UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-21504
QUAD SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2180139
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(State or other jurisdiction (I. R. S. Employer Identification Number)
of incorporation or organization)
2405 MARYLAND ROAD, WILLOW GROVE, PENNSYLVANIA 19090
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 657-6202
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.03 PAR VALUE
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS
-------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 22, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $22,457,304*
As of December 22, 1997, 4,354,491 shares of common stock, $.03 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
- ----------
* Calculated by excluding all shares that may be deemed to be beneficially
owned by executive officers and directors of the Registrant, without
conceding that all such persons are "affiliates" of the Registrant for
purposes of the federal securities laws.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Quad Systems Corporation (the "Company" or "Quad") designs, manufactures,
markets and supports surface mount technology ("SMT") and advanced packaging
equipment used in the assembly of SMT printed circuit boards and advanced
packages and other semiconductor assembly processes, primarily in low to medium
volume production environments. The Company's assembly equipment facilitates and
controls the handling and positioning of printed circuit boards and other
substrates, and the precision placement of a broad range of electronic
components and semiconductor dies. In conjunction with the Company's assembly
equipment, the Company also offers component feeders, machine vision systems,
and other peripherals. In addition, the Company sells turnkey systems
incorporating the major elements of a complete surface mount production line:
namely, a screen printer, an assembly system or systems, a reflow oven and
material handling conveyors. The Company designs and manufactures its own
assembly systems, reflow ovens and screen printers and supplies material
handling conveyors purchased from third party sources. The Company also
purchases an assembly system, the QSA-30, from Samsung Aerospace Industries,
Ltd. ("Samsung"). From time to time, the Company examines the products it
manufactures and those produced by third parties to determine whether the mix of
products to be offered by the Company and those to be purchased from third party
sources should be changed.
In SMT, printed circuit boards ("PCB") are prepared by screen-printing small
quantities of solder paste on the numerous contact pads at the termination of
each printed circuit board trace. Components are added to the printed circuit
board by an assembly system that picks a component and precisely places it on
trace terminations that have been so prepared with solder paste. Leads from each
component, of which there may be as few as two or as many as several hundred,
must be aligned with the contact pad to assure proper electrical connection.
After the components are placed, the entire printed circuit board is heated to a
temperature just above the melting point of the solder in the solder paste. The
resulting reflow of the solder provides a permanent physical and electrical bond
between each lead of each component and the pads and traces of the printed
circuit board.
Advanced packaging combines semiconductor assembly processes and SMT assembly
processes with a wide range of substrate materials to produce products that
are significantly smaller, faster, lighter and occasionally more cost effective
than those produced using older processes. The advanced packaging marketplace
is emerging and customer requirements are not yet known with certainty.
Advanced packaging includes processes such as "chip on board", "flip chip"
and "chip scale" assembly. While this list of processes is not exhaustive,
it includes those the Company believes are some of the most commercially
feasible processes currently being utilized. The Company also believes that
many yet-to-be developed advanced packaging processes eventually will be
introduced which may require equipment functionality that the Company's
products do not provide. In addition, the Company's products do not address all
functionality requirements for all such existing processes. The Company is
continuing to develop and market additional features for its assemblers,
to attempt to respond to demands and needs of this emerging market. There can
be no assurance that the Company will be successful in doing so. Additionally,
new technologies may be introduced in the future which could cause
advanced packaging to become obsolete.
The Company was incorporated in Pennsylvania in 1980 and changed its state of
incorporation to Delaware in 1987.
PRODUCTS AND SERVICES
The Company offers a line of SMT process equipment and related services for the
electronics manufacturing market. The products offered by the Company are sold
as part of a turnkey system marketed by the Company under the "QuadLine" name or
are sold separately and integrated with products offered by third parties into
an SMT production line. Most of the Company's currently marketed SMT equipment
is compatible with the Company's software and component handling subsystems and
the Company attempts to provide suitable upgrade paths for its products.
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Primary Surface Mount Assembly Equipment
<TABLE>
<CAPTION>
FISCAL YEAR
PRODUCT CAPABILITIES MARKET FOCUS INTRODUCED
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<S> <C> <C> <C>
Quad QSP-2 (part of Full range of fine pitch capability Medium to 1994
the "Q" Series) "QuadAlign" component centering high volume
Placement rates of up to 14,000 SMT assembly
components per hour (CPH) market
Quad QSV-1 (part of Full range of fine pitch capability Medium to high 1997
the "Q" Series) "QuadAlign" component centering volume SMT
Placement rates of up to 7,000 CPH assembly market
Quad APS-1 (part of Suitable for advanced packaging processes Ultra-high 1997
the "Q" Series) including: Chip On Board, Flip Chip precision SMT
and Chip Scale Packaging and semiconductor
packaging market
Quad QSA-30 Limited range of fine pitch capability Medium to high 1997
"QuadAlign" component centering volume market
Placement rates of up to 13,300 CPH
Quad IVcMk2 (part Full range of fine pitch capability Low to medium 1994
of the "C" Series) High accuracy placement volume market
"QuadAlign" component centering
Placement rates of up to 3,600 CPH per
head
Quad IIc Limited range of fine pitch capability Low to medium 1994
(part of the "C" "QuadAlign" component centering volume market
Series) Placement rates of up to 3,600 CPH
Entry level system
</TABLE>
"Q" SERIES OF PRODUCTS
The "Q" Series multi-functional SMT assemblers offer a range of throughput
rates, precision and capabilities. "Q" Series assemblers share several common
technologies, including patented QuadAlign(TM), a component processing alignment
system that allows the assembler to process fine pitch components "on-the-fly,"
the P4 (Pick-Pick-Place-Place) head and QSOFT(TM), Quad's proprietary software
for electronic assembly machine programming and operation. QSOFT enables
assemblers of the "Q" Series to be combined efficiently to form higher capacity
production lines. In addition, all standard Quad component feeder systems and
accessories are compatible with the "Q" Series assemblers and can be used in
combination with the Company's docking feeder carts. Approximately 41% of the
Company's fiscal 1997 net sales were attributable to sales of the "Q" Series
including accessories.
Quad QSP-2
The QSP-2 is a high speed multi-functional "Q" Series assembler with fine pitch
capabilities. The QSP-2 was the first Quad production assembler to utilize
QuadAlign. Its ability to place a large range of components at high throughput
rates provides flexibility in production line balancing, allowing easy
optimization of production. The Quad QSP-2 is designed for applications with
placement rates, depending upon customer applications, of up to 14,000
components per hour.
QSV-1
The QSV-1 is a medium volume multi-functional "Q" Series assembler with fine
pitch capabilities. The QSV-1 is designed for applications with placement rates,
depending upon customer application, of up to 7,000 components per hour.
APS-1
During fiscal 1997, the Company introduced the APS-1 (Advanced Packaging System)
to address the emerging requirements of both the advanced SMT and the
semiconductor packaging markets. The APS-1 utilizes patented QuadAlign, linear
direct-drive servo motors and ultra-high resolution vision cameras to sustain
fast, accurate placement of a broad range of both SMT components and
semiconductor die. The APS-1 is designed
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to place semiconductor die, including flip chip on a variety of substrates, in
addition to placing a broad range of SMT components at throughput rates of up to
5,000 components per hour, depending upon customer applications. The APS-1 has
been designed to be flexible with optional modular subsystems to meet a variety
of customer applications. Options currently available include the Multiple Wafer
Presentation Systems, Waffle Pack Die and Component Presentation System and a
Flux option to support flip chip processes.
Although the APS-1 was introduced in 1997, the product is still in the early
stages of development. The Company's current version of the APS-1 includes
features to address some requirements of advanced packaging systems. The
Company is continuing to develop and markets certain additional features of the
APS-1 that currently do not have complete functionality or meet some customers
requirements. The Company continually attempts to improve its products to expand
and increase the functionality of the product, although there can be no
assurance the Company will do so. Several APS-1 systems have been sold and
installed at various locations throughout the world. Customer applications
including "flip chip" and "chip on board" processes are currently meeting
customer expectations. However, one specific application for "chip scale"
packaging, which required adding heat to the bond head, has not met customer
requirements, and accordingly, the customer has returned this system to Quad for
additional testing, analysis and redesign.
QSA-30
During fiscal 1997, the company introduced the QSA-30 High Volume SMT Assembler,
developed in partnership with and purchased from Samsung. The QSA-30 utilizes
QuadAlign, Quad tape feeders and docking feeder carts. The Quad QSA-30 is
designed for applications with placement rates, depending upon customer
applications, of up to 13,300 components per hour, while placing components
ranging in size from very small passive components to medium-sized non-fine
pitch components.
Quad QSX-1
The Quad QSX-1 is a high-speed fine pitch component assembler, capable of
placing ultra-fine pitch components. This precision system combines an advanced
mechanical platform, direct linear drive motor system, coupled with an
easy-to-use Windows(TM) based graphical user interface. Advanced features of the
Quad QSX-1 include adaptive process control and QuadAlign. The Company began
full production and shipments of the QSX-1 during the fourth fiscal quarter of
1996.
"C" SERIES OF PRODUCTS
Quad IVcMk2
The Quad IVcMk2 is a high-accuracy assembler, providing a full range of fine
pitch capability, which incorporates QuadAlign. The Quad IVcMk2 is a modular
assembly system that can be configured with a wide variety of accessories,
designed to meet the specific processing requirements of Quad's customers. The
Company believes that this modular design is also attractive to many SMT
customers, who prefer an initial high capability system that can be upgraded as
their production requirements change. The Quad IVcMk2 replaced the Quad IVc and
the Quad IIIc (which were formerly part of the "C" Series). Approximately 13% of
the Company's fiscal 1997 net sales were attributable to sales of the current
"C" Series and its predecessors, including accessories.
The Quad IVcMk2 is designed to be configured as a single unit, with placement
rates of up to 3,600 components per hour, or as a multiple headed system
(usually with up to two heads), with placement rates increasing up to 9,600
components per hour, depending upon customer applications. The Company markets
its two-headed system under the name Quad IVcMk2/136. The Quad IVcMk2 is
compatible with all accessories offered by the Company, including vision
systems, software and a variety of feeders. The Company believes that the Quad
IVcMk2 provides advantages from the standpoint of accuracy of its component
positioning system and its superior vision system, as well as its ease and speed
of programming, setup and changeover.
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Quad IIc
The Quad IIc is an entry level system, providing a limited range of fine pitch
capability. The Quad IIc is based on the original Quad IVc and uses QuadAlign.
The Quad IIc includes a belt-driven system for positioning of the X and Y axes,
while it maintains the precision advantage of linear glass scale encoders for
positional accuracy.
The Quad IIc is a modular, mid-range assembly system, which can be configured
with a wide variety of accessories designed to meet the specific processing
requirements of Quad's customers. Components placed by the Quad IIc range from
very small passive components, to multi-leaded, fine pitch component parts with
lead spacing down to 15 mil. All of the Company's standard accessories and
QuadVu vision systems are available as options for the Quad IIc. The Quad IIc
offers large board capacity that may be configured in a standard workholder, an
in-line board transport or a side shuttle configuration.
Reflow Ovens
The Company also sells convection dominant reflow ovens manufactured by its
wholly-owned subsidiary Quad Europe Limited (QEL), acquired in 1993 and located
in High Wycombe, England. These reflow ovens incorporate forced hot air, and
convection heat, utilizing recirculated hot air. Oven features include a passive
pre-heat section and an integrated thermal profiling system. Based on a modular
frame design, Quad's convection reflow ovens are available in several models.
Approximately 5% of the Company's fiscal 1997 net sales were attributable to
sales of reflow ovens.
Profile Series of Ovens
The Company's high performance Profile Series reflow ovens feature what the
Company believes is an advanced airflow and thermal dynamics technology to offer
high production throughputs. Quad Profile Ovens feature QuadTherm(TM) heating
modules, designed to generate highly accurate thermal profiles. Carefully
balanced airflow velocity and volume uniformity are used to maintain a
repeatable and stable process. The resulting thermal stability allows for the
high speed reflow of advanced multi-layer printed circuit boards that
incorporate ball grid arrays, multi-chip-modules and fine pitch technology. The
Profile Series production rates match up to the current highest pick and place
placement rates, equating to a 60% increase in thermal transfer rates over
conventional forced air reflow ovens. Each oven in the Profile Series offers a
modular, expandable design intended to respond to customers' continually
changing production needs. Plug-in heating modules can be configured and
re-configured to accommodate up to 14 independently controlled heating zones
within an oven enclosure. The oven's flexibility is further increased through
each heating module's built-in exhaust capability. Ease of operation is further
enhanced by the adoption of a light pen operator interface.
During fiscal 1997, the Company introduced the Thermal Imaging option for the
Profile Series reflow ovens. The Thermal Imaging option utilizes a computerized
thermal camera inside the oven and an independent computer system to monitor and
report the temperature at user selected points on each circuit board processed.
The system monitors the temperature of board components, leads and solder paste
and identifies temperature variations. Variations are then reported to the
operator to aid in quality control.
QCR Series Ovens
The QCR Series reflow ovens are designed for low to medium volume production
environments and for highly consistent reflow of assembled PCB. QCR ovens
feature high mass heating modules, automatic start up with zonal power up,
closed loop conveyor speed control, four channel PCB thermal profiling,
automatic data logging, pneumatic powered hood lift, powered exhaust system,
signal light tower, computer system with easy-to-use graphic display operating
software, multi-level password protection, computer controlled rail width
adjustment for edge rail and combination belt/rail oven configurations.
Additional process enhancing options, such as nitrogen atmosphere, fume
extractor, conveyor battery backup, top side cooling module and off load
annunciator, are available. QCR ovens are available in two models with 4 or 8
independently controlled convection zones, and belt, rail or combination
transport systems.
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Screen Printers
The Company sells screen printers manufactured by SMTech Limited ("SMTech"), a
subsidiary of Quad, acquired in 1995 and located in Dorchester, England. These
screen printers offer high precision, repeatable application of solder paste
onto printed circuit boards. The Company offers screen printers in a range of
products, starting with a basic, benchtop screen printer for use in small
contract manufacturing. Quad also offers semi-automatic screen printers that
have motorized conveyer rails, programmable stencil cleaners, and other options.
In fiscal 1996, Quad introduced a new in-line screen printer, the AVX 400(TM),
which utilizes vision robotic roving cameras, under-screen cleaners, automatic
paste dispensers and a Windows(TM) control system. Approximately 17% of the
Company's fiscal 1997 net sales were attributable to sales of screen printers.
Material Handling Conveyors
Quad sells material handling conveyors manufactured by third parties. Such
conveyors include circuit board loaders and unloaders, manual inspection
stations and other conveyor systems. Conveyor systems automate the material
transfer steps throughout the SMT assembly processing system.
QuadLine
The Company provides its customers with the major elements of turnkey SMT
production lines, under the name "QuadLine," a service that integrates its full
line of assembly equipment. The Company believes that offering the major
elements of a turnkey production line system complements the Company's primary
business of selling surface mount assemblers. The Company also believes that
QuadLine enhances the Company's overall market position by providing customers a
sole source of responsibility and service for, and increased compatibility
among, the equipment in customers' assembly production lines. During fiscal
1997, net sales of such systems accounted for approximately 33% of net sales.
PERIPHERALS AND SERVICE
Component Feeders and Adhesive Dispensers
The Company manufactures a variety of tape, vibratory and waffle tray feeders.
The Company also has an agreement with Samsung for Samsung to become the
Company's sole supplier of component tape feeders. The contact covers six years
and deliveries under the contract will commence in fiscal 1998. The Company's
electronic tape feeders are available in 8mm, 12mm, 16mm, 24mm, 32mm, 44mm and
56mm formats and are compatible with all Quad assemblers. In addition, the
Company offers a docking feeder cart that can be loaded with tape feeders
off-line and rolled into place at the assembler when ready to use. This feature
can greatly reduce the time involved in changing over the assembler from
assembling one printed circuit board to another.
The Company's waffle tray handler can present up to twenty different waffle
trays to the assembler and is compatible with the Quad QSP-2, QSV-1, QSA-30 and
the Quad IVcMk2 and the Quad IIc. The Company's vibratory feeders are compatible
with all of its assembly systems.
The Company also markets adhesive dispensers for the Quad IVcMk2. These
dispensers enable components to be held in place prior to soldering.
QuadCare
QuadCare is the Company's integrated service and support program, offering
complete coverage for preventive and unscheduled maintenance, including parts
and labor, software and firmware upgrades, telephone consultations, application
engineering support and periodic retraining. The provision of software and
firmware upgrades under QuadCare permits existing customers to benefit from the
Company's development activities both to improve the operation of the assembler
and to provide support for additional peripheral equipment and modular
enhancements.
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MANUFACTURING
The Company's principal manufacturing activities consist of sub-assembly, final
assembly and testing of the Company's products in Willow Grove, Pennsylvania, of
reflow ovens in High Wycombe, England and of screen printers in Dorchester,
England. Virtually all of the Company's printed circuit board and machine parts,
an increasing number of tape feeders and some of the Company's sub-assemblies
are manufactured by third parties. Logistical and sourcing assistance, technical
training for testing and debugging and quality and assurance coordination is
provided to the Company's subcontractors on an ongoing basis to ensure quality
and low cost production.
The Company believes it is advantageous to use multiple sources for printed
circuit boards, fabricated parts and other essential components and generally
attempts to maintain more than one qualified vendor for the manufacture of each
fabricated part used in production of the Company's products. Certain parts,
however, currently are available from or have been subcontracted out to only one
source. The Company purchases components from suppliers pursuant to standard
purchase orders. Should the Company experience interruptions in any of these
supplies, or increases in costs of essential components, production delays or
cost increases could result, which might have a materially adverse effect on the
Company's business. On occasion, the Company has experienced delays due to
supply shortages, but such delays have not had a material adverse effect on the
Company.
The Company provides its customers with a one year warranty on parts and labor
on all products.
SALES AND MARKETING
The Company markets its products and services through a combination of a direct
sales force, regional sales managers and manufacturers' representatives in the
United States. At the end of fiscal 1997, the Company employed 29 people in
sales and marketing, including 10 in direct sales and 14 manufacturers'
representatives in the United States. In addition to the sales and service
personnel located at the Company's headquarters in Willow Grove, Pennsylvania,
the Company has sales or service personnel at 29 other locations in the United
States and Canada.
Outside of the United States and Canada, the Company has a direct sales force in
the United Kingdom and has sales representative arrangements with firms located
in Brazil, India, Indonesia, Taiwan, Korea, Singapore (also covering Malaysia
and Thailand), Hong Kong, China, Philippines, Australia and New Zealand, Israel
and in several Western European countries. In connection with the SMTech
acquisition, the Company also entered into a five-year consulting agreement with
Mr. Dominique Henry, under which Mr. Henry advises the Company about prospective
customers for the Company's products, principally in countries that comprised
the former USSR or former member countries of the Warsaw Pact, which agreement
expires in 1999.
Sales to customers outside of the United States represented approximately 44%,
43% and 39% of net sales in fiscal 1997, 1996 and 1995, respectively. The
acquisition of QEL in fiscal 1993 enhanced the Company's presence in Europe,
since QEL's manufacturing facilities are in England. The Company further
expanded its activities in Europe with the acquisition of SMTech in 1995. The
Company continues to increase its international selling efforts. During fiscal
1996, the Company penetrated the Japanese market with sales of the AVX 400
screen printer. For financial information on the Company's foreign operations,
see Note 8 of Notes to Consolidated Financial Statements, included herein.
BACKLOG
Backlog of orders as of September 30, 1997, totaled $11.3 million compared to
$12.5 million as of September 30, 1996. Backlog includes $6.7 million of
assemblers, $1.5 million of screen printers and $.8 million of reflow ovens
compared with $9.0 million of assemblers, $1.1 million of screen printers and
$.8 million of reflow ovens as of September 30, 1996. The remainder of backlog
consists of other products. The Company expects to ship all backlog orders
outstanding at September 30, 1997 during fiscal 1998. It has been the
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Company's experience that purchasers of capital equipment have not issued
purchase orders calling for delivery of products over an extended period.
Therefore, backlog may not necessarily be indicative of future sales.
ENGINEERING, RESEARCH AND DEVELOPMENT
The Company's product development activities focus on improving system features,
including accuracy, reliability and flexibility, while increasing placement
rates and yield. These efforts include improvement of manufacturing techniques
and enhancement and development of software used in the Company's products. In
addition, the Company seeks to develop process systems that support advances in
component packaging and device design technologies. These efforts produced
QuadAlign, a component processing alignment system used in many of the Company's
products; new products such as the APS-1, an advanced packaging system assembler
and the QSV-1 (a "Q" Series product, both of which commenced shipment during
1997); enhanced software functionality in "Q" Series products and third party
product integration software. These efforts may include obtaining additional
research and development support from third parties.
Engineering, research and development is currently conducted at the Company's
headquarters in Willow Grove, Pennsylvania, at QEL's headquarters in High
Wycombe, England and SMTech's headquarters in Dorchester, England. Engineering,
research and development expenses for fiscal 1997, 1996 and 1995 were
approximately $6.8 million, $6.2 million and $4.8 million, respectively. This
represented approximately 8.3%, 8.6% and 7.7% of net sales, for fiscal 1997,
1996 and 1995, respectively.
COMPETITION
The markets in which the Company competes are characterized by intense
competition, rapid technological and product changes, changing market
requirements and significant expenditures for product and market development.
The Company has a number of present and potential competitors in its markets,
many of whom have more diverse product lines and greater financial, marketing
and other resources than the Company. The Company's major domestic competitors
are Amistar Corp., BTU International, Inc., Conceptronic, Inc., Contact Systems,
Inc., Heller Industries, Kulicke & Soffa Industries, Inc., MPM Corporation,
MRSI, Palomar Products., Inc., Universal Instruments, Inc. and Vitronics Corp.
The Company's principal foreign competitors are DeK Printing Machines, Inc.,
Fuji Heavy Machinery Company, Hitachi, Ltd., Mydata Automation, Inc., Panasonic
Factory Automation Division of Matsushita Electric Corporation of America,
Phillips SMD Technology, Inc., Sanyo High Technology Co., Ltd., Shinkawa Ltd.,
Siemens Factory Automation Inc., Toshiba Corp. and Zevatech, Inc.
The Company believes that the principal competitive factors in the segments of
the surface mount assembly market in which it competes are price, performance,
accuracy, flexibility, reliability, enabling technology, throughput and the
ability to meet demand in a timely manner. The Company believes that it
addresses these issues through its emphasis on quality control and investments
in product development and production capacity.
PATENTS AND LICENSES
The Company holds two United States patents and expects to apply for additional
patents for protection of technology under development by the Company, although
there can be no assurance that any such patents will be issued or will be
sufficient to protect the Company's competitive position. One patent, which
expires in 2008, covers the Company's component centering system utilized on the
Quad IIIc and the Quad 1000. The other patent, which was granted in 1996, covers
the Company's non-contact component alignment subsystems, such as that used in
most of the "C" Series and all of the "Q" Series products. Although the current
patents and any other patents that may be obtained are considered valuable
intellectual property, the Company
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believes that they are not determinative of any success the Company enjoys,
which the Company believes depends principally upon engineering, marketing,
service and manufacturing skills.
The Company enters into technology licensing arrangements with others when it
believes it is appropriate to do so. In July 1997, the Company reached an
agreement with Samsung for the sale and distribution of the QSA-30 assembler.
Under the terms of the agreement, the Company has an exclusive right to
distribute and sell the QSA-30 assembler in North America, Europe and South
America and a non-exclusive right to sell in Asia, except in Korea. The contract
covers a term of two years, subject to extension, and has a targeted goal for
Quad to purchase a minimum of 150 assemblers at a pre-determined price per unit
during the first year of the contract, although Samsung's remedy if Quad fails
to meet the target is to terminate the agreement. The number of assemblers to be
purchased and their purchase price during the remainder of the contract is to be
negotiated.
In June 1996, the Company also reached an agreement with Samsung. Under the
terms of this agreement, the Company granted an exclusive license (subject to
certain exceptions as to the Company) to Samsung for Samsung to become the
Company's sole supplier of component tape feeders, which are currently used on
all of the Company's placement systems. The contract covers a six year period
and requires Quad to purchase a minimum of 40,000 component tape feeders with a
value of at least $6.8 million during the first two years of the contract
although Samsung's remedy if Quad fails to meet the target is to terminate the
agreement. The number of tape feeders to be purchased during the remainder of
the contract term is to be negotiated. Samsung is required to pay to Quad a
total of $300,000, representing a combination of licensing fees and a
reimbursement for expenses incurred in transferring technology to Samsung for
use in production of the component tape feeders. The Company expects Samsung to
begin to supply component tape feeders to the Company during fiscal 1998.
The Company believes that much of its important technology resides in its
proprietary software and trade secrets. Insofar as the Company relies on trade
secrets and unpatented knowledge to maintain its competitive position, there is
no assurance that others may not independently develop similar technologies. In
addition, although the Company executes non-disclosure agreements with its
employees, selected vendors and others, there can be no assurance that secrecy
obligations will not be breached. Any loss of such know-how or breach of such
agreements could have a material adverse effect on the Company.
The Company owns a registered trademark for the name "Quad" in both the United
States and Canada.
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EMPLOYEES
At the end of fiscal 1997, the Company employed 363 persons on a full-time basis
of which 269 were domestic and 94 were foreign based. None of the Company's
employees are represented by a labor union, and the Company has experienced no
labor actions, although the Company has laid off personnel from time to time.
Management considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company maintains its headquarters and principal manufacturing facility in a
leased 106,000 square foot facility in Willow Grove, Pennsylvania. The facility
is leased for a term ending December 2006, and the monthly rental for the space
is approximately $66,000 plus taxes, insurance and maintenance costs.
QEL occupies a 9,600 square foot facility in High Wycombe, England, for a term
of 25 years with a current monthly rental of approximately $7,600 (at current
exchange rates), plus taxes, insurance, maintenance and utilities. SMTech
occupies a 19,000 square foot facility in Dorchester, England, for a term of 15
years with a current monthly rental of approximately $8,400 (at current exchange
rates), plus taxes, insurance and maintenance costs. The Company believes that
its existing facilities are adequate to meet its current needs.
ITEM 3. LEGAL PROCEEDINGS
In July 1996, the Company was named a defendant in a patent infringement lawsuit
filed by The Zevatech Group in Munich, Germany. The complaint alleges that the
Company infringed on the plaintiff's German patents relating to pick and place
assemblers. The Company has responded with an action against the plaintiff in
Munich, Germany seeking to have such plaintiff's patents invalidated. Management
believes the lawsuit to be without merit or that the Company has meritorious
defenses and intends to vigorously defend itself against the lawsuit.
Accordingly, no provision for this lawsuit has been recorded during fiscal 1996
or 1997.
In March 1995, a shareholder of the Company filed a complaint in the United
States District Court for the Eastern District of Pennsylvania (the "Action")
against the Company, two of its executive officers and two of its directors (one
of which was also sued as an executive officer) alleging that, during the period
December 23, 1994 through March 7, 1995, the defendants knowingly or recklessly
misrepresented or omitted material information about the Company, its prospects
and earnings, and knowingly or recklessly misrepresented or omitted information
about the status and operation of certain software used in the Company's
products in violation of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, as amended, and common law. During fiscal 1996, the Company, to avoid
the uncertainties of litigation and without admitting any wrongdoing with
respect to any of the claims alleged in the Action, entered into a final
settlement agreement and related documents, which has received court approval.
Under this agreement, the Company, together with its directors and officers
liability insurer, paid an aggregate of $2,450,000 in settlement of all claims.
Total cost (including legal fees) to the Company, net of the amount paid by such
insurer, was $1,467,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
<PAGE>
EXECUTIVE OFFICERS, OTHER OFFICERS AND DIRECTORS
The executive officers, other officers and directors of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David W. Smith 55 President, Chief Executive Officer and Director
Anthony R. Drury 55 Senior Vice President, Finance and Chief Financial Officer
Joseph L. Gasper 50 Senior Vice President, Operations
Ian H. Henderson 41 Senior Vice President, European Operations
John D. Dreibelbis 43 Vice President and Chief Technology Officer
Terry D. Ellis 37 Vice President, North American Sales & Customer Support
Craig C. Ramsey 44 Vice President, Product Assurance and Marketing
James R. Bergman 55 Director
Vahram V. Erdekian 49 Director
Robert P. Pinkas 44 Director
Lorin J. Randall 54 Director
David H. Young 50 Director
</TABLE>
Directors hold office until the next annual meeting of the stockholders, or
until their successors are duly elected and qualified. Officers are elected by
and serve at the pleasure of the Board of Directors.
Mr. Smith has been President and Chief Executive Officer of the Company since
May 1992.
Mr. Drury has been Senior Vice President, Finance of the Company since December
1993. From January 1990 until December 1993, he was Vice President, Finance of
the Company. Mr. Drury has also been Chief Financial Officer of the Company
since January 1990.
Mr. Gasper has been Senior Vice President, Operations of the Company since
October 1992.
Mr. Henderson has been the Company's Senior Vice President, European Operations
since November 1996. Prior to November 1996, he was the Managing Director of
Quad Europe Limited, a subsidiary of the Company.
Mr. Dreibelbis has been Vice President and Chief Technology Officer of the
Company since March 1997. From September 1995 until March 1997, he was an
engineering fellow at Kulicke & Soffa Industries, Inc. and from January 1989 to
September 1995 he was founder and President of Blue Ridge Technologies.
Mr. Ellis has been Vice President, North American Sales and Customer Support
since June 1997. From February 1997 until June 1997 he was Vice President,
Customer Service Support. From June 1996 to February 1997, he served as the
Company's Director of Customer Support. From April 1995 to June 1996, Mr. Ellis
was the acting Director of Customer Support for MPM Corporation ("MPM"), a
leading manufacturer of screen printers used in the SMT industry and a
competitor of the Company. From February 1994 to April 1995, he was the manager
of MPM's Technical Support Center in Rolling Meadows, IL. From July 1991 to
February 1994, he was Manager, Customer Service Automation Support Center for
Advanced Technology Laboratories, Inc.
Mr. Ramsey has been Vice President, Product Assurance and Marketing since
January 1996. From November 1994 until January 1996, he was the Company's Vice
President, Product Assurance. From July 1993 until November 1994, he was the
Company's Vice President, Engineering. Prior to July 1993, he was the Company's
Director of Engineering.
Mr. Bergman has served on the Board of Directors of the Company since 1982. He
has been a general partner responsible for venture capital investments of DSV
Partners III, L.P. and DSV Partners IV, L.P., venture
10
<PAGE>
capital firms, for more than five years. Since August 1996, Mr. Bergman has been
a limited partner of Brantley Venture Management, L.P. Since November 1996, he
has also been a Vice President of Brantley Capital Corporation. Mr. Bergman is
also a director of Maxim Integrated Products, Inc. and DeCrane Aircraft
Holdings, Inc., both of which are traded on NASDAQ.
Mr. Erdekian has served on the Board of Directors of the Company since July
1996. Since October 1996, he has been Vice President, Worldwide Manufacturing
Operations of Bay Networks, Inc. ("Bay Networks"), a leader in the computer
network industry. From October 1994 until October 1996, he was Vice President,
Manufacturing Product Operations of Bay Networks. From September 1993 until
October 1994, Mr. Erdekian was the Vice President, Manufacturing Operations of
Wellfleet Communications, which merged with Synoptics Corporation to form Bay
Networks in August 1994. Prior to September 1993, he was an operations
consultant to private and public corporations.
Mr. Pinkas has served on the Board of Directors of the Company since 1982. Mr.
Pinkas has been a general partner of Brantley Venture Partners, L.P. a venture
capital firm, for more than five years. Since August 1996, Mr. Pinkas has also
been a general partner of Brantley Venture Management, L.P. Mr. Pinkas is also a
director of Gliatech, Inc., Pediatric Services of America, Inc., Medirisk, Inc.
and Waterlink, Inc. Since November 1996, Mr. Pinkas has also been the Chairman
of the Board, Chief Executive Officer, Treasurer and Director of Brantley
Capital Corporation. Mr. Pinkas was the Company's Treasurer from March 1982
until October 1987.
Mr. Randall has served on the Board of Directors of the Company since January
1988. Since January 1995, he has been the Vice President, Finance and Chief
Financial Officer of CFM Technologies, Inc. From May 1994 until June 1995, Mr.
Randall was the President and Chief Executive Officer of Greenwich
Pharmaceuticals Incorporated ("GPI") (now known as Boston Life Sciences, Inc.).
From September 1991 until May 1994, he was the Chief Financial Officer and Vice
President of GPI. Mr. Randall was the Company's President and Chief Executive
Officer from August 1988 until January 1990 and was the Company's Vice
President, Operations and Chief Financial Officer from May 1985 until July 1988.
Mr. Young is the founder of the Company and has served on the Company's Board of
Directors since its inception. Mr. Young has been the President of Two
Technologies, Inc., a company which manufactures hand-held computers, for more
than five years. Mr. Young served as the Company's President from its inception
until October 1985.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on The Nasdaq Stock Market under the symbol
"QSYS." The quarterly range of high and low sales prices for fiscal 1997 and
1996 are set forth below:
FISCAL 1997 HIGH LOW
- ----------- ---- ---
First Quarter $ 12.25 $ 9.00
Second Quarter $ 14.50 $ 9.50
Third Quarter $ 11.00 $ 8.63
Fourth Quarter $ 10.38 $ 7.00
FISCAL 1996
- -----------
First Quarter $ 9.75 $ 6.50
Second Quarter $ 8.00 $ 5.88
Third Quarter $ 9.88 $ 6.38
Fourth Quarter $ 10.00 $ 7.00
NUMBER OF HOLDERS OF COMMON STOCK
At December 22, 1997, there were approximately 103 stockholders of record of the
Company's Common Stock. Based on information obtained from the Company's
transfer agent, the Company believes that the number of beneficial owners of its
Common Stock is approximately 2,200.
DIVIDENDS
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings for use in its business and, therefore,
does not anticipate paying cash dividends on its Common Stock in the foreseeable
future. Payment of dividends is restricted under terms of the Company's credit
agreements.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended September 30, (1)
-----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Net sales $ 81,723 $ 71,591 $ 62,591 $ 50,776 $ 34,773
Cost of products sold 51,417 43,912 39,537 29,721 19,964
-------- -------- -------- -------- ---------
Gross profit 30,306 27,679 23,054 21,055 14,809
Operating expenses:
Engineering, research and development 6,759 6,153 4,844 4,300 2,966
Selling and marketing 14,197 12,076 10,276 8,313 5,947
Administrative and general 5,912 5,561 3,997 3,026 2,182
-------- -------- -------- -------- ---------
Total operating expenses 26,868 23,790 19,117 15,639 11,095
-------- -------- -------- -------- ---------
Income from operations 3,438 3,889 3,937 5,416 3,714
Interest (income) expense, net 381 195 124 (103) 22
Settlement of securities litigation -- 1,287 180 -- --
-------- -------- -------- -------- ---------
Income before income taxes 3,057 2,407 3,633 5,519 3,692
Income tax expense (benefit) 1,070 915 945 1,336 (399)
-------- -------- -------- -------- ---------
Net income $ 1,987 $ 1,492 $ 2,688 $ 4,183 $ 4,091
======== ======== ======== ======== =========
Net income per share (2) $ 0.45 $ 0.35 $ 0.62 $ 0.98 $ 1.23
======== ======== ======== ======== =========
Weighted average common and
common equivalent shares (2) 4,464 4,321 4,329 4,269 3,313
BALANCE SHEET DATA:
Working capital $ 25,954 $ 23,317 $ 22,229 $ 19,074 $ 15,035
Total assets 50,037 43,823 41,175 29,919 23,969
Line of credit and current portion of long-term debt 5,540 700 700 200 6
Long-term debt 2,325 1,750 2,450 300 502
Stockholders' equity 30,778 28,091 26,380 22,171 17,647
</TABLE>
- ----------
(1) For ease of presentation, the Company has indicated its fiscal year as
ending on September 30; whereas, in fact, the Company reports on a 52-53
week fiscal year ending on the last Sunday in September. Fiscal 1997, which
ended on September 28, 1997, and fiscal 1995 through 1993 which ended on
September 24, 1995, September 25, 1994 and September 26, 1993,
respectively, each included 52 weeks. Fiscal 1996, which ended on September
29, 1996, included 53 weeks.
(2) Net income per share and weighted average common and common equivalent
shares were calculated assuming that the Preferred Stock and accrued
dividends were converted into Common Stock for all periods presented prior
to the Company's initial public offering in May 1993. All outstanding
Preferred Stock and accrued dividends in fact were converted into Common
Stock on May 19, 1993.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For ease of presentation, the Company has indicated its fiscal year as ending on
September 30; whereas, in fact, the Company reports on a 52-53 week fiscal year
ending on the last Sunday in September. Fiscal 1997, which ended on September
28, 1997, and fiscal 1995, which ended on September 24, 1995, each included 52
weeks. Fiscal 1996, which ended on September 29, 1996, included 53 weeks.
The following table sets forth for the years indicated certain financial data as
a percentage of net sales:
YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Gross margin 37.1 38.7 36.8
Engineering, research and development 8.3 8.6 7.7
Selling and marketing 17.4 16.9 16.4
Administrative and general 7.2 7.8 6.4
Income from operations 4.2 5.4 6.3
Income before income taxes 3.7 3.4 5.8
Net income 2.4 2.1 4.3
Net Sales. The Company derives net sales from the sale of its assembly products
and peripherals, screen printers, reflow ovens, the resale of products
manufactured by third-parties and services. Sales are recorded upon shipment of
products configured to meet customer application requirements. Net sales
increased $10,132,000 or 14.2% in 1997 and $9,000,000 or 14.4% in 1996 over net
sales in the respective preceding years. The increase in net sales in 1997 was
primarily attributable to commencement of sales of newly introduced products and
to increased sales of recently introduced products. Net sales for 1997 included
$16,200,000 of sales for the QSV-1 assembler, the QSA-30 assembler and the APS-1
assembler, for which no sales were recognized during the prior year.
Additionally, net sales of products first introduced in 1996 contributed an
incremental $7,700,000 to net sales in 1997.
Sales of the "Q" series of products, excluding the Q1000 and QSA-30, which do
not incorporate "Q-Soft" software, represented 40.7% and 34.4% of net sales in
1997 and 1996, respectively. The increase of the "Q" series to 40.7% of net
sales primarily reflects commencement of shipment of the QSV-1 assembler. Sales
of the "C" series of products represented 13.1% and 30.0% of net sales in 1997
and 1996, respectively. The Company believes that sales of the "C" series will
continue to decrease.
Net sales also included increased sales of screen printers and reflow ovens as
sales under "Quadline" have continued to expand. "Quadline" is the Company's
marketing program offering the major elements of SMT production lines on a
turnkey basis, including assemblers, screen printers and reflow ovens. During
1997 and 1996, sales of such systems accounted for approximately 33% and 30% of
net sales, respectively.
The Company continues to experience international growth. The Company derives
its international sales from two wholly-owned foreign subsidiaries in England
that both manufacture and sell products, as well as from international sales
shipped from its U.S. operations. International sales increased to $35.7 million
in 1997 from $30.6 million in 1996, an increase of 16.7%. International sales
accounted for
14
<PAGE>
43.7%, 42.8% and 38.6% of the Company's net sales for the years 1997, 1996 and
1995, respectively. The Company believes that international sales will continue
to be a significant percentage of net sales.
In 1996, net sales increased $9,000,000 or 14.4% over 1995. The growth in net
sales during 1996 was primarily due to the inclusion in sales for a full year of
the QSP-2 assembler and commencement of sales of the AVX-400 screen printer, the
QSX-1 assembler and the "Profile" series of reflow ovens. Sales of "Q" series
products represented 34.4% and 16.6% of net sales in 1996 and 1995,
respectively. The increase in "Q" series sales reflected increased market
penetration and market acceptance of the QSP-2 and, as previously noted,
commencement of shipment of the QSX-1. Sales of the "C" series of products
represented 30.0% and 43.4% of net sales in 1996 and 1995, respectively. The
Company believes that the decrease in sales of the "C" series was due to sales
of the QSP-2 product and increased competition. 1996 sales also included
increased sales of screen printers as 1996 was the first full year of inclusion
of sales from SMTech Limited, which was acquired in early 1995. In addition,
sales of screen printers and reflow ovens also increased as sales under
"Quadline" expanded.
Sales results for any particular year may not be indicative of results for
future years. The rate of technological change in the SMT industry, including
advances in component packaging, device design technologies and required
software development, together with intense competition, represent continuous
pressures on the Company. The Company believes that the SMT industry is entering
the initial stages of a transition period with respect to certain aspects of the
technology and marketing of SMT products, with a focus on advanced packaging
technology. Failure by the Company to successfully respond in a timely fashion
to such changes and competition or to customers' requirements, with enhanced
products and marketing, would have a material adverse effect on the Company.
There can be no assurance that the Company will be successful in responding to
such changes or in meeting such requirements. In addition, the nature and extent
of such changes and requirements and the Company's ability to respond to such
changes and requirements cannot be predicted. With respect to the Company's
near-term expectations, order bookings activity to date in the first quarter of
fiscal 1998 has been below prior expectations. This rate of order bookings could
adversely affect net sales and gross margins as competition increases for those
orders.
Gross Margin. Gross margin (gross profit as a percentage of net sales) decreased
to 37.1% in 1997 from 38.7% in 1996 and decreased to 36.3% in the fourth quarter
of 1997 from 39.8% in the third quarter of 1997. Gross profit during these
comparative periods was negatively affected by lower margins in all major
product lines as a result of competitive pricing pressures and from commencement
of sales of the QSA-30, which contributes lower margins as a result of it being
manufactured by a third party. Gross margin for 1997 was also adversely affected
by a continuing shift in product mix from the "C" series to the "Q" series. The
Company expects that competitive pressures and product mix will cause gross
margin for the first half of fiscal 1998 to decline further from the 36.3% level
achieved in the fourth quarter of 1997. However, the Company believes that if it
is successful in increasing sales of the recently introduced APS-1 assembler,
which is expected to have higher margins, and also achieves success in the
second half of 1998 with other new products and product enhancements, gross
margin improvement could commence during the second half of fiscal 1998. There
can be no assurance, however, that the Company will be successful in these
efforts, especially in view of the rate of technological change and issues that
ordinarily arise in the introduction of a new advanced technology product.
Several APS-1 systems have been sold and installed at various locations
throughout the world. Customer applications including Flip Chip and Chip on
Board processes are currently meeting customer expectations. However, one
specific application for Chip Scale packaging, which required adding heat to
the bond head, has not met customer requirements, and accordingly, the
customer has returned this system to Quad for additional testing, analysis
and redesign.
In 1996, gross margin increased to 38.7% from 36.8% in 1995. Gross margin
improved as a result of higher margins from sales of the "C" series, screen
printers and the absence of a provision for product returns and allowances
relating to the "Q" series, partially off-set by lower margins on the "Q"
series.
15
<PAGE>
The Company believes that the "C" series gross margin improvement was due to
fewer sales of higher discounted multiple-headed "C" series products. Gross
margins on screen printer sales also improved as the Company was no longer a
reseller of screen printers subsequent to the acquisition of SMTech. "Q" series
gross margins decreased as a result of expanded sales to contract manufacturers,
which in turn resulted in lower average selling prices, and with low margins on
the then recently introduced QSX-1.
Engineering, Research and Development Expenses. Engineering, research and
development expenses increased $606,000 or 9.8% in 1997 over 1996 due to
increased spending to support product development activities related to the
APS-1 assembler, a new screen printer to be introduced in 1998 and continuing
enhancements to the "Profile" series of reflow ovens. The APS-1 assembler is an
advanced packaging assembler product that is being developed to meet new market
opportunities taking place in semiconductor packaging technologies, such as chip
scale packaging and flip chip assembly. However, there can be no assurance that
the Company will successfully market and sell the APS-1 assembler.
During 1996, engineering, research and development expenses increased $1,309,000
and were 27.0% higher than the preceding year, supporting product development
activities related to an expanded "Q" series product line, the AVX-400 screen
printer and the new "Profile" series of reflow ovens.
Selling and Marketing Expenses. Selling and marketing expenses increased
$2,121,000 or 17.6% in 1997 as compared to last year. This increase was
primarily due to expenses associated with higher sales volume, higher commission
rates associated with changes to the Company's sales incentive programs,
increased promotion and trade show costs and higher field service customer
support costs.
During 1996, selling and marketing expenses increased $1,800,000 or 17.5%
compared to the prior year. This increase was primarily due to expenses
associated with higher sales volume, higher advertising and trade show costs, a
change in the Company's sales and service management structure, increased hiring
of personnel in support of international sales and higher spending in support of
customer demonstrations.
Administrative and General Expenses. Administrative and general expenses
increased $351,000 or 6.3% over last year, primarily reflecting an increased
provision for doubtful accounts associated with a higher accounts receivable
balance partially attributable to timing of sales within the fourth quarter of
fiscal 1997.
In 1996, administrative and general expenses increased $1,564,000 or 39.1% over
the preceding year reflecting increased employee compensation, a full year of
expenses after the acquisition of SMTech, costs incurred in connection with the
Company's planned relocation and consolidation to a new operating and
manufacturing facility, increased operating costs associated with the expansion
of SMTech into larger facilities and legal costs associated with the patent
litigation discussed below.
Income Tax Expense. The Company's effective income tax rate was 35.0%, amounting
to $1,070,000 in 1997, 38.0%, amounting to $915,000 in 1996 and 26.0%, amounting
to $945,000 in 1995. Income tax expense differs from the amount that would
result from applying the Federal statutory tax rate to pretax income primarily
due to permanent differences in taxable income versus book income, partially
offset by benefits realized from the Company's foreign sales corporation. The
decrease in the 1997 effective tax rate is principally due to a non-recurring
benefit from research and development tax credit claims associated with prior
years. The Company expects an effective tax rate in the 37%-38% range for fiscal
1998.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to $26.0 million as of September 30,
1997, including cash balances of $2.0 million, compared to working capital of
$23.3 million as of September 30, 1996, including cash balances of $2.6 million.
The most significant change to working capital from the prior year was an
increase in accounts receivable of $5.4 million financed principally by $4.9
million of incremental borrowings under the Company's unsecured revolving line
of credit. The primary reason for the increase in accounts receivable was the
timing of sales within the fourth quarter of fiscal 1997 compared to the same
period last year.
The Company has a revolving line of credit agreement which permits borrowings up
to a maximum of $10,000,000 and bears interest at the bank's base rate of
interest (6.9% as of September 30, 1997) or at the Company's option, the bank's
prime rate or LIBOR plus 1.30% when the outstanding balance is greater than
$500,000. This line of credit is secured by a pledge by the Company's United
Kingdom holding company, Quad Systems Holdings Limited, of 65% of the
outstanding shares of its two wholly-owned United Kingdom operating
subsidiaries. The Company pays a fee of .25% on the unused portion of the line
of credit. This credit agreement expires in April 2000. The line of credit
agreement restricts the payment or declaration of any dividends on an annual
basis in excess of 50% of such year's pre-tax income. This line of credit
agreement also contains various operating and reporting covenants and requires
maintenance of certain financial ratios. As of September 30, 1997, total
borrowings under this line of credit were $4,920,000. Prior to April 1997, the
Company had a revolving line of credit that permitted borrowings up to a maximum
of $8,000,000 with similar terms as in the $10,000,000 credit agreement.
Subsequent to September 30, 1997, the Company obtained an increase to its
existing line of credit whereby an additional $2,500,000 is available. This
$2,500,000 increase expires on April 30, 1998.
The Company invested $2,099,000 in equipment and leasehold improvements in 1997
as compared to $1,559,000 in 1996 and $1,077,000 in 1995. During January 1997,
the Company relocated its corporate headquarters and U.S. manufacturing facility
to a leased facility in Willow Grove, Pennsylvania. This new facility is being
leased for a period of ten years and provides the Company with additional
capacity to allow for continued growth and the opportunity for increased
efficiencies in its manufacturing operations. Capital spending for 1997 included
significant costs associated with site preparation and internal furnishings for
the new facility in addition to significant expenditures supporting upgrades to
computer hardware and software. Most of these expenditures are not expected to
repeat next year, and therefore, the Company expects that 1998 capital additions
will be lower than the 1997 level, although there can be no assurance that the
Company will achieve this objective.
In 1995, the Company obtained a $3,500,000 term loan to finance the acquisition
of SMTech. During 1997, the Company obtained a new $3,100,000 term loan, the
proceeds of which were used to pay off the outstanding balance of the then
existing term loan in the amount of $2,100,000 and to finance leasehold
improvements and furniture and fixtures purchased in connection with the
Company's move to the new facility noted above.
The Company believes that existing cash balances and borrowing capacity will be
sufficient for the Company to meet its working capital needs through fiscal
1998.
BACKLOG
Backlog of orders as of September 30, 1997, totaled $11.3 million compared to
$12.5 million as of September 30, 1996. Backlog includes $6.7 million of
assemblers, $1.5 million of screen printers and $.8 million of reflow ovens
compared with $9.0 million of assemblers, $1.1 million of screen printers and
$.8
17
<PAGE>
million of reflow ovens as of September 30, 1996. The remainder of backlog
consists of other products. The Company expects to ship all backlog orders
outstanding at September 30, 1997 during fiscal 1998. It has been the Company's
experience that purchasers of capital equipment have not issued purchase orders
calling for delivery of products over an extended period. Therefore, backlog may
not necessarily be indicative of future sales.
SAMSUNG AGREEMENTS
In July 1997, the Company reached an agreement with Samsung Aerospace
Industries, Ltd. ("Samsung") for the sale and distribution of the QSA-30
assembler. Under the terms of the agreement, the Company has an exclusive right
to distribute and sell the QSA-30 assembler in North America, Europe and South
America and a non-exclusive right to sell in Asia, except in Korea. The contract
covers a term of two years, subject to extension, and has a targeted goal for
Quad to purchase a minimum of 150 assemblers at a pre-determined price per unit
during the first year of the contract, although Samsung's remedy if this target
is not met is to terminate the agreement. The number of assemblers to be
purchased and their purchase price during the remainder of the contract is to be
negotiated.
In June 1996, the Company reached an agreement with Samsung for the supply of
component tape feeders. Under the terms of this agreement, the Company granted
an exclusive license (subject to certain exceptions in favor of the Company) to
Samsung for Samsung to become the Company's sole supplier of component tape
feeders, which are currently used on all of the Company's placement systems. The
contract covers a six year period and requires Quad to purchase a minimum of
40,000 component tape feeders with the value of at least $6.8 million during the
first two years of the contract, although Samsung's remedy if this target is not
met is to terminate the agreement. The number of tape feeders to be purchased
during the remainder of the contract term will be negotiated. Samsung is
required to pay to Quad a total of $300,000 representing a combination of
licensing fees and a reimbursement for expenses incurred in transferring the
Company's technology to Samsung for use in the production of the component tape
feeders. The Company expects Samsung to begin to supply component tape feeders
to the Company during fiscal 1998.
PATENT INFRINGEMENT LAWSUIT
In July 1996, the Company was named a defendant in a patent infringement lawsuit
filed by The Zevatech Group in the federal district court in Munich, Germany.
The complaint alleges that the Company infringed on the plaintiff's German
patents relating to pick and place assemblers. The Company has responded with an
action against the plaintiff in Munich, Germany seeking to have such plaintiff's
patents invalidated. Management believes the lawsuit to be without merit or the
Company has meritorious defenses and intends to vigorously defend itself against
the lawsuit. Accordingly, no provision for this lawsuit has been recorded during
1996 or 1997.
SETTLEMENT OF SECURITIES LITIGATION
In March 1995, a shareholder of the Company filed a complaint in the United
States District Court for the Eastern District of Pennsylvania (the "Action")
against the Company, two of its executive officers and two of its directors (one
of which was also sued as an executive officer) alleging that, during the period
December 23, 1994 through March 7, 1995, the defendants knowingly or recklessly
misrepresented or omitted material information about the Company, its prospects
and earnings, and knowingly or recklessly misrepresented or omitted information
about the status and operation of certain software used in the Company's
products in violation of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, as amended, and common law. During the year ended September 30, 1996,
the Company, to avoid the
18
<PAGE>
uncertainties of litigation and without admitting any wrongdoing of any of the
claims alleged in the Action, entered into a final settlement agreement and
related documents, which has received court approval. Under this agreement, the
Company, together with its directors and officers liability insurer, paid an
aggregate of $2,450,000 in settlement of all claims. Total cost (including legal
fees) to the Company, net of the amount paid by such insurer, was $1,467,000
IMPACT OF YEAR 2000 SOFTWARE ISSUES
The Company believes that the advent of the Year 2000 will not cause material
issues in regard to either its internal business operating systems or its
internal engineering research and development systems. However, the Company has
not determined the impact, if any, on software that either is currently being or
previously was provided to its customers.
Accordingly, the Company is undertaking a study to determine the extent, if any,
that software currently or previously supplied by the Company needs to be
modified to accommodate customer requirements. The cost of this study and any
resulting modifications required, if any, can not be reasonably estimated at
this time but may be material.
The Company also plans to initiate formal communications with all of its
significant suppliers in an effort to determine the extent to which the Company
may be vulnerable to those third parties who fail to remediate their own year
2000 issues. However, upon completion of this project, there can be no assurance
that the systems of other companies on which the Company relies will be timely
converted, or that such failure to convert by another company would not have an
adverse effect on the Company.
FORWARD LOOKING STATEMENTS
The discussions above regarding the Company's expectations of future sales,
gross margins, operating expenses, facilities relocation, scheduling of new
product introductions, quote activity, order bookings, expected shipment dates,
and supply of tape feeders and assemblers manufactured by a third party include
certain forward-looking statements on these subjects. As such, actual results
may vary materially from such expectations. Among the meaningful factors that
may affect the realization of such expectations are variations in the level of
order bookings, which can be affected by general economic conditions and growth
rates in the SMT manufacturing industry and the intensity of competition,
product development delays or performance problems or difficulties in
penetrating the advanced packaging market, difficulties or delays in software
functionality and performance, the timing of future software releases, failure
to respond adequately either to changes in technology or to customer
preferences, failures in the source of supply for tape feeders or assemblers
manufactured by a third party, failure to successfully defend itself against the
patent infringement litigation, risks of nonpayment of accounts receivable or
changes in forecasted costs, including unexpected required additional
engineering costs.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended September 30, 1997 and 1996. This information is derived from unaudited
financial statements of the Company that include, in the opinion of the Company,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation when read in conjunction with the consolidated financial
statements and footnotes of the Company.
19
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1997 Quarter Ended Fiscal 1996 Quarter Ended
------------------------------------------------- ------------------------------------------------
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
1997 1997 1997 1996 1996 1996 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $21,071 $16,975 $21,712 $21,965 $20,491 $18,382 $15,834 $16,884
Gross profit 7,639 6,762 7,905 8,000 7,991 7,328 6,472 5,888
Engineering, research and
development 1,642 1,651 1,905 1,561 1,645 1,565 1,528 1,415
Selling and marketing 3,695 3,383 3,426 3,693 3,310 3,102 2,930 2,734
Administrative and general 1,464 1,420 1,409 1,619 1,750 1,365 1,283 1,163
Income from operations 838 308 1,165 1,127 1,286 1,296 731 576
Net income 448 127 707 705 786 84 354 268
Net income per share $ 0.10 $ 0.03 $ 0.16 $ 0.16 $ 0.18 $ 0.02 $ 0.08 $ 0.06
Weighted average common and
common equivalent shares 4,435 4,462 4,520 4,446 4,362 4,328 4,289 4,310
</TABLE>
The following table sets forth for the quarters indicated the percentage of net
sales represented by the indicated items:
<TABLE>
<CAPTION>
Fiscal 1997 Quarter Ended Fiscal 1996 Quarter Ended
-------------------------------------------- -------------------------------------------------
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
1997 1997 1997 1996 1996 1996 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin 36.3% 39.8% 36.4% 36.4% 39.0% 39.9% 40.9% 34.9%
Engineering, research and
development 7.8% 9.7% 8.8% 7.1% 8.0% 8.5% 9.7% 8.4%
Selling and marketing 17.5% 19.9% 15.8% 16.8% 16.2% 16.9% 18.5% 16.2%
Administrative and general 6.9% 8.4% 6.5% 7.4% 8.5% 7.4% 8.1% 6.9%
Income from operations 4.0% 1.8% 5.4% 5.1% 6.3% 7.1% 4.6% 3.4%
Net income 2.1% 0.7% 3.3% 3.2% 3.8% 0.5% 2.2% 1.6%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and consolidated financial statements and
financial statement schedule of the Company required by this item are filed as
exhibits hereto, are listed under Item 14(a)(1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is contained in Part I of the Form 10-K, and is hereby
incorporated by reference thereto.
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 1934 Act requires the Company's officers and directors and
persons who own more than ten percent of its Common Stock to file reports with
the Securities and Exchange Commission disclosing their ownership of stock in
the Company and changes in such ownership. Copies of such reports are also
required to be furnished to the Company. Based solely on a review of the copies
of such reports received by it, the Company believes that, during fiscal 1997,
all such filing requirements were complied with, except that Mr.
Smith filed one late Form 4 to report a sale of 351 shares of Common Stock..
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation paid
and accrued during each of the last three fiscal years to the Company's Chief
Executive Officer and each of the other persons serving as the Company's four
other executive officers as of the end of the Company's last fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------- ------------
SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS (#) ($) (1)
- --------------------------- ---- --- --- ----------- -------
<S> <C> <C> <C> <C> <C>
David W. Smith 1997 195,700 45,000 10,000 1,000
President and Chief Executive 1996 190,000 154,875 20,000 1,000
Officer 1995 169,731 22,500 10,000 1,000
Joseph L. Gasper 1997 133,900 15,000 5,000 1,000
Senior Vice President, 1996 130,000 88,500 10,000 1,000
Operations 1995 119,885 20,000 5,000 1,000
Anthony R. Drury 1997 128,750 20,000 5,000 1,000
Senior Vice President, Finance 1996 125,000 88,500 10,000 1,000
and Chief Financial Officer 1995 113,885 11,000 5,000 1,000
Ian H. Henderson 1997 98,980 18,588 4,000 6,124
Senior Vice President, 1996 80,828 12,507 7,000 674
European Operations 1995 73,480 31,268 5,000 --
Terry D. Ellis(2) 1997 90,000 12,000 21,000 --
Vice President, 1996 25,309 5,000 5,000 --
North American Sales and
Customer Support
</TABLE>
21
<PAGE>
(1) Consists of the Company's matching payments under its 401(k) Plan, except
for Mr. Henderson for whom the amounts shown represent the Company's
contribution under an English personal pension plan.
(2) Mr. Ellis joined the Company in June 1996, and his annualized base salary
was then expected to be approximately $80,000.
STOCK OPTION GRANTS
The following table sets forth certain information with respect to individual
grants of stock options during the year ended September 30, 1997 to the
Company's Chief Executive Officer and each of the Company's four other executive
officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (1)
------------------------------------------------------------- ----------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES OR BASE
GRANTED IN FISCAL PRICE EXPIRATION
NAME (#) (2) YEAR ($/SH) DATE 5% ($) 10%($)
---- ------- ---- ------ ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
David W. Smith 10,000 4.5% $ 8.625 09/11/07 $ 54,242 $137,460
Joseph L. Gasper 5,000 2.2% $ 8.625 09/11/07 $ 27,121 $ 68,730
Anthony R. Drury 5,000 2.2% $ 8.625 09/11/07 $ 27,121 $ 68,730
Ian H. Henderson 4,000 1.8% $ 8.625 09/11/07 $ 21,697 $ 54,984
Terry D. Ellis 15,000 6.7% $ 10.625 03/05/07 $100,230 $254,003
5,000 2.2% $ 10.000 07/24/07 $ 31,445 $ 79,687
1,000 0.4% $ 8.625 09/11/07 $ 5,424 $ 13,746
------ ---- -------- --------
21,000 9.3% $137,099 $347,436
</TABLE>
(1) Potential realizable value is based on the assumed annual growth rates
compounded annually for the ten-year option term. The dollar amounts set
forth under this heading are the result of calculations at the 5% and 10%
assumed rates set by the Securities and Exchange Commission and are not
intended to forecast possible future appreciation, if any, of the stock
price of the Company.
(2) The options granted in September 1997, with terms of 10 years, vest and
become exercisable on September 11, 2002. The 15,000 options and the 5,000
options granted to Mr. Ellis in March 1997 and July 1997, respectively,
vest in five annual installments beginning one year after the date of
grant.
22
<PAGE>
STOCK OPTION EXERCISES AND HOLDINGS
The following table sets forth information relating to options exercised during
the year ended September 30, 1997 by the Company's Chief Executive Officer and
each of the Company's four other executive officers and presents the value of
unexercised options held by such individuals as of September 30, 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR END (#) FISCAL YEAR END ($) (2)
----------------------------- ------------------------------
SHARES VALUE
ACQUIRED ON REALIZED
NAME EXERCISE ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David W. Smith 5,000 $ 35,205 150,000 62,500 $428,750 $ 23,125
Joseph L. Gasper 16,000 $137,996 37,500 29,750 $ 56,188 $ 9,875
Anthony R. Drury -- $ -- 56,300 29,750 $152,538 $ 9,875
Ian H. Henderson -- $ -- 13,334 21,333 $ 15,001 $ 6,250
Terry D. Ellis -- $ -- 1,000 25,000 $ 625 $ 2,500
</TABLE>
- ----------
(1) Value realized is based upon the difference between the last sale price of
the Company's Common Stock on The Nasdaq Stock Market on the dates of
exercise and the exercise price of the options, multiplied by the number of
shares acquired on exercise of the option.
(2) Total value of "in-the-money" unexercised options is based upon the
difference between the last sale price of the Company's Common Stock on The
Nasdaq Stock Market on September 26, 1997 ($8.125 per share) and each
exercise price of the various "in-the-money options" held by such person,
multiplied by the number of "in-the-money" option shares.
COMPENSATION OF DIRECTORS
Non-employee directors of the Company are paid a $1,000 fee for attendance at
each meeting and a $250 fee for each telephonic meeting of the Board of
Directors. The directors are also reimbursed for their out-of-pocket expenses
incurred in connection with the meetings. Effective July 24, 1997, each
non-employee director in office on each October 1 commencing October 1, 1998
shall be paid a $5,000 retainer for services provided to the Company for the
prior year or, to the extent such person did not so serve for the entire prior
year, such retainer payment will be made on a pro rata basis for the period
served.
Pursuant to the terms of the Company's 1993 Stock Option Plan (the "Plan"), as
amended on July 24, 1997, each non-employee director, upon first being elected
to the Board of Directors after July 24, 1997, shall be granted an option to
purchase 6,000 shares of Common Stock exercisable in three equal installments on
the first three anniversary dates of the date of grant, at an exercise price
equal to the fair market value of the shares on the date of grant. In addition,
each such director will receive a grant of 2,000 shares with an exercise price
determined on the same basis every year thereafter, which options become
exercisable on the third anniversary of the date of grant. Also on July 24,
1997, each non-employee director was granted an option to purchase an additional
3,000 shares exercisable over three years, so that the optionee shall have the
right to exercise the
23
<PAGE>
option with respect to one third of the shares covered thereby commencing on the
first anniversary of the date of grant with respect to the initial grant
received upon first being elected to the Board of Directors.
To date, each of Messrs. Bergman, Pinkas, Randall and Young has received, under
the Plan, 10,000 options for their service as directors, at exercise prices
ranging from $7.00 to $11.25 and Mr. Erdekian has received a total of 7,000
options for his services, at exercise prices ranging from $7.50 to $10.00
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
REPORT OF THE STOCK OPTION AND COMPENSATION COMMITTEE
The Company's compensation policy with respect to its executive officers
reflects two basic principles. First, compensation should, to a significant
extent, reflect the financial performance of the Company. Second, a portion of
an executive officers' compensation should provide long-term incentives that
will tie long-term rewards for the executive officers to increases in
stockholder values. The Company has traditionally attempted to effect its
compensation policy through three separate components: salary, bonus and stock
options.
Annual Compensation
Annual cash compensation is comprised of a base salary and a bonus award. The
Committee establishes annual salaries by evaluating individual performances and
the level of the executive's responsibility and experience. In addition, the
Committee considers marketplace valuations of comparable executives of other
companies in related industries, comparable in size with the Company, although
salary determinations have not been based upon any specific criteria of
compensation. Nevertheless, the members of the Stock Option and Compensation
Committee, who either are affiliated with venture capital firms (Mr. Bergman) or
a NYSE company (Mr. Erdekian) and have experience in setting compensation for
companies in similar stages of development, believe that salaries of the
executive officers in fiscal 1997 were modest, considering the scope of the
Company's operations and the respective responsibilities and achievements of the
executive officers. Annual adjustments in base salaries typically are made
effective at the beginning of the fiscal year for which they are intended to
apply and therefore reflect in large part prior year's business and individual
performance achievements. During fiscal 1997, salary increases for the executive
officers (except for Mr. Ellis and Mr. Henderson) were three percent. The
increases in salary for Mr. Ellis and Mr. Henderson reflect their promotions to
Vice President of North American Sales and Customer Support and Senior Vice
President of European Operations, respectively.
Bonus awards are made pursuant to criteria established toward the beginning of
each fiscal year. A portion of the bonus, which comprised approximately 70% of
the maximum bonus payable during the 1997 fiscal year, is non-discretionary and
in 1997 is based upon the Company's achievement of specified levels of net
income determined by the Committee in the relevant fiscal year. The amount of
bonus is subject to minimum and maximum specified levels of net income. The
Company's net income was less than the minimum net income level previously
determined by the Committee; accordingly, the non-discretionary bonuses were not
paid to any of the executives.
The remaining portion of the bonus is discretionary and is based on the
Committee's judgment concerning the achievement by the executive officer of
certain stated objectives specifically related to that executive's functional
responsibilities. The executive officers received a range from 50% to 86% of the
discretionary bonuses, based upon the Committee's assessment of the level of
achievement with respect to the stated objectives. If maximum bonuses are
awarded, the amounts are reduced by the amount of the Company's contributions to
its 401(k) and profit sharing plans for the employee. The discretionary bonus
for Mr. Smith was based on criteria that included, among others, (i) improvement
of customer satisfaction and reduction in warranty costs; (ii) completion of the
semiconductor strategic plan and (iii) joint venture for development of new
products.
24
<PAGE>
Long Term Compensation - Stock Options
The stock option component of the executive officers' compensation package is
designed to provide incentive for the enhancement of stockholder value, since
the full benefit of stock option grants will not be realized unless there has
been appreciation in per share values over several years. In this regard,
options have been granted at fair market value on the date of grant and vest in
five years, except for certain options granted to Mr. Ellis which vest in equal
annual installments over five years. The number of shares subject to each grant
is set at a level intended to create an opportunity for stock ownership based on
the officer's current position with the Company and the individual's personal
performance in recent periods. The Committee also takes into account the number
of vested and unvested options held by the executive officer in order to
maintain an appropriate level of equity incentive for that individual. However,
the Committee does not adhere to any specific guidelines as to the relative
option holdings of the Company's executive officers. The options granted to each
executive officer is detailed in the Option Grants in Last Year table.
Deferred Compensation Plan
The Company maintains a deferred compensation plan, pursuant to which certain
executive officers may elect to defer a portion of their annual compensation.
The participant's funds are invested among various investment vehicles
designated by the plan administrators. Upon the death or retirement of a
participant, the funds attributable to the participant (including any earnings
on contributions) are distributed to the participant or the participant's
beneficiary in a lump sum or in annual installments over various selected
periods.
Qualifying Executive Compensation for Deductibility Under Provisions of the
Internal Revenue Code
The Internal Revenue Code of 1986, as amended (the "Code"), provides that a
publicly held corporation generally may not deduct compensation for its chief
executive officer or each of certain other executive officers to the extent that
such compensation exceeds $1,000,000 for the executive. The Committee intends to
take such actions as are possible and appropriate to qualify compensation paid
to executives for deductibility under the Code. In this regard, the Committee
notes, however, that base salary and bonus levels are expected to remain well
below the $1,000,000 limitation in the foreseeable future.
JAMES R. BERGMAN VAHRAM V. ERDEKIAN
PERFORMANCE GRAPH
The chart below compares the cumulative total stockholder return of the Company
with the cumulative total return on the S & P 500 Stock Index and the Hambrecht
& Quist Technology Index. Information relating to the Company begins on May 12,
1993 (the first date on which the Company's Common Stock was publicly traded).
COMPARISON OF 51 MONTH CUMULATIVE TOTAL RETURN*
AMONG QUAD SYSTEMS CORPORATION, THE S & P 500 INDEX AND THE HAMBRECHT &
QUIST TECHNOLOGY INDEX
<TABLE>
<CAPTION>
5/12/93 9/93 9/94 9/95 9/96 9/97
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Quad Systems Corporation 100 197 200 126 128 113
S & P 500 100 104 108 140 169 237
H & Q TECHNOLOGY 100 104 119 199 220 341
</TABLE>
- ----------
* $100 invested on 5/12/93 in stock or on 4/30/93 in index-including
reinvestment of dividends.
25
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The table below sets forth certain information as of December 22, 1997 regarding
the beneficial ownership (as defined in regulations of the Securities and
Exchange Commission) of Common Stock of (i) each director and executive officer
of the Company; (ii) each nominee for director; (iii) all directors and
executive officers as a group; and (iv) each person known to the Company to own
beneficially 5% or more of its Common Stock. Unless otherwise specified, the
named beneficial owner has sole voting and investment power. The information in
the table below was furnished by the owners listed. Shares issuable pursuant to
the exercise of stock options are included in the table below if such options
are currently exercisable or exercisable by February 20, 1998 (60 days after the
date above).
NUMBER OF PERCENT
NAME SHARES OF CLASS
---- ------ --------
James R. Bergman(1) 53,254 1.2%
Anthony R. Drury(1) 76,865 1.8%
Terry D. Ellis(1) 1,000 *
Vahram V. Erdekian 2,000 *
Joseph L. Gasper(1) 41,500 1.0%
Ian H. Henderson(1) 16,667 *
Lorin J. Randall(1) 32,338 *
Robert P. Pinkas(1) 38,890 *
David W. Smith(1) 171,008 3.9%
David H. Young(1) 36,000 *
All Directors and Executive 469,522 10.8%
Officers as a group(1)(10 persons)
FMR Corp.(2,4) 421,700 9.7%
82 Devonshire Street
Boston, MA 02109
Cowen & Company(3,4) 259,800 6.0%
Financial Square
New York, NY 10005
- ----------
* Less than 1%.
1. The amounts shown include shares covered by options exercisable within 60
days of December 22, 1997, as follows: 4,000 shares each, Messrs. Bergman,
Randall, Pinkas and Young; 1,000 shares each, Messrs. Erdekian and Ellis;
60,300 shares, Mr. Drury; 41,500 shares, Mr. Gasper; 13,334 shares, Mr.
Henderson; 160,000 shares, Mr. Smith; and 293,134 shares, all directors and
executive officers as a group.
2. FMR Corp., as the parent holding company of Fidelity Management and
Research Company, its wholly-owned subsidiary, owns the shares reported.
FMR Corp. has sole dispositive power with respect to all of the shares
reported.
3. Cowen and Company has both shared dispositive and voting power with respect
to all of the shares reported.
4. Based solely on information contained in filings with the Securities and
Exchange Commission pursuant to Section 13(d) or 13(g) of the 1934 Act.
26
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1997, the Company purchased from Two Technologies, Inc. ("Two
Technologies") certain hand-held computers used in the Company's products. David
H. Young, a director of the Company, is the President of Two Technologies. The
Company paid a total of $38,837. Also during fiscal 1997, Two Technologies
purchased SMT process equipment from the Company in amounts totaling $243,421.
The Company's transactions with Two Technologies were made at prices and on
terms comparable to other arms'-length purchases and sales by the Company and
the Company believes that such was also the case with respect to Two
Technologies' transactions with the Company.
During fiscal 1997, the Company received general contracting services for
leasehold improvements at its Willow Grove facility from a son of Joseph L.
Gasper, the Senior Vice President, Operations of the Company. The amount paid in
fiscal 1997 totaled $70,855. Mr. Gasper has informed the Company that, other
than his familial relationship with his son, who does not reside in Mr. Gasper's
household, Mr. Gasper has no direct or indirect interest in the services
provided by his son to the Company.
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.
Consolidated Balance Sheets as of September 30, 1997 and 1996.
Consolidated Statements of Income for the years ended September 30, 1997,
1996 and 1995.
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended September 30,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts.
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
Consolidated Financial Statements or the Notes thereto.
3. LISTING OF EXHIBITS
EXHIBIT
NO. DESCRIPTION
--- -----------
3.1 Certificate of Incorporation of the Registrant, as amended -
Incorporated by reference to Exhibit 3.1 to Amendment No. 2 to
the Registrant's Registration Statement on Form S-1 (No.
33-60588) filed with the Securities and Exchange Commission on
May 7, 1993.
3.2 By-Laws of the Registrant, as amended - Incorporated by
reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (No. 33-60588) filed with the Securities
and Exchange Commission on April 5, 1993.
*10.1 1986 Stock Option Plan, as amended - Incorporated by reference
to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-8 (No. 33-71590) filed with the Securities and Exchange
Commission on November 12, 1993.
o*10.2 1993 Stock Option Plan, as amended.
*10.3.1 Deferred Compensation Agreement dated September 30, 1994,
between the Company and David W. Smith - Incorporated by
references to Exhibit 10.3.1 filed under the Company's Annual
Report on Form 10-K for the fiscal year ended September 24,
1995.
*10.3.2 Deferred Compensation Agreement dated September 30, 1994,
between the Company and Anthony R. Drury - Incorporated by
reference to Exhibit 10.3.2 filed under the Company's Annual
Report on Form 10-K for the fiscal year ended September 24,
1995.
28
<PAGE>
10.4.1 Agreement relating to the acquisition of capital shares in
SMTech Limited, dated January 27, 1995, among the Company,
Investech SA and Messrs. David Wheatley and Richard Willshere -
Incorporated by reference to Exhibit 2.1 filed under the
Company's Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 27, 1995.
10.4.2 Consulting agreement dated January 27, 1995, among the Company,
Mr. Dominique Henry, Quad Europe Limited, Quad Holdings Limited
and SMTech Limited - Incorporated by reference to Exhibit 2.2
filed under Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 27, 1995.
10.5 Lease dated August 27, 1996, between the Registrant and Marave
Associates, L.P. - Incorporated by reference to Exhibit 10.5.2
filed under the Company's Annual Report on Form 10-K for the
fiscal year ended September 29, 1996.
10.6 Agreement dated March 19, 1993, among the Registrant, A.S.Z. de
Ferranti and Ferranti Limited, relating to the Registrant's
acquisition of ZCR Limited (now Quad Europe Limited)
Incorporated by reference to Exhibit 10.5.1 to the Registrant's
Registration Statement on Form S-1 (No. 33-60588) filed with the
Securities and Exchange Commission on April 5, 1993.
o10.7.1 Credit Agreement dated April 11, 1997, between the Company and
CoreStates Bank, N.A.
o10.7.2 First Amendment to Credit Agreement dated September 11, 1997,
between the Company and CoreStates Bank, N.A.
*10.8 401(k) Salary Reduction Plan and Trust dated October 1, 1989, as
amended - Incorporated by reference to Exhibit 10.8 to the
Registrant's Registration Statement on Form S-1 (No. 33-60588)
filed with the Securities and Exchange Commission on April 5,
1993.
10.9 Agreement dated November 1, 1993, between the Registrant and
Samsung Aerospace Industries, Ltd. Incorporated herein by
reference to Exhibit 10.9 filed under the Company's Annual
Report on Form 10-K for the fiscal year ended September 26,
1993.
*10.10 Agreement dated June 20, 1996 between the Registrant and Samsung
Aerospace Industries, Ltd.-Incorporated herein by reference to
Exhibit 10.1 filed under Form 10-Q for the period ended June 23,
1996 (portions redacted pursuant to SEC order granting
confidential treatment to certain provisions).
o10.11 Agreement dated March 19, 1997, between the Registrant and
Samsung Aerospace Industries, Ltd. (portions redacted pursuant
to application to SEC for confidential treatment to certain
provisions).
*10.12 Quad Systems Corporation Employee Stock Purchase Plan, as
amended - Incorporated by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-8 (No. 33-93436)
filed with the Securities and Exchange Commission on June 20,
1997.
o*11 Statement regarding computation of per share earnings.
o*22 Subsidiaries of the registrant.
o*23 Consent of Ernst & Young LLP.
o*27 Financial Data Schedule.
29
<PAGE>
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the last quarter of the fiscal
year covered by this report.
- ----------
* Constitutes compensatory plan or arrangement required to be filed as an
exhibit to this form.
o Filed herewith
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUAD SYSTEMS CORPORATION
By: /s/ DAVID W. SMITH
---------------------------
David W. Smith, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/S/ DAVID W. SMITH Principal Executive December 29, 1997
- -------------------------- Officer and Director
David W. Smith
/S/ ANTHONY R. DRURY Principal Financial December 29, 1997
- -------------------------- and Accounting Officer
Anthony R. Drury
/S/ JAMES R. BERGMAN Director December 29, 1997
- --------------------------
James R. Bergman
/S/ VAHRAM V. ERDEKIAN Director December 29, 1997
- --------------------------
Vahram V. Erdekian
/S/ ROBERT P. PINKAS Director December 29, 1997
- --------------------------
Robert P. Pinkas
/S/ LORIN J. RANDALL Director December 29, 1997
- --------------------------
Lorin J. Randall
/S/ DAVID H. YOUNG Director December 29, 1997
- --------------------------
David H. Young
</TABLE>
31
<PAGE>
QUAD SYSTEMS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors.............................................F-2
Consolidated Balance Sheets as of September 30,
1997 and 1996..............................................................F-3
Consolidated Statements of Income for the
Years Ended September 30, 1997, 1996 and 1995..............................F-4
Consolidated Statements of Stockholders'
Equity for the Years Ended
September 30, 1997, 1996 and 1995..........................................F-5
Consolidated Statements of Cash Flows for the
Years Ended September 30, 1997, 1996 and 1995..............................F-6
Notes to Consolidated Financial Statements.................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Quad Systems Corporation
We have audited the accompanying consolidated balance sheets of Quad Systems
Corporation as of September 30, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended September 30, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Quad
Systems Corporation at September 30, 1997 and 1996, and the consolidated results
of its operations and cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
October 31, 1997
F-2
<PAGE>
QUAD SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,981 $ 2,636
Accounts receivable, net of allowance for doubtful accounts-
$788 and $633 at September 30, 1997 and 1996, respectively 20,234 15,076
Inventory:
Raw materials 8,478 7,951
Work in process 2,017 3,400
Finished goods 6,602 4,961
-------- --------
17,097 16,312
Deferred income taxes 2,593 2,450
Prepaid expenses and other current assets 983 825
-------- --------
Total current assets 42,888 37,299
Equipment and leasehold improvements:
Machinery, equipment, and software 5,365 5,333
Furniture and fixtures 1,099 964
Leasehold improvements 678 1,055
-------- --------
7,142 7,352
Less accumulated depreciation and amortization (3,937) (4,865)
-------- --------
3,205 2,487
Deferred income taxes 699 673
Goodwill, net of accumulated amortization 2,831 3,115
Other assets 414 249
-------- --------
Total assets $ 50,037 $ 43,823
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 4,920 $ --
Accounts payable 3,908 4,770
Accrued commissions 1,885 1,169
Accrued warranty 1,355 1,488
Accrued expenses 1,145 1,511
Employee compensation and related taxes 1,141 1,861
Deferred service revenue 1,035 732
Customer deposits 696 1,301
Current portion of long-term debt 620 700
Income taxes payable 229 450
-------- --------
Total current liabilities 16,934 13,982
Long-term debt, less current portion 2,325 1,750
Stockholders' equity:
Preferred Stock, par value $.01 per share; authorized shares:
1,000,000; no shares issued at September 30, 1997 and 1996 -- --
Common Stock, par value $.03 per share; authorized shares:
15,000,000; shares issued: 4,337,467 and 4,255,022 at
September 30, 1997 and 1996, respectively 130 128
Additional paid-in-capital 24,345 23,713
Retained earnings 6,445 4,458
Foreign currency translation 34 (32)
Less treasury stock, at cost, 13,908 shares at September 30, 1997
and 1996 (176) (176)
-------- --------
Total stockholders' equity 30,778 28,091
-------- --------
Total liabilities and stockholders' equity $ 50,037 $ 43,823
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
QUAD SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $81,723 $71,591 $62,591
Cost of products sold 51,417 43,912 39,537
------- ------- -------
Gross profit 30,306 27,679 23,054
Operating expenses:
Engineering, research and
development 6,759 6,153 4,844
Selling and marketing 14,197 12,076 10,276
Administrative and general 5,912 5,561 3,997
------- ------- -------
26,868 23,790 19,117
------- ------- -------
Income from operations 3,438 3,889 3,937
Interest expense 484 304 234
Interest income (103) (109) (110)
Settlement of securities litigation -- 1,287 180
------- ------- -------
Income before income taxes 3,057 2,407 3,633
Income tax expense 1,070 915 945
------- ------- -------
Net income $ 1,987 $ 1,492 $ 2,688
======= ======= =======
Net income per share $ 0.45 $ 0.35 $ 0.62
======= ======= =======
Weighted average common and
common equivalent shares 4,463,813 4,321,177 4,328,974
========= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
QUAD SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ADDITIONAL FOREIGN
SHARES PAID-IN RETAINED CURRENCY TREASURY STOCKHOLDERS'
OUTSTANDING AMOUNT CAPITAL EARNINGS TRANSLATION STOCK EQUITY
----------- ------ ------- -------- ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 4,012,301 $ 121 $ 21,899 $ 278 $ 49 $ (176) $ 22,171
Net income -- -- -- 2,688 -- -- 2,688
Compensation expense related
to the issuance of stock options -- -- 20 -- -- -- 20
Restricted Common Stock issued
in purchase of SMTech Limited 50,372 1 566 -- -- -- 567
Restricted Common Stock issued upon
conversion of convertible notes issued
in purchase of Quad Europe Limited 83,333 2 498 -- -- -- 500
Common Stock issued under
employee benefit plans 50,944 2 187 -- -- -- 189
Tax benefit related to stock
options exercised -- -- 265 -- -- -- 265
Foreign currency translation adjustment -- -- -- -- (20) -- (20)
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1995 4,196,950 126 23,435 2,966 29 (176) 26,380
Net income -- -- -- 1,492 -- -- 1,492
Compensation expense related
to the issuance of stock options -- -- 11 -- -- -- 11
Common Stock issued under
employee benefit plans 44,164 2 259 -- -- -- 261
Tax benefit related to stock
options exercised -- -- 8 -- -- -- 8
Foreign currency translation adjustment -- -- -- -- (61) -- (61)
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1996 4,241,114 128 23,713 4,458 (32) (176) 28,091
Net income -- -- -- 1,987 -- -- 1,987
Compensation expense related
to the issuance of stock options -- -- 5 -- -- -- 5
Common Stock issued under
employee benefit plans 82,445 2 528 -- -- -- 530
Tax benefit related to stock
options exercised -- -- 99 -- -- -- 99
Foreign currency translation adjustment -- -- -- -- 66 -- 66
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1997 4,323,559 $ 130 $ 24,345 $ 6,445 $ 34 $ (176) $ 30,778
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
QUAD SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,987 $ 1,492 $ 2,688
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 1,800 1,643 1,078
Provision (recovery) for losses on accounts receivable 204 (153) 260
Provision (recovery) for sales returns and allowances (288) (288) 643
Provision for deferred income taxes (169) (163) (1,065)
Stock option compensation 5 11 20
Changes in operating assets and liabilities, net:
Accounts receivable (5,362) 2,419 (3,561)
Inventory (785) (3,350) (2,686)
Other assets (392) (364) 84
Accounts payable (862) (376) 2,031
Accrued expenses 503 451 (224)
Employee compensation and related taxes (718) 743 175
Deferred service revenue 303 455 (1)
Customer deposits (605) 814 54
Income taxes payable (122) (154) 411
------- ------- -------
Net cash (used in) provided by operating activities (4,501) 3,180 (93)
INVESTING ACTIVITIES
Net purchases of equipment and leasehold improvements (2,099) (1,559) (1,077)
Purchase of SMTech Limited, net of cash acquired -- -- (3,307)
------- ------- -------
Net cash used in investing activities (2,099) (1,559) (4,384)
FINANCING ACTIVITIES
Proceeds from line of credit 4,920 -- --
Proceeds from term loan 3,100 -- --
Principal payments on long-term debt (2,605) (700) (350)
Common Stock issued under employee benefit plans 530 261 189
Proceeds from term loan incurred to purchase
SMTech Limited -- -- 3,500
------- ------- -------
Net cash provided by (used in) financing activities 5,945 (439) 3,339
(Decrease) increase in cash and cash equivalents (655) 1,182 (1,138)
Cash and cash equivalents at beginning of year 2,636 1,454 2,592
------- ------- -------
Cash and cash equivalents at end of year $ 1,981 $ 2,636 $ 1,454
======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
1. DESCRIPTION OF THE BUSINESS
The Company designs, manufactures, markets and supports surface mount technology
("SMT") and advanced packaging equipment used in the assembly of SMT printed
circuit boards and advanced packages and other semiconductor assembly processes,
primarily in low to medium volume production environments.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Quad Systems
Corporation and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the 1996 and 1995 financial statements to
conform with the 1997 financial statements.
FISCAL YEAR
For ease of presentation, the Company has indicated its fiscal year as ending on
September 30; whereas, in fact, the Company reports on a 52-53 week fiscal year
ending on the last Sunday in September. Fiscal 1997, which ended on September
28, 1997, and fiscal 1995, which ended on September 24, 1995, each included 52
weeks. Fiscal 1996, which ended on September 29, 1996, included 53 weeks.
CASH FLOWS
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Supplemental disclosure of cash flow information (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Schedule of noncash activity:
Tax benefit related to employee stock benefit plans $ 99 $ 8 $ 265
====== ====== ======
Restricted Common Stock issued in purchase of
SMTech Limited $ -- $ -- $ 567
====== ====== ======
Restricted Common Stock issued upon conversion
of convertible notes issued in purchase of
Quad Europe Limited -- 83,333 shares $ -- $ -- $ 500
====== ====== ======
Cash paid during the year for:
Interest $ 483 $ 316 $ 152
====== ====== ======
Income taxes $1,678 $1,183 $1,600
====== ====== ======
</TABLE>
F-7
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
INVENTORY
The Company values its inventory at the lower of cost (first-in, first-out
method) or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation on assets
is provided using the straight-line method over the estimated useful lives of
the related assets.
GOODWILL
Goodwill is amortized on a straight-line basis over ten years. The carrying
value of goodwill is evaluated whenever changes in circumstances indicate the
carrying amount of goodwill may not be recoverable. In performing such review
for recoverability, the Company compares the expected future cash flows to the
carrying value of goodwill. If the anticipated undiscounted future cash flows
are less than the carrying amount of such goodwill, the Company recognizes an
impairment loss for the difference between the carrying amount of the goodwill
and its estimated fair value. Accumulated amortization was $1,207,000, $828,000
and $438,000 for the years ended September 30, 1997, 1996 and 1995,
respectively.
PRODUCT WARRANTY
The financial statements reflect accruals for potential product warranty claims
based on the Company's claim experience. Such costs are accrued at the time
sales are recognized.
REVENUE RECOGNITION
Revenue from the sale of products is generally recognized upon shipment. Service
and support revenues are recognized over the life of the relevant contract on a
straight-line basis. Such revenues were $1,522,000, $1,276,000 and $934,000 for
the years ended September 30, 1997, 1996 and 1995, respectively.
INCOME TAXES
The Company accounts for income taxes under the liability method, whereby,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws that will be in effect when the differences are
expected to reverse. No provision is made for U.S. income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely reinvested
in foreign operations.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's United Kingdom subsidiaries are
translated into U. S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." Net assets are translated at the exchange rate at the end of the
fiscal year. Income and expense items are translated at the average exchange
rate during the year. The resulting translation adjustments are recorded
directly into a separate component of shareholders' equity. Gains and losses
resulting from foreign currency
F-8
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
transactions are included in the income statement. Net foreign currency
transaction gains or losses are not material in any of the years presented.
NET INCOME PER SHARE
Net income per share is calculated by dividing net income by the weighted
average number of common and common equivalent shares (stock options and stock
purchase plan shares) outstanding during the period.
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share,"("SFAS
128") which is required to be adopted for annual and quarterly periods ended
after December 15, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share
(referred to as basic earnings per share under SFAS 128), the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share for the years ended September 30, 1997 and 1995 of
$.01 and $.03 per share, respectively. There was no impact on earnings per share
for the year ended September 30, 1996. The impact of SFAS 128 on the calculation
of fully diluted earnings per share for these years is not expected to be
material.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
STOCK BASED COMPENSATION
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," ("APB 25") and related interpretations in accounting for
its stock-based compensation plans. Note 7 of these notes includes the required
disclosures and pro forma information provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation,"("SFAS 123"). Under APB 25, because
the exercise price of the Company's stock options equals the market price of the
underlying common stock on the date of grant, no compensation expense is
recognized.
F-9
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
3. DEBT OBLIGATIONS
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996
---- ----
<S> <C> <C>
Term loan, requiring quarterly principal payments of
$155,000, bearing interest at 7.95% per annum and
maturing in April 2002. The term loan contains various
covenants and requires maintenance of certain ratios
as defined in the loan agreement $2,945 $ --
Term loan which required quarterly principal payments of
$175,000, bearing interest at the bank's prime rate or
an applicable margin above LIBOR or the bank's CD
rate. This loan was repaid in April 1997 -- 2,450
------ ------
2,945 2,450
Less current portion 620 700
------ ------
$2,325 $1,750
====== ======
</TABLE>
Maturities of long-term debt outstanding at September 30, 1997 are as follows:
$620,000-1998; $620,000-1999; $620,000-2000; $620,000-2001; $465,000-2002.
The Company has a revolving line of credit agreement which permits borrowings up
to a maximum of $10,000,000 and bears interest at the bank's base rate of
interest (6.9% as of September 30, 1997) or at the Company's option, the bank's
prime rate or LIBOR plus 1.30% when the outstanding balance is greater than
$500,000. This line of credit is secured by a pledge by the Company's United
Kingdom holding company, Quad Systems Holdings Limited, of 65% of the
outstanding shares of its two wholly-owned United Kingdom operating
subsidiaries. The Company pays a fee of .25% on the unused portion of the line
of credit. This credit agreement expires in April 2000. The line of credit
agreement restricts the payment or declaration of any dividends on an annual
basis in excess of 50% of such year's pre-tax income. This line of credit
agreement also contains various operating and reporting covenants and requires
maintenance of certain financial ratios. As of September 30, 1997, total
borrowings under this line of credit were $4,920,000. Prior to April 1997, the
Company had a revolving line of credit that permitted borrowings up to a maximum
of $8,000,000 with similar terms as in the $10,000,000 credit agreement. The
weighted average interest rates on short-term borrowings for the years ended
September 30, 1997 and 1996 were 7.47% and 8.69%, respectively.
F-10
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
4. COMMITMENTS
As of September 30, 1997, the Company has the following commitments for future
minimum lease payments under various operating leases for real estate and
equipment (in thousands):
1998 $ 1,144
1999 1,060
2000 1,054
2001 1,030
2002 and thereafter 4,980
Rent expense was $980,000, $692,000 and $497,000 for the years ended September
30, 1997, 1996 and 1995, respectively.
In July 1997, the Company reached an agreement with Samsung Aerospace
Industries, Ltd. ("Samsung") for the sale and distribution of the QSA-30
assembler. Under the terms of the agreement, the Company has an exclusive right
to distribute and sell the QSA-30 assembler in North America, Europe and South
America and a non-exclusive right to sell in Asia, except in Korea. The contract
covers a term of two years, subject to extension, and has a targeted goal for
Quad to purchase a minimum of 150 assemblers at a predetermined price per unit
during the first year of the contract, although if the target is not met
Samsung's remedy is limited to terminating the agreement. The number of
assemblers to be purchased and their purchase price during the remainder of the
contract is to be negotiated.
In June 1996, the Company also reached an agreement with Samsung for the supply
of component tape feeders. Under the terms of this agreement, the Company
granted an exclusive license (subject to certain exceptions in favor of the
Company) to Samsung for Samsung to become the Company's sole supplier of
component tape feeders, which are currently used on all of the Company's
placement systems. The contract covers a six year period and requires Quad to
purchase a minimum of 40,000 component tape feeders with the value of at least
$6.8 million during the first two years of the contract, although if the target
is not met Samsung's remedy is limited to terminating the agreement The number
of tape feeders to be purchased during the remainder of the contract term will
be negotiated. Samsung is required to pay to Quad a total of $300,000,
representing a combination of licensing fees and a reimbursement for expenses
incurred in transferring the Company's technology to Samsung for use in the
production of the component tape feeders. The Company expects Samsung to begin
to supply component tape feeders to the Company during fiscal 1998.
5. INCOME TAXES
For financial reporting purposes, income before income taxes includes the
following components (in thousands):
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1996 1995
---- ---- ----
Pretax income:
United States $2,942 $2,279 $2,817
Foreign 115 128 816
------ ------ ------
$3,057 $2,407 $3,633
====== ====== ======
F-11
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
Income tax expense for the fiscal years ended September 30, 1997, 1996 and 1995
consists of (in thousands):
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1996 1995
---- ---- ----
Current:
Federal $ 887 $ 688 $ 1,619
State 19 -- 211
Foreign 333 358 389
------- ------- -------
1,239 1,046 2,219
Deferred:
Federal (73) (57) (1,106)
State (47) 19 (135)
Foreign (49) (93) (33)
------- ------- -------
(169) (131) (1,274)
------- ------- -------
Income tax expense $ 1,070 $ 915 $ 945
======= ======= =======
A reconciliation of the Company's effective income tax rate to the federal
statutory rate is as follows:
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1996 1995
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
Change in valuation allowance for
deferred tax assets -- 2.1% (14.6%)
State taxes, net of federal benefit -- (1.0%) 1.8%
Permanent -- goodwill 4.0% 5.5% 2.7%
Permanent -- other 1.5% 2.0% 1.3%
Foreign sales corporation benefit (3.9%) (5.8%) (1.3%)
Research and development tax credit (6.7%) (2.1%) --
Other 6.1% 3.3% 2.1%
---- ---- ----
Effective tax rate 35.0% 38.0% 26.0%
==== ==== ====
F-12
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Research and development tax credit carryforwards $ 552 $ 407
Net operating loss carryforwards 50 372
Tax credit carryforwards 84 84
Inventory and accounts receivable reserves 1,553 1,447
Warranty and other accruals 301 386
Deferred service and other unearned revenue 542 331
Deferred compensation 96 84
Other 220 133
------- -------
Total deferred tax assets 3,398 3,244
Valuation allowance for deferred tax assets (50) (50)
------- -------
Deferred tax assets, net 3,348 3,194
Deferred tax liability:
Prepaid expenses 56 71
------- -------
Net deferred tax assets $ 3,292 $ 3,123
======= =======
</TABLE>
At September 30, 1997, the Company has the following net operating loss and tax
credit carryforwards (in thousands):
AMOUNT EXPIRATION DATE
------ ---------------
State net operating loss $760 1998
Research and development tax credit 552 2002 to 2005
Investment tax credit 55 1998 to 2001
Alternative minimum tax credit 29 indefinite
6. STOCKHOLDERS' EQUITY
Under the Company's Certificate of Incorporation, the Board of Directors, at its
discretion, may issue up to 1,000,000 shares of preferred stock and establish
the voting, dividend, liquidation, and other rights, designations and
preferences of the preferred shares. At September 30, 1997, no shares of
preferred stock were outstanding.
Subsequent to September 30, 1997, the Company adopted a Stockholder Rights Plan
(the "Plan") designed to protect the Company's stockholders in the event of an
attempt to acquire control of the Company on terms which do not deal fairly with
all of the Company's stockholders. Under the Plan, the Company distributed one
right per Common Stock on the stated record date, which becomes exercisable in
certain events involving the acquisition of 15% or more of the Company's Common
Stock. Upon the occurrence of such an event, each right entitles its holder to
purchase one one-hundredth of a share of a new series of preferred stock at a
price of $45.00. In addition, upon the occurrence of certain events, holders of
the rights will be entitled to purchase either the Company's stock or shares in
an "acquiring entity" at half of market value.
F-13
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
7. STOCK PLANS AND EMPLOYEE BENEFITS
Stock Option Plans
The Company has adopted stock option plans, as amended (the "Plans"), under
which incentive stock options and non-incentive stock options may be granted to
employees and other qualified individuals. The Plans provide that the option
price shall not be less than the fair market value of the shares on the date of
grant and that no portion of the option may be exercised beyond ten years from
that date. Options vest as determined by the Stock Option and Compensation
Committee of the Board of Directors (the "Committee"). The Plans provide for
full vesting of the option in the event there is a Change of Control (as defined
in the Plans). The Committee has the authority to determine the number, terms
and type of stock options to be granted. No additional options may be granted
under the 1986 Stock Option Plan. The 1993 Stock Option Plan provides for the
issuance of up to 900,000 shares of Common Stock pursuant to the exercise of
options.
Changes in the number of outstanding options and number of available shares for
grant under the Plans are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------
WEIGHTED
AVERAGE
UNDER EXERCISE
AVAILABLE OPTION PRICE
--------- ------ -----
<S> <C> <C> <C>
Outstanding, September 30, 1994 260,313 583,821 $ 6.58
Granted (147,250) 147,250 12.46
Exercised -- (50,944) 3.69
Canceled 35,580 (35,580) 10.44
-------- -------- ------
Outstanding, September 30, 1995 148,643 644,547 7.94
Additional shares reserved for issuance 300,000 -- --
Granted (232,000) 232,000 7.94
Exercised -- (11,064) 3.05
Canceled 81,213 (81,213) 9.79
Shares expired from 1986 plan (32,331) -- --
-------- -------- ------
Outstanding, September 30, 1996 265,525 784,270 7.81
Granted (243,400) 243,400 9.77
Exercised -- (54,797) 5.72
Canceled 129,821 (129,821) 9.17
Shares expired from 1986 plan (5,638) -- --
-------- -------- ------
Outstanding, September 30, 1997 146,308 843,052 $ 8.31
======== ======== ======
</TABLE>
At September 30, 1997, options to purchase 341,248 at prices ranging from $3.00
to $14.00 per share were exercisable.
F-14
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
The following table summarizes information about options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
Weighted
Weighted Avg. Remaining Weighted
Range of Options Avg. Exercise Contractual Life Options Avg. Exercise
Exercise Prices Outstanding Price (Years) Exercisable Price
--------------- ----------- ----- ------- ----------- -----
<S> <C> <C> <C> <C> <C>
$3.00 95,642 $ 3.00 4.80 94,901 $ 3.00
$7.00 215,370 7.00 5.51 183,267 7.00
$7.25-$9.00 238,750 8.27 9.05 10,910 7.81
$9.25-$14.00 293,290 11.03 8.09 52,170 10.72
------- ------ ---- ------- ------
843,052 $ 8.31 7.33 341,248 $ 6.48
======= ====== ==== ======= ======
</TABLE>
Employee Stock Purchase Plan
The Company has adopted an employee stock purchase plan under which the sale of
150,000 shares of its Common Stock has been authorized. The stock purchase plan
is based on six-month offering periods and no more than 30,000 shares of Common
Stock are available for purchase during each offering period. Shares are
purchased at the end of each offering period at 85% of the fair market value of
the shares on the first or last day of the offering period, whichever is lower.
Eligible employees may authorize payroll deductions not to exceed the lesser of
25% of their compensation or $6,250 during each six-month offering period. Under
the plan, 27,648 and 33,100 shares were issued at an average price of $7.86 and
$6.85 during the years ended September 30, 1997 and 1996, respectively. Shares
available for future grant were approximately 89,252 shares at September 30,
1997.
The Company has elected to follow APB 25 for these plans, under which no
compensation cost has been recognized. For the purposes of pro forma disclosure
under SFAS 123, the estimated fair value of the Company's options is amortized
to expense over the options' vesting period. The Company's pro forma information
follows (in thousands except earnings per share):
Year Ended September 30,
------------------------
1997 1996
---- ----
Net income As reported $1,987 $1,492
Pro forma 1,577 1,256
Earnings per share As reported $0.45 $0.35
Pro forma 0.35 0.29
Pro forma compensation costs were estimated using the Black-Scholes option
valuation model using the following weighted average assumptions for grants in
1997 and 1996, respectively: a dividend yield rate of 0 for each year; expected
lives of 5.2 and 5.4 years; expected volatility of 60.93% and 73.29%; and risk
free interest rates of 6.22% and 6.13%. The Black-Scholes valuation model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of trade options, and because
changes in subjective input assumptions can materially affect the fair value
estimate, in the opinion of management, the existing models do not necessarily
provide a reliable single measure of fair value of the Company's stock options.
F-15
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
The weighted average fair value of options granted during fiscal 1997 and 1996
was $5.63 and $4.69, respectively. The weighted average fair value of options
associated with the Company's Employee Stock Purchase Plan for fiscal 1997 and
1996 was $3.13 and $2.77, respectively.
Savings Plan
The Company sponsors an employee savings plan that provides for eligible
employees to make pre-tax contributions up to 15% of eligible compensation,
subject to certain limitations imposed by Section 401(k) of the Internal Revenue
Code. The Company matches 50% of the first 4% of the employee's compensation, up
to a maximum of $1,000 per year. In addition, the Company made discretionary
contributions representing 2% of net income to the plan in each of the three
years in the period ended September 30, 1997. The Company's total contributions
were approximately $189,000, $184,000 and $168,000 for the years ended September
30, 1997, 1996 and 1995 respectively.
8. SEGMENT REPORTING
The Company, operating in a single industry segment, designs, manufactures,
markets and supports SMT assembly equipment and related peripherals. The
Company's operations by geographic area are as follows (in thousands):
<TABLE>
<CAPTION>
UNITED
STATES EUROPE ELIMINATIONS CONSOLIDATED
------ ------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended September 30, 1997
Total net sales:
Unaffiliated customers $ 56,435 $ 25,288 $ -- $ 81,723
Interarea transfers 14,154 8,940 (23,094) --
-------- -------- -------- --------
Total $ 70,589 $ 34,228 $(23,094) $ 81,723
======== ======== ======== ========
Income from operations $ 2,874 $ 487 $ 77 $ 3,438
======== ======== ======== ========
Total assets $ 51,265 $ 11,846 $(13,074) $ 50,037
======== ======== ======== ========
Year ended September 30, 1996:
Total net sales:
Unaffiliated customers $ 50,448 $ 21,143 $ -- $ 71,591
Interarea transfers 12,541 5,780 (18,321) --
-------- -------- -------- --------
Total $ 62,989 $ 26,923 $(18,321) $ 71,591
======== ======== ======== ========
Income from operations $ 5,048 $ 329 $ (1,488) $ 3,889
======== ======== ======== ========
Total assets $ 44,925 $ 10,355 $(11,457) $ 43,823
======== ======== ======== ========
Year ended September 30, 1995:
Total net sales:
Unaffiliated customers $ 48,301 $ 14,290 $ -- $ 62,591
Interarea transfers 8,780 3,734 (12,514) --
-------- -------- -------- --------
Total $ 57,081 $ 18,024 $(12,514) $ 62,591
======== ======== ======== ========
Income from operations $ 3,232 $ 889 $ (184) $ 3,937
======== ======== ======== ========
Total assets $ 41,746 $ 9,423 $ (9,994) $ 41,175
======== ======== ======== ========
</TABLE>
Interarea transfers primarily represent sales to and from the Company's United
Kingdom subsidiaries. These transfers are made at prices to recover cost, plus
an appropriate markup for profit, and have been eliminated from consolidated net
sales.
F-16
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
Sales by geographic area made by the Company's United States operations are as
follows (in thousands):
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1996 1995
---- ---- ----
United States $45,981 $40,944 $38,433
Pacific 7,034 5,644 5,043
Canada and Latin America 3,420 3,860 4,568
Other -- -- 257
------- ------- -------
$56,435 $50,448 $48,301
======= ======= =======
9. LITIGATION
In July 1996, the Company was named a defendant in a patent infringement lawsuit
filed by The Zevatech Group in the federal district court in Munich, Germany.
The complaint alleges that the Company infringed on the plaintiff's German
patents relating to pick and place assemblers. The Company has responded with an
action against the plaintiff in Munich, Germany seeking to have such plaintiff's
patents invalidated. Management believes the lawsuit to be without merit or the
Company has meritorious defenses and intends to vigorously defend itself against
the lawsuit. Accordingly, no provision for this lawsuit has been recorded during
1996 or 1997.
In March 1995, a shareholder of the Company filed a complaint in the United
States District Court for the Eastern District of Pennsylvania (the "Action")
against the Company, two of its executive officers and two of its directors (one
of which was also sued as an executive officer) alleging that, during the period
December 23, 1994 through March 7, 1995, the defendants knowingly or recklessly
misrepresented or omitted material information about the Company, its prospects
and earnings, and knowingly or recklessly misrepresented or omitted information
about the status and operation of certain software used in the Company's
products in violation of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, as amended, and common law. During the year ended September 30, 1996,
the Company, to avoid the uncertainties of litigation and without admitting any
wrongdoing with respect to any of the claims alleged in the Action, entered into
a final settlement agreement and related documents, which has received court
approval. Under this agreement, the Company, together with its directors and
officers liability insurer, paid an aggregate of $2,450,000 in settlement of all
claims. Total cost (including legal fees) to the Company, net of the amount paid
by such insurer, was $1,467,000. During the years ended September 30, 1996 and
1995, the Company recorded $1,287,000 and $180,000 of expenses, relating to the
settlement of this litigation, respectively.
10. SUBSEQUENT EVENT
Subsequent to September 30, 1997, the Company obtained an increase to its
existing line of credit, whereby an additional $2,500,000 is available. This
$2,500,000 increase expires on April 30, 1998.
F-17
<PAGE>
QUAD SYSTEMS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
ADDITIONS
--------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES -DESCRIBE DESCRIBE PERIOD
- ----------- --------- -------- --------- -------- ------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $ 558,000 $ 260,000 $ -- $ -- $ 818,000
Reserves for inventory 1,481,000 855,000 -- 20,000(2) 2,316,000
----------- ----------- --------- ----------- -----------
Total $ 2,039,000 $ 1,115,000 $ -- $ 20,000 $ 3,134,000
=========== =========== ========= =========== ===========
Product Warranty Liability $ 636,000 $ 2,508,000 $ -- $ 2,011,000(3) $ 1,133,000
=========== =========== ========= =========== ===========
Reserve for product returns and
allowances $ 120,000 $ 643,000 $ -- $ -- $ 763,000
=========== =========== ========= =========== ===========
Year ended September 30, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 818,000 $ (153,000) $ -- $ 32,000(1) $ 633,000
Reserves for inventory 2,316,000 1,104,000 -- 886,000(2) 2,534,000
----------- ----------- --------- ----------- -----------
Total $ 3,134,000 $ 951,000 $ -- $ 918,000 $ 3,167,000
=========== =========== ========= =========== ===========
Product Warranty Liability $ 1,133,000 $ 2,866,000 $ -- $ 2,511,000(3) $ 1,488,000
=========== =========== ========= =========== ===========
Reserve for product returns and
allowances $ 763,000 $ (288,000) $ -- $ -- $ 475,000
=========== =========== ========= =========== ===========
Year ended September 30, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 633,000 $ 204,000 $ -- $ 49,000(1) $ 788,000
Reserves for inventory 2,534,000 898,000 -- 764,000(2) 2,668,000
----------- ----------- --------- ----------- -----------
Total $ 3,167,000 $ 1,102,000 $ -- $ 813,000 $ 3,456,000
=========== =========== ========= =========== ===========
Product Warranty Liability $ 1,488,000 $ 2,123,000 $ -- $ 2,256,000(3) $ 1,355,000
=========== =========== ========= =========== ===========
Reserve for product returns and
allowances $ 475,000 $ (288,000) $ -- $ -- $ 187,000
=========== =========== ========= =========== ===========
</TABLE>
- ----------
(1) Uncollectible accounts written off, net of recoveries.
(2) Disposals of obsolete inventory.
(3) Warranty costs paid during the year.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
EXHIBIT PAGE
NO. NO.
--- ---
3.1 Certificate of Incorporation of the Registrant, as amended -
Incorporated by reference to Exhibit 3.1 to Amendment No. 2 to
the Registrant's Registration Statement on Form S-1 (No.
33-60588) filed with the Securities and Exchange Commission on
May 7, 1993.
3.2 By-Laws of the Registrant, as amended - Incorporated by
reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (No. 33-60588) filed with the Securities
and Exchange Commission on April 5, 1993.
*10.1 1986 Stock Option Plan, as amended - Incorporated by reference
to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-8 (No. 33-71590) filed with the Securities and Exchange
Commission on November 12, 1993.
o*10.2 1993 Stock Option Plan, as amended.
*10.3.1 Deferred Compensation Agreement dated September 30, 1994,
between the Company and David W. Smith - Incorporated by
references to Exhibit 10.3.1 filed under the Company's Annual
Report on Form 10-K for the fiscal year ended September 24,
1995.
*10.3.2 Deferred Compensation Agreement dated September 30, 1994,
between the Company and Anthony R. Drury - Incorporated by
reference to Exhibit 10.3.2 filed under the Company's Annual
Report on Form 10-K for the fiscal year ended September 24,
1995.
10.4.1 Agreement relating to the acquisition of capital shares in
SMTech Limited, dated January 27, 1995, among the Company,
Investech SA and Messrs. David Wheatley and Richard Willshere
Incorporated by reference to Exhibit 2.1 filed under the
Company's Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 27, 1995.
10.4.2 Consulting agreement dated January 27, 1995, among the Company,
Mr. Dominique Henry, Quad Europe Limited, Quad Holdings Limited
and SMTech Limited - Incorporated by reference to Exhibit 2.2
filed under Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 27, 1995.
10.5 Lease dated August 27, 1996, between the Registrant and Marave
Associates, L.P. Incorporated by reference to Exhibit 10.5.2
filed under the Company's Annual Report on Form 10-K for the
fiscal year ended September 29, 1996.
10.6 Agreement dated March 19, 1993, among the Registrant, A.S.Z. de
Ferranti and Ferranti Limited, relating to the Registrant's
acquisition of ZCR Limited (now Quad Europe Limited)
Incorporated by reference to Exhibit 10.5.1 to the Registrant's
Registration Statement on Form S-1 (No. 33-60588) filed with the
Securities and Exchange Commission on April 5, 1993.
<PAGE>
EXHIBIT PAGE
NO. NO.
--- ---
o10.7.1 Credit Agreement dated April 11, 1997, between the Company and
CoreStates Bank, N.A.
o10.7.2 First Amendment to Credit Agreement dated September 11, 1997,
between the Company and CoreStates Bank, N.A.
*10.8 401(k) Salary Reduction Plan and Trust dated October 1, 1989, as
amended - Incorporated by reference to Exhibit 10.8 to the
Registrant's Registration Statement on Form S-1 (No. 33-60588)
filed with the Securities and Exchange Commission on April 5,
1993.
10.9 Agreement dated November 1, 1993, between the Registrant and
Samsung Aerospace Industries, Ltd. - Incorporated herein by
reference to Exhibit 10.9 filed under the Company's Annual
Report on Form 10-K for the fiscal year ended September 26,
1993.
10.10 Agreement dated June 20, 1996 between the Registrant and Samsung
Aerospace Industries, Ltd.-Incorporated herein by reference to
Exhibit 10.1 filed under Form 10-Q for the period ended June 23,
1996 (portions redacted pursuant to SEC order granting
confidential treatment to certain provisions).
o10.11 Agreement dated March 19, 1997, between the Registrant and
Samsung Aerospace Industries, Ltd. (portions redacted pursuant
to application to SEC for confidential treatment to certain
provisions).
*10.12 Quad Systems Corporation Employee Stock Purchase Plan, as
amended - Incorporated by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-8 (No. 33-93436)
filed with the Securities and Exchange Commission on June 20,
1997.
o11 Statement regarding computation of per share earnings.
o22 Subsidiaries of the registrant.
o23 Consent of Ernst & Young LLP.
o27 Financial Data Schedule.
</TABLE>
- ----------
* Constitutes compensatory plan or arrangement required to be filed as an
exhibit to this form.
o Filed herewith
Exhibit 10.2
QUAD SYSTEMS CORPORATION
1993 STOCK OPTION PLAN
1. PURPOSE. Quad Systems Corporation (the "Company") hereby adopts the Quad
Systems Corporation 1993 Stock Option Plan (the "Plan"). The Plan is intended to
recognize the contributions made to the Company by employees (including
employees who are members of the Board of Directors) of the Company or any
Affiliate (as defined below) and certain consultants or advisors to the Company
or an Affiliate, to provide such persons with additional incentive to devote
themselves to the future success of the Company or an Affiliate, and to improve
the ability of the Company or an Affiliate to attract, retain, and motivate
individuals upon whom the Company's sustained growth and financial success
depend, by providing such persons with an opportunity to acquire or increase
their proprietary interest in the Company through receipt of rights to acquire
the Company's Common Stock, par value $.03 per Share (the "Common Stock"). In
addition, the Plan is intended as an additional incentive to certain directors
of the Company who are not employees of the Company or an Affiliate to serve on
the Board of Directors and to devote themselves to the future success of the
Company by providing them with an opportunity to acquire or increase their
proprietary interest in the Company through the receipt of Options to acquire
Common Stock.
<PAGE>
2. DEFINITIONS. Unless the context clearly indicates otherwise, the
following terms shall have the following meanings:
(a) "Affiliate" means a corporation which is a parent
corporation or a subsidiary corporation with respect to the Company
within the meaning of Section 424(e) or (f) of the Code.
(b) "Board of Directors" or "Board" means the Board of Directors
of the Company.
(c) "Change in Control" shall have the meaning as set forth in
Section 10 of the Plan.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" shall have the meaning set forth in Section 3 of
the Plan.
(f) "Company" means Quad Systems Corporation, a Delaware
corporation.
(g) "Disability" shall have the meaning set forth in Section
22(e)(3) of the Code.
(h) "Fair Market Value" shall have the meaning set forth in
Subsection 8(b) of the Plan.
(i) "ISO" means an Option granted under the Plan which is
intended to qualify as an "incentive stock option" within the meaning of
Section 422 of the Code.
(j) "Non-employee Director" means a member of the Board of
Directors who is not an employee of the Company or an Affiliate.
2
<PAGE>
(k) "Non-qualified Stock Option" means an Option granted under
the Plan which is not intended to qualify, or otherwise does not
qualify, as an "incentive stock option" within the meaning of Section
422(b) of the Code.
(l) "Option" means either an ISO or a Non-qualified Stock Option
granted under the Plan.
(m) "Optionee" means a person to whom an Option has been granted
under the Plan, which Option has not been exercised and has not expired
or terminated.
(n) "Option Document" means the document described in Section 8
or Section 9 of the Plan, as applicable, which sets forth the terms and
conditions of each grant of Options.
(o) "Option Price" means the price at which Shares may be
purchased upon exercise of an Option, as calculated pursuant to
Subsection 8(b) or Subsection 9(a) of the Plan, as applicable.
(p) "Rule 16b-3" means Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended.
(q) "Shares" means the shares of Common Stock of the Company
which are the subject of Options.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Board of Directors of the Company; however, the Board of Directors may (i)
designate a committee composed of two or more directors who are "Non-Employee
Directors" as defined in Rule 16b-3 to operate and administer the Plan in its
stead, (ii) designate two committees to operate and administer the Plan in its
stead, one of such committees composed of two or more directors who
3
<PAGE>
are "Non-Employee Directors" as defined in Rule 16b-3 to operate and administer
the Plan with respect to the Company's "Principal Officers" (as defined below)
and directors, and the other such committee composed of two or more directors
(which may include directors who are also employees of the Company) to operate
and administer the Plan with respect to persons other than Principal Officers
and directors or (iii) designate only one of the two committees referred to in
subparagraph (ii) and itself operate and administer the Plan with respect to
persons not within the jurisdiction of such committee. Any of such committees
designated by the Board of Directors, and the Board of Directors itself in its
administrative capacity with respect to the Plan, is referred to as the
"Committee." As used herein, the term "Principal Officers" means the Chairman of
the Board of Directors (if the Chairman of the Board of Directors is a payroll
employee), President, Executive Vice President, Senior Vice President, Vice
President, Treasurer, and any other person who is an "officer" within the
meaning of Rule 16a-1(f) promulgated under the Securities Exchange Act of 1934,
as amended, or any successor rule.
(a) MEETINGS. The Committee shall hold meetings at such times and places as
it may determine. Acts approved at a meeting by a majority of the members of the
Committee or acts approved in writing by the unanimous consent of the members of
the Committee shall be the valid acts of the Committee.
(b) GRANTS. Except with respect to Options granted to Non-employee
Directors pursuant to Section 9 of the Plan, the
4
<PAGE>
Committee shall from time to time at its discretion direct the Company to grant
Options pursuant to the terms of the Plan. The Committee shall have plenary
authority to (i) determine the individuals to whom, the times at which, and the
price at which Options shall be granted, (ii) determine the type of Option to be
granted and the number of Shares subject thereto, and (iii) approve the form and
terms and conditions of the Option Documents; all subject, however, to the
express provisions of the Plan. In making such determinations, the Committee may
take into account the nature of the Optionee's services and responsibilities,
the Optionee's present and potential contribution to the Company's success and
such other factors as it may deem relevant. The interpretation and construction
by the Committee of any provisions of the Plan or of any Option granted under it
shall be final, binding and conclusive.
(c) EXCULPATION. No member of the Board of Directors shall be personally
liable for monetary damages for any action taken or any failure to take any
action in connection with the administration of the Plan or the granting of
Options under the Plan, provided that this Subsection 3(c) shall not apply to
(i) any breach of such member's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law, (iii) acts or omissions that would
result in liability under Section 174 of the General Corporation Law of the
State of Delaware, as amended, and (iv) any transaction from which the member
derived an improper personal benefit.
5
<PAGE>
(d) INDEMNIFICATION. Service on the Committee shall constitute service as a
member of the Board of Directors of the Company. Each member of the Committee
shall be entitled without further act on his or her part to indemnity from the
Company to the fullest extent provided by applicable law and the Company's
Certificate of Incorporation and/or By-laws in connection with or arising out of
any action, suit or proceeding with respect to the administration of the Plan or
the granting of Options thereunder in which he or she may be involved by reason
of his or her being or having been a member of the Committee, whether or not he
or she continues to be such member of the Committee at the time of the action,
suit or proceeding.
(e) LIMITATIONS ON GRANTS OF OPTIONS TO CONSULTANTS AND ADVISORS. With
respect to the grant of Options to consultants or advisors, bona fide services
shall be rendered by consultants or advisors and such services must not be in
connection with the offer or sale of securities in a capital-raising
transaction.
4. GRANTS UNDER THE PLAN. Grants under the Plan may be in the form of a
Non-qualified Stock Option, an ISO or a combination thereof, at the discretion
of the Committee.
5. ELIGIBILITY. All employees of the Company or an Affiliate (including
employees who are members of the Board of Directors), consultants or advisors to
the Company or an Affiliate who satisfy the requirements set forth in Subsection
3(e), and all Non-employee Directors shall be eligible to receive Options
hereunder. The Committee, in its sole discretion, shall determine
6
<PAGE>
whether an individual is eligible to receive Options under the Plan.
6. SHARES SUBJECT TO PLAN. The aggregate maximum number of Shares for which
Options may be granted pursuant to the Plan is nine hundred thousand (900,000),
subject to adjustment as provided in Section 11 of the Plan. The Shares shall be
issued from authorized and unissued Common Stock or Common Stock held in or
hereafter acquired for the treasury of the Company. If an Option terminates or
expires without having been fully exercised for any reason, the Shares for which
the Option was not exercised may again be the subject of one or more Options
granted pursuant to the Plan.
7. TERM OF THE PLAN. The Plan is effective as of March 23, 1993, the date
on which it was adopted by the Board of Directors, subject to the approval of
the Plan on or before March 22, 1994 by a majority of the votes cast at a duly
called meeting of the stockholders at which a quorum representing a majority of
all outstanding voting stock of the Company is, either in person or by proxy,
present and voting. If the Plan is not so approved on or before March 22, 1994,
all Options granted under the Plan shall be null and void. No Option may be
granted under the Plan after March 22, 2003.
If the Reverse Split (as defined in Section 11) is not approved by
stockholders of the Company at the Annual Meeting of Stockholders on April 2,
1993 or any adjournment or postponement
7
<PAGE>
thereof, the Plan shall be terminated, and any Options granted under the Plan
shall be null and void.
8. OPTION DOCUMENTS AND TERMS. Each Option granted under the Plan shall be
a Non-qualified Stock Option unless the Option shall be specifically designated
at the time of grant to be an ISO for Federal income tax purposes. If any Option
designated as an ISO is determined for any reason not to qualify as an incentive
stock option within the meaning of Section 422 of the Code, such Option shall be
treated as a Non-qualified Stock Option for all purposes under the provisions of
the Plan. Options granted pursuant to the Plan shall be evidenced by the Option
Documents in such form as the Committee shall from time to time approve, which
Option Documents shall comply with and be subject to the following terms and
conditions and such other terms and conditions as the Committee shall from time
to time require which are not inconsistent with the terms of the Plan. However,
the following provisions of this Section 8 shall not be applicable to Options
granted pursuant to Section 9, except as otherwise provided in Subsection 9(c).
(a) NUMBER OF OPTION SHARES. Each Option Document shall state the number of
Shares to which it pertains. An Optionee may receive more than one Option, which
may include Options which are intended to be ISO's and Options which are not
intended to be ISO's, but only on the terms and subject to the conditions and
restrictions of the Plan. Effective February 17, 1993, the maximum number of
Shares for which Options may be granted to any eligible
8
<PAGE>
individual during any fiscal year of the Company is thirty thousand (30,000)
Shares.
(b) OPTION PRICE. Each Option Document shall state the Option Price, which
shall be at least 100% of the Fair Market Value of the Shares on the date the
Option is granted; provided, however, that if an ISO is granted to an Optionee
who then owns, directly or by attribution under Section 424(d) of the Code,
shares possessing more than ten percent of the total combined voting power of
all classes of stock of the Company or an Affiliate, then the Option Price shall
be at least 110% of the Fair Market Value of the Shares on the date the Option
is granted. If the Common Stock is traded in a public market, then the Fair
Market Value per share shall be, if the Common Stock is listed on a national
securities exchange or included in the NASDAQ National Market System, the last
reported sale price thereof on the relevant date, or, if the Common Stock is not
so listed or included, the mean between the last reported "bid" and "asked"
prices thereof on the relevant date, as reported on NASDAQ or, if not so
reported, as reported by the National Daily Quotation Bureau, Inc. or as
reported in a customary financial reporting service, as applicable and as the
Committee determines.
(c) EXERCISE. No Option shall be deemed to have been exercised prior to the
receipt by the Company of written notice of such exercise and payment in full of
the Option Price for the Shares to be purchased. Each such notice shall specify
the number of Shares to be purchased and shall (unless the Shares are
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covered by a then current registration statement or a Notification under
Regulation A under the Securities Act of 1933, as amended (the "Act")), contain
the Optionee's acknowledgment in form and substance satisfactory to the Company
that (a) such Shares are being purchased for investment and not for distribution
or resale (other than a distribution or resale which, in the opinion of counsel
satisfactory to the Company, may be made without violating the registration
provisions of the Act), (b) the Optionee has been advised and understands that
(i) the Shares have not been registered under the Act and are "restricted
securities" within the meaning of Rule 144 under the Act and are subject to
restrictions on transfer and (ii) the Company is under no obligation to register
the Shares under the Act or to take any action which would make available to the
Optionee any exemption from such registration, (c) such Shares may not be
transferred without compliance with all applicable federal and state securities
laws, and (d) an appropriate legend referring to the foregoing restrictions on
transfer and any other restrictions imposed under the Option Documents may be
endorsed on the certificates. Notwithstanding the foregoing, if the Company
determines that issuance of Shares should be delayed pending (A) registration
under federal or state securities laws, (B) the receipt of an opinion of counsel
acceptable to the Company that an appropriate exemption from such registration
is available, (C) the listing or inclusion of the Shares on any securities
exchange or an automated quotation system or (D) the consent or approval of any
governmental regulatory body
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whose consent or approval is necessary in connection with the issuance of such
Shares, the Company may defer exercise of any Option granted hereunder until any
of the events described in this Subsection 8(c) has occurred.
(d) MEDIUM OF PAYMENT. An Optionee shall pay for Shares (i) in cash, (ii)
by certified or cashier's check payable to the order of the Company, or (iii) by
such other mode of payment as the Committee may approve, including payment
through a broker in accordance with procedures permitted by Regulation T of the
Federal Reserve Board. Without limiting the foregoing, the Committee may provide
(and in the case of Options granted to Non-employee Directors, shall provide) in
an Option Document that payment may be made in whole or in part in shares of the
Company's Common Stock. If payment is made in whole or in part in shares of the
Company's Common Stock, then the Optionee shall deliver to the Company
certificates registered in the name of such Optionee representing the shares
owned by such Optionee, free of all liens, claims and encumbrances of every kind
and having an aggregate Fair Market Value on the date of delivery that is at
least as great as the Option Price of the Shares (or relevant portion thereof)
with respect to which such Option is to be exercised by the payment in shares of
Common Stock, accompanied by stock powers duly endorsed in blank by the
Optionee. In the event that certificates for shares of the Company's Common
Stock delivered to the Company represent a number of shares in excess of the
number of shares required to make payment for the Option Price of the Shares (or
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relevant portion thereof) with respect to which such Option is to he exercised
by payment in shares of Common Stock, the stock certificate issued to the
Optionee shall represent (i) the Shares in respect of which payment is made, and
(ii) such excess number of shares. Notwithstanding the foregoing, the Committee
may impose from time to time such limitations and prohibitions on the use of
shares of the Common Stock to exercise an option as it deems appropriate.
(e) TERMINATION OF OPTIONS.
(i) No Option shall be exercisable after the first to occur of the
following:
(A) Expiration of the Option term specified in the Option
Document, which, in the case of an ISO, shall not occur after (1) ten
years from the date of grant, or (2) five years from the date of grant
of an ISO if the Optionee on the date of grant owns, directly or by
attribution under Section 424(d) of the Code, shares possessing more
than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or of an Affiliate;
(B) Expiration of three months from the date the Optionee's
employment or service with the Company or its Affiliates terminates
for any reason other than Disability or death or as otherwise
specified in Subsection 8(e)(i)(D) or 8(e)(i)(E) below;
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<PAGE>
(C) Expiration of one year from the date such employment or
service with the Company or its Affiliates terminates due to the
Optionee's Disability or death;
(D) A finding by the Committee, after full consideration of the
facts presented on behalf of both the Company and the Optionee, that
the Optionee has breached his or her employment or service contract
with the Company or an Affiliate, or has been engaged in disloyalty to
the Company or an Affiliate, including, without limitation, fraud,
embezzlement, theft, commission of a felony or proven dishonesty in
the course of his employment or service, or has disclosed trade
secrets or confidential information of the Company or an Affiliate. In
such event, in addition to immediate termination of the Option, the
Optionee shall automatically forfeit all Shares for which the Company
has not yet delivered the share certificates upon refund by the
Company of the Option Price. Notwithstanding anything herein to the
contrary, the Company may withhold delivery of share certificates
pending the resolution of any inquiry that could lead to a finding
resulting in a forfeiture; or
(E) The date, if any, set by the Board of Directors as an
accelerated expiration date pursuant to Section 10 of the Plan.
With respect to Subsections 8(e) (i) (B) and (C) above, the only Options
which may be exercised during the three-month or one-year period, as the case
may be, following the date of Optionee's termination of employment or service
with the
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Company or its Affiliates are Options which were exercisable on the
last date of such employment or service and not Options which, if the Optionee
were still employed or rendering service during such three-month or one-year
period, would become exercisable, unless the Option Document specifically
provides to the contrary.
(ii) Notwithstanding the foregoing, the Committee may extend the period
during which all or any portion of an Option may be exercised to a date no later
than the Option term specified in the Option Document pursuant to Subsection
8(e)(i)(A), provided that any change pursuant to this Subsection 8(e)(ii) which
would cause an ISO to become a Non-qualified Stock Option may be made only with
the consent of the Optionee. The terms of an executive severance agreement or
other agreement between the Company and an Optionee, approved by the Committee,
whether entered into prior or subsequent to the grant of an Option, which
provide for Option exercise dates later than those set forth in Subsection
8(e)(i) but permitted by this Subsection 8(e)(ii) shall be deemed to be Option
terms approved by the Committee and consented to by the Optionee.
(f) TRANSFERS. No Option granted under the Plan may be transferred, except
by will or by the laws of descent and distribution. During the lifetime of the
person to whom an Option is granted, such Option may be exercised only by such
person. Notwithstanding the foregoing, a Non-qualified Stock Option may be
transferred pursuant to the terms of a "qualified domestic relations order,"
within the meaning of Sections 401(a)(13) and
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414(p) of the Code or within the meaning of Title I of the Employee Retirement
Income Security Act of 1974, as amended.
(g) LIMITATION ON ISO GRANTS. In no event shall the aggregate Fair Market
Value of the Shares of Common Stock (determined at the time the ISO is granted)
with respect to which incentive stock options under all stock option plans of
the Company or its Affiliates are exercisable for the first time by the Optionee
during any calendar year exceed $100,000.
(h) OTHER PROVISIONS. Subject to the provisions of the Plan, the Option
Documents shall contain such other provisions including, without limitation,
additional restrictions upon the exercise of the Option or additional
limitations upon the term of the Option, as the Committee shall deem advisable.
(i) AMENDMENT. Subject to the provisions of the Plan, the Committee shall
have the right to amend Option Documents issued to an Optionee, subject to the
Optionee's consent if such amendment is not favorable to the Optionee, except
that the consent of the Optionee shall not be required for any amendment made
under Subsection 8(e)(i)(E) or Section 10 of the Plan, as applicable.
9. SPECIAL PROVISIONS RELATING TO GRANTS OF OPTIONS TO NON-EMPLOYEE
DIRECTORS. In addition to being eligible to receive Options pursuant to Section
8, Non-employee Directors shall be granted Options, without any further action
by the Committee, in accordance with the terms and conditions set forth in this
Section 9. Options granted pursuant to this Section 9 shall be evidenced by
Option Documents in such form as the Committee shall from time to time approve,
which Option Documents
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shall comply with and be subject to the following terms and conditions and such
other terms and conditions as the Committee shall from time to time require
which are not inconsistent with the terms of the Plan.
(a) TIMING OF GRANTS; NUMBER OF SHARES SUBJECT TO OPTIONS; EXERCISABILITY
OF OPTIONS; OPTION PRICE. Each Non-employee Director on the effective date of
the Plan shall be granted, on May 19, 1993 (the date of the first closing of the
initial public offering of the Common Stock)(the "IPO Closing Date"), an Option
to purchase three thousand (3,000) Shares. Each Non-employee Director first
elected to the Board of Directors after the IPO Closing Date but on or before
July 24, 1997 (the "Increase Date") shall be granted an Option to purchase three
thousand (3,000) Shares on the date he or she becomes a director. Each
Non-employee Director first elected to the Board of Directors after the Increase
Date shall be granted an Option to purchase six thousand (6,000) Shares on the
date he or she becomes a director. (Any grant of Options to Non-employee
Directors pursuant to the preceding three sentences is hereinafter referred to
as the "Initial Grant"). Each Non-employee Director on the Increase Date shall
be granted an Option to purchase an additional three thousand (3,000) Shares (an
"Equalization Grant"). Subject to Section 10, each Option granted in the Initial
Grant and in the Equalization Grant shall be a Non-qualified Stock Option
becoming exercisable over a period of three (3) years, so that the Optionee
shall have the right to exercise the Option with respect to one third (1/3) of
the Shares covered thereby commencing on the first anniversary of the date of
grant with respect to the Initial Grant, and in 1997 on the anniversary of the
Initial Grant with respect to the Equalization Grant, and the right to exercise
the Option with respect to an additional one third (1/3) of such Shares
commencing on each of the following two anniversaries of the applicable first
vesting date. Each Non-employee Director who did not receive an Equalization
Grant shall be granted, after receipt of such person's Initial Grant, an Option
to purchase an additional two thousand (2,000) Shares on each anniversary of the
Initial Grant. Each person serving as a Non-employee Director who received an
Equalization Grant, shall be granted, commencing in 1998, an Option to purchase
an additional two thousand (2,000) Shares on each anniversary of the Initial
Grant. (The grants of Options to Non-employee Directors pursuant to the
preceding two sentences are hereinafter referred to as "Subsequent Annual
Grants"). Subject to Section 10, each Option granted in a Subsequent Annual
Grant shall be a Non-qualified Stock Option becoming exercisable with respect to
all such Shares commencing on the third anniversary of the date on which the
Subsequent Annual Grant is made. The Option Price of any Option granted under
this Section 9(a) shall be equal to the Fair Market Value of the Shares on the
date the Option is granted; PROVIDED, HOWEVER, that if such date as determined
under this Section 9(a) would fall on a Saturday, Sunday or any other day on
which banks in the State of New York are required or authorized to close (a
"Non-Business Day"), the Option Price of any such Option shall be equal to the
Fair Market Value of the Shares on the first date succeeding such Non-Business
Day which is not a Non-Business Day."
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(b) TERMINATION OF OPTIONS GRANTED PURSUANT TO SECTION 9.
All Options granted pursuant to this Section 9 shall be exercisable until
the first to occur of the following:
(i) Expiration of ten (10) years from the date of grant,
(ii) Expiration of three months from the date the Optionee's service
as a member of the Board terminates for any reason other than Disability or
death; or
(iii) Expiration of one year from the date the Optionee's service as a
member of the Board terminates due to the Optionee's Disability or death.
(c) APPLICABILITY OF PROVISIONS OF SECTION 8 TO OPTIONS GRANTED PURSUANT TO
SECTION 9. The following provisions of Section 8 shall be applicable to Options
granted pursuant to this Section 9: Subsection 8(a) (provided that all Options
granted pursuant to this Section 9 shall be Non-qualified Stock Options);
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the last sentence of Subsection 8(b); Subsection 8(c); Subsection 8(d);
subsection 8(f); and Subsection 8(i).
10. CHANGE IN CONTROL. In the event of a Change in Control, the Committee
may take whatever action it deems necessary or desirable with respect to the
Options outstanding, including, without limitation, accelerating the expiration
or termination date in the respective Option Documents for Options to a date no
earlier than thirty (30) days after notice of such acceleration is given to the
Optionees.
A "Change of Control" shall be deemed to have occurred upon the earliest to
occur of the following events: (i) the date the stockholders of the Company (or
the Board of Directors, if stockholder action is not required) approve a plan or
other arrangement pursuant to which the Company will be dissolved or liquidated,
or (ii) the date the stockholders of the Company (or the Board of Directors, if
stockholder action is not required) approve a definitive agreement to sell or
otherwise dispose of substantially all of the assets of the Company, or (iii)
the date the stockholders of the Company (or the Board of Directors, if
stockholder action is not required) and the stockholders of the other
constituent corporation (or its board of directors if stockholder action is not
required) have approved a definitive agreement to merge or consolidate the
Company with or into such other corporation, other than, in either case, a
merger or consolidation of the Company in which holders of shares of the
Company's Common Stock immediately prior to the merger or
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consolidation will hold at least a majority of the ownership of common stock of
the surviving corporation (and, if one class of common stock is not the only
class of voting securities entitled to vote on the election of directors of the
surviving corporation, a majority of the voting power of the surviving
corporation's voting securities) immediately after the merger or consolidation,
which common stock (and if applicable voting securities) is to be held in the
same proportion as such holders' ownership of Common Stock of the Company
immediately before the merger or consolidation, or (iv) the date any entity,
person or group within the meaning of Section 13(d)(3) or Section 14(d)(2) of
the Securities Exchange Act of 1934, as amended (other than (A) the Company or
any of its subsidiaries or any employee benefit plan (or related trust)
sponsored or maintained by the Company or any of its subsidiaries, or (B) any
person who, on the date the Plan is effective, shall have been the beneficial
owner of or have voting control over shares of Common Stock of the Company,
possessing more than ten percent (10%) of the aggregate voting power of the
Company's Common Stock) shall have become the beneficial owner of, or shall have
obtained voting control over, more than ten percent (10%) of the outstanding
shares of the Company's Common Stock, or (v) the first day after the date this
Plan is effective when directors are elected such that a majority of the Board
of Directors shall have been members of the Board of Directors for less than two
(2) years, unless the nomination for election of each new director who was not a
director at the beginning of such two (2) year period was
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<PAGE>
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of such period.
11. ADJUSTMENTS ON CHANGES IN CAPITALIZATION. The aggregate number of
Shares and class of shares as to which Options may be granted hereunder and to
any eligible individual hereunder, the number and class or classes of shares
covered by each outstanding Option and the Option Price thereof shall be
appropriately adjusted in the event of a stock dividend, stock split,
recapitalization or other change in the number or class of issued and
outstanding equity securities of the Company resulting from a subdivision or
consolidation of the Common Stock and/or, if appropriate, other outstanding
equity securities or a recapitalization or other capital adjustment (not
including the issuance of Common Stock on the conversion of other securities of
the Company which are convertible into Common Stock) affecting the Common Stock
which is effected without receipt of consideration by the Company. The Committee
shall have authority to determine the adjustments to be made under this Section,
and any such determination by the Committee shall be final, binding and
conclusive; provided, however, that no adjustment shall be made which will cause
an ISO to lose its status as such without the consent of the Optionee, except
for adjustments made pursuant to Section 10 hereof. Notwithstanding the
foregoing, the number of shares set forth in Section 6 already reflects a
one-for-three reverse stock split (the "Reverse Split") expected to be approved
by stockholders of the Company at the Annual Meeting of
20
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Stockholders on April 2, 1993 or any adjournment or postponement thereof; no
adjustments will be made pursuant to this Section 11 as a result of the Reverse
Split.
12. AMENDMENT OF THE PLAN. The Board of Directors of the Company may amend
the Plan from time to time in such manner as it may deem advisable.
Nevertheless, the Board of Directors of the Company may not change the class of
individuals eligible to receive an ISO or increase the maximum number of Shares
as to which Options may be granted without obtaining stockholder approval,
within twelve months before or after such action. No amendment to the Plan shall
adversely affect any outstanding Option, however, without the consent of the
Optionee that holds such Option.
13. NO COMMITMENT TO RETAIN. The grant of an Option pursuant to the Plan
shall not be construed to imply or to constitute evidence of any agreement,
express or implied, on the part of the Company or any Affiliate to retain the
Optionee in the employ of the Company or an Affiliate and/or as a member of the
Company's Board of Directors or in any other capacity.
14. WITHHOLDING OF TAXES. Whenever the Company proposes or is required to
deliver or transfer Shares in connection with the exercise of an Option, the
Company shall have the right to (a) require the recipient to remit or otherwise
make available to the Company an amount sufficient to satisfy any federal, state
and/or local withholding tax requirements prior to the delivery or transfer of
any certificate or certificates for such Shares or (b) take whatever other
action it deems necessary to protect its
21
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interests with respect to tax liabilities. The Company's obligation to make any
delivery or transfer of Shares shall be conditioned on the Optionee's
compliance, to the Company's satisfaction, with any withholding requirement.
15. INTERPRETATION. The Plan is intended to enable transactions under the
Plan with respect to directors and officers (within the meaning of Section 16(a)
under the Securities Exchange Act of 1934, as amended) to satisfy the conditions
of Rule 16b-3; to the extent that any provision of the Plan, or any provisions
of any Option granted pursuant to the Plan, would cause a conflict with such
conditions or would cause the administration of the Plan as provided in Section
3 to fail to satisfy the conditions of Rule 16b-3, such provision shall be
deemed null and void to the extent permitted by applicable law.
22
EXHIBIT 10.7.1
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of April 11, 1997 (this "AGREEMENT"), is
entered into by and between QUAD SYSTEMS CORPORATION, HITECH FINANCE COMPANY,
TRIMARK INVESTMENT CORPORATION, QUAD LEASING CORPORATION AND QUAD FOREIGN SALES
CORPORATION ("QFSC"), (each of which may be referred to individually by name or
as "BORROWER" and collectively, as the "BORROWERS") and CoreStates Bank, N.A.,
("BANK").
W I T N E S S E T H :
WHEREAS, the Bank, another lender and the Borrowers are parties to a
certain revolving credit agreement dated as of December 4, 1995 and a certain
term loan agreement dated as of January 24, 1995 as amended ("PRIOR LOAN
AGREEMENTS") pursuant to which the lenders therein agreed to provide loans and
other financial accommodations to the Borrowers in an aggregate principal amount
of up to $11,500,000; and
WHEREAS, Borrowers desire to refinance certain of their outstanding
indebtedness including the indebtedness outstanding under the Prior Loan
Agreements and to obtain additional credit facilities; and
WHEREAS, the Bank is willing to provide a credit facility to the Borrowers
on the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the premises and intending to be
legally bound hereby, the parties hereto agree as follows:
ARTICLE I.
CERTAIN DEFINITIONS.
1.1 DEFINITIONS. As used in this Agreement, the following terms shall have
these meanings (and other capitalized terms shall have the meanings set forth in
Article VIII):
"ACCEPTANCE AGREEMENT" shall mean any Acceptance Agreement executed by the
Bank and the Borrowers with respect to Bankers' Acceptances to be created by the
Bank.
"ACCOMMODATION" shall have the meaning set forth in Section 2.5.
"ADDITIONAL AMOUNT" shall have the meaning set forth in Section 2.8.
"AFFILIATE" shall mean any Person (1) which directly or indirectly
controls, or is controlled by, or is under common control with Borrower or a
Subsidiary; (2) which directly or indirectly beneficially owns or holds ten
percent (10.0%) or more of any class of voting stock of the Borrower or any
Subsidiary; or (3) ten percent (10.0%) or more of the voting stock is directly
or indirectly beneficially owned or held by the Borrower or a Subsidiary. The
term control means the possession, directly or indirectly, of the power to
direct or
<PAGE>
cause the direction of the management and policies of a Person, whether through
the ownership of voting securities, by contract, or otherwise.
"AGREEMENT" shall mean this Credit Agreement, as amended, supplemented, or
modified from time to time and all exhibits and schedules attached hereto.
"APPLICABLE LENDING OFFICE" shall mean the office of the Bank at the
address set forth next to the name of the Bank in the signature pages hereof.
"AUTHORIZED FINANCIAL OFFICER" shall mean the director of financial
services, controller, treasurer or chief financial officer of the Borrower and
such other officers of the Borrower as to which Quad Systems Corporation and the
Bank may agree in writing.
"BANK" shall have the meaning set forth in the introductory clauses hereof.
"BANKERS' ACCEPTANCE" shall mean each acceptance created by the Bank
pursuant to Section 2.14 of this Agreement.
"BASE RATE" shall mean, for any day, the per annum rate of interest quoted
by the Bank on each Business Day as its overnight base rate for such day, as
said rate shall change from time to time with such changes to be immediately
effective, (it being understood that said rate is determined by the Bank in its
sole discretion on the basis of its assessment of money market conditions)
calculated on the basis of the actual number of days elapsed in a year of 360
days.
"BASE RATE LOANS" shall mean Revolving Credit Loans accruing interest based
on the Base Rate.
"BORROWERS" shall have the meaning set forth in the introductory clauses
hereof but, for purposes of Artice IV or Section 5.2(c), shall not include QFSC.
"BUSINESS DAY" shall mean (a) any day other than a Saturday, Sunday, or
other day on which commercial banks in Philadelphia are authorized or required
to close under the laws of the Commonwealth of Pennsylvania and, (b) if the
applicable day relates to a LIBO Rate Loan, or notice with respect to a LIBO
Rate Loan, a day on which dealings in Dollar deposits are also carried on the
London interbank market and banks are open for business in London ("LONDON
BUSINESS Day").
"CAPITAL EXPENDITURES" shall mean expenditures for any fixed assets or
improvements replacements, substitutions or additions thereto which have a
useful life of more than one year, including expenditures within the meaning of
Section 263 of the Code and assets acquired pursuant to Capitalized Lease;
"CAPITALIZED LEASE" shall mean all lease obligations of any Person or
Subsidiary for any property (whether real, personal or mixed) which have been or
should be capital on the books of the lessee in accordance with General Accepted
Accounting Principles.
"CERCLA" shall mean the Comprehensive Environmental Response Compensation
and Liability Act, 33 U.S.C. ss. 1251 ET SEQ, as amended from time to time, and
all and regulations with respect thereto in effect from time to time.
"CLOSING DATE" shall mean April 11, 1997.
<PAGE>
"CODE" shall mean the Internal Revenue Code of 1986, as amended from time
to time, and all and regulations with respect thereto in effect from time to
time.
"COLLATERAL" shall mean all property, tangible or intangible, which is
subject or to be subject to the Liens granted hereunder and under the Collateral
Documents pursuant to Article 3 hereof.
"COLLATERAL DOCUMENTS" shall mean the Stock Pledge Agreement and all other
agreements, consents, and/or instruments creating, assigning, confirming or
otherwise relating to the lien and/or security interest granted to the Bank in
any of the Collateral, all as more fully described in Article 3 hereof.
"COVENANT COMPLIANCE CERTIFICATE" shall mean a certificate completed by an
Authorized Financial Officer of the Borrower on behalf of the Borrower and
submitted to Bank under Section 6.1 (g) and containing a computation of, and
showing compliance with, each of the financial covenants set forth in Article
VIII.
"DEBT" shall mean as to any Person, without duplication, (i) all items
which in accordance with GAAP would be included in determining total liabilities
as shown on the liability side of a consolidated balance sheet of such Person
and its Subsidiaries as of the date on which Debt is to be determined including
trade debt and accruals, (ii) all indebtedness secured by any Lien on any
property or asset owned or held by such Person and any Subsidiary whether or not
the indebtedness secured thereby shall have been assumed, (iii) all indebtedness
of others with respect to which such Person or any Subsidiary has become liable
by way of a guarantee or endorsement (other than for collection or deposit in
the ordinary course of business), (iv) all contingent liabilities of such Person
or any Subsidiary, includIng but not limited to contingent liabilities in
connection with outstanding letters of credit, and (v) lease obligations that,
in conformity with GAAP, have been or should be capitalized on such entity's
balance sheet.
"DEFAULT RATE" on any Loan shall mean the rate of interest determined under
Section 2.2(e).
"DOLLARS" shall mean the lawful currency of the United States of America.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
it may be amended from time to time.
"ERISA AFFILIATE" shall mean any corporation which is a member of the same
controlled group of corporations as Borrower within the meaning of Section
414(b) of the Code, or any trade or business which is under common control with
Borrower within the meaning of Section 414(c) of the Code.
"EVENT OF DEFAULT" shall have the meaning set forth in Section 9.1.
"ENVIRONMENTAL CONTROL STATUTES" shall mean any federal, state, county,
regional or local statute, law, ordinance, rule, regulation, order, directive or
requirement, together with all successor statutes, ordinances, rules,
regulations, orders, directives or regulations governing the control, storage,
removal, spill, release or discharge of Hazardous Substances, including without
limitation CERCLA, the Solid Waste Disposal Act, as
3
<PAGE>
amended by the Resource Conservation and Recovery Act of 1976 and the Hazardous
and Solid Waste Amendments of 1984, the Federal Water Pollution Control Act, as
amended by the Clean Water Act of 1976, the Hazardous Materials Transportation
Act, the Emergency Planning and Community Right to Know Act of 1986, the
National Environmental Policy Act of 1975, the Oil Pollution Act of 1990, any
similar or implementing state law, and in each case, as amended from time to
time and in effect from time to time.
"FIXED RATE LOANS" shall mean any Loan bearing interest at a fixed rate.
"GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" OR "GAAP" shall mean generally
accepted accounting principles as in effect from time to time in the United
States, consistently applied.
"HAZARDOUS SUBSTANCES" shall mean without limitation, any regulated
substance, toxic substance, hazardous substance, hazardous waste, pollution,
pollutant or contaminant, under, and which may give rise to liability pursuant
to, any Environmental Control Statutes as well as words of similar purport or
meaning referred to in any other federal, state, county or municipal
environmental statute, ordinance, rule or regulation.
"INDEBTEDNESS FOR BORROWED MONEY" shall mean as to any Person (i) all
indebtedness, liabilities, and obligations, now existing or hereafter arising,
for money borrowed by such Person, or any Subsidiary, whether or not evidenced
by any note, indenture, or agreement (including, without limitation, the Note
and any indebtedness for money borrowed from an Affiliate) and (ii) all
indebtedness of others for money borrowed (including indebtedness of an
Affiliate) with respect to which such Person or any Subsidiary has become liable
by way of a guarantee or indemnity.
"INTEREST PERIOD" shall mean with respect to any LIBO Rate Loan, each
period commencing on the date any such Loan is made, or, with respect to a Loan
being renewed, the last day of the next preceding Interest Period with respect
to a Loan, and ending on the numerically corresponding day (or, if there is no
numerically corresponding day, on the last day of the calendar month) in the
first, second or third calendar month thereafter as selected under the
procedures specified in Section 2.3, if the Bank is then offering LIBO Rate
Loans for such period; provided that each LIBO Rate Loan Interest Period which
would otherwise end on a day which is not a Business Day (or, for purposes of
Loans to be repaid on a London Business Day, such day not a London Business Day)
shall end on the next succeeding Business Day (or London Business Day, as
appropriate) unless such next succeeding Business Day (or London Business Day,
as appropriate) falls in the next succeeding calendar month, in which case the
Interest Period shall end on the next preceding Business Day (or London Business
Day, as appropriate).
"INVESTMENT" in any Person shall mean:
(a) the acquisition (whether for cash, property, services or
securities or otherwise) of capital stock, bonds, notes, debentures,
partnership or other ownership interests or other securities of such
Person; and
(b) any deposit with, or advance, loan or other extension of credit
to, such Person (other than any such deposit, advance, loan or extension of
credit having a term not exceeding 120 days in the case of unaffiliated
Persons and one year in the case of Affiliates representing the purchase
price of inventory or supplies purchased in the
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ordinary course of business) or guarantee or assumption of, or other
contingent obligation with respect to, Indebtedness for Borrowed Money or
other liability of such Person; and
(c) (without duplication of the amounts included in (a) and (b) above)
any amount that may, pursuant to the terms of such investment, be required
to be paid, deposited, advanced, lent or extended to or guaranteed or
assumed on behalf of such Person.
"LETTER OF CREDIT" shall mean individually and collectively any commercial
letter of credit or standby letter of credit issued by the Bank for the account
of the Borrowers.
"LETTER OF CREDIT SUBLIMIT" shall mean the sum of $3,000,000.
"LIBO RATE" shall mean, for the applicable Interest Period, (i) the rate,
rounded upwards to the next one-sixteenth of one percent, determined by the Bank
two London Business Days prior to the date of the corresponding LIBO Rate Loan,
at which the Bank is offered deposits in dollars at approximately 11:00 A.M.,
London time, by leading banks in the interbank Eurodollar or Eurocurrency market
for delivery on the date of such Loan in an amount and for a period comparable
to the amount and Interest Period of such Loan and in like funds, DIVIDED BY
(ii) a number equal to one (1.0) minus the LIBO Rate Reserve Percentage. The
LIBO Rate shall be Adjusted automatically with respect to any LIBO Rate Loan
outstanding on the effective date of any change in the LIBO Rate Reserve
Percentage, as of such effective date. LIBO Rate shall be calculated on the
basis of the number of days elapsed in a year of 360 days.
"LIBO RATE RESERVE PERCENTAGE" shall mean, for any LIBO Rate Loan for any
Interest Period therefor, the daily average of the stated maximum rate
(expressed as a decimal) at which reserves (including any marginal,
supplemental, or emergency reserves) are required to be maintained during such
Interest Period under Regulation D by the Bank against "Eurocurrency
Liabilities" (as such term is used in Regulation D) but without benefit or
credit proration, exemptions, or offsets that might otherwise be available to
the Bank from time to time under Regulation D. Without limiting the effect of
the foregoing, the LIBO Rate Reserve Percentage shall reflect any other reserves
required to be maintained by the Bank against (1) any category of liabilities
which includes deposits by reference to which the rate for LIBO Rate Loans is to
be determined; or (2) any category of extension of credit or other assets which
include LIBO Rate Loans.
"LIBO RATE LOANS" shall mean Revolving Credit Loans accruing interest based
on the LIBO Rate.
"LIEN" shall mean any lien, mortgage, security interest, chattel mortgage,
pledge or other encumbrance (statutory or otherwise) of any kind securing
satisfaction of an obligation, including any agreement to give any of the
foregoing, any conditional sales or other title retention agreement or any lease
in the nature thereof, and the filing of or the agreement to give any financing
statement under the Uniform Commercial Code (intended to perfect any of the
foregoing) of any jurisdiction or similar evidence of any encumbrance.
"LOAN" or "LOANS" shall mean a Revolving Credit Loan or the Term Loan.
"LOAN DOCUMENTS" shall mean this Agreement, the Notes, the Stock Pledge
Agreement, the Collateral Documents, and all filings under the UCC as the same
may be replaced, amended or modified from time-to-time.
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"MATERIAL ADVERSE EFFECT" shall mean the existence of any fact,
circumstance or occurrence which would reasonably be expected to have a material
and adverse effect on the business, properties, operations or condition
(financial or otherwise) of the Borrowers and their respective subsidiaries,
taken as a whole.
"MATURITY DATE" shall mean April 1, 2002.
"MULTIEMPLOYER PLAN" shall mean a multiemployer plan as defined in ERISA
Section 4001(a)(3), which covers employees of Borrowers or any ERISA Affiliate.
"NET AVAILABILITY" shall mean at any time of determination an amount equal
to the Revolving Loan Commitment, MINUS (i) the aggregate principal amount of
all Revolving Credit Loans outstanding and (ii) the face amount of all
Accommodations outstanding provided, HOWEVER, that for purposes of determining
Net Availability, Loans and Accommodations for which a request is already
pending shall be deemed to be outstanding at that time.
"NOTES" shall mean the Revolving Credit Note and the Term Note.
"OBLIGATIONS" shall mean all now existing or hereafter arising debts,
obligations, covenants, and duties of payment or performance of every kind,
matured or unmatured, direct or contingent, owing, arising, due, or payable to
the Bank by or from the Borrowers or any Subsidiary arising out of this
Agreement or any other Loan Document, including, without limitation, all
obligations to repay principal of and interest on all the Revolving Credit Loans
and the Term Loan, and to pay interest, fees, costs, charges, expenses,
professional fees, and all sums chargeable to the Borrowers and any Subsidiary
or for which any Borrower or any Subsidiary is liable as indemnitors under the
Loan Documents, whether or not evidenced by any note or other instrument.
"OPERATING LEASE" shall mean an operating lease as defined by Generally
Accepted accounting Principles, excluding all leases the expenses for which may
be charged to a customer of a Borrower pursuant to the written terms of the
contract with such customer.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"PENSION PLAN" shall mean, at any time, any Plan (including a Multiemployer
Plan), the funding requirements of which (under ERISA Section 302 or Code
Section 412) are, or at any time within the six years immediately preceding the
time in question, were in whole or in part, the responsibility of the Borrowers
or any ERISA Affiliate.
"PERMITTED ACQUISITIONS shall mean any and all acquisitions of the assets
of, or stock (or similar interest) in, another Person, which either individually
or in the aggregate, during any Fiscal Year, have a cost to Borrowers of, or are
valued at, not more than $2,000,000 (in each case after giving effect to all
liabilities assumed in connection therewith) PROVIDED, HOWEVER, that the
Borrowers shall give the Bank ten (10) Business Days prior written notice of
each such transaction together with a pro-forma financial statement and Covenant
Compliance Certificate with respect to the proposed transaction, and the
consummation of each such transaction would not cause the Borrowers to be in
violation or default of any other term, condition, covenant or agreement
contained herein.
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"PERMITTED LIENS" shall mean as to any Person:
(a) any Liens for current taxes, assessments and other governmental
charges not yet due and payable or being contested in good faith by such
Person [or Subsidiary] by appropriate proceedings and for which adequate
reserves have been established by such Person [or Subsidiary] as reflected
in such Person's [or Subsidiary's] financial statements;
(b) any Liens imposed by law such as mechanics', materialmen's,
landlords', warehousemen's, and carriers' Liens, and other similar Liens,
securing obligations incurred in the ordinary course of business which are
not past due for more than thirty (30) days or which are being contested in
good faith by appropriate proceedings promptly initiated and diligently
conducted and for which appropriate reserves have been established and so
long as no foreclosure, distraint, sale or other similar proceedings shall
have been commenced with respect thereto;
(c) easements, rights-of-way, restrictions and other similar
encumbrances on the real property or fixtures of such Person incurred in
the ordinary course of business which individually or in the aggregate are
not substantial in amount and which do not in any case materially detract
from the value or marketability of the property subject thereto or
interfere with the ordinary conduct of the business of such Person [or
Subsidiary];
(d) Liens (other than Liens imposed on any property of such Person or
any ERISA Affiliate pursuant to ERISA or section 412 of the Code) incurred
or deposits made in the ordinary course of business, including Liens in
connection with workers' compensation, unemployment insurance and other
types of social security and Liens to secure performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases that are not
Capitalized Leases, performance bonds, sales contracts and other similar
obligations, in each case, not incurred in connection with the obtaining of
credit or the payment of a deferred purchase price, and which do not, in
the aggregate, result in a material adverse effect on the business,
operations, assets or condition (financial or otherwise) of such Person or
any Subsidiary;
(e) Liens securing Indebtedness of a Subsidiary to such Person or to
another Subsidiary;
(f) Liens existing on the date hereof as set forth in Schedule 4.13
hereto including existing purchase money Liens on equipment, hereof so long
as each such Lien (x) exists upon the same terms as those existing on the
date hereof and (y) does not secure indebtedness in greater principal
amount than that outstanding on the date hereof and no additional assets
are furnished as collateral; and
(g) purchase money Liens on any property hereafter acquired; provided
that (i) such property is acquired in the ordinary course of business and
the Lien on such property is created contemporaneously with such
acquisition; (ii) the obligation secured by a Lien so created shall not
exceed 100% of the lesser of cost or fair market value of the property
covered thereby; (iii) each such Lien shall attach only to the property so
acquired and not to any other property or asset of the Borrower; (iv) the
Debt secured by all such Liens in the aggregate shall not exceed $1,000,000
at any one time outstanding; and (v) the obligation secured by such Lien is
permitted by the provisions of Section 7.2(c).
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"PERSON" shall mean any individual, corporation, partnership, limited
liability company, joint venture, association, company, trust, business trust,
entity, any other entity of whatever nature, government, agency or political
subdivision thereof.
"PLAN" or "PENSION PLAN" shall mean an employee benefit plan as defined in
Section 3(3) of ERISA, other an a Multiemployer Plan, whether formal or informal
and whether legally binding or not.
"POTENTIAL DEFAULT" shall mean an event, condition or circumstance that
with the giving of notice or lapse of time or both would become an Event of
Default.
"PRIME RATE" shall mean the rate of interest publicly announced by the Bank
from time to time as its "prime rate" (it being acknowledged that such announced
rate is not tied to any external rate of interest or index and does not
necessarily reflect the lowest rate charged by the Bank to any particular class
or category of customers), which Prime Rate shall change simultaneously with any
change in such announced rate.
"PRIME RATE LOANS" shall mean Revolving Credit Loans accruing interest
based on the Prime Rate.
"PRIOR LOAN AGREEMENTS" shall have the meaning set forth in the
introductory clauses hereof.
"PROHIBITED TRANSACTION" shall mean a transaction that is prohibited under
Code Section 75 or ERISA Section 406 and not exempt under Code Section 4975 or
ERISA Section 408.
"REGULATION" shall mean any statute, law, ordinance, regulation, order or
rule of any United States or foreign, federal, state, local or other government
or governmental body, including, without limitation, those covering or related
to banking, financial transactions, public utilities, environmental control,
energy, safety, health, transportation, bribery, record keeping, zoning,
antidiscrimination, antitrust, wages and hours, employee benefits, and price and
wage control matters.
"REGULATION D" shall mean Regulation D of the Board of Governors of the
Federal Reserve System, as it may be amended from time to time.
"REGULATORY CHANGE" shall mean any change after the date of this Agreement
in regulations (including Regulation D) or the adoption or making after such
date of any interpretations, directives or requests of or under any Regulation
(whether or not having the force of law) by any court or governmental or
monetary authority charged with the interpretation or administration thereof
applying to a class of banks including the Bank.
"REPORTABLE EVENT" shall mean, with respect to a Plan: (a) any of the
events set forth in ERISA Sections 4043(b) (other than a reportable event as to
which the provision of 30 days notice to the PBGC is waived under applicable
regulations) or 4063(a) or the regulations hereunder, (b) an event requiring any
Borrower or any ERISA Affiliate to provide security to a Pension Plan under Code
Section 401(a)(29) and (c) any failure by any Borrower or any ERISA Affiliate to
make payments required by Code Section 412(m).
"REVOLVER TERMINATION DATE" shall mean the EARLIER TO OCCUR of (a) April 1,
2000, or (b) the date on which this Agreement and/or the Revolving Loan
Commitment shall be terminated pursuant to Sections 2.7 or 9.2.
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"REVOLVING LOAN COMMITMENT" shall mean the sum of $10,000,000.
"REVOLVING CREDIT LOAN" shall have the meaning set forth in Section 2.1.
"REVOLVING CREDIT NOTE" shall have the meaning set forth in Section 2.10.
"STOCK PLEDGE AGREEMENT" shall mean the Pledge Agreement between the
Borrowers and the Bank.
"SOLVENT" shall mean, with respect to any Person that the aggregate present
fair saleable value of such Person's assets is in excess of the total amount of
its probable liability on its existing debts as they become absolute and
matured, such Person has not incurred debts beyond its foreseeable ability to
pay such debts as they mature, and such Person has capital adequate to conduct
the business it is presently engaged in or is about to engage in.
"SUBSIDIARY" shall mean a corporation or other entity the shares of stock
or other equity interests of which having ordinary voting power (other than
stock having such power only by reason of the happening of a contingency) to
elect a majority of the board of directors or other managers of such corporation
are at the time owned, or the management of which is otherwise controlled,
directly or indirectly through one or more intermediaries or both, by a
Borrower.
"TAXES" shall have the meaning set forth in Section 2.9.
"TERMINATION EVENT" shall mean, with respect to a Pension Plan: (a) a
Reportable Event, (b) the termination of a Pension Plan, or the filing of a
notice of intent to terminate a Pension Plan, or the treatment of a Pension Plan
amendment as a termination under ERISA Section 4041(c), (c) the institution of
proceedings to terminate a Pension Plan under ERISA Section 4042 (d) the
appointment of a trustee to administer any Pension Plan under ERISA Section
4042.
"TERM NOTE" shall have the meaning set forth in Section 2.10.
"TYPE" when used with respect to any Loan or advance, means the
designation of whether such Loan or advance is a Base Rate Loan, a Prime Rate
Loan or a LIBO Rate Loan and when used with respect to any accommodation means
whether such accommodation is a letter of credit or a banker's acceptance.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined herein
shall be construed in accordance with Generally Accepted Accounting Principles
consistent with those applied in the preparation of the financial statements
referred to in Section 4.5, and all financial data submitted pursuant to this
Agreement shall be prepared in accordance with such principles.
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ARTICLE II
THE LOANS
Subject to the terms and conditions of this Agreement and in reliance upon
all of the representations and warranties, covenants and agreements of the
Borrowers set forth herein, the Bank agrees to make the following Loans to, and
to issue Accommodations for, the Borrowers.
2.1 REVOLVING CREDIT LOANS.
(a) The Bank agrees to make advances (collectively called the "REVOLVING
CREDIT LOANS" and individually a "REVOLVING CREDIT LOAN") to the Borrowers from
time to time during the period commencing on the Closing Date and ending on, but
not including, the Revolver Termination Date, in a principal amount not to
exceed at any one time outstanding (after giving effect to any then pending
request for Loan), the Revolving Loan Commitment; PROVIDED, HOWEVER, that
notwithstanding the foregoing, the Bank will not make a Revolving Credit Loan
if, after giving effect to such Revolving Credit Loan, the SUM OF: (i) the
unpaid principal amount of the Revolving Credit Loans to the Borrowers, PLUS
(ii) the face amount of all outstanding Accommodations, exceeds or would exceed
the Revolving Loan Commitment.
(b) The Borrowers may request Revolving Credit Loans at any one of the
following interest rate options further described in Section 2.2: (1) Base Rate
(2) Prime Rate or (3) LIBO Rate. The Revolving Credit Loans outstanding at any
one time may involve any combination of such interest rate options in such
amounts as the Borrowers may determine, subject to the terms and conditions
hereof, including the requirement concerning minimum amounts for Loan requests
and the further requirements that:
(i) no request may be made which would require more than one interest
rate option or more than one Interest Period to apply to a single Revolving
Credit Loan, and
(ii) Revolving Credit Loans made automatically in connection with the
payment of an Accommodation, shall be deemed to be Prime Rate Loans, and
(iii) in the case of LIBO Rate Loans, (x) not more than five (5) such
Loans may be outstanding at any one time, (y) no LIBO Rate Loan may have an
Interest Period extending beyond the Revolver Termination Date and the
Interest Periods available for LIBO Rate Loans shall be limited to periods
of one, two or three months,
(c) Except for Revolving Credit Loans which exhaust the full remaining
amount of the Revolving Loan Commitment and conversions which result in the
conversion of all Revolving Credit Loans subject to a particular interest rate
option, each of which may be in lesser amounts, each Revolving Credit Loan when
made and each conversion of Revolving Credit Loans of one type into Loans of
another type hereunder shall be in an amount at least equal to: (i) $500,000 or,
if greater, then in such minimum amount plus $100,000 multiples for LIBO Rate
Loans; and (ii) $100,000 or, if greater than in such
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minimum amount plus $25,000 multiples for all other Revolving Credit Loans.
(d) Within the limits of the Revolving Loan Commitment, the Borrowers may
borrow, prepay (in accordance with Section 2.8) and reborrow Revolving Credit
Loans. All Revolving Credit Loans shall, in any event, be repaid by the
Borrowers on the Revolver Termination Date.
2.2 INTEREST ON THE REVOLVING CREDIT LOANS.
(a) BASE RATE. Each Revolving Credit Loan designated to be a Base Rate Loan
shall bear interest on the principal amount thereof from the date made until
such Loan is paid in full or converted, at a rate per annum equal to the SUM OF:
the Base Rate determined from time to time; PLUS a margin (expressed in basis
points) as may be negotiated by Borrower and the Bank from time to time. Accrued
interest on all Base Rate Loans shall be due and payable in arrears on the first
Business Day of each calendar month until paid in full and upon the Revolver
Termination Date.
(b) PRIME RATE. Each Revolving Credit Loan designated to be a Prime Rate
Loan shall bear interest on the principal amount thereof from the date made
until such Loan is paid in full or converted, at a rate per annum equal to the
Prime Rate determined from time to time. Accrued interest on all Prime Rate
Loans shall be due and payable in arrears on the first Business Day of each
calendar month until paid in full and upon the Revolver Termination Date.
(c) LIBO RATE. Each Revolving Credit Loan designated to be a LIBO Rate Loan
shall bear interest on the principal amount thereof from the date made until
such Loan is paid in full, renewed, or converted, at a rate per annum equal to
the SUM OF the LIBO Rate determined by the Bank from time to time (for the one,
two or three month period selected by Borrowers) PLUS a margin of 130 basis
points. Accrued interest on LIBO Loans with Interest Periods of one, two or
three months shall be due and payable on the last day of such Interest Period.
(i) After receipt of a request for a LIBO Rate Loan, the Bank shall
proceed to determine the LIBO Rate to be applicable thereto. The Bank shall
give prompt notice by telephone or facsimile to Borrowers of the LIBO Rate
thus determined in respect of each LIBO Rate Loan or any change therein.
(ii) In the event the Borrowers fail or are not permitted to select an
Interest Period for any LIBO Rate Loan within the time period and otherwise
as provided herein, such Loan shall be automatically converted into a Prime
Rate Loan on the last day of the Interest Period for such Loan.
(d) RENEWALS AND CONVERSIONS OF LOANS. The Borrowers shall have the right
to convert Base Rate Loans or Prime Rate Loans into LIBO Rate Loans, and vice
versa, and to renew LIBO Rate Loans; from time to time, provided that: (i)
Borrowers shall give the Bank notice of each permitted conversion or renewal as
provided in Section 2.3 hereof; (ii) LIBO Rate Loans may be converted or renewed
only as of the last day of the applicable Interest Period for such Loans; (iii)
without the consent of the Bank, no Loan may be converted into a LIBO Rate Loan,
and no Interest Period may be renewed if on the proposed
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date of conversion an Event of Default, or Potential Default exists or would
thereby occur. The Bank shall use its best efforts to notify the Borrowers of
the effectiveness of such conversion or renewal, and the new interest rate to
which the converted or renewed Loan is subject, as soon as practicable after the
conversion; provided, however, that any failure to give such notice shall not
affect the Borrowers' obligations or the Bank's rights and remedies hereunder in
any way whatsoever.
(e) INTEREST RATES; DEFAULT RATE. Interest under this Agreement shall
accrue for each day from the date a Loan is made until paid in full (both before
and after maturity, default and or judgment) at the rates set forth in this
Agreement. If an Event of Default shall have occurred and be continuing
hereunder (without giving effect to any grace period provided hereunder), the
Borrowers shall, on demand, from time to time pay interest, to the extent
permitted by law, on the Loans (after as well as before judgment) at a rate
equal to the SUM OF (i) the rate which would have been applicable to such Loans
in the absence of such default PLUS (ii) 2.50%.
2.3 FUNDING PROCEDURES.
(a) Each request for a Revolving Credit Loan or the conversion or renewal
of an interest rate with respect to a Revolving Credit Loan shall be made not
later than 1:00 p.m. on a Business Day by delivery to the Bank of a written
request signed by the Borrowers or in the alternative a telephone request
followed promptly by written confirmation of the request, specifying the date
and amount of the Loan to be made, converted or renewed, selecting the interest
rate option applicable thereto, and in the case of LIBO Rate Loans, specifying
the Interest Period applicable to such Loans. The form of request attached
hereto as Exhibit "A" shall be used to request the making, conversion or renewal
of Loans unless otherwise agreed. Each request shall be received not less than
three London Business Days prior to the date of the proposed borrowing,
conversion or renewal in the case of Loans which will be LIBO Rate Loans. No
request shall be effective until actually received in writing by the Bank, and
upon receipt by the Bank, the request for a Loan shall not be revocable by the
Borrowers.
(b) Not later than 5:00 p.m. on the date of each Loan, unless any
applicable condition specified herein has not been satisfied, the Bank will make
funds immediately available to the Borrowers on the date of each Loan by a
credit to the account of Borrowers at the Bank's Applicable Lending Office.
(c) If the Bank makes a Loan on a day on which all or any part of an
outstanding Loan from the Bank is to be repaid, the Bank shall apply the
proceeds of its new loan to make such repayment and only an amount equal to the
difference (if any) between the amount being borrowed and the amount being
repaid shall be made available by the Bank as provided in clause (b).
2.4 TERM LOAN; INTEREST ON THE TERM LOAN.
(a) The Bank agrees to make a term loan to the Borrowers on the date hereof
in the principal amount of Three Million One Hundred Thousand Dollars
($3,100,000). The Term Loan shall be payable in twenty (20) consecutive,
quarterly installments of principal, each in the amount of One Hundred
Fifty-Five Thousand Dollars ($155,000), commencing on July 1, 1997 and
continuing on the first day of each calendar quarter thereafter to and including
April 1, 2002; the entire remaining unpaid balance of the
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Term Loan together with all accrued interest shall be due and payable in full on
the Maturity Date.
(b) The Term Loan shall bear interest on the unpaid principal amount
thereof from time to time outstanding at the fixed rate of 7.95% per annum.
Interest on the Term Loan shall be computed on the basis of the actual number of
days elapsed over a year of 360 days, and such interest shall be payable in
arrears (i) on the first business day of each calendar month occurring after the
date hereof until the Term Loan is paid in full, (ii) at maturity, and (iii)
upon final payment.
2.5 ACCOMMODATIONS. The Bank may issue or cause to be issued, from
time to time at Borrowers' request and on terms and conditions satisfactory to
the Bank, credit accommodations consisting of Letters of Credit in accordance
with Section 2.13 or Bankers' Acceptances in accordance with Section 2.14 for
Borrowers' account ("ACCOMMODATIONS"). Borrowers shall execute such additional
agreements relating to the Accommodations, in form and substance acceptable to
Bank, as Bank may require. Any payments made by Bank in connection with the
Accommodations shall constitute additional Revolving Credit Loans hereunder. No
Accommodation will be issued unless the full amount of the Accommodation
requested, plus fees and costs for issuance, is less than the Net Availability
existing immediately prior to the issuance of the requested Accommodation, or if
the requested Accommodation would cause the outstanding Obligations to exceed
the Revolving Loan Commitment, or cause the open amount of any type of
Accommodation to exceed any sublimit applicable thereto.
2.6 FEES.
(a) CLOSING FEE. The Borrowers shall pay to the Bank a one-time fee (the
"CLOSING FEE") equal to the SUM OF: (i) 0.125% of the Revolving Loan Commitment;
PLUS (ii) 0.25% of the amount of the Term Loan; the unpaid balance (I.E., 50%)
of the Closing Fee shall be due and payable on the Closing Date.
(b) COMMITMENT FEE. From and after the Closing Date, Borrowers shall pay to
the Bank quarterly, in arrears, on the first day of each Fiscal Quarter
beginning with April 1, 1997, a Commitment Fee in the amount of 1/4 of one
percent (0.25%) per annum of the "unused portion of the Revolving Loan
Commitment", computed on a daily basis for the actual number of days elapsed
over a year of 360 days. For purposes of this provision, the "unused portion of
the Revolving Loan Commitment" shall mean the dollar amount of the Revolving
Loan Commitment REDUCED BY the aggregate principal amount of the Revolving
Credit Loans outstanding and the face amount of Accommodations outstanding.
(c) EXPENSES. The Borrowers shall pay to the Bank for its own account, the
fees and expenses agreed to between the Borrowers and Bank in the Outline of
Terms and Conditions signed by the Borrowers on March 6, 1997.
(d) NONREFUNDABLE. No portion of any of the above fees or expenses shall be
refundable under any circumstances, including prepayment, repayment or
acceleration of the Loans with respect to which such fees are due or have been
paid.
2.7 REDUCTION OR TERMINATION OF REVOLVING LOAN COMMITMENT; DATE.
(a) VOLUNTARY. The Borrowers may at any time, on not less than three
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Business days' written notice, terminate or permanently reduce the Revolving
Loan Commitment, provided that any reduction shall be in the amount of
$1,000,000 or a multiple thereof and that no such reduction shall cause the
principal amount of Revolving Credit Loans outstanding to exceed the Revolving
Loan Commitment as reduced.
(b) TERMINATION. In the event the Revolving Loan Commitment is terminated
by the Borrowers, the Revolver Termination Date shall accelerate and the
Borrowers shall, simultaneously with such termination, repay the Revolving
Credit Loans in full.
2.8 PREPAYMENTS.
(a) BASE RATE LOANS. On one Business Day's notice to the Bank, the Borrower
may prepay the Base Rate Loans and/or the Prime Rate Loans in whole at any time
or in part from time to time, provided that each partial prepayment shall be in
the principal amount of $100,000 or, if greater, then in such minimum amount
plus $25,000 multiples.
(b) LIBO RATE LOANS. If any principal of a LIBO Rate Loan shall be repaid
(whether upon repayment, reduction of the Revolving Loan Commitment, after
acceleration or for any other reason) or converted to a Base Rate Loan prior to
the last day of the Interest Period applicable to such LIBO Rate Loan or if the
Borrowers fail for any reason to borrow a LIBO Rate Loan after giving
irrevocable notice pursuant to Section 2.3, the Borrowers shall pay to the Bank,
in addition to the principal and interest then to be paid, such additional
amounts as may be necessary to compensate the Bank for all direct and indirect
costs and losses (including losses resulting from redeployment of prepaid or
unborrowed funds at rates lower than the cost of such funds to the Bank, and
including lost profits incurred or sustained by the Bank) incurred as a result
of such repayment or failure to borrow (the "ADDITIONAL AMOUNT"). The Additional
Amount (which the Bank shall take reasonable measures to minimize) shall be
specified in a written notice or certificate delivered to Borrowers by the Bank.
Such notice or certificate shall contain a calculation in reasonable detail of
the Additional Amount to be compensated and shall be conclusive as to the acts
and the amounts stated therein, absent manifest error.
(c) FIXED RATE LOANS. Borrowers may prepay the outstanding principal amount
of the Term Loan, in whole or in part, from time to time, subject to the
following conditions: (i) each partial prepayment shall be in a minimum amount
of $50,000 and in integral multiples of $50,000; (ii) each prepayment shall be
preceded by one (1) Business Days' prior written notice specifying the amount of
the prepayment and the prepayment date; (iii) each partial prepayment shall be
applied in the inverse order of maturity on the unpaid principal balance of the
Term Loan; and (iv) each such prepayment shall be accompanied by a prepayment
premium determined as follows: such premium shall be equal to the amount, if
any, by which the aggregate present value of scheduled principal and interest
payments eliminated by the prepayment exceeds the principal amount being
prepaid. Said present value shall be calculated by application of a discount
rate determined by the Bank in its reasonable judgment to be the
yield-to-maturity at the time of prepayment on U.S. Treasury securities having a
maturity which most closely approximates the final maturity date of the
principal balance then outstanding and proposed to be pre-paid.
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2.9 PAYMENTS - GENERAL.
(a) FORM OF PAYMENTS, APPLICATION OF PAYMENTS, PAYMENT ADMINISTRATION, ETC.
Provided that no Event of Default has occurred and is continuing, all payments
and prepayments shall be applied to the Loans in such order and to such extent
as shall be specified by the Borrowers, by written notice to the Bank at the
time of such payment or prepayment. Except as otherwise provided herein, all
payments of principal, interest, fees, or other amounts payable by the Borrowers
hereunder shall be remitted to the Bank at its Applicable Lending Office in
immediately available funds not later than 2:00 p.m. on the day when due.
Whenever any payment is stated as due on a day which is not a Business Day, the
maturity of such payment shall, except as otherwise provided in the definition
of "Interest Period" in Section 1.1, be extended to the next succeeding Business
Day and interest and commitment fees shall continue to accrue during such
extension. The Borrowers authorize the Bank to deduct from any account of any
Borrower maintained at the Bank or over which the Bank has control any amount
payable under this Agreement, the Notes or any other Loan Document as and when
such amounts become due. The Bank's failure to deliver any bill, statement or
invoice with respect to amounts due under this Section or under any Loan
Document shall not affect the Borrowers' obligation to pay any installment of
principal, interest or any other amount under this Agreement when due and
payable.
(b) NET PAYMENTS. All payments made to the Bank by the Borrowers hereunder,
under any Note or under any other Loan Document will be made without set off,
counterclaim or other defense. All such payments will be made free and clear of,
and without deduction or withholding for, any present or future taxes, levies,
imposts, duties, fees, assessments or other charges of whatever nature now or
hereafter imposed by any jurisdiction or any political subdivision or taxing
authority thereof or therein (but excluding, except as provided below, any tax
imposed on or measured by the gross or net income of the Bank (including all
interest, penalties or similar liabilities related thereto) pursuant to the laws
of the United States of America or any political subdivision thereof, or taxing
authority of the United States of America or any political subdivision thereof,
in which the principal office or applicable lending office of the Bank is
located), and all interest, penalties or similar liabilities with respect
thereto (collectively, together with any amounts payable pursuant to the next
sentence, "TAXES"). The Borrowers shall also reimburse the Bank, upon the
written request of the Bank, for Taxes imposed on or measured by the gross or
net income of the Bank pursuant to the laws of the United States of America (or
any State or political subdivision thereof), or the jurisdiction (or any
political subdivision or taxing authority thereof in which the principal office
or applicable lending office of the Bank is located as the Bank shall determine
are payable by the Bank due to the amount of Taxes paid to or on behalf of the
Bank pursuant to this or the preceding sentence. If any Taxes are so levied or
imposed, the Borrowers agree to pay the full amount of such Taxes, and such
additional amounts as may be necessary so that every payment of all amounts due
hereunder, under any Note or under any other Loan Document, after withholding or
deduction for or on account of any Taxes, will not be less than the amount
provided for herein or in such Note. The Borrowers will furnish to the Bank upon
request certified copies of tax receipts evidencing such payment by Borrowers.
The Borrowers will indemnify and hold harmless the Bank, and reimburse the Bank
upon its written request, for the amount of any Taxes so levied or imposed and
paid or withheld by the Bank.
2.10 NOTES.
(a) REVOLVING LOAN NOTE. Together herewith, the Borrowers shall issue
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and deliver to the Bank a promissory note, substantially in the form of Exhibit
"B" hereto, payable to the order of the Bank, duly executed on behalf of the
Borrowers, dated as of the Closing Date, and in a maximum principal amount equal
to the Revolving Loan Commitment (the "REVOLVING LOAN NOTE"). Subject to the
terms of this Agreement, the principal balance outstanding under the Revolving
Loan Note together with all accrued interest shall be due and payable on the
Revolver Termination Date. All Revolving Credit Loans made by the Bank to the
Borrowers pursuant to this Agreement and all payments of principal thereon shall
be evidenced by the Bank in its records or, at its option, on a schedule
attached to the Revolving Loan Note, which records or schedule, as the case may
be, shall be conclusive and binding for all purposes absent error in
computation.
(b) TERM NOTE. Together herewith, the Borrowers shall issue and deliver to
the Bank a promissory note, substantially in the form of Exhibit "C" hereto,
payable to the order of the Bank, duly executed on behalf of the Borrowers,
dated as of the Closing Date, and in a principal amount of $3,100,000 (the "TERM
NOTE"). The Term Note shall be due and payable in accordance with the provisions
of Section 2.4. All payments of the Term Loan shall be evidenced by the Bank in
its records or, at its option, on a schedule attached to the Term Note, which
records or schedule shall be conclusive and binding for all purposes absent
error in computation.
(c) ADDITIONAL NOTES. In addition thereto, Borrowers shall, from time to
time at the reasonable request of the Bank execute and deliver such replacement
promissory notes to the Bank as the Bank deems necessary to evidence any of the
Loans.
2.11 DEPOSIT ACCOUNTS. To induce the Bank to make and to better secure the
Loans provided for hereunder, the Borrowers agrees, to establish and maintain
with the Bank at all times until all of the Obligations have been satisfied and
discharged, all of its principal deposit and cash management accounts. All
balances of the Borrowers maintained with the Bank in any deposit account or
otherwise shall be additional security for, and shall be subject to the Bank's
lien and security interest for, all Obligations of the Borrowers to the Bank.
The Bank is authorized to charge each Borrower's deposit account(s) for all of
the Obligations as they become due from time to time, including, without
limitation, principal, interest, fees and other charges and reimbursement of the
Bank's costs of collection in relation to the Obligations. The Borrowers shall
be permitted to maintain accounts with other banks or financial institutions
(acceptable to the Bank in its reasonable discretion) but only to the extent
necessary to meet Borrowers' payroll requirements and to service Borrowers'
office locations (i) in areas where the Bank does not maintain banking offices
and (ii) outside of the United States. Following the occurrence of an Event of
Default hereunder, Borrower will, immediately upon receipt of notice from the
Bank, assign to the Bank, all of Borrower's right, title and interest in and to
any and all accounts (other than those maintained for payroll purposes as
described above) maintained by Borrower at any bank, other than the Bank, to the
effect that following such assignment, the Bank shall have sole dominion and
control over such account(s).
2.12 JOINT AND SEVERAL LIABILITY. The business operations of the Borrowers
are interrelated and compliment one another, they have a common business
purpose, with intercompany bookkeeping and accounting adjustments used to
separate their respective properties, assets, liabilities and transactions. To
permit their uninterrupted and continuous operations, the Borrowers will require
funds for working capital and other corporate business purposes, and the making
of Loans hereunder by the Bank will directly or indirectly benefit each Borrower
severally and jointly whether or not certain of the
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Borrowers receive part or all of the proceeds of any particular Loan. The
Borrowers hereby agree and acknowledge that each is jointly and severally liable
for the repayment of all of the Obligations, and each Borrower hereby guarantees
the Obligations incurred by the other Borrowers.
2.13 LETTERS OF CREDIT.
(a) Subject to the terms and conditions of this Agreement and to the Letter
of Credit Sublimit, the Bank will issue Letters of Credit for Borrower's
account, as soon as reasonably practicable but within three (3) Business Days
following the date Borrower's request for a Letter of Credit (including a fully
completed Letter of Credit Application and a Master Letter of Credit Agreement
in the customary form of the Bank) is received by the Bank. Notwithstanding
anything herein to the contrary, the Bank may decline to issue any requested
Letter of Credit on the basis that the terms or the conditions of drawing are
unacceptable to it in its reasonable discretion. Each Letter of Credit shall
provide that drafts drawn on it shall be payable on sight (or as otherwise
specified in the letter of credit). Each standby Letter of Credit issued by the
Bank shall have a maturity date of 364 days or less from the date issued and
each commercial Letter of Credit issued by the Bank shall have a maturity date
of 180 days or less from the date issued PROVIDED, HOWEVER, that no Letter of
Credit issued by the Bank shall have a maturity date extending beyond the
Revolver Termination Date. All Letter of Credit Borrowings made under this
Section shall be due and payable as provided below. No Letter of Credit shall be
issued unless the face amount of the Letter of Credit is less than the Net
Availability existing immediately prior to its issuance and such issuance would
not cause the Loans and Accommodations outstanding to exceed the Revolving Loan
Commitment.
(b) The Borrowers shall pay to the Bank, on each date on which the Bank
shall honor a draft or other demand for payment presented or made under any
Letter of Credit, an amount equal to the amount paid by the Bank in respect of
such draft or other demand under such Letter of Credit. If the Borrowers shall
fail to pay the full amount due on each such date, any amount due but unpaid
shall automatically be paid through the making of a Revolving Credit Loan in the
amount due but unpaid as of such date. Upon the making of such an automatic
Loan, the obligation of the Borrowers to repay amounts drawn under such Letter
of Credit shall be deemed satisfied. The automatic Loan under subsection (a)
above shall be deemed to be a Prime Rate Loan made under the Revolving Loan
Commitment and the parties shall be entitled to treat such Loan, for all
purposes under this Agreement, as if it were made under Section 2.1.
2.14 BANKERS ACCEPTANCES.
(a) Upon receiving an appropriate request from the Borrowers, the Bank
shall create a Bankers' Acceptance in the manner set forth in the Acceptance
Agreement, using drafts signed by Borrower and provided to Bank. Each Bankers'
Acceptance shall (i) be of a type of eligible for discounting and purchase under
12 U.S.C. ss.372 and the rules of the Board of Governors of the Federal Reserve
System then in effect, and (ii) have a maturity of 30, 60 or 90 days. On the
date of the requested Bankers' Acceptance, the Bank shall notify Borrowers as to
the rate applicable for discounting the Bankers' Acceptance to be created, which
rate shall be the Discount Rate. The obligations and rights of the Borrowers and
the Bank with respect to the Bankers' Acceptances shall be governed by the terms
of this Agreement as well as the terms of the Acceptance Agreement which is
incorporated herein by reference and made a part hereof.
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(b) The Borrowers shall pay to the Bank the face amount of the Bankers'
Acceptance created by the Bank under above, on the stated maturity date of such
Bankers' Acceptance. If the Borrowers shall fail to pay the full amount on each
such date, any amount due but unpaid shall automatically be paid through the
making of a Revolving Credit Loan in the amount due but unpaid as of such date.
Upon the making of such an automatic Revolving Credit Loan, the Obligation of
the Borrowers to pay the Bankers' Acceptances on such date shall be deemed
satisfied. Upon being made, such automatic Revolving Credit Loan shall be deemed
to be a Prime Rate Loan made under the Revolving Loan Commitment and the Bank
shall be entitled to exercise all of its rights and remedies with respect to
such automatic Revolving Credit Loan as if it were made pursuant to Section 2.1
hereof.
2.15 CHANGES IN CIRCUMSTANCES; YIELD PROTECTION.
(a) If any Regulatory Change or compliance by the Bank with any request
made after the date of this Agreement by the Board of Governors of the Federal
Reserve System or by any Federal Reserve Bank or other central bank or fiscal,
monetary or similar authority (in each case whether or not having the force of
law) shall:
(i) impose, modify or make applicable any reserve, special deposit,
Federal Deposit Insurance Corporation premium or similar requirement or
imposition against assets held by, or deposits in or for the account of, or
loans or accommodations made by, or any other acquisition of funds for
loans or advances by, the Bank;
(ii) impose on the Bank any other condition regarding the Notes;
(iii) subject the Bank to, or cause the withdrawal or termination of
any previously granted exemption with respect to, any tax (including any
withholding tax but not including any income tax not currently causing the
Bank to be subject to withholding) or any other levy, impost, duty, charge,
fee or deduction on or from any payments due from the Borrowers; or
(iv) change the basis of taxation of payments from the Borrowers to
the Bank (other than by reason of a change in the method of taxation of the
Bank's net income);
and the result of any of the foregoing events is to increase the cost to the
Bank of making or maintaining any Loan or Accommodation or to reduce the amount
of principal, interest or fees to be received by the Bank hereunder in respect
of any Loan or Accommodation, the Bank will so notify the Borrowers. If the Bank
determines in good faith that the effects of the change resulting in such
increased cost or reduced amount cannot reasonably be avoided or the cost
thereof mitigated, then upon notice by the Bank to the Borrowers, the Borrowers
shall pay to the Bank on each interest payment date of or applicable to the Loan
or Accommodation, such additional amount as shall be necessary to compensate the
Bank for such increased cost or reduced amount.
(b) If the Bank shall determine that any Regulation regarding capital
adequacy or the adoption of any Regulation regarding capital adequacy, which
Regulation is
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applicable to banks (or their holding companies) generally and not the Bank (or
its holding company) specifically, or any change therein, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by the Bank (or its holding company) with any such
request or directive regarding capital adequacy (whether or not having the force
of law) of any such authority, central bank or comparable agency, has the effect
of reducing the rate of return on the Bank's capital as a consequence of its
obligations hereunder to a level below that which the Bank could have achieved
but for such adoption, change or compliance (taking into consideration the
Bank's policies with respect to capital adequacy) by an amount deemed by the
Bank to be material, the Borrowers shall promptly pay to the Bank, upon demand,
such additional amount or amounts as will compensate the Bank for such
reduction.
(c) If the Bank shall determine (which determination shall be, in the
absence of fraud or manifest error, conclusive and binding upon all parties
hereto) that by reason of abnormal circumstances affecting the interbank
eurodollar or applicable eurocurrency market adequate and reasonable means do
not exist for ascertaining the LIBO Rate to be applicable to the requested LIBO
Rate Loan or that eurodollar or eurocurrency funds in amounts sufficient to fund
all the LIBO Rate Loans are not obtainable on reasonable terms, the Bank shall
give notice of such inability or determination by telephone to the Borrowers at
least two Business Days prior to the date of the proposed Loan and thereupon the
obligations of the Bank to make, convert other Loans to, or renew such LIBO Rate
Loan shall be excused, subject, however, to the right of the Borrowers at any
time thereafter to submit another request.
(d) Determination by the Bank for purposes of this Section of the effect of
any Regulatory Change or other change or circumstance referred to above on its
costs of making or maintaining Loans or Accommodations or on amounts receivable
by it in respect of the Loans and of the additional amounts required to
compensate the Bank in respect of any additional costs, shall be made in good
faith and shall be evidenced by a certificate, signed by an officer of the Bank
and delivered to the Borrowers, as to the fact and amount of the increased cost
incurred by or the reduced amount accruing to the Bank owing to such event or
events. Such certificate shall be prepared in reasonable detail and shall be
conclusive as to the facts and amounts stated therein, absent manifest error.
(e) The Bank will notify the Borrowers of any event occurring after the
date of this Agreement that will entitle the Bank to compensation pursuant to
this Section as promptly as practicable after it obtains knowledge thereof and
determines to request such compensation. Said notice shall be in writing, shall
specify the applicable Section or Sections of this Agreement to which it relates
and shall set forth the amount of amounts then payable pursuant to this Section.
The Borrowers shall pay the Bank the amount shown as due on such notice within
10 days after its receipt of the same.
2.16 RIGHT OF SET-OFF. Upon the occurrence and during the continuance of
any Event of Default, the Bank is hereby authorized at any time and from time to
time, to the fullest extent permitted by law, to set off and apply any and all
monies, securities and other property of any Borrower and the proceeds thereof,
now or hereafter held or received by, or in transit to, the Bank from or for any
Borrower, whether for safekeeping, custody, pledge, transmission, collection or
otherwise and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by the Bank to
or for the credit or the account of any Borrower against any and all of the
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obligations of the Borrowers now or hereafter existing under this Agreement and
the Notes, irrespective of whether or not the Bank shall have made any demand
under this Agreement or the Notes and although such obligations may be
unmatured.
2.17 ILLEGALITY. Notwithstanding any other provision in this Agreement, if
the adoption of any applicable Regulation, or any change therein, or any change
in the interpretation or administration thereof by any governmental authority,
central bank, or comparable agency charged with the interpretation or
administration thereof, or compliance by the Bank with any request or directive
(whether or not having the force of law) of any such authority, central bank, or
comparable agency shall make it unlawful or impossible for the Bank to (1)
maintain its Revolving Loan Commitment, then upon notice to the Borrowers by the
Bank, the Revolving Loan Commitment shall terminate; or (2) maintain or fund
LIBO Rate Loans, then upon notice to the Borrowers of such event, the
outstanding LIBO Rate Loans shall be converted into Base Rate Loans.
2.18 EXTENSION OF REVOLVER TERMINATION DATE. The Revolver Termination Date
may be extended for an additional period (to be agreed upon by Bank and the
Borrowers) at the request of Borrowers and with the written consent of the Bank
(which consent may be withheld in the sole discretion of Bank). Within the 45
day period beginning 90 days prior to the Revolver Termination Date then in
effect, Borrowers may deliver to the Bank a written request for an extension of
the Revolver Termination Date. If the Bank has consented, then, so long as the
representations and warranties contained in Article IV (other than
representations and warranties which expressly speak as of a particular date or
are no longer true and correct as a result of a change which is permitted by
this Agreement) shall be true and correct on and as of the Revolver Termination
Date then in effect, the Revolver Termination Date shall be extended for the
additional period agreed upon by Borrowers and the Bank (effective as of the
Revolver Termination Date then in effect.
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ARTICLE III
SECURITY FOR LIABILITIES
3.1 GRANT OF SECURITY INTEREST. As security for the due and punctual
payment of the Obligations, including, without limitation, all of each
Borrower's obligations under this Agreement and the Notes, and whether the
Obligations are from time to time reduced and thereafter increased or entirely
extinguished and thereafter reincurred, the Borrowers hereby pledge, grant and
assign to the Bank a first priority lien on and security interest in all of the
Collateral, as described on Schedule 3.1 hereto and as to be evidenced by the
following Collateral Documents:
(a) A Stock Pledge Agreement which provides the Bank with a first
priority lien upon and security interest in sixty-five (65%) percent of the
issued and outstanding shares of capital stock of the Subsidiaries of
Borrowers identified on Schedule 3.1.
(b) Form UCC-1 financing statements relating to all Collateral, to be
filed in all jurisdictions in which filings are deemed appropriate by the
Bank.
Borrowers shall have sixty (60) days following the Closing Date in which to
deliver to the Bank the agreements, certificates, instruments and other
documents necessary to satisfy the requirements of this Section 3.1 (including
without limitation delivery to the Bank of an opinion of counsel to Borrowers
regarding the validity, perfection and enforceability in favor of the Bank of
all of the foregoing).
3.2 FURTHER ASSURANCES. The Borrowers further agree to execute and deliver
to the Bank, at any time and from time to time, at Borrowers' sole cost and
expense, all assignments, financing statements pursuant to the Uniform
Commercial Code ("UCC"), including continuation statements thereof, and other
documents requested by the Bank, at its reasonable discretion, and to take all
other actions reasonably requested of the Borrowers from time to time by the
Bank to protect all Collateral now or hereafter granted to secure payment of the
Obligations and to create and perfect the security interest granted herein and
in the Collateral Documents. If Borrowers shall fail to execute any UCC
statement following a request reasonably made by the Bank, the Bank is
authorized to sign such financing statement on behalf of the Borrowers as their
attorney in fact with the same authority given to the Bank under Section 9.3 as
if there had occurred an Event of Default.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES.
Each Borrower represents and warrants to the Bank that:
4.1 ORGANIZATION, STANDING. The Borrower and each Subsidiary (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation, (ii) has the corporate power and
authority necessary to own its assets, carry on its business and enter into and
perform its obligations hereunder, under each Loan Document to which it is a
party and (iii) is qualified to do business and is in good standing in each
jurisdiction where the nature of its business or the ownership of its properties
requires such qualification except where the failure to be so qualified would
not have a material adverse effect on the business, operations, assets or
condition (financial or otherwise) of the Borrower and its Subsidiaries taken as
a whole. All of Borrower's places of business, offices or other locations owned,
leased, or used in any manner by Borrower or any Subsidiary are accurately and
completely listed on Schedule 4.1 hereto, which schedule shall be amended, from
time to time, to reflect any of Borrower's or any Subsidiaries' future places of
business, offices or locations.
4.2 CORPORATE AUTHORITY. VALIDITY ETC. The making and performance of the
Loan Documents to which it is a party are within the power and authority of the
Borrower and have been duly authorized by all necessary corporate action. The
making and performance of the Loan Documents do not and under present law will
not require any consent or approval of any of the Borrower's shareholders or any
other person, do not and under present law will not violate any law, rule,
regulation order, writ, judgment, injunction, decree, determination or award
then in effect and binding on Borrower, do not violate any provision of its
charter or by-laws, do not and will not result in any breach of any material
agreement, lease or instrument to which it is a party, by which it is bound or
to which any of its assets are or may be subject, and do not and will not give
rise to any Lien upon any of its assets (other than those created in connection
with the Loans hereunder in favor of the Bank). Further, the Borrower is not in
default under any such agreement, lease or instrument except to the extent such
default reasonably would not have a material adverse effect on the business,
operations, assets or condition (financial or otherwise) of the Borrower and its
Subsidiaries taken as a whole. No authorizations, approvals or consents of, and
no filings or registrations with, any governmental or regulatory authority or
agency are necessary for the execution, delivery or performance by any Borrower
of any Loan Document to which the Borrower is a party or for the validity or
enforceability thereof. Each Loan Document, when executed and delivered, will be
the legal, valid and binding obligation of Borrower, the 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.
4.3 LITIGATION. Except as disclosed herein, there are no actions, suits or
proceedings pending or, to the Borrower's knowledge, threatened against or
affecting the Borrower or any assets of the Borrower before any court,
government agency or other tribunal which if adversely determined reasonably
could have a material adverse effect on the financial condition, operations or
assets of the Borrower and its Subsidiaries taken as a whole or upon the ability
of the Borrower to perform under the Loan Documents. The status (including the
tribunal, the nature of the claim and the amount in controversy) of
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each such litigation matter as of the date of this Agreement is set forth in
Schedule 4.3.
4.4 ERISA. The Borrower and each Subsidiary and ERISA Affiliate are in
compliance in all material respects with all applicable provisions of ERISA and
the regulations promulgated thereunder; and, (a) Neither the Borrower, any
Subsidiary, nor any ERISA Affiliate maintains or contributes to or has
maintained or contributed to any multiemployer plan (as defined in section 4001
of ERISA) under which the Borrower, any Subsidiary or any ERISA Affiliate could
have any withdrawal liability; (b) Neither the Borrower, any Subsidiary, nor any
ERISA Affiliate, sponsors or maintains any Plan under which there is an
accumulated funding deficiency within the meaning of ss.412 of the Code, whether
or not waived; (c) The aggregate liability for accrued benefits and other
ancillary benefits under each Plan that is or will be sponsored or maintained by
the Borrower, any Subsidiary or any ERISA Affiliate (determined on the basis of
the actuarial assumptions prescribed for valuing benefits under terminating
single-employer defined benefit plans under Title IV of ERISA) does not exceed
the aggregate fair market value of the assets under each such defined benefit
pension Plan; (d) The aggregate liability of the Borrower and each Subsidiary
and each ERISA Affiliate arising out of or relating to a failure of any Plan to
comply with the provisions of ERISA or the Code, will not have a material
adverse effect on the Borrower or any Subsidiary; and (e) There does not exist
any unfunded liability (determined on the basis of actuarial assumptions
utilized by the actuary for the plan in preparing the most recent Annual Report)
of the Borrower, any Subsidiary or ERISA Affiliate under any plan, program or
arrangement providing post-retirement life or health benefits.
4.5 FINANCIAL STATEMENTS. The consolidated financial statements of the
Borrower and its Subsidiaries as of and for the fiscal year ending September 30,
1996 consisting of a balance sheet, income statement, a statement of
shareholders' equity, a statement of cash flows and accompanying footnotes, and
the interim consolidated financial statements of the Borrower and its
Subsidiaries as of December 31, 1996 furnished to the Bank in connection
herewith, present fairly, in all material respects, the financial position,
results of operations and cash flows of the Borrower and its Subsidiaries as of
the dates and for the periods referred to, in conformity with Generally Accepted
Accounting Principles. Except as set forth on Schedule 4.5, there are no
liabilities, fixed or contingent, which are not reflected in such financial
statements, other than liabilities which are not required to be reflected in
such balance sheets. Except as otherwise previously or contemporaneously with
the execution of this Agreement communicated to the Bank in writing by an
Authorized Financial Officer of Quad Systems Corporation, there has been no
material adverse change in the business, operations or assets or condition
(financial or otherwise) of any of the Borrower or its Subsidiaries since
December 31, 1996.
4.6 NOT IN DEFAULT; JUDGMENTS, ETC. No Event of Default under any Loan
Document has occurred and is continuing. The Borrower and its Subsidiaries have
satisfied all judgments and neither the Borrower nor any Subsidiary is in
default with respect to any judgment, writ, injunction, decree, rule, or
regulation of any court, arbitrator, or federal, state, municipal, or other
governmental authority, commission, board bureau, agency, or instrumentality,
domestic or foreign.
4.7 TAXES. The Borrower and each Subsidiary has filed all federal, state,
local and foreign tax returns and reports which it is required by law to file
and has paid all taxes, including wage taxes, assessments, withholdings and
other governmental charges which are presently due and payable (other than those
being contested in good faith by
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appropriate proceedings and disclosed on Schedule 4.7). The tax charges,
accruals and reserves on the books of the Borrower and each Subsidiary are
adequate to pay all such taxes that have accrued but are not presently due and
payable.
4.8 PERMITS, LICENSES, ETC. The Borrower and each Subsidiary possess all
permits, licenses, franchises, trademarks, trade names, copyrights and patents
necessary to the conduct of its business as presently conducted or as presently
proposed to be conducted, except where the failure to possess the same would not
have a Material Adverse Effect.
4.9 COMPLIANCE WITH LAWS.
(a) COMPLIANCE. The Borrower and each Subsidiary is in compliance in all
material respects with all Regulations applicable to its business (including
obtaining all authorizations, consents, approvals, orders, licenses, exemptions
from, and making all filings or registrations or qualifications with, any court
or governmental department, public body or authority, commission, board, bureau,
agency, or instrumentality), the noncompliance with which reasonably would not
have a Material Adverse Effect.
(b) HAZARDOUS WASTES, SUBSTANCES AND PETROLEUM PRODUCTS.
(i) The Borrower and each Subsidiary: (i) have received all permits
and filed all notifications necessary to carry on their respective
business(es); and (ii) are in compliance in all respects with all
Environmental Control Statutes.
(ii) Neither the Borrower nor any Subsidiary has given any written or
oral notice, nor has it failed to give required notice, to the
Environmental Protection Agency ("EPA") or any state or local agency with
regard to any actual or imminently threatened Release of Hazardous
Substances on properties owned, leased or operated by the Borrower or any
Subsidiary or used in connection with the conduct of its business and
operations.
(iii) Neither the Borrower nor any Subsidiary has received notice that
it is potentially responsible for costs of clean-up or remediation of any
actual or imminently threatened Release of Hazardous Substances pursuant to
any Environmental Control Statute.
(iv) No real property owned or leased by the Borrower or any
Subsidiary is in violation of any Environmental Laws, no Hazardous
Materials are present on said real property and neither the Borrower nor
any Subsidiary has been identified in any litigation, administrative
proceedings or investigation as a responsible party for any liability under
any Environmental Laws.
4.10 SOLVENCY. The Borrower and each Subsidiary are, and after giving
effect to the transactions contemplated hereby, will be on and as of the date
hereof, Solvent.
4.11 NO BURDENSOME AGREEMENTS. Neither the Borrower nor any Subsidiary is a
party to or bound by any agreement or instrument or subject to any corporate or
other restriction, the performance or observance of which now has or, as far as
the Borrower or any Subsidiary can reasonably foresee, may have a materially
adverse effect on the financial condition, operations or assets of the Borrower
or of the Borrower and its Subsidiaries taken as a whole.
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4.12 SUBSIDIARIES, INVESTMENTS, ETC. Set forth in Schedule 4.12 hereto is a
complete and correct list, as of the date of this Agreement, of all Subsidiaries
(and the respective jurisdiction of incorporation of each such Subsidiary), and
of all Investments held by the Borrower in any joint venture or other Person.
Except as disclosed in Schedule 4.12 hereto, as of the date hereof, the Borrower
owns, directly or through a Subsidiary, free and clear of Liens, all outstanding
shares of each Subsidiary and all such shares are validly issued, fully paid and
non-assessable, and the Borrower (or the respective Subsidiary) also owns, free
and clear of Liens, all such Investments. Schedule 4.12 also sets forth as to
each Subsidiary the authorized capital stock, the number of shares of each class
of such capital stock issued and outstanding and held in treasury and the record
and beneficial owners of all such issued and outstanding shares. Except as set
forth on Schedule 4.12, all of the issued and outstanding shares of capital
stock of each Subsidiary have been duly authorized and validly issued and are
fully paid and nonassessable and held free and clear of all Liens whatsoever,
and there are no outstanding subscriptions, options, warrants, calls, conversion
or exchange rights, commitments or agreements of any character obligating any
Subsidiary to issue, deliver or sell additional shares of its capital stock of
any class or any securities convertible into or exchangeable for any such
capital stock.
4.13 TITLE; LIENS. Except as otherwise disclosed in Schedule 4.13, Borrower
and its Subsidiaries have good and marketable title to and indefeasible
ownership interests in, all of their respective properties and assets, free and
clear of any Lien. Schedule 4.13 sets forth and describes in reasonable detail
each Lien in existence with regard to the property and assets of the Borrower
and any Subsidiary.
4.14 COLLATERAL DOCUMENTS. The provisions of the Collateral Documents are
effective to create in favor of the Bank, a legal, valid and enforceable
security interest in all of the Borrower's right, title and interest in the
Collateral, which security interest will be and constitute fully perfected first
priority Lien on and security interest in all right, title and interest of the
Borrower in such Collateral, superior in right to any Liens, existing or future,
which any third-party may have against such Collateral or interests therein.
4.15 LABOR MATTERS. The Borrower has not experienced any strike, labor
dispute, slowdown or work stoppage due to labor disagreements which would have a
Material Adverse Effect and, to the best knowledge of the Borrower, there is no
such strike, dispute, slowdown or work stoppage threatened.
4.16 DISCLOSURE GENERALLY. The representations and statements made by or on
behalf of the Borrower or any Subsidiary in connection with this credit facility
and each Loan, hereunder, including representations and statements in each of
the Loan Documents, do not contain any untrue statement of a material fact or
omit to state a material fact or any fact necessary to make the representations
made not materially misleading. No written information, exhibit, report or
financial statement furnished by the Borrower to the Bank in connection with
this Agreement, the Loans, or any Loan Document, contains any material
misstatement of fact or omits to state a material fact or any fact necessary to
make the statements contained therein not materially misleading.
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ARTICLE V
CONDITIONS PRECEDENT
5.1 ALL LOANS. The obligation of the Bank to make any Loan is conditioned
upon satisfaction of the following by each Borrower:
(a) DOCUMENTS. The Borrower shall have delivered and the Bank shall
have received a request for a Loan, in the form attached hereto as Exhibit
"A".
(b) COVENANTS; REPRESENTATIONS. The Borrower shall be in compliance
with all covenants, agreements and conditions in each Loan Document and
each representation and warranty contained in each Loan Document (other
than representations and warranties which expressly speak as of a
particular date or are no longer true and correct as a result of a change
which is permitted by this Agreement) shall be true with the same effect as
if such representation or warranty had been made on the date such Loan is
made or issued.
(c) DEFAULTS. After giving effect to such transaction, no Event of
Default or Potential Default shall exist.
(d) CHANGE. No material, adverse change shall have occurred in the
business or condition (financial or otherwise) of the Borrowers taken as a
whole.
5.2 CONDITIONS TO FIRST LOAN. The obligation of the Bank to make the first
Loan hereunder is conditioned upon satisfaction of the following by each
Borrower:
(a) ARTICLES, BYLAWS. The Bank shall have received copies of the
Articles or Certificates of Incorporation and Bylaws of the Borrower,
certified by the Secretary or Assistant Secretary of the Borrower; together
with Certificate of Good Standing from any jurisdiction where the nature of
its business or the ownership of its properties requires such qualification
except where the failure to be so qualified would not have a material
adverse effect on the business, operations, assets or condition (financial
or otherwise) of the Borrower and its Subsidiaries taken as a whole;
(b) EVIDENCE OF AUTHORIZATION. The Bank shall have received copies
certified by the Secretary or Assistant Secretary of the Borrower of all
corporate or other action taken by each Person who is a party to any Loan
Document to authorize its execution and delivery and performance of the
Loan Documents and to authorize the Revolving Credit Loans, together with
such other related papers as the Bank shall reasonably require;
(c) LEGAL OPINIONS. The Bank shall have received a favorable written
opinion of BALLARD SPAHR ANDREWS & INGERSOLL, Counsel for the Borrower,
which shall be addressed to the Bank and be dated the date of the first
Loan, in substantially the form attached as Exhibit 5.2(c);
(d) INCUMBENCY. The Bank shall have received a certificate signed by
the secretary or assistant secretary of each corporate signatory to the
Loan Documents other than the Bank, together with the true signature of the
officer or officers authorized to execute and deliver the Loan Documents,
upon which the Bank shall be entitled to rely conclusively;
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(e) NOTES. The Bank shall have received an executed Revolving Loan
Note and an executed Term Note, each payable to the order of the Bank and
otherwise in the form of Exhibits "B" and "C" hereto. In addition, the Bank
shall have received all certificates, instruments and other documents then
required to be delivered pursuant to any Loan Documents, in each instance
in form and substance reasonably satisfactory to the Bank;
(f) CONSENTS. The Borrower shall have provided to the Bank evidence
satisfactory to the Bank that all governmental, shareholder and third party
consents and approvals necessary in connection with the transactions
contemplated hereby have been obtained and remain in effect;
(g) CHANGE. No material adverse change shall have occurred in the
financial condition or prospects of the Borrowers since the date of the
most recent annual Financial Statements of the Borrowers;
(h) OTHER AGREEMENTS. The Borrower shall have executed and delivered
each other Loan Document required hereunder including without limitation
the documents required under Section 3.1;
(i) LOAN REQUEST. A completed Loan Request Form required under
Paragraph 2.3(a), hereof, and any other documents or information reasonably
required by the Bank in connection therewith.
(j) FEE. Payment of the fees required by Section 2.6 hereof.
(k) FINANCIAL STATEMENTS. The Bank shall have received and reviewed a
true and complete copy of the Financial Statements of the Borrower for its
fiscal year ended September 30, 1996, audited by Ernst & Young, LLP,
Certified Public Accountants.
(l) DUE DILIGENCE. The Bank shall have completed and been satisfied
with the results of its due diligence review and audit of the Borrower, its
financial condition, assets, operations and property.
(m) INSURANCE. Evidence satisfactory to the Bank that the Borrower has
obtained the policies of insurance required by Section 6.6 of this
Agreement, that the policies provide that they cannot be cancelled or
amended without at least 30 days prior notice to the Bank and that all of
the requirements of such documents and sections relating to insurance have
been duly complied with.
(n) PRIOR INDEBTEDNESS. Evidence satisfactory to the Bank that all
previously existing Debt of Borrower including but not limited to the term
loans and revolving loans under the Prior Loan Agreements (but expressly
excluding the Indebtedness for Borrowed Money identified on Schedule 4.5 by
an asterisk [*]) have been paid in full and that any and all Liens existing
in connection therewith have been satisfied and released.
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ARTICLE VI
AFFIRMATIVE COVENANTS
Each Borrower covenants and agrees that, without the prior written consent
of the Bank, from and after the date hereof and so long as the Revolving Loan
Commitments are in effect or any Obligations remain unpaid or outstanding, the
Borrower will, and will cause each Subsidiary to:
6.1 FINANCIAL STATEMENTS AND REPORTS. Furnish to the Bank the following
financial information:
(a) ANNUAL STATEMENTS. As soon as available but no later than ninety
(90) days after the end of each fiscal year, a balance sheet of the
Borrower and its Subsidiaries as of the end of such year and the prior year
in comparative form, and related statements of operations, shareholders'
equity, and cash flows for the Borrower for the fiscal year and the prior
fiscal year in comparative form. The financial statements shall be on a
consolidated basis and shall include consolidating information. The
financial statements shall be in reasonable detail with appropriate notes
and be prepared in accordance with Generally Accepted Accounting
Principles. The annual financial statements (other than the consolidating
information) shall be certified by independent public accountants of
nationally recognized standing acceptable to the Bank and such
consolidating information shall be certified by the chief financial
officer, treasurer or controller of Borrower. Such Financial statements
shall be accompanied by a report of such independent certified public
accountants, and such consolidating information shall be accompanied by a
report of such chief financial officer, treasurer or controller, in each
case stating that, in the opinion of such accountants or officer,
respectively, such financial statements or consolidating information
present fairly, in all material respects, the financial position, and the
results of operations and the cash flows of the Borrower and its
Subsidiaries for the period then ended in conformity with Generally
Accepted Accounting Principles, except for inconsistencies resulting from
changes in accounting principles and methods agreed to by such accountants
or officer and specified in such report, and that, in the case of such
financial statements, the examination by such accountants of such financial
statements has been made in accordance with generally accepted auditing
standards and accordingly included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and
assessing the accounting principles used and significant estimates made, as
well as evaluating the overall financial statement presentation. In
addition to the annual financial statements, Borrower shall, promptly upon
receipt thereof, furnish to the Bank a copy of each other report submitted
to the board of directors of Borrower by its independent accountants in
connection with any annual, interim or special audit made by them of the
financial records of the Borrower.
(b) QUARTERLY STATEMENTS. As soon as available but no later than fifty
(50) calendar days after the end of each fiscal quarter of each fiscal
year, a consolidated balance sheet of the Borrower and its Subsidiaries and
related consolidated statements of operations (which includes shareholders'
equity) and cash flows for such quarterly period and for the period from
the beginning of such fiscal year to the end of such fiscal quarter and a
corresponding financial statement for the same periods in the preceding
fiscal year certified by the Authorized Financial Officer of Borrower as
having been prepared in accordance with Generally Accepted Accounting
Principles (subject to changes resulting from audits and year-end
adjustments).
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(c) NO DEFAULT. Within sixty (60) calendar days after the end of each
of the first three fiscal quarters of each fiscal year and within one
hundred five (105) calendar days after the end of each fiscal year, a
certificate signed by the Authorized Financial Officer of Borrower
certifying that, to the best of such officer's knowledge, after due
inquiry, (i) the Borrower has complied with all covenants, agreements and
conditions in each Loan Document and that each representation and warranty
contained in each Loan Document is true and correct with the same effect as
though each such representation and warranty had been made on the date of
such certificate (except to the extent such representation or warranty
related to a specific prior date), and (ii) no event has occurred and is
continuing which constitutes an Event of Default or Potential Default, or
describing each such event and the remedial steps being taken by the
Borrower.
(d) ERISA. All reports and forms filed with respect to all Plans,
except as filed in the normal course of business and that would not result
in an adverse action to be taken under ERISA, and details of related
information of a Reportable Event.
(e) MATERIAL CHANGES. The Borrower shall promptly notify the Bank of
any litigation, administrative proceeding, investigation, business
development, or change in financial condition which would reasonably be
expected to have a Material Adverse Effect.
(f) OTHER INFORMATION. The Borrower will provide to the Bank all
shareholder and Securities and Exchange Commission notices, reports and
filings and any material press releases promptly after filing with the
Securities and Exchange Commission or release, respectively including
without limitation, all Annual Reports, Forms 10-K and 10-Q. In addition,
promptly upon request by the Bank from time to time (which may be on a
monthly or other basis), the Borrower shall provide such other information
and reports regarding the operations, business affairs, prospects and
financial condition of the Borrower as the Bank may reasonably request.
(g) COVENANT COMPLIANCE CERTIFICATE. Together with each required
Annual and Quarterly Statement described in (a) and (b) above, a Covenant
Compliance Certificate in the form of Exhibit "D", certified by an
Authorized Financial Officer of Quad Systems Corporation, as agent for the
Borrowers.
6.2 CORPORATE EXISTENCE. Except where failure to do so would not have a
Material Adverse Effect, Borrower will preserve its corporate existence and
material franchises, licenses, patents, copyrights, trademarks and trade names
consistent with good business practice and maintain, keep, and preserve, and
cause each Subsidiary to maintain, keep, and preserve, all of its properties
(tangible and intangible) necessary or useful in the proper conduct of its
business in good working order and condition, ordinary wear and tear excepted.
6.3 ERISA. (a) Comply in all material respects with the provisions of ERISA
to the extent applicable to any Plan maintained for the employees of Borrower,
any Subsidiary or any ERISA Affiliate; (b) do or cause to be done all such acts
and things that are required to maintain the qualified status of each Plan and
tax exempt status of each trust forming part of such Plan; (c) not incur any
material accumulated funding deficiency (within the meaning of ERISA and the
regulations promulgated thereunder), or any material liability to the PBGC (as
established by ERISA); (d) permit any event to occur (i) as
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described in Section 4042 of ERISA or (ii) which may result in the imposition of
a lien on its properties or assets; and (e) notify Bank in writing promptly
after it has come to the attention of senior management of Borrower of the
assertion or threat of any "reportable event" or other event described in
Section 4042 of ERISA (relating to the soundness of a Plan) or the PBGC's
ability to assert a material liability against it or impose a lien on
Borrower's, any Subsidiary's, or any ERISA Affiliates' properties or assets; and
(f) refrain from engaging in any Prohibited Transactions or actions causing
possible liability under Section 5.02 of ERISA.
6.4 COMPLIANCE WITH RELATIONS. Comply in all material respects with all
Regulations applicable to its business, the noncompliance with which reasonably
could have a Material Adverse Effect.
6.5 CONDUCT OF BUSINESS; PERMITS AND APPROVALS; COMPLIANCE WITH LAWS.
Maintain, and cause each Subsidiary to maintain, in full force and effect, its
franchises, and all licenses, patents, trademarks, trade names, contracts,
permits, approvals and other rights necessary to the profitable conduct of its
business; and comply, in all respects with all applicable laws, rules,
regulations, and orders, except where failure to do so would not have a Material
Adverse Effect.
6.6 MAINTENANCE OF INSURANCE. Keep and maintain its properties and assets
insured against loss or damage by fire, theft, explosion, sprinklers and all
other hazards and risks ordinarily insured against by other owners who use such
properties in similar businesses for the full replacement value thereof. The
Borrower shall also maintain business interruption and public liability
insurance in amounts and with companies satisfactory to the Bank. The Bank shall
be named as lender loss payee on all such policies of insurance. All such
policies of insurance shall be in such form, with such companies and in such
amounts as may be satisfactory to the Bank. The Borrower shall deliver
certificates of insurance which shall indicate that (i) cancellation or material
amendment of any such policy is prohibited without thirty (30) days prior
written notice to the Agent and (ii) losses payable to the Bank as a lender loss
payee. The receipt by the Bank, of any such insurance proceeds shall be applied
on the account of Borrower's obligations in accordance with Section 10.7.
6.7 PAYMENT OF DEBT; PAYMENT OF TAXES; ETC. Promptly pay and discharge.
(a) all of its material Debt (including specifically all Indebtedness
for Borrowed Money and all indebtedness owed to the Bank) in accordance
with the terms thereof;
(b) all taxes, assessments, and governmental charges or levies imposed
upon it or upon its income and profits, upon any of its property, real,
personal or mixed, or upon any part thereof, before the same shall become
in default;
(c) all lawful claims for labor, materials and supplies or otherwise,
which, if unpaid, might become a lien or charge upon such property or any
part thereof;
provided, however, that so long as the Borrower first notifies the Bank of its
intention to do so, the Borrower shall not be required to pay and discharge (or
to cause such Subsidiary to pay and discharge) any such Debt, tax, assessment,
charge, levy or claim so long as the failure to so pay or discharge does not
constitute or result in a Event of Default or Potential
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Default hereunder and so long as no foreclosure or other similar proceedings
shall have been commenced against such property or any part thereof and so long
as the validity thereof shall be contested in good faith by appropriate
proceedings diligently pursued and it shall have set aside on its books adequate
reserves with respect thereto.
6.8 NOTICE OF EVENTS. Promptly upon discovery by the Borrower of any of
the events described in (a) through (d) hereof, the Borrower shall give notice
to the Bank by telephone followed by a written notice, which describes the event
and all action the Borrower proposes to take with respect thereto:
(a) an Event of Default (determined without regard to any grace
period) under this Agreement;
(b) any default or event of default under a contract or contracts or
with respect to any evidence of or agreements for Indebtedness or Borrowed
Money and the default or event of default involves payments by one or more
of the Borrowers in an aggregate amount equal to or in excess of $250,000;
(c) the institution of, any material adverse determination in, or the
entry of any default judgment or order or stipulated judgment or order in,
any suit, action, arbitration, administrative proceeding, criminal
prosecution or governmental investigation against one or more of the
Borrowers or any Subsidiary in which the amount in controversy is at least
$500,000 singularly or in the aggregate; or
(d) any change in any Regulation, including, without limitation,
changes in tax laws and regulations, which could reasonably have a material
adverse impact on the ability of any Borrower to perform its obligations
under the Loan Documents or otherwise have a Material Adverse Effect.
6.9 INSPECTION RIGHTS. At any time during regular business hours and as
often as reasonably requested of the Borrower by the Bank, permit the Bank or
any authorized officer, employee, agent, or representative of the Bank, to
examine and make abstracts from the records and books of account of the
Borrower, wherever located, and to visit the properties of the Borrower; and to
discuss the affairs, finances, and accounts of the Borrower with any Borrower's
officers, directors or independent accountants, which activities shall be at the
expense of the Bank.
6.10 REPAIR. Maintain, preserve and keep its properties and assets in good
repair, working order and condition and from time to time make all necessary and
proper repairs, renewals, replacements, additions, betterments and improvements
thereto so that at all times such properties are maintained consistent with good
business practices except where failure to do so would not have a Material
Adverse Effect.
6.11 MAINTENANCE OF LIENS AND THE COLLATERAL DOCUMENTS. Observe and comply
with all the terms, conditions and covenants contained in the Collateral
Documents, and at the Borrower's expense, execute, acknowledge and deliver, or
cause the execution, acknowledgement and delivery of, and thereafter register,
file or record in an appropriate governmental office, any document or instrument
supplemental to or confirmatory of the Collateral Documents or otherwise
necessary or reasonably desirable for the creation, preservation and/or
perfection of the Liens purported to be created by the Collateral Documents.
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6.12 LENDER EXPENDITURES. If the Borrower fails at any time to obtain and
maintain insurance required under Section 6.6, maintain or preserve the
Collateral, discharge taxes or liens at any time placed upon the Collateral or
pay or perform any of its obligations hereunder, the Bank, after fifteen (15)
days written notice to the Borrower, shall have the right, in its sole
discretion and without liability to the Borrower or any other Person, to do or
provide for any or all of the foregoing at the Borrower's sole cost and expense.
Notwithstanding the foregoing, if the Bank determines that the occurrence of any
of the conditions set forth in the preceding sentence requires immediate remedy,
then the Bank shall have the right, without notice to the Borrower, to take all
such actions as the Bank deems necessary to preserve the Collateral or any other
rights of the Bank provided for hereunder. Any such expenditures by the Bank
shall be added to the balance of the Revolving Credit Loans, bear interest at
the interest rate applicable to Revolving Credit Loans and shall be secured by
all of the Collateral. The Bank shall not be obligated to take any such action
contemplated in this subsection 6.12 nor shall it be liable to the Borrower for
failure to take or delay in taking any such action.
6.13 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Maintain its books and
records at all times in accordance with Generally Accepted Accounting
Principles.
6.14 USE OF PROCEEDS. The proceeds of the Revolving Credit Loans and the
Term Loan hereunder shall be used by the Borrowers, respectively, for general,
corporate working capital purposes, to purchase equipment for the Borrower's
headquarters facility, to acquire intangible assets, and for Permitted
Acquisitions and to: (i) refinance the revolving loans under the Prior Loan
Agreements, finance accounts and inventory and provide letters of credit and
other financial accommodations; and (ii) refinance the term loan under the Prior
Loan Agreements and finance equipment, furnishings and leasehold improvements
for the Borrowers' facility in Willow Grove, Pennsylvania.
6.15 FURTHER ASSURANCES. Do such further acts and things and execute and
deliver to the Bank such additional assignments, agreements, powers and
instruments, as the Bank may reasonably require or reasonably deem advisable to
carry into effect the purposes of this Agreement or to better assure and confirm
unto the Bank its rights, powers and remedies hereunder.
ARTICLE VII
NEGATIVE COVENANTS
Each Borrower covenants and agrees that, without the prior written consent
of the Bank, from and after the date hereof and so long as the Revolving Loan
Commitments are in effect or any Obligations remain unpaid or outstanding, it
will not, and will not permit any Subsidiary to:
7.1 MERGER, CONSOLIDATION. Merge or consolidate with or into any
corporation except, if no Event of Default (determined without regard to any
applicable grace period) shall have occurred and be continuing either
immediately prior to or upon the consummation of such transaction, any
Subsidiary may be merged into another Subsidiary or into Quad Systems
Corporation as long as Quad Systems Corporation is the surviving entity.
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7.2 INDEBTEDNESS FOR BORROWED MONEY. Incur, create, or permit to exist any
Indebtedness for Borrowed Money except:
(a) Indebtedness for Borrowed Money of Quad Systems Corporation and
its Subsidiaries under this Agreement or the Notes;
(b) Indebtedness for Borrowed Money existing on the date hereof and
disclosed in the Borrower's financial statements referred to in Section 4.5
or otherwise disclosed to the Bank on Schedule 4.5, but no renewals,
extensions, or refinancings thereof;
(c) Indebtedness for Borrowed Money (other than to the Bank) of Quad
Systems Corporation and its Subsidiaries of up to Two Million Dollars
($2,000,000) in the aggregate including Debt in respect of letters of
credit or bankers acceptances issued for the account of Quad Systems
Corporation or any Subsidiary and Debt secured by purchase-money Liens
permitted under Section 7.3;
(d) Indebtedness for Borrowed Money of Quad Systems Corporation to a
Borrower or Subsidiary (which is not a Borrower hereunder) or of any
Subsidiary to Quad Systems Corporation or another Subsidiary.
7.3 LIENS. Create, assume or permit to exist any Lien on any of the
property or assets of the Borrower or any Subsidiary whether now owned or
hereafter acquired, or upon any income or profits therefrom, except Permitted
Liens, determined with respect to all Borrowers and Subsidiaries taken as a
whole.
7.4 GUARANTEES. Guarantee or otherwise in any way become or be responsible
for indebtedness or obligations (including working capital maintenance,
take-or-pay contracts, etc.) of any other person, contingently or otherwise,
except: (a) the endorsement of negotiable instruments of deposit in the normal
course of business; (b) guarantees by the Borrower or by any Subsidiary issued
to secure the indebtedness or obligation which underlying indebtedness or
obligation is permitted hereunder; and (c) guarantees (other than those
described in subsection (a) and (b)) made in the ordinary course of business by
Quad Systems Corporation with respect to obligations of Subsidiaries and in an
aggregate amount not greater than $1,000,000.
7.5 MARGIN STOCK. Use or permit any proceeds of the Loans to be used,
either directly or indirectly, for the purpose, whether immediate, incidental or
ultimate, of buying or carrying margin stock within the meaning of Regulation U
of The Board of Governors of the Federal Reserve System, as amended from time to
time.
7.6 ACQUISITIONS AND INVESTMENTS. Purchase or otherwise acquire (including
without limitation by way of share exchange) any part or amount of the capital
stock or assets of, or make any Investments in any other Person; or enter into
any new business activities or ventures not directly related to its present
business; or create any Subsidiary, except:
(a) Quad Systems Corporation may maintain its ownership interest in
each of the Subsidiaries listed on Schedule 4.12 at the percentage of
ownership disclosed on said Schedule.
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(b) Quad Systems Corporation or any Subsidiary may acquire and hold
stock, obligations or securities received in settlement of debts (created
in the ordinary course of business) owing to Quad Systems Corporation or
such Subsidiary.
(c) Quad Systems Corporation or any Subsidiary may make and own:
(i) Investments in certificates of deposit or time deposits
having maturities in each case not exceeding one year from the date of
issuance thereof and issued by the Bank, or any FDIC-insured
commercial bank incorporated in the United States or any state thereof
having a combined capital and surplus of not less than $100,000,000;
(ii) Investments in marketable direct obligations issued or
unconditionally guaranteed by the United States of America any agency
thereof, or backed by the full faith and credit of the United States
of America, in each case maturing within one year from the date of
issuance or acquisition thereof including those acquired under
standard repurchase agreements;
(iii) Investments in commercial paper issued by a corporation
incorporated in the United States or any State thereof maturing no
more than one year from the date of issuance thereof and, at the time
of acquisition, having a rating of A-1 (or better) by Standard &
Poor's Corporation or P-1 (or better) by Moody's Investors Service,
Inc.; and
(iv) Investments in money market mutual funds all of the assets
of which are invested in cash or investments described in clauses (i),
(ii) and (iii) of this paragraph (c).
(v) Stock obligations, or securities received in settlement of
debts (created in the ordinary course of business) owing to any
Borrower or Subsidiary.
(d) Quad Systems Corporation may make Permitted Acquisitions.
7.7 TRANSFER OF ASSETS; NATURE OF BUSINESS. Sell, transfer, pledge, assign
or otherwise dispose of any assets or capital stock of the Borrower or any
Subsidiary unless such sale or disposition shall be in the ordinary course of
Borrower's or such Subsidiary's business for value received; or discontinue,
liquidate or change in any material respect any substantial part of its
operations or business unless the same would not have a Material Adverse Effect.
7.8 RESTRICTED PAYMENTS. Declare or pay any dividends; or purchase,
redeem, retire, or otherwise acquire for value any of its capital stock now or
hereafter outstanding; or make any distribution of assets to its shareholders as
such whether in cash, assets, or obligations of any of the Borrowers; or
allocate or otherwise set apart any sum for the payment of any dividend or
distribution on, or for the purchase, redemption, or retirement of, any shares
of its capital stock; or make any other distribution by reduction of capital or
otherwise in respect of any shares of its capital stock; or permit any of the
Subsidiaries to purchase or otherwise acquire for value any stock of any
Borrower or any other Subsidiary, EXCEPT THAT: (i) a Borrower may declare and
deliver dividends and make distributions
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payable solely in common stock of such Borrower; (ii) a Borrower may purchase or
otherwise acquire shares of its capital stock by exchange for or out of the
proceeds from a substantially concurrent issue of new shares of its capital
stock; and (iii) so long as no Event of Default or Potential Default has
occurred and is continuing or would be caused or created thereby, the Borrowers
may declare and pay dividends on an annual basis in amounts which do not in the
aggregate exceed 50% of the pre-tax Net Income of the Borrowers for such year
and which would not cause a breach of any of the Financial Covenants set forth
in Article VIII.
7.9 ACCOUNTING CHANGE. Make or permit any material change in financial
accounting policies or financial reporting practices, except as required by
Generally Accepted Accounting Principles or regulations of the Securities and
Exchange Commission, and in any event without having first given written notice
to the Bank of such proposed, required change.
7.10 LOCATION OF OFFICES. Change its principal place of business or chief
executive office unless Borrower has given the Bank thirty (30) days prior
written notice.
7.11 CAPITAL EXPENDITURES. Make Capital Expenditures (including (i)
indebtedness incurred under Section 7.2(c) in connection with purchase money
liens permitted under Section 7.3 and (ii) commitments to make any Capital
Expenditure in any such fiscal year) which exceed the amounts set forth below
(determined in the aggregate for all Borrowers) for the corresponding fiscal
year:
FISCAL YEAR ENDING MAXIMUM CAPITAL EXPENDITURES
------------------ ----------------------------
September 30, 1997 $3,000,000
September 30, 1998,
and thereafter 2,000,000
7.12 TRANSACTION WITH AFFILIATES. Enter into any transaction, including,
without limitation, the purchase, sale, or exchange of property or the rendering
of any service, with any Affiliate, or permit any non-borrower Subsidiary to
enter into any transaction, including, without limitation, the purchase, sale,
or exchange of property or the rendering of any service, with any Affiliate,
except in the ordinary course of and pursuant to the reasonable requirements of
such Borrower's or non-borrower Subsidiary's business.
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ARTICLE VIII
FINANCIAL COVENANTS.
The Borrowers covenant and agree that from and after the date hereof and so
long as the Revolving Loan Commitment is in effect or any Obligations remain
unpaid or outstanding, the Borrowers will keep and maintain the following
financial covenants, each of which shall, unless otherwise indicated, be (1)
tested quarterly at and as of the end of each fiscal quarter; and (2) prepared
on the basis of Consolidated results of the Borrowers and Subsidiaries as
reported on Forms 10-K and 10-Q:
8.1 LEVERAGE RATIO. Borrowers will maintain at all times a ratio of Total
Liabilities TO Tangible Net Worth, not greater than 1.00 to 1.00.
8.2 CURRENT RATIO. Borrowers will maintain at all times a ratio of Current
Assets TO the SUM OF Current Liabilities, PLUS, without duplication, the amount
of Revolving Credit Loans outstanding, of no less than 2.00 to 1.00.
8.3 CASH FLOW COVERAGE RATIO. Borrowers will maintain at all times a ratio
of (a) the SUM OF net income before taxes, PLUS, depreciation, amortization and
interest expense TO (b) the SUM OF all current maturities of Indebtedness for
Borrowed Money (including Capitalized Leases) PLUS, interest expense PLUS, all
taxes and dividends paid in cash, of not less than 1.50 to 1.00 for the period
then ended consisting of the fiscal quarter then ended and the immediately
proceeding three fiscal quarters.
8.4 MINIMUM TANGIBLE NET WORTH. Borrowers will maintain a minimum Tangible
Net Worth of not less than the sum of (i) $23,000,000 PLUS (ii) on a cumulative
basis 50% of the Borrowers' Net Income (but not less than zero for any year) for
each subsequent fiscal year during the term of this Agreement beginning with the
fiscal year ending on September 30, 1997, PLUS (iii) an amount equal to the net
proceeds received by any Borrower (during the relevant period) from any equity
offering, stock sale or contribution of capital.
8.5 DEFINITIONS. The terms "Current Assets", "Current Liabilities", "Net
Income" and "Total Liabilities" shall have the meanings attributed to such terms
under GAAP. In addition, the following definitions shall apply in calculating
the foregoing covenants:
"CONSOLIDATED" refers to the consolidation of the accounts of Borrowers and
their Subsidiaries in accordance with GAAP, including principles of
consolidation.
"TANGIBLE NET WORTH" means (a) the aggregate amount of all assets as may be
properly classified as such, OTHER THAN (i) all assets which are properly
classified as intangible assets including, without limiting the generality of
the foregoing, franchises, licenses, permits, patents, patent applications,
copyrights, trademarks, trade names, goodwill, experimental or organizational
expense and other like intangibles, including the excess paid for assets
acquired over their respective book values on the books of the corporation from
which acquired, AND (ii) all loans to shareholders, officers and employees, LESS
(b) Total Liabilities (other than contingent liabilities corresponding to the
face amount of outstanding, standby Letters of Credit), all determined in
accordance with GAAP, consistently applied.
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ARTICLE IX
DEFAULT
9.1 EVENTS OF DEFAULT. The Borrowers shall be in default if any one or more
of the following events ("Event of Default") occurs with respect to any
Borrower:
(a) PAYMENTS. Borrower fails to pay any principal of or interest
on any Note when due and payable (whether at maturity, by notice of
intention to prepay, or otherwise) or fails to pay when it is due and
payable any other amount payable under any Loan Document;
(b) COVENANTS. The Borrower fails to observe or perform as and
when required any of the terms, conditions or covenants contained in
any Loan Document;
(c) REPRESENTATIONS, WARRANTIES. Any representation or warranty
made or deemed to be made by the Borrower herein or in any Loan
Document or in any exhibit, schedule, report or certificate delivered
pursuant hereto or thereto shall prove to have been false, misleading
or incorrect in any material respect when made or deemed to have been
made;
(d) BANKRUPTCY. The Borrower or any Subsidiary is dissolved or
liquidated, makes an assignment for the benefit of creditors, files a
petition in bankruptcy, is adjudicated insolvent or bankrupt,
petitions or applies to any tribunal for any receiver or trustee,
commences any proceeding relating to itself under any bankruptcy,
reorganization, readjustment of debt, dissolution or liquidation law
or statute of any jurisdiction, has commenced against it any such
proceeding which remains undismissed for a period of sixty (60) days,
or indicates its consent to, approval of or acquiescence in any such
proceeding, or any receiver of or trustee for the Borrower or any
Subsidiary or any substantial part of the property of the Borrower or
any Subsidiary is appointed, or if any such receivership or
trusteeship to continues undischarged for a period of sixty (60) days
(provided, that the voluntary liquidation or dissolution by Quad
Systems Corporation of any of its Subsidiaries, after written notice
to the Bank, shall not constitute an Event of Default unless the Bank,
acting in its reasonable discretion, shall determine that such action
has a Material Adverse Effect;
(e) CERTAIN OTHER DEFAULTS. If the Borrower or any Subsidiary
shall fail to pay when due any Indebtedness for Borrowed Money which
singularly or in the aggregate as to all Borrowers exceeds $250,000,
and such failure shall continue beyond any applicable cure period, or
the Borrower or any Subsidiary shall suffer to exist any default or
event of default in the performance or observance, subject to any
applicable grace period, of any agreement, term, condition or covenant
with respect to any agreement or document, relating to Indebtedness
for Borrowed Money, if the effect of such default is to permit, with
the giving of notice or passage of time or both, the holders thereof,
or any trustee or agent for said holders, to terminate or suspend any
commitment (which is equal to or in excess of $250,000) to lend money
or to cause or declare any portion of any borrowings thereunder to
become due and payable prior to the date on which it would otherwise
be due and payable, provided that during any applicable cure period
the Bank's obligations hereunder to make further Loans shall be
suspended;
(f) JUDGMENTS. Any judgments against the Borrower or any
Subsidiary or against its assets or property for amounts in excess of
$1,000,000 in the aggregate as to
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all Borrowers remain unpaid, unstayed on appeal, undischarged,
unbonded and undismissed for a period of sixty (60) days;
(g) ATTACHMENTS. Any assets of the Borrowers or any Subsidiary
shall be subject to attachments, levies, or garnishments for amounts
in excess of $250,000 in the aggregate as to all Borrowers which have
not been disclosed or satisfied within twenty (20) days after service
of notice thereof to the Borrowers or such Subsidiary.
(h) CESSATION OF COLLATERAL DOCUMENTS. Any Collateral Documents
shall at any time and for any reason cease to be in full force and
effect.
(i) USE OF PROCEEDS OF LOANS. The Borrowers use any of the funds
borrowed hereunder for purposes other than those specifically
authorized hereunder.
(j) ANNUAL STATEMENTS. The existence of any qualification or
exception in the report of the independent public accountants
accompanying the Borrowers' annual Financial Statements.
9.2 REMEDIES.
(a) The Bank, following the occurrence and the continuance of an Event of
Default or as otherwise permitted under this Agreement, shall, at its option,
declare the Revolving Loan Commitment to be terminated and all principal and
interest owed under the Notes and all other Obligations to be immediately due
and payable, whereupon the Revolving Loan Commitment shall immediately terminate
and all principal and interest owed under the Notes and other Obligations shall
become immediately due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by Borrowers.
(b) In addition to the remedies provided herein, the Bank may exercise and
enforce any and all other rights and remedies available to it whether arising
under this Agreement, the Notes or the Collateral Documents or under applicable
law, in any manner deemed appropriate by the Bank, including a suit in equity,
action at law, or other appropriate proceedings, whether for the specific
performance (to the extent permitted by law) of any covenant or agreement
contained in this Agreement or in the Notes or any of the Collateral Documents
or in aid of the exercise of any power granted in this Agreement, the Notes or
any of the Collateral Documents.
(c) Upon the occurrence and during the continuance of any Event of Default,
the Bank may at any time and from time to time, without notice to the Borrowers
(any requirement for such notice being expressly waived by the Borrowers) set
off and apply against any and all of the Obligations of any Borrower now or
hereafter existing any amounts held in deposit accounts at the Bank or other
indebtedness at any time owing by the Bank to or for the credit or the account
of any Borrower or any property of any Borrower from time to time in possession
of the Bank.
(d) All moneys received by the Bank from its exercise of remedies under
this Agreement, the Notes, or the Collateral Document or applicable law, shall,
unless otherwise required by law, be applied by the Bank as follows:
First, to the Bank for any fees, costs or expenses incurred by the
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Bank under any of the Loan Documents or this Agreement, then due and
payable and not reimbursed by the Borrowers to the Bank until such fees,
costs and expenses are paid in full;
Second, to the Bank for the Commitment Fee or any other fees then due
and payable under this Agreement until such fee is paid in full;
Third, to the Bank for all interest then due and payable from the
Borrowers until such interest is paid in full;
Fourth, to the Bank for the principal amount of the Loans then due and
payable from the Borrowers until such principal is paid in full.
(e) IN ADDITION TO ALL OTHER REMEDIES PROVIDED FOR HEREIN, EACH BORROWER
HEREBY IRREVOCABLY AUTHORIZES AND EMPOWERS THE PROTHONOTARY OR CLERK OR ANY
ATTORNEY OF ANY COURT OF RECORD TO APPEAR FOR AND CONFESS JUDGMENT THEREIN
AGAINST THE BORROWER AFTER AN EVENT OF DEFAULT HEREUNDER WHICH IS CONTINUING FOR
THE AMOUNT WHICH MAY BE DUE THEREON AS EVIDENCED BY AN AFFIDAVIT SIGNED BY AN
OFFICER OF THE BANK SETTING FORTH THE AMOUNT THEN DUE, INCLUDING ACCRUED
INTEREST, PLUS ATTORNEY'S FEES AND COSTS OF SUIT AND RELEASE OF ERRORS. IF A
COPY HEREOF, VERIFIED BY AN AFFIDAVIT, SHALL HAVE BEEN FILED IN SAID PROCEEDING,
IT SHALL NOT BE NECESSARY TO FILE THE ORIGINAL AS A WARRANT OF ATTORNEY. EACH
BORROWER WAIVES THE RIGHT TO ANY STAY OF EXECUTION AND THE BENEFIT OF ALL
EXEMPTION LAWS NOW OR HEREAFTER IN EFFECT. NO SINGLE EXERCISE OF THE FOREGOING
WARRANT AND POWER TO CONFESS JUDGMENT SHALL BE DEEMED TO EXHAUST THE POWER,
WHETHER OR NOT ANY SUCH EXERCISE SHALL BE HELD BY ANY COURT TO BE INVALID,
VOIDABLE, OR VOID, BUT THE POWER SHALL CONTINUE UNDIMINISHED AND MAY BE
EXERCISED FROM TIME TO TIME AS OFTEN AS THE HOLDER HEREOF SHALL ELECT, UNTIL ALL
LIABILITIES PAYABLE OR THAT MAY BECOME PAYABLE HEREUNDER BY THE BORROWERS HAVE
BEEN PAID IN FULL.
9.3 POWER OF ATTORNEY. Each Borrower does hereby make, constitute and
appoint the Bank its true and lawful attorney-in-fact with power: (a) to execute
all UCC-1 statements and other UCC statements on behalf of the Borrower with
respect to the Collateral given for the Obligations and in such Borrower's name
or otherwise, to demand, sue for, collect and give releases for, any and all
moneys due or to become due upon the Collateral and to compromise, prosecute or
defend any action, claim or proceeding with respect thereto; and to do any and
all other things necessary or desirable to carry out the purposes herein
contemplated. The foregoing powers of attorney are hereby acknowledged by the
Borrowers to be coupled with an interest and irrevocable. Each Borrower further
grants to Bank full power and authority to substitute or add any of their
employees or agents as attorneys-in-fact to act pursuant to such power.
ARTICLE X
MISCELLANEOUS
10.1 WAIVER. No failure or delay on the part of the Bank or any holder of
any Note in exercising any right, power or remedy under any Loan Document shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right, power or remedy
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preclude any other or further exercise thereof or the exercise of any other
right, power or remedy under any Loan Document. The remedies provided under the
Loan Documents are cumulative and not exclusive of any remedies provided by law.
10.2 AMENDMENTS. No amendment, modification, termination or waiver of any
Loan Document or any provision thereof nor any consent to any departure by any
Borrower therefrom shall be effective unless the same shall have been approved
in writing by the Bank, be in writing and be signed by the Bank and the
Borrowers and then any such waiver or consent shall be effective only in the
instance and for the specific purpose for which given. No notice to or demand on
the Borrowers shall entitle the Borrowers to any other or further notice or
demand in similar or other circumstances.
10.3 GOVERNING LAW. The Loan Documents and all rights and obligations of
the parties thereunder shall be governed by and be construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania without regard to
any principles of conflict of laws.
10.4 PARTICIPATIONS AND ASSIGNMENTS. Borrowers hereby acknowledge and agree
that the Bank may at any time: (a) grant participations in all or any portion of
its Revolving Loan Commitment, any Note or of its right, title and interest
therein or in or to this Agreement (collectively, "Participations") to any other
lending office or to any other bank, lending institution or other entity which
has the requisite sophistication to evaluate the merits and risks of investments
in Participations ("Participants"); provided, however, that: (i) all amounts
payable by the Borrowers hereunder shall be determined as if the Bank had not
granted such Participation; and (ii) any agreement pursuant to which the Bank
may grant a Participation (x) shall provide that the Bank shall retain the sole
right and responsibility to enforce the obligations of the Borrowers hereunder
including, without limitation, the right to approve any amendment, modification
or waiver of any provisions of this Agreement; (y) such participation agreement
may provide that the Bank will not agree to any modification, amendment or
waiver of this Agreement without the consent of the Participant if such
modification, amendment or waiver would reduce the principal of or rate of
interest on the Loan or postpone the date fixed for and payment of principal of
or interest on the Loan; and (z) shall not relieve the Bank from its
obligations, which shall remain absolute, to make Loans hereunder; and (b) the
Bank may assign any of its Loans and its Revolving Loan Commitment (but only
with the consent of Borrowers, which consent shall be unreasonably withheld,
provided that: each such assignment shall be in an amount of at least $1,000,000
(unless, after giving effect to such assignment and all other such assignments
by the Bank occurring simultaneously or substantially simultaneously therewith,
the Bank shall hold no Revolving Loan Commitment or Loan hereunder); and (ii)
each such assignment by the Bank of its Loans, or Revolving Loan Commitment
shall be made in such manner so that the same portion of its Loans, Note and
Revolving Loan Commitment is assigned to the respective assignee. Upon execution
and delivery by the assignee to the Borrowers and the Bank of an instrument in
writing pursuant to which such assignee agrees to become a "Bank" hereunder (if
not already the Bank) having the Commitment(s) and Loans specified in such
instrument, and upon consent thereto by the Borrowers and the Bank, to the
extent required above, the assignee shall have, to the extent of such assignment
(unless otherwise provided in such assignment with the consent of the Borrowers
and the Bank), the obligations, rights and benefits of the Bank hereunder
holding the Revolving Loan Commitment(s) and Loans (or portions thereof)
assigned to it (in addition to the Revolving Loan Commitment(s) and Loans, if
any, theretofore held by such assignee) and the assigning Bank shall, to the
extent of such assignment, be released from the Commitment(s) (or portion(s)
thereof) so assigned.
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10.5 CAPTIONS. Captions in the Loan Documents are included for convenience
of reference only and shall not constitute a part of any Loan Document for any
other purpose.
10.6 NOTICES. All notices, requests, demands, directions, declarations and
other communications between the Bank and the Borrowers provided for in any Loan
Document shall, except as otherwise expressly provided, be mailed by registered
or certified mail, return receipt requested, or telegraphed, or telefaxed, or
delivered in hand to the applicable party at its address indicated opposite its
name on the signature pages hereto. The foregoing shall be effective and deemed
received three days after being deposited in the mails, postage prepaid,
addressed as aforesaid and shall whenever sent by telegram, telegraph or telefax
or delivered in hand be effective when received. Any party may change its
address by a communication in accordance herewith.
10.7 EXPENSES OF THE BANK; INDEMNIFICATION OF THE BANK.
(a) The Borrowers will from time to time reimburse the Bank promptly
following demand for all out-of-pocket expenses (including the reasonable fees
and expenses of legal counsel) in connection with (i) the preparation of the
Loan Documents, (ii) the making of any Loans, and (iii) the enforcement of the
Loan Documents; and reimburse the Bank for all out-of-pocket expenses (including
reasonable fees and expenses of legal counsel) in connection with the
enforcement of the Loan Documents.
(b) In addition to the payment of the foregoing expenses, the Borrowers
hereby agree to indemnify, protect and hold the Bank and any holder of the Note
and the officers, directors, employees, agents, affiliates and attorneys of the
Bank and such holder (collectively, the "INDEMNITEES") harmless from and against
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses and disbursements of any kind or nature,
including reasonable fees and expenses of legal counsel, which may be imposed
on, incurred by, or asserted against such Indemnitee by any Borrower or other
third parties and arise out of or relate to this Agreement or the other Loan
Documents or any other matter whatsoever related to the transactions
contemplated by or referred to in this Agreement or the other Loan Documents;
provided, however, that the Borrowers shall have no obligation to an Indemnitee
hereunder to the extent that the liability incurred by such Indemnitee has been
determined by a court of competent jurisdiction to be the result of gross
negligence or willful misconduct of such Indemnitee.
10.8 SURVIVAL OF WARRANTIES AND CERTAIN AGREEMENTS. All agreements,
representations and warranties (other than representations and warranties which
expressly speak as of a particular date or are no longer true and correct as a
result of a change which is permitted by this Agreement) made or deemed made
herein shall survive the execution and delivery of this Agreement, the making of
the Loans hereunder and the execution and delivery of the Note. Notwithstanding
anything in this Agreement or implied by law to the contrary, the agreements of
the Borrowers set forth in Sections 2.6, 2.8(b), 2.8(c), 2.9, 2.15 and 10.7,
shall survive the payment of the Loans and the termination of this Agreement.
This Agreement shall remain in full force and effect until the latest to occur
of the termination of the Revolving Loan Commitment or the repayment in full of
all amounts owed by the Borrowers under any Loan Document.
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10.9 SEVERABILITY. The invalidity, illegality or unenforceability in any
jurisdiction of any provision in or obligation under this Agreement, the Note or
other Loan Documents shall not affect or impair the validity, legality or
enforceability of the remaining provisions or obligations under this Agreement,
the Note or other Loan Documents or of such provision or obligation in any other
jurisdiction.
10.10 NO FIDUCIARY RELATIONSHIP. No provision in this Agreement or in any
of the other Loan Documents and no course of dealing between the parties shall
be deemed to create any fiduciary duty by the Bank to any Borrower.
10.11 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. EACH OF THE
BORROWERS AND THE BANK HEREBY CONSENT TO THE JURISDICTION OF ANY STATE OR
FEDERAL COURT LOCATED WITHIN THE EASTERN DISTRICT OF PENNSYLVANIA AND
IRREVOCABLY AGREES THAT, ANY ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING
TO THE NOTE, THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS MAYBE LITIGATED IN SUCH
COURTS. EACH PARTY TO THIS AGREEMENT ACCEPTS FOR ITSELF AND IN CONNECTION WITH
ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF
THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENT, AND
IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION
WITH THIS AGREEMENT, SUCH NOTE, OR SUCH OTHER LOAN DOCUMENT.
10.12 WAIVER OF JURY TRIAL. EACH OF THE BORROWERS AND THE BANK HEREBY
WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE LOAN DOCUMENTS, OR ANY
DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND THE
LENDER/BORROWER RELATIONSHIP ESTABLISHED HEREBY. THE SCOPE OF THIS WAIVER IS
INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY
COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING
WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW AND STATUTORY CLAIMS. EACH OF THE BORROWERS, AND THE BANK
ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO THE TRANSACTION, THAT
EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT
EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH
OF THE BORROWERS AND THE BANK FURTHER WARRANTS AND REPRESENTS THAT EACH HAS
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. THIS WAIVER IS IRREVOCABLE, AND THE WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT,
THE LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE
LOANS. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL BY THE COURT.
10.13 COUNTERPARTS; EFFECTIVENESS. This Agreement and any amendment hereto
or waiver hereof may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument. This Agreement and any amendments hereto
or waivers hereof shall become effective when the Bank shall have received
signed counterparts or notice by telecopy of
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the signature page that the counterpart has been signed and is being delivered
to the Bank or facsimile that such counterparts have been signed by all the
parties hereto or thereto.
10.14 USE OF DEFINED TERMS. All words used herein in the singular or plural
shall be deemed to have been used in the plural or singular where the context or
construction so requires. Any defined term used in the singular preceded by
"any" shall be taken to indicate any number of the members of the relevant
class.
10.15 APPOINTMENT OF QUAD AS AGENT FOR BORROWERS. Each Borrower hereby
irrevocably appoints and authorizes Quad Systems Corporation to act as its agent
hereunder and under any and all other Loan Document with the powers to take any
and all actions that may be taken by Borrowers, including without limitation,
the power to request Loans or the issuance of Accommodations and to give and
receive notice and accept service on behalf of all Borrowers, together with such
other powers as are reasonably incidental thereto; notice by Bank to Quad
Systems Corporation shall be deemed notice to all Borrowers.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the Borrowers
and the Bank have caused this Agreement to be executed by their proper corporate
officers thereunto duly authorized as of the day and year first above written.
Applicable Lending Office: CORESTATES BANK, N.A.,
2240 Butler Pike
Plymouth Meeting, PA 19462
By:_______________________________
Name: William F. Dohmen
Title: Vice President
QUAD SYSTEMS CORPORATION
By:______________________________
HITECH FINANCE COMPANY
By:_______________________________
TRIMARK INVESTMENT CORP.
By:_______________________________
QUAD LEASING CORPORATION
By:_______________________________
QUAD FOREIGN SALES CORPORATION
By:_______________________________
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EXHIBIT 10.7.2
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Credit Agreement, dated as of September11, 1997
(this "FIRST AMENDMENT") is made by, between and among QUAD SYSTEMS CORPORATION,
HITECH FINANCE COMPANY, TRIMARK INVESTMENT CORPORATION, QUAD LEASING CORPORATION
and QUAD FOREIGN SALES CORPORATION (collectively the "BORROWERS" and
individually, a "BORROWER") and CORESTATES BANK, N.A., a national banking
association (referred to herein as the "BANK").
W I T N E S S E T H :
WHEREAS, the Borrowers and the Bank entered into a Credit Agreement dated
as of April 11, 1997, (the "CREDIT AGREEMENT") pursuant to which the Bank agreed
to provide loans and other extensions of credit to the Borrowers on the terms
set forth therein; and
WHEREAS, Borrowers have requested that the Credit Agreement be amended to
permit Quad Europe Limited (a Subsidiary of Quad Systems Corporation but one
which is not a Borrower under the Credit Agreement) to incur certain
indebtedness and that certain other, conforming changes be made to the Credit
Agreement, and the Bank has agreed to the foregoing subject to the terms and
conditions of this First Amendment.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration the receipt and adequacy of which are hereby
acknowledged, the Borrowers and the Bank intending to be legally bound, hereby
agree as follows:
All capitalized terms used herein, unless defined herein, shall have the
meanings set forth in the Credit Agreement.
PART A. AMENDMENTS TO LOAN DOCUMENTS
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT. Effective as of the date
hereof and subject to the satisfaction of the conditions precedent set forth in
Part B of this First Amendment, the Credit Agreement is hereby amended as
follows:
(a) AMENDED DEFINITIONS. Section 1.1 ("Definitions") of Article I of
the Credit Agreement is amended as follows:
(i) The defined term "Obligations" is amended by adding thereto
the following phrase:
"; and shall also include the Borrowers'
obligations under the Surety Agreement"
(ii) The defined term "Revolving Loan Commitment" is amended by
adding thereto the following phrase:
"MINUS the Foreign Currency Equivalent of all
amounts outstanding from time to time under the
Foreign Currency Loan"
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(iii) A new defined term "Foreign Currency Loan" is added to the
Credit Agreement (in alphabetical order) as follows:
"FOREIGN CURRENCY LOAN" shall mean that certain
uncommitted, revolving credit facility made in favor of
Quad Europe Limited by the London Branch of CoreStates
Bank, N.A. in the maximum principal amount of (POUND)
1,000,000(U.K.) and evidenced by that certain Uncommitted
Facility Note dated August __, 1997. The Foreign Currency
Loan shall bear interest on the principal amount thereof,
at the rate per annum set forth in said note.
(iv) A new defined term "Foreign Currency Equivalent" is added to
the Credit Agreement (in alphabetical order) as follows:
"'FOREIGN CURRENCY EQUIVALENT' means, as of any date of
determination, the equivalent amount in Dollars of the
amounts outstanding under the Foreign Currency Loan, using
the currency exchange rate for such date in the London
wholesale foreign currency exchange market in trading
among banks as reasonably determined by the Bank."
(v) A new defined term "Surety Agreement" is added to the Credit
Agreement (in alphabetical order) as follows:
"SURETY AGREEMENT" shall mean that certain guaranty and
surety agreement executed by Quad Systems Corporation in
favor of CoreStates Bank, N.A. with respect to the Foreign
Currency Loan.
(b) PREPAYMENTS. Section 2.8 of the Credit Agreement is amended by
adding a new subsection (d) as follows:
"(d) MANDATORY PREPAYMENTS. If at any time the amount
outstanding of all Revolving Credit Loans exceeds the Revolving
Loan Commitment solely as a result of a change in the Foreign
Currency Equivalent as determined by the Bank in its reasonable
discretion (and the amount of such excess over the Revolving
Loan Commitment is greater than five percent (5%) of the amount
of the Foreign Currency Loan) then the entire excess shall be
immediately repaid by the Borrowers to the Bank, and so long as
no Event of Default has occurred, such mandatory prepayment
shall be applied to the loans as requested by the Borrower.
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(c) INDEBTEDNESS FOR BORROWED MONEY. The negative covenant set forth
in Section 7.2 of the Credit Agreement is amended by revising subsection
(c) thereof to read in its entirety as follows:
"Debt under the Foreign Currency Loan and Indebtedness for
Borrowed Money (other than to the Bank) of Quad Systems
Corporation and its Subsidiaries of up to Two Million Dollars
($2,000,000) in the aggregate including (i) Debt in respect of
letters of credit or bankers acceptances issued for the account
of Quad Systems Corporation or any Subsidiary, and (ii) Debt
secured by purchase-money Liens permitted under Section 7.3;"
(d) GUARANTEES. The negative covenant set forth in Section 7.4 of the
Credit Agreement is amended by adding thereto the following phrase:
"and (d) the Surety Agreement"
(e) EVENTS OF DEFAULT. Section 9.1 of the Credit Agreement is amended
by adding thereto a new subsection (k) as follows:
"(k) FOREIGN CURRENCY LOAN. If the Borrower or any
subsidiary shall be in default under the Foreign
Currency Loan."
SECTION 2. GUARANTY OF FOREIGN CURRENCY LOAN
(a) SURETY AGREEMENT. As security for the due and punctual payment of
the Foreign Currency Loan, Quad Systems Corporation agrees to execute and
deliver to the Bank the Surety Agreement.
(b) FURTHER ASSURANCES. Borrowers agree to execute and deliver to the
Bank, at any time and from time to time, at their sole cost and expense,
all assignments and other documents requested by the Bank, at its sole
discretion, and to take all actions reasonably requested of Borrowers from
time to time by the Bank to create, perfect, protect and enforce the Credit
Agreement, the Collateral Documents and the lien and security interest in
all Collateral now or hereafter granted to secure payment of all of the
Liabilities.
PART B. PROVISIONS OF THIS FIRST AMENDMENT
SECTION 1. ACKNOWLEDGMENTS AND AGREEMENTS OF THE BORROWERS. By executing
this First Amendment, the Borrowers acknowledge and agree that the Credit
Agreement, the Notes and the Collateral Documents, all as amended hereby, are
and remain valid, binding, enforceable and in full force and effect as of the
date hereof, and neither the Borrowers nor any other party to the Loan Documents
has any defense, set-off, counterclaim, or challenge against the payment of any
of the sums owing under the terms of the Loan Documents, the performance of any
obligations thereunder, or the enforcement or validity of any of the terms
thereof.
SECTION 2. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers, jointly
and severally, hereby represents and warrants to the Bank that:
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(a) All representations and warranties made by Borrowers in the Loan
Documents are and remain true and correct on and as of the date hereof, as
if newly made on and as of this date, and no Event of Default, or event
which, with the lapse of time or giving of notice, or both, would be an
Event of Default, has occurred and is continuing under any of the Loan
Documents.
(b) Each of the Borrowers has the power and authority to execute,
deliver and perform under the terms and provisions of this First Amendment
and the other documents and instruments executed and delivered in
connection herewith (collectively, the "AMENDMENT DOCUMENTS"). The
execution, delivery and performance by each of Borrowers of the Amendment
Documents, and the consummation of the transactions herein and therein
contemplated, have been duly authorized by all necessary corporate action
and do not, and will not: (i) violate or result in the breach of, or
constitute a default under, any of the terms, conditions or provisions of
(A) any Borrower's Certificate of Incorporation or By-Laws, (B) any law,
rule or regulation applicable to any Borrower, (C) any order, writ,
injunction or decree of any court or Governmental Authority applicable to
any Borrower, or (D) any agreement, instrument or undertaking to which any
of the Borrowers, their properties or assets, are subject; or (ii) result
in the creation or imposition of any Lien (other than those Liens granted
to the Bank by the Collateral Documents) upon any of the properties or
assets of any Borrower.
(c) The Amendment Documents have been duly executed and delivered by
the Borrowers and are the legal, valid and binding obligations of the
Borrowers enforceable against the Borrowers in accordance with their
respective terms.
(d) No consent, approval or authorization of or declaration,
registration or filing with any Governmental Authority or any
nongovernmental person or entity, including, without limitation any
creditor, lessor or stockholder of any of the Borrowers, is required on the
part of any of the Borrowers in connection with the execution, delivery and
performance of the Amendment Documents or the transactions contemplated
hereby or thereby as a condition to the legality, validity or
enforceability of the Amendment Documents.
SECTION 3. CONDITIONS OF EFFECTIVENESS. This First Amendment shall become
effective when, and only when, the Bank shall have received a counterpart of
this First Amendment executed by each of the Borrowers and, in addition, shall
have received, in form and substance satisfactory to the Bank:
(a) THE AMENDMENT DOCUMENTS. Executed originals of this First
Amendment, the Surety Agreement and related documents contemplated by this
First Amendment duly executed by Borrowers and all other documents or
certificates required to be delivered pursuant to this Section 3.
(b) OFFICER'S CERTIFICATE. A certificate of a Responsible Officer of
each of the Borrowers stating that:
(i) the representations and warranties contained in Article IV of
the Credit Agreement are true and correct on and as of the date of
such certificate as though made on and as of such date;
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(ii) no Event of Default or event which, with the passage of time
or the giving of notice, or both, would constitute an Event of Default
has occurred and is continuing or would result from the signing of the
Amendment Documents or the transactions contemplated hereby or
thereby; and
(iii) there has been no material adverse change in the financial
condition, operations, properties or business of the Borrowers since
March 31, 1997.
(c) SECRETARY'S CERTIFICATE. A certificate of the Secretary or
Assistant Secretary of each of the Borrowers as to the following:
(i) specimen signatures and incumbency of officers signing the
Amendment Documents; and
(ii) that attached thereto is a true, complete and correct copy
of the resolutions of the Board of Directors of each Borrower
authorizing the transactions contemplated by the Amendment Documents,
certified by the Secretary of such Borrower (which certificate shall
state that such resolutions are in full force and effect on the date
of the certificate).
(iii) that attached thereto is a true, complete and current copy
of all documents executed by Quad Europe Limited in connection with
the Foreign Currency Loan.
(d) APPROVALS. Certified copies (or duplicates thereof) of all
approvals, authorizations, or consents of, or notices to or registrations
with, any governmental body or agency or any existing creditor or other
Person required for any of the Borrowers to enter into the Amendment
Documents.
(e) SUPPORTING DOCUMENTS. (1) A copy of all amendments to the
Certificate of Incorporation of each Borrower filed after April 11, 1997;
(2) a copy of all amendments to the By-laws of each Borrower adopted after
April 11, 1997; or, in place of (1) or (2) a certificate of the Secretary
or Assistant Secretary of each Borrower dated the Effective Date and
certifying with respect to such Borrower that either or both of the
Certificate of Incorporation and/or Bylaws of such Borrower, as applicable,
have not been amended since the date of the last amendment indicated on the
certificate of the Secretary of each such Borrower respectively furnished
to the Bank in connection with the Closing of the Credit Agreement on April
11, 1997.
(f) OPINION. Opinion of Ballard Spahr Andrews & Ingersoll addressed to
the Bank dated as of the effective date and in form and substance
satisfactory to the Bank.
(g) OTHER. All information and documents relating to the Borrowers, as
the Bank may reasonably request, all in form and substance satisfactory to
the Bank and its counsel.
SECTION 4. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT.
(a) Upon the effectiveness of this First Amendment, on and after the
date
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hereof, each reference in the Credit Agreement (and in the Loan Documents)
to "this Credit Agreement", "hereunder", "hereof", "herein" or words of
like import shall mean and be a reference to the Credit Agreement as
amended hereby.
(b) Except as expressly provided in this First Amendment, the Loan
Documents shall remain in full force and effect in accordance with their
respective terms and are hereby ratified and confirmed. Without limiting
the generality of the foregoing, nothing in this First Amendment shall be
construed to:
(i) impair the validity, perfection or priority of any lien or
security interest securing the Liabilities;
(ii) waive, release or impair any rights, powers or remedies of
the Bank under the Loan Documents;
(iii) require the Bank to grant any forbearance, to modify any
provision of the Loan Documents or to extend the time for payment of
any of the Obligations; or
(iv) require the Bank to make any loans or other extensions of
credit to the Borrowers.
(c) In the event of any inconsistency between the terms of this First
Amendment and the Loan Documents, this First Amendment shall govern.
(d) The execution, delivery and effectiveness of this First Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of the Bank under the Credit Agreement, nor
constitute a waiver of any provision of the Credit Agreement.
(e) Without limiting the generality of the foregoing, the revisions to
the Credit Agreement, shall not apply to any period prior to the "effective
date" of the First Amendment.
SECTION 5. SECURITY. Each of the Borrowers hereby agrees and confirms that
all obligations of the Borrowers under the Loan Documents remain in full force
and effect and, together with this First Amendment, are and continue to be
secured by and entitled to the benefits of the Security Agreement and all of the
other Loan Documents.
SECTION 6. FURTHER ASSURANCES. Each of the Borrowers agrees to execute and
deliver to the Bank, from time to time on and after the date hereof, such
further certificates, instruments, records or other documents, assurances or
things as may be reasonably necessary to give full effect to this Third
Amendment.
SECTION 7. NO NOVATION. Neither this First Amendment nor any documents
executed in connection herewith is in any way intended to constitute a novation
of any of the Loan Documents.
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SECTION 8. NO AMENDMENT. The provisions of this First Amendment shall not
be modified or amended save in writing, executed by all the parties hereto.
SECTION 9. GOVERNING LAW. This First Amendment and all documents executed
and delivered in connection herewith shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
SECTION 10. SUCCESSORS AND ASSIGNS. This First Amendment shall bind and
inure to the benefit of each signatory, its successors and assigns, except that
none of the Borrowers shall make any assignment of any of their respective
rights hereunder without the prior written consent of the Bank.
SECTION 11. COUNTERPARTS. This First Amendment 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 taken together shall constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties have duly executed this First Amendment as
of the day and year specified above.
CORESTATES BANK, N.A.,
By:___________________________
Name: William F. Dohmen
Title: Vice President
QUAD SYSTEMS CORPORATION
By:___________________________
HITECH FINANCE COMPANY
By:___________________________
TRIMARK INVESTMENT CORP.
By:___________________________
QUAD LEASING CORPORATION
By:___________________________
QUAD FOREIGN SALES CORPORATION
By:___________________________
7
EXHIBIT 10.11
THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A
CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS STARRED
AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION.
OEM & DISTRIBUTORSHIP AGREEMENT
This Agreement made and entered into this 19th day of March 1997, by and
between SAMSUNG AEROSPACE INDUSTRIES, LTD., a corporation duly organized and
existing under the laws of the Republic of Korea, with its principal office at
14th floor, Samsung Life Insurance Building (Samsung Finance Plaza), 142-43,
Samsung-dong, Kangnam-gu, Seoul, Korea (hereinafter referred to as "SSA"), and
Quad Systems Corporation, a Delaware corporation duly organized and existing
under the laws of United States of America, with its principal office at 2405
Maryland Road, Willow Grove, PA 19090, USA (hereinafter referred to as "Quad").
WITNESSETH
WHEREAS, SSA is engaged in, among other things, the business of
manufacturing and exporting chip mounters;
WHEREAS, Quad wishes to purchase certain chip mounters from SSA and sell
those chip mounters installed with "QuadAlign", a touchless centering device
(hereinafter referred to as "QuadAlign") developed by it;
WHEREAS, SSA is willing to sell chip mounters to Quad for distribution and
resale after Quad installs the QuadAlign units onto the chip mounters at Quad's
factory site; and
WHEREAS, SSA wishes to purchase the QuadAlign units from Quad to be
installed onto its chip mounters for its own distribution and sale.
NOW, THEREFORE, in consideration of the mutual premises, obligations and
covenants contained herein, the parties agree as set forth herein.
Article 1. DEFINITIONS
When used in this Agreement, the following terms shall have the following
respective meanings:
1.1 "Chip Mounter(s)" shall mean the chip mounter(s) QSA-30 to be developed and
manufactured by SSA, the specifications of which are attached hereto as
Exhibit A.
1.2 "QuadAlign(s)" shall mean the touchless centering device developed by Quad
and sold under the name of "QuadAlign".
1.3 "Effective Date" shall mean the date on which both of the following events
have occurred: (i) execution hereof by both parties hereto; and (ii) the
determination of the specification of the Chip Mounters by SSA and the
documented acceptance thereof by Quad.
1.4 "Contract Year" shall mean a year from the Effective Date or succeeding one
(1) year periods each, as the case may be.
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Article 2. ORDER: MINIMUM PURCHASE REQUIREMENT
2.1 Quad shall order Chip Mounters by written order, stating the quantity, a
requested shipping date and any particular shipping instructions ("Purchase
Order").
2.2 SSA shall confirm in writing the extent to which it will comply with an
Order within ten (10) days of receiving the Purchase Order.
2.3 Quad shall order at least one hundred fifty (150 ) units of the Chip
Mounters for the first Contract Year. If Quad fails to meet its annual
minimum purchase requirement for the first Contract Year, Quad has the
option of extending the current Contract Year and all of its conditions for
another ninety (90) days to meet its obligation to purchase at least 150
units. If said failure continues after the grace period of ninety (90) days
and fails to pay the sum to be payable for the deficient number to SSA
under Article 3.3 hereof, then SSA shall have the right to terminate this
Agreement in accordance with Article 7.2 (e) hereof.. By no later than
ninety (90) days prior to the expiration of each normal of extended
Contract Year, SSA and Quad shall determine, by mutual agreement, the
annual minimum purchase requirement for the following Contract.
Article 3. PRICE: PAYMENT: ACCOUNTING
3.1 (a) The price of each Chip Mounter to be charged by SSA to Quad shall be
**************************************. This price of each Chip Mounter is
based on the quantity of one hundred fifty machines.
(b) By no later than one (1) month prior to the expiration of each Contract
Year, SSA and Quad shall determine, by mutual agreement, the price to be
applicable for the Purchase Orders to be made during the following Contract
Year.
3.2 Unless other payment method is agreed upon by mutual agreement of the
parties hereto in writing for a particular shipment of the Chip Mounters,
Quad shall wire transfer the amount of *********. per unit on the shipping
date and submit a documentation proving the wire transfer. SSA reserves the
right to request an irrevocable letter of credit for the form of payment at
any time during the term of the Agreement.
3.3 Within one (1) month of the close of each normal or extended Contract Year,
SSA shall settle the accounting for the said year. If the quantity ordered
for the said year is less than the annual minimum purchase requirement, it
shall demand Quad to pay the appropriate sum [i.e., ******* x (150 - the
quantity ordered)], which shall be paid by Quad within ten (10) days after
receiving the demand.
Article 4. SALES TERRITORIES: BRAND NAMES
4.1 During the term hereof, Quad shall have an exclusive right to distribute
and sell the Chip Mounters installed with QuadAligns under its own brand(s)
in North America (Canada, U.S. and Mexico) and Europe (European countries
and Israel)
4.2 During the term hereof, Quad shall have an exclusive right to distribute
and sell the Chip Mounters installed with QuadAligns, under its own
brand(s), in South America, provided that it shall have sold at least
twenty (20) units of the Chip Mounters in the said area during the eighteen
(18) months from the Effective Date. If Quad fails to sell twenty (20)
units of the Chip Mounters in the
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said area during the said eighteen (18) months, Quad's sales right shall be
converted into a non-exclusive right. Quad must, at the end of the said
eighteen (18) months period, submit a written documentation that it has
sold more than twenty (20) units of the Chip Mounters in South America to
maintain exclusivity within the territory.
4.3 During the term hereof, Quad shall have a non-exclusive right to distribute
and sell the Chip Mounters installed with QuadAligns, under its own
brand(s), in Asia except in Korea where SSA has an exclusive right to
distribute and sell the Chip Mounters installed with QuadAligns.
4.4 All rights to distribute and sell the Chip Mounters that are not granted to
Quad under Articles 4.1, 4.2, and 4.3 hereof shall be reserved in SSA,
including the right to sell the Chip Mounters with QuadAligns anywhere in
the world except the countries where Quad has an exclusive right to
distribute and sell under Article 4.1 or 4.2 above, under SSA's own
brand(s).
Article 5. SHIPPING TERMS, SHIPMENT DATE, RISK OF LOSS
5.1 The price of the Chip Mounters shall be based on a F.O.B. port of export
(as defined in INCOTERMS 1990). In all cases, title, risk of loss and
responsibility for transportation and insurance shall pass from SSA to Quad
at the time and place where the Chip Mounters pass the ship's rail.
5.2 At Quad's request and for Quad's account, SSA will arrange for
transportation and insurance for Chip Mounters to Quad or to Quad's
customers. SSA will determine the method of transportation and the carrier
unless Quad specifies a method of transportation and a carrier no less than
fifteen (15) days prior to the requested shipping date. SSA shall promptly
deliver to Quad documentation, if any, necessary for Quad to obtain
possession of such Chip Mounters. The normal preferred shipping method
would be by vessel.
Article 6. FORECAST
Exhibit B contains Quad's forecast of Chip Mounters which Quad expects to
order during the first Contract Year. Quad shall, from time to time, submit
to SSA good faith projections of Chip Mounters expected to be ordered for
delivery in the several months after the then current month (a "Forecast").
A Forecast shall represent a good faith estimate by Quad and shall not
constitute an Order. Neither the Forecasts nor the requirement to provide
them shall imply any obligation on either party to renew this Agreement.
Article 7. TERM: TERMINATION
7.1 Subject to Article 7.2 below, this Agreement shall remain in effect for two
years from the Effective Date and shall thereafter be renewed automatically
for successive terms of one (1) year each unless notice of termination is
given by either party at least sixty (60) days prior to the expiration of
the then current term.
7.2 This Agreement may be terminated upon giving written notice of termination:
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(a) by either party if the other party commits a breach of this Agreement,
except the breach under Article 4 hereof, and fails to correct the
breach within thirty (30) days of receiving the notice of breach from
the non-defaulting party;
(b) by the party whose performance is not affected by the Event of Force
Majeure (defined in Article 13 hereof) if the Event of Force Majeure
continues for more than sixty (60) days;
(c) by either party if a filing of a petition in bankruptcy or for
reorganization of similar relief by or against the other party is
made;
(d) by either SSA or Quad if SSA or Quad breaches the territorial
restriction imposed on it in Articles 4.1 and 4.2 hereof; or
(e) by SSA if Quad fails to meet its annual minimum purchase requirement
for any Contract Year and fails to pay the sum to be payable for the
deficient number to SSA under Article 3.3 hereof.
7.3 The termination of this Agreement hereunder shall be without prejudice to
the rights of either party to monies due or to become due under this
Agreement.
Article 8. CONFIDENTIAL INFORMATION
8.1 Both SSA and Quad recognize that during the term of this Agreement, SSA or
Quad may disclose certain information, equipment or materials which SSA and
Quad considers confidential in regards to Chip Mounters ("Confidential
Information"). SSA desires to protect and preserve the confidential and
proprietary quality of the Confidential Information disclosed by it to
Quad. Quad desires to protect and preserve the confidential and proprietary
quality of the technology disclosed to SSA, including but not limited to,
that of QuadAlign. All Confidential Information, whether that of SSA or of
Quad, must be marked "Confidential".
"Confidential Information" shall include:
(a) all equipment, hardware, software, technology, documentation and
information which SSA or Quad consider confidential;
(b) all information disclosed by SSA or Quad orally which SSA or Quad
consider confidential; and
(c) Chip Mounters and every part thereof.
(d) QuadAligns and every part directly associated with it.
But "Confidential Information" shall not include:
(a) information in the public domain;
(b) information published or disseminated by SSA or Quad without
restriction to persons other than Quad and SSA;
(c) information which is independently developed by SSA or Quad; and
8.2 Both Quad and SSA agree not to disclose Confidential Information to any
person other than SSA and Quad. Both SSA and Quad shall not copy any part
of the Confidential
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Information. SSA and Quad shall use all reasonable efforts to maintain the
confidentiality of the Confidential Information and to prevent the
disclosure of Confidential Information by its agents and employees, and in
every event, SSA and Quad shall use at least the degree of care it uses in
maintaining the confidentiality of its own trade secrets and confidential
information.
8.3 Both SSA and Quad acknowledge that unauthorized disclosure, use or copying
of Confidential Information, may cause SSA or Quad irreparable harm and
significant injury which may be difficult to ascertain. SSA and Quad
therefore agree that SSA or Quad may seek and obtain immediate injunctive
relief for breach of this Article 8.
8.4 Both SSA and Quad shall retain in confidence and require its customers to
retain in confidence all Confidential Information of SSA and Quad.
8.5 SSA and Quad's obligations under this Agreement shall survive any
termination or expiration of this Agreement.
Article 9. MANUALS
SSA shall, upon the request of Quad, provide to Quad copies of SSA's user's,
operators and service manuals for Chip Mounters ("SSA Manuals") free of charge
from time to time, by mutual agreement between SSA and Quad. A complete of set
of SSA Manual will be provided for every shipment of the Chip Mounter. Quad
acknowledges SSA's ownership of copyrights in SSA Manuals. SSA grants Quad a
non-exclusive right to create derivative works from SSA Manuals (such derivative
works to be referred to herein as "Quad Manuals").
Article 10. WARRANTY: DISCLAIMER OF WARRANTY
10.1 Subject to the terms and conditions below in this Article 10., SSA will,
for fifteen (15) months from the relevant shipment date, supply the
necessary spares to repair any Chip Mounter determined by SSA to have
been defective at the shipment date, without charge, provided that Quad
notifies SSA of the defect within (15) days of learning of the defect and
in no event later than (15) months from the shipment date. SSA will ship
the same day via overnight service, all machine down parts, regardless of
the end user location.
10.2 This warranty applies only to Chip Mounters that, after the shipment
date, have not been damaged, altered, repaired or treated in any manner
whatsoever, whether negligently or not, by other than authorized
representatives of SSA. SSA disclaims liability for negligent acts or
omissions by Quad, Quad's customers or other persons that affect the
performance of the Chip Mounters. Authorized representatives of SSA are
defined as distributors and agents of SSA permitted to be involved in the
sales activity of SSA's products within the agreed territory.
10.3 This warranty applies to Chip Mounters which SSA delivers to Quad to
replace defective Chip Mounters and products that have been repaired, but
only for the original repair or replacement period indicated in Article
10.1 above for the particular product. Transfer of title to any Chip
Mounter by Quad to any third person or to Quad's customers shall not
extend the repair or replacement period for the particular Chip Mounter.
SSA agrees to dispatch an engineer at the request of Quad within two (2)
business days of such requests, to perform repairs on defective Chip
Mounters. Quad agrees to be responsible for travel expenses, unless the
repair is required due to a design flaw, in which case SSA would be
responsible for all expenses.
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10.4 SSA HEREBY EXCLUDES ALL WARRANTIES NOT HEREIN STATED, WHETHER EXPRESS OR
IMPLIED BY OPERATION OF LAW, COURSE OF DEALING, TRADE USAGE,
REPRESENTATION, STATEMENT OR OTHERWISE, INCLUDING BUT NOT LIMITED TO ANY
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
10.5 FURTHERMORE, SSA SHALL NOT BE LIABLE TO ANYONE FOR ANY INCIDENTAL OR
CONSEQUENTIAL LOSS, DAMAGE OR EXPENSE DIRECTLY OR INDIRECTLY ARISING OUT
OF OR RELATED TO THE USE OF ANY PRODUCT. THE LIABILITY OF SSA IS LIMITED
TO REPLACING OR REPAIRING, AT SSA'S SOLE OPTION, ANY DEFECTIVE PRODUCT
ACCORDING TO THE TERMS SET FORTH ABOVE.
Article 11. PURCHASE OF QUADALIGNS
11.1 Quad shall supply the QuadAligns to be installed on the Chip Mounters to
be sold by SSA to its customers other than Quad. In consideration of the
strategic alliance between SSA and Quad, it is Quad's intent not to
supply QuadAligns to any third company involved in the development,
production, or distribution of production equipment similar to Chip
Mounters based on SSA meeting the context of this Agreement.
11.2 The price of QuadAlign shall
********************************************* *********** per unit on
F.O.B. basis (as defined in INCOTERMS 1990), which price is fixed in
consideration of SSA's commitment to purchase three hundred (300)
QuadAlign units per year. In case where the number of QuadAlign units
exceed the number of three hundred (300), SSA and Quad will mutually
agree on a new pricing that will reflect the increased number.
11.3 The warranty provisions in Article 10 hereof shall apply to the
QuadAligns purchased by SSA from Quad hereunder mutandis mutatis.
Article 12. INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD PARTIES;
INDEMNITY
12.1 Quad accepts exclusive liability and agrees to indemnify SSA with respect
to, and hold SSA, its officers, employees and agents harmless from and
against, any and all loss, damage, liability direct and indirect, costs
and expenses, including, without limitation, attorney's fees, whether or
not a law suit is commenced, which are caused by or arise out of any
proceedings or claims against SSA based on SSA's use of QuadAligns or the
specifications provided by Quad in regards to the Chip Mounters (if any)
for infringement or alleged infringement of any patent, copyright, trade
secret or any other intellectual property of any third party.
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12.2 SSA agrees defend any suit brought against Quad if the suit is based
solely on a claim that Chip Mounters, exclusive or any addition,
modification or alteration and used for its intended purposes, infringe
upon a patent, copyright or trade secret, subject to the condition that
Quad promptly notifies SSA in writing of any such claim, gives SSA full
authority for the conduct of such defense and aids SSA's counsel by
giving whatever time, information, expertise and assistance as reasonably
requested for such defense. Upon fulfillment by Quad of such conditions,
SSA shall pay such damages and costs, if any, finally awarded against
Quad based on the Chip Mounters, exclusive of any addition, modification
or alteration and used for its intended purposes.
12.3 The obligations of Quad or SSA, as case may be, under this Article 12
shall survive the termination or expiration of this Agreement.
Article 13. FORCE MAJEURE
Neither party shall be held responsible for any delay or failure of performance
under this Agreement due to any governmental action, ordinance, or regulation,
strike or other labor trouble, fire damage or destruction in whole or in part of
merchandise or manufacturing plant, acts of God, or any other cause,
contingency, or circumstance which is beyond the reasonable control of the party
(the "Events of Force Majeure").
Article 14. INDEPENDENT CONTRACTORS
The relationship of Quad and SSA established by this Agreement is of independent
contractors and not agents, and nothing in this Agreement shall be construed:
(a) to give either party the power to direct to control the daily activities
of the other party;
(b) to constitute the parties as partners, joint venturers, co-owners or
otherwise as participants in a joint undertaking; or
(c) to allow either party to create or assume any obligation on behalf of the
other party for any purpose whatsoever.
Article 15. AMENDMENT
This Agreement may be amended, altered or modified only by a written instrument
signed by the parties hereto.
Article 16. ARBITRATION
Problems arising from alleged violations of any condition of this Agreement, if
deemed to be violated by either party, and without prompt resolution and
agreement by the other party, shall be resolved by binding arbitration by an
independent arbitrator initially acceptable to both parties. The costs
associated with such arbitration shall be equally borne by both parties.
7
<PAGE>
Article 17. ASSIGNMENT
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, and neither party shall
assign this Agreement without the prior written consent of the other party.
Article 18. SEVERABILITY
Whenever 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 should be prohibited or invalid, in whole or in part, 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.
Article 19. NOTICES
19.1 Any notice, request, and other correspondence under and in connection
with this Agreement shall be in the English language, and be sent by
registered air mail or by telegraph, telex, or telefax (with
confirmation copy to follow by air mail) to the following addresses;
To SSA: Samsung Aerospace Industries, Ltd.
14th floor, Samsung Life Insurance Building
(Samsung Finance Plaza)
142-43, Samsung-dong, Kangnam-gu
Seoul, Korea 135-090
Telephone: +82-2-528-8313
--------------
Fax : +82-2-3459-6132
---------------
To Quad: Quad Systems Corporation
2405 Maryland Road
Willow Grove, PA 19090 USA
Telephone: +1-215-657-6202
Fax : +1-215-657-5013
19.2 The notice, request, and other correspondence shall be deemed duly
received on the fifteenth (15th) day after posting if sent by mail or
forty eight (48) hours after transmission if sent by telegraph, telex, or
telefax.
19.3 Any party hereto may at any time change its address by notifying the
other parties of such change in accordance with the procedures provided
in Article 19.1 hereof.
8
<PAGE>
Article 20. SUBJECT HEADING
The subject heading in this Agreement are included for the purpose of
convenience only and shall not affect the construction or interpretation of any
of its provisions.
Article 21. WAIVER
No failure by either party to take action or assert any right hereunder shall
affect the right subsequently to require performance of the obligation waived or
be deemed to be a waiver of such right in the event of the continuation or
repetition of the circumstances giving rise to such right.
Article 22. ENTIRE AGREEMENT
This Agreement sets forth the entire agreement and understanding of the parties
relating to the subject matter herein and supersedes all prior discussions
between them.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their duly authorized representatives on the date written
above.
Signature Signature
Subject to the approval of Quads
B of D which has yet to be
obtained
/s/ BOK-HYUN AHN /s/ DAVID W. SMITH
----------------------------- ---------------------------------
Mr. Bok-Hyun Ahn Mr. David W. Smith
President & CEO President & CEO
Samsung Aerospace Ind., Ltd. Quad Systems Corporation
9
<PAGE>
EXHIBIT A.
Products Specification
10
<PAGE>
EXHIBIT B.
Forecast
The forecast will be provide by Quad on March 22, 1997
11
<PAGE>
- --------------------------------------------------------------------------------
QSA-30 General Specification
- --------------------------------------------------------------------------------
MAXIMUM PLACEMENT RATE 13,000 cph
COMPONENT RANGE 1005(0402) - 26mm
QUADALIGN (IN-PROCESS) ALIGNMENT
Component Range 1005(0402) - 26mm
Max. Component Thickness 10.0mm
Minimum Lead Pitch 0.65mm
Lead Alignment 0.65mm
FEEDER CAPACITY*
8mm Feeders 76
NUMBER OF PLACEMENT SPINDLES 3
NUMBER OF HEADS 3
PLACEMENT ACCURACY
Chip +/-0.1mm
QFP +/-0.08mm
PLACEMENT REPEATABILITY 0.1mm
PLACEMENT FORCE 270 grams
30" FEEDER CAPACITY 76 (8mm tape feeders)
MACHINE DIMENSIONS
Length (1650mm)
Width (1540mm)
Height (1408mm)
Height (w/monitor) (1760mm)
Height (w/ tower lamp) (1945mm)
FLOOR SPACE REQUIREMENTS
Length (w/computer console) (1650mm)
Width (w/7" reels and
computer console) (1540mm)
POWER REQUIREMENTS
Input Line Voltage 100~240 VAC
Input Line Frequency 56/60 Hz
Power 2.6 kVA (Max)
COMPRESSED AIR REQUIREMENTS
Pressure 5~10 kg/cm
Flow 100~150 NL/min
OPERATIONAL TEMPERATURE RANGE 50(Degree)~95(Degree) F
(10(Degree)~35(Degree) C)
RELATIVE HUMIDITY Less than RH 90%
SHIPPING DIMENSIONS 1948(L)mm x 1783(W)mm x
1717(H)mm
76.7"(L) x 70.2"(W) x 67.6"(H)
SHIPPING WEIGHT 2490 lbs. (1130 kg)
ACCESSORIES BOX
Dimensions 17.7" x 17.7" x 15.7"
(450mm x 450mm x 400 mm)
Weight 44 lbs. (20 kg)
* Consult applications department for other configurations.
- --------------------------------------------------------------------------------
Positioning System
- --------------------------------------------------------------------------------
X-Y DRIVE SYSTEM Brushless DC Servo Motor
X-Y Encoder Type Rotary Encoder
X-Y Axis Resolution 0.0002" (0.005mm)
X-Y Axis Repeatability +0.0007" (+0.02mm)
- -
X-Y Axis Accuracy 0.002" (0.05mm)
X-Y Axis Max. Velocity 53 in/sec (1.35m/sec)
X Axis Acceleration 71.768 ft/s/s (21.875 m/s/s)
Y Axis Acceleration 63.051 ft/s/s (19.218 m/s/s)
Z DRIVE SYSTEM Brushless DC Servo Motor
Z Encoder Type Rotary Encoder
Z Axis Resolution 0.0003" (0.01mm)
Z Axis Maximum Velocity 118 in/sec (3000mm/sec)
THETA DRIVE SYSTEM Micro Step Motor
Theta Encoder Type None
Theta Axis Resolution 0.01(Degree)
Theta Axis Accuracy +/-0.02(Degree)
Theta Axis Repeatability +/-0.01(Degree)
NUMBER OF NOZZLES
Standard Nozzles 6
Special Nozzles 2 (option)
NOZZLE CHANGERS 1 (standard)
- --------------------------------------------------------------------------------
Board Handling
- --------------------------------------------------------------------------------
BOARD SIZE (typical**)
Maximum (length x width) 18" x 16" (450mm x 400mm)
Minimum (length x width) 2" x 2" (50mm x 50mm)
- --------------------------------------------------------------------------------
Board Handling
- --------------------------------------------------------------------------------
BOARD SIZE (CONT'D)
Maximum Thickness
(including warpage) 0.165" (4.2mm)
Minimum Thickness 0.020" (0.5mm)
CONVEYOR
Height 37.4" +/- 0.59" SMEMA
Board Flow Direction Left to Right (standard)
Right to Left (Factory Option)
REGISTRATION TYPE Hole, Edge, Back Pusher
EDGE CLEARANCE 0.079" (2mm)
UNDERSIDE BOARD CLEARANCE 0.709" (18mm)
TOPSIDE BOARD CLEARANCE 0.571" (14.5mm)
UNDERSIDE BOARD SUPPORT Magnetic back up pins
TRANSPORT SPEED 0-21m/min
BOARD WIDTH ADJUSTMENT Manual (standard)
** Consult applications department for specific machine configurations
- --------------------------------------------------------------------------------
Control System
- --------------------------------------------------------------------------------
PROGRAMMING CAPABILITIES
Machine Operating System MS Windows(TM) 95
User Interface MS Windows(TM) 95
Camera Teach Capability Standard
ARRAY PROGRAMMING CAPABILITIES
Multi-Image Panels Standard
Rotated Board Images Standard
OFF-LINE PROGRAMMING INTERFACE
ASCII Data Input Optional
CADStar v.6.0, v.7.0 Optional
Mentor v.8.2.5, v.8.4 Optional
Digitizer
Summa Sketch III Series Optional
Wacom UD II Series Optional
Placement Optimizer Standard
INTEGRATED PC CONTROLLER Intel Pentium(TM) processor
with SVGA monitor
SELF-DIAGNOSTIC SOFTWARE
PCB Production Rate Standard
Total Operating Time Standard
Total Down Time Standard
Pick Up Error Messages Standard
Error/Operating Rate Standard
Error Messages per Feeder Standard
DATA MANAGEMENT
Floppy Disk Drive(3.5", 2HD) Standard
Hard Disk (540MB) Standard
FEEDER CRASH SENSOR Optional
AUTO-ALTERNATE FEEDER USAGE Standard
(In case of component shortage)
TEACHING FEATURES
Optical Beam Sensor Standard
Head Standard
Camera Standard
FIDUCIAL REJECT MARK CHECK
Vision Standard
- --------------------------------------------------------------------------------
Optional Equipment
- --------------------------------------------------------------------------------
FEEDER BASE
DOCKING FEEDER CART
MATRIX TRAY HOLDER
AUTO MATRIX TRAY HANDLER
8/12/16/24/32/44MM FEEDERS
VIBRATORY STICK FEEDER
SAMSUNG AEROSPACE IND., LTD.
14th Floor, Samsung Finance Plaza
142-43 Samsungdong, Kangnammgu
Seoul, Korea 135-090
+82-2-528-8313
(Fax) +82-2-3459-6132
(C) 2/97 Windows is a registered trademark of Microsoft Corporation. Microsoft
is a registered trademark of Microsoft Corporation. Intel is a trademark of
Intel Corporation. Note: All specifications provided in this brochure are
subject to change without prior notice.
<PAGE>
10 June 1997
Mr. Young-Hong Bae
Managing Director
Samsung Aerospace Ind., Ltd.
Dear Mr. Bae
For the Quad-SSA Agreement of 19 March '97 on the QSA-30, you will recall that I
needed to get the approval of the Quad Board of Directors.
I am happy to report that the Board has looked favorably upon the Agreement and
has concurred with all but one of its conditions. The Board has stated that it
will grant its full approval with the following UNDERLINED ADDITIONS and
[bracketed removals] to Article 2.3 and the related Articles 3.3 and 7.2 (e).
2.3 Quad shall order at least one hundred fifty (150) units of the Chip
Mounters for the first Contract Year. If Quad fails to meet its annual
minimum purchase requirement for the first Contract Year, Quad has the
option of extending the current Contract Year and all of its conditions
for another ninety (90) days to meet its obligation to purchase at
least 150 units. If said failure continues after the grace period of
ninety (90) days, [and fails to pay the sum to be payable for the
deficient number to SSA under Article 3.3 hereof,] then SSA shall have
the right to CONVERT THE EXCLUSIVE LICENSE TO DISTRIBUTE PRODUCTS IN
ARTICLE 4. HEREOF INTO A COMPARABLE NON-EXCLUSIVE LICENSE. THIS RIGHT
SHALL BE SSA'S SOLE AND EXCLUSIVE REMEDY FOR QUAD'S FAILURE TO MEET THE
MINIMUM PURCHASE REQUIREMENT SET FORTH IN THIS ARTICLE 2.3. EXCEPT THAT
SSA HAS THE OPTION TO terminate this Agreement in accordance with
Article 7.2 (e) hereof. By no later than ninety (90) days prior to the
expiration of each normal or extended Contract Year, SSA and Quad shall
determine, by mutual agreement, the annual minimum purchase requirement
for the following Contract Year.
7.2 (e) by SSA if Quad fails to meet its annual minimum purchase
requirement for any Contract Year. [and fails to pay the sum to be
payable for the deficient number to SSA under Article 3.3 hereof.]
3.3 Entire Article Deleted
In view of the contents of the Letter of Understanding that you and I signed in
relation to the Agreement, I feel that the above accurately specifies our
intent.
If you agree with me and accept the written changes, please countersign this
letter. It will be in conformance with Section 15. of the Agreement, which
allows for changes and/or clarifications.
/s/ DAVID W. SMITH /s/ YOUNG-HONG BAE
- ------------------------------- ----------------------------
David W. Smith Young-Hong Bae
President & CEO Managing Director
Quad Systems Corp Samsung Aerospace Ind., Ltd.
Exhibit 11
QUAD SYSTEMS CORPORATION
STATEMENT REGARDING COMPUTATION OF
PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
PRIMARY
Average shares outstanding 4,286,556 4,221,888 4,130,482
Net effect of dilutive options
based on the treasury method 177,154 97,432 195,971
Net effect of dilutive stock purchase plan
shares based on the treasury method 103 1,857 2,521
--------- --------- ---------
Total 4,463,813 4,321,177 4,328,974
========= ========= =========
Net income $1,987 $1,492 $2,688
========= ========= =========
Net income per share $0.45 $0.35 $0.62
========= ========= =========
</TABLE>
The calculation of fully diluted earnings per share is the same as the
calculation of primary earnings per share.
Exhibit 22
QUAD SYSTEMS CORPORATION
SUBSIDIARIES OF THE REGISTRANT
1. Quad Europe Limited, an English company
2. SMTech Limited, an English company
3. HiTech Finance Company, a Delaware corporation
4. TriMark Investment Corp., a Delaware corporation
5. Quad Foreign Sales Corporation, a Barbados company
6. Quad Systems Holdings Limited, an English company
7. Quad Leasing Corporation, a Delaware corporation
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
pertaining to the Quad Systems Corporation 1986 Stock Option Plan and Quad
Systems Corporation 1993 Stock Option Plan (Form S-8 No. 333-04755) and the Quad
Systems Corporation Employee Stock Purchase Plan (Form S-8 No. 33-93436) of our
report dated October 31, 1997, with respect to the consolidated financial
statements and schedule of Quad Systems Corporation included in the Annual
Report (Form 10-K) for the year ended September 30, 1997.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
December 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> SEP-30-1997
<CASH> 1,981
<SECURITIES> 0
<RECEIVABLES> 20,234
<ALLOWANCES> 788
<INVENTORY> 17,097
<CURRENT-ASSETS> 42,888
<PP&E> 3,205
<DEPRECIATION> 3,937
<TOTAL-ASSETS> 50,037
<CURRENT-LIABILITIES> 16,934
<BONDS> 0
0
0
<COMMON> 130
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 50,037
<SALES> 81,723
<TOTAL-REVENUES> 81,723
<CGS> 51,417
<TOTAL-COSTS> 51,417
<OTHER-EXPENSES> 26,868
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 484
<INCOME-PRETAX> 3,057
<INCOME-TAX> 1,070
<INCOME-CONTINUING> 3,438
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,987
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
