Current Assets - at any date means the amount at which all
of the current assets of a Person would be properly classified
as current assets shown on a balance sheet at such date in
accordance with GAAP except that amounts due from Affiliates and
investments in Affiliates shall be excluded therefrom.
Default - an 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.
<PAGE>
Default Rate - as defined in Section 3.1(C) of this
Agreement.
Distribution - in respect of any corporation means and
includes: (i) the payment of any dividends or other
distributions on capital stock of the corporation (except
distributions in such stock) and (ii) the redemption or
acquisition of Common Stock unless made contemporaneously from
net proceeds of the sale of Common Stock.
EBITDA - with respect to any fiscal period, the sum of
Borrower's Consolidated (i) net earnings (or loss) before
interest expense and taxes for said period, plus (ii)
depreciation and amortization expense for such period, all as
determined in accordance with GAAP.
Eligible Account - an Account arising in the ordinary
course of Borrower's business from the sale of goods or
rendition of services unless: (i) it arises out of a sale made
by Borrower to a Subsidiary or an Affiliate of Borrower or to a
Person controlled by an Affiliate of Borrower; or (ii) it is due
or unpaid more than ninety (90) days after the original invoice
date; or (iii) twenty-five percent (25%) or more of the Accounts
from the Account Debtor are not deemed Eligible Accounts
hereunder; or (iv) any covenant, representation or warranty
contained in this Agreement with respect to such Account has
been breached in any material respect; or (v) the Account Debtor
is also Borrower's creditor or supplier, but only to the extent
of Borrower's obligations to such creditor or supplier, or the
Account Debtor has disputed liability with respect to such
Account, or the Account Debtor has made any claim with respect
to any other Account due from such Account Debtor to Borrower,
or the Account otherwise is or may become subject to any right
of setoff by the Account Debtor; or (vi) the Account Debtor has
commenced a voluntary case under the federal bankruptcy laws, as
now constituted or hereafter amended, or made an assignment for
the benefit of creditors, or a decree or order for relief has
been entered by a court having jurisdiction in the premises in
respect of the Account Debtor in an involuntary case under the
federal bankruptcy laws, as now constituted or hereafter
amended, or any other petition or other application for relief
under the federal bankruptcy laws has been filed against the
Account Debtor, or if the Account Debtor has failed, suspended
business, ceased to be Solvent, or consented to or suffered a
receiver, trustee, liquidator or custodian to be appointed for
it or for all or a significant portion of its assets or affairs;
or (vii) it arises from a sale to an Account Debtor outside the
United States, unless the sale is on letter of credit, guaranty
or acceptance terms, in each case acceptable to Lender in its
sole discretion or unless Lender, in its sole discretion, has
approved the Account Debtor; or (viii) it arises from a sale to
the Account Debtor on a bill-and-hold, guaranteed sale,
sale-or-return, sale-on-approval, consignment or any other
repurchase or return basis; or (ix) the Account Debtor is the
United States of America or any department, agency or
instrumentality thereof unless all Accounts of such Account
Debtor are equal to or less than $100,000 in the aggregate,
provided, however, that any Accounts of such Account Debtor
<PAGE>
which are greater than $100,000 in the aggregate shall be deemed
Eligible Accounts if Borrower assigns its right to payment of
such Account to Lender, in form and substance satisfactory to
Lender, so as to comply with the Assignment of Claims Act of
1940, as amended (31 U.S.C. Sub-Section 203 et seq.); or (x) the
Account Debtor is located in the State of Minnesota or the State
of Alabama, unless Borrower has filed a Notice of Business
Activities Report with the appropriate officials in those states
for the then current year; or (xi) the Account is subject to a
Lien other than a Permitted Lien; or (xii) the goods giving rise
to such Account have not been delivered to and accepted by the
Account Debtor or the services giving rise to such Account have
not been performed by Borrower and accepted by the Account
Debtor or the Account otherwise does not represent a final sale;
or (xiii) the Account is evidenced by chattel paper or an
instrument of any kind, or has been reduced to judgment; or
(xiv) Borrower has made any agreement with the Account Debtor
for any deduction therefrom, except for discounts or allowances
which are made in the ordinary course of business for prompt
payment and which discounts or allowances are reflected in the
calculation of the face value of each invoice related to such
Account; or (xv) Borrower has made an agreement with the Account
Debtor to extend the time of payment thereof; or (xvi) the
Account consists of uncollected progress billings.
Eligible Inventory - such Inventory of Borrower (other than
packaging materials and supplies) which (i) is in good, new and
saleable condition; (ii) is not slow moving, obsolete or
unmerchantable; (iii) meets all standards imposed by any
governmental agency or authority; (iv) conforms in all respects
to the warranties and representations set forth in Section 6.1
hereof; (v) is at all times subject to Lender's duly perfected,
first priority security interest and no other Lien except a
Permitted Lien; and (vi) is situated at a location in compliance
with Section 4.5 hereof and is not in-transit unless it is
(y) Inventory in transit to a customer of Borrower or
(z) Inventory with an aggregate value of less than $100,000
which is transit to, or at, a trade show or the home or office
of a sales representative of the Borrower.
Environmental Laws - all federal, state and local laws,
rules, regulations, ordinances, programs, permits, guidances,
orders and consent decrees relating to health, safety and
environmental matters, including, but not limited to, the
Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980,
the Toxic Substances Control Act as amended, the Clean Water
Act, the River and Harbor Act, Water Pollution Control Act, the
Marine Protection Research and Sanctuaries Act, the Deep-Water
Port Act, the Safe Drinking Water Act, the SuperFund Amendments
and Reauthorization Act of 1986, the Federal Insecticide,
Fungicide and Rodenticide Act, the Mineral Lands and Leasing
Act, the Surface Mining Control and Reclamation Act, state and
federal superlien and environmental clean up programs and laws,
and U.S. Department of Transportation regulations.
<PAGE>
Equipment - all machinery, apparatus, equipment, fittings,
furniture, fixtures, motor vehicles and other tangible personal
Property (other than Inventory) of every kind and description
used in Borrower's operations or owned by Borrower or in which
Borrower has an interest, whether now owned or hereafter
acquired by Borrower and wherever located, and all parts,
accessories and special tools and all increases and accessions
thereto and substitutions and replacements therefor.
ERISA - the Employee Retirement Income Security Act of 1974
and all rules and regulations from time to time promulgated
thereunder.
Event of Default - as defined in Section 11.1 of this
Agreement.
Excess Revolving Credit Loan Availability - as of any date,
the amount, if any, by which the Borrowing Base exceeds the
aggregate outstanding principal balance of the Revolving Credit
Loans.
Fixed Charge Ratio - with respect to any fiscal period, the
ratio of (a) EBITDA for such period, less extraordinary income
to (b) all regularly scheduled payments of principal and
interest on Obligations required to be paid in cash within such
period.
GAAP - generally accepted accounting principles in the
United States of America in effect from time to time.
General Intangibles - all general intangibles of Borrower,
whether now owned or hereafter created or acquired by Borrower,
including, without limitation, all choses in action, causes of
action, corporate or other business records, deposit accounts,
inventions, designs, patents, patent applications, trademarks,
trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, tax refund claims,
computer programs, all claims under guaranties, security
interests or other security held by or granted to Borrower to
secure payment of any of the Accounts by an Account Debtor, all
rights to indemnification and all other intangible property of
every kind and nature (other than Accounts).
Guarantors - Michael J. Carroll, Brian Carroll and James
Urban and any other Person who may hereafter guarantee payment
or performance of the whole or any part of the Obligations.
Guaranty Agreements - the Continuing Guaranty Agreement
which is to be executed by each Guarantor in form and substance
satisfactory to Lender.
Hazardous Substance - the meaning given such term in 42 USC
S 9601(14), 42 USC S 9601(33) and 42 USC S 6991(8) or any state
or local counterpart Environmental Law.
<PAGE>
Indebtedness for Borrowed Money - means for any Person
(without duplication) (i) all indebtedness created, assumed or
incurred in any manner by such Person representing money
borrowed (including by the issuance of debt securities),
(ii) all indebtedness for the deferred purchase price of
property or services (other than trade accounts payable arising
in the ordinary course of business not more than 60 days past
due), (iii) all indebtedness secured by any Lien upon Property
of such Person, whether or not such Person has assumed or become
liable for the payment of such indebtedness, (iv) all
Capitalized Lease Obligations of such Person, and (v) all
obligations of such Person on or with respect to letters of
credit, banker's acceptances and other evidences of indebtedness
representing extensions of credit whether or not representing
obligations for borrowed money.
Inventory - all of Borrower's inventory, whether now owned
or hereafter acquired by the Borrower, including, but not
limited to, all goods intended for sale or lease by Borrower, or
for display or demonstration; all work in process; all raw
materials and other materials and supplies of every nature and
description used or which might be used in connection with the
manufacture, printing, packing, shipping, advertising, selling,
leasing or furnishing of such goods or otherwise used or
consumed in Borrower's business; and all documents evidencing
and General Intangibles relating to any of the foregoing,
whether now owned or hereafter acquired by Borrower.
Inventory Percentage - Fifty percent (50%).
Investments - when used with reference to any investment of
Borrower or its Subsidiaries means any investment so classified
under GAAP, and, whether or not so classified, includes (a) any
loan or advance made by Borrower or its Subsidiaries to any
other Person, (b) any guaranty, and (c) any ownership or similar
interest in any other Person; and the amount of any Investment
shall be the original principal or capital amount thereof less
all cash returns of principal or equity thereof (and without
adjustment by reason of the financial condition of such other
Person).
LC Guaranty - a guaranty executed by Lender at Borrower's
request in favor of a person who has issued a letter of credit
for the account of the Borrower.
Leases - all of those leasehold estates in real property
now owned or hereafter acquired by Borrower or any Subsidiary of
Borrower, as lessee.
<PAGE>
Legal Requirement - any requirement imposed upon Lender by
any law of the United States of America or the United Kingdom or
by any regulation, order, interpretation, ruling of official
directive (whether or not having the force of law) of the Board,
the Bank of England or any other board, central bank or
governmental or administrative agency, institution or authority
of the United States of America, the United Kingdom or any
political subdivision of either thereof.
Letter of Credit - a letter of credit at any time issued by
Lender for the account of Borrower.
LIBOR Interest Payment Date - with respect to any LIBOR
Revolving Credit Portion or any LIBOR Term Portion, the last day
of the applicable LIBOR Period.
LIBOR Option - the option granted pursuant to Section
3.1(B) to have the interest on all or any portion of the
principal amount of the Revolving Credit Loan or the Term Loan
based on a LIBOR Rate.
LIBOR Period - any period, selected as provided below in
Section 3.1(B) of 1 month, 2 months or 3 months, commencing on
any Business Day, subject to the provisions of Section 3.1(B);
provided, however, that no LIBOR Period shall extend beyond the
last day of the maturity date of the applicable Loan, unless
Borrower and Lender have agreed to an extension of such maturity
date beyond the expiration of the LIBOR Period in question. No
LIBOR period may be selected if after giving effect thereto the
Borrower will be unable to make a principal payment scheduled to
be made during such LIBOR Period without paying part of a LIBOR
Portion on a date other than the last day of the LIBOR Period
applicable thereto. If any LIBOR Period so selected shall end
on a date that is not a Business Day, such LIBOR Period shall
instead end on the next preceding or succeeding Business Day as
determined by the Lender in accordance with the then current
banking practice in London. Each determination by Lender of a
LIBOR Period shall, in the absence of manifest error, be
conclusive, and at Borrower's request, Lender shall demonstrate
the basis of such determination.
LIBOR Portion - all of the Indebtedness for Borrowed Money
hereunder evidenced by the Notes bearing interest at the same
LIBOR Rate for the same period of time.
<PAGE>
LIBOR Rate - with respect to any LIBOR Revolving Credit
Portion or any LIBOR Term Portion for the related LIBOR Period,
an interest rate per annum (rounded upwards, if necessary, to
the next higher one hundred thousandth of a percentage point)
equal to the product of (a) the Base LIBOR Rate (as hereinafter
defined) and (b) Statutory Reserves. For purposes of this
definition, the term "Base LIBOR Rate" shall mean (i) the LIBOR
Index Rate (as hereinafter defined) for such LIBOR Period, or if
the LIBOR Index Rate is unavailable (ii) the rate per anum
(rounded upwards, if necessary, to the next higher one
hundred thousandth of a percentage point) at which deposits of
U.S. Dollars approximately equal in principal amount to the
LIBOR Revolving Credit Portion or the LIBOR Term Portion
specified in the applicable LIBOR Request are offered to Lender,
in the London interbank foreign currency deposits market at
approximately 11:00 a.m., London time, two (2) Business Days
prior to the commencement of such LIBOR Period, for delivery on
the first day of such LIBOR Period. For purposes of this
definition, the term "LIBOR Index Rate" shall mean, for any
LIBOR Period, the rate per annum (rounded upwards, if necessary,
to the next one hundred thousandth of a percentage point) for
deposits of U.S. Dollars for a period equal to such LIBOR
Period, which appears on the Telerate Page 3750 (as hereinafter
defined) as of 11:00 a.m., London time, two (2) Business Days
prior to the commencement of such LIBOR Period, for delivery on
the first day of such LIBOR Period. For purposes of this
definition, the term "Telerate Page 3750" means 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). Each determination by Lender of any LIBOR Rate shall
in the absence of manifest error, be conclusive, and at
Borrower's request, Lender shall demonstrate the basis for such
determination.
LIBOR Rate Loan - a Loan that bears interest based on the
LIBOR Rate.
LIBOR Request - a notice in writing (or by telephonic
communication confirmed by telex, telecopy or other facsimile
transmission on the same day as the telephone request) from
Borrower to Lender requesting that interest on a LIBOR Revolving
Credit Loan or a LIBOR Term Loan be based on the LIBOR Rate,
specifying: (i) the first day of the LIBOR Period, (ii) the
length of the LIBOR Period consistent with the definition of
that term, and (iii) a dollar amount of the LIBOR Revolving
Credit Portion or LIBOR Term Portion consistent with the
definition of such terms.
LIBOR Revolving Credit Portion - that portion of the
Revolving Credit Loan specified in a LIBOR Request (including
any portion of Revolving Credit Loan and Term Loan which is
being borrowed by Borrower concurrently with such LIBOR Request)
which is not less than $500,000 and an integral multiple of
$100,000, which does not exceed the outstanding balance of
Revolving Credit Loan not already subject to a LIBOR Option and,
which, as of the date of the LIBOR Request specifying such LIBOR
Revolving Credit Portion, has met the conditions for basing
interest on the LIBOR Rate in Section 3.1(B) hereof and the
LIBOR Period of which was commenced and not terminated.
<PAGE>
LIBOR Term Portion - that portion of the Term Loan
specified in a LIBOR Request (including any portion of Revolving
Credit Loan and Term Loan which is being borrowed by Borrower
concurrently with such LIBOR Request) which is not less than
$500,000 and an integral multiple of $100,000, which does not
exceed the outstanding balance of Term Loan not already subject
to a LIBOR Option and, which, as of the date of the LIBOR
Request specifying such LIBOR Term Portion, has met the
conditions for basing interest on the LIBOR Rate in Section
3.1(B) hereof and the LIBOR Period of which was commenced and
not terminated.
Lien - 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 the common law,
statute or contract, and including, but not limited to, the
security interest, security title or lien arising from a
security agreement, mortgage, deed of trust, deed to secure
debt, encumbrance, pledge, conditional sale or trust receipt or
a lease, consignment or bailment for security purposes. The
term "Lien" shall include reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases and other title exceptions and encumbrances
affecting Property. For the purpose of this Agreement, Borrower
shall be deemed to be the owner of any Property which it has
acquired or holds subject to a conditional sale agreement or
other arrangement pursuant to which title to the Property has
been retained by or vested in some other Person for security
purposes.
Loan Account - the loan account established on the books of
Lender pursuant to Section 2.6 hereof.
Loan Documents - this Agreement, the Other Agreements and
the Security Documents.
Loans - all loans and advances made by Lender pursuant to
this Agreement, including, without limitation, all Revolving
Credit Loans and the Term Loan, and each payment made pursuant
to an LC Guaranty and each payment made by Lender or any
Affiliate pursuant to a Letter of Credit.
Maximum Revolving Credit Loan - at any particular time, an
amount equal to $2,200,000.
Multiemployer Plan - has the meaning set forth in Section
4001(a)(3) of ERISA.
New Mortgages - as defined in Section 4.2 hereof.
Note(s) - the Term Note and the Revolving Credit Note.
Notice of Revolving Credit Loan - as defined in Section
2.1(A) of this Agreement.
<PAGE>
Obligations - all Loans and all other advances, letter of
credit reimbursement obligations, and/or any debts, liabilities,
obligations, covenants and duties owing, arising, due or payable
from Borrower to Lender of any kind or nature, present or
future, whether or not evidenced by any note, guaranty or other
instrument, whether arising under this Agreement or any of the
other Loan Documents or otherwise whether direct or indirect
(including those acquired by assignment), absolute or
contingent, primary or secondary, due or to become due, now
existing or hereafter arising and however acquired. The term
includes, without limitation, all interest, charges, expenses,
fees, attorney's fees and any other sums chargeable to Borrower
under any of the Loan Documents.
Original Term - as defined in Section 3.3 of this
Agreement.
OSHA - the Occupational Safety and Health Act and all rules
and regulations from time to time promulgated thereunder.
Other Agreements - any and all agreements, instruments and
documents (other than this Agreement and the Security
Documents), heretofore, now or hereafter executed by Borrower
and delivered to Lender in respect to the transactions
contemplated by this Agreement, including, without limitation,
the Term Note and the Revolving Credit Note.
Overadvance - as defined in Section 2.1(C) of this
Agreement.
Permitted Liens - any Lien of a kind specified in
subparagraphs (i) through (x) of Section 9.2(H) of this
Agreement.
Permitted Purchase Money Indebtedness - Purchase Money
Indebtedness of Borrower incurred after the date hereof which is
secured by a Purchase Money Lien and which, when aggregated with
the principal amount of all Indebtedness for Borrowed Money
(other than the Obligations) and Capitalized Lease Obligations
of Borrower at the time outstanding, does not exceed Five
Hundred Thousand and No/100 Dollars ($500,000). For the
purposes of this definition, the principal amount of any
Purchase Money Indebtedness consisting of capitalized leases
shall be computed as a Capitalized Lease Obligation.
Person - an individual, sole proprietorship, partnership,
joint venture, corporation, limited liability company, joint
stock company, land trust, association, business trust,
institution, or unincorporated organization, or a government or
agency or political subdivision thereof.
Plan - an employee benefit plan now or hereafter maintained
for employees of Borrower that is covered by Title IV of ERISA.
Prime Revolving Credit Portion - that portion of the
Revolving Credit Loan not subject to a LIBOR Option.
Prime Term Portion - that portion of the Term Loan not
subject to a LIBOR Option.
<PAGE>
Prohibited Transaction - any transaction set forth in
Section 406 of ERISA or Section 4975 of the Internal Revenue
Code of 1986.
Property - any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
Purchase Money Indebtedness - means and includes (i)
Indebtedness for Borrowed Money (other than the Obligations) for
the payment of all or any part of the purchase price of any
fixed assets, (ii) any Indebtedness for Borrowed Money (other
than the Obligations) incurred at the time of or within ten (10)
days prior to or after the acquisition of any fixed assets for
the purpose of financing all or any part of the purchase price
thereof, and (iii) any renewals, extensions or refinancings
thereof, but not any increases in the principal amounts thereof
outstanding at the time.
Purchase Money Lien - a Lien upon fixed assets which secure
Purchase Money Indebtedness, but only if such Lien shall at all
times be confined solely to the fixed assets the purchase price
of which was financed through the incurrence of the Purchase
Money Indebtedness secured by such Lien.
Rentals - as defined in Section 9.2(V) of this Agreement.
Reportable Event - any of the events set forth in Section
4043(b) of ERISA.
Restricted Investment - any investment in cash or by
transfer or other delivery of Property to any Person, whether by
acquisition of stock, indebtedness or other obligation or
Security, or by loan, advance or capital contribution, or
otherwise, or in any Property except the following: (i)
investments in one or more Subsidiaries of Borrower; (ii)
Property to be used in the ordinary course of business; (iii)
Current Assets arising from the sale of goods and services in
the ordinary course of business of Borrower and its
Subsidiaries; (iv) investments in direct obligations of the
United States of America, or any agency thereof or obligations
guaranteed by the United States of America, provided that such
obligations mature within one year from the date of acquisition
thereof; (v) investments in certificates of deposit maturing
within one year from the date of acquisition issued by a bank or
trust company organized under the laws of the United States or
any state thereof having capital surplus and undivided profits
aggregating at least $100,000,000; and (vi) investments in
commercial paper given the highest rating by a national credit
rating agency and maturing not more than two hundred seventy
(270) days from the date of creation thereof.
Revolving Credit Loan - a Loan made by Lender as provided
in Section 2.1 of this Agreement.
Revolving Credit Loan Commitment - as defined in Section
2.1 of this Agreement.
<PAGE>
Revolving Credit Notes - the Revolving Credit Notes to be
executed by Borrower on or prior to the Closing Date in favor of
Lender to evidence the Revolving Credit Loans, which shall be in
the form of Exhibit A attached hereto.
Security - shall have the same meaning as in Section 2(1)
of the Securities Act of 1933, as amended.
Security Documents - the Guaranty Agreement, each New
Mortgage, and all other instruments and agreements now or at any
time hereafter securing the whole or any part of the
Obligations.
Solvent - as to any Person, such Person (i) owns Property
whose fair saleable value is greater than the amount required to
pay all of such Person's indebtedness (including contingent
debts), (ii) is able to pay all of its indebtedness as such
indebtedness matures and (iii) has capital sufficient to carry
on its business and transactions and all business and
transactions in which it is about to engage.
Statutory Reserves - a fraction (expressed as a decimal),
the numerator of which is the number one and the denominator of
which is the number one minus the aggregate of the maximum
reserve percentages (including, without limitation, any
marginal, special, emergency or supplemental reserves),
expressed as a decimal, established by the Board and any other
banking authority to which Lender is subject for Eurocurrency
Liabilities (as defined in Regulation D of the Board or any
successor thereto). Such reserve percentages shall include,
without limitation, those imposed under such Regulation D.
LIBOR Revolving Credit Portions or LIBOR Term Portions shall be
deemed to constitute Eurocurrency Liabilities and as such shall
be deemed to be subject to such reserve requirements without
benefit of or credit for proration, exceptions or offsets which
may be available from time to time to Lender under such
Regulation D. Statutory Reserves shall be adjusted
automatically on and as of the effective date of any change in
any reserve percentage, provided that no adjustment shall reduce
Statutory Reserves below the amount in effect on the Closing
Date.
Subordinated Debt - Indebtedness for Borrowed Money of
Borrower that is subordinated to the Obligations.
Subsidiary - any corporation of which a Person owns,
directly or indirectly through one or more intermediaries, more
than 50% of the Voting Stock at the time of determination.
Tax - in relation to any LIBOR Revolving Credit Portion or
LIBOR Term Portion and the applicable LIBOR Rate, any tax, levy,
impost, duty, deduction, withholding or other charges of
whatever nature required by any Legal Requirement (i) to be paid
by Lender and/or (ii) to be withheld or deducted from any
payment otherwise required hereby to be made by Borrower to
Lender; provided, that the term "Tax" shall not include any
taxes imposed upon the net income of Lender by the United States
of America or any political subdivision thereof.
<PAGE>
Term Loan - the Loan described in Section 2.2(A) of this
Agreement.
Term Loan Commitment - as defined in Section 2.2(A) of this
Agreement.
Term Notes - the Secured Promissory Notes to be executed by
Borrower on or prior to the Closing Date in favor of Lender to
evidence the Term Loan, which shall be in the form of Exhibit B
attached hereto.
Voting Stock - Securities of any class or classes of a
corporation the holders of which are ordinarily, in the absence
of contingencies, entitled to elect a majority of the corporate
directors (or Persons performing similar functions).
A. Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with
GAAP consistent with that applied in preparation of the financial
statements referred to in Section 9.1(J), and all financial data
pursuant to the Agreement shall be prepared in accordance with such
principles.
A. Other Terms. All other terms contained in this
Agreement shall have, when the context so indicates, the meanings
provided for by the Code to the extent the same are used or defined
therein.
A. Certain Matters of Construction. The terms "herein",
"hereof" and "hereunder" and other words of similar import refer to
this Agreement as a whole and not to any particular section,
paragraph or subdivision. Any pronoun used shall be deemed to cover
all genders. The section titles, table of contents and list of
exhibits appear as a matter of convenience only and shall not affect
the interpretation of this Agreement. All references to statutes and
related regulations shall include any amendments of same and any
successor statutes and regulations. All references to any
instruments or agreements, including, without limitation, references
to any of the Loan Documents, shall include any and all modifications
thereto and any and all extensions or renewals thereof. Wherever
from the context it appears appropriate, each term stated in either
the singular or plural shall include the singular and the plural, and
pronouns stated in the masculine, feminine or neuter gender shall
include the masculine, the feminine and the neuter.
<PAGE>
I. SECTION CREDIT FACILITY
Subject to the terms and conditions of, and in reliance upon the
representations and warranties made in, this Agreement and the other
Loan Documents, Lender agrees to make a total credit facility of up
to Two Million Five Hundred Thousand Dollars ($2,500,000) available
upon Borrower's request therefor, as follows:
A. Revolving Credit Loans.
1. The aggregate principal amount of the Revolving
Credit Loans to be made by Lender is Two Million Two Hundred Thousand
Dollars ($2,200,000) (the "Revolving Credit Loan Commitment") minus
(without duplication) (i) the Obligations of Borrower hereunder
(other than the Term Loan) minus (ii) the stated amount of all LC
Guaranties and Letters of Credit minus (iii) the aggregate principal
amount of permanent reductions of the Revolving Credit Loan
Commitment. Subject to all of the terms and conditions of this
Agreement, Lender agrees, for so long as no Default or Event of
Default exists, to make Revolving Credit Loans to Borrower and to
provide Letters of Credit and LC Guaranties from time to time, as
requested by Borrower in accordance with the terms of Section 2.3 and
Section 2.4 hereof, up to a maximum principal amount at any time
outstanding equal to the Borrowing Base at such time. It is
expressly understood and agreed that Lender may use the Borrowing
Base as a maximum ceiling on Revolving Credit Loans outstanding to
Borrower at any time. If the unpaid balance of the Revolving Credit
Loans should exceed the ceiling so determined or any other limitation
set forth in this Agreement, such Revolving Credit Loans shall
nevertheless constitute Obligations that are secured by the
Collateral and entitled to all the benefits thereof. In no event
shall Borrower be authorized to request a Loan at any time that there
exists a Default or an Event of Default. Notwithstanding the
foregoing provisions of this Section 2.1(A), Lender shall have the
right to establish reserves in such amounts, and with respect to such
matters, as Lender shall deem reasonably necessary or appropriate,
against the amount of Revolving Credit Loans which Borrower may
otherwise request under this Section 2.1(A), including, without
limitation, with respect to (i) price adjustments, damages, unearned
discounts, returned products or other matters for which credit
memoranda are issued in the ordinary course of Borrower's business;
(ii) shrinkage, spoilage and obsolescence of Inventory; (iii) slow
moving Inventory; (iv) other sums chargeable against Borrower's Loan
Account as Revolving Credit Loans under any section of this
Agreement; and (v) such other matters, events, conditions or
contingencies as to which Lender, in its reasonable discretion,
determines reserves should be established from time to time
hereunder. Each Revolving Credit Loan shall be made on notice, given
not later than 11:00 A.M. (Chicago time) (i) three Business Days
prior to the requested borrowing date in the case of LIBOR Rate
Loans; and (ii) on the Business Day of the proposed Revolving Credit
Loan in the case of Prime Revolving Credit Portions, by Borrower to
Lender. Each such notice (a "Notice of Revolving Credit Loan") shall
be in writing or by telephone to Todd A. Andritsch of Lender at (847)
640-3525, or such other person as Lender notifies Borrower of in
writing, confirmed immediately in writing, specifying therein the
requested date and amount of such Revolving Credit Loan.
<PAGE>
1. The Revolving Credit Loans shall be evidenced by
a promissory note to be executed and delivered by Borrower at the
time of the initial Revolving Credit Loan, the form of which is
attached hereto and made a part hereof as Exhibit A (the "Revolving
Credit Note"). The Revolving Credit Note shall be payable to the
order of Lender and shall represent the obligation of Borrower to pay
the amount of Lender's Revolving Credit Loan Commitment or, if less,
the aggregate unpaid principal amount of all Revolving Credit Loans
made by Lender to Borrower with interest thereon as prescribed in
Section 3.1.
1. Insofar as Borrower may request and Lender may be
willing in its sole and absolute discretion to make Revolving Credit
Loans to Borrower at a time when the unpaid balance of Revolving
Credit Loans exceeds, or would exceed with the making of any such
Revolving Credit Loan, the Borrowing Base (any such Loans or Loans
being herein referred to individually as an "Overadvance" and
collectively as "Overadvances"; provided, however, that the Term Loan
shall not be considered an Overadvance), Lender shall enter such
Overadvances as debits in the Loan Account. All Overadvances shall
be repaid on demand, shall be deemed to be secured by the Collateral
and shall bear interest as provided in this Agreement for Revolving
Credit Loans generally.
1. The Revolving Credit Loans shall be used solely
for the satisfaction of existing Indebtedness for Borrowed Money of
Borrower to Silicon Valley Bank, and for Borrower's general operating
capital needs to the extent consistent with the provisions of this
Agreement.
A. Term Loan.
1. Term Loan. Subject to all of the terms and
conditions of this Agreement, Lender agrees to make a term loan
("Term Loan") to Borrower in the principal amount equal to Three
Hundred Thousand Dollars ($300,000) (the "Term Loan Commitment").
The Term Loan shall be evidenced, shall bear interest as specified in
Section 3.1, shall be repayable in accordance with the terms of Term
Note, and shall be secured by the Property of Borrower described in
Section 4 hereof and in the Security Documents. The Term Loan shall
be funded on the Closing Date, concurrently with Lender's initial
Revolving Credit Loan. The proceeds of the Term Loan shall be used
by Borrower solely for purposes for which the proceeds of the
Revolving Credit Loans are authorized to be used.
The Term Loan shall be made on notice, given not later than
11:00 A.M. (Chicago time) on the Closing Date, by Borrower to Lender.
Such notice from Borrower shall be by telephone to Todd A. Andritsch
of Lender at (847) 640-3525, confirmed immediately in writing, and
shall specify the Closing Date. Lender shall, before 3:00 P.M.
(Chicago Time) on the Closing Date, wire to a bank or other third
party designated by Borrower and reasonably acceptable to Lender, the
amount of the Term Loan Commitment.
<PAGE>
1. Mandatory Prepayments. If Borrower sells an
aggregate amount of Equipment and real Property during any calendar
year for an aggregate purchase price in excess of Fifty Thousand
Dollars ($50,000), or if any of the Collateral is taken by
condemnation, Borrower shall prepay the principal installments of the
Term Note, unless otherwise agreed by Lender, as and when received by
the Borrower and as a mandatory prepayment of the Term Loan (or, at
Lender's option, such of the other Obligations as Lender may elect),
a sum equal to the proceeds received by Borrower from such sale or
condemnation. Said prepayments shall be applied to the outstanding
principal balance of the Term Note.
A. Manner of Borrowing Revolving Credit Loans.
Borrowings under the credit facility established pursuant to Section
2.1 hereof shall be as follows:
1. A request for a Revolving Credit Loan shall be
made, or shall be deemed to be made, in the following manner: (i)
Borrower may give Lender notice of its intention to borrow in
accordance with the provisions contained in Section 2.1; (ii) the
becoming due of any amount required to be paid under this Agreement
or the Term Note as interest shall be deemed irrevocably to be a
request for a Revolving Credit Loan on the due date in the amount
required to pay such interest; and (iii) the becoming due of any
other Obligations shall be deemed irrevocably to be a request for a
Revolving Credit Loan on the due date in the amount then so due;
1. Borrower hereby irrevocably authorizes Lender to
disburse the proceeds of each Revolving Credit Loan requested, or
deemed to be requested, pursuant to this Section 2.3 as follows: (i)
the proceeds of each Revolving Credit Loan requested under Section
2.3(A)(i) shall be disbursed by Lender in lawful money of the United
States of America in immediately available funds, in the case of the
initial Revolving Credit Loan, in accordance with the terms of the
written disbursement letter from Borrower, and in the case of each
subsequent borrowing, by wire transfer to such bank account as may be
agreed upon by Borrower and Lender from time to time; and (ii) the
proceeds of each Revolving Credit Loan requested under Section
2.3(A)(ii) or (iii) shall be disbursed by Lender by way of direct
payment of the relevant Obligation.
<PAGE>
A. Letters of Credit; LC Guaranties.
1. Subject to availability under the Borrowing Base
and all of the terms and conditions of this Agreement and subject to
the written consent of Lender, if requested to do so by Borrower, the
Revolving Credit Loan Commitment and a Revolving Credit Loan may be
made available to the Borrower (to the same extent a Revolving Credit
Loan would otherwise be available hereunder) in the form of Letters
of Credit issued by the Lender, or issued by its Affiliates, for the
account of Borrower, or the Lender or its Affiliates may execute LC
Guaranties by which Lender or its Affiliates shall guaranty the
payment or performance by Borrower of its reimbursement obligation
with respect to Letters of Credit issued for Borrower's account by
other Persons; provided, however, that (i) the aggregate face amount
of all Letters of Credit and LC Guaranties outstanding at any time
shall not exceed One Million Dollars ($1,000,000) and (ii) no Letter
of Credit may have an expiration date that is after the Commitment
Termination Date. Any amounts paid by Lender under any LC Guaranty
or in connection with any Letter of Credit shall become part of the
Obligations and shall be payable on demand.
1. Borrower agrees to unconditionally, irrevocably
and absolutely pay immediately to Lender the amount drawn under a
Letter of Credit or paid pursuant to a LC Guaranty. If Borrower at
any time fails to make such payment, Borrower shall be deemed to have
elected to borrow from Lender on such date Revolving Credit Loans
equal in aggregate amount to the amount paid by Lender under such
Letter of Credit or LC Guaranty.
<PAGE>
1. At the time Borrower requests each Letter of
Credit to be issued (or prior to the first issuance of a Letter of
Credit, in the case of a continuing application), Borrower shall
execute and deliver to Lender an application for such Letter of
Credit in the form customarily prescribed by the Lender (individually
an "Application" and collectively the "Applications"). Subject to
the other provisions of this subsection, the obligation of Borrower
to reimburse Lender for drawings under a Letter of Credit shall be
governed by the Application for such Letter of Credit. In the event
Lender is not reimbursed by Borrower for the amount Lender pays on
any draft drawn under a Letter of Credit issued hereunder by 11:00
a.m. (Chicago time) on the date when such drawing is paid, the
obligation of Borrower to reimburse Lender for the amount of such
draft paid shall bear interest (which Borrower hereby promises to pay
on demand) from and after the date the draft is paid and until
payment in full thereof at the Default Rate as from time to time in
effect. This Agreement supersedes any terms of the Applications
which are irreconcilably inconsistent with the terms hereof.
Anything contained in the Applications to the contrary
notwithstanding, (i) Borrower shall pay fees in connection with each
Letter of Credit as set forth in Section 3.2 hereof, (ii) except as
otherwise provided herein, prior to the occurrence of a Default or an
Event of Default, Lender will not call for additional collateral
security for the obligations of Borrower under the Applications other
than the collateral security contemplated by this Agreement and the
Loan Documents, and (iii) except as otherwise provided herein, prior
to the occurrence of a Default or an Event of Default, Lender will
not call for the funding of a Letter of Credit by Borrower prior to
being presented with a draft drawn thereunder (or, in the event the
draft is a time draft, prior to its due date). Borrower hereby
irrevocably authorizes Lender to charge any of Borrower's deposit
accounts maintained with Lender for the amount necessary to reimburse
Lender for any drafts drawn under Letters of Credit issued hereunder.
1. Borrower is obligated, and hereby unconditionally
agrees, to pay in immediately available funds to Lender (i) each
draft drawn and presented under a Letter of Credit issued by Lender
hereunder and (ii) each LC Guaranty honored by Lender not later than
11:00 a.m. (Chicago Time) on the date provided for in the relevant
Application (Chicago time) or letter of credit subject to such LC
Guaranty (the obligation of each Borrower under this Section 2.4(D)
with respect to any Letter of Credit or LC Guaranty is a
"Reimbursement Obligation"). Borrower's obligation to repay all
Reimbursement Obligations shall be absolute and unconditional. If at
any time Borrower fails to pay any Reimbursement Obligations when
due, Borrower shall be deemed to have automatically requested a Base
Rate Loan from Lender hereunder, as of the maturity date of such
Reimbursement Obligation, the proceeds of which Loan shall be used to
repay such Reimbursement Obligation. Such Loan shall only be made if
no Default or Event of Default shall exist and upon approval of
Lender, and shall be subject to availability under the Revolving
Credit Loan Commitment. If such Loan is not made by Lender for any
reason, the unpaid amount of such Reimbursement Obligation shall be
due and payable to Lender upon demand and shall bear interest at the
Default Rate.
<PAGE>
A. All Loans to Constitute One Obligation. The Loans
shall constitute one general Obligation of Borrower, and shall be
secured by Lender's security interest in and Lien upon all of the
Collateral, and by all other security interests, Liens, claims and
encumbrances heretofore, now or at any time or times hereafter
granted by Borrower to Lender.
A. Loan Account. Lender shall enter all Loans as debits
to the Loan Account and shall also record in the Loan Account all
payments made by Borrower on any Obligations and all proceeds of
Collateral which are finally paid to Lender and may record therein,
in accordance with customary accounting practice, other debits and
credits, including all charges and expenses properly chargeable to
Borrower and any other Obligation.
I. SECTION INTEREST, FEES, TERM AND REPAYMENT
A. Interest, Fees and Charges.
a) Interest. Interest shall accrue on the Prime
Revolving Credit Portion outstanding at the end of each day (computed
on the basis of a calendar year of 360 days) at a fluctuating rate
per annum equal to the sum of one-half percent (.50%) plus the Base
Rate. After the date hereof, the foregoing rate of interest shall be
increased or decreased, as the case may be, by an amount equal to any
increase or decrease in the Base Rate, with such adjustments to be
effective as of the opening of business on the day that any such
change in the Base Rate becomes effective. The Base Rate in effect
on the date hereof shall be the Base Rate Effective on the opening of
business on the date hereof, but if this Agreement is executed on a
day that is not a Business Day, the Base Rate in effect on the date
hereof shall be the Base Rate effective as of the opening of business
on the last Business Day immediately preceding the date hereof.
a) Interest shall accrue on each LIBOR
Revolving Credit Portion outstanding at the end of each day (computed
on the basis of a calendar year of 360 days) at rates equal to the
sum of the LIBOR Rate applicable to each such LIBOR Revolving Credit
Portion plus three percent (3%).
a) Interest shall accrue on the Prime Term
Portion outstanding at the end of each day (computed on the basis of
a calendar year of 360 days) at a fluctuating rate per annum equal to
the sum of one-half percent (.50%) plus the Base Rate. After the
date hereof, the foregoing rate of interest shall be increased or
decreased, as the case may be, by an amount equal to any increase or
decrease in the Base Rate, with such adjustments to be effective as
of the opening of business on the day that any such change in the
Base Rate becomes effective. The Base Rate in effect on the date
hereof shall be the Base Rate effective on the opening of business on
the date hereof, but if this Agreement is executed on a day that is
not a Business Day, the Base Rate in effect on the date hereof shall
be the Base Rate effective as of the opening of business on the last
Business Day immediately preceding the date hereof.
<PAGE>
a) Interest shall accrue on each LIBOR Term
Portion outstanding at the end of each day (computed on the basis is
of a calendar year of 360 days) at rates equal to the sum of the
LIBOR Rate applicable to each such LIBOR Term Loan Portion plus three
percent (3%).
2. LIBOR Option.
a) Conditions for Basing Interest on the LIBOR
Rate. Upon the condition that:
(1) Lender shall have received a LIBOR
Request from Borrower at least three (3) Business Days
prior to the first day of the LIBOR Period requested prior
to 1:00 p.m. (Chicago time) on such Business Day;
(1) There shall have occurred no change in
applicable law which would make it unlawful for Lender to
obtain deposits of U.S. dollars in the London interbank
foreign currency deposits market;
(1) As of the date of the LIBOR Request and
the first day of the LIBOR Period, there shall exist no
Default or Event of Default which has not been waived by
Lender; and
(1) Lender shall not have determined in
good faith that Lender is unable to determine the LIBOR
Rate in respect of the requested LIBOR Period or that
Lender is unable to obtain deposits of U.S. dollars in the
London interbank foreign currency deposits market in the
applicable amounts and for the requested LIBOR Period;
then interest on the LIBOR Revolving Credit Portion and/or LIBOR Term
Portion requested during the LIBOR Period requested will be based on
the applicable LIBOR Rate. Notwithstanding anything contained to the
contrary, at no time shall there be more than four (4) LIBOR Portions
outstanding hereunder.
a) Indemnification for Funding and Other Losses
. Each LIBOR Request shall be irrevocable and binding on Borrower.
Borrower shall indemnify Lender as a result of any failure on the
part of Borrower to fulfill, on or before the date specified in any
LIBOR Request, the applicable conditions set forth in this Agreement,
including, without limitation, any loss (including loss of
anticipated profits) or expense incurred by reason of the liquidation
of redeployment of deposits or other funds acquired by Lender to fund
or maintain the requested LIBOR Revolving Credit Portion and/or LIBOR
Term Portion, when, as a result of such failure on the part of
Borrower, interest on such LIBOR Revolving Credit Portion or LIBOR
Term Portion is not based on the applicable LIBOR Rate for the
requested LIBOR Period.
<PAGE>
a) Change in Applicable Laws, Regulations, etc.
If any Legal Requirement shall make it unlawful for Lender to fund
through the purchase of U.S. dollar deposits any LIBOR Revolving
Credit Portion or LIBOR Term Portion, or otherwise to give effect to
its obligations as contemplated under this Section 3.1(B), or shall
impose on Lender any costs based on or measured by the excess above a
specified level of the amount of a category of deposits or other
liabilities of Lender which includes deposits by reference to which
the LIBOR Rate is determined as provided herein or a category of
extensions of credit or other assets or Lender which includes any
LIBOR Revolving Credit Portion, or LIBOR Term Portion, or shall
impose on Lender any restrictions on the amount of such a category of
liabilities of assets which Lender may hold, (i) Lender may by notice
thereof to Borrower terminate the LIBOR Option, with respect to the
Revolving Credit Loans and Term Loans made or to be made by Lender,
(ii) any LIBOR Revolving Credit Portion of Lender's Revolving Credit
Loans and/or any LIBOR Term Portion of Lender's Term Loans subject
thereto shall immediately bear interest thereafter at the rate
provided for in Section 3.1(A) payable on the dates provided for in
Section 3.5(C), and (iii) Borrower shall indemnify Lender against any
loss, penalty or expense incurred by Lender by reason of the
liquidation or redeployment of deposits or other funds acquired by
Lender to fund or maintain such LIBOR Revolving Credit Portion and/or
LIBOR Term Portion.
a) Taxes. It is the understanding of Borrower
and Lender that Lender shall receive payments of amounts of principal
of and interest on the Revolving Credit Note, with respect to the
LIBOR Revolving Credit Portions and on the Term Note with respect to
LIBOR Term Portions from time to time subject to a LIBOR Option free
and clear of, and without deduction for, any Taxes. If (i) Lender
shall be subject to any such Tax in respect of any such LIBOR
Revolving Credit Portion or LIBOR Term Portion or any part thereof or
(ii) Borrower shall be required to withhold or deduct any such Tax
from any such amount, the LIBOR Rate applicable to such LIBOR
Revolving Credit Portion or LIBOR Term Portion shall be adjusted by
Lender to reflect all additional costs incurred by Lender in
connection with the payments by Lender or the withholding by Borrower
of such Tax and Borrower shall provide Lender with a statement
detailing the amount of any such Tax actually paid by Borrower.
Determination by Lender of the amount of such costs shall, in the
absence of manifest error, be conclusive, and at Borrower's request,
Lender shall demonstrate the basis of such determination. If after
any such adjustment, any part of any Tax paid by Lender is
subsequently recovered by Lender, Lender shall reimburse Borrower to
the extent of the amount so recovered. A certificate of an officer
of Lender setting forth the amount of such recovery and the basis
therefor shall, in the absence of manifest error, be conclusive.
1. Default Rate of Interest. Upon and after the
occurrence of an Event of Default, and during the continuation
thereof, the principal amount of the Obligations shall bear interest,
calculated daily (computed on the actual days elapsed over a year of
360 days), at a fluctuating rate per annum equal to four percent (4%)
above the Base Rate (the "Default Rate").
<PAGE>
1. Unused Line Fee. If during any calendar quarter
prior to the Commitment Termination Date, the average daily balance
of the Revolving Credit Loan is less than the Maximum Revolving
Credit Loan amount as reduced by any permanent reduction in the
Revolving Credit Loan Commitment, Borrower shall pay to Lender in
addition to any interest, late charges or liquidated damages due
under this Agreement, an amount ("Unused Revolving Credit Loan
Charge") equal to the quotient of (i) an amount equal to (A) the sum
of positive differences between the Maximum Revolving Credit Loan
above and the sum of the average daily balance of the Revolving
Credit Loan plus the sum of the daily balance of outstanding Letters
of Credit and L/C Guaranties on each during such quarter for each day
during the previous quarter or portion thereof, multiplied by (B) a
rate equal to one quarter of one percent (1/4%), divided by (ii) 360.
The amount of any Unused Revolving Credit Loan Charge shall be
payable to Lender quarterly, in arrears, commencing April 1, 1998,
with a final payment date on the Commitment Termination Date.
2. Closing Fee. Borrower shall pay to Lender a
closing fee of Fifteen Thousand Dollars ($15,000), which shall be
deemed fully earned and nonrefundable at the closing of the
transactions contemplated hereby and shall be paid concurrently with
the initial Loan hereunder. Such fee shall compensate Lender for the
costs associated with the origination, structuring, processing,
approving and closing of the transactions contemplated by this
Agreement, including, but not limited to, administrative,
out-of-pocket, general overhead and lost opportunity costs, but not
including any expenses for which Borrower has agreed to reimburse
Lender pursuant to any other provisions of this Agreement or any of
the other Loan Documents, such as, by way of example, legal fees and
expenses.
1. Capital Adequacy Charge. In the event that
Lender shall have determined that the adoption of any law, rule or
regulation regarding capital adequacy, or any change therein or in
the interpretation or application thereof or compliance by Lender
with any request or directive regarding capital adequacy (whether or
not having the force of law) from any central bank or governmental
authority, does or shall have the effect of reducing the rate of
return on Lender's capital as a consequence of its obligations
hereunder 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) by an amount
deemed by Lender, in its sole discretion, to be material, then from
time to time, after submission by Lender to Borrower of a written
demand therefor, the Borrower shall pay to Lender such additional
amount or amounts as will compensate Lender for such reduction. A
certificate of Lender claiming entitlement to payment as set forth
above shall be conclusive in the absence of manifest error. Such
certificate shall set forth the nature of the occurrence giving rise
to such payment, the additional amount or amounts to be paid to
Lender, and the method by which such amounts were determined. In
determining such amount, Lender may use any reasonable averaging and
attribution method.
<PAGE>
1. Maximum Interest. In no contingency or event
whatsoever shall the aggregate of all amounts deemed interest
hereunder or under the Revolving Credit Note or the Term Note and
charged or collected pursuant to the terms of this Agreement or
pursuant to the Revolving Credit Note or the Term Note exceed the
highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto.
In the event that such a court determines that Lender has charged or
received interest hereunder in excess of the highest applicable rate,
the rate in effect hereunder shall automatically be reduced to the
maximum rate permitted by applicable law and Lender shall promptly
refund to Borrower any interest received by Lender in excess of the
maximum lawful rate or, if so requested by Borrower, shall apply such
excess to the principal balance of the Obligations. It is the intent
hereof that Borrower not pay or contract to pay, and that Lender not
receive or contract to receive, directly or indirectly in any manner
whatsoever, interest in excess of that which may be paid by Borrower
under applicable law.
1. Discretion of Lender as to Manner of Funding.
Notwithstanding any provision of this Agreement to the contrary,
Lender shall be entitled to fund and maintain its funding of all or
any part of the Loans in any manner it sees fit, it being understood
however, that for the purposes of this Agreement all determinations
hereunder shall be made as if Lender had actually funded and
maintained each LIBOR Portion during each Interest Period applicable
thereto through the purchase of deposits in the relevant market in
the amount of such LIBOR Portion, having a maturity corresponding to
such Interest Period and bearing an interest rate equal to the LIBOR
Rate for such Interest Period.
A. Letter of Credit and LC Guaranty Fees. As additional
consideration for Lender issuing its, or causing to be issued,
Letters of Credit for Borrower's account or for issuing its LC
Guaranties at Borrower's request pursuant to Section 2.4 hereof,
Borrower agrees to pay Lender, commencing with the date upon which
the Letter of Credit or LC Guaranty is issued and upon each
subsequent renewal or issuance thereafter during which the Letters of
Credit or LC Guaranties are outstanding, a fee in an amount equal to
the quotient of (x) an amount equal to (A) the sum of the daily
outstanding amount of such Letter of Credits or LC Guaranties
outstanding on each day during the previous month multiplied by (B) a
rate equal to one percent (1%) for Standby Letters of Credit, or (2)
one-quarter percent (0.25%) for Documentary Letters of Credit,
divided by (y) 360. Further, Borrower shall pay and/or reimburse
Lender all fees and charges paid by Lender on account of any Letter
of Credit or LC Guaranty, including, but not limited to, customary
issuance and draw fees. Such fees and other amounts shall be paid to
Lender in advance upon the issuance or renewal of any Letter of
Credit or LC Guaranties and on the Commitment Termination Date.
A. Term of Agreement. Subject to Lender's right to cease
making Loans to Borrower at any time upon or after the occurrence of
any Default or Event of Default, this Agreement shall be in effect
for a period through and including March 31, 2000 (the "Original
Term").
<PAGE>
A. Termination.
1. Upon at least ninety (90) days prior written
notice to Lender, Borrower may, at its option, terminate this
Agreement; provided, however, no such termination shall be effective
until Borrower has paid all of the Obligations in immediately
available funds and all Letters of Credit issued by Lender or its
Affiliates and all LC Guaranties have expired.
1. Borrower may terminate or reduce the financing
under the Revolving Credit Loan at any time prior to the end of the
Original Term by giving to the other party written notice of
reduction or termination hereunder, by registered or certified mail
addressed to the other party at its principal place of business at
least one (1) day prior to the end of any such term. In order for a
notice of reduction or termination to become effective, Borrower
shall, on or before the termination date or reduction date, pay to
Lender in full all of Borrower's Obligations under this Agreement and
the Notes in an amount to the reduction or in full in the case of a
termination, notwithstanding that any portion thereof may be payable
in installments not yet due, and shall cause all outstanding Letters
of Credit or L/C Guaranties to be terminated, or otherwise provided
for as set forth in Section 3.4(D). The aforesaid notice of
termination by Borrower or Lender shall have the effect of
accelerating payment on any principal indebtedness not then due. In
the event of a termination, Lender shall have no further Obligations
to make Revolving Credit Loans after the date specified in any such
notice of termination.
1. All of the Obligations including, without
limitation, the Term Loan, shall be forthwith due and payable upon
any termination of this Agreement. Except as otherwise expressly
provided for in this Agreement or the other Loan Documents, no
termination or cancellation (regardless of cause or procedure) of
this Agreement, or any of the other Loan Documents shall in any way
affect or impair the rights, powers or privileges of Lender or the
obligations, duties, or liabilities of Borrower or Lender in any way
relating to (i) any transaction or event occurring prior to such
termination or cancellation or (ii) any of the undertakings,
agreements, covenants, warranties or representations of Borrower
contained in this Agreement, or any of the other Loan Documents. All
such undertakings, agreements, covenants, warranties and
representations of Borrower shall survive such termination or
cancellation and Lender shall retain its Liens in the Collateral, and
all of its rights and remedies under this Agreement and the other
Loan Documents notwithstanding such termination or cancellation, and
Lender shall retain its Liens in the Collateral until Borrower has
paid the Obligations to Lender in full, in immediately available
funds.
<PAGE>
1. With respect to the face amount of all LC
Guaranties and Letters of Credit issued by Lender or Affiliates of
Lender outstanding on any proposed date of termination, Lender may,
at its option, require Borrower to deposit with Lender funds equal to
such face amount, in order for any such termination to become
effective. Any such deposit or advance shall be held by Lender as a
reserve to fund future payments on such LC Guaranties and future
drawings against such Letters of Credit. At such time as all LC
Guaranties have been paid or terminated and all Letters of Credit
have been drawn upon or expired, any amounts remaining in such
reserve shall be applied against any outstanding Obligations, or to
the extent all Obligations have been indefeasibly paid in full,
returned to Borrower.
1. It is understood that Borrower may elect to
terminate this Agreement in its entirety only; no section or lending
facility may be terminated singly.
A. Payments. Except where evidenced by notes or other
instruments issued or made by Borrower to Lender specifically
containing payment provisions which are in conflict with this Section
3.5 (in which event the conflicting provisions of said notes or other
instruments shall govern and control), that portion of the
Obligations consisting of:
1. Principal, payable on account of Revolving Credit
Loans made by Lender to Borrower pursuant to Section 2.1 of this
Agreement, shall be payable by Borrower to Lender immediately upon
the earliest of (i) the receipt by Lender or Borrower of any proceeds
of any of the Collateral consisting of Accounts or Inventory, to the
extent of said proceeds, (ii) the occurrence of an Event of Default
in consequence of which Lender elects to accelerate the maturity and
payment of the Obligations, or (iii) termination of this Agreement
pursuant to Section 3.4 hereof; provided, however, that if the
principal balance of Revolving Credit Loans outstanding at any time
shall exceed the Borrowing Base at such time, Borrower shall, on
demand, repay the Revolving Credit Loans in an amount sufficient to
reduce the aggregate unpaid principal amount of such Revolving Credit
Loans by an amount equal to such excess;
1. Principal, payable on account of the Term Loans
made by Lender to Borrower pursuant to Section 2.2 of this Agreement
shall be payable by Borrower to Lender in an amount equal to $3,750
per month which is based upon a five-year amortization schedule with
a final payment due on March 31, 2000 or immediately upon the
earliest of (i) the occurrence of an Event of an Event of Default in
consequence of which Lender elects to accelerate the maturity and
payment of the Obligations, or (ii) termination of this Agreement
pursuant to Section 3.4 hereof;
<PAGE>
(a) Interest accrued on the Prime Revolving Credit
Portion and the Prime Term Portion shall be due on the earliest of
(i) the first day of each month (for the immediately preceding
month), computed through the last calendar day of the preceding
month, (ii) the occurrence of an Event of Default in the consequence
of which Lender elects to accelerate the maturity and payment of the
Obligations or (iii) termination of this Agreement pursuant to
Section 3.4 hereof; provided, however, the Borrower hereby
irrevocably authorizes Lender, in Lender's sole discretion, to
advance to Borrower and to charge to Borrower's Loan Account
hereunder as a Revolving Credit Loan, a sum sufficient each month to
pay all interest accrued on the Prime Revolving Credit Portion and on
the Prime Term Portion during the immediately preceding month.
(a) Interest on the LIBOR Revolving Credit
Portion and the LIBOR Term Portion shall be due on the earliest of
(i) each LIBOR Interest Payment Date applicable to each such LIBOR
Revolving Credit Portion and each LIBOR Term Portion, (ii) the
occurrence of Events of Default in consequence of which Lender elects
to accelerate the maturity and payment of the Obligations, or (iii)
termination of this Agreement pursuant to Section 3.4; provided,
however, that Borrower irrevocably authorizes Lender, in Lender's
sole discretion, to advance to Borrower, and to charge Borrower's
Loan Account hereunder as a Revolving Credit Loan on each LIBOR
Interest Payment Date, a sum sufficient to pay all interest accrued
and payable with respect to each LIBOR Revolving Credit Portion and
each LIBOR Term Portion.
1. Costs, fees and expenses payable pursuant to this
Agreement shall be payable by Borrower, on demand, to Lender or to
any other Person designated by Lender in writing; and
1. The balance of the Obligations requiring the
payment of money, if any, shall be payable by Borrower to Lender as
and when provided in this Agreement, the Other Agreements or the
Security Documents, or on demand, whichever is earlier.
A. Application of Payments and Collections. Borrower
irrevocably waives the right to direct the application of any and all
payments and collections at any time or times hereafter received by
Lender from or on behalf of Borrower, and Borrower does hereby
irrevocably agree that Lender shall have the continuing exclusive
right to apply and reapply any and all such payments and collections
received at any time or times hereafter by Lender against the
Obligations, in such manner as Lender may deem advisable,
notwithstanding any entry by Lender upon any of its books and
records. If as the result of collections of Accounts as authorized
by Section 5.2 hereof a credit balance exists in the Loan Account,
such credit balance shall not accrue interest in favor of Borrower,
but shall be available to Borrower at any time or times for so long
as no Default or Event of Default exists. In no event shall such
credit balance be applied or be deemed to have been applied as a
prepayment of the Term Loan.
Upon receipt from Borrower of good funds, Lender will promptly
thereafter cause to be distributed like funds relating to the payment
of principal, interest or, if applicable, fees ratably to Lender.
<PAGE>
A. Statements of Account. Lender will account to
Borrower monthly with a statement of Loans, charges and payments made
pursuant to this Agreement, a copy of which shall be sent to Lender
and such account rendered by Lender shall be deemed final, binding
and conclusive upon Borrower unless Lender is notified by Borrower in
writing to the contrary within thirty (30) days of the date each
account is mailed to Borrower. Such notice shall only be deemed an
objection to those items specifically objected to therein.
I. SECTION COLLATERAL: GENERAL TERMS
A. Security Interest in Collateral. To secure the prompt
payment and performance to Lender of the Obligations, Borrower hereby
grants to Lender a continuing security interest in and Lien upon all
of Borrower's current and non-current assets, including all of the
following Property and interests in Property of Borrower, whether now
owned or existing or hereafter created, acquired or arising and
wheresoever located:
1. Accounts;
1. Inventory;
1. Equipment;
1. General Intangibles;
1. All monies and other Property of any kind, now or
at any time or times hereafter, in the possession or under the
control of Lender or a bailee of Lender;
1. All accessions to, substitutions for and all
replacements, products and cash and non-cash proceeds of (A), (B),
(C), (D) and (E) above, including, without limitation, proceeds of
and unearned premiums with respect to insurance policies insuring any
of the Collateral; and
1. All books and records (including, without
limitation, customer lists, credit files, computer programs,
print-outs, and other computer materials and records) of Borrower
pertaining to any of (A), (B), (C), (D), (E) or (F) above.
<PAGE>
A. Lien on Realty. If Borrower shall acquire at any time
or times hereafter any interest in other real Property, Borrower
agrees promptly to execute and deliver to Lender as additional
security and Collateral for the Obligations, deeds of trust, security
deeds, mortgages or other collateral assignments satisfactory in form
and substance to Lender, and its counsel (herein collectively
referred to as "New Mortgages") covering such real Property. Each
New Mortgage shall be duly recorded in each office where such
recording is required to constitute a valid Lien on the real Property
covered thereby. Borrower shall deliver to Lender at Borrower's
expense, mortgagee title insurance policies issued by a title
insurance company satisfactory to Lender insuring Lender as
mortgagee; such policies shall be in form and substance satisfactory
to Lender and shall insure a valid first Lien in favor of Lender on
the Property covered thereby, subject only to those exceptions
acceptable to Lender and its counsel. Said policies shall be in form
and substance satisfactory to Lender. Borrower shall deliver to
Lender such other documents, including, without limitation, ALTA
Surveys, of the real Property, as Lender and its counsel may
reasonably request relating to the real Property subject to any such
New Mortgages.
A. Representations, Warranties and Covenants --
Collateral. To induce Lender to enter into this Agreement, Borrower
represents, warrants, and covenants to Lender:
1. The Collateral is now, and so long as any of the
Obligations are outstanding, will continue to be, owned solely by
Borrower. No other Person has or will have any right, title,
interest, claim, or Lien thereon, other than a Permitted Lien.
1. Except as specifically consented to in writing by
Lender, the Liens granted to Lender shall be first and prior on the
Collateral and as to the Accounts and proceeds, including insurance
proceeds, resulting from the sale, disposition, or loss thereof. No
further action need be taken to perfect the Liens granted to Lender
other than the filing of continuation statements under the Code or
other applicable law, continued possession by Lender of that portion
of the Collateral constituting instruments or documents and the
processing of Lien notations on motor vehicle title certificates and
the recording of the New Mortgages.
1. All goods evidenced by the Collateral
constituting chattel paper, documents, or instruments, the possession
of which has been given to Lender, are owned by Borrower and the same
are free and clear of any prior Lien. Borrower further warrants and
guarantees the value, quantities, sound condition, grades, and
qualities of the goods and services described therein. Borrower
shall pay and discharge when due all taxes, levies, and other charges
upon said Collateral and upon the goods evidenced by any documents
constituting Collateral and shall defend Lender against and save it
harmless from all claims of any Person with respect to the
Collateral. This indemnity shall include reasonable attorneys' fees
and legal expenses.
<PAGE>
A. Lien Perfection. Borrower agrees to execute the UCC-1
financing statements or similar documents provided for by the Code or
otherwise, together with any and all other instruments, assignments
or documents and shall take such other action as may be required to
perfect or to continue the perfection of Lender's security interest
in the Collateral, including, without limitation, the execution at
Lender's request of all documents deemed necessary by Lender to cause
Lender's Lien to be noted on any motor vehicle title certificates for
motor vehicles forming a part of the Collateral. Unless prohibited
by applicable law, Borrower hereby authorizes Lender to execute and
file any such financing statement on Borrower's behalf. The parties
agree that a carbon, photographic or other reproduction of this
Agreement shall be sufficient as a financing statement and may be
filed in any appropriate office in lieu thereof.
A. Location of Collateral. All Collateral, other than
Inventory in transit and motor vehicles, will at all times be kept by
Borrower at one or more of the business locations set forth in
Exhibit C and shall not, without the prior written approval of
Lender, be moved therefrom except, prior to an Event of Default and
the acceleration of the maturity of the Obligations in consequence
thereof, for (A) sales of Inventory in the ordinary course of
business; (B) the storage of Inventory at locations within the
continental United States other than those shown on Exhibit C if (i)
Borrower gives Lender written notice of the new storage location at
least thirty (30) days prior to storing Inventory at such location,
(ii) Lender's security interest in such Inventory is and continues to
be a duly perfected, first priority Lien thereon, (iii) neither
Borrower's nor Lender's right of entry upon the premises where such
Inventory is stored, or its right to remove the Inventory therefrom,
is in any way restricted, (iv) the owner of such premises agrees with
Lender not to assert any landlord's, bailee's or other Lien in
respect of the Inventory for unpaid rent or storage charges and (v)
all negotiable documents and receipts in respect of any Collateral
maintained at such premises are promptly delivered to Lender; (C)
temporary transfers (for a period not to exceed three (3) months in
any event) of Equipment from a location set forth on Exhibit C to
another location if done for the limited purpose of repairing,
refurbishing or overhauling such Equipment in the ordinary course of
Borrower's business and (D) removals in connection with dispositions
of Equipment that are authorized by Section 7.4 hereof.
Notwithstanding anything else herein to the contrary, Inventory (i)
with an aggregate value of less than $100,000 may be in transit, to,
or at, a trade show or the home or office of a sales representative
of Borrower, and (ii) with an aggregate value of less than $30,000
may be held by third parties, including but not limited to Borrower's
customers, to demonstrate the benefit of Borrower's products.
<PAGE>
A. Insurance of Collateral. Borrower agrees to maintain
and pay for insurance upon all Collateral wherever located, in
storage or in transit in vehicles, including goods evidenced by
documents, covering casualty, hazard, public liability and such other
risks and in such amounts and with such insurance companies as shall
be reasonably satisfactory to Lender to insure Lender's interest in
the Collateral. Borrower shall deliver copies of such policies to
Lender with satisfactory lender's loss payable endorsements naming
Lender loss payee. Each policy of insurance or endorsement shall
contain a clause requiring the insurer to give not less than thirty
(30) days prior written notice to Lender in the event of cancellation
of the policy for any reason whatsoever. If Borrower fails to
provide and pay for such insurance, Lender may, at Borrower's
expense, procure the same, but shall not be required to do so.
Borrower agrees to deliver to Lender, promptly as rendered, true
copies of all reports made in any reporting forms to insurance
companies. Borrower will maintain, with financially sound and
reputable insurers, insurance with respect to its Properties and
business against such casualties and contingencies of such type
(including public liability, product liability, larceny,
embezzlement, or other criminal misappropriation insurance) and in
such amounts as is customary in the business.
A. Protection of Collateral. All insurance expenses and
all expenses of protecting, storing, warehousing, insuring, handling,
maintaining and shipping the Collateral, any and all excise,
property, sales, and use taxes imposed by any state, federal, or
local authority on any of the Collateral or in respect of the sale
thereof shall be borne and paid by Borrower. If Borrower fails to
promptly pay any portion thereof when due, Lender may, at its option,
but shall not be required to, pay the same and charge the Loan
Account therefor. Borrower agrees to reimburse Lender promptly
therefor with interest accruing thereon daily at the Default Rate
provided in this Agreement. All sums so paid or incurred by Lender
for any of the foregoing and all costs and expenses (including
reasonable attorneys' fees, legal expenses, and court costs) which
Lender may incur in enforcing or protecting its Lien on or rights and
interest in the Collateral or any of is rights or remedies under this
or any other agreement between the parties hereto or in respect of
any of the transactions to be had hereunder until paid by Borrower to
Lender with interest at the Default Rate, shall be considered
Obligations owing by Borrower to Lender hereunder. Such Obligations
shall be secured by all Collateral and by any and all other
collateral, security, assets, reserves, or funds of Borrower in or
coming into the hands or inuring to the benefit of Lender. Lender
shall not be liable or responsible in any way for the safekeeping of
any of the Collateral or for any loss or damage thereto (except for
reasonable care in the custody thereof while any Collateral is in
Lender's actual possession) or for any diminution in the value
thereof, or for any act or default of any warehouseman, carrier,
forwarding agency, or other person whomsoever, but the same shall be
at Borrower's sole risk.
<PAGE>
I. SECTION PROVISIONS RELATING TO ACCOUNTS
A. Representations, Warranties and Covenants. With
respect to all Accounts, Borrower represents and warrants to Lender
that Lender may rely, in determining which Accounts are Eligible
Accounts, on all statements and representations made by Borrower with
respect to any Account or Accounts, and, unless otherwise indicated
in writing to Lender, that with respect to each Account:
1. It is genuine and in all respects what it
purports to be, and it is not evidenced by a judgment;
1. It arises out of a completed, bona fide sale and
delivery of goods or rendition of services by Borrower in the
ordinary course of its business and in accordance with the terms and
conditions of all purchase orders, contracts or other documents
relating thereto and forming a part of the contract between Borrower
and the Account Debtor;
1. It is for a liquidated amount maturing as stated
in the duplicate invoice covering such sale or rendition of services,
a copy of which has been furnished or is available to Lender;
1. To the best of Borrower's knowledge, such
Account, and Lender's security interest therein, is not, and will not
be in the future, subject to any offset, Lien, deduction, defense,
dispute, counterclaim or any other adverse condition except for
disputes resulting in returned goods where the amount in controversy
is deemed by Lender to be immaterial, and each such Account is
absolutely owing to Borrower and is not contingent in any respect or
for any reason;
1. Borrower has made no agreement with any Account
Debtor thereunder for any deduction therefrom, except discounts or
allowances which are granted by Borrower in the ordinary course of
its business for prompt payment and which are reflected in the
calculation of the net amount of each respective invoice related
thereto;
1. To the best of Borrower's knowledge, there are no
facts, events or occurrences which in any way impair the validity or
enforceability thereof or tend to reduce the amount payable
thereunder from the face amount of the invoice and statements
delivered to Lender with respect thereto;
1. To the best of Borrower's knowledge, the Account
Debtor thereunder (i) had the capacity to contract at the time any
contract or other document giving rise to the Account was executed
and (ii) such Account Debtor is Solvent; and
1. Borrower has no knowledge of any fact or
circumstance which would impair the validity or collectability of the
Account, and to the best of Borrower's knowledge there are no
proceedings or actions which are threatened or pending against any
Account Debtor thereunder which might result in any material adverse
change in such Account Debtor's financial condition or the
collectability of such Account.
<PAGE>
A. Assignments, Records and Schedules of Accounts. If so
requested by Lender, Borrower shall execute and deliver to Lender
formal written assignments of all of its Accounts weekly, or if
requested by Lender, daily, which shall include all Accounts that
have been created since the date of the last assignment, together
with copies of invoices or invoice registers related thereto.
Borrower shall keep accurate and complete records of its Accounts and
all payments and collections thereon and shall submit to Lender on a
monthly basis a sales and collections report for the preceding month,
in form satisfactory to Lender. On or before the fifteenth day of
each month from and after the date hereof, Borrower shall deliver to
Lender, in form acceptable to Lender, a detailed aged trial balance
of all Accounts existing as of the last day of the preceding month,
specifying the names, addresses, face value, dates of invoices and
due dates for each Account Debtor obligated on an Account so listed
("Schedule of Accounts"), and, upon Lender's request therefor, copies
of proof of delivery and the original copy of all documents,
including, without limitation, repayment histories and present status
reports relating to the Accounts so scheduled and such other matters
and information relating to the status of then existing Accounts as
Lender shall reasonably request.
A. Administration of Accounts.
1. Upon the granting of any discounts, allowances or
credits by Borrower that are not shown on the face of the invoice for
the Account involved, Borrower shall promptly report such discounts,
allowances or credits, as the case may be, to Lender and in no event
later than the time of its submission to Lender of the next Schedule
of Accounts as provided in Section 5.2. Upon and after the
occurrence of an Event of Default, Lender shall have the right to
settle or adjust all disputes and claims directly with the Account
Debtor and to compromise the amount or extend the time for payment of
the Accounts upon such terms and conditions as Lender may deem
advisable, and to charge the deficiencies, and reasonable costs and
expenses thereof, including attorney's fees, to Borrower.
1. If an Account includes a charge for any tax
payable to any governmental taxing authority, Lender is authorized,
in its sole discretion, to pay the amount thereof to the proper
taxing Authority for the account of Borrower and to cause Borrower's
Loan Account hereunder to be charged therefor. Borrower shall notify
Lender if any Account includes any tax due to any governmental taxing
authority and, in the absence of such notice, Lender shall have the
right to retain the full proceeds of the Account and shall not be
liable for any taxes to any governmental taxing authority that may be
due by Borrower by reason of the sale and delivery creating the
Account.
1. Whether or not a Default or an Event of Default
has occurred, any of Lender's officers, employees or agents shall
have the right, at any time or times hereafter, in the name of
Lender, any designee of Lender or Borrower, to verify the validity,
amount or any other matter relating to any Accounts by mail,
telephone, telegraph or otherwise. Borrower shall cooperate fully
with Lender in an effort to facilitate and promptly conclude any such
verification process.
<PAGE>
A. Collection of Accounts.
Upon an Event of Default, all cash, checks, notes, drafts
or other remittances received by Borrower on account of Accounts or
which constitute Collateral or proceeds thereof shall be held as
Lender's property by Borrower, as trustee of an express trust for
Lender's benefit and Borrower shall immediately deposit same in a
lockbox account set up with the Lender. Borrower agrees to pay to
Lender any and all reasonable fees, costs and expenses which Lender
incurs in connection with opening and maintaining a lockbox account
and depositing for collection by Lender any check or item of payment
received by Lender or delivered to Lender. Borrower further agrees
to execute all agreements and documents and to open and maintain all
accounts Lender reasonably deems necessary or appropriate to
effectuate an effective lockbox arrangement for the operations of
Borrower. Upon an Event of Default, Lender retains the right at all
times to notify Account Debtors that Accounts have been assigned to
Lender and to collect Accounts directly in its own name and to charge
the collection costs and expenses, including attorneys' fees, to
Borrower. Lender has no duty to protect, insure, collect or realize
upon the Accounts or preserve rights in them. For the purpose of
computing interest hereunder, all items of payment received by Lender
shall be deemed applied by Lender on account of the Obligations
(subject to final payment of such items) one (1) Business Day after
receipt by Lender of such items.
A. Notice Regarding Disputed Accounts. In the event any
amounts due and owing in excess of One Hundred Fifty Thousand and
No/100 Dollars ($150,000) are in dispute between Borrower and any
Account Debtor, Borrower shall provide Lender with written notice
thereof at the time of submission of the next Schedule of Accounts,
explaining in detail the reason for the dispute, all claims related
thereto and the amount in controversy.
I. SECTION PROVISIONS RELATING TO INVENTORY
A. Representations, Warranties and Covenants. With
respect to Inventory, Borrower represents and warrants to Lender that
Lender may rely, in determining which items of Inventory constitute
Eligible Inventory, on all statements and representations made by
Borrower with respect to any Inventory and that:
1. All Inventory is presently and will continue to
be located at Borrower's places of business listed on Exhibit C and
will not be removed therefrom except as authorized by Section 4.5 of
this Agreement;
1. No Inventory is now, nor shall any Inventory at
any time or times hereafter be, stored with a bailee, warehouseman or
similar party without Lender's prior written consent and, if Lender
gives such consent, Borrower will concurrently therewith cause any
such bailee, warehouseman, or similar party to issue and deliver to
Lender, in form and substance acceptable to Lender, warehouse
receipts therefor in Lender's name;
<PAGE>
1. No Inventory is or will be consigned to any
Person without Lender's prior written consent, and, if such consent
is given, Borrower shall, prior to the delivery of any Inventory on
consignment (provided, however, that nothing contained herein shall
prevent Borrower from providing up to Thirty Thousand and No/100
Dollars ($30,000) of Inventory at any one time to third parties to be
used to demonstrate the benefits of Borrower's products), (i) provide
Lender with all consignment agreements to be used in connection with
such consignment, all of which shall be acceptable to Lender, (ii)
prepare, execute and file appropriate financing statements with
respect to any consigned Inventory, showing Lender as assignee, (iii)
conduct a search of all filings made against the consignee in all
jurisdictions in which any consigned Inventory is to be located and
deliver to Lender copies of the results of all such searches, and
(iv) notify, in writing, all the creditors of the consignee which are
or may be holders of Liens in the Inventory to be consigned that
Borrower expects to deliver certain Inventory to the consignee, all
of which Inventory shall be described in such notice by item or type;
and
1. No Inventory is or will be produced by Borrower
in violation of the Fair Labor Standards Act.
A. Inventory Reports. Borrower agrees to furnish Lender
with Inventory reports at such times as Lender may request. Such
reports shall be in form and detail satisfactory to Lender. Borrower
shall conduct a physical inventory no less frequently than annually
and shall provide to Lender a report based on each such physical
inventory promptly thereafter, together with such supporting
information as Lender shall in its discretion request.
A. Returns of Inventory. If at any time or times
hereafter any Account Debtor returns any Inventory to Borrower the
shipment of which generated an Account on which such Account Debtor
is obligated in excess of One Hundred Thousand and No/100 Dollars
($100,000), Borrower shall notify Lender of the same immediately,
specifying the reason for such return and the location and condition
of the returned Inventory. After the occurrence of an Event of
Default, Borrower shall hold all returned Inventory in trust for
Lender shall segregate all returned Inventory from all other Property
owned by Borrower or in its possession and shall conspicuously label
such Inventory as the Property of Lender.
<PAGE>
I. SECTION PROVISIONS RELATING TO EQUIPMENT
A. Representations, Warranties and Covenants. With
respect to the Equipment, Borrower represents, warrants and covenants
to and with Lender that:
1. The Equipment is in good operating condition and
repair, and all necessary replacements of and repairs thereto shall
be made so that the value and operating efficiency of the Equipment
shall be maintained and preserved, reasonable wear and tear excepted;
and
1. Borrower will not permit any of the Equipment to
become affixed to any real Property leased to Borrower so that an
interest arises therein under the real estate laws of the applicable
jurisdiction unless the landlord of such real Property has executed a
landlord waiver or leasehold mortgage in favor of Lender and Borrower
will not permit any of the Equipment to become an accession to any
personal Property other than Equipment subject to first priority
Liens in favor of Lender or subject to Permitted Liens.
A. Evidence of Ownership of Equipment. Immediately on
request therefor by Lender, Borrower shall deliver to Lender any and
all evidence of ownership, if any, of any of the Equipment
(including, without limitation, certificates of title and
applications for title).
A. Records and Schedules of Equipment. Borrower shall
maintain accurate records itemizing and describing the kind, type,
quality, quantity and value of its Equipment and all dispositions
made in accordance with Section 7.4 hereof, and shall furnish Lender
with a current schedule containing the foregoing information on at
least an annual basis and more often if requested by Lender.
A. Dispositions of Equipment. Borrower will not sell,
lease or otherwise dispose of or transfer any of the Equipment or any
part thereof without the prior written consent of Lender; provided,
however, that the foregoing restriction shall not apply, for so long
as no Default or Event of Default exists, to (i) dispositions of
Equipment which, in the aggregate during any consecutive twelve-month
period, has a fair market value or book value, whichever is less, of
Fifty Thousand Dollars and No/100 ($50,000) or less, or (ii)
replacements of Equipment that is substantially worn, damaged or
obsolete with Equipment of like kind, function and value, provided
that the replacement Equipment shall be acquired prior to or
concurrently with any disposition of the Equipment that is to be
replaced, the replacement Equipment shall be free and clear of Liens
other than Permitted Liens that are not Purchase Money Liens, and
Borrower shall give Lender at least five (5) days prior written
notice of such disposition.
<PAGE>
I. SECTION REPRESENTATIONS AND WARRANTIES
A. General Representations and Warranties. To induce
Lender to enter into this Agreement and to make advances hereunder,
Borrower warrants, represents and covenants to Lender that:
1. Organization and Qualification. Borrower is a
corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. Borrower has duly qualified
and is authorized to do business and is in good standing as a foreign
corporation in each state or jurisdiction listed on Exhibit D
attached hereto and made a part hereof and in all other states and
jurisdictions where the character of its Properties or the nature of
its activities make such qualification necessary, or in which the
failure of Borrower to be so qualified would have a material adverse
effect on the financial condition, business or Properties of
Borrower.
1. Corporate Names. During the preceding seven (7)
years, Borrower has not been known as or used any corporate,
fictitious or trade names except as disclosed on Exhibit E attached
hereto and made a part hereof. Except as set forth on Exhibit E,
Borrower has not, during the preceding seven (7) years, been the
surviving corporation of a merger or consolidation or acquired all or
substantially all of the assets of any Person.
1. Corporate Power and Authority. Borrower has the
right and power and is duly authorized and empowered to enter into,
execute, deliver and perform this Agreement and each of the other
Loan Documents to which it is a party. The execution, delivery and
performance of this Agreement and each of the other Loan Documents
have been duly authorized by all necessary corporate action and do
not and will not (i) require any consent or approval of the
shareholders of Borrower; (ii) contravene Borrower's charter,
certificate or articles of incorporation or by-laws; (iii) violate,
or cause Borrower to be in default under, any provision or any law,
rule, regulation, order, writ, judgment, injunction, decree,
determination or award in effect having applicability to Borrower;
(iv) result in a breach of or constitute a default under any
indenture or loan or credit agreement or any other agreement, lease
or instrument to which Borrower is a party or by which it or its
Properties may be bound or affected; or (v) result in, or require,
the creation or imposition of an Lien (other than Permitted Liens)
upon or with respect to any of the Properties now owned or hereafter
acquired by Borrower.
1. Legally Enforceable Agreement. This Agreement
is, and each of the other Loan Documents when delivered under this
Agreement will be, legal, valid and binding obligations of Borrower
enforceable against it in accordance with its terms, except to the
extent that such enforcement may be limited by applicable bankruptcy,
insolvency and other similar laws affecting creditors' rights
generally or by principles of equity pertaining to the availability
of equitable remedies.
<PAGE>
1. Use of Proceeds. Borrower's uses of the proceeds
of any Loans made pursuant to this Agreement are, and will continue
to be, legal and proper corporate uses, duly authorized by its Board
of Directors, and such uses will not violate any applicable laws,
including, without limitation, the Foreign Assets Control
Regulations, the Foreign Funds Control Regulations and the
Transaction Control Regulations of the United States Treasury
Department (31 CFR, Subtitle B, Chapter V, as amended).
1. Margin Stock. Borrower is not engaged
principally, or as one of its important activities, in the business
of purchasing or carrying "margin stock" (within the meaning of
Regulation G, T or U of the Board of Governors of the Federal Reserve
System), and no part of any Loans to Borrower will be used to
purchase or carry any margin stock or to extend credit to others for
the purpose of purchasing or carrying any margin stock or be used for
any purpose which violates or in inconsistent with the provisions of
Regulation X of said Board of Governors.
1. Governmental Consents. Borrower has, and is in
good standing with respect to, all governmental consents, approvals,
authorizations, permits, certificates, inspections, and franchises
necessary to continue to conduct its business as heretofore or
proposed to be conducted by it and to own or lease and operate its
Properties as now owned or leased by it.
1. Patents, Trademarks, Copyrights and Licenses.
Borrower owns or possesses all the patents, trademarks, service
marks, trade names, copyrights, licenses, and rights with respect to
the foregoing necessary for the present and planned future conduct of
its business without any known conflict with the rights of others.
All such patents, trademarks, service marks, tradenames, copyrights,
licenses and other similar rights are listed on Exhibit F attached
hereto and made a part hereof.
1. Capital Structure. Exhibit G attached hereto and
made a part hereof states (a) the correct name of each of the
Subsidiaries of Borrower, the jurisdiction of incorporation and the
percentage of its Voting Stock owned by Borrower, (b) the name of
Borrower's corporate or joint venture Affiliates and the nature of
the affiliation, (c) the number, nature and holder of all outstanding
Securities of Borrower and each Subsidiary of Borrower and (d) the
number of authorized, issued and treasury shares of Borrower and each
Subsidiary of Borrower. Borrower has good and marketable title to
all of the shares it purports to own of the stock of each Subsidiary,
free and clear in each case of any Lien other than Permitted Liens.
All such shares have been duly issued and are fully paid and
non-assessable. Other than as set forth on Exhibit G, there are not
outstanding any options to purchase, or any rights or warrants to
subscribe for, or any commitments or agreements to issue or sell, or
any Securities or obligations convertible into, or any powers of
attorney relating to, shares of the capital stock of Borrower. Other
than as set forth on Exhibit G, there are not outstanding any
agreements or instruments binding upon any of Borrower's shareholders
relating to the ownership of its shares of capital stock.
<PAGE>
1. Solvent Financial Condition. Borrower is now
and, after giving effect to initial Loans to be made hereunder, at
all times will be, Solvent.
1. Restrictions. Borrower is not a party or subject
to any contract, agreement, or charter or other corporate
restriction, which materially and adversely affect its business or
the use or ownership of any of its Properties. Borrower is not a
party or subject to any contract or agreement which restricts its
right or ability to incur Indebtedness for Borrowed Money, other than
as set forth on Exhibit H attached hereto, none of which prohibit the
execution of or compliance with this Agreement by Borrower. Neither
Borrower nor any of its Subsidiaries has agreed or consented to cause
or permit in the future (upon the happening of a contingency or
otherwise) any of its Property, whether now owned or hereafter
acquired, to be subject to a Lien that is not a Permitted Lien.
1. Litigation. Except as set forth on Exhibit I
attached hereto and made a part hereof, there are no actions, suits,
proceedings or investigations pending, or to the knowledge of
Borrower, threatened, against or affecting Borrower or any of its
Subsidiaries, or the business, operations, Properties, prospects,
profits or condition of Borrower or any of its Subsidiaries, in any
court or before any governmental authority or arbitration board or
tribunal, and no action, suit, proceeding or investigation shown on
Exhibit I involves the possibility of materially and adversely
affecting the Properties, business, prospects, profits or condition
(financial or otherwise) of Borrower or the ability of Borrower to
perform this Agreement. Neither Borrower nor any of its Subsidiaries
is in default with respect to any order, writ, injunction, judgment,
decree or rule of any court, governmental authority or arbitration
board or tribunal.
1. Title to Properties. Borrower and its
Subsidiaries each has good, indefeasible and marketable title to and
fee simple ownership of, or valid and subsisting leasehold interests
in, all of its real Property, and good title to all of its other
Property, including all of the Collateral, in each case, free and
clear of all Liens except Permitted Liens.
1. Financial Statements; Fiscal Year. The
Consolidated and consolidating balance sheets of Borrower and its
Subsidiaries as of September 30, 1997, and the related statements of
income, changes in stockholder's equity, and changes in financial
position for the periods ended on such dates, have been prepared in
accordance with GAAP, and present fairly the financial position of
Borrower and its Subsidiaries at such dates and the results of
Borrower's operations for such periods. Since September 30, 1997,
there has been no material change in the condition, financial or
otherwise, of Borrower and its Subsidiaries and such other Persons as
shown on the Consolidated balance sheet as of such date and no change
in the aggregate value of Equipment and real Property owned by
Borrower and its Subsidiaries, except changes in the ordinary course
of business, none of which individually or in the aggregate has been
materially adverse. The fiscal year of Borrower and each of its
Subsidiaries ends on September 30 of each year.
<PAGE>
1. Full Disclosure. The financial statements
referred to in Section 8.1(N) above, do not, nor does this Agreement
or any other written statement of Borrower to Lender (including,
without limitation, Borrower's filings, if any, with the Securities
and Exchange Commission), contain any untrue statement of a material
fact or omit a material fact necessary to make the statements
contained therein or herein not misleading. There is no fact which
Borrower has failed to disclose to Lender in writing which materially
affects adversely or, so far as Borrower can now foresee, will
materially affect adversely the Properties, business, prospects,
profits, or condition (financial or otherwise) of Borrower or any of
its Subsidiaries or the ability of Borrower or its Subsidiaries to
perform this Agreement.
1. Pension Plans. Except as disclosed on Exhibit J
attached hereto and made a part hereof, neither Borrower nor any of
its Subsidiaries has any Plan. Neither Borrower nor any of its
Subsidiaries has received any notice to the effect that it is not in
full compliance with any of the requirements of ERISA and the
regulations promulgated thereunder with respect to any Plan. No fact
or situation that could lead to a material adverse change in the
financial condition of Borrower, including, but not limited to, any
Reportable Event, or Prohibited Transaction exists in connection with
any Plan. Neither Borrower nor any of its Subsidiaries has any
withdrawal liability in connection with a Multiemployer Plan.
1. Taxes. The federal tax identification number of
Borrower is 94-3123210. Borrower and its Subsidiaries each have
filed all federal, state and local tax returns and other reports it
is required by law to file and has paid, or made provision for the
payment of, all taxes, assessments, fees and other governmental,
charges that are due and payable. The provision for taxes on the
books of Borrower and its Subsidiaries are adequate for all years not
closed by applicable statutes, and for its current fiscal year.
1. Labor Relations. Except as described on Exhibit
K attached hereto and made a part hereof, neither Borrower nor any of
its Subsidiaries is a party to any collective bargaining agreement,
and to the best of Borrower's knowledge, there are no material
grievances, disputes or controversies with any union or any other
organization of Borrower's employees, or threats of strikes, work
stoppages or any asserted pending demands for collective bargaining
by any union or organization.
1. Compliance With Laws. Borrower and its
Properties, business operations and leaseholds are in current
compliance in all material respects with, the provisions of all
federal, state and local laws, rules and regulations applicable to
Borrower, its Properties or the conduct of its business, including,
without limitation, OSHA and all Environmental Laws, and there have
been no citations, notices or orders of noncompliance issued to
Borrower or any of its Subsidiaries under any such law, rule or
regulation.
1. Surety Obligations. Borrower is not obligated as
surety or indemnitor under any surety or similar bond or other
contract issued or entered into any agreement to assure payment,
performance or completion of performance of any undertaking or
obligation of any Person.
<PAGE>
1. No Defaults. No event has occurred and no
condition exists which would, upon the execution and delivery of this
Agreement or Borrower's performance hereunder, constitute a Default
or an Event of Default. Neither Borrower nor any of its Subsidiaries
is in default, and no event has occurred and no condition exists
which constitutes, or which with the passage of time or the giving of
notice or both would constitute, a default in the payment of any
Indebtedness for Borrowed Money to any Person.
1. Brokers. There are no claims for brokerage
commissions, finder's fees or investment banking fees in connection
with the transactions contemplated by this Agreement.
1. Business Locations; Agent for Process. During
the preceding seven (7) year period, Borrower has had no office,
place of business or agent for service of process located in any
state or county other than as shown on Exhibit C.
1. Trade Relations. There exists no actual or, to
the best of Borrower's knowledge, threatened termination,
cancellation or limitation of, or any modification or change in, the
business relationship between Borrower and any customer or any group
of customers whose purchases individually or in the aggregate are
material to the business of Borrower, or with any material supplier,
and there exists no present condition or state of facts or
circumstances which would materially affect adversely Borrower or
prevent Borrower from conducting such business after the consummation
of the transaction contemplated by this Agreement in substantially
the same manner in which it has heretofore been conducted.
1. Leases. Exhibit L attached hereto is a complete
listing of all capitalized leases of Borrower and Exhibit M attached
hereto is a complete listing of all operating leases of Borrower.
1. Investment Company Act. Borrower is not an
"investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended.
A. Reaffirmation. Each request for a Loan made by
Borrower pursuant to this Agreement or any of the other Loan
Documents shall constitute (i) an automatic representation and
warranty by Borrower to Lender that there does not then exist any
Default or Event of Default and (ii) a reaffirmation as of the date
of said request that all of the representations and warranties of
Borrower contained in this Agreement and the other Loan Documents are
true in all material respects except for changes in the nature of
Borrower's business or operations that would render the information
in any Exhibit attached hereto either inaccurate or incomplete, so
long as Lender has consented to such changes or such changes are
expressly permitted by this Agreement.
<PAGE>
A. Survival of Representations and Warranties. Borrower
covenants, warrants and represents to Lender that all representations
and warranties of Borrower contained in this Agreement or any of the
other Loan Documents shall be true at the time of Borrower's
execution of this Agreement and the other Loan Documents, and shall
survive the execution, delivery and acceptance thereof by Lender and
the parties thereto and the closing of the transactions described
therein or related thereto.
I. SECTION COVENANTS AND CONTINUING AGREEMENTS
A. Affirmative Covenants. During the term of this
Agreement, and thereafter for so long as there are any Obligations to
Lender, Borrower covenants that, unless otherwise consented to by
Lender in writing, it shall:
1. Taxes and Liens. Pay and discharge, and cause
each Subsidiary to pay and discharge, all taxes, assessments and
governmental charges upon it, its income and Properties as and when
such taxes, assessments and charges are due and payable, unless and
to the extent only that such taxes, assessments and charges are being
contested in good faith and by appropriate proceedings and Borrower
maintains reasonable reserves on its books therefor. Borrower shall
also pay and discharge any lawful claims which, if unpaid, might
become a Lien against Borrower's Properties except for Permitted
Liens, other than those claims being contested in good faith by
Borrower or any Subsidiary, and for which appropriate reserves have
been established in accordance with GAAP.
1. Tax Returns. File, and cause each Subsidiary to
file, all federal, state and local tax returns and other reports
Borrower or such Subsidiary is required by law to file and maintain
adequate reserves for the payment of all taxes, assessments,
governmental charges, and levies imposed upon it, its income, or its
profits, or upon any Property belonging to it.
1. Payment of Bank Charges. Pay to Lender, on
demand, any and all fees, costs or expenses which Lender pays to a
bank or other similar institution (including, without limitation, any
fees paid by the Lender) arising out of or in connection with (i) the
forwarding to Borrower or any other Person on behalf of Borrower, by
Lender, proceeds of loans made by Lender to Borrower pursuant to this
Agreement and (ii) the depositing for collection, by Lender, of any
check or item of payment received or delivered to Lender on account
of the Obligations.
1. Business and Existence. Preserve and maintain,
and cause each Subsidiary to preserve and maintain, its separate
corporate existence and all rights, privileges, and franchises in
connection therewith, and maintain, and cause each Subsidiary to
maintain, its qualification and good standing in all states in which
such qualification is necessary in order for Borrower or such
Subsidiary to conduct its business in such states.
1. Maintain Properties. Maintain, and cause each
Subsidiary to maintain, its Properties in good condition and make,
and cause each Subsidiary to make, all necessary renewals, repairs,
replacements, additions and improvements thereto.
<PAGE>
1. Compliance with Laws. Comply, and cause each
Subsidiary to comply, with all laws, ordinances, governmental rules
and regulations to which it is subject, and obtain and keep in force
any and all licenses, permits, franchises, or other governmental
authorizations necessary to the ownership of its Properties or to the
conduct of its business, which violation or failure to obtain might
materially and adversely affect the business, prospects, profits,
Properties, or condition (financial or otherwise) of Borrower.
1. ERISA Compliance. (i) At all times make prompt
payment of contributions required to meet the minimum funding
standards set forth in ERISA with respect to each Plan; (ii) promptly
after the filing thereof, furnish to Lender copies of any annual
report required to be filed pursuant to ERISA in connection with each
Plan and any other employee benefit plan of it and its Affiliates
subject to ERISA Section; (iii) notify Lender as soon as practicable
of any Reportable Event and of any additional act or condition
arising in connection with any Plan which Borrower believes might
constitute grounds for the termination thereof by the Pension Benefit
Guaranty Corporation or for the appointment by the appropriate United
States district court of a trustee to administer the Plan; and (iv)
furnish to Lender, promptly upon Lender's request therefor, such
additional information concerning any Plan or any other such employee
benefit plan as may be reasonably requested.
1. Business Records. Keep, and cause each
Subsidiary to keep, adequate records and books of account with
respect to its business activities in which proper entries are made
in accordance with GAAP reflecting all its financial transactions.
1. Visits and Inspections. Permit representatives
of Lender, from time to time, as often as may be reasonably
requested, but only during normal business hours, to visit and
inspect the Properties of Borrower, inspect and make extracts from
its books and records, and discuss with its officers, its employees
and its independent accountants, Borrower's business, assets,
liabilities, financial condition, business prospects and results of
operations. Borrower further agrees to permit auditors, satisfactory
to Lender, to perform field audits no more than twice a year, so long
as Borrower is in compliance with the terms and conditions thereof,
the cost of which shall be paid by Borrower (up to a maximum of
$1,000 per year).
1. Financial Statements. Cause to be prepared and
furnished to Lender the following (all to be kept and prepared in
accordance with GAAP applied on a consistent basis, unless Borrower's
certified public accountants concur in any change therein and such
change is disclosed to Lender and is consistent with GAAP):
<PAGE>
a) as soon as possible, but not later than one
hundred twenty (120) days after the close of each fiscal year of
Borrower, unqualified audited financial statements of Borrower and
its Subsidiaries as of the end of such year, on a Consolidated and
Consolidating basis, certified by a firm of independent certified
public accountants of recognized standing selected by Borrower but
acceptable to Lender (except for a qualification for a change in
accounting principles with which the accountant concurs) which shall
include a Consolidating report of income, a balance sheet, a Form 10-
K and the Annual Report, if any, provided to the shareholders of
Borrower;
a) as soon as possible, but not later than
forty-five (45) days after the end of each fiscal quarter hereafter,
unaudited interim Consolidated financial statements of Borrower and
its Subsidiaries as of the end of such quarter and of the portion of
Borrower's financial year then elapsed, including but not limited to
a Form 10-QSB, on a Consolidated and Consolidating basis, certified
by the principal financial officer of Borrower as prepared in
accordance with GAAP and fairly presenting the Consolidated financial
position and results of operations of Borrower and its Subsidiaries
for such quarter and period subject only to changes from audit and
year-end adjustments and except that such statements need not contain
notes;
a) as soon as possible, but not later than
thirty (30) days after the end of each month hereafter, unaudited
interim consolidated financial statements of Borrower and its
Subsidiaries as of the end of such month and of the portion of
Borrower's financial year then elapsed, on a Consolidated and
Consolidating basis, certified by the principal financial officer of
Borrower as prepared in accordance with GAAP and fairly presenting
the Consolidated financial position and results of operations of
Borrower and its Subsidiaries for such month and period subject only
to changes from audit and year-end adjustments and except that such
statements need not contain notes;
a) promptly after the sending or filing
thereof, as the case may be, copies of any proxy statements,
financial statements or reports which Borrower has made available to
its shareholders and copies of any regular, periodic and special
reports or registration statements which Borrower files with the
Securities and Exchange Commission or any governmental authority
which may be substituted therefor, or any national securities
exchange; and
b) such other data and information (financial
and otherwise) as Lender, from time to time, may reasonably request,
bearing upon or related to the Collateral, Borrower's financial
condition or results of operations, including, without limitation,
federal income tax returns of Borrower, accounts payable ledgers, and
bank statements.
<PAGE>
Concurrently with the delivery of the financial statements
described in clause (i) of this Section 9.1(J), Borrower shall
forward to Lender a copy of the accountants' letter to Borrower's
management that is prepared in connection with such financial
statements and also shall cause to be prepared and shall furnish to
Lender a certificate of the aforesaid certified public accountants
certifying to Lender that, based upon their examination of the
financial statements of Borrower and its Subsidiaries performed in
connection with their examination of said financial statements, they
are not aware of any Default or Event of Default, or, if they are
aware of such Default or Event of Default, specifying the nature
thereof. Concurrently with the delivery of the financial statements
described in clauses (i) and (ii) of this Section 9.1(J), Borrower
shall cause to be prepared and furnished to Lender a Compliance
Certificate in the form of Exhibit N attached hereto, with
appropriate insertions, from the Chief Financial Officer of Borrower
certifying to Lender that to the best of his knowledge, Borrower has
kept, observed, performed and fulfilled each and every covenant,
obligation and agreement binding upon Borrower in this Agreement and
the other Loan Documents and that no Default or Event of Default has
occurred, or, if such Default or Event of Default has occurred,
specifying the nature thereof. Within twenty (20) days after the end
of each month hereafter, Borrower shall cause to be prepared and
furnish to Lender a Borrowing Base Certificate in the form of Exhibit
O attached hereto. Borrower authorizes Lender to communicate
directly with its independent certified public accountants and
authorizes those accountants to disclose to Lender any and all
financial statements and other supporting financial documents and
schedules. At or before the initial Closing Date, Borrower shall
deliver a letter addressed to such accountants instructing them to
comply with the provisions of this Section 9.1(J).
1. Notices to Lender. Notify Lender in writing:
(i) promptly after Borrower's learning thereof, of the commencement
of any litigation affecting Borrower or any of its Properties,
whether or not the claim is considered by Borrower to be covered by
insurance, and of the institution of any administrative proceeding
which may materially and adversely affect Borrower's operations,
financial condition, Properties or business or Lender's Lien upon any
of the Collateral; (ii) at least sixty (60) days prior thereto, of
Borrower's opening of any new office or place of business or
Borrower's closing of any existing office or place of business; (iii)
promptly after Borrower's learning thereof, of any labor dispute to
which Borrower may become a party, any strikes or walkouts relating
to any of its plants or other facilities, and the expiration of any
labor contract to which it is a party or by which it is bound; (iv)
promptly after Borrower's learning thereof, of any material default
by Borrower under any note, indenture, loan agreement, mortgage,
lease, deed, guaranty or other similar agreement relating to any
Indebtedness for Borrowed Money exceeding Two Hundred Fifty Thousand
and No/100 Dollars ($ 250,000); (v) promptly after the occurrence
thereof, any Default or Event of Default; (vi) promptly after the
occurrence thereof, of any default by any obligor under any note or
other evidence of Indebtedness for Borrowed Money payable to
Borrower; and (vii) promptly after the rendition thereof, of any
judgment rendered against Borrower or any of its Subsidiaries.
<PAGE>
1. Landlord and Storage Agreements. Provide Lender
with copies of all agreements between Borrower and any landlord or
warehouseman which owns any premises at which any Inventory or
Equipment may, from time to time, be kept.
1. Subordinations. Provide Lender with a debt
subordination agreement, in form and substance satisfactory to
Lender, executed by Borrower and any Person who is an officer,
director or Affiliate of Borrower to whom Borrower is or hereafter
becomes indebted for Indebtedness for Borrowed Money, subordinating
in right of payment and claim all of such Indebtedness for Borrowed
Money and any future advances thereon to the full and final payment
and performance of the Obligations. Within sixty (60) days of the
date hereof, Borrower agrees to provide a debt subordination
agreement, in form and substance satisfactory to Lender, executed by
Borrower and by the applicable subordinated lender with respect to
indebtedness of Borrower held by Reliance Medical Products, Inc.,
Haag-Streit Service, Inc., Eastman Kodak Company and Mentor
Ophthalmics, Inc.
1. Further Assurances. At Lender's request,
promptly execute or cause to be executed and delivered to Lender any
and all documents, instruments and agreements deemed reasonably
necessary by Lender to give effect to or carry out the terms or
intent of this Agreement or any of the other Loan Documents. Without
limiting the generality of the foregoing, if any of the Accounts, the
face value of which exceeds $10,000, arises out of a contract with
the United States of America, or any department, agency, subdivision
or instrumentality thereof, Borrower shall promptly notify Lender
thereof in writing and shall execute any instruments and take any
other action required or requested by Lender to comply with the
provisions of the Federal Assignment of Claims Act.
1. Annual Operating Plan. As soon as available, and
in any event no later than thirty (30) days prior to the end of each
fiscal year of Borrower, deliver to Lender the Annual Operating Plan
of Borrower for the forthcoming year.
a) Environmental Matters. Borrower shall and
shall cause each of its Subsidiaries to (a) comply strictly and in
all material respects with all applicable Environmental Laws, (b)
take promptly any remediation and/or corrective action necessary to
cure any material violation of Environmental Laws of which Borrower
has knowledge, (c) notify the proper governmental agency promptly in
the event of any Release of any Hazardous Substance reportable under
42 USC S9603, 42 USC S11044, 33 USC S1321(b)(5) or any counterpart or
similar state or local requirement, (d) promptly forward to Lender,
upon its request, a copy of any order, notice, permit, application,
or any other communication or report in connection with any such
Release of any Hazardous Substance or any other matter relating to
the Environmental Laws as they may affect its premises, and (e)
promptly forward to Lender a copy of any order, notice, permit,
application or other communication or report in connection with any
material Release of any Hazardous Substance or any other material
matter relating to the Environmental Laws as they may affect its
premises.
<PAGE>
a) Borrower shall indemnify Lender and hold
Lender harmless from and against any loss, liability, damage or
expense, including attorneys' fees, suffered or incurred by Lender,
whether as mortgagee pursuant to any New Mortgage, as mortgagee in
possession, or as successor in interest to Borrower or any of its
Subsidiaries as owner or lessee of any premises by virtue of
foreclosure or acceptance of deed in lieu of foreclosure (a) under or
on account of the Environmental Laws, including the assertion of any
Lien thereunder; (b) with respect to any Release of any Hazardous
Substance reportable under 42 USC S9603, 42 USC S11044, 33 USC
S1321(b)(5) or any counterpart or similar state or local requirement,
affecting such premises or the premises of any other place, including
any loss of value of such premises as a result of a Release of any
Hazardous Substance; and (c) with respect to any other environmental
matter within the jurisdiction of any federal, state, or municipal
official administering the Environmental Laws; provided, however,
that Borrower will not be liable for such indemnification to Lender
to the extent that any such loss, liability, damage or expense
results from the gross negligence or willful misconduct of the Person
who would otherwise be entitled to be indemnified pursuant to this
Section 9.1(P)(ii). The procedures to be followed as to any
indemnity pursuant to this Section shall be as set forth in Section
12.2 hereof.
a) Borrower shall provide Lender with such
evidence, reports and/or other documentation as reasonably requested
by Lender to insure that Borrower is in compliance with the terms of
this Section 9.1(P).
A. Negative Covenants. During the term of this
Agreement, and thereafter for so long as there are any Obligations to
Lender, Borrower covenants that, unless Lender has first consented
thereto in writing, it will not:
1. Mergers; Consolidations; Acquisitions. Merge or
consolidate, or permit any Subsidiary to merge or consolidate, with
any Person, except a consolidation or merger involving only (i)
Borrower and one or more wholly owned Subsidiaries or (ii) two or
more wholly owned Subsidiaries; nor acquire all or any substantial
part of the Properties of any Person.
1. Loans. Make, or permit any Subsidiary to make,
any loans or other advances of money (other than for salary, travel
advances, advances against commissions and other similar advances in
the ordinary course of business) to any Person (other than advances
of up to $10,000 to sales representatives), including, without
limitation, any of Borrower's Affiliates, officers or employees.
<PAGE>
1. Total Indebtedness. Create, incur, assume, or
suffer to exist, or permit any Subsidiary to create, incur or suffer
to exist, any Indebtedness for Borrowed Money, except:
(i) Obligations owing to Lender; (ii) Indebtedness for Borrowed Money
of any Subsidiary to Borrower; (iii) accounts payable to trade
creditors which are not more than thirty (30) days past due and
current operating expenses (other than for Indebtedness for Borrowed
Money) which are not more than thirty (30) days past due, in each
case incurred in the ordinary course of business and paid within such
time period, unless the same are actively being contested in good
faith and by appropriate and lawful proceedings; and the Borrower
shall have set aside such reserves, if any, with respect thereto as
are required by generally accepted accounting principles and deemed
adequate by Borrower and its independent accountants;
(iv) obligations to pay Rentals permitted by Section 9.2(V);
(v) Permitted Purchase Money Indebtedness; (vi) contingent
liabilities arising out of endorsements of checks and other
negotiable instruments for deposit or collection in the ordinary
course of business; and (vii) Indebtedness for Borrowed Money not
included in paragraphs (i) through (vi) above which does not exceed
at any time, in the aggregate, the sum of Three Hundred Thousand and
No/100 Dollars ($300,000).
1. Affiliate Transactions. Enter into, or be a
party to, or permit any Subsidiary to enter into or be a party to,
any transaction with any Affiliate or stockholder, except in the
ordinary course of and pursuant to the reasonable requirements of
Borrower's or such Subsidiary's business and upon fair and reasonable
terms which are fully disclosed to Lender and are no less favorable
to Borrower that would obtain in a comparable arm's length
transaction with a Person not an Affiliate or stockholder of Borrower
or such Subsidiary.
1. Partnership or Joint Ventures. Become or agree
to become a general or limited partner in any general or limited
partnership or a joint venturer in any joint venture.
1. Adverse Transactions. Enter into any
transaction, or permit any Subsidiary to enter into any transaction,
which materially and adversely affects or may materially and
adversely affect the Collateral or Borrower's ability to repay the
Obligations or permit or agree to any material extension, compromise
or settlement or make any change or modification of any kind or
nature with respect to any Account, including any of the terms
relating thereto, other than discounts and allowances in the ordinary
course of business, all of which shall be reflected in the Schedules
of Accounts submitted to Lender pursuant to Section 5.2 of this
Agreement.
1. Guaranties. Except for the Guaranty Agreement,
guarantee, assume, endorse or otherwise, in any way, become directly
or contingently liable with respect to the indebtedness of any Person
except by endorsement or instruments or items of payment for deposit
or collection.
<PAGE>
1. Limitation on Liens. Create or suffer to exist,
or permit any Subsidiary to create or suffer to exist, any Lien upon
any of its Property, income or profits, whether now owned or
hereafter acquired, except: (i) Liens at any time granted in favor
of Lender; (ii) Liens for taxes (excluding any Lien imposed pursuant
to any of the provisions of ERISA) not yet due or which are being
contested as permitted by Section 9.1(A) hereof, but only if in
Lender's reasonable judgment such Lien does not affect adversely
Lender's rights or the priority of Lender's Lien in the Collateral;
(iii) Liens securing the claims or demands of materialmen, mechanics,
carriers, warehousemen, landlords and other like Persons for labor,
materials, supplies or rentals incurred in the ordinary course of
Borrower's business, but only if the payment thereof is not at the
time required and only if such Liens are junior to the Liens in favor
of Lender; (iv) Deposits made in the ordinary course of business in
connection with workmen's compensation, unemployment insurance,
social security and other like laws; (v) attachment, judgment and
other similar non-tax Liens arising in connection with court
proceedings, but only if and for so long as the execution or other
enforcement of such Liens is and continues to be effectively stayed
and bonded on appeal, the validity and amount of the claims secured
thereby are being actively contested in good faith and by appropriate
lawful proceedings and such Liens do not, in the aggregate,
materially detract from the value of the Property of Borrower or
materially impair the use thereof in the operation of Borrower's
business; (vi) Purchase Money Liens securing Permitted Purchase Money
Indebtedness which is not incurred in violation of Section 9.2(C) of
this Agreement; (vii) reservations, exceptions, easements, rights of
way, and other similar encumbrances affecting real Property, provided
that, in Lender's reasonable judgment, they do not in the aggregate
materially detract from the value of said Properties or materially
interfere with their use in the ordinary conduct of Borrower's
business and, if said real Property constitutes Collateral, Lender
has consented thereto; (viii) Liens securing Indebtedness for
Borrowed Money of a Subsidiary to Borrower or another Subsidiary;
(ix) such other Liens as appear on Exhibit P attached hereto; and (x)
such other Liens as Lender may hereafter approve in writing.
1. Subordinated Debt. Make, or permit any
Subsidiary to make, any payment of any part or all of any
Subordinated Debt, or otherwise repurchase, redeem or retire any
instrument evidencing any such Subordinated Debt, prior to maturity;
or enter into any agreement (oral or written) which could in any way
be construed to amend, modify, alter or terminate any one or more
instruments or agreements evidencing or relating to any Subordinated
Debt.
1. Distributions. Declare or make, or permit any
Subsidiary to declare or make, any Distributions, other than
Distributions by wholly-owned Subsidiaries which are payable solely
to Borrower.
1. Subsidiaries. Hereafter create any Subsidiary or
divest itself of any material assets by transferring them to any
Subsidiary to whose existence Lender has consented.
<PAGE>
1. Capital Expenditures. Make Capital Expenditures
(including, without limitation, by way of capitalized leases) which,
in the aggregate, as to Borrower and its Subsidiaries, exceed, during
any fiscal year of Borrower, the amount set forth opposite such
fiscal year in the following schedule:
Fiscal Year Ending Amount
September 30, 1998 $150,000
September 30, 1999 $150,000
September 30, 2000 $150,000
1. Business Locations. Transfer its principal place
of business or chief executive office, or open new manufacturing
plants, or transfer existing manufacturing plants, or maintain
warehouses or records with respect to Accounts, Inventory or
Equipment, to or at any locations other than those at which the same
are presently kept or maintained, as set forth on Exhibit C hereto,
except upon at least thirty (30) days prior written notice to Lender
and after the delivery to Lender of financing statements, if required
by Lender, in form satisfactory to Lender to perfect or continue the
perfection of Lender's Lien and security interest hereunder.
1. Change of Business. Enter into any new business
or make any material change in any of Borrower's business objectives,
purposes and operations.
1. Disposition of Assets. Sell, lease or otherwise
dispose of any of its Properties, including any disposition of
Property as part of a sale and leaseback transaction, to or in favor
of any Person, except (i) sales of Inventory in the ordinary course
of Borrower's business for so long as no Event of Default exists
hereunder, (ii) a transfer of Property to Borrower by a Subsidiary or
(iii) dispositions expressly authorized by this Agreement.
1. Name of Borrower. Use any corporate name (other
than its own) or any fictitious name, tradestyle or "d/b/a" except
for the names disclosed on Exhibit E attached hereto.
1. Use of Lender's Name. Without the prior written
consent of Lender, use of the name of Lender or the name of any
Affiliates of Lender in connection with any of Borrower's business or
activities, except in connection with internal business matters, as
required in dealings with governmental agencies and financial
institutions and to trade creditors of Borrower solely for credit
reference purposes.
1. Margin Securities. Own, purchase or acquire (or
enter into any contract to purchase or acquire) any "margin security"
as defined by any regulation of the Federal Reserve Board as now in
effect or as the same may hereafter be in effect unless, prior to any
such purchase or acquisition or entering into any such contract,
Lender shall have received an opinion of counsel satisfactory to
Lender to the effect that such purchase or acquisition will not cause
this Agreement to violate Regulations G, T or U or any other
regulation of the Federal Reserve Board then in effect.
<PAGE>
1. Restricted Investment. Make or have, or permit
any Subsidiary to make or have, any Restricted Investment.
1. Fiscal Year. Change, or permit any Subsidiary to
change, its fiscal year, or permit any Subsidiary to have a fiscal
year different from that of Borrower.
1. Stock of Subsidiary, Etc. Sell or otherwise
dispose of any shares of capital stock of any Subsidiary, except in
connection with a transaction permitted under Section 9.2(A), or
permit any Subsidiary to issue any additional shares of its capital
stock except director's qualifying shares.
1. Leases. Become a lessee under any operating
lease (other than a lease under which Borrower is lessor) of Property
if the aggregate Rentals payable during any current or future period
of twelve (12) consecutive months under the lease in question and all
other leases under which Borrower is then lessee would exceed
$250,000. The term "Rentals" means, as of the date of determination,
all payments which the lessee is required to make by the terms of any
lease.
1. Tax Consolidation. File or consent to the filing
of any consolidated income tax return with any Person other than a
Subsidiary.
A. Specific Financial Covenants. During the term of this
Agreement, and thereafter for so long as there are any Obligations to
Lender, Borrower covenants that, unless otherwise consented to by
Lender in writing, it shall:
1. Minimum Adjusted Tangible Net Worth. Maintain at
all times a Consolidated Adjusted Tangible Net Worth such that the
Consolidated Tangible Net Worth increases (i) by $200,000 during the
period from October 1, 1997 to September 30, 1998, (ii) by $250,000
during the period from October 1, 1998 to September 30, 1999 and
(iii) by $250,000 during the period from October 1, 1999 to September
30, 2000.
1. Book Value. Maintain at all times a net book
value, (after deleting related depreciation, obsolescence,
amortization, valuation and other proper reserves) at which all
assets of a Person would be shown on a balance sheet at such date in
accordance with GAAP minus the amount at which such Person's
liabilities (other than capital stock and surplus) would be shown on
such balance sheet in accordance with GAAP, and including as
liabilities all reserves for contingencies and other potential
liabilities, equal to or greater than $1,450,000.
<PAGE>
1. Fixed Charge Ratio. Maintain at all times during
each fiscal quarter of each Fiscal Year shown below a Fixed Charge
Ratio (calculated on a year to date basis through September 29, 1998
and a rolling four quarter basis thereafter) equal to or greater than
the Fixed Charge Ratio set forth opposite such period in the
following schedule:
Period
Fixed Charge Ratio
Closing Date through September 29, 1998 1.4 to 1.0
September 30, 1998 through March 31, 2000 2.0 to 1.0
I. SECTION CONDITIONS PRECEDENT
Notwithstanding any other provision of this Agreement or any of
the other Loan Documents, and without affecting in any manner the
rights of Lender under the other Sections of this Agreement, it is
understood and agreed that Lender will not make any Loans under
Section 2 of this Agreement unless and until each of the following
conditions has been and continues to be satisfied, all in form and
substance satisfactory to Lender and Lender's counsel:
A. Documentation. Lender shall have received the
following documents, each to be in form and substance satisfactory to
Lender and its counsel:
1. Copies of Borrower's casualty insurance policies,
together with loss payable endorsements on Lender standard form of
Loss Payee Endorsement naming Lender as loss payee, and certified
copies of Borrower's liability insurance policies, together with
endorsements naming Lender as a co-insured;
1. Copies of all filing receipts or acknowledgments
issued by any governmental authority to evidence any filing or
recordation necessary to perfect the Liens of Lender in the
Collateral and evidence in a form acceptable to Lender that such
Liens constitute valid and perfected security interests and Liens,
having the Lien priority specified in Section 4.3(B) hereof;
1. Landlord or warehouseman agreements with respect
to all premises leased by Borrower and which are disclosed on Exhibit
Q attached hereto;
1. A copy of the Certificate of Incorporation of
Borrower, and all amendments thereto, certified by the Secretary of
State or other appropriate official of its jurisdiction of
incorporation;
1. Good standing certificates for Borrower, issued
by the Secretary of State or other appropriate official of Borrower's
jurisdiction of incorporation and each jurisdiction where the conduct
of Borrower's business activities or the ownership of its Properties
necessitates qualification;
<PAGE>
1. A Certificate of the Secretary of Borrower,
together with true and correct copies of the Certificate of
Incorporation and Bylaws of Borrower, and all amendments thereto,
true and correct copies of the resolutions of the Board of Directors
and the shareholders of Borrower authorizing or ratifying the
execution, delivery and performance of this Agreement, the Notes, the
Security Documents and the Other Agreements and the names of the
officer or officers of Borrower authorized to sign this Agreement,
the Notes, the Security Documents and the Other Agreements together
with a sample of the true signature of each such officer;
1. The Security Documents duly executed, accepted
and acknowledged by or on behalf of each of the signatories thereto;
1. The Other Agreements duly executed and delivered
by Borrower;
1. The favorable, written opinion of Ungaretti &
Harris, a counsel to Borrower, as to the transactions contemplated by
this Agreement and any of the other Loan Documents, to be
substantially in the form of Exhibit R attached hereto;
1. Written instruction from Borrower directing the
application of proceeds of the initial Loan made pursuant to this
Agreement, and an initial Borrowing Base Certificate from Borrower
reflecting that Borrower has Eligible Accounts and Eligible Inventory
in Amounts sufficient in value and amount to support Loans in the
amount requested by Borrower on the date of such certificate;
1. Pay-off statements, releases and UCC-3
termination statements from Borrower's existing senior lenders;
1. Accountant's letter;
1. Duly executed Guaranty Agreement; and
1. Such other documents, instruments and agreements
as Lender shall reasonably request in connection with the foregoing
matters.
A. Other Conditions. The following conditions have been
and shall continue to be satisfied, in the sole discretion of Lender:
1. No Default or Event of Default shall exist;
1. Each of the conditions precedent set forth in the
other Loan Documents shall have been satisfied;
1. Since November 30, 1997, there shall not have
occurred any material adverse change in the business, financial
condition or results of operations of Borrower, or the existence or
value of any Collateral, or any event, condition or state of facts
which would reasonably be expected materially and adversely to affect
the business, financial condition or results of operations of
Borrower;
<PAGE>
1. No action, proceeding, investigation, regulation
or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or legislative body to enjoin,
restrain or prohibit, or to obtain damages in respect of, or which is
related to or arises out of this Agreement or the consummation of the
transactions contemplated hereby or which, in Lender's sole
discretion, would make it inadvisable to consummate the transactions
contemplated by this Agreement or any of the other Loan Documents;
and
1. Lender shall have received such certificates and
documents reflecting the Solvency of Borrower, after giving effect to
the transactions contemplated by this Agreement, as Lender shall find
acceptable, including, without limitation, pro-forma balance sheets,
forecasted financial statements consisting of balance sheets, income
statements and cash flow statements for Borrower covering at least
the five (5) year period commencing on the Closing Date, prepared by
Borrower and a fair valuation balance sheet for Borrower showing that
Borrower is Solvent.
I. SECTION EVENTS OF DEFAULT: RIGHTS AND REMEDIES ON DEFAULT
A. Events of Default. The occurrence of one or more of
the following events shall constitute an "Event of Default":
1. Payment of Term Notes. Borrower shall fail to
pay any installment of principal, interest or premium, if any, owing
on the Notes on the due date of such installment.
1. Payment of Obligations. Borrower shall fail to
pay any of the Obligations that are not evidenced by the Notes on the
due date thereof (whether due at stated maturity, on demand, upon
acceleration or otherwise).
1. Misrepresentations. Any warranty,
representation, or other statement made or furnished to Lender by or
on behalf of Borrower or in any instrument, certificate or financial
statement furnished in compliance with or in reference to this
Agreement, the Security Documents or any of the Other Agreements
proves to have been false or misleading in any material respect when
made or furnished.
2. Breach of Covenants. Borrower shall fail or
neglect to perform, keep or observe (i) any covenant contained in
Sections 4.3, 4.4, 4.5, 5.2, 5.4, 9.1(A), 9.1(F), 9.1(J), 9.1(O), 9.2
or 9.3 of this Agreement or (ii) any other covenant contained in this
Agreement (other than a covenant a default in the performance or
observance of which is dealt with specifically elsewhere in this
Section 11.1) and the breach of such other covenant is not cured to
Lender's reasonable satisfaction within thirty (30) days after the
sooner to occur of Borrower's receipt of notice of such breach from
Lender or the date on which such failure or neglect becomes known to
any officer of Borrower.
1. Default Under Other Agreements. Any event of
default shall occur under, or Borrower shall default in the
performance or observance of any term, covenant, condition or
agreement contained in, any of the Other Agreements and such default
shall continue beyond any applicable period of grace.
<PAGE>
1. Default Under Security Documents. Any event of
default shall occur under, or Borrower shall default in the
performance or observance of any term, covenant, condition or
agreement contained in, any of the Security Documents and such
default shall continue beyond any applicable period of grace.
1. Other Defaults. There shall occur any default or
event of default on the part of Borrower (including specifically, but
without limitation, due to non-payment) under any agreement, document
or instrument to which Borrower is a party or by which Borrower or
any of its Property is bound, creating or relating to any
Indebtedness for Borrowed Money (other than the Obligations) if the
payment or maturity of such Indebtedness for Borrowed Money is
accelerated in consequence of such event of default or demand for
payment of such Indebtedness for Borrowed Money is made.
1. Uninsured Losses; Unauthorized Dispositions. Any
material loss, theft, damage or destruction not fully covered by
insurance (as required by this Agreement and subject to such
deductibles as Lender shall have agreed to in writing), or sale,
lease or encumbrance of any of the Collateral or the making of any
levy, seizure, or attachment thereof or thereon except in all cases
as may be specifically permitted by other provisions of this
Agreement.
1. Adverse Changes. There shall occur any material
adverse change in the financial condition or business prospects of
Borrower or any Guarantor.
1. Insolvency, etc. Borrower or any Guarantor shall
cease to be Solvent or shall suffer the appointment of a receiver,
trustee, custodian or similar fiduciary, or shall make an assignment
for the benefit of creditors, or any petition for an order for relief
shall be filed by or against Borrower or any Guarantor under the
Bankruptcy Code (if against Borrower or any Guarantor, the
continuation of such proceeding for more than sixty (60) days), or
Borrower or any Guarantor shall make any offer of settlement,
extension or composition to their respective unsecured creditors
generally.
1. Business Disruption; Condemnation. There shall
occur a cessation of a substantial part of the business of Borrower
for a period which significantly affects Borrower's capacity to
continue its business, on a profitable basis; or Borrower shall
suffer the loss or revocation of any license or permit now held or
hereafter acquired by Borrower which is necessary to the continued or
lawful operation of its business; or Borrower shall be enjoined,
restrained or in any way prevented by court, governmental or
administrative order from conducting all or any material part of its
business affairs; or any material lease or agreement pursuant to
which Borrower leases, uses or occupies any Property shall be
canceled or terminated prior to the expiration of its stated term; or
any part of the Collateral shall be taken through condemnation or the
value of such Property shall be impaired through condemnation.
<PAGE>
1. Change of Ownership. There shall occur a change
in ownership in any year of greater than 15% of the Common Stock that
is owned or controlled, directly or indirectly, by the officers,
employees and directors of Borrower and their Affiliates unless
otherwise consented to by Lender in writing.
1. ERISA. A Reportable Event shall occur which
Lender, in its sole discretion, shall determine in good faith
constitutes grounds for the termination by the Pension Benefit
Guaranty Corporation of any Plan or for the appointment by the
appropriate United States district court of a trustee for any Plan,
or if any such trustee shall be requested or appointed, or if
Borrower is in "default" (as defined in Section 4219(c) (5) of ERISA)
with respect to payments to a Multiemployer Plan resulting from
Borrower's complete or partial withdrawal from such Plan.
1. Litigation. Borrower or any Guarantor, or any
Affiliate of Borrower, shall challenge or contest in any action, suit
or proceeding the validity or enforceability of this Agreement, or
any of the other Loan Documents, the legality or enforceability of
any of the Obligations or the perfection or priority of any Lien
granted to Lender.
1. Repudiation or Default Under Guaranty Agreement.
Any Guarantor shall revoke or attempt to revoke the Guaranty
Agreement signed by such Guarantor, or shall repudiate such
Guarantor's liability thereunder or shall be in default under the
terms thereof.
1. Criminal Forfeiture. Borrower or any Guarantor
shall be criminally indicated or convicted under any law that could
lead to a forfeiture of any Property of Borrower or any Guarantor.
1. Judgments. Any money judgment, writ of
attachment or similar process is filed against Borrower or any of its
Property and results in the creation or imposition of any Lien that
is not a Permitted Lien.
A. Acceleration of the Obligations. If any Event of
Default shall have occurred and be continuing, Lender may, without
notice, (i) terminate this facility with respect to further Revolving
Credit Loans, whereupon no Revolving Credit Loans may be made
hereunder, and/or (ii) declare all Obligations to be forthwith due
and payable, whereupon all Obligations shall become and be due and
payable, without presentment, demand, protest or further notice of
any kind, all of which are expressly waived by Borrower; provided,
however, that upon the occurrence of an Event of Default specified in
Section 11.1(J) hereof, the Obligations shall become due and payable
without declaration, notice or demand by Lender.
Lender may (but shall not be obligated to) take any such action,
or refrain from taking such action, with respect to any Default or
Event of Default as it shall deem advisable in the best interest of
Lender holding Revolving Credit Notes and Term Notes taken as a
whole, including any action (or the failure to act) pursuant to the
Loan Documents.
<PAGE>
A. Remedies. Upon and after the occurrence of an Event
of Default, Lender shall have and may exercise from time to time the
following rights and remedies:
1. All of the rights and remedies of a secured party
under the Code or under other applicable law, and all other legal and
equitable rights to which Lender may be entitled, all of which rights
and remedies shall be cumulative, and none of which shall be
exclusive, and shall be in addition to any other rights or remedies
contained in this Agreement or any of the other Loan Documents.
1. The right to take immediate possession of the
Collateral, and (i) to require Borrower to assemble the Collateral,
at Borrower's expense, and make it available to Lender at a place
designated by Lender which is reasonably convenient to both parties,
and (ii) to enter any of the premises of Borrower or wherever any of
the Collateral shall be located, and to keep and store the same on
said premises until sold (and if said premises be the Property of
Borrower, Borrower agrees not to charge Lender for storage thereof).
1. The right to sell or otherwise dispose of all or
any Collateral in its then condition, or after any further
manufacturing or processing thereof, at public or private sale or
sales, with such notice as may be required by law, in lots or in
bulk, for cash or on credit, all as Lender, in its sole discretion,
may deem advisable. Borrower agrees that ten (10) days written
notice to Borrower of any public or private sale or other disposition
of Collateral shall be reasonable notice thereof, and such sale shall
be at such locations as Lender may designate in said notice. Lender
shall have the right to conduct such sales on Borrower's premises,
without charge therefor, and such sales may be adjourned from time to
time in accordance with applicable law. Lender shall have the right
to sell, lease or otherwise dispose of the Collateral, or any part
thereof, for cash, credit or any combination thereof, and Lender may
purchase all or any part of the Collateral at public or, if permitted
by law, private sale and, in lieu of actual payment of such purchase
price, may set off the amount of such price against the Obligations.
1. Lender is hereby granted a license or other right
to use, without charge, Borrower's labels, patents, copyrights,
rights of use of any name, trade secrets, tradenames, trademarks and
advertising matter, or any Property of a similar nature, as it
pertains to the Collateral, in advertising for sale and selling any
Collateral and Borrower's rights under all licenses and all franchise
agreements shall inure to Lender's benefit.
1. The proceeds realized from the sale of any
Collateral may be applied, after allowing three (3) Business Days for
collection, first to the costs, expenses and attorneys' fees incurred
by Lender in collecting the Obligations, in enforcing the rights of
Lender under the Loan Documents and in collecting, retaking,
completing, protecting, removing, storing, advertising for sale,
selling and delivering any Collateral, secondly to the interest due
upon any of the Obligations; and thirdly, to the principal of the
Obligations. If any deficiency shall arise, Borrower and each
Guarantor shall remain jointly and severally liable to Lender
therefor.
<PAGE>
1. With respect to the face amount of all LC
Guaranties and Letters of Credit issued by Lender or Affiliates of
Lender and then outstanding, Lender may, at its option, require
Borrower to deposit with Lender funds equal to such face amount, and
if Borrower fails to promptly make such deposit, Lender may advance
such amount as a Revolving Credit Loan (whether or not an Overadvance
is created thereby). Any such deposit or advance shall be held by
Lender as a reserve to fund future payments on such LC Guaranties and
future drawings against such Letters of Credit. At such time as all
LC Guaranties have been paid or terminated and all Letters of Credit
have been drawn upon or expired, any amounts remaining in such
reserve shall be applied against any outstanding Obligations, or to
the extent all Obligations have been indefeasibly paid in full,
returned to Borrower.
A. Remedies Cumulative; No Waiver. All covenants,
conditions, provisions, warranties, guaranties, indemnities, and
other undertakings of Borrower contained in this Agreement and the
other Loan Documents, or in any document referred to herein or
contained in any agreement supplementary hereto or in any schedule or
in any Guaranty Agreement given to Lender or contained in any other
agreement between Lender and Borrower, heretofore, concurrently, or
hereafter entered into, shall be deemed cumulative to and not in
derogation or substitution of any of the terms, covenants,
conditions, or agreements of Borrower herein contained. The failure
or delay of Lender to exercise or enforce any rights, Liens, powers,
or remedies hereunder or under any of the aforesaid agreements or
other documents or security or Collateral shall not operate as a
waiver of such Liens, rights, powers and remedies, but all such
Liens, rights, powers, and remedies shall continue in full force and
effect until all Loans and all other Obligations owing or to become
owing from Borrower to Lender shall have been fully satisfied, and
all Liens, rights, powers, and remedies herein provided for are
cumulative and none are exclusive.
<PAGE>
I. SECTION MISCELLANEOUS
A. Power of Attorney. Borrower hereby irrevocably
designates, makes, constitutes and appoints Lender (and all Persons
designated by Lender) as Borrower's true and lawful attorney (and
agent-in-fact) and Lender, or agent of Lender, may, without notice to
Borrower and in either Borrower's or Lender's name, but at the cost
and expense of Borrower:
1. At such time or times upon or after the
occurrence and during the continuance of an Event of Default
hereafter as Lender or said agent, in its sole discretion, may
determine, endorse Borrower's name on any checks, notes, acceptances,
drafts, money orders or any other evidence of payment or proceeds of
the Collateral which come into the possession of Lender or under
Lender's control; and
2. At such time or times upon or after the
occurrence of an Event of Default as Lender or its agent in its sole
discretion may determine: (i) demand payment of the Accounts from the
Account Debtors, enforce payment of the Accounts by legal proceedings
or otherwise, and generally exercise all of Borrower's rights and
remedies with respect to the collection of the Accounts; (ii) settle,
adjust, compromise, discharge or release any of the Accounts or other
Collateral or any legal proceedings brought to collect any of the
Accounts or other Collateral; (iii) sell or assign any of the
Accounts and other Collateral upon such terms, for such amounts and
at such time or times as Lender deems advisable; (iv) take control,
in any manner, of any item of payment or proceeds relating to any
Collateral; (v) prepare, file and sign Borrower's name to a proof of
claim in bankruptcy or similar document against any Account Debtor or
to any notice of lien, assignment or satisfaction of lien or similar
document in connection with any of the Collateral; (vi) receive, open
and dispose of all mail addressed to Borrower and to notify postal
authorities to change the address for delivery thereof to such
address as Lender may designate; (vii) endorse the name of Borrower
upon any of the items of payment or proceeds relating to any
Collateral and deposit the same to the account of Lender on account
of the Obligations; (viii) endorse the name of Borrower upon any
chattel paper, document, instrument, invoice, freight bill, bill of
lading or similar document or agreement relating to the Accounts,
Inventory and any other Collateral; (ix) use Borrower's stationery
and sign the name of Borrower to verifications of the Accounts and
notices thereof to Account Debtors; (x) use the information recorded
on or contained in any data processing equipment and computer
hardware and software relating to the Accounts, Inventory, Equipment
and any other Collateral and to which Borrower has access; (xi) make
and adjust claims under policies of insurance; and (xii) do all other
acts and things reasonably necessary, in Lender's determination, to
fulfill Borrower's obligations under this Agreement.
<PAGE>
A. Indemnity. Borrower hereby agrees to indemnify Lender
and hold Lender harmless from and against any liability, loss,
damage, suit, action or proceeding ever suffered or incurred by
Lender as the result of Borrower's failure to observe, perform or
discharge Borrower's duties hereunder. Without limiting the
generality of the foregoing, this indemnity shall extend to any
claims asserted against Lender by any Person under any Environmental
Laws or similar laws by reason of Borrower's or any other Person's
failure to comply with laws applicable to solid or hazardous waste
materials or other toxic substances. Notwithstanding any contrary
provision in this Agreement, the obligation of Borrower under this
Section 12.2 shall survive the payment in full of the Obligations and
the termination of this Agreement, until expiration of any applicable
statute of limitations.
A. Complete Agreement; Modification of Agreement; Sale of
Interest. The Loan Documents constitute the complete agreement
between the parties with respect to the subject matter hereof and may
not be modified, altered or amended except by an agreement in writing
signed by Borrower and Lender. Borrower may not sell, assign or
transfer any of the Loan Documents or any portion thereof, including
without limitation, Borrower's rights, title, interests, remedies,
powers and duties hereunder or thereunder. Lender may, with the
prior written consent of Borrower, which consent shall not be
unreasonably withheld, sell participations, assignment, transfer or
other disposition, at any time or times, of any of the Loan Documents
or of any portion thereof or interest therein, including, without
limitation, Lender's rights, title, interests, remedies, powers or
duties thereunder, whether evidenced by a writing or not; Borrower
agrees that it will use its best efforts to assist and cooperate with
Lender in any manner reasonably requested by Lender to effect the
sale of participations in or assignments of any of the Loan Documents
or of any portion thereof or interest therein, including, without
limitation, assistance in the preparation of appropriate disclosure
documents or placement memoranda and executing appropriate amendments
to the signature pages hereto to reflect the addition of Lender. The
foregoing notwithstanding, except with respect to sales, assignments
or transfers to Affiliates under common control pursuant to which the
selling, assigning or transferring Lender retains its voting rights,
Lender shall not sell participations or assign, transfer or otherwise
dispose of any of the Loan Documents or any portion thereof or
interest therein, without the prior written consent of Lender.
In the event Lender assigns or otherwise transfers all or any
part of the Term Note or Revolving Credit Note, Lender shall so
notify Borrower and Borrower shall, upon the request of Lender, issue
new Term Notes or Revolving Credit Notes in exchange for the old Term
Notes or Revolving Credit Notes.
No amendment or waiver of any provision of this Agreement or the
Notes or any other Loan Document, nor consent to any departure by
Borrower therefrom, shall in any event be effective unless the same
shall be in writing and signed by Lender, and then such waiver or
consent shall be effective only in the specific instance and for the
specific purpose for which given.
<PAGE>
A. Reimbursement of Expenses. If, at any time or times
prior or subsequent to the date hereof, regardless of whether or not
an Event of Default then exists or any of the transactions
contemplated hereunder are concluded, Lender employs counsel for
advice or other representation, or incurs reasonable legal expenses
or other costs or reasonable out-of-pocket expenses in connection
with: (A) the negotiation and preparation of this Agreement or any
of the other Loan Documents, any amendment of or modification of this
Agreement or any of the other Loan Documents, or any sale or
attempted sale of any interest herein to Lender; (B) the
administration of this Agreement or any of the other Loan Documents
and the transactions contemplated hereby and thereby; (C) any
litigation, contest, dispute, suit, proceeding or action (whether
instituted by Lender, Borrower or any other Person) in any way
relating to the Collateral, this Agreement or any of the other Loan
Documents or Borrower's affairs; (D) any attempt to enforce any
rights of Lender against Borrower or any other Person which may be
obligated to Lender by virtue of this Agreement or any of the other
Loan Documents, including, without limitation, the Account Debtors;
or (E) any attempt to inspect, verify, protect, preserve, restore,
collect, sell, liquidate or otherwise dispose of or realize upon the
Collateral; then in any such event, the reasonable attorneys' fees
arising from such services and all expenses, costs, charges and other
fees of such counsel or of Lender or relating to any of the events or
actions described in this Section shall be payable, on demand, by
Borrower to Lender, as the case may be, and shall be additional
Obligations hereunder secured by the Collateral. Without limiting
the generality of the foregoing, such reasonable expenses, costs,
charges and fees may include accountants' fees, costs and expenses;
court costs and expenses; photocopying and duplicating expenses;
court reporter fees, costs and expenses; long distance telephone
charges; air express charges; telegram charges; secretarial over-time
charges; and expenses for travel, lodging and food paid or incurred
in connection with the performance of such legal services.
Additionally, if any taxes (excluding taxes imposed upon or measured
by the net income of Lender) shall be payable on account of the
execution or delivery of this Agreement, or the execution, delivery,
issuance or recording of any of the other Loan Documents, or the
creation of any of the Obligations hereunder, by reason of any
existing or hereafter enacted federal or state statute, Borrower will
pay all such taxes, including, but not limited to, any interest and
penalties thereon, and will indemnify and hold Lender harmless from
and against liability in connection therewith. Borrower's
obligations pursuant to this Section 12.4 shall survive the
termination of this Agreement.
<PAGE>
A. Indulgences Not Waivers. Lender's failure, at any
time or times hereafter, to require strict performance by Borrower of
any provision of this Agreement shall not waive, affect or diminish
any right of Lender thereafter to demand strict compliance and
performance therewith. Any suspension or waiver by Lender of an
Event of Default by Borrower under this Agreement or any of the other
Loan Documents shall not suspend, waive or affect any other Event of
Default by Borrower under this Agreement or any of the other Loan
Documents, whether the same is prior or subsequent thereto and
whether of the same or of a different type. None of the
undertakings, agreements, warranties, covenants and representations
of Borrower contained in this Agreement or any of the other Loan
Documents and no Event of Default by Borrower under this Agreement or
any of the other Loan Documents shall be deemed to have been
suspended or waived by Lender, unless such suspension or waiver is by
an instrument in writing specifying such suspension or waiver and is
signed by a duly authorized representative of Lender and directed to
Borrower.
A. Severability. Wherever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this
Agreement shall be prohibited by or invalid under applicable law,
such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
A. Successors and Assigns. This Agreement, the Other
Agreements and the Security Documents shall be binding upon and inure
to the benefit of the successors and assigns of Borrower and Lender.
This provision, however, shall not be deemed to modify Section 12.3
hereof.
A. Cumulative Effect; Conflict of Terms. The provisions
of the Other Agreements and the Security Documents are hereby made
cumulative with the provisions of this Agreement. Except as
otherwise provided in Section 3.5 of this Agreement and except as
otherwise provided in any of the other Loan Documents by specific
reference to the applicable provision of this Agreement, if any
provision contained in this Agreement is in direct conflict with, or
inconsistent with, any provision in any of the other Loan Documents,
the provision contained in this Agreement shall govern and control.
A. Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different parties
hereto in separate counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which
counterparts taken together shall constitute but one and the same
instrument.
<PAGE>
A. Notice. Except as otherwise provided herein, all notices,
requests and demands to or upon a party hereto to be effective shall
be in writing and shall be sent by certified or registered mail,
return receipt requested, personal delivery against receipt, delivery
service against receipt, overnight courier service against receipt,
or by telegraph or telex and, unless otherwise expressly provided
herein, shall be deemed to have been validly served, given or
delivered when delivered against receipt, or one (1) Business Day
after deposit in the mail, postage prepaid, or, in the case of
telegraphic notice, when delivered to the telegraph company, or, in
the case of telex notice, when sent, answerback received, addressed
as follows:
1. If to Lender: Harris Trust and Savings Bank
111 West Monroe Street
P.O. Box 755
Chicago, Illinois 60690
Attention: Todd A. Andritsch
Telephone: (847) 640-3525
Telecopier: (847) 640-2583
With a copy to:
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
Attention: Lane R. Moyer, Esq.
Telephone: (312) 609-7586
Telecopier: (312) 609-5005
1. If to Borrower: Franklin Ophthalmic Instruments Co., Inc.
1265 Naperville Drive
Romeoville, Illinois 60446
Attention: Brian Carroll
Telephone: (630) 759-7666
Telecopier: (630) 759-1744
With a copy to: Ungaretti & Harris
3500 Three First National Plaza
Chicago, Illinois 60602
Attention: David J. Morris, Esq.
Telephone: (312) 977-4471
Telecopier: (312) 977-4405
The foregoing notwithstanding, any notice, request or demand to
or upon Lender pursuant to Sections 2.3, 2.4 or 3.4 shall not be
effective until received by Lender.
A. Lender's Consent. Except as otherwise specifically
provided for herein whenever Lender's consent is required to be
obtained under this Agreement, any of the Other Agreements or any of
the Security Documents as a condition to any action, inaction,
condition or event, Lender shall be authorized to give or withhold
such consent in its sole and absolute discretion and to condition its
consent upon the giving of additional collateral security for the
Obligations, the payment of money or any other matter.
<PAGE>
A. Demand Obligations. Nothing in this Agreement shall
affect or abrogate the demand nature of any portion of the
Obligations expressly made payable on demand by this Agreement or by
any instrument evidencing or securing same, and the occurrence of an
Event of Default shall not be a prerequisite for Lender requiring
payment of such Obligations.
A. Time of Essence. Time is of the essence of this
Agreement, the Other Agreements and the Security Documents.
A. Entire Agreement. This Agreement and the other Loan
Documents, together with all other instruments, agreements and
certificates executed by the parties in connection therewith or with
reference thereto, embody the entire understanding and agreement
between the parties hereto and thereto with respect to the subject
matter hereof and thereof and supersede all prior agreements,
understandings and inducements, whether express or implied, oral or
written.
A. Interpretation. No provision of this Agreement or any of
the other Loan Documents shall be construed against or interpreted to
the disadvantage of any party hereto by any court or other
governmental or judicial authority by reason of such party having or
being deemed to have structured or dictated such provision.
<PAGE>
A. GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN
NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE
BEEN MADE IN CHICAGO, ILLINOIS. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS;
PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE LOCATED IN
ANY JURISDICTION OTHER THAN ILLINOIS, THE LAWS OF SUCH JURISDICTION
SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF
LENDER'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S
OTHER REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE
LAWS OF SUCH JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE
LAWS OF ILLINOIS. AS PART OF THE CONSIDERATION FOR NEW VALUE
RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR
PRINCIPAL PLACE OF BUSINESS OF BORROWER OR LENDER, BORROWER HEREBY
CONSENTS AND AGREES THAT THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS,
OR, AT LENDER'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION, SHALL HAVE EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN
BORROWER AND LENDER PERTAINING TO THIS AGREEMENT OR TO ANY MATTER
ARISING OUT OF OR RELATED TO THIS AGREEMENT. BORROWER EXPRESSLY
SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR
SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY
OBJECTION WHICH BORROWER MAY HAVE BASED UPON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY
CONSENTS TO THE GRANTING FOR SUCH LEGAL OR EQUITABLE RELIEF AS IS
DEEMED APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES PERSONAL
SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY
SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS,
COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
MAIL ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN THIS AGREEMENT
AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER
OF BORROWER'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT
IN THE U.S. MAILS, PROPER POSTAGE PREPAID. NOTHING IN THIS AGREEMENT
SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE
LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE
THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH
FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE
SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION.
<PAGE>
A. WAIVERS BY BORROWER. BORROWER WAIVES (i) THE RIGHT TO
TRIAL BY JURY (WHICH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT,
PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO
ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL: (ii)
PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST,
DEFAULT, NON PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT,
EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS,
CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS CHATTEL PAPER AND GUARANTIES
AT ANY TIME HELD BY LENDER ON WHICH BORROWER MAY IN ANY WAY BE LIABLE
AND HEREBY RATIFIES AND CONFIRMS WHATEVER LENDER MAY DO IN THIS
REGARD; (iii) NOTICE PRIOR TO TAKING POSSESSION OR CONTROL OF THE
COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY
COURT PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF LENDER'S REMEDIES;
(iv) THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS;
(v) ANY RIGHT BORROWER MAY HAVE UPON PAYMENT IN FULL OF THE
OBLIGATIONS TO REQUIRE LENDER TO TERMINATE ITS SECURITY INTEREST IN
THE COLLATERAL OR IN ANY OTHER PROPERTY OF BORROWER UNTIL TERMINATION
OF THIS AGREEMENT IN ACCORDANCE WITH ITS TERMS AND THE EXECUTION BY
BORROWER, AND BY ANY PERSON WHOSE LOANS TO BORROWER IS USED IN WHOLE
OR IN PART TO SATISFY THE OBLIGATIONS, OF AN AGREEMENT INDEMNIFYING
LENDER FROM ANY LOSS OR DAMAGE LENDER MAY INCUR AS THE RESULT OF
DISHONORED CHECKS OR OTHER ITEMS OF PAYMENT RECEIVED BY LENDER FROM
BORROWER OR ANY ACCOUNT DEBTOR AND APPLIED TO THE OBLIGATIONS; AND
(vi) NOTICE OF ACCEPTANCE HEREOF. BORROWER ACKNOWLEDGES THAT THE
FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO
THIS AGREEMENT AND THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS
IN THEIR FUTURE DEALINGS WITH BORROWER. BORROWER WARRANTS AND
REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL
COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL
RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A
TRIAL BY THE COURT.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed in
Chicago, Illinois, on the day and year specified at the beginning
hereof.
BORROWER:
FRANKLIN OPHTHALMIC
INSTRUMENTS CO., INC.
By: /S/ Brian M. Carroll
Name: Brian M. Carroll
Title: Chief Financial Officer
LENDER:
HARRIS TRUST & SAVINGS BANK
By: /s/ Todd A. Andritsch
Name: Todd A. Andritsch
Title: Vice President
<PAGE>
EXHIBIT A
REVOLVING CREDIT NOTE
$2,200,000 December 30, 1997
Chicago, Illinois
FOR VALUE RECEIVED, the undersigned, FRANKLIN OPHTHALMIC
INSTRUMENTS CO., INC., a Delaware corporation (hereinafter referred
to as "Borrower"), hereby PROMISES TO PAY to the order of HARRIS
TRUST AND SAVINGS BANK, an Illinois banking corporation (hereinafter
referred to as "Lender"), or its registered assigns, at 111 West
Monroe Street, Chicago, Illinois 60690, or at such other place as the
holder of this Note may designate from time to time in writing, in
lawful money of the United States of America and in immediately
available funds, the principal amount of Two Million Two Hundred
Thousand Dollars ($2,200,000), or such lesser principal amount as may
be outstanding pursuant to the Loan Agreement (as hereinafter
defined) with respect to the Revolving Credit Loan, together with
interest on the unpaid principal amount of this Note outstanding from
time to time.
This Note is the Revolving Credit Note issued pursuant to
Section 2.1 of that certain Amended and Restated Loan and Security
Agreement dated as of December 30, 1997, between Borrower and Lender
(the "Loan Agreement"), and is entitled to the benefit and security
of the "Loan Documents" (as defined in the Loan Agreement) provided
for therein, to which reference is hereby made for a statement of all
of the terms and conditions under which the loan evidenced hereby is
made. All capitalized terms herein, unless otherwise defined, shall
have the meanings ascribed to them in the Loan Agreement.
The principal amount of the indebtedness evidenced hereby
shall be payable in the amounts and on the dates specified in the
Loan Agreement and, if not sooner paid in full, on March 31, 2000
unless the term hereof is extended in accordance with the Loan
Agreement. Interest thereon shall be paid until such principal
amount is paid in full at such interest rates and at such times as
are specified in the Loan Agreement.
If any payment on this Note becomes due and payable on a
day other than a Business Day, the maturity thereof shall be extended
to the next succeeding Business Day and, with respect to payments of
principal, interest thereon shall be payable at the then applicable
rate during such extension.
<PAGE>
Upon and after the occurrence of an Event of Default, this
Note shall or may, as provided in the Loan Agreement, and without
demand, notice or legal process of any kind, become or be declared
immediately due and payable.
Demand, presentment, protest and notice of nonpayment and
protest are hereby waived by Borrower.
This Note shall be interpreted, governed by, and construed
in accordance with, the laws of the State of Illinois.
FRANKLIN OPHTHALMIC
INSTRUMENTS CO, INC.
By: /s/ Brian M. Carroll
Name: Brian M. Carroll
Title: Vice President & CFO
<PAGE>
EXHIBIT B
SECURED PROMISSORY NOTE
$300,000 December 30, 1997
Chicago, Illinois
FOR VALUE RECEIVED, the undersigned, FRANKLIN OPHTHALMIC
INSTRUMENTS CO., INC., a Delaware corporation (hereinafter referred
to as "Borrower"), hereby promises to pay to the order of HARRIS
TRUST AND SAVINGS BANK, an Illinois banking corporation (hereinafter
referred to as "Lender"), in such coin or currency of the United
States which shall be legal tender in payment of all debts and dues,
public and private, at the time of payment, the principal sum of
THREE HUNDRED THOUSAND AND NO/100 DOLLARS ($300,000) together with
interest from and after the date hereof on the unpaid principal
balance from time to time outstanding.
This Secured Promissory Note (the "Note") is the Term Note
referred to in, and is issued pursuant to, that certain Amended and
Restated Loan and Security Agreement between Borrower and Lender
dated the date hereof (hereinafter, as amended from time to time, the
"Loan Agreement"), and is entitled to all of the benefits and
security of the Loan Agreement. All of the terms, covenants and
conditions of the Loan Agreement and all other instruments evidencing
or securing the indebtedness hereunder (including, without
limitation, the "Security Documents" as defined in the Loan
Agreement) are hereby made a part of this Note and are deemed
incorporated herein in full. All capitalized terms used herein,
unless otherwise specifically defined in this Note, shall have the
meanings ascribed to them in the Loan Agreement.
Interest from and after the date hereof on the unpaid principal
balance from time to time outstanding shall bear interest at such
rates as are specified in the Loan Agreement.
For so long as no Event of Default shall have occurred under the
Loan Agreement, the principal amount and accrued interest of this
Note shall be due and payable on the dates and in the manner
hereinafter set forth:
(a) Interest shall be due and payable at such times as are
specified in the Loan Agreement;
(b) Commencing on February 1, 1998, and continuing on the
first day of each month thereafter to and including March 1,
2000, principal payments in the amount of Three Thousand Seven
Hundred Fifty Dollars ($3,750) each; and
(c) On March 31, 2000, a final principal payment equal to
the entire unpaid principal balance hereof, together with any
and all other amounts due hereunder.
<PAGE>
Notwithstanding the foregoing, the entire unpaid principal balance
and accrued interest on this Note shall be due and payable
immediately upon any termination of the Loan Agreement pursuant to
Section 3.4 thereof.
This Note shall be subject to mandatory prepayment in accordance
with the provisions of Section 2.2(B) of the Loan Agreement.
Borrower may prepay this Note in whole at any time or in part from
time to time upon ten (10) days' prior written notice to Lender,
provided that each such prepayment shall be made together with
accrued interest on the principal amount so prepaid at the prepayment
date.
All partial prepayments, whether mandatory or voluntary, shall
be applied to installment of principal in the inverse order of their
maturities.
The occurrence of an Event of Default under the Loan Agreement,
including, without limitation, the failure to pay any installment of
principal or interest on this Note in full on the due date thereof in
accordance with the terms of this Note, shall constitute an event of
default under this Note and shall entitle Lender, at its option, upon
or at any time after the occurrence of any such Event of Default to
declare the then outstanding principal balance and accrued interest
hereof to be, and the same shall thereupon become, immediately due
and payable without notice to or demand upon Borrower, all of which
Borrower hereby expressly waives. If this Note is collected by or
through an attorney at law, then Borrower shall be obligated to pay,
in addition the principal balance and accrued interest hereof,
reasonable attorney's fees and court costs.
Time is of the essence of this Note. To the fullest extent
permitted by applicable law, Borrower, for itself and its legal
representatives, successors and assigns, expressly waives
presentment, demand, protest, notice of dishonor, notice of
non-payment, notice of maturity, notice of protest, presentment for
the purpose of accelerating maturity, diligence in collection, and
the benefit of any exemption or insolvency laws.
Wherever possible, each provision of this Note shall be
interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Note shall be prohibited
or invalid under applicable law, such provision shall be ineffective
to the extent of such prohibition or invalidity without invalidating
the remainder of such provision or remaining provisions of this Note.
No delay or failure on the part of Lender in the exercise of any
right or remedy hereunder shall operate as a waiver thereof, nor as
an acquiescence in any default, nor shall any single or partial
exercise by Lender of any right or remedy preclude any other right or
remedy. Lender, at its option, may enforce its rights against any
collateral securing this Note without enforcing its rights against
Borrower, any guarantor of the indebtedness evidenced hereby or any
other property or indebtedness due or to become due to Borrower.
Borrower agrees that, without releasing or impairing Borrower's
liability hereunder, Lender may at any time release, surrender,
substitute or exchange any collateral securing this Note and may at
any time release any party primarily or secondarily liable for the
indebtedness evidenced by this Note.
<PAGE>
This Note shall be governed by, and construed and enforced in
accordance with, the internal laws of the State of Illinois, and is
intended to take effect as an instrument under seal.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly
executed, sealed and delivered in Chicago, Illinois, on the date
first above written.
FRANKLIN OPHTHALMIC INSTRUMENTS
CO., INC.
By: /s/ Brian M. Carroll
Name: Brian M. Carroll
Title: Vice President & CFO
<PAGE>
EXHIBIT C
BORROWER'S BUSINESS LOCATIONS
(1) Borrower currently has the following business locations,
and no others:
(2) Borrower maintains its books and records relating to
Accounts and General Intangibles at:
(3) During the preceding seven-year period, Borrower has had no
office, place of business or agent for process located in any county
other than as set forth above, except:
EXHIBIT D
JURISDICTIONS IN WHICH BORROWER
IS AUTHORIZED TO DO BUSINESS
EXHIBIT E
CORPORATE NAMES AND PREDECESSORS
(1) Each Borrower's correct corporate name, as registered with
the Secretary of State (Commonwealth) of its State (Commonwealth) of
incorporation is:
Name State (Commonwealth) of
Incorporation
(a)
(b)
(c)
(d)
(2) During the preceding seven-year period, Borrower has used
the following names:
<PAGE>
EXHIBIT F
PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
(1) Borrower has no patents [, except].
(2) Borrower has no trademarks [, except].
(3) Borrower has no copyrights [, except].
(4) Borrower has no licenses, other than routine business
licenses, authorizing them to transact business in local
jurisdictions [and the following:].
EXHIBIT G
CAPITAL STRUCTURE AND AFFILIATES
(1) The number of authorized shares of common stock of
[BORROWER] is __________. The number of issued shares of common
stock of [BORROWER] is __________. [BORROWER] has no treasury stock.
(2) All of the issued shares of [BORROWER] are fully paid and
non-assessable and are owned by the following Persons:
(3) [BORROWER] has no Subsidiaries [, except the following:]
Name State of Percent of Voting
Incorporation Stock Borrower Owns
EXHIBIT H
CONTRACTS RESTRICTING BORROWER'S RIGHT TO INCUR DEBTS
There are no contracts that restrict the right of Borrower to
incur Indebtedness, except the following:
(1)
(2)
None of the foregoing contracts restricts or prohibits Borrower
from executing, delivering and performing this Agreement, the Other
Agreements or the Security Documents or incurring any Obligations to
Lender in accordance with this Agreement.
<PAGE>
EXHIBIT I
LITIGATION
(1) There are no proceedings pending against Borrower in any
court, except as follows:
(2) The only threatened litigation of which Borrower is aware
is as follows:
EXHIBIT J
PENSION PLANS
EXHIBIT K
LABOR CONTRACTS
Borrower has no agreements with any organization of its
employees [, except the following:]
EXHIBIT L
CAPITALIZED LEASES
Borrower has the following capitalized leases:
EXHIBIT M
OPERATING LEASES
Borrower has the following operating leases:
EXHIBIT P
PERMITTED LIENS
EXHIBIT Q
LEASED PREMISES
EXHIBIT R
[LETTERHEAD OF BORROWER'S COUNSEL]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 851,574
<ALLOWANCES> 23,438
<INVENTORY> 1,583,510
<CURRENT-ASSETS> 2,605,871
<PP&E> 880,046
<DEPRECIATION> 707,837
<TOTAL-ASSETS> 4,845,899
<CURRENT-LIABILITIES> 1,720,060
<BONDS> 0
0
0
<COMMON> 19,583
<OTHER-SE> 1,434,560
<TOTAL-LIABILITY-AND-EQUITY> 4,845,899
<SALES> 9,568,352
<TOTAL-REVENUES> 0
<CGS> 6,893,083
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 150,612
<INCOME-PRETAX> 2,515,954
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,515,954
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,515,954
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
