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, 1999
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
---------------------------- ----------------------
(State or other jurisdiction (I. R. S. Employer
of incorporation or organization) Identification Number)
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)
<PAGE>
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. [X]
As of December 31, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $4,900,000.*
As of December 31, 1999, 4,474,060 shares of common stock, $.03 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III- Portions of the Registrant's definitive Proxy Statement with respect
to the Registrant's 1999 Annual Meeting of Stockholders, to be filed no later
than 120 days after the end the Registrant's fiscal year covered by this report.
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* 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
The principal business of Quad Systems Corporation (the "Company" or "Quad") is
the distribution, marketing, design, manufacture and support of surface mount
technology ("SMT") equipment used in the assembly of printed circuit wiring
boards. Quad sells and distributes SMT assembly equipment primarily in low to
medium volume production environments. The Company's SMT assembly equipment
conveys and positions printed circuit wiring boards in preparation for the
precision placement of a broad range of electronic components. In conjunction
with the Company's primary business of selling SMT assembly equipment, the
Company also markets screen printers, reflow ovens and certain other peripherals
such as component feeders, matrix tray handlers, material handling conveyors and
machine vision systems.
Under SMT, printed circuit or wiring boards ("PWBs") are prepared by
screen-printing solder paste onto numerous contact pads at the termination of
each PWB trace. Components are added to the PWB by an assembly system that picks
a component and places it precisely on trace terminations that have been
appropriately 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 pads to assure proper electrical connections. After the components
are placed, the entire PWB 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 PWB.
The Company sells its SMT equipment as separate, individual units as well as in
turnkey systems incorporating the major elements of a SMT production line:
namely, a screen printer, an assembly system, a reflow oven and material
handling conveyors. The Company's turnkey systems are sold under the name
"QuadLineTM". The Company purchases and resells from third party manufacturers
several components of the Company's turnkey systems. The Company distributes and
sells its Meridian Series of products, under a distribution agreement with Mirae
Corporation, a Korean SMT equipment manufacturer. The Company purchases and
resells its screen printers from Speedline Technologies, Inc., to whom the
Company sold in fiscal 1999 substantially all of the assets and liabilities of
one of its European subsidiaries that manufactured such screen printers.
Finally, the Company purchases its material handling conveyors and certain of
its peripherals from third party sources. The remainder of the Company's
assembly systems, along with its reflow ovens, are designed and manufactured by
the Company. From time to time, the Company evaluates the products it
manufactures and those produced by third parties to determine whether the mix of
products to be produced and directly offered by the Company and those to be
offered by the Company from third party sources should be changed. As further
described herein, the Company is currently involved in disputes with the
supplier of its screen printers, Speedline Technologies, Inc., and the supplier
of its component tape feeders, Samsung Aerospace Industries, which could
adversely affect the supply of both products.
In addition to its SMT business, the Company designs, manufactures, markets and
supports advanced packaging technology ("APT") equipment used in processes such
as "chip on board", "flip chip" and "chip scale package" assembly. The Company
has entered into the APT market segment to a small extent only, and APT
therefore is not yet a significant portion of the Company's business and there
can be no assurance that the Company will ever be able to generate substantial
APT sales. APT combines semiconductor assembly processes and SMT assembly
processes with a wide range of substrate materials to produce products that are
significantly smaller, faster and lighter than previously possible. APT is an
enabling technology that the Company believes is becoming increasingly more
cost-effective compared against competing technologies. The Company also
believes that the APT marketplace is continuing to evolve and customer
requirements are not yet fully defined. While the APT processes described above
are not exhaustive, they include what the Company believes are some of the most
commercially feasible processes currently being utilized. The Company's current
APT product offering meets certain of the APT market's application requirements.
The Company's products do not seek to address all currently identified needs for
the APT marketplace. The Company is continuing to develop and market additional
features for its APS-1 assembler, seeking to meet targeted needs of this
evolving market. There can be no assurance that the Company will be successful
in doing so. Additionally, new technologies and competitive models may be
introduced in the future that might cause the Company's current APT product
offerings to become obsolete.
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As described above, at the beginning of the Company's 1999 fiscal year, the
Company sold substantially all of the assets and liabilities of one of its
European subsidiaries, SMTech Limited ("SMTech"), to Speedline Technologies,
Inc. ("Speedline") for $14.8 million in cash, subject to a holdback of $750,000.
This holdback is payable to the Company once all disagreements and potential
litigation identified by Speedline and communicated to the Company are resolved.
SMTech's principal business was the manufacture and sale of screen printers used
in the Company's turnkey systems, which also were sold separately. The Company
is liable for various representations and warranties provided to Speedline under
this agreement and is liable for certain indemnification obligations with
respect to the intellectual property transferred to Speedline. In connection
with the sale, Quad and Speedline's MPM Corporation division ("MPM") entered
into an agreement under which MPM will supply Quad on an OEM basis with the
former SMTech screen printer product line. See Note 6 to the Consolidated
Financial Statements for further information relating to the sale of the net
assets of SMTech.
The Company was incorporated in Pennsylvania in 1980 and changed its state of
incorporation to Delaware in 1987.
PRODUCTS AND SERVICES
The Company offers various SMT and APT process equipment and related services
for the electronics manufacturing market. The products offered by the Company
are sold both as part of a turnkey system marketed by the Company under the
"QuadLineTM" name and are sold separately. Most of the Company's currently
marketed SMT and APT equipment is compatible with the Company's current and
prior software and component handling sub-systems. The Company attempts to
provide suitable upgrade paths for its products.
Primary Surface Mount Assembly Equipment
<TABLE>
<CAPTION>
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FISCAL YEAR
PRODUCT CAPABILITIES MARKET FOCUS INTRODUCED
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<S> <C> <C> <C>
Quad Meridian Limited range of fine pitch capability High volume 1999
1010/1010P Series Chip shooter placement rates of up to SMT assembly
28,000 components per hour (CPH) market
- ----------------------------------------------------------------------------------------------------
Quad Meridian Limited range of large and fine pitch Medium volume 1999
1020/1020P Series capability Chip shooter SMT assembly
Placement rates of up to 15,000 CPH market
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Quad Meridian Limited range of fine pitch capability Low 1999
1030/1030P Series Chip shooter placement rates of up to volume/high job
11,000 CPH mix SMT
assembly market
- ----------------------------------------------------------------------------------------------------
Quad Meridian Specialized range assembler and tray Memory modules 1999
1050M handler
Placement rates of up to 8,000 CPH
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QSA-30 Series Limited range of fine pitch capability Medium volume 1997
"QuadAlign" component centering SMT assembly
Placement rates of up to 13,300 CPH market
- ----------------------------------------------------------------------------------------------------
QSV-1 (part of the Full range fine pitch capability Medium volume 1997
"Q" Series) "QuadAlign" component centering SMT assembly
Placement rates of up to 7,000 CPH market
- ----------------------------------------------------------------------------------------------------
QSP-2 (part of the Full range of fine pitch capability Medium volume 1994
"Q" Series) "QuadAlign" component centering SMT assembly
Placement rates of up to 14,000 CPH market
- ----------------------------------------------------------------------------------------------------
</TABLE>
* See note below on the QSA-30.
2
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"MERIDIAN" SERIES OF PRODUCTS
The Company distributes the Meridian Series of products under a three year
purchase and distribution agreement with Mirae Corporation ("Mirae"), a Korean
SMT equipment manufacturer. Under the terms of the distribution agreement,
executed in June 1999, Mirae appointed the Company as Mirae's exclusive private
label distributor of Mirae's SMT placement systems throughout North and South
America and Europe. The distribution agreement provides for an initial term of
three years, with options to extend the term. This new product line is called
the Quad "Meridian Series" and initially is to consist of seven fully compatible
high-speed SMT assembler models designed to meet a wide variety of production
requirements. The new assemblers have the potential to help manufacturers
achieve increased return on investment by providing high quality and
productivity for the production of PWB's, low setup and operating costs,
effective line optimization and operation monitoring tools.
The Company intends to use products from the Meridian Series to replace the
QSA-30 machine, to supplement the Company's current "Q" Series and "C" Series of
products and to help gain entry into the high volume production SMT placement
market. During the first quarter of fiscal 2000, the Company commenced shipping
Meridian Series of products to beta sites for customer evaluation. The Company
believes that during the second half of fiscal 2000 Meridian Series product
sales will represent a major portion of the Company's total sales. Attainment of
this goal will be a critical factor towards improving the Company's financial
position. There can be no assurance, however, that this goal will be attained or
that the Company will be successful marketing and selling the Meridian Series of
products.
The Meridian Series is a recently developed and previously unmarketed product
line, with several models in final stages of development. There can be no
assurance that the products will achieve market acceptance or penetration. In
addition, there can be no assurance that the Meridian Series will achieve the
required customer satisfaction or satisfactorily meet applicable reliability
standards and criteria.
1010/1010P
The Meridian Series 1010 and 1010P are designed for use in high volume
environments where throughput is the primary concern. The modular head on the
Meridian Series 1010 is designed for chip and small IC type component
placements. The Meridian Series 1010P has a precision head that allows the user
to extend the component range to include large and fine pitch component
placements.
1020/1020P
The Meridian Series 1020 and 1020P are designed for use in medium volume
environments where both accuracy and throughput are concerns. The modular head
on the Meridian Series 1020 is designed for chip and small IC type component
placements. The Meridian Series 1020P also has a precision head that allows the
user to extend the component range to include large and fine pitch component
placements.
3
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1030/1030P
The Meridian Series 1030 and 1030P are designed for use in low volume/high job
mix environments where overall placement system cost is the primary concern. The
modular head on the Meridian Series 1030 is designed for chip and small IC type
component placements. The Meridian Series 1030P also has a precision head that
allows the user to extend the component range to include large and fine pitch
component placements.
1050M
The Meridian 1050M is designed for the assembly of memory modules. It
incorporates two important innovations: a high capacity matrix tray handler and
a programmable nozzle pitch that allow the 1050M to sustain high rates of tray
packaged component placement.
"Q" SERIES OF PRODUCTS
The "Q" Series were designed and manufactured by the Company and consist of
multi-functional SMT assemblers offering a range of throughput rates, precision
and capabilities. "Q" Series assemblers share several common technologies,
including Quad's patented QuadAlign technology, 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 more efficiently than otherwise
would be the case, 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. All "Q" Series models share Quad's proprietary IQ (TM) feeder
setup verification technology. The Company believes that this technology
increases machine utilization and yield. Approximately 44% of the Company's
fiscal year 1999 net sales were attributable to sales of the "Q" Series,
including accessories.
QSP-2
The QSP-2 is a medium-speed multi-functional "Q" Series SMT assembler with fine
pitch capabilities. The QSP-2 was introduced in February 1994 and was the first
"Q" Series production assembler to utilize QuadAlign. The ability of the QSP-2
to place a large range of components at high throughput rates provides
flexibility in production line balancing, allowing easier optimization of
production. The QSP-2 is designed for applications with placement rates,
depending upon customer applications, of up to 14,000 CPH.
QSV-1
The QSV-1 is a low to medium volume multi-functional "Q" Series SMT assembler
with fine pitch capabilities. The QSV-1 was introduced in June 1996 and is
designed for applications with placement rates, depending upon customer
application, of up to 7,000 CPH.
QSX-1
The QSX-1 is a medium-speed "Q" Series SMT assembler that is capable of placing
ultra-fine-pitch components onto very large PWBs. This precision assembly system
combines an advanced mechanical platform and direct linear drive motor system
with the common QSOFT, QuadAlign and P4 head technologies. The QSX-1 was
designed for use in full-production fine-pitch IC placement applications. The
Company began full production and shipments of the QSX-1 during the fourth
fiscal quarter of 1996.
QSA-30 Series
The QSA-30 Series were medium volume SMT assemblers, developed in partnership
with and purchased from Samsung. The QSA-30, QSA-30A and QSA-30V models utilize
QuadAlign, Quad tape feeders and docking feeder carts. The QSA-30 Series 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 fine pitch components. In
March 1999, the supply agreement with Samsung under which the Company purchased
the QSA-30 units from Samsung terminated. The Company expects to fill the market
serviced by the QSA-30 products from the Company's new Meridian Series.
5
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APS-1
The APS-1 (Advanced Packaging System) is a "Q" Series assembler designed to
address the evolving requirements of both the advanced SMT and APT markets. The
APS-1, introduced in fiscal 1997, is designed 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 CPH, depending upon
customer applications. The APS-1 has been designed to be flexible, with optional
modular sub-systems to meet a variety of customer applications. Options
currently available include Wafer Presentation Systems, a Die Inverter, an
Automatic Wafer Transfer System, a Dip Fluxer and a variety of Waffle Pack
Holders.
The Company's APT products meet certain of the APT current market application
requirements. The Company's products do not address the needs for all APT
processes in the marketplace. The Company is continuing to develop and market
additional features for its APS-1 assembler, to meet targeted needs the Company
has identified for this evolving market. There can be no assurance that the
Company will be successful in doing so. Additionally, new technologies and
competitive models may be introduced in the future which might cause the
Company's current APT product offerings to become obsolete. The Company
continually attempts to improve its products to expand and increase the
application of its products, although there can be no assurance the Company will
be successful.
"C" SERIES OF PRODUCTS
The "C" Series are modular, low to mid-range assembly systems, which can be
configured with a wide variety of accessories designed to meet the specific
processing requirements of Quad's customers. The "C" Series also incorporates
QuadAlign. Components placed by the "C" Series range from very small passive
components, to multi-leaded, fine pitch component parts with lead spacing down
to 15 mils. All of the Company's standard accessories and QuadVu TM vision
systems are available as options for the "C" Series. Approximately 8% of the
Company's fiscal 1999 net sales were attributable to sales of the current "C"
Series and its predecessors, including accessories. The "C" Series includes the
IvcMk2 which is currently nearing the end of its product life.
IIc
The IIc is an entry-level system, providing a limited range of fine pitch
capability. The IIc is based on the original IVc. The 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 IIc offers
large board capacity that may be configured in a standard workholder, an in-line
board transport or a side shuttle configuration.
SCREEN PRINTERS
The Company sells screen printers manufactured by Speedline Technologies, Inc.
("Speedline"), under the agreement described below. The VMP (TM) Series and AVX
500 (TM) models are screen printers that offer high precision and repeatable
application of solder paste onto PWBs. The models range from entry level through
fully automated in-line full-size 29" screen printers.
6
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In conjunction with the sale of substantially all of the assets and business of
its U.K. subsidiary SMTech to Speedline, as discussed above, (See Note 6 to the
Consolidated Financial Statements for further information relating to the sale
of SMTech), the Company entered into a supply agreement dated September 30, 1998
with Speedline for the purchase and resale of the former SMTech line of screen
printers (the "Printer Supply Agreement"). The terms of the Printer Supply
Agreement includes minimum purchase requirements for one specific printer, the
AVX 500, and fixed pricing for all products, subject to periodic renegotiations
by the parties.
Within the first six months of commencement of the Printer Supply Agreement,
Speedline adjusted its selling prices on the Speedline equivalent of the AVX 500
to its customers to levels approximately equal to the fixed pricing paid for the
printer by the Company under the Printer Supply Agreement. This action forced
the Company to lower its selling prices of the AVX 500 to levels that resulted
in marginal income and occasional losses to the Company in order to compete with
Speedline. As a result, during the first supply term ending November 1999, the
Company had purchased only 17 units of the minimum purchase requirement of 40
units. The Company is currently negotiating a reduction in the minimum purchase
requirements on account of the pricing policies established by Speedline. There
can be no assurance, however, that the Company will be successful in obtaining
relief from the minimum purchase requirements.
Approximately 10% of the Company's fiscal year 1999 net sales were attributable
to sales of screen printers. Consequently, a disruption of the supply of screen
printers from Speedline could adversely affect the ability of the Company to
meet its customers' needs and could adversely affect the sale of the Company's
other products. If Speedline were to stop supplying Quad with screen printers,
the Company has the right to use alternative suppliers. The Company believes
that there are other suitable screen printer products that can be obtained from
other screen printer manufacturers.
REFLOW OVENS
The Company also sells convection dominant reflow ovens manufactured by its
wholly-owned subsidiary Quad Europe Limited ("QEL"). QEL, located in High
Wycombe, England, was acquired by the Company in 1993. 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 6% of the Company's fiscal year 1999 net sales were
attributable to sales of reflow ovens, which was the same as last year.
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 that
supports high-production throughputs. The A.I.R.TM (Adaptive Intelligent Reflow)
option for the Profile Series utilizes a computerized thermal camera inside the
oven and an independent computer system to monitor and control the temperature
of each PWB processed.
QCR Series Ovens
The QCR Series reflow ovens are designed for low to medium volume production
environments and for highly consistent reflow of assembled PWBs. QCR ovens are
available in two models, with four or eight independently controlled convection
zones, and belt, rail or combination transport systems.
MATERIAL HANDLING CONVEYORS
Quad sells material handling conveyors manufactured by third parties. Such
conveyors include wiring board loaders and unloaders, manual inspection stations
and other conveyor systems. Conveyor systems automate the material transfer
steps throughout the SMT assembly processing system.
7
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QUADLINE
The Company provides its customers with the major elements of turnkey SMT
production lines, under the name "QuadLine," a service that integrates a 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
with a sole source of responsibility and service for, and increased
compatibility among, the equipment in customers' assembly production lines.
During fiscal year 1999, the Company's sales of such systems accounted for
approximately 29% of net sales.
PERIPHERALS AND SERVICE
Component Feeders and Accessories
The Company sells, both in conjunction with its assembler products and on a
stand-alone basis to its customers, a variety of tape, vibratory and waffle tray
feeders. In June 1996, the Company licensed its then current tape feeder
technology to Samsung Aerospace Technologies, Ltd. ("Samsung") and, in
conjunction with such license, the Company entered into a long-term tape feeder
supply agreement with Samsung, under which Samsung became the Company's sole
supplier of electronic component tape feeders (the "Feeder Supply Agreement").
The Feeder Supply Agreement carries a six-year term with minimum purchase
requirements and revised product pricing established every two years during the
term of the agreement. Deliveries under the Feeder Supply Agreement commenced in
fiscal year 1997, with the first two years of the six year supply period ending
approximately the middle of June 2000. The Company's electronic tape feeders are
available in 8mm, 12mm, 16mm, 24mm, 32mm, 44mm and other special formats and are
compatible with all Quad assembly systems, although certain of the Meridian
Series of products work at their optimal performance level in conjunction with a
modified tape feeder product currently manufactured by and obtained from
Samsung. In addition, the Company offers docking feeder carts that can be loaded
with tape feeders off-line and rapidly rolled into place to prepare the
assembler to populate a new PWB. This feature can greatly reduce the time
involved in changing over the assembler from assembling one PWB to another.
During the spring of 1999, the Company notified Samsung of Samsung's
non-compliance with certain quantity and quality requirements in its supply of
tape feeders under the Feeder Supply Agreement. As required under the terms of
the Feeder Supply Agreement, the Company supplied Samsung in late summer 1999
with its good faith requirements of the tape feeders for years three and four of
the six year supply term. In late November, 1999, Samsung notified the Company
of Samsung's disagreement with the Company's good faith purchase requirements
and threatened to terminate the agreement and declare the Company in breach. The
Company disputes Samsung's claims of non-compliance with the Feeder Supply
Agreement and believes it has adequate defenses to such claims.
A disruption of the supply of component tape feeders, whether through a
termination of the Feeder Supply Agreement or otherwise, could adversely affect
the ability of the Company to meet its customers' needs and therefore, could
adversely affect the Company's revenues and earnings. If Samsung were to stop
supplying Quad with component tape feeders, Quad has the right under the tape
feeder supply agreement to resume manufacturing or use alternative suppliers.
The Company believes it has sufficient access to alternative sources of
component tape feeders to meet its needs should any disruption in supply from
Samsung occur, although there can be no assurance that such alternate sources
will be available or will be sufficient to meet the Company's requirements.
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The Company's MT-20 waffle tray handler can present up to twenty different
waffle trays to the assembler and is compatible with most of the Company's
assemblers. The Company's vibratory feeders are compatible with all of its
assembly systems.
QuadCareTM
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 their
assemblers and to provide support for additional peripheral equipment and
modular enhancements. The Company views this line of business as supporting the
marketing of the Company's assembly equipment and not as a substantial
additional line of business.
MANUFACTURING
The Company's current principal manufacturing activities consist of
sub-assembly, final assembly and testing of the Company's SMT and APT assembly
products in Willow Grove, Pennsylvania, and of reflow ovens in High Wycombe,
England. Virtually all of the Company's PWBs, machine parts, component 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 assurance coordination is provided to the Company's
subcontractors on an ongoing basis as a method of seeking to ensure quality and
low-cost production.
The Company believes it is advantageous to use multiple sources for PWBs,
fabricated parts and other essential components and generally, with the
exception of tape feeders, screen printers and Meridian Series products,
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 would 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.
Prior to the start of fiscal 1999, the Company manufactured a majority of its
SMT assembler products and all of its screen printers. On account of the
termination of the agreement with Samsung for the supply of the QSA-30 assembler
and the delays associated with the development with Samsung of the QSA-60 and
the need for a new line of assembler products to supplement the Company's then
current assembler line, the Company entered into a three year distribution
agreement with Mirae for the purchase and sale of the Company's new Meridian
line of assemblers.
The Company provides its customers with a one-year warranty on parts and labor
on all new products, whether manufactured by the Company or purchased from third
party suppliers.
SALES AND MARKETING
The Company markets its products and services in North America through a
combination of a direct sales force, regional sales managers and manufacturers'
representatives. At the end of fiscal year 1999, the Company employed 24 people
in sales and marketing, including 10 in direct sales and 19 manufacturers'
representative firms in North America. 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 34 other locations in North
America.
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Outside of North America, the Company has a direct sales force in the United
Kingdom and has sales representative arrangements with firms located in Brazil,
Argentina, Mexico, India, Indonesia, Taiwan, Korea, Singapore (also covering
Malaysia and Thailand), Hong Kong, China, Japan, Philippines, Australia, New
Zealand, Turkey, Egypt, Israel and in several Western European countries, other
than the U.K.
Sales to customers outside of the United States represented approximately 45%,
39% and 44% of net sales in fiscal year 1999, 1998 and 1997, respectively. The
Company derives its international sales from Quad Europe Limited, one of its
wholly-owned foreign operating subsidiaries in the United Kingdom, that both
manufactures and sells product, as well as from international sales shipped from
its U.S. operations. Prior to October, 1998, the Company also manufactured and
sold product through its European subsidiary SMTech. Substantially all of the
assets and liabilities of SMTech were sold to Speedline in October 1998.
The increase in the Company's international sales as a percentage of total sales
(international sales decreased approximately $9 million in fiscal year 1999) is
primarily the result of significant decreases in the Company's U.S. domestic
sales rather than due to an increase in international sales. For financial
information on the Company's foreign operations and the sale of SMTech, see
Notes 6 and 11 to the Consolidated Financial Statements included herein.
BACKLOG
Backlog of orders as of September 30, 1999, totaled $4.3 million compared to
$8.8 million as of September 30, 1998. The following table sets forth certain
backlog information by product line for the periods indicated (in thousands):
YEAR ENDED
SEPTEMBER 30,
-----------------
1999 1998
---- ----
Assemblers $1,572 $5,519
Screen printers 127 1,103
Reflow ovens 215 240
The remainder of backlog consists of other products. The Company expects to ship
all backlog orders outstanding at September 30, 1999 during fiscal year 2000.
Due to increased competition and over overcapacity within the SMT industry,
orders are being completed within a shorter timeframe. 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.
ENGINEERING, RESEARCH AND DEVELOPMENT
The Company's product development activities focus on developing new equipment
and on improving current system features, including accuracy, reliability and
flexibility, while increasing placement rates and yield. These efforts include
seeking to improve manufacturing techniques and further enhancing and developing
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 IQ(TM) Feeder Setup Verification
System, a component handling platform that presents SMT components to the
assembler while monitoring inventory status in the component feeders; QuadAlign,
a component processing alignment system used in many of the Company's products;
new products such as the APS-1 and the QSV-1; enhanced software functionality in
"Q" Series products and third party product integration software. These efforts
from time to time may include obtaining additional research and development
support from third parties.
10
<PAGE>
Engineering, research and development is currently conducted at the Company's
headquarters in Willow Grove, Pennsylvania and at QEL's headquarters in High
Wycombe, England. Engineering, research and development expenses for fiscal
1999, 1998 and 1997 were approximately $4.9 million, $7.5 million and $6.8
million, respectively. This represented approximately 10.8%, 10.0% and 8.3% of
net sales, for fiscal year 1999, 1998 and 1997, respectively.
In regards to the Meridian Series of products, the Company provided significant
resources to Mirae related to the development of the Meridian Series.
Significant and ongoing engineering, research and development expense have been
utilized in the final preparation of the Meridian Series of products and its
introduction to the market. The Company anticipates significant expenses will be
generated for the duration of the distribution agreement with Mirae, as sales
derived from the Meridian Series of products are anticipated to be a significant
portion of the Company's overall future sales.
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 principal domestic
competitors are Amistar Corp., BTU International, Inc., Conceptronic, Inc.,
Contact Systems, Inc., Heller Industries, Kulicke & Soffa Industries, Inc.,
Speedline (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, Ltd.,
Hitachi, Juki Automation Systems, Mydata Automation, Inc., Panasonic Factory
Automation Division of Matsushita Electric Corporation of America, Phillips SMD
Technology, Inc., Toshiba Corp., Samsung Aerospace, Sanyo High Technology Co.,
Ltd., Shinkawa Ltd., Siemens Factory Automation Inc., and The Zevatech Group.
With the introduction of the Company's Meridian Series and the offering of a
high speed assembler products (Meridian 1010), the Company expects to enter into
the high speed SMT market, which therefore will represent an additional customer
base. Because the Company is new to the high speed SMT market, the Company is
faced with the challenge of entering into this market with new and untested
products. There can be no assurance that the Company will be able to compete
effectively or efficiently in these new markets and against these new
competitors.
The Company believes that the principal competitive factors in the segments of
the SMT and APT assembly markets in which it competes and it expects to compete
are accuracy, reliability, speed, ease of use, service and support, throughput,
price, flexibility, enabling technology 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 customer
responsiveness.
11
<PAGE>
PATENTS AND LICENSES
The Company holds four 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 of the Company's
patents, which was granted in 1996, covers the Company's non-contact component
alignment sub-systems (known as QuadAlign), used in certain of the Company "C"
Series and all of the "Q" Series products. Although the QuadAlign patent and any
other patents that may be obtained are considered valuable intellectual
property, the Company 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. The Company has an agreement with Speedline
to supply Quad on an OEM basis with the former SMTech screen printer product
line. This agreement provides, among other things, that Quad will purchase a
minimum of $7.4 million of AVX 500 screen printers by December 31, 2000. This
agreement, however, is subject to certain provisions that could reduce the
minimum commitment required.
The Company had an agreement with Samsung for the sale and distribution of the
QSA-30 Series, which terminated in March 1999. The Company intends to replace
the QSA-30 with one or more offerings under the Meridian Series of products.
In 1996, the Company granted an exclusive license to Samsung for Samsung to be
the Company's sole supplier of component tape feeders, which are currently used
on all of the Company's assembly systems. The contract has a six-year term and
requires Quad to purchase a minimum quantity of component tape feeders with a
value of at least $6.8 million during the first two years of the contract and in
amounts to be negotiated for each subsequent two-year period of the term.
Samsung's remedy if Quad fails to meet the target for a particular two-year
period is to terminate the agreement. Under the agreement, Samsung paid 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. Samsung began to supply
component tape feeders to the Company during fiscal year 1997.
The Company believes that much of its important technology resides in its
proprietary software (much of which has not received federal copyright
registration or is not patented) 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 for use with electronic assembly equipment.
In connection with the Company's new revolving asset based line of credit
agreement entered into on January 7, 2000 and the Company's reaffirmed bank term
loan entered into on December 9, 1999, the Company granted the lenders security
interests in the Company's intellectual property, including its patents,
trademarks and trade secrets, to secure the Company's obligations thereunder.
Upon an event of default under either loan agreement evidencing the line of
credit or the reaffirmed term loan, the lenders are permitted to satisfy the
Company's obligations to the lender by selling, assigning or licensing the
Company's intellectual property to third parties.
12
<PAGE>
EMPLOYEES
At the end of fiscal year 1999, the Company employed 255 persons on a full-time
basis of which 214 were domestic and 41 were foreign based. None of the
Company's employees are represented by a labor union. 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 current monthly rental for
the space is approximately $68,000 plus taxes, insurance, maintenance and
utilities.
QEL occupies a 9,600 square foot facility in High Wycombe, England, for a term
of 25 years ending in December 2018 with a current monthly rental of
approximately $8,000 (at current exchange rates), plus taxes, insurance,
maintenance and utilities. SMTech occupied a 19,000 square foot facility in
Dorchester, England, for a term of 15 years ending in April 2011 with a current
monthly rental of approximately $9,000 (at current exchange rates), plus taxes,
insurance, maintenance and utilities (see discussion below). Both the QEL and
SMTech facilities have clauses that permit the tenant to vacate at no cost after
ten and five years, respectively, from the beginning of their leases. The
Company believes that its existing facilities are adequate to meet its current
needs.
As discussed earlier, the Company sold substantially all of the assets and
liabilities of SMTech to Speedline in the beginning of fiscal year 1999.
Subsequent to the sale, Speedline subleased the SMTech facility from the
Company, which sublease terminated in September 1999. The Company is currently
seeking to sublease the facility to other tenants.
ITEM 3. LEGAL PROCEEDINGS
In 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 and is vigorously defending itself
against the lawsuit. Accordingly, no provision for this lawsuit has been
recorded since its inception.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
<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>
Theodore J. Shoneck 42 President
Anthony R. Drury 57 Senior Vice President, Finance and Chief Financial Officer
Craig C. Ramsey 46 Senior Vice President, Marketing
John D. Dreibelbis 45 Vice President and Chief Technology Officer
William W. Pease 52 Vice President, North American Sales & Customer Support
Vahram V. Erdekian 51 Director
Roger E. Gower 59 Director
Robert P. Pinkas 46 Director
David H. Young 52 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. Shoneck has been President of the Company since April 1998. From December
1997 until April 1998, he was the Company's Chief Operating Officer. From May
1996 until December 1997, he was the Chief Operating Officer of Cutting Edge
Technologies, Inc. From April 1994 until May 1996, he was the Vice President and
General Manager of KMI Surgical Products, Inc. Prior to April 1994, Mr. Shoneck
was the Manager of Operations Services for Alcon Laboratories, Inc.
Mr. Drury has been Senior Vice President, Finance of the Company since December
1993. Mr. Drury has also been Chief Financial Officer of the Company since
January 1990.
Mr. Ramsey has been Senior Vice President, Marketing since November 1998. From
January 1996 until November 1998, he was the Company's Vice President, Product
Assurance and Marketing. From November 1994 until January 1996, Mr. Ramsey was
the Company's Vice President, Product Assurance. Prior to November 1994, he was
the Company's Vice President, Engineering.
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. Pease has been Vice President, North American Sales and Customer Support
since June 1999. Prior to his promotion, Mr. Pease had served many functions for
the Company within North American Sales beginning in 1985. Most recently, Mr.
Pease served as the Company's director of North American sales and northeast
regional sales manager.
Mr. Erdekian has served on the Board of Directors of the Company since July
1996. Since October 1998, he has been the Vice President, Strategic Account
Management of Solectron Corporation. From January 1998 until October 1998, Mr.
Erdekian was the Vice President, Mergers and Acquisitions of Bay Networks, Inc.
("Bay Networks"). From October 1996 until January 1998, he was Vice President,
Worldwide Manufacturing Operations of Bay Networks. 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. Erdekian has advised the Company that he will not be seeking
re-election to the Board at the 2000 Annual Meeting of Stockholders.
14
<PAGE>
Mr. Gower has served on the Company's Board of Directors since May 1999. Mr.
Gower is currently Chairman, President and Chief Executive Officer of Micro
Component Technology, Inc. ("Micro") Prior to his position at Micro, Mr. Gower
served as President and Chief Executive Officer of Datamedia Corporation from
1991 to 1995.
Mr. Pinkas has served on the Board of Directors of the Company since 1982 and
has been a general partner of Brantley Venture Partners, L.P. a venture capital
firm, for more than ten 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. Young is the founder of the Company and has served on the Company's Board of
Directors since its inception. In March 1998, Mr. Young was elected Chairman of
the Board. Mr. Young has been the President of Two Technologies, Inc., a company
that manufactures hand-held computers, for more than five years. Mr. Young
served as the Company's President from its inception until October 1985.
Mr. Randall had 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 Quad'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.
Randall resigned as a director from the Board of Directors effective December
16, 1999 due to pressures from other business obligations.
15
<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 Inc.'s National
Market under the symbol "QSYS". The quarterly range of high and low bid
quotations for 1999 and 1998 are set forth below. Such high and low bid
quotations reflect inter-dealer prices without retail mark-up, mark-down or
commissions and may not necessarily represent actual transactions.
YEAR ENDED SEPTEMBER 30, 1999 HIGH LOW
- ----------------------------- ---- ---
First Quarter $2.94 $0.75
Second Quarter $2.94 $1.88
Third Quarter $2.22 $1.75
Fourth Quarter $1.94 $1.50
YEAR ENDED SEPTEMBER 30, 1998 HIGH LOW
- ----------------------------- ---- ---
First Quarter $8.38 $5.00
Second Quarter $5.56 $3.56
Third Quarter $5.50 $2.44
Fourth Quarter $2.81 $1.06
NUMBER OF HOLDERS OF COMMON STOCK
At January 4, 1999, there were approximately 93 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 1,300.
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
agreement.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended September 30, (1)
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands, Except Per Share Amounts)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net sales $ 45,124 $ 74,859 $ 81,723 $ 71,591 $ 62,591
Cost of products sold 34,416 52,128 51,417 43,912 39,537
-------- -------- -------- -------- --------
Gross profit 10,708 22,731 30,306 27,679 23,054
Operating expenses:
Engineering, research and development 4,889 7,515 6,759 6,153 4,844
Selling and marketing 9,612 14,542 14,197 12,076 10,276
Administrative and general 4,457 6,955 5,912 5,561 3,997
-------- -------- -------- -------- --------
Total operating expenses 18,958 29,012 26,868 23,790 19,117
-------- -------- -------- -------- --------
Income (loss) from operations (8,250) (6,281) 3,438 3,889 3,937
Interest income (expense), net 68 (684) (381) (195) (124)
Gain on Sale of SMTech, Ltd. 8,375 -- -- -- --
Settlement of securities litigation -- -- -- (1,287) (180)
-------- -------- -------- -------- --------
Income (loss) before income taxes 193 (6,965) 3,057 2,407 3,633
Income tax expense (benefit) 6,494 (1,915) 1,070 915 945
======== ======== ======== ======== ========
Net income (loss) $ (6,301) $ (5,050) $ 1,987 $ 1,492 $ 2,688
======== ======== ======== ======== ========
Net income (loss) per share:
Basic $ (1.43) $ (1.16) $ 0.46 $ 0.35 $ 0.65
Diluted $ (1.43) $ (1.16) $ 0.45 $ 0.35 $ 0.62
Weighted average number of shares outstanding:
Basic 4,419 4,359 4,287 4,222 4,130
Diluted 4,419 4,359 4,464 4,321 4,329
BALANCE SHEET DATA:
Working capital $ 18,395 $ 20,863 $ 25,954 $ 23,317 $ 22,229
Total assets 33,780 50,976 50,037 43,823 41,175
Line of credit and current portion
of long-term debt 1,954 9,429 5,540 700 700
Long-term debt 1,126 1,761 2,325 1,750 2,450
Stockholders' equity 19,766 26,212 30,778 28,091 26,380
</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 1999,
which ended on September 26, 1999, and fiscal 1998, 1997, 1995 and 1994
which ended on September 27, 1998, September 28, 1997, September 24, 1995,
and September 25, 1994, respectively, each included 52 weeks. Fiscal 1996,
which ended on September 29, 1996, included 53 weeks.
17
<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 years 1999, 1998 and 1997, which
ended on September 26, 1999, September 27, 1998, and September 28, 1997,
respectively, each included 52 weeks.
The following table sets forth certain financial data as a percentage of net
sales for the years indicated:
YEAR ENDED SEPTEMBER 30,
--------------------------------
1999 1998 1997
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Gross margin 23.7 30.4 37.1
Engineering, research and development 10.8 10.0 8.3
Selling and marketing 21.3 19.4 17.4
Administrative and general 9.9 9.3 7.2
Income (loss) from operations (18.3) (8.4) 4.2
Income (loss) before income taxes 0.4 (9.3) 3.7
Net income (loss) (14.0) (6.7) 2.4
Net Sales. The Company derives net sales from the sale of its assembler products
and peripherals, reflow ovens, the resale of products manufactured by third
parties (including certain of its assembly products, peripherals and screen
printers) and services. Sales are recorded upon shipment of products configured
to meet customer application requirements. Net sales decreased $29,735,000 or
39.7% in 1999 over net sales in 1998. The following table sets forth sales of
certain product lines for the periods indicated (in thousands):
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1999 1998 1997
---- ---- ----
Assemblers $24,465 $42,199 $49,175
Screen printers 4,416 13,570 13,748
Reflow ovens 2,598 4,130 4,129
The Company believes that demand for the Company's SMT assembly equipment
decreased as a result of the continuing impact of the severe market downturns in
the electronics and semiconductor industries that commenced in fiscal year 1998
coupled with limited assembler product offerings capable of servicing medium to
high volume manufacturing environments where low cost throughput (i.e. cost per
placement sensitivity) is a primary concern. The Company's recently discontinued
QSA-30 assembler addressed only a small portion of this cost per placement
sensitive sector.
To meet this sector's requirements and to address competitive product offerings,
in June 1999, the Company entered into a distribution agreement with Mirae
Corporation ("Mirae") a Korean SMT equipment manufacturer. Under the terms of
the distribution agreement, Mirae appointed the Company as Mirae's exclusive
private label distributor of Mirae's SMT assembler equipment. The new assemblers
are referred to as the Quad "Meridian Series" and initially consist of seven
fully compatible high-speed SMT assembler models designed to meet a wide variety
of production requirements, including servicing medium to high volume
manufacturing environments where cost per placement sensitive is a primary
concern.
18
<PAGE>
Regarding decreased sales of screen printers, the sale of SMTech Limited
("SMTech") at the beginning of fiscal year 1999 has had a significant adverse
impact on sales of screen printers, as the Company lost sales revenue previously
recorded by SMTech, although the Company realized a substantial gain on the
sale.
Order bookings for fiscal 1999 were $40,612,000 compared to $72,791,000 for
1998, a decrease of 44.2%. This decrease was due to the above mentioned factors.
The consolidated backlog of unshipped orders as of September 30, 1999, was
$4,300,000 compared to $8,800,000 as of September 30, 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. Also,
due to increased competition and overcapacity within the SMT industry, orders
are being completed within a shorter timeframe. Therefore, backlog may not
necessarily be indicative of future sales.
International sales represented approximately 44.5%, 38.9%, and 43.7% of net
sales for the years 1999, 1998 and 1997, respectively. The Company derived
international sales from one wholly-owned U.K. foreign subsidiary in fiscal 1999
and two wholly-owned subsidiaries in fiscal 1998 and 1997 that both manufacture
and sell product, as well as from international sales shipped from its U.S.
operation. The Company also derives a small level of sales from certain non-U.K.
wholly-owned foreign subsidiaries. The increase in the Company's international
sales percentage was primarily caused by significant decreases in domestic sales
as international sales also decreased $9,013,000 in fiscal year 1999.
In 1998, net sales decreased $6,864,000 or 8.4% over net sales in the preceding
year. The decrease in net sales in 1998 was due to a decrease in assembler sales
resulting from market downturns in the electronics and semiconductor industries,
which resulted in increased price competition and decreased margins.
Gross Margin. Gross margin decreased to 23.7% in fiscal 1999 from 30.4% in
fiscal 1998. During fiscal 1999, the continued market downturn in the
electronics industry has continued to cause intense price competition between
the Company and its competitors due to overcapacity within the SMT industry as
well as an excess supply of new SMT equipment available in the market.
Additionally, the Company recorded $750,000 in inventory reserves for product
obsolescence as the Company continued its inventory reduction programs.
Excluding the $750,000 in additional inventory reserves, the gross margin for
fiscal 1999 was 25.4%. The Company did, however, experience improved margins in
the fourth quarter and believes the Company could realize higher gross margins
in subsequent periods if market conditions in the electronics industry continue
to improve, sales of the Meridian Series of products materialize and cost
reduction programs, which the Company is continually working on, are successful.
During 1998, gross margin decreased to 30.4% from 37.1% in 1997. This resulted
in part because the Company recorded a total of $2.1 million of inventory
reserve charges for discontinued products and slow moving inventory and a severe
downturn in the electronics and semiconductor industries. Excluding the $2.1
million special inventory reserve charges, gross margin for 1998 was 33.2%.
Engineering, Research and Development Expenses. Engineering, research and
development expenses decreased $2,626,000 or 34.9% in fiscal year 1999 over
fiscal year 1998 resulting from a combination of workforce reductions and
deferral of certain development efforts, as well as the absence of engineering,
research and development expenses from SMTech, which was sold in the first
quarter of fiscal year 1999. The Company anticipates increased spending related
to research and development related to the continued development of key products
as the electronics market continues to recover.
19
<PAGE>
During 1998, engineering, research and development expenses increased $756,000
or 11.2% in 1998 over 1997 due to the addition of personnel to the engineering,
research and development departments as the Company increased product
development activities associated with various products such as the APS-1
assembler, new SMT assembly equipment and other option features for the "Q"
Series. The Company continued to develop additional features for the APS-1
assembler, seeking to further expand market penetration and increase the
functionality of this product.
Selling and Marketing Expenses. Selling and marketing expenses decreased
$4,930,000 or 33.9% in 1999 as compared to the prior year. The decrease is
primarily related to sales volume decreases of 39.7% and from the absence of
selling and marketing expenses related to SMTech. Selling expenses are expected
to increase if sales of the Meridian Series of products materialize as
anticipated, therefore increasing commission expense.
During 1998, selling and marketing expenses increased $345,000 or 2.4% as
compared to the prior year. This increase was due to higher overall commission
rates. Excluding the increase in commission rates, selling and marketing
expenses decreased $478,000 or 3.4% which is the result of decreased net sales
in 1998 compared to net sales in 1997.
Administrative and General Expenses. Administrative and general expenses
decreased $2,498,000 or 35.9% in 1999 over the prior year. The decrease is
mainly due to the elimination of administrative and general expenses of SMTech
and the absence of one-time costs incurred in fiscal 1998, including $1.0
million for a paid-up license of patented technology from MPM Corporation and
severance costs of $451,000 related to reductions in the workforce. The decrease
in these expenses was partially offset by the write off of goodwill of $442,000,
as management believed the carrying value of this asset was not recoverable.
During 1998, administrative and general expenses increased $1,043,000 or 17.6%
over 1997. The increase was mostly due to one-time costs incurred in 1998,
including $1.0 million to obtain a paid-up license of patented technology and
severance costs of $451,000 related to reductions in the workforce. Excluding
these costs, administrative and general expenses decreased approximately
$408,000 or 6.9% in 1998 compared to last year.
Income Tax Expense. The Company incurred income tax expense of $6,494,000 in
1999, which includes approximately $3,100,000 of tax expense on the sale of the
SMTech subsidiary. In addition, the current year tax expense includes the
recording of a valuation allowance in the second quarter of 1999 against the
Company's net deferred tax assets as the Company believed the realization of the
deferred tax assets was uncertain based on the information available at that
time.
In 1998, the Company's effective income tax rate was 27.5%, amounting to a tax
benefit of $1,915,000, and 35.0% in 1997, amounting to income tax expense of
$1,070,000. Income tax expense (benefit) differs from the amount that would
result from applying the Federal statutory tax rate to pretax income (loss)
primarily due to permanent differences in taxable income (loss) versus book
income (loss). Income tax expense for 1997 was partially offset by tax benefits
realized from the Company's foreign sales corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased to $18.4 million as of September 30,
1999, including cash balances of $2.9 million, compared to working capital of
$20.9 million as of September 30, 1998, including cash balances of $2.1 million.
Net cash used in operations amounted to $4.6 million, this amount was funded
principally by the gain on sale of SMTech of $8.4 million. Purchases of
equipment and cash used in operations was mainly financed by the proceeds from
the sale of SMTech. Proceeds from the SMTech sale have amounted to $14,050,000.
The Company used part of these proceeds to repay its then outstanding line of
credit with First Union National Bank, which line of credit totaled $8,795,000
at the end of fiscal 1998.
20
<PAGE>
On January 7, 2000, the Company entered into a loan agreement with Congress
Financial Corporation ("Congress"), an affiliate of First Union National Bank
("Congress Loan Agreement"), that provides for an asset based revolving line of
credit and letters of credit. This agreement will expire on January 6, 2003. The
Congress Loan Agreement permits maximum borrowings not to exceed $12,000,000,
based on a percentage of eligible receivables and inventory.
The Company's obligations under the Congress Loan Agreement are secured by a
lien on all of the assets of the Company and its wholly-owned subsidiaries, and
pledges of the outstanding shares of stock of and guarantees of the Company's
obligations by the Company's wholly-owned subsidiaries. Interest on borrowings
is payable monthly at either 0.25% above the bank's published prime rate or
LIBOR plus 2.75%, at the Company's election. The interest rate will be reduced
0.25% provided no event of default has occurred and the Company meets a certain
net income level for fiscal 2000. The agreement also contains various operating
and reporting covenants and requires maintenance of minimum tangible net worth
levels.
The Congress Loan Agreement required the payment of commitment fees and closing
fees aggregating approximately $250,000. The Company may terminate the Congress
Loan Agreement prior to its expiration date upon the payment of a termination
fee ranging from 1% to 3% of a maximum borrowing base of $12,000,000, depending
on the date of termination. However, if the Company replaces the Congress Loan
Agreement with a facility with First Union National Bank, the early termination
fee is waived.
Under the Congress Loan Agreement, Congress is granted discretion to reduce
substantially the amount of permitted borrowings under the agreement if Congress
determines in good faith that the receivables, inventory, or other collateral
under the Congress Loan Agreement is impaired. Any such action could impair the
Company's ability to obtain the necessary working capital needed for its
operations. In addition, the Congress Loan Agreement includes conditions,
restrictions, or circumstances under which an event of default can occur.
Management believes that such clauses are normal and typical to secure asset
based financing arrangements. Upon the occurrence of an event of default under
the Congress Loan Agreement, Congress is permitted to liquidate the collateral
to satisfy the Company's obligations to Congress. Any such action by Congress
could materially adversely affect the Company's ability to operate its business
in an ongoing manner.
The Congress Loan Agreement replaces a revolving credit agreement with First
Union National Bank ("First Union") dated October 27, 1999 (the "First Union
Agreement), which permitted maximum borrowings not to exceed $8,000,000 and was
to expire on February 29, 2000. As with the Congress Loan Agreement, the First
Union Credit Agreement was also secured by a lien on all of the assets of the
Company and its wholly-owned subsidiaries. Although the revolving loan agreement
with First Union was replaced by the Congress Loan Agreement, the First Union
lien continues to secure a one million dollar term loan obtained by the Company
pursuant to a reaffirmed bank term loan dated December 9, 1999 with First Union
(the "Term Loan"). The Term Loan agreement is cross defaulted with the Congress
Loan Agreement. The First Union Agreement replaced a prior unsecured revolving
line of credit initially obtained by the Company in 1997.
The Company believes that its existing cash balances, cash flow from operations
and its borrowing capacity from the new asset based line of credit will be
sufficient for the Company to meet its working capital needs through fiscal year
2000.
21
<PAGE>
SALE OF SMTECH LIMITED
In the first quarter of fiscal year 1999, the Company sold substantially all of
the assets and liabilities of SMTech to Speedline for $14,800,000 million in
cash paid at closing, subject to a holdback of $750,000. The Company is liable
for various representations and warranties provided to Speedline under this
agreement. The Company recorded an after-tax net gain of approximately
$5,100,000 million in the first quarter of fiscal 1999. In connection with the
sale, Quad and Speedline's MPM division entered into an agreement whereby MPM
will supply Quad on an OEM basis with the former SMTech screen printer product
line(Note 6). Proceeds from the sale were used to repay the Company's
outstanding line of credit as well as fund purchases of equipment and cash used
in operations.
The Company invested $871,000 in equipment and leasehold improvements in 1999 as
compared to $1,384,000 in 1998 and $2,099,000 in 1997. Capital spending for 1997
included significant costs associated with site preparation and internal
furnishings for the corporate headquarters and U.S.
manufacturing facility into which the Company moved in January 1997.
COMMITMENTS
As of September 30, 1999, the Company had entered into various purchase order
agreements with vendors whereby the Company has committed to acquire inventory
for approximately $12,600,000. Such commitments are anticipated for delivery and
payment in the next twelve months. This total includes approximately $900,000 of
purchase orders with Samsung in accordance with an agreement to purchase
electronic tape feeders used in the Company's assemblers and approximately
$3,500,000 of purchase orders with Mirae in accordance with a distributorship
agreement (see below).
DISTRIBUTION AGREEMENTS
In June 1999, the Company reached an agreement with Mirae Corporation appointing
the Company as Mirae's exclusive private label distributor of Mirae SMT
placement systems throughout North and South America and Europe. The systems,
called the Meridian Series, consist of a series of seven high-speed SMT
assembler models that are designed to meet a wide variety of production
requirements, especially targeted at the cost per placement sensitive market
segments. The distribution agreement between the Company and Mirae provides for
an initial term of three years in length, with options to extend the length of
the term.
Under a long-term supply agreement with the Company executed in June 1996,
Samsung is the Company's sole supplier of electronic component tape feeders,
which are used in conjunction with the Company's SMT assembler products and are
sold on a stand-alone basis. The supply agreement carries a six-year term with
minimum purchase requirements and revised product pricing established every two
years during the term of the agreement. Deliveries under the agreement commenced
in fiscal year 1997, with the first two years of the six year supply period
ending in June 2000. The Company's electronic tape feeders are available in 8mm,
12mm, 16mm, 24mm, 32mm, 44mm and other special formats and are compatible with
all Quad assembly systems, although certain of the Meridian Series of products
work at their optimal performance level in conjunction with a modified tape
feeder product currently manufactured and supplied by Samsung. In addition, the
Company offers docking feeder carts that can be loaded with tape feeders
off-line and rapidly rolled into place to prepare the assembler to populate a
new PWB. This feature can greatly reduce the time involved in changing over the
assembler from assembling one PWB to another.
22
<PAGE>
During the spring of 1999, the Company notified Samsung of Samsung's
non-compliance with certain quantity and quality requirements in its supply of
tape feeders under the Feeder Supply Agreement. As required under the terms of
the Feeder Supply Agreement, the Company supplied Samsung in late summer 1999
with its good faith requirements of the tape feeders for years three and four of
the six year supply term. In late November, 1999 and again in early January
2000, Samsung notified the Company of Samsung's disagreement with the Company's
good faith purchase requirements and threatened to terminate the agreement and
declare the Company in breach. The Company disputes Samsung's claims of
non-compliance with the Feeder Supply Agreement and believes it has adequate
defenses to such claims.
A disruption of the supply of component tape feeders, whether through a
termination of the Feeder Supply Agreement or otherwise, could adversely affect
the ability of the Company to meet its customers' needs and therefore, could
adversely affect the Company's revenues and earnings. If Samsung were to stop
supplying Quad with component tape feeders, Quad has the right under the tape
feeder supply agreement to resume manufacturing or use alternative suppliers.
The Company believes it has sufficient access to alternative sources of
component tape feeders to meet its needs should any disruption in supply from
Samsung occur, although there can be no assurance that such alternate sources
will be available or will be sufficient to meet the Company's requirements.
In addition to the component feeder supply agreement, the Company and Samsung
have been involved in other product development programs, including a Joint
Development and Distribution Agreement dated September 22, 1997 for the joint
development and subsequent distribution of a high speed, high volume SMT
assembler, designated as the QSA-60 (the "Development Agreement"). Pursuant to
the Development Agreement, the Company and Samsung jointly participated in the
development of a new SMT assembler, based in part on the QSA-30 assembler
previously distributed by the Company. The Development Agreement also provided
for the subsequent distribution of the developed product. The parties are
currently in disagreement with respect to several issues relating to the
Development Agreement, including the parties' respective liability for funding
of the development project and their respective obligations relating to the
future distribution of the developed product. Each of the parties have claimed
that the other has breached its obligations under the Development Agreement, and
Samsung back in late November 1999 and in early January 2000 has threatened
litigation with respect thereto claiming substantial damanges. While the Company
believes it has defenses to these claims asserted by Samsung, the resolution to
the claims remains uncertain.
In conjunction with the sale of substantially all of the assets and business of
its U.K. subsidiary SMTech to Speedline, as discussed above, (See Note 6 to the
Consolidated Financial Statements for further information relating to the sale
of SMTech), the Company entered into a supply agreement dated September 30, 1998
with Speedline for the purchase and resale of the former SMTech line of screen
printers (the "Printer Supply Agreement"). The terms of the Printer Supply
Agreement includes minimum purchase requirements for one specific printer, the
AVX 500, and fixed pricing for all products, subject to periodic renegotiations
by the parties.
Within the first six months of commencement of the Printer Supply Agreement,
Speedline adjusted its selling prices on the Speedline equivalent of the AVX 500
to its customers to levels approximately equal to the fixed pricing paid for the
printer by the Company under the Printer Supply Agreement. This action forced
the Company to lower its selling prices of the AVX 500 to levels that resulted
in marginal income and occasional losses to the Company in order to compete with
Speedline. As a result, during the first supply term ending November 1999, the
Company had purchased only 17 units of the minimum purchase requirement of 40
units. The Company is currently negotiating a reduction in the minimum purchase
requirements on account of the pricing policies established by Speedline. There
can be no assurance, however, that the Company will be successful in obtaining
relief from the minimum purchase requirements.
Approximately 10% of the Company's fiscal year 1999 net sales were attributable
to sales of screen printers. Consequently, a disruption of the supply of screen
printers from Speedline could adversely affect the ability of the Company to
meet its customers' needs and could adversely affect the sale of the Company's
other products. If Speedline were to stop supplying Quad with screen printers,
the Company has the right to use alternative suppliers. The Company believes
that there are other suitable screen printer products that can be obtained from
other screen printer manufacturers.
23
<PAGE>
YEAR 2000
The Company developed plans to address the possible exposures related to the
impact on its computer systems of the Year 2000. Key financial, informational,
and operational systems, including equipment with embedded microprocessors, have
been inventoried and assessed, and the required systems modifications or
replacements. Progress against these plans has been monitored and reported to
management and to the Audit Committee of the Board of Directors on a periodic
basis. In January 1999, the Company successfully replaced its existing business
and accounting system in the Willow Grove manufacturing facility with an
enterprise-wide business system that is certified by the supplier to be Year
2000 compliant. Year-to-date spending on this management information system
upgrade has totaled approximately $145,000. Internal staffing costs and
re-engineering costs, if any, associated with this system implementation project
are being expensed as incurred. Required Year 2000 readiness changes to the
business and accounting systems at the Willow Grove headquarters were completed
in June 1999. The Company believes that this business unit is now fully Y2K
compliant. Additional Year 2000 expenditures for all other business and
accounting systems in fiscal 1999 did not exceed $150,000.
The Company's key suppliers have been queried as to their Year 2000
preparedness. All of the Company's key suppliers have answered affirmatively as
to Year 2000 readiness. In addition, the Company has conducted an evaluation of
the operating software used in the Company's products for possible Year 2000
issues. The Company has addressed the single deficiency identified during this
evaluation. The cost of this project did not exceed $5,000. The Company does not
believe that the operation of recently manufactured equipment sold to customers
will be affected by the transition to the Year 2000. Accordingly, the Company
does not currently anticipate any material disruption in its business operations
as a consequence of the Year 2000 issue.
The Company's risk management program includes emergency backup and recovery
procedures to be followed in the event of failure of a business-critical system.
Contingency plans to protect the business from Year 2000-related interruptions
have been developed. These plans have been completed and include, for example,
development of backup procedures, identification of alternate suppliers and
possible increases in safety inventory levels.
FORWARD-LOOKING STATEMENTS
The discussions above regarding the Company's expectations of future sales and
bookings, gross margins, operating expenses, the success of a distribution
arrangement with Mirae, renegotiating the supply agreement with Speedline,
access to sources of component tape feeders, continued access to financial
availability, Year 2000 compliance and the outlook for the SMT and APT
industries 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 for the SMT and APT industries and the
intensity of competition, marketplace acceptance of and response to the new
Meridian product line, product development delays, performance problems or the
ability to meet expected performance levels of Meridian SMT assemblers, timing
of future product releases, product development delays or performance problems
or difficulties in penetrating the APT 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, assemblers or
screen printers manufactured by a third party, a reduction in the level of
permitted borrowings under or termination of the Loan Agreement by Congress on
account of the Company's failure to achieve the minimum tangible net worth
levels and/or attain the other operating and reporting requirements contained in
the Congress Loan Agreement, failure to maintain various operating and reporting
covenants and requirements as required by the loan agreement with Congress, the
timely resolution of any Year 2000 issues by the Company and its customers and
suppliers, failure to successfully defend itself against the patent infringement
litigation, foreign exchange rate fluctuations, risks of nonpayment of accounts
receivable or changes in forecasted costs, including unexpected required
additional engineering costs.
24
<PAGE>
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.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is contained in the Company's definitive
Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission no later than 120 days
after the end of the Company's fiscal year, and is incorporated herein by
reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is contained in the Company's definitive
Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission no later than 120 days
after the end of the Company's fiscal year, and is incorporated herein by
reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 is contained in the Company's definitive
Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission no later than 120 days
after the end of the Company's fiscal year, and is incorporated herein by
reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is contained in the Company's definitive
Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission no later than 120 days
after the end of the Company's fiscal year, and is incorporated herein by
reference thereto.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
(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, 1999 and 1998.
Consolidated Statements of Operations for the years ended September 30, 1999,
1998 and 1997.
Consolidated Statements of Stockholders' Equity for the years ended September
30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended September 30, 1999,
1998 and 1997.
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.
4.1 Shareholder's Rights Agreement dated November 12, 1997 - Incorporated
by reference to Exhibit 1 and 2 to the Registrant's Registration
Statement on Form 8-A filed with the Securities and Exchange
Commission on February 2, 1998.
*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.
*10.2 1993 Stock Option Plan, as amended - Incorporated by reference to
Exhibit 10.2 filed under Form 10-Q for the period ended March 31,
1998.
27
<PAGE>
*10.3 Quad Systems Corporation Employee Stock Purchase Plan, as amended -
Incorporated by reference to Exhibit 10.3 to Registrant's Registration
Statement on Form S-8 (No. 033-93436) filed with the Securities and
Exchange Commission on May 25, 1999.
*10.4 401(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.
*10.5 Executive Severance Pay Plan - Incorporated by reference to Exhibit
10.3 filed under Form 10-Q for the period ended June 30, 1998.
*10.6 Employment memorandum dated April 27, 1998, between the Company and
Theodore J. Shoneck Incorporated by reference to Exhibit 10.4 filed
under Form 10-Q for the period ended June 30, 1998.
*10.7 Employment memorandum dated April 27, 1998, between the Company and
Anthony R. Drury Incorporated by reference to Exhibit 10.5 filed under
Form 10-Q for the period ended June 30, 1998.
10.8 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.
10.9.1 Credit Agreement dated April 11, 1997, between the Company and
CoreStates Bank, NA - Incorporated by reference to Exhibit 10.7.1
filed under the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997.
10.9.2 First Amendment to Credit Agreement dated September 11, 1997, between
the Company and CoreStates Bank, NA - Incorporated by reference to
Exhibit 10.7.2 filed under the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997.
10.10.1 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 (portions redacted pursuant
to SEC order granting confidential treatment to certain provisions).
10.10.2 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).
10.10.3 Agreement dated March 19, 1997, between the Registrant and Samsung
Aerospace Industries, Ltd. Incorporated by reference to Exhibit 10.11
filed under the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997 (portions redacted pursuant to SEC order
granting confidential treatment to certain provisions).
10.11 OEM and Distributorship Agreement dated December 2, 1997 between the
Registrant and Kaijo Corporation for the distribution of the
Registrant's APS-1 product - Incorporated by reference to Exhibit 10.1
filed under Form 10-Q for the period ended December 31, 1997 (portions
redacted pursuant to SEC order granting confidential treatment to
certain provisions).
*10.12 Severance Agreement dated March 30, 1998, as further amended on
April 7, 1998, between the Company and David W. Smith - Incorporated
by reference to Exhibit 10.1 filed under Form 10-Q for the period
ended June 30, 1998.
*10.13 Severance Agreement dated April 6, 1998, between the Company and
Joseph L. Gasper - Incorporated by reference to Exhibit 10.2 filed
under Form 10-Q for the period ended June 30, 1998.
28
<PAGE>
10.14.1 Agreement relating to the sale and purchase of the business and
assets of SMTech Limited, dated September 30, 1998, between the
Registrant, SMTech Limited and Speedline Technologies, Inc.
Incorporated by reference to Exhibit 2.1 filed under Current Report on
Form 8-K filed with the Securities and Exchange Commission on October
14, 1998.
10.14.2 Agreement relating to the goodwill and intellectual property
assignment of SMTech Limited, dated September 30, 1998, between the
Registrant, SMTech Limited and Speedline Technologies, Inc.
Incorporated by reference to Exhibit 2.2 filed under Current Report on
Form 8-K filed with the Securities and Exchange Commission on October
14, 1998.
10.15 Supply agreement dated September 30, 1998 between the Registrant and
Speedline Technologies, Inc. for the resale of SMTech stencil printers
- Incorporated by reference to Exhibit 2.3 filed under Current Report
on Form 8-K filed with the Securities and Exchange Commission on
October 14, 1998 (portions redacted pursuant to SEC order granting
confidential treatment to certain provisions).
10.16 Distribution agreement dated June 1, 1999 between the Registrant and
Mirae Corporation for the appointment of the Company as Mirae's
exclusive distributor of certain products in North America, South
America, Europe, Africa, Israel and Turkey - Incorporated by reference
to Exhibit 10.1 filed under Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 6, 1999 (portions
redacted pursuant to SEC order granting confidential treatment to
certain provisions).
o10.17 Reaffirmation of Term Loan agreement dated December 9, 1999.
o10.18 Secured Line of Credit agreement dated January 7, 2000 between
Registrant and Congress Financing Company.
o21 Subsidiaries of the registrant.
o23 Consent of Ernst & Young LLP.
o27 Financial Data Schedule.
- ----------
* Constitutes compensatory plan or arrangement required to be filed as an
exhibit to this form.
o Filed herewith
29
<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 January
11, 2000 on its behalf by the undersigned, thereunto duly authorized.
QUAD SYSTEMS CORPORATION
By: /s/ THEODORE J. SHONECK
-------------------------------
Theodore J. Shoneck, 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.
/s/ THEODORE J. SHONECK Principal Executive January 11, 2000
- ----------------------- Officer
Theodore J. Shoneck
/s/ ANTHONY R. DRURY Principal Financial January 11, 2000
- ------------------------- and Accounting Officer
Anthony R. Drury
/s/ VAHRAM V. ERDEKIAN Director January 11, 2000
- -------------------------
Vahram V. Erdekian
/s/ ROBERT P. PINKAS Director January 11, 2000
- -------------------------
Robert P. Pinkas
/s/ DAVID H. YOUNG Director January 11, 2000
- -------------------------
David H. Young
/s/ ROGER E. GOWER Director January 11, 2000
- -------------------------
David H. Young
30
<PAGE>
QUAD SYSTEMS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors..........................................F-2
Consolidated Balance Sheets as of September 30,
1999 and 1998...........................................................F-3
Consolidated Statements of Operations for the
Years Ended September 30, 1999, 1998 and 1997...........................F-4
Consolidated Statements of Stockholders'
Equity for the Years Ended
September 30, 1999, 1998 and 1997.......................................F-5
Consolidated Statements of Cash Flows for the
Years Ended September 30, 1999, 1998 and 1997...........................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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended September 30, 1999, in conformity with accounting principles generally
accepted in the United States. 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
November 8, 1999,
except for Note 13 as to which the date is
January 7, 2000
F-2
<PAGE>
QUAD SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,890 $ 2,116
Accounts receivable, net of allowance for doubtful accounts-
$493 and $1,196 at September 30, 1999 and 1998, respectively 9,695 15,003
Inventory:
Raw materials 6,597 7,752
Work in process 1,926 2,446
Finished goods 7,923 10,320
-------- --------
16,446 20,518
Deferred income taxes -- 3,886
Income taxes receivable 549 1,088
Prepaid expenses and other current assets 1,703 1,255
-------- --------
Total current assets 31,283 43,866
Property and equipment, net 2,497 3,498
Deferred income taxes -- 653
Goodwill, net of accumulated amortization -- 2,594
Other assets -- 365
-------- --------
Total assets $ 33,780 $ 50,976
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,318 $ 8,795
Accounts payable 3,887 4,937
Accrued expenses 5,790 6,908
Deferred service revenue 986 1,220
Customer deposits 271 509
Current portion of long-term debt 636 634
-------- --------
Total current liabilities 12,888 23,003
Long-term debt, less current portion 1,126 1,761
-------- --------
Total liabilities 14,014 24,764
Stockholders' equity:
Preferred Stock, par value $.01 per share; authorized shares:
1,000,000; no shares issued at September 30, 1999 and 1998 -- --
Common Stock, par value $.03 per share; authorized shares:
15,000,000; shares issued: 4,444,072 and 4,398,706 at
September 30, 1999 and 1998, respectively 133 132
Additional paid-in capital 24,657 24,719
Retained earnings (accumulated deficit) (4,906) 1,395
Accumulated other comprehensive income (loss) (118) 142
Less treasury stock, at cost, 13,908 shares at September 30, 1998 -- (176)
-------- --------
Total stockholders' equity 19,766 26,212
-------- --------
Total liabilities and stockholders' equity $ 33,780 $ 50,976
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
QUAD SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $ 45,124 $ 74,859 $ 81,723
Cost of products sold 34,416 52,128 51,417
----------- ----------- -----------
Gross profit 10,708 22,731 30,306
Operating expenses:
Engineering, research and
development 4,889 7,515 6,759
Selling and marketing 9,612 14,542 14,197
Administrative and general 4,457 6,955 5,912
----------- ----------- -----------
18,958 29,012 26,868
Income (loss) from operations (8,250) (6,281) 3,438
Gain on sale of SMTech, Ltd. 8,375 0 0
Interest expense (257) (722) (484)
Interest income 325 38 103
----------- ----------- -----------
Income (loss) before income taxes 193 (6,965) 3,057
Income tax expense (benefit) 6,494 (1,915) 1,070
----------- ----------- -----------
Net income (loss) $ (6,301) $ (5,050) $ 1,987
=========== =========== ===========
Net income (loss) per share:
Basic $ (1.43) $ (1.16) $ 0.46
Diluted $ (1.43) $ (1.16) $ 0.45
Weighted average number of shares outstanding:
Basic 4,419,148 4,359,494 4,286,556
Diluted 4,419,148 4,359,494 4,463,813
</TABLE>
See accompanying notes.
F-4
<PAGE>
QUAD SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED ACCUMULATED
----------------------- ADDITIONAL EARNINGS OTHER
SHARES PAID-IN (ACCUMULATED COMPREHENSIVE TREASURY STOCKHOLDERS'
OUTSTANDING AMOUNT CAPITAL DEFICIT) INCOME (LOSS) STOCK EQUITY
----------- ------ ------- -------- ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 4,241,114 $ 128 $23,713 $ 4,458 $ (32) $ (176) $ 28,091
Net income -- -- -- 1,987 -- -- 1,987
Foreign currency translation adjustment -- -- -- -- 66 -- 66
---------
Comprehensive income (loss) -- -- -- -- -- -- 2,053
Compensation 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
--------- ------- ------- --------- ------- ------- ---------
Balance at September 30, 1997 4,323,559 130 24,345 6,445 34 (176) 30,778
Net loss -- -- -- (5,050) -- -- (5,050)
Foreign currency translation adjustment -- -- -- -- 108 -- 108
---------
Comprehensive income (loss) -- -- -- -- -- -- (4,942)
Compensation related to the issuance
of stock options -- -- 100 -- -- -- 100
Common Stock issued under
employee benefit plans 61,239 2 264 -- -- -- 266
Tax benefit related to stock
options exercised -- -- 10 -- -- -- 10
--------- ------- ------- --------- ------- ------- ---------
Balance at September 30, 1998 4,384,798 132 24,719 1,395 142 (176) 26,212
Net loss -- -- -- (6,301) -- -- (6,301)
Foreign currency translation adjustment -- -- -- -- (260) -- (260)
---------
Comprehensive income (loss) -- -- -- -- -- -- (6,561)
Common Stock issued under
employee benefit plans 59,274 1 111 -- -- -- 112
Tax benefit related to shares issued
under employee benefit plans -- -- 3 -- -- -- 3
Retirement of treasury stock -- -- (176) -- -- 176 0
--------- ------- ------- --------- ------- ------- ---------
Balance at September 30, 1999 4,444,072 $ 133 $24,657 $ (4,906) $ (118) $ -- $ 19,766
========= ======= ======= ========= ======= ======= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
QUAD SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (6,301) $ (5,050) $ 1,987
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation 1,009 1,218 1,421
Amortization - 383 379
Provision for goodwill writedown 442
Provision for (recovery from) losses on accounts receivable (175) 420 204
Provision for (benefit from) deferred income taxes 4,539 (1,246) (169)
Stock option compensation - 100 5
Gain on sale of Smtech, Ltd. (8,375) - -
Changes in operating assets and liabilities, net:
Accounts receivable 4,532 4,811 (5,362)
Inventory 1,827 (3,421) (785)
Income taxes receivable 539 (1,088) --
Other assets (379) (309) (392)
Accounts payable (43) 1,029 (862)
Accrued expenses (1,694) 1,382 (503)
Customer deposits (238) (187) (605)
Deferred service revenue (234) 185 303
Income taxes payable - (219) (122)
-------- -------- --------
Net cash used in operating activities (4,551) (1,992) (4,501)
INVESTING ACTIVITIES
Proceeds from the sale of SMTech, Ltd. 14,050 - -
Purchases of property and equipment (871) (1,384) (2,099)
Proceeds from the sale of property and equipment 144 - -
-------- -------- --------
Net cash provided by (used in) investing activities 13,323 (1,384) (2,099)
FINANCING ACTIVITIES
Net proceeds from (repayments on) line of credit (7,477) 3,875 4,920
Proceeds from term loan - - 3,100
Principal payments on long-term debt and capital leases (633) (630) (2,605)
Common Stock issued under employee benefit plans 112 266 530
-------- -------- --------
Net cash provided by (used in) financing activities (7,998) 3,511 5,945
Net increase (decrease) in cash and cash equivalents 774 135 (655)
Cash and cash equivalents at beginning of year 2,116 1,981 2,636
-------- -------- --------
Cash and cash equivalents at end of year $ 2,890 $ 2,116 $ 1,981
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
1. DESCRIPTION OF THE BUSINESS
The Company distributes, markets, designs, manufactures and supports flexible,
high-performance surface mount technology ("SMT") and advanced packaging
technology ("APT") equipment used in the assembly of SMT printed circuit wiring
boards, advanced packages and other semiconductor assembly processes.
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
accounts and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the 1998 and 1997 financial statements to
conform with the 1999 presentation.
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 1999, which ended on September
26, 1999, fiscal 1998, which ended on September 27, 1998, and fiscal 1997, which
ended on September 28, 1997, each included 52 weeks.
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.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents and trade receivables.
Concentrations of credit risk with respect to trade receivables is related to
the Company selling primarily to customers in the SMT industry in the United
States and abroad. The Company performs ongoing credit evaluations of customers
and generally does not require collateral. Allowances are maintained for
potential credit losses and such losses have been within management's
expectations. At September 30, 1999, the Company had no significant
concentrations of credit risk.
F-7
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
CASH AND CASH EQUIVALENTS
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):
YEAR ENDED SEPTEMBER 30,
---------------------------------
1999 1998 1997
---- ---- ----
Schedule of noncash activity:
Equipment acquired under capital lease
$ -- $ 81 $ -
====== ===== ======
Tax benefit related
to employee stock benefit plans $ 3 $ 10 $ 99
====== ===== ======
Cash paid during the year for:
Interest $ 288 $ 730 $ 483
====== ===== ======
Income taxes $1,235 $ 157 $1,678
====== ===== ======
INVENTORY
The Company values its inventory at the lower of cost (first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on assets is provided
using the straight-line method over the estimated useful lives of the related
assets.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the Company reviews its long lived assets, including intangible
assets, for impairment whenever events or circumstances indicate that the
carrying value of the asset may not be recoverable. If this review indicates
that the asset will not be recoverable based on the expected undiscounted net
cash flows of the related asset, the asset's carrying value is reduced by the
estimated excess of such value over projected discounted cash flow. As a result
of this evaluation during fiscal year 1999, the Company wrote-off the remaining
balance of Quad Europe Limited's (QEL) unamortized goodwill of $442,000, as
management believed the carrying value was not recoverable. This charge is
included in operating expenses in the 1999 consolidated statement of operations.
During fiscal year 1999, the Company sold substantially all of the assets and
liabilities of one of its European subsidiaries, SMTech Limited (Note 6). As a
result of the sale, the Company wrote off goodwill of $2,152,000 associated with
the business.
F-8
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
PRODUCT WARRANTY
The consolidated financial statements reflect estimated accruals for potential
product warranty claims based on the Company's claim experience. Such costs are
accrued at the time sales are recognized. The Company's actual product warranty
costs have not differed materially from accrued estimated amounts.
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 $2,221,000, $1,853,000 and $1,522,000
for the years ended September 30, 1999, 1998 and 1997, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", defines
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties. Cash, cash
equivalents, accounts receivable, other current assets, accounts payable,
accrued expenses and the line of credit reported in the consolidated balance
sheets equal or approximate fair value due to their short maturities. For
long-term debt, including current maturities, the fair value of the Company's
long-term debt approximates historically recorded cost since interest rates
approximate market.
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
Assets and liabilities of the Company's international operations are translated
into U.S. dollars at fiscal year-end exchange rates. Income and expense items
are translated at the average exchange rate prevailing during the fiscal year.
The resulting translation adjustments are recorded as a component of
stockholders' equity.
NET INCOME (LOSS) PER SHARE
Basic earnings per share is calculated by dividing net income (loss) by the
weighted average common shares outstanding for the period. Diluted earnings per
share is calculated by dividing net income (loss) by the weighted average common
shares outstanding for the period plus the dilutive effect of stock options and
other dilutive securities.
F-9
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except for share and per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income (loss) $ (6,301) $ (5,050) $ 1,987
========= ========= =========
Denominator:
Denominator for basic earnings (loss)
per share-weighted average shares 4,419,148 4,359,494 4,286,556
Effect of dilutive securities:
Employee stock options -- -- 177,154
Employee stock purchase plan -- -- 103
--------- --------- ---------
Dilutive potential Common Stock -- -- 177,257
Denominator for diluted earnings (loss)
per share-weighted average shares 4,419,148 4,359,494 4,463,813
========= ========= =========
Basic earnings (loss) per share $(1.43) $(1.16) $0.46
========= ========= =========
Diluted earnings (loss) per share $(1.43) $(1.16) $0.45
========= ========= =========
</TABLE>
The effect of dilutive securities for the years ended September 30, 1999 and
1998 were not included in the computation of diluted (loss) per share because
they were antidilutive.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required. The adoption of SFAS No. 130 had no impact on the Company's
consolidated results of operations, financial position or cash flows, but did
effect the consolidated statements of stockholders' equity disclosure.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographical areas and major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. The adoption of SFAS No. 131 did not
effect results of operations of financial position, but did effect the
disclosure of segment information (see Note 11).
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires entities to record all derivative instruments on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and the type of hedge transaction. The ineffective portion of all hedges will be
recognized in earnings. In June 1999, the FASB voted to defer the implementation
date of SFAS 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Management has not completed its review of SFAS
133, but does not expect the adoption of SFAS 133 to have a material impact on
its future earnings or financial position.
F-10
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
SEPTEMBER 30,
--------------------------
1999 1998
---- ----
Computer hardware and software $2,596 $3,244
Machinery and equipment 2,493 3,149
Furniture and fixtures 566 1,141
Leasehold improvements 562 843
Equipment under capital lease 81 81
------- -------
6,298 8,458
Less accumulated depreciation (3,801) (4,960)
------- -------
$2,497 $3,498
======= =======
4. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
SEPTEMBER 30,
----------------------
1999 1998
---- ----
Accrued commissions $ 909 $1,776
Accrued warranty 563 932
Employee compensation and
related taxes 815 892
Reserve for losses on firm
purchase commmitments 552 992
Other 2,951 2,316
------ ------
$5,790 $6,908
====== ======
F-11
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
SEPTEMBER 30,
-------------------
1999 1998
---- ----
Term loan, requiring quarterly principal payments of
$155, 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. $1,705 $2,325
Other 57 70
------ ------
1,762 2,395
Less current portion 636 634
------ ------
$1,126 $1,761
====== ======
Maturities of long-term debt outstanding at September 30, 1999 are as follows:
$636,000-2000; $637,000-2001; $484,000-2002; $5,000-2003.
At September 30, 1999, the Company had a revolving line of credit agreement
which permitted borrowings up to a maximum of $10,000,000 with interest at the
bank's base rate of interest (6.78% as of September 30, 1999) 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 only by a
pledge by the Company's United Kingdom holding company, Quad Systems Holdings
Limited, of 65% of the outstanding shares of it's two wholly-owned United
Kingdom operating subsidiaries. In connection will the SMTech sale (Note 6), the
bank released the pledge on the SMTech pledged shares. The Company paid 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. On
October 27, 1998, this agreement was replaced (see Note 13).
As of September 30, 1999 and 1998, total borrowings under this line of credit
were $1,318,000 and $8,795,000, respectively. The weighted average interest
rates on short-term borrowings for the years ended September 30, 1999 and 1998
were 6.59% and 7.11%, respectively.
The Company has issued and outstanding letters of credit totaling $1,747,000 at
September 30, 1999. These instruments are maintained primarily to guarantee
certain settlements and are deducted from the available line of credit.
F-12
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
6. SALE OF SMTECH LIMITED
During the first quarter of fiscal 1999, the Company sold substantially all of
the assets and liabilities of one of its U.K. subsidiaries, SMTech Limited
("SMTech") to Speedline Technologies, Inc. ("Speedline") for $14,800,000 in cash
paid at closing, subject to a holdback of $750,000. The Company is liable for
various representations and warranties provided to Speedline under this
agreement. The Company recorded an after-tax net gain of $5,127,000. In
connection with the sale, the Company and MPM Corporation ("MPM"), a Speedline
division entered into an agreement whereby MPM has agreed to supply the Company
on an OEM basis with the former SMTech screen printer product line. This
agreement provides, among other things, that the Company will purchase a minimum
of $7,400,000 of AVX 500 screen printers by December 31, 2000 (see Note 7). The
Company is currently in negotiations with MPM to reduce the minimum purchase
commitment. There can be no assurance, however, that the Company will be
successful in doing so.
Sumarized financial information for SMTech as of September 30, 1998 and for the
year then ended is as follows:
Total assets $4,502
Total liabilities $2,117
Revenues $6,620
The following unaudited pro forma results of operations for the fiscal year
ended September 30, 1998 assumes that SMTech was disposed of on October 1, 1997
and the Company repaid its outstanding line of credit balance with a portion of
the sale proceeds on October 1, 1997:
1998
----
Net sales $ 68,239
Net income (loss) $ (4,192)
Diluted net income (loss) per share $ (0.96)
7. COMMITMENTS
As of September 30, 1999, the Company had entered into various purchase order
agreements with vendors whereby the Company has committed to acquire inventory
for approximately $12,600,000. Such commitments are anticipated for delivery and
payment in the next twelve months. This total includes approximately $900,000 of
purchase orders with Samsung Aerospace Industries, Ltd. ("Samsung") in
accordance with an agreement to purchase electronic tape feeders used in the
Company's assemblers and approximately $3,500,000 of purchase orders with Mirae
Corporation ("Mirae") in accordance with a distributorship agreement (see
below). At September 30, 1999, the Company recorded reserves of approximately
$552,000 for losses on firm purchase commitments which are in excess of the
estimated net realizable value of this inventory.
In June 1999, the Company reached an agreement with Mirae whereby the Company
was appointed as Mirae's exclusive private label distributor of Mirae SMT
placement systems throughout North and South America and Europe. The placement
systems consist of a series of seven high-speed SMT assembler models that are
designed to meet a wide variety of production requirements. The distribution
agreement between the Company and Mirae provides for an initial term of three
years, with options to extend the length of the term.
Prior to March 1999, the Company has an agreement with Samsung for the sale and
distribution of the QSA-30 Series assemblers. In March 1999, Samsung notified
the Company, that in connection with the expiration of the first "supply term"
under the QSA-30 agreement, Samsung would no longer be manufacturing the QSA-30
Series, which constituted a termination of the QSA-30 Agreement.
The Company also has a long-term supply agreement with Samsung, whereas Samsung
is the Company's sole supplier of component tape feeders, which are used with
the Company's SMT assembler products. The supply contract expires in 2004. The
Company has notified Samsung of Samsung's non-compliance with certain supply
obligations under the agreement. Samsung has denied the allegations of
non-compliance and disputes the Company's position on these issues. The parties
have entered into discussions in an attempt to come to a mutually acceptable
resolution to this matter. If Samsung were to stop supplying the Company with
component tape feeders, the Company has the right to resume manufacturing or use
alternative suppliers. The Company maintains an inventory of component tape
feeders that it believes will sustain the business during such a transition, if
any.
F-13
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
As of September 30, 1999, the Company has the following commitments for future
minimum lease payments under various operating leases for real estate and
equipment (in thousands):
2000 $1,108
2001 235
2002 182
2003 182
2004 and thereafter 419
Rent expense was approximately $965,000, $1,156,000 and $980,000 for the years
ended September 30, 1999, 1998 and 1997, respectively.
8. INCOME TAXES
For financial reporting purposes, income (loss) before income taxes includes the
following (in thousands):
Year Ended September 30,
-----------------------------------------
1999 1998 1997
---- ---- ----
Pretax income (loss):
United States $(7,552) $(3,143) $ 2,942
Foreign 7,745 (3,822) 115
------- ------- -------
$ 193 $(6,965) $ 3,057
======= ======= =======
Income tax expense (benefit) for the fiscal years ended September 30, 1999, 1998
and 1997 consists of (in thousands):
Year Ended September 30,
-----------------------------------
1999 1998 1997
---- ---- ----
Current:
Federal $(1,046) $ (657) $ 887
State -- 3 19
Foreign 3,001 (15) 333
------- ------- -------
1,955 (669) 1,239
Deferred:
Federal 3,426 (237) (73)
State 442 (42) (47)
Foreign 671 (967) (49)
------- ------- -------
4,539 (1,246) (169)
------- ------- -------
Income tax expense (benefit) $ 6,494 $(1,915) $ 1,070
======= ======= =======
F-14
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
A reconciliation of the Company's effective income tax rate to the federal
statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax expense at the federal statutory rate (34%) $ 66 $(2,368) $ 1,039
Valuation allowance 5,243 -- --
Research and development tax credit 0 -- (203)
Permanent - goodwill 729 119 121
Permanent - other 39 73 45
Lapse of state net operating
loss carryforward -- 50 --
State taxes, net of federal benefit -- (39) --
Foreign sales corporation benefit -- -- (118)
Other 417 250 186
------- ------- -------
Income tax expense (benefit) $ 6,494 $(1,915) $ 1,070
======= ======= =======
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
September 30,
---------------------
1999 1998
---- ----
Deferred tax assets:
Net operating loss carry forwards $ 1,717 $ 979
Research and development tax credit carryforwards 249 552
Tax credit carryforwards 120 151
Inventory and accounts receivable reserves 2,493 2,011
Warranty and other accruals 119 138
Deferred service and other unearned revenue 536 580
Deferred compensation 72 137
Other 40 88
------- -------
Total deferred tax assets 5,346 4,636
Deferred tax liability:
Prepaid expenses 53 47
------- -------
Deferred tax assets, net 5,293 4,589
Valuation allowance for deferred tax assets (5,293) (50)
------- -------
Net deferred tax assets $ -- $ 4,539
======= =======
During the second quarter of the fiscal year ending September 30, 1999, the
Company was unable to conclude, that it was more likely than not, that it would
earn sufficient taxable income in order to realize the prior period net deferred
tax assets recorded. Accordingly, a valuation allowance was recorded to fully
reserve the net deferred tax assets.
At September 30, 1999, the Company has the following net operating loss and tax
credit carryforwards (in thousands):
AMOUNT EXPIRATION DATE
------ ---------------
Net operating loss carryforwards $5,049 2019
Research and development tax credit 249 2001 to 2008
Alternative minimum tax credit 120 indefinite
F-15
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
9. 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, 1999, no shares of
preferred stock were outstanding.
During November 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.
10. 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.
F-16
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
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, 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
Granted (471,396) 471,396 4.28
Exercised -- (1,301) 3.00
Canceled 603,175 (603,175) 8.52
Shares expired from 1986 plan (19,970) -- --
------- ------- --------
Outstanding, September 30, 1998 258,117 709,972 5.46
Granted (204,400) 204,400 1.57
Canceled 269,429 (269,429) 5.53
Shares expired from 1986 plan (65,502) -- --
------- ------- --------
Outstanding, September 30, 1999 257,644 644,943 $ 4.20
======= ======= ========
</TABLE>
During fiscal year 1998, the Company's Board of Directors authorized a stock
option repricing program whereby all holders (except Company executive officers
and Board of Directors) of stock options granted under the Company's 1993 Stock
Option Plan were offered an opportunity to cancel their current outstanding
stock options for new options. As a result of this repricing program, 361,225
stock options were canceled and 258,446 stock options were granted at the market
price of the underlying Common Stock on the date of grant. Accordingly, no
compensation expense was recognized.
The following table summarizes information about options outstanding at
September 30, 1999:
<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>
$1.50 - $1.68 174,700 $1.52 9.19 -- $ --
$1.75 - $3.88 214,726 3.46 7.97 66,739 3.46
$4.37 - $7.00 177,267 5.34 7.06 103,517 5.80
$7.25 - $13.75 78,250 9.62 6.87 35,050 9.38
------- ----- ---- ------- -----
644,943 $4.20 7.33 205,306 $5.65
======= ===== ==== ======= =====
</TABLE>
Employee Stock Purchase Plan
The Company has adopted an employee stock purchase plan under which the sale of
300,000 shares of its Common Stock has been authorized (150,000 was authorized
during fiscal 1999). 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,
59,274 and 59,938 shares were issued at an average price of $1.88 and $4.38
during the years ended September 30, 1999 and 1998, respectively. Shares
available for future grant were approximately 120,040 and 29,314 shares at
September 30, 1999 and 1998, respectively.
F-17
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
The Company has elected to follow APB 25 for these plans. 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 cost is
recognized. For the purposes of the required disclosure and pro forma
information required under SFAS 123, "Accounting for Stock-Based Compensation",
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 (loss) per share):
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) As reported $(6,301) $(5,050) $1,987
Pro forma $(6,697) $(5,356) $1,577
Diluted earnings (loss) per share As reported $(1.43) $(1.16) $0.45
Pro forma $(1.52) $(1.23) $0.35
</TABLE>
Pro forma compensation costs were estimated using the Black-Scholes option
valuation model using the following weighted average assumptions for grants in
1999, 1998 and 1997, respectively: a dividend yield rate of zero for each year;
expected lives of 4.3, 4.3 and 5.2 years; expected volatility of 97.51%, 111.06%
and 60.93%; and risk free interest rates of 4.88%, 5.57% and 6.22%. 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. The effects of applying SFAS 123 to
provide the disclosures above are not likely to be representative of the effects
on reported net income (loss) for future years.
The weighted average fair value of options granted during fiscal 1999 and 1998
was $1.12 and $3.28, respectively. The weighted average fair value of options
associated with the Company's Employee Stock Purchase Plan for fiscal 1999 and
1998 was $1.03 and $2.70, 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. The Company made discretionary contributions
representing 2% of net income to the plan in fiscal year ending September 30,
1997 and none during the fiscal years ending September 30, 1999 and 1998. The
Company's total contributions were approximately $125,000, $139,000, and
$189,000 for the years ending September 30, 1999, 1998 and 1997, respectively.
F-18
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
11. SEGMENT REPORTING
The Company, operates exclusively in one industry segment, the business of
developing, designing, manufacturing, marketing and supporting the SMT and APT
assembly equipment and related peripherals market. In addition to its principal
manufacturing operations and markets in the United States, the Company conducts
sales, customer support, and service operations out of locations in Europe and
North America. The following table presents financial information by geographic
region for the fiscal years ended September 30, 1999, 1998, and 1997 (in
thousands):
<TABLE>
<CAPTION>
United
States Europe Eliminations Consolidated
------ ------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended September 30, 1999
Total net sales:
Unaffiliated customers $31,139 $13,985 $ -- $45,124
Interarea transfers 7,497 994 (8,491) --
------- ------- -------- -------
Total $38,636 $14,979 $ (8,491) $45,124
======= ======= ======== =======
Loss from operations $(8,176) $(1,256) $ 1,182 $(8,250)
======= ======= ======== =======
Total assets $33,383 $12,595 $(12,198) $33,780
======= ======= ======== =======
Property and equipment, net $ 1,899 $ 598 $ -- $ 2,497
======= ======= ======== =======
Year ended September 30, 1998
Total net sales:
Unaffiliated customers $53,185 $21,674 $ -- $74,859
Interarea transfers 10,890 10,356 (21,246) --
------- ------- -------- -------
Total $64,075 $32,030 $(21,246) $74,859
======= ======= ======== =======
Loss from operations $(3,199) $(2,815) $ (267) $(6,281)
======= ======= ======== =======
Total assets $54,108 $10,215 $(13,347) $50,976
======= ======= ======== =======
Property and equipment, net $ 2,239 $ 1,259 $ -- $ 3,498
======= ======= ======== =======
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
======= ======= ======== =======
</TABLE>
Interarea transfers primarily represent sales to and from the Company's United
Kingdom subsidiaries. These transfers are accounted for at cost, plus a
reasonable profit, and have been eliminated from consolidated net sales.
Sales by geographic area made by the Company's United States operations are as
follows (in thousands):
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
---- ---- ----
United States $25,026 $45,748 $45,981
Pacific 4,423 4,890 7,034
Canada and Latin America 1,639 2,065 3,420
Other 51 482 --
------- ------- -------
$31,139 $53,185 $56,435
======= ======= =======
F-19
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
12. LITIGATION
In 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 and is vigorously defending itself
against the lawsuit. Accordingly, no provision for this lawsuit has been
recorded since its inception.
13. SUBSEQUENT EVENTS
On October 27, 1999, the Company entered into a revolving bank line of credit
agreement. This agreement, which replaced the line of credit facility in place
as of September 30, 1999, permitted maximum borrowings not to exceed $8,000,000
and expired on February 29, 2000. This line of credit was a secured line with
maximum borrowings based on a percentage of eligible receivables and inventory.
Interest was payable monthly at LIBOR plus 2.50%. The agreement also contained
various operating and reporting covenants and required the maintenance of
certain financial ratios.
On January 7, 2000, the Company entered into a revolving asset based line of
credit agreement, which replaced the revolving line of credit agreement of
October 27, 1999. The new agreement permits maximum borrowings not to exceed
$12,000,000, based on a percentage of eligible receivables and inventory. This
agreement expires on January 6, 2003. The line is secured by a lien on all of
the assets of the Company and its wholly-owned subsidiaries, and pledges of all
the outstanding shares of stock and guarantees of the Company's obligations by
the Company's wholly-owned subsidiaries. Interest on borrowings is payable
monthly, at the Company's election, at either 0.25% above the bank's published
prime rate or LIBOR plus 2.75%. The interest rate will be reduced 0.25% provided
no event of default has occurred and the Company meets a certain net income
level for fiscal 2000. The agreement also contains various operating and
reporting covenants and requires maintenance of a net tangible worth financial
ratio.
On January 7, 2000, the Company received a letter from Samsung which threatened
litigation with respect to the matters discussed in Note 7. While the Company
believes it has defenses to these claims asserted by Samsung, the resolution
to these claims remains uncertain.
F-20
<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, 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
=========== =========== ======= =========== ===========
Reserve for product returns and
allowances $ 475,000 $ (288,000) $ - $ - $ 187,000
=========== =========== ======= =========== ===========
Year ended September 30, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 788,000 $ 420,000 $ 12,000(1) $ 1,196,000
Reserves for inventory 2,668,000 2,354,000 - 799,000(2) 4,223,000
----------- ----------- ------- ----------- -----------
Total $ 3,456,000 $ 2,774,000 $ - $ 811,000 $ 5,419,000
=========== =========== ======= =========== ===========
Reserve for product returns and
allowances $ 187,000 $ 190,000 $ - $ - $ 377,000
=========== =========== ======= =========== ===========
Year ended September 30, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,196,000 $ (175,000) $ 528,000(1)(3) $ 493,000
Reserves for inventory 4,223,000 1,450,000 - 1,427,000(2)(3) 4,246,000
----------- ----------- ------- ----------- -----------
Total $ 5,419,000 $ 1,275,000 $ - $ 1,955,000 $ 4,739,000
=========== =========== ======= =========== ===========
Reserve for product returns and
allowances $ 377,000 $ 350,000 $ - $ 43,000 $ 684,000
=========== =========== ======= =========== ===========
<FN>
(1) Uncollectible accounts written off, net of recoveries.
(2) Disposals of obsolete inventory.
(3) Subsidiary sold 10/1/98
</FN>
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
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.
4.1 Shareholder's Rights Agreement dated November 12, 1997 - Incorporated
by reference to Exhibit 1 and 2 to the Registrant's Registration
Statement on Form 8-A filed with the Securities and Exchange
Commission on February 2, 1998.
*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.
*10.2 1993 Stock Option Plan, as amended - Incorporated by reference to
Exhibit 10.2 filed under Form 10-Q for the period ended March 31,
1998.
<PAGE>
*10.3 Quad Systems Corporation Employee Stock Purchase Plan, as amended -
Incorporated by reference to Exhibit 10.3 to Registrant's Registration
Statement on Form S-8 (No. 033-93436) filed with the Securities and
Exchange Commission on May 25, 1999.
*10.4 401(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.
*10.5 Executive Severance Pay Plan - Incorporated by reference to Exhibit
10.3 filed under Form 10-Q for the period ended June 30, 1998.
*10.6 Employment memorandum dated April 27, 1998, between the Company and
Theodore J. Shoneck Incorporated by reference to Exhibit 10.4 filed
under Form 10-Q for the period ended June 30, 1998.
*10.7 Employment memorandum dated April 27, 1998, between the Company and
Anthony R. Drury Incorporated by reference to Exhibit 10.5 filed under
Form 10-Q for the period ended June 30, 1998.
10.8 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.
10.9.1 Credit Agreement dated April 11, 1997, between the Company and
CoreStates Bank, NA - Incorporated by reference to Exhibit 10.7.1
filed under the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997.
10.9.2 First Amendment to Credit Agreement dated September 11, 1997, between
the Company and CoreStates Bank, NA - Incorporated by reference to
Exhibit 10.7.2 filed under the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997.
10.10.1 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 (portions redacted pursuant
to SEC order granting confidential treatment to certain provisions).
10.10.2 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).
10.10.3 Agreement dated March 19, 1997, between the Registrant and Samsung
Aerospace Industries, Ltd. Incorporated by reference to Exhibit 10.11
filed under the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997 (portions redacted pursuant to SEC order
granting confidential treatment to certain provisions).
10.11 OEM and Distributorship Agreement dated December 2, 1997 between the
Registrant and Kaijo Corporation for the distribution of the
Registrant's APS-1 product - Incorporated by reference to Exhibit 10.1
filed under Form 10-Q for the period ended December 31, 1997 (portions
redacted pursuant to SEC order granting confidential treatment to
certain provisions).
*10.12 Severance Agreement dated March 30, 1998, as further amended on
April 7, 1998, between the Company and David W. Smith - Incorporated
by reference to Exhibit 10.1 filed under Form 10-Q for the period
ended June 30, 1998.
*10.13 Severance Agreement dated April 6, 1998, between the Company and
Joseph L. Gasper - Incorporated by reference to Exhibit 10.2 filed
under Form 10-Q for the period ended June 30, 1998.
<PAGE>
10.14.1 Agreement relating to the sale and purchase of the business and
assets of SMTech Limited, dated September 30, 1998, between the
Registrant, SMTech Limited and Speedline Technologies, Inc.
Incorporated by reference to Exhibit 2.1 filed under Current Report on
Form 8-K filed with the Securities and Exchange Commission on October
14, 1998.
10.14.2 Agreement relating to the goodwill and intellectual property
assignment of SMTech Limited, dated September 30, 1998, between the
Registrant, SMTech Limited and Speedline Technologies, Inc.
Incorporated by reference to Exhibit 2.2 filed under Current Report on
Form 8-K filed with the Securities and Exchange Commission on October
14, 1998.
10.15 Supply agreement dated September 30, 1998 between the Registrant and
Speedline Technologies, Inc. for the resale of SMTech stencil printers
- Incorporated by reference to Exhibit 2.3 filed under Current Report
on Form 8-K filed with the Securities and Exchange Commission on
October 14, 1998 (portions redacted pursuant to SEC order granting
confidential treatment to certain provisions).
10.16 Distribution agreement dated June 1, 1999 between the Registrant and
Mirae Corporation for the appointment of the Company as Mirae's
exclusive distributor of certain products in North America, South
America, Europe, Africa, Israel and Turkey - Incorporated by reference
to Exhibit 10.1 filed under Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 6, 1999 (portions
redacted pursuant to SEC order granting confidential treatment to
certain provisions).
o10.17 Reaffirmation of Term Loan agreement dated December 9, 1999.
o10.18 Secured Line of Credit agreement dated January 7, 2000 between
Registrant and Congress Financing Company.
o21 Subsidiaries of the registrant.
o23 Consent of Ernst & Young LLP.
o27 Financial Data Schedule.
- ----------
* Constitutes compensatory plan or arrangement required to be filed as an
exhibit to this form.
o Filed herewith
OUTLINE OF TERMS AND CONDITIONS
QUAD SYSTEMS CORPORATION
DECEMBER 9, 1999
Reaffirmation of Term Loan
BORROWER: QUAD SYSTEMS CORPORATION
CO-BORROWERS: TRIMARK INVESTMENT CORP; QUAD LEASING CORP;
HITECH FINANCE CO.; QUAD EUROPE LTD.
BANK: FIRST UNION NATIONAL BANK
AMOUNT: $1,000,000.00 A payment of $395,000 will be required
at the time Quad settles with Congress Financial
Corporation. With the prepayment of $395,000 there will
be no prepayment penalties attached to this one-time
prepayment.
EXPIRATION: 10/1/2001
INTEREST RATE: 7.95% fixed.
PAYMENT OF PRINCIPAL
AND INTEREST: Interest monthly; Quarterly principal payments of
$155,000 due on the first day of each calendar
quarter starting on January 1, 2000 and continuing
thereafter until the loan is paid in full.
COLLATERAL: As security for this facility, the Bank will require
a first priority security interest perfected under the
Uniform Commercial Code in all of the Borrower's
furniture, fixtures and equipment and patents of Quad
Systems Corporation. The Bank will require evidence
satisfactory to it and its counsel that the assets are
free and clear of any and all security interest, except
as set forth herein. A second lien behind Congress
Financial Corporation perfected under the Uniform
Commercial Code in all of the Borrower's present and
future accounts, chattel paper, contracts, documents,
and accessions, general intangibles, instruments and
inventory and any products and proceeds of the
foregoing.
INSURANCE: The Borrower will provide fire and extended coverage
insurance on all insurable assets during the term of
the loan satisfactory to the Bank as to form and
insurer and containing the standard loss payable
clauses in favor of the Bank. The amount of such
coverage will not be less than 80% of the insurable
value of the assets or 100% of the loan amount,
whichever is greater. The insurance will be in effect
evidenced by a certificate of insurance submitted to
the Bank prior to or at settlement. The policy shall
require a thirty-day notice of cancellation to the
Bank.
<PAGE>
FINANCIAL COVENANTS: The term Loan shall be cross defaulted with the
Borrower's agreement with Congress Financial
Corporation.
EXPENSES: The Borrower shall pay all out-of-pocket costs and
expenses incurred by the Bank in connection with the
proposed loan and financing arrangement promptly upon
Bank's submission of a statement to the Borrower.
FINANCIAL REPORTING
REQUIREMENTS: A. The Borrower shall deliver its actual financial
statements to the Bank within ninety (90) days after
the close of each fiscal year during the term of these
commitments. The financial statements will be prepared
unqualified by an independent accountant satisfactory
to the Bank. The statements will be prepared in
accordance with generally accepted accounting
principles (GAAP). In addition, the Borrower will
submit on a monthly basis internally prepared financial
statements. Submission of the monthly statements will
be within thirty (30) days after the end of each
period. In addition, the Borrower will submit on a
quarterly basis their 10Q's.
B. Covenant compliance certificate submitted
quarterly.
C. Submission of monthly backlog reports with a
breakdown of Quad products and Mirae products.
D. Quarterly submission of rolling 4 quarter
financial projections (balance sheet, income
statement and cash flow) within 30 days of the
quarter end.
DOCUMENTATION: Borrower shall duly execute and deliver such
instruments, documents, certificates, opinions,
assurances, and do such other acts and things as the
Bank may reasonably request, to effect the purpose of
the transaction described in this commitment letter.
All proceedings, agreements, instruments, documents
and other matters relating to the making of the loan,
and all of the transactions herein contemplated, shall
be satisfactory in the form and substance to the Bank
and its counsel. Our counsel must be satisfied with
respect to the legality, validity, binding effect, and
enforceability of all instruments, agreements, and
documents used to effect and consummate the loans and
transactions herein contemplated.
<PAGE>
REPRESENTATIONS
AND WARRANTIES: Borrower will make the following representations and
warranties to include, but not be limited to, valid
existence and power, authority, financial condition,
litigation, agreements.
DEPOSIT
RELATIONSHIP: The Borrower, except Quad Europe, Ltd., will maintain
First Union National Bank as its primary bank of
account for the term of the above commitment.
AGREED TO AND ACCEPTED BY:
QUAD SYSTEMS CORPORATION
BY: /s/ Anthony Drury DATED: 12/10/99
------------------------- --------------------
Name: Anthony Drury
Title: Sr. V.P. Finance
Exhibit 10.18
EXECUTION
LOAN AND SECURITY AGREEMENT
by and between
CONGRESS FINANCIAL CORPORATION
as Lender
and
QUAD SYSTEMS CORPORATION
as Borrower
Dated: January 7, 2000
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. DEFINITIONS................................................... 1
SECTION 2. CREDIT FACILITIES............................................ 22
2.1 Revolving Loans.............................................. 22
2.2 Letter of Credit Accommodations.............................. 22
SECTION 3. INTEREST AND FEES............................................ 25
3.1 Interest..................................................... 25
3.2 Closing Fee.................................................. 27
3.3 Servicing Fee................................................ 27
3.4 Unused Line Fee.............................................. 27
3.5 Changes in Laws and Increased Costs of Loans................. 27
SECTION 4. CONDITIONS PRECEDENT......................................... 28
4.1 Conditions Precedent to Initial Loans and Letter of Credit
Accommodations............................................... 28
4.2 Conditions Precedent to All Loans and Letter of Credit
Accommodations............................................... 30
SECTION 5. GRANT OF SECURITY INTEREST................................... 31
SECTION 6. COLLECTION AND ADMINISTRATION................................ 32
6.1 Borrower's Loan Account...................................... 32
6.2 Statements................................................... 32
6.3 Collection of Accounts....................................... 32
6.4 Payments..................................................... 33
6.5 Taxes........................................................ 34
6.6 Authorization to Make Loans.................................. 35
6.7 Use of Proceeds.............................................. 36
SECTION 7. COLLATERAL REPORTING AND COVENANTS........................... 36
7.1 Collateral Reporting......................................... 36
7.2 Accounts Covenants........................................... 37
7.3 Inventory Covenants.......................................... 39
7.4 Equipment and Real Property Covenants........................ 40
7.5 Power of Attorney............................................ 41
7.6 Right to Cure................................................ 41
7.7 Access to Premises........................................... 42
i
<PAGE>
SECTION 8. REPRESENTATIONS AND WARRANTIES............................... 42
8.1 Corporate Existence, Power and Authority; Subsidiaries....... 42
8.2 Financial Statements; No Material Adverse Change............. 43
8.3 Chief Executive Office; Collateral Locations................. 43
8.4 Priority of Liens; Title to Properties....................... 43
8.5 Tax Returns.................................................. 43
8.6 Litigation................................................... 43
8.7 Compliance with Other Agreements and Applicable Laws......... 44
8.8 Environmental Compliance..................................... 44
8.9 Employee Benefits............................................ 45
8.10 Bank Accounts................................................ 45
8.11 Intellectual Property........................................ 45
8.12 Capitalization............................................... 46
8.13 Labor Disputes............................................... 46
8.14 Corporate Name; Prior Transactions........................... 47
8.15 Restrictions on Subsidiaries................................. 47
8.16 Material Contracts........................................... 47
8.18 Accuracy and Completeness of Information..................... 47
8.19 Survival of Warranties; Cumulative........................... 47
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS........................... 48
9.1 Maintenance of Existence..................................... 48
9.2 New Collateral Locations..................................... 48
9.3 Compliance with Laws, Regulations, Etc....................... 48
9.4 Payment of Taxes and Claims.................................. 50
9.5 Insurance.................................................... 50
9.6 Financial Statements and Other Information................... 51
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc...... 52
9.8 Encumbrances................................................. 54
9.9 Indebtedness................................................. 56
9.10 Loans, Investments, Guarantees, Etc.......................... 57
9.11 Dividends and Redemptions.................................... 60
9.12 Transactions with Affiliates................................. 60
9.13 Additional Bank Accounts..................................... 61
9.14 Compliance with ERISA. ..................................... 61
9.15 End of Fiscal Years: Fiscal Quarters......................... 62
9.16 Change in Business........................................... 62
9.17 Limitation of Restrictions Affecting Subsidiaries............ 62
9.18 Adjusted Tangible Net Worth.................................. 62
9.19 Year 2000 Compliance......................................... 63
9.20 Costs and Expenses........................................... 63
9.21 Further Assurances........................................... 64
SECTION 10. EVENTS OF DEFAULT AND REMEDIES............................... 64
10.1 Events of Default............................................ 64
10.2 Remedies..................................................... 66
10.3 Confession of Judgement...................................... 68
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW........................................ 69
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial
Waiver....................................................... 69
11.2 Waiver of Notices............................................ 70
11.3 Amendments and Waivers....................................... 70
11.4 Waiver of Counterclaims...................................... 70
11.5 Indemnification.............................................. 70
11.6 Currency Indemnity........................................... 71
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS............................. 71
12.1 Term......................................................... 71
12.2 Interpretative Provisions.................................... 73
12.3 Notices...................................................... 74
12.4 Partial Invalidity........................................... 74
12.5 Successors................................................... 75
12.6 Entire Agreement............................................. 75
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INDEX TO
EXHIBITS AND SCHEDULES
Exhibit A Information Certificate
Exhibit B Form of Preferential Creditor Report
Exhibit C Compliance Certificate
Exhibit 1.16 Recourse Agreement
Exhibit 7.1(a)(ii) Letter from counsel Samsung to counsel to Borrower
Schedule 1.58 Permitted Holders
Schedule 8.4 Existing Liens
Schedule 8.6 Litigation
Schedule 8.8 Environmental Matters
Schedule 8.10 Bank Accounts
Schedule 8.11 Intellectual Property
Schedule 8.16 Material Contracts
Schedule 8.17 Existing Terms of Creditors with Retention of
Title
Schedule 9.9 Existing Indebtedness
Schedule 9.10(f) Existing Loans, Advances and Guarantees
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LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement dated January 7, 2000 is entered into by
and between Congress Financial Corporation, a Delaware corporation ("Lender")
and Quad Systems Corporation, a Delaware corporation ("Borrower").
W I T N E S S E T H:
WHEREAS, Borrower has requested that Lender enter into certain financing
arrangements with Borrower pursuant to which Lender may make loans and provide
other financial accommodations to Borrower; and
WHEREAS, Lender is willing to make such loans and provide such financial
accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS
For purposes of this Agreement, the following terms shall have the
respective meanings given to them below:
1.1 "Accounts" shall mean all present and future rights of Borrower or
Quad Europe to payment for goods sold or leased or for services rendered, which
are not evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.2 "Adjusted Eurodollar Rate" shall mean, with respect to each Interest
Period for any Eurodollar Rate Loan, the rate per annum (rounded upwards, if
necessary, to the next one-sixteenth (1/16) of one (1%) percent) determined by
dividing (a) the Eurodollar Rate for such Interest Period by (b) a percentage
equal to: (i) one (1) minus (ii) the Reserve Percentage. For purposes hereof,
"Reserve Percentage" shall mean the reserve percentage, expressed as a decimal,
prescribed by any United States or foreign banking authority for determining the
reserve requirement which is or would be applicable to deposits of United States
dollars in a non-United States or an international banking office of Reference
Bank used to fund a Eurodollar Rate Loan or any Eurodollar Rate Loan made with
the proceeds of such deposit, whether or not the Reference Bank actually holds
or has made any such deposits or loans. The Adjusted Eurodollar Rate shall be
adjusted on and as of the effective day of any change in the Reserve Percentage.
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1.3 "Adjusted Tangible Net Worth" shall mean as to any Person, at any
time, in accordance with GAAP (except as otherwise specifically set forth
below), on a consolidated basis for such Person and its Subsidiaries (if any),
the amount equal to the difference between: (a) the aggregate net book value of
all assets of such Person and its Subsidiaries (excluding the value of patents,
trademarks, tradenames, copyrights, licenses, goodwill, net leasehold
improvements, prepaid assets and other intangible assets), calculating the book
value of inventory for this purpose on a first-in-first-out basis, after
deducting from such book values all appropriate reserves in accordance with GAAP
(including all reserves for doubtful receivables, obsolescence, depreciation and
amortization) and (b) the aggregate amount of the Indebtedness and other
liabilities of such Person and its Subsidiaries (including tax and other proper
accruals).
1.4 "Affiliate" shall mean, with respect to a specified Person, any other
Person (a) which directly or indirectly through one or more intermediaries
controls, or is controlled by, or is under common control with, such specified
person; (b) which beneficially owns or holds five (5%) percent or more of any
class of the Voting Stock of such specified person; or (c) of which five (5%)
percent or more of the Voting Stock is beneficially owned or held by such
specified person or a Subsidiary of such specified person. For purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling", "controlled by" and "under common control with") when used with
respect to any specified person shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such person, whether through the ownership of Voting Stock, by
agreement or otherwise.
1.5 "Blocked Accounts" shall have the meaning set forth in Section 6.3
hereof.
1.6 "Borrowing Base" shall mean, at any time, the amount equal
to:
(a) seventy-five (75%) percent multiplied by the US Dollar
Equivalent of the Net Amount of Eligible Accounts, PLUS
(b) the lesser of:
(i) the sum of:
(A) fifty (50%) percent multiplied by the US Dollar Equivalent
of the Value of Eligible Inventory consisting of finished
goods, and
(B) the lesser of: (1) thirty-five (35%) percent multiplied by
the US Dollar Equivalent of the Value of Eligible Inventory
consisting of work-in-process finished goods, Development and
Quad Lease Inventory (as such categories of Inventory are
characterized in the ETV Appraisal) and (2) $1,500,000,
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(ii) eighty-five (85%) percent of the OLV
Percentage multiplied by the US Dollar Equivalent
of the Value of Eligible Inventory, or
(iii) US$6,000,000, LESS
(c) any Reserves.
For purposes only of applying the sublimit on Revolving Loans based on Eligible
Inventory set forth in clause (b)(ii) above, Lender may treat the then undrawn
amounts of outstanding Letter of Credit Accommodations for the purpose of
purchasing Eligible Inventory as Revolving Loans to the extent Lender is in
effect basing the issuance of the Letter of Credit Accommodations on the Value
of the Eligible Inventory being purchased with such Letter of Credit
Accommodations. In determining the actual amounts of such Letter of Credit
Accommodations to be so treated for purposes of the sublimit, the outstanding
Revolving Loans and Reserves shall be attributed first to any components of the
lending formulas set forth above that are not subject to such sublimit, before
being attributed to the components of the lending formulas subject to such
sublimit.
1.7 "Business Day" shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks are authorized or required to close under
the laws of the State of New York, the State of North Carolina, or the
Commonwealth of Pennsylvania and a day on which the Reference Bank and Lender
are open for the transaction of business, except that if a determination of a
Business Day shall relate to any Eurodollar Rate Loans, the term Business Day
shall also exclude any day on which banks are closed for dealings in dollar
deposits in the London interbank market or other applicable Eurodollar Rate
market.
1.8 "Capital Leases" shall mean, as applied to any Person, any lease of
(or any agreement conveying the right to use) any property (whether real,
personal or mixed) by such Person as lessee which in accordance with GAAP, is
required to be reflected as a liability on the balance sheet of such Person.
1.9 "Capital Stock" shall mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's capital stock, partnership interests or limited liability company
interests at any time outstanding, and any and all rights, warrants or options
exchangeable for or convertible into such capital stock or other interests (but
excluding any debt security that is exchangeable for or convertible into such
capital stock).
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1.10 "Cash Equivalents" shall mean, at any time, (a) any evidence of
Indebtedness with a maturity date of one hundred eighty (180) days or less
issued or directly and fully guaranteed or insured by the United States of
America of any agency or instrumentality thereof; PROVIDED, THAT, the full faith
and credit of the United States of America is pledged in support thereof; (b)
certificates of deposit or bankers' acceptances with a maturity of one hundred
eighty (180) days or less of any financial institution that is a member of the
Federal Reserve System having combined capital and surplus and undivided profits
of not less than US$250,000,000; (c) commercial paper (including variable rate
demand notes) with a maturity of one hundred eighty (180) days or less issued by
a corporation (except an Affiliate of Borrower) organized under the laws of any
State of the United States of America or the District of Columbia and rated at
least A-1 by Standard & Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc. or at least P-1 by Moody's Investors Service, Inc.; (d)
repurchase obligations with a term of not more than thirty (30) days for
underlying securities of the types described in clause (a) above entered into
with any financial institution having combined capital and surplus and undivided
profits of not less than US$250,000,000; (e) repurchase agreements and reverse
repurchase agreements relating to marketable direct obligations issued or
unconditionally guaranteed by the United States of America or issued by any
governmental agency thereof and backed by the full faith and credit to the
United States of America, in each case maturing within one hundred eighty (180)
days or less from the date of acquisition; PROVIDED, THAT, the terms of such
agreements comply with the guidelines set forth in the Federal Financial
Agreements of Depository Institutions with Securities Dealers and Others, as
adopted by the Comptroller of the Currency on October 31, 1985; (f) overnight
sweep account investment vehicles offered by First Union National Bank or Royal
Bank of Scotland; and (g) investments in money market funds and mutual funds
which invest substantially all of their assets in securities of the types
described in clauses (a) through (e) above.
1.11 "Change of Control" shall mean (a) the transfer (in one transaction
or a series of transactions) of all or substantially all of the assets of
Borrower or any Guarantor to any Person or group (as such term is used in
Section 13(d)(3) of the Exchange Act); (b) the liquidation or dissolution of
Borrower or Guarantor or the adoption of a plan by the stockholders of Borrower
or any Guarantor relating to the dissolution or liquidation of Borrower or any
Guarantor; (c) the acquisition by any Person or group (as such term is used in
Section 13(d)(3) of the Exchange Act), except for one or more Permitted Holders,
of beneficial ownership, directly or indirectly, of fifty (50%) percent or more
of the voting power of the total outstanding Voting Stock of Borrower or any
Guarantor; (d) during any period of two (2) consecutive years, which period
shall begin from the date of Borrower's 2000 Annual Meeting, individuals who at
the beginning of such period constituted the Board of Directors of Borrower
(together with any new directors who have been appointed by any Permitted
Holder, or whose nomination for election by the stockholders of Borrower, as the
case may be, was approved by a vote of at least sixty-six and two-thirds (66
2/3%) percent of the directors then still in office who were either directors at
the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of Borrower then still in office; (e) the failure of the
Permitted Holders to own more than fifty (50%) percent of the voting power of
the total outstanding Voting Stock of Borrower; or (f) failure of Borrower to
own one hundred (100%) percent of the voting power of the total outstanding
Voting Stock of any Guarantor.
1.12 "Code" shall mean the Internal Revenue Code of 1986, as amended,
together with all rules, regulations and interpretations thereunder or related
thereto.
1.13 "Collateral" shall have the meaning set forth in Section 5 hereof.
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1.14 "Collateral Access Agreement" shall mean an agreement in writing, in
form and substance reasonably satisfactory to Lender, from a lessor of premises
to Borrower or Quad Europe, or any other person to whom any Collateral
(including Inventory, Equipment, bills of lading or other documents of title) is
consigned or who has custody, control or possession of any such Collateral or is
otherwise the owner or operator of any premises on which any of such Collateral
is located, pursuant to which such lessor, consignee or other person, INTER
ALIA, acknowledges the first priority security interest of Lender in such
Collateral, agrees to waive any and all claims such lessor, consignee or other
person may, at any time, have against such Collateral, whether for processing,
storage or otherwise, and agrees to permit Lender access to, and the right to
remain on, the premises of such lessor, consignee or other person, for such
period of time as Lender determines is necessary or desirable, so as to exercise
Lender's rights and remedies and otherwise deal with such Collateral and in the
case of any person who at any time has custody, control or possession of any
bills of lading or other documents of title, agrees to hold such bills of lading
or other documents as bailee for Lender and to follow all instructions of Lender
with respect thereto.
1.15 "Copelco" shall mean Copelco Capital, Inc., and it successors and
assigns.
1.16 "Copelco Recourse Agreements" shall mean all Recourse Agreements, by
and between Borrower, and Copelco, in the form annexed hereto as Exhibit 1.16,
entered into after the date hereof together with the Recourse Agreements, by and
between Copelco and Borrower, dated October 8, 1998, January 21, 1999, August
24, 1998, and December 21, 1998 and all equipment schedules and other agreements
related thereto, as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.17 "Copelco Repurchase Obligations" shall mean, as of any date of
determination by Lender, the aggregate amount of all of Borrower's obligations
and liabilities to Copelco, contingent or otherwise, under the Copelco Recourse
Agreements then outstanding, including, without limitation, Borrower's
liability, whether contingent or fixed, as of the date of any determination, to
pay "Repurchase Amounts" (as such quoted term is defined in the Copelco Recourse
Agreements).
1.18 "Debenture" shall mean the guarantee and debenture, dated on or about
the date hereof, by Quad Europe in favor of Lender, as the same now exists or
may hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
1.19 "Dilution" shall mean, for any period, the fraction, expressed as a
percentage, the numerator of which is the aggregate amount of non-cash
reductions in the Accounts of Borrower and Quad Europe for such period and the
denominator of which is the aggregate dollar amount of the sales of Borrower and
Quad Europe for such period.
1.20 "Dilution Reserve" shall mean a Reserve in amounts established by
Lender to reflect that Dilution with respect to any category of Eligible
Accounts as calculated by Lender for any period is greater than fifteen (15%)
percent.
1.21 "Eligible Accounts" shall mean Accounts created by Borrower or Quad
Europe which are and continue to be acceptable to Lender in good faith based on
the criteria set forth below. Accounts shall be Eligible Accounts if:
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(a) such Accounts arise from the actual and BONA FIDE sale and
delivery of goods by Borrower or Quad Europe or rendition of services by
Borrower or Quad Europe in the ordinary course of their respective businesses
which transactions are completed in accordance with the terms and provisions
contained in any documents related thereto in all material respects;
(b) as to Accounts of Borrower, such Accounts are not unpaid more than
the earlier of (i) sixty (60) days after the original due date for them, or (ii)
ninety (90) days after the date of the original invoice for them;
(c) as to Accounts of Quad Europe, such Accounts are not unpaid more
than the earlier of (i) ninety (90) days after the original due date for them,
or (ii) one hundred twenty (120) days after the date of the original invoice for
them;
(d) such Accounts comply with the terms and conditions contained
in Section 7.2(c) of this Agreement;
(e) such Accounts do not arise from sales on consignment, guaranteed
sale, sale and return, sale on approval, or other terms under which payment by
the account debtor may be conditional or contingent;
(f) with respect to Accounts of Borrower, the chief executive office
and principal place of business of the account debtor with respect to such
Accounts is located in the United States of America or Canada (provided, THAT,
at any time promptly upon Lender's request, Borrower shall execute and deliver,
or cause to be executed and delivered, such other agreements, documents and
instruments as may be required by Lender to perfect the security interests or
other interests of Lender in those Accounts of an account debtor with its chief
executive office or principal place of business in Canada in accordance with the
applicable laws of the Province of Canada in which such chief executive office
or principal place of business is located and take or cause to be taken such
other and further actions as Lender may request to enable Lender as secured
party with respect thereto to collect such Accounts under the applicable Federal
or Provincial laws of Canada) or, at Lender's option, if the chief executive
office and principal place of business of the account debtor with respect to
such Accounts is located other than in the United States of America or Canada,
then if either: (i) the account debtor has delivered to Borrower an irrevocable
letter of credit issued or confirmed by a bank satisfactory to Lender and
payable only in the United States of America and in U.S. Dollars, sufficient to
cover such Account, in form and substance satisfactory to Lender and if required
by Lender, the original of such letter of credit has been delivered to Lender or
Lender's agent and the issuer thereof notified of the assignment of the proceeds
of such letter of credit to Lender, or (ii) such Account is subject to credit
insurance payable to Lender issued by an insurer and on terms and in an amount
acceptable to Lender;
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(g) with respect to Accounts of Quad Europe, the chief executive
office and principal place of business of the account debtor with respect to
such Accounts is located in the United Kingdom, or, at Lender's option, if the
chief executive office and principal place of business of the account debtor
with respect to such Accounts is located other than in the United Kingdom, then
if either: (i) the account debtor has delivered to Quad Europe an irrevocable
letter of credit issued or confirmed by a bank reasonably satisfactory to Lender
and payable only in the United Kingdom in either Sterling, Eurodollars, US
Dollars or any other currency acceptable to Lender, sufficient to cover such
Account, in form and substance satisfactory to Lender and if required by Lender,
the original of such letter of credit has been delivered to Lender or Lender's
agent and the issuer thereof notified of the assignment of the proceeds of such
letter of credit to Lender, or (ii) such Account is subject to credit insurance
payable to Lender issued by an insurer and on terms and in an amount acceptable
to Lender;
(h) such Accounts do not consist of progress billings (such that the
obligation of the account debtors with respect to such Accounts is conditioned
upon Borrower's or Quad Europe's satisfactory completion of any further
performance under the agreement giving rise thereto), bill and hold invoices or
retainage invoices, except as to bill and hold invoices, if Lender shall have
received an agreement in writing from the account debtor, in form and substance
reasonably satisfactory to Lender, confirming the unconditional obligation of
the account debtor to take the goods related thereto and pay such invoice,
PROVIDED, THAT, Eligible Accounts shall include the portion of such Accounts not
subject to reduction or withholding, as reasonably determined by Lender.
(i) the account debtor with respect to such Accounts has not asserted
a counterclaim, defense or dispute and does not have, and does not engage in
transactions which may give rise to any right of setoff or recoupment against
such Accounts (but the portion of the Accounts of such account debtor in excess
of the amount at any time and from time to time owed by Borrower or Quad Europe
to such account debtor or claimed owed by such account debtor may be deemed
Eligible Accounts);
(j) there are no facts, events or occurrences which would (i) impair
the validity, enforceability or collectability of such Accounts or (ii) reduce
the amount payable or delay payment thereunder, PROVIDED, THAT, Eligible
Accounts shall include the portion of such Accounts not subject to reduction, as
reasonably determined by Lender;
(k) such Accounts are subject to the first priority, valid and
perfected security interest of Lender (and as to Accounts of Quad Europe, are
subject to the first ranking fixed and floating charge in favor of Lender
pursuant to the Debenture) and any goods giving rise thereto are not, and were
not at the time of the sale thereof, subject to any liens except those permitted
in this Agreement;
(l) neither the account debtor nor any officer or employee of the
account debtor with respect to such Accounts is an officer, employee, agent or
other Affiliate of Borrower or Quad Europe;
(m) the account debtors with respect to such Accounts are not any
foreign government, the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, unless, if the
account debtor is the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, upon Lender's
request, the Federal Assignment of Claims Act of 1940, as amended or any similar
State or local law, if applicable, has been complied with in a manner
satisfactory to Lender;
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(n) Borrower has received no notice of and has no actual or
constructive knowledge of any proceedings or actions which are threatened or
pending against the account debtors with respect to such Accounts which might
result in any material adverse change in any such account debtor's financial
condition;
(o) as to such Accounts of Borrower, the Accounts of a single account
debtor or its affiliates do not constitute more than twenty (20%) percent of all
otherwise Eligible Accounts (but the portion of the Accounts not in excess of
such percentage may be deemed Eligible Accounts);
(p) as to Accounts of Quad Europe, the Accounts of a single account
debtor or its affiliates do not constitute more than twenty (20%) percent of all
otherwise Eligible Accounts (but the portion of the Accounts not in excess of
such percentage may be deemed Eligible Accounts);
(q) as to Accounts of Borrower, such Accounts are not owed by an
account debtor who has Accounts unpaid more than the earlier of (i) sixty (60)
days after the original due date for them, or (ii) ninety (90) days after the
date of the original invoice for them, which constitute more than fifty (50%)
percent of the total Accounts of such account debtor;
(r) as to Accounts of Quad Europe, such Accounts are not owed by an
account debtor who has Accounts unpaid more than the earlier of (i) ninety (90)
days after the original due date for them, or (ii) one hundred twenty (120) days
after the date of the original invoice for them which constitute more than fifty
(50%) percent of the total Accounts of such account debtor;
(s) the account debtor is not located in a state or country requiring
the filing of a Notice of Business Activities Report or similar report in order
to permit Borrower to seek judicial enforcement in such state or country of
payment of such Account, unless Borrower has qualified to do business in such
state or country or has filed a Notice of Business Activities Report or
equivalent report for the then current year or such failure to file and
inability to seek judicial enforcement is capable of being remedied without any
material delay or material cost;
(t) such Accounts are owed by account debtors whose total indebtedness
to Borrower or Quad Europe, as the case may be, does not exceed the credit limit
with respect to such account debtors as determined by Borrower or Quad Europe,
as the case may be, from time to time and as is reasonably acceptable to Lender
(but the portion of the Accounts not in excess of such credit limit may be
deemed Eligible Accounts);
(u) such Accounts do not arise from pre-billed service contracts;
and
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(v) such Accounts are owed by account debtors deemed creditworthy at
all times by Borrower or Quad Europe, as the case may be, consistent with its
current practice and who are reasonably acceptable to Lender.
General criteria for Eligible Accounts may be established and revised from time
to time by Lender in good faith based on an event, condition or other
circumstance arising after the date hereof, or existing on the date hereof to
the extent Lender has no actual notice thereof from Borrower or Quad Europe, as
the case may be, which adversely affects or could reasonably be expected to
adversely affect the Accounts in the good faith determination of Lender. Any
Accounts of Borrower or Quad Europe which are not Eligible Accounts shall
nevertheless be part of the Collateral. Notwithstanding anything to the contrary
contained herein, the Accounts of Quad Europe shall not be considered Eligible
Accounts and shall not be included in calculating the Borrowing Base, and then
such Accounts of Quad Europe shall only be deemed Eligible Accounts to the
extent the criteria for Eligible Accounts set forth herein is satisfied with
respect thereto unless Lender shall have received, in form and substance
satisfactory to Lender, an opinion letter from United Kingdom counsel to Quad
Europe, Quad Systems Holdings Limited and Quad Systems Limited with respect to
the Financing Agreements executed by Quad Europe, Quad Systems Holdings Limited
and Quad Systems Limited and such other matters as Lender may request.
1.22 "Eligible Inventory" shall mean Inventory consisting of finished
goods held for resale in the ordinary course of the business of Borrower or Quad
Europe and "Work-in-Process Finished Goods", "Development" and "Quad Lease"
Inventory of Borrower as such categories of Inventory are identified in the ETV
Appraisal, all of which are acceptable to Lender based on the criteria set forth
below. In general, Eligible Inventory shall not include (a) spare parts for
equipment; (b) packaging and shipping materials; (c) raw materials for such
finished goods, including, without limitation, Inventory characterized as "Raw
Components" in the ETV Appraisal, (d) supplies used or consumed in Borrower's or
Quad Europe's business; (e) Inventory at premises other than those owned and
controlled by Borrower or Quad Europe, EXCEPT any Inventory which would
otherwise be deemed Eligible Inventory at locations in the United States of
America which are not owned and operated by Borrower, or at locations in the
United Kingdom which are not owned by Quad Europe, in each case may nevertheless
be considered Eligible Inventory: (i) as to locations which are leased by
Borrower or Quad Europe, if Lender shall have received a Collateral Access
Agreement from the owner and lessor of such location, duly authorized, executed
and delivered by such owner and lessor, and (ii) as to locations owned and
operated by a third person, if Lender shall have received a Collateral Access
Agreement from such owner and operator with respect to such location, duly
authorized, executed and delivered by such owner and operator and, in addition,
if Lender shall have received: (A) UCC-1 financing statements between the owner
and operator, as consignee or bailee and Borrower, as consignor or bailor, in
form and substance satisfactory to Lender, which are duly assigned to Lender and
(B) a written notice to any lender to the owner and operator of the first
priority security interest in such Inventory of Lender; (f) Inventory subject to
a security interest, lien, mortgage, pledge, charge or other encumbrance in
favor of any person other than Lender except those permitted in this Agreement;
(g) bill and hold goods; (h) Inventory which is not subject to the first
priority, valid and perfected security interest and lien of Lender (and as to
Inventory of Quad Europe located in
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the United Kingdom, the first ranking fixed and floating charge of Lender
pursuant to the Debenture); (i) returned, damaged and/or defective Inventory;
(j) Inventory outside the Continental United States other than Inventory
consisting of finished goods of Quad Europe in High Wycombe and Berkshire,
England; (k) samples; (l) Inventory purchased on consignment; (m) Inventory
subject to retention of title or Romalpa provisions in favor of any person; and
(n) unserviceable, obsolete or slow moving Inventory (for purposes of this
definition, "slow moving shall mean any Inventory not sold by Borrower or Quad
Europe in six months immediately preceding any date of determination); (o)
Inventory that is located at customer locations pursuant to lease or rental
arrangements with Borrower or Quad Europe, as lessor, or to customer locations
for beta-testing, equipment evaluations, or as temporary replacement machines;
and (p) Inventory that is located at trade shows and other exhibitions. General
criteria for Eligible Inventory may be established and revised from time to time
by Lender in good faith based on an event, condition or other circumstance
arising after the date hereof, or existing on the date hereof to the extent
Lender has no actual notice thereof which adversely affects or could reasonably
be expected to adversely affect the Inventory in the good faith determination of
Lender. Any Inventory of Borrower which is not Eligible Inventory shall
nevertheless be part of the Collateral. Notwithstanding anything to the contrary
contained herein, the Inventory of Quad Europe shall not be considered Eligible
Inventory and shall not be included in calculating the Borrowing Base, and then
such Inventory of Quad Europe shall only be deemed Eligible Inventory to the
extent the criteria for Eligible Inventory is satisfied with respect thereto,
unless Lender shall have received, in form and substance satisfactory to Lender,
an opinion letter from United Kingdom counsel to Quad Europe, Quad Systems
Holdings Limited and Quad Systems Limited with respect to the Financing
Agreements executed by Quad Europe, Quad Systems Holdings Limited and Quad
Systems Limited and such other matters as Lender may request.
1.23 "Environmental Laws" shall mean all foreign, Federal, State and local
laws (including common law), legislation, rules, codes, licenses, permits
(including any conditions imposed therein), authorizations or agreements between
Borrower or any Guarantor and any Governmental Authority, (a) relating to
pollution and the protection, preservation or restoration of the environment
(including air, water vapor, surface water, ground water, drinking water,
drinking water supply, surface land, subsurface land, plant and animal life or
any other natural resource), or to human health or safety, (b) relating to the
exposure to, or the use, storage, recycling, treatment, generation, manufacture,
processing, distribution, transportation, handling, labeling, production,
release or disposal, or threatened release, of Hazardous Materials, or (c) with
regard to record keeping, notification, disclosure and reporting requirements
respecting Hazardous Materials. The term "Environmental Laws" includes (i) the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, the Federal Superfund Amendments and Reauthorization Act, the Federal
Water Pollution Control Act of 1972, the Federal Clean Water Act, the Federal
Clean Air Act, the Federal Resource Conservation and Recovery Act of 1976
(including the Hazardous and Solid Waste Amendments thereto), the Federal Solid
Waste Disposal and the Federal Toxic Substances Control Act, the Federal
Insecticide, Fungicide and Rodenticide Act, and the Federal Safe Drinking Water
Act of 1974, (ii) applicable state counterparts to such laws, and (iii) any
common law that may impose liability or obligations for injuries or damages due
to, or threatened as a result of, the presence of or exposure to any Hazardous
Materials.
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1.24 "Equipment" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
1.25 "ERISA" shall mean the United States Employee Retirement Income
Security Act of 1974, together with all rules, regulations and interpretations
thereunder or related thereto.
1.26 "ERISA Affiliate" shall mean any person required to be aggregated
with Borrower or any of its Subsidiaries under Sections 414(b), 414(c), 414(m)
or 414(o) of the Code.
1.27 "ERISA Event" shall mean (a) any "reportable event", as defined in
Section 4043 of ERISA or the regulations issued thereunder, with respect to a
Plan; (b) the adoption of any amendment to a Plan that would require the
provision of security pursuant to Section 401(a)(29) of the Code or Section 307
of ERISA; (c) the existence with respect to any Plan of an "accumulated funding
deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA),
whether or not waived; (d) the filing pursuant to Section 412 of the Code or
Section 303(d) of ERISA of an application for a waiver of the minimum funding
standard with respect to any Plan; (e) the occurrence of a "prohibited
transaction" with respect to which Borrower or any of its Subsidiaries is a
"disqualified person" (within the meaning of Section 4975 of the Code) and with
respect to which prohibition or exemption is not provided by Section 407 or 408
of ERISA or by Section 4975 of the Code and has not been provided by the
Department of Labor, whether on a class or individual basis or with respect to
which Borrower or any of its Subsidiaries could otherwise be liable; (f) a
complete or partial withdrawal by the Borrower or any ERISA Affiliate from a
Multiemployer Plan or a cessation of operations which is treated as such a
withdrawal or notification that a Multiemployer Plan is in reorganization; (g)
the filing of a notice of intent to terminate, the treatment of a Plan amendment
as a termination under Section 4041 or 4041A of ERISA, or the commencement of
proceedings by the Pension Benefit Guaranty Corporation to terminate a Plan or
Multiemployer Plan; (h) an event or condition which might reasonably be expected
to constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan or Multiemployer Plan; (i) the
imposition of any liability under Title IV of ERISA, other than the Pension
Benefit Guaranty Corporation premiums due but not delinquent under Section 4007
of ERISA, upon Borrower or any ERISA Affiliate; and (j) any other event or
condition with respect to a Plan or Multiemployer Plan or any Plan subject to
Title IV of ERISA maintained, or contributed to, by any ERISA Affiliate that
could reasonably be expected to result in liability of Borrower.
1.28 "ETV Appraisal" shall mean the Appraisal dated November 15, 1999
prepared by Emerald Technology Valuations, LLC of Specified Inventory of Quad
Systems Corporation prepared for Quad Systems Corporation as supplemented by
letter dated November 22, 1999 re: Opinion of the specified United Kingdom
Feeder Inventory of Quad Systems Corporation.
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1.29 "Eurodollar Rate" shall mean with respect to the Interest Period for
a Eurodollar Rate Loan, the interest rate per annum equal to the arithmetic
average of the rates of interest per annum (rounded upwards, if necessary, to
the next one-sixteenth (1/16) of one (1%) percent) at which Reference Bank is
offered deposits of United States dollars in the London interbank market (or
other Eurodollar Rate market selected by Borrower and approved by Lender) on or
about 9:00 a.m. (New York, New York time) two (2) Business Days prior to the
commencement of such Interest Period in amounts substantially equal to the
principal amount of the Eurodollar Rate Loans requested by and available to
Borrower for such Interest Period in accordance with this Agreement, with a
maturity of comparable duration to the Interest Period selected by Borrower.
1.30 "Eurodollar Rate Loans" shall mean any Loans or portion thereof on
which interest is payable based on the Adjusted Eurodollar Rate in accordance
with the terms hereof.
1.31 "Event of Default" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
1.32 "Excess Availability" shall mean the amount, as determined by Lender,
calculated at any time, equal to: (a) the lesser of: (i) the Borrowing Base and
(ii) the Maximum Credit, MINUS (b) the sum of: (i) the amount of all then
outstanding and unpaid Obligations, plus (ii) the aggregate amount of all then
outstanding and unpaid trade payables and other obligations of Borrower which
are more than ninety (90) days from the original invoice date for them as of
such time, (but which are, in any event, no more than sixty (60) days past due
from the original due date for them), plus (iii) the amount of checks issued by
Borrower to pay trade payables and other obligations which are more than ninety
(90) days past due from the original invoice date for them as of such time (but
which are, in any event, no more than sixty (60) days past due from the original
due date for them), but not yet sent and the book overdraft of Borrower.
1.33 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, together with all rules, regulations and interpretations thereunder or
related thereto.
1.34 "Exchange Rate" shall mean the prevailing spot rate of exchange of
such bank as Lender may reasonably select for the purpose of conversion of one
currency to another, at or around 11:00 a.m. New York, New York time, on the
date on which any such conversion of currency is to be made under this
Agreement.
1.35 "Financing Agreements" shall mean, collectively, this Agreement, and
all notes, guarantees, security agreements and other agreements, documents and
instruments now or at any time hereafter executed and/or delivered by Borrower
or any Obligor in connection therewith.
1.36 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Board which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Section 9.18 hereof, GAAP shall be determined on the basis of
such principles in effect on the date hereof and consistent with those used in
the preparation of the most recent audited financial statements delivered to
Lender prior to the date hereof.
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1.37 "Governmental Authority" shall mean any nation or government, any
state, province, or other political subdivision thereof, any central bank (or
similar monetary or regulatory authority) thereof, any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government, and any corporation or other entity owned or
controlled, through stock or capital ownership or otherwise, by any of the
foregoing.
1.38 "Guarantors" shall mean, collectively, the following, together with
their respective successors and assigns: (a) HiTech Finance Company, a Delaware
corporation, (b) Quad Foreign Sales Corporation, a corporation organized under
the laws of Barbados, (c) Quad Systems de Mexico S.A. de C.V., a Mexican
corporation, (d) Trimark Investment Corporation., a Delaware corporation, (e)
Quad Leasing Corp., a Delaware corporation, (f) Quad Systems Holdings Limited,
an English company, (g) Quad Systems Limited, an English company, and (h) Quad
Europe Limited, an English company.
1.39 "Hazardous Materials" shall mean any hazardous, toxic or dangerous
substances, materials and wastes, including hydrocarbons (including naturally
occurring or man-made petroleum and hydrocarbons), flammable explosives,
asbestos, urea formaldehyde insulation, radioactive materials, polychlorinated
biphenyls, pesticides, herbicides and any other kind and/or type of pollutants
or contaminants (including materials which include hazardous constituents),
sewage, sludge, industrial slag, solvents and/or any other similar substances,
materials, or wastes and including any other substances, materials or wastes
that are or become regulated under any Environmental Law (including any that are
or become classified as hazardous or toxic under any Environmental Law).
1.40 "Indebtedness" shall mean, with respect to any Person, any liability,
whether or not contingent (as calculated in accordance with GAAP), (a) in
respect of borrowed money (whether or not the recourse of the lender is to the
whole of the assets of such Person or only to a portion thereof) or evidenced by
bonds, notes, debentures or similar instruments; (b) representing the balance
deferred and unpaid of the purchase price of any property or services (except
any such balance that constitutes an account payable to a trade creditor
(whether or not an Affiliate) created, incurred, assumed or guaranteed by such
Person in the ordinary course of business of such Person in connection with
obtaining goods, materials or services that is not overdue by more than ninety
(90) days, unless the trade payable is being contested in good faith); (c) all
obligations as lessee under leases which have been, or should be, in accordance
with GAAP recorded as Capital Leases; (d) any contractual obligation, whether or
not contingent (as calculated in accordance with GAAP), of such Person to pay or
be liable for the payment of any indebtedness described in this definition of
another Person, including, without limitation, any such indebtedness, directly
or indirectly guaranteed, or any agreement to purchase, repurchase, or otherwise
acquire such indebtedness, obligation or liability or any security therefor, or
to provide funds for the payment or discharge thereof, or to maintain solvency,
assets, level of income, or other financial condition; (e) all obligations with
respect to redeemable stock and redemption or repurchase obligations under any
Capital Stock or other equity securities issued by such Person;
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(f) all reimbursement obligations and other liabilities of such Person with
respect to surety bonds (whether bid, performance or otherwise), letters of
credit, banker's acceptances or similar documents or instruments issued for such
Person's account; (g) all indebtedness of such Person in respect of indebtedness
of another Person for borrowed money or indebtedness of another Person otherwise
described in this definition which is secured by any consensual lien, security
interest, collateral assignment, conditional sale, mortgage, deed of trust, or
other encumbrance on any asset of such Person, whether or not such obligations,
liabilities or indebtedness are assumed by or are a personal liability of such
Person, all as of such time; and (h) to the extent not included in clauses (a)
through (g) of this definition, the Copelco Repurchase Obligations.
1.41 "Information Certificate" shall mean the Information Certificate of
Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.
1.42 "Intellectual Property" shall mean Borrower's now owned and hereafter
arising or acquired: patents, patent rights, patent applications, copyrights,
works which are the subject matter of copyrights, copyright registrations,
trademarks, trade names, trade styles, trademark and service mark applications,
and licenses and rights to use any of the foregoing; all extensions, renewals,
reissues, divisions, continuations, and continuations-in-part of any of the
foregoing; all rights to sue for past, present and future infringement of any of
the foregoing; inventions, trade secrets, formulae, processes, compounds,
drawings, designs, blueprints, surveys, reports, manuals, and operating
standards; goodwill; customer and other lists in whatever form maintained; and
trade secret rights, copyright rights, rights in works of authorship, and
contract rights relating to computer software programs, in whatever form created
or maintained.
1.43 "Intercreditor Agreement" shall mean the Intercreditor Agreement,
dated of even date herewith, by and between First Union National Bank and
Lender, as acknowledged and agreed to by Borrower and Guarantors, providing for,
among other things, the relative rights and priorities with respect to the
assets and properties of Borrower as between Lender and First Union National
Bank.
1.44 "Interest Period" shall mean for any Eurodollar Rate Loan, a period
of approximately one (1), two (2), or three (3) months duration as Borrower may
elect, the exact duration to be determined in accordance with the customary
practice in the applicable Eurodollar Rate market; PROVIDED, THAT, Borrower may
not elect an Interest Period which will end after the last day of the
then-current term of this Agreement.
1.45 "Interest Rate" shall mean:
(a) subject to clauses (b) and (c) below, as to Prime Rate Loans, a
rate of one-quarter (1/4%) percent per annum in excess of the Prime Rate and as
to Eurodollar Rate Loans a rate of two and three-quarters (2 3/4%) percent per
annum in excess of the Adjusted Eurodollar Rate (based on the Eurodollar Rate
applicable for the Interest Period selected by Borrower as in effect three (3)
Business Days after the date of receipt by Lender of the request of Borrower for
such Eurodollar Rate Loans in accordance with the terms hereof, whether such
rate is higher or lower than any Eurodollar Rate previously quoted to Borrower);
PROVIDED, THAT;
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(b) the Interest Rate applicable to Eurodollar Rate Loans and Prime
Rate Loans shall be reduced, one time only, by one-quarter of one (1/4%)
percent, effective as of the first day of the month after each of the following
conditions is satisfied as determined by Lender: (i) the Pre-Tax Income of
Borrower and its Subsidiaries calculated on a consolidated basis, for the fiscal
year ending on September 30, 2000 as set forth in the audited consolidated
financial statements of Borrower and its Subsidiaries for such fiscal year
delivered to Lender, together with the unqualified opinion of the independent
certified accountants, in accordance with Section 9.6 hereof, shall equal or
exceed $1.00 and (ii) no Event of Default or act, condition or event which with
notice or passage of time would constitute an Event of Default shall exist or
have occurred, and be continuing; PROVIDED, THAT, in the event that the Interest
Rate is reduced as provided in this clause (b), if in any subsequent fiscal year
thereafter the condition set forth in clause (b)(i) is not satisfied, effective
as of the first day of the month after the receipt by Lender of the audited
consolidated financial statements of Borrower and its Subsidiaries for such
fiscal year, the Interest Rate shall increase to the rate set forth in clause
(a) above; and
(c) notwithstanding anything to the contrary contained herein, the
Interest Rate shall mean the rate of two and one-quarter (2 1/4%) percent per
annum in excess of the Prime Rate as to Prime Rate Loans and the rate of four
and three-quarters (4 3/4%) percent per annum in excess of the Adjusted
Eurodollar Rate as to Eurodollar Rate Loans, at Lender's option, without notice,
(i) either (A) for the period from and after the date of termination or
non-renewal hereof until Lender has received full and final payment of all
obligations (notwithstanding entry of a judgment against a Borrower) or (B) from
and after the date of the occurrence of an Event of Default for so long as such
Event of Default is continuing as determined by Lender, and (ii) on the Loans to
any Borrower at any time outstanding in excess of the amounts available to such
Borrower under Section 2 (whether or not such excess(es), arise or are made with
or without Lender's knowledge or consent and whether made before or after an
Event of Default).
1.46 "Inventory" shall mean all of Borrower's or Quad Europe's now owned
and hereafter existing or acquired raw materials, work in process, finished
goods and all other inventory of whatsoever kind or nature, wherever located.
1.47 "Letter of Credit Accommodations" shall mean the letters of credit,
merchandise purchase or other guaranties which are from time to time either (a)
issued or opened by Lender for the account of Borrower or any Obligor or (b)
with respect to which Lender has agreed to indemnify the issuer or guaranteed to
the issuer the performance by Borrower or any Obligor of its obligations to such
issuer.
1.48 "Loans" shall mean the Revolving Loans.
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1.49 "Material Contract" shall mean (a) any contract or other agreement
(other than the Financing Agreements), written or oral, of Borrower involving
monetary liability of or to any Person in an amount in excess of US$750,000 in
any fiscal year, and (b) any other contract or other agreement (other than the
Financing Agreements), whether written or oral, to which Borrower is a party as
to which the breach, nonperformance, cancellation or failure to renew by any
party thereto would have a material adverse effect on the business, assets,
condition (financial or otherwise) or results of operations or prospects of
Borrower or the validity or enforceability of this Agreement, any of the other
Financing Agreements, or any of the rights and remedies of Lender hereunder or
thereunder, including without limitation, the contracts specified on Schedule
8.16.
1.50 "Maximum Credit" shall mean the amount of US$12,000,000.
1.51 "Multiemployer Plan" shall mean a "multi-employer plan" as defined in
Section 4001(a)(3) of ERISA which is or was at any time during the current year
or the immediately preceding six (6) years contributed to by Borrower or any
ERISA Affiliate.
1.52 "Net Amount of Eligible Accounts" shall mean the US Dollar Equivalent
of the gross amount of Eligible Accounts less (a) sales, excise or similar taxes
included in the amount thereof and (b) returns, discounts, claims, credits and
allowances of any nature at any time issued, owing, granted, outstanding,
available or claimed with respect thereto.
1.53 "Obligations" shall mean any and all Revolving Loans, Letter of
Credit Accommodations and all other obligations, liabilities and indebtedness of
every kind, nature and description owing by Borrower or any Obligor to Lender
and/or its Affiliates (other than for Indebtedness owing to First Union National
Bank pursuant to the Term Loan Agreements), including principal, interest,
charges, fees, costs and expenses, however evidenced, whether as principal,
surety, endorser, guarantor or otherwise, whether arising under this Agreement
or otherwise, whether now existing or hereafter arising, whether arising before,
during or after the initial or any renewal term of this Agreement or after the
commencement of any case with respect to Borrower under the United States
Bankruptcy Code or any similar statute (including the payment of interest and
other amounts which would accrue and become due but for the commencement of such
case, whether or not such amounts are allowed or allowable in whole or in part
in such case), whether direct or indirect, absolute or contingent, joint or
several, due or not due, primary or secondary, liquidated or unliquidated,
secured or unsecured, and however acquired by Lender.
1.54 "Obligor" shall mean any Guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than Borrower.
1.55 "OLV Percentage" shall mean the fraction, expressed as a percentage,
(a) the numerator of which is the amount equal to the amount of the recovery in
respect of the Inventory at such time on a liquidation basis as set forth in the
most recent acceptable appraisal of Inventory received by Lender in accordance
with Section 7.3, and (b) the denominator of which is the original cost of the
aggregate amount of the Inventory subject to such appraisal.
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1.56 "Other Taxes" shall mean any present or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies which
arise from any payment made hereunder or from the execution, delivery or
registration of, or otherwise with respect to, this Agreement or any of the
other Financing Agreements.
1.57 "Payment Account" shall have the meaning set forth in Section 6.3
hereof.
1.58 "Permitted Holders" shall mean the persons listed on Schedule 1.58
hereto and their respective successors and assigns and including as to any
Permitted Holder which is as an individual, the heirs, executors,
administrators, testamentary trustees, legatees or beneficiaries of such
individual or a trust or custodianship, to the extent that the beneficiaries
include such individual or his or her spouse and former spouse and ancestors or
lineal descendants (by blood or adoption).
1.59 "Person" or "person" shall mean any individual, sole proprietorship,
partnership, corporation (including any corporation which elects subchapter S
status under the Code), limited liability company, limited liability
partnership, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.
1.60 "Plan" means an employee benefit plan (as defined in Section 3(3) of
ERISA) which Borrower sponsors, maintains, or to which it makes, is making, or
is obligated to make contributions, or in the case of a Multiemployer Plan has
made contributions at any time during the immediately preceding six (6) plan
years.
1.61 "Pre-Tax Income" shall mean, with respect to any Person, for any
period, the aggregate of the net income (loss) of such Person and its
Subsidiaries, on a consolidated basis, for such period (excluding to the extent
included therein any extraordinary or one-time or non-recurring gains) after
deducting all charges which should be deducted before arriving at the net income
(loss) for such period and before deducting the Provision for Taxes for such
period, all as determined in accordance with GAAP, PROVIDED, THAT, the net
income of any Person that is not a wholly-owned Subsidiary or that is accounted
for by the equity method of accounting shall be included only to the extent of
the amount of dividends or distributions paid or payable to Borrower or a
wholly-owned Subsidiary of such person; the effect of any change in accounting
principles adopted by such Person or its Subsidiaries after the date hereof
shall be excluded; and the net income (if positive) of any wholly-owned
Subsidiary to the extent that the declaration or payment of dividends or similar
distributions by such wholly-owned Subsidiary to Borrower or to any other
wholly-owned Subsidiary of Borrower is not at the time permitted by operation of
the terms of its charter or any agreement (other than under this Agreement),
instrument, judgment, decree, order, statute, rule or government regulation
applicable to such wholly-owned Subsidiary shall be excluded. For the purpose of
this definition, net income excludes any gain (but not loss), together with any
related Provision for Taxes for such gain (but not loss) realized upon the sale
or other disposition of any assets that are not sold in the ordinary course of
business (including, without limitation, dispositions pursuant to sale and
leaseback transactions), or of any Capital Stock of such Person or a Subsidiary
of such Person and any net income realized as a result of changes in accounting
principles or the application thereof to such Person.
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1.62 "Prime Rate" shall mean the rate from time to time publicly announced
by First Union National Bank, or its successors, as its prime rate, whether or
not such announced rate is the best rate available at such bank.
1.63 "Prime Rate Loans" shall mean any Loans or portion thereof on which
interest is payable based on the Prime Rate in accordance with the terms
thereof.
1.64 "Priority Payables" shall mean, at any time, the full amount of the
liabilities at such time which have a trust imposed to provide for payment or a
security interest, lien or charge ranking or capable of ranking senior to or
pari passu with security interests, liens or charges securing the Obligations on
any of the Collateral under Federal, Provincial, State, county, district,
municipal, or local law or have a right imposed to provide for payment ranking
or capable of ranking senior to or pari passu with the Obligations under local,
national or supranational law, regulation or directive, including, but not
limited to, claims for unremitted and/or accelerated rents, taxes (including
claims for debts due to Inland Revenue or Customs and Excise), wages, employee
withholdings or deductions and vacation pay, workers' compensation obligations,
government royalties or pension fund obligations, together with the aggregate
value, determined in accordance with GAAP, of all Eligible Inventory which
Lender, in good faith, considers may be or may become subject to retention of
title by a supplier or a right of a supplier to recover possession thereof,
where such supplier's right may have priority over the security interests, liens
or charges securing the Obligations.
1.65 "Provision for Taxes" shall mean an amount equal to all taxes imposed
on or measured by net income, whether Federal, State or local, and whether
foreign or domestic, that are paid or payable by any Person and its Subsidiaries
in respect of such fiscal year on a consolidated basis in accordance with GAAP.
1.66 "Quad Europe" shall mean Quad Europe Limited, an English company,
which is an indirect wholly owned subsidiary of Borrower and its successors and
assigns.
1.67 "Real Property" shall mean all now owned and hereafter acquired real
property of Borrower, including leasehold interests, together with all
buildings, structures, and other improvements located thereon and all licenses,
easements and appurtenances relating thereto, wherever located, including the
real property and related assets.
1.68 "Receivables" shall mean: (a) all Accounts; (b) all amounts at any
time payable to Borrower or Quad Europe in respect of the sale or other
disposition by Borrower or Quad Europe of any Account or other obligation for
the payment of money; (c) all interest, fees, late charges, penalties,
collection fees and other amounts due or to become due or otherwise payable in
connection with any Account; (d) all letters of credit, indemnities, guarantees,
security or other deposits and proceeds thereof issued payable to Borrower or
Quad Europe or otherwise in favor of or delivered to Borrower or Quad Europe in
connection with any Account; and (e) all other contract rights, chattel paper,
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instruments, notes, general intangibles and other forms of obligations owing to
Borrower or Quad Europe, whether from the sale and lease of goods or other
property, licensing of any property (including Intellectual Property or other
general intangibles), rendition of services or from loans or advances by
Borrower or Quad Europe or to or for the benefit of any third person (including
loans or advances to any Affiliates or Subsidiaries) or otherwise associated
with any Accounts, Inventory or general intangibles of Borrower or Quad
Europe(including, without limitation, choses in action, causes of action, tax
refunds, tax refund claims, any funds which may become payable to Borrower or
Quad Europe in connection with the termination of any Plan or other employee
benefit plan and any other amounts payable to Borrower or Quad Europe from any
Plan or other employee benefit plan, rights and claims against carriers and
shippers, rights to indemnification, business interruption insurance and
proceeds thereof, casualty or any similar types of insurance and any proceeds
thereof and proceeds of insurance covering the lives of employees on which
Borrower or Quad Europe is beneficiary).
1.69 "Records" shall mean all of Borrower's present and future books of
account of every kind or nature, purchase and sale agreements, invoices, ledger
cards, bills of lading and other shipping evidence, statements, correspondence,
memoranda, credit files and other data relating to the Collateral or any account
debtor, together with the tapes, disks, diskettes and other data and software
storage media and devices, file cabinets or containers in or on which the
foregoing are stored (including any rights of Borrower with respect to the
foregoing maintained with or by any other person).
1.70 "Reference Bank" shall mean First Union National Bank, or such other
bank as Lender may from time to time designate.
1.71 "Renewal Date" shall the meaning set forth in Section 12.1 hereof.
1.72 "Reserves" shall mean as of any date of determination, such amounts as
Lender may from time to time establish and revise in good faith reducing the
amount of Revolving Loans and Letter of Credit Accommodations which would
otherwise be available to Borrower under the lending formula(s) provided for
herein: (a) to reflect events, conditions, contingencies or risks which, as
determined by Lender in good faith, adversely affect, or would have a reasonable
likelihood of adversely affecting, either (i) the Collateral or any other
property which is security for the Obligations or its value, (ii) the assets or
business of Borrower or any Obligor or (iii) the security interests and other
rights of Lender in the Collateral (including the enforceability, perfection and
priority thereof); (b) to reflect Lender's good faith belief that any collateral
report or financial information furnished by or on behalf of Borrower or any
Obligor to Lender is or may have been incomplete, inaccurate or misleading in
any material respect; (c) to reflect outstanding Letter of Credit Accommodations
as provided in Section 2.2 hereof; (d) in respect of any state of facts which
Lender determines in good faith constitutes an Event of Default or may, with
notice or passage of time or both, constitute an Event of Default; (e) to
reflect the Dilution Reserve; (f) to reflect the Priority Payables; (g) to
reflect Lender's good faith estimate of the amount of any reserve necessary to
reflect changes in applicable currency exchange rates or currency exchange
markets; (h) to reflect any rental payments, service charges or other amounts
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due to lessors of real or personal property (other than amounts due to lessors
who have executed and delivered Collateral Access Agreements) to the extent
Inventory or Records are located in or on such property or such Records are
needed to monitor or otherwise deal with the Collateral; (i) to reflect deposits
of account debtors held by Borrower; or (j) to reflect the aggregate amount of
Borrower's Copelco Repurchase Obligations with respect to the Copelco Recourse
Agreements as set forth in the most recent report received by Lender in
accordance with Section 7.1(a)(ii) hereof. To the extent Lender may revise the
lending formulas used to determine the Borrowing Base or establish new criteria
or revise existing criteria for Eligible Accounts or Eligible Inventory so as to
address any circumstances, condition, event or contingency in an manner
satisfactory to Lender, Lender shall not establish a Reserve for the same
purpose. The amount of any Reserve established by Lender shall have a reasonable
relationship to the event, condition or other matter which is the basis for such
reserve as determined by Lender in good faith.
1.73 "Revolving Loans" shall mean the loans now or hereafter made by
Lender to or for the benefit of Borrower on a revolving basis (involving
advances, repayments and readvances) as set forth in Section 2.1 hereof.
1.74 "Solvent" shall mean, at any time with respect to any Person, that at
such time such Person (a) is able to pay its debts as they mature and has (and
has reason to believe it will continue to have) sufficient capital (and not
unreasonably small capital) to carry on its business consistent with its current
practices as of the date hereof, and (b) the assets and properties of such
Person at a fair valuation and at their present fair salable value are greater
than the Indebtedness of such Person, and including subordinated and contingent
liabilities computed at the amount which, to the best of such Person's
knowledge, represents an amount which can reasonably be expected to become an
actual or matured liability.
1.75 "Sterling" and "[Pound Sign]" shall each mean the lawful currency of
the United Kingdom.
1.76 "Subsidiary" or "subsidiary" shall mean, with respect to any Person,
any corporation, limited liability company, limited liability partnership or
other limited or general partnership, trust, association or other business
entity of which an aggregate of at least a majority of the outstanding Capital
Stock or other interests entitled to vote in the election of the board of
directors of such corporation (irrespective of whether, at the time, Capital
Stock of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency), managers, trustees
or other controlling persons, or an equivalent controlling interest therein, of
such Person is, at the time, directly or indirectly, owned by such Person and/or
one or more subsidiaries of such Person.
1.77 "Taxes" shall mean any and all present or future taxes, levies,
imposts, deductions, charges or withholdings, and all liabilities with respect
thereto, excluding, in the case of Lender, such taxes (including income taxes,
franchise taxes or capital taxes) as are imposed on or measured by Lender's net
income or capital by any jurisdiction (or any political subdivision thereof).
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1.78 "Term Loan Agreements" shall mean, collectively, the Term Loan Note,
the agreements listed in Schedule A to the Intercreditor Agreement, and all
agreements, documents and instruments at any time executed and/or delivered by
Borrower, any of Obligors or any other person with, to or in favor of First
Union National Bank in connection therewith or related thereto, as all of the
foregoing now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
1.79 "Term Loan Collateral" shall have the meaning ascribed to such term
in the Intercreditor Agreement dated the date hereof, by and between First Union
National Bank and Lender with respect to the assets of Borrower and its
Subsidiaries.
1.80 "Term Loan Note" shall mean the Term Note in the original principal
amount of $3,100,000, dated April 11, 1997 made by Borrower and certain of
Guarantors, in favor of First Union National Bank (as successor in interest to
CoreStates Bank, N.A.), as amended, as the same now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced.
1.81 "US Dollars", "US$" or "$" shall mean the lawful currency of the
United States of America.
1.82 "US Dollar Equivalent" shall mean at any time (a) as to any amount
denominated in US Dollars, the amount thereof at such time, and (b) as to any
amount denominated in Sterling or any other currency, the equivalent amount in
US Dollars calculated by Lender at such time using the Exchange Rate in effect
on the Business Day of determination.
1.83 "Value" shall mean the US Dollar Equivalent, as reasonably determined
by Lender in good faith, with respect to Inventory, equal to the lower of (a)
cost computed on a first-in-first-out basis in accordance with GAAP or (b)
market value, PROVIDED, THAT, for purposes of the calculation of the Borrowing
Base, the Value of the Inventory shall not include: (i) the portion of the value
of Inventory equal to the profit earned by any Affiliate on the sale thereof to
Borrower or Quad Europe or (ii) write-ups in value with respect to currency
exchange rates.
1.84 "VAT" shall mean Value Added Tax imposed in the United Kingdom and
any equivalent tax applicable in any European jurisdiction.
1.85 "Voting Stock" shall mean with respect to any Person, (a) one (1) or
more classes of Capital Stock of such Person having general voting powers to
elect at least a majority of the board of directors, managers or trustees of
such Person, irrespective of whether at the time Capital Stock of any other
class or classes have or might have voting power by reason of the happening of
any contingency, and (b) any Capital Stock of such Person convertible or
exchangeable without restriction at the option of the holder thereof into
Capital Stock of such Person described in clause (a) of this definition.
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SECTION 2. CREDIT FACILITIES
2.1 REVOLVING LOANS.
(a) Subject to and upon the terms and conditions contained herein,
Lender agrees to make Revolving Loans to Borrower from time to time in amounts
requested by Borrower up to the amount equal to the lesser of:
(i) the Borrowing Base or (ii) the Maximum Credit.
(b) Lender may, in its discretion, from time to time, upon not less
than five (5) days prior notice to Borrower, (i) reduce the lending formula with
respect to Eligible Accounts to the extent that Lender determines in good faith
that the general creditworthiness of account debtors has declined or (ii) reduce
the lending formula(s) with respect to Eligible Inventory to the extent that
Lender determines that: (A) the number of days of the turnover of the Inventory
for any period has changed in any material respect or (B) the liquidation value
of the Eligible Inventory, or any category thereof, has decreased in any
material respect, or (C) the nature, quality or mix of the Inventory has
deteriorated. The amount of any decrease in the lending formulas shall have a
reasonable relationship to the event, condition or circumstance which is the
basis for such decrease as determined by Lender in good faith. In determining
whether to reduce the lending formula(s), Lender may consider events,
conditions, contingencies or risks which are also considered in determining
Eligible Accounts, Eligible Inventory or in establishing Reserves.
(c) Except in Lender's discretion, the aggregate amount of the Loans
and the Letter of Credit Accommodations outstanding at any time shall not exceed
the Maximum Credit. In the event that the outstanding amount of any component of
the Loans, or the aggregate amount of the outstanding Loans and Letter of Credit
Accommodations, exceed the amounts available under the lending formulas, the
sublimits for Letter of Credit Accommodations set forth in Section 2.2(e) or the
Maximum Credit, as applicable, such event shall not limit, waive or otherwise
affect any rights of Lender in that circumstance or on any future occasions and
Borrower shall, upon demand by Lender, which may be made at any time or from
time to time, immediately repay to Lender the entire amount of any such
excess(es) for which payment is demanded.
2.2 LETTER OF CREDIT ACCOMMODATIONS.
(a) Subject to and upon the terms and conditions contained herein, at
the request of Borrower (or Quad Europe on behalf of Borrower), Lender agrees to
provide or arrange for Letter of Credit Accommodations for the account of
Borrower containing terms and conditions reasonably acceptable to Lender and the
issuer thereof. Any payments made by Lender to any issuer thereof and/or related
parties in connection with the Letter of Credit Accommodations shall constitute
additional Revolving Loans to Borrower pursuant to this Section 2.
(b) In addition to any charges, fees or expenses charged by any bank or
issuer in connection with the Letter of Credit Accommodations, Borrower shall
pay to Lender a letter of credit fee at a rate equal to one and one-half (1/2%)
percent per annum on the daily outstanding balance of the Letter of Credit
Accommodations for the immediately preceding month (or part thereof), payable in
arrears as of the first day of each succeeding month, except that Borrower shall
pay to Lender such letter of credit fee, at Lender's option, without notice, at
a rate equal to
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three and one-half (3 1/2%) percent per annum on such daily outstanding balance
for: (i) the period from and after the date of termination or non-renewal hereof
until Lender has received full and final payment of all Obligations
(notwithstanding entry of a judgment against Borrower) and (ii) the period from
and after the date of the occurrence of an Event of Default for so long as such
Event of Default is continuing as determined in good faith by Lender. Such
letter of credit fee shall be calculated on the basis of a three hundred sixty
(360) day year and actual days elapsed and the obligation of Borrower to pay
such fee shall survive the termination or non-renewal of this Agreement.
(c) Borrower shall give Lender three (3) Business Days' prior written
notice of Borrower's request for the issuance of a Letter of Credit
Accommodation. Such notice shall be irrevocable and shall specify the original
face amount of the Letter of Credit Accommodation requested, the effective date
(which date shall be a Business Day) of issuance of such requested Letter of
Credit Accommodation, whether such Letter of Credit Accommodations may be drawn
in a single or in partial draws, the date on which such requested Letter of
Credit Accommodation is to expire (which date shall be a Business Day), the
purpose for which such Letter of Credit Accommodation is to be issued, and the
beneficiary of the requested Letter of Credit Accommodation. Borrower shall
attach to such notice the proposed form of the Letter of Credit Accommodation.
(d) In addition to being subject to the satisfaction of the applicable
conditions precedent contained in Section 4 hereof and the other terms and
conditions contained herein, no Letter of Credit Accommodations shall be
available unless each of the following conditions precedent have been satisfied
as determined by Lender in good faith: (i) Borrower shall have delivered to the
proposed issuer of such Letter of Credit Accommodation at such times and in such
manner as such proposed issuer may require, an application in form and substance
satisfactory to such proposed issuer and Lender for the issuance of the Letter
of Credit Accommodation and such other documents as may be required pursuant to
the terms thereof, and the form and terms of the proposed Letter of Credit
Accommodation shall be satisfactory to Lender and such proposed issuer, (ii) as
of the date of issuance, no order of any court, arbitrator or other Governmental
Authority shall purport by its terms to enjoin or restrain money center banks
generally from issuing letters of credit of the type and in the amount of the
proposed Letter of Credit Accommodation, and no law, rule or regulation
applicable to money center banks generally and no request or directive (whether
or not having the force of law) from any Governmental Authority with
jurisdiction over money center banks generally shall prohibit, or request that
the proposed issuer of such Letter of Credit Accommodation refrain from, the
issuance of letters of credit generally or the issuance of such Letters of
Credit Accommodation, and (iii) the Revolving Loans then available to Borrower
(subject to the Maximum Credit and any Reserves), on the date of the proposed
issuance of any Letter of Credit Accommodations, shall be equal to or greater
than: (A) if the proposed Letter of Credit Accommodation is for the purpose of
purchasing Eligible Inventory, the sum of (1) the percentage equal to one
hundred (100%) percent minus the then applicable percentage set forth in Section
1.6(b)(i) multiplied by the Value of such Eligible Inventory, plus (2) freight,
taxes, duty and other amounts which Lender estimates must be paid in connection
with such Inventory upon arrival and for delivery to one of Borrower's locations
for Eligible Inventory within the United States of America and (B) if the
proposed Letter of Credit Accommodation is for any other purpose, an amount
equal to one hundred (100%) percent of the face amount thereof and all other
commitments and obligations made or incurred by Lender with respect thereto.
Effective on the issuance of each Letter of Credit Accommodation, a Reserve
shall be established in the applicable amount set forth in Section
2.2(d)(iii)(A) or Section 2.2(d)(iii)(B).
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(e) Except in Lender's discretion, the amount of all outstanding Letter
of Credit Accommodations and all other commitments and obligations made or
incurred by Lender in connection therewith shall not at any time exceed
US$4,000,000. At any time an Event of Default exists or has occurred and is
continuing, upon Lender's request, Borrower will either furnish cash collateral
to secure the reimbursement obligations to the issuer in connection with any
Letter of Credit Accommodations or furnish cash collateral to Lender for the
Letter of Credit Accommodations.
(f) Borrower shall indemnify and hold Lender harmless from and against
any and all losses, claims, damages, liabilities, costs and expenses which
Lender may suffer or incur in connection with any Letter of Credit Accommodation
and any documents, drafts or acceptances relating thereto, including any losses,
claims, damages, liabilities, costs and expenses due to any action taken by any
issuer or correspondent with respect to any Letter of Credit Accommodation.
Borrower assumes all risks with respect to the acts or omissions of the drawer
under or beneficiary of any Letter of Credit Accommodation and for such purposes
the drawer or beneficiary shall be deemed Borrower's agent. Borrower assumes all
risks for, and agrees to pay, all foreign, Federal, State and local taxes,
duties and levies relating to any goods subject to any Letter of Credit
Accommodations or any documents, drafts or acceptances thereunder. Borrower
hereby releases and holds Lender harmless from and against any acts, waivers,
errors, delays or omissions, whether caused by Borrower, by any issuer or
correspondent or otherwise with respect to or relating to any Letter of Credit
Accommodation except for the gross negligence or wilful misconduct of Lender as
determined pursuant to a final, non-appealable order of a court of competent
jurisdiction. The provisions of this Section 2.2(e) shall survive the payment of
Obligations and the termination or non-renewal of this Agreement.
(g) In connection with Inventory purchased pursuant to Letter of Credit
Accommodations, upon Lender's request, Borrower will instruct all suppliers,
carriers, forwarders, customs brokers, warehouses or others receiving or holding
cash, checks, Inventory, documents or instruments in which Lender holds a
security interest to deliver them to Lender and/or subject to Lender's order,
and if they shall come into Borrower's possession, to deliver them, upon
Lender's request, to Lender in their original form. Borrower shall also, at any
time and from time to time upon Lender's request, designate Lender as the
consignee on all bills of lading and other negotiable and non-negotiable
documents.
(h) Borrower hereby irrevocably authorizes and directs any issuer of a
Letter of Credit Accommodation to name Borrower as the account party therein and
to deliver to Lender all instruments, documents and other writings and property
received by issuer pursuant to the Letter of Credit Accommodations and to accept
and rely upon Lender's instructions and agreements with respect to all matters
arising in connection with the Letter of Credit
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Accommodations or the applications therefor. Nothing contained herein shall be
deemed or construed to grant Borrower any right or authority to pledge the
credit of Lender in any manner. Lender shall have no liability of any kind with
respect to any Letter of Credit Accommodation provided by an issuer other than
Lender unless Lender has duly executed and delivered to such issuer the
application or a guarantee or indemnification in writing with respect to such
Letter of Credit Accommodation. Borrower shall be bound by any interpretation
made in good faith by Lender, or any other issuer or correspondent under or in
connection with any Letter of Credit Accommodation or any documents, drafts or
acceptances thereunder, notwithstanding that such interpretation may be
inconsistent with any instructions of Borrower. Lender shall have the sole and
exclusive right and authority to, and Borrower shall not: (i) at any time an
Event of Default exists or has occurred and is continuing, (A) approve or
resolve any questions of non-compliance of documents, (B) give any instructions
as to acceptance or rejection of any documents or goods or (C) execute any and
all applications for steamship or airway guaranties, indemnities or delivery
orders, and (ii) at all times, (A) grant any extensions of the maturity of, time
of payment for, or time of presentation of, any drafts, acceptances, or
documents, and (B) agree to any amendments, renewals, extensions, modifications,
changes or cancellations of any of the terms or conditions of any of the
applications, Letter of Credit Accommodations, or documents, drafts or
acceptances thereunder or any letters of credit included in the Collateral.
Lender may take such actions either in its own name or in Borrower's name.
(i) Any rights, remedies, duties or obligations granted or undertaken
by Borrower to any issuer or correspondent in any application for any Letter of
Credit Accommodation, or any other agreement in favor of any issuer or
correspondent relating to any Letter of Credit Accommodation, shall be deemed to
have been granted or undertaken by Borrower to Lender. Any duties or obligations
undertaken by Lender to any issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement by Lender in favor of any
issuer or correspondent relating to any Letter of Credit Accommodation, shall be
deemed to have been undertaken by Borrower to Lender and to apply in all
respects to Borrower.
SECTION 3. INTEREST AND FEES
3.1 INTEREST.
(a) Borrower shall pay to Lender interest on the outstanding principal
amount of the Loans at the Interest Rate. All interest accruing hereunder on and
after the date of any Event of Default or termination or non-renewal hereof
shall be payable on demand.
(b) Borrower may from time to time request that Prime Rate Loans be
converted to Eurodollar Rate Loans or that any existing Eurodollar Rate Loans
continue for an additional Interest Period. Such request from Borrower shall
specify the amount of the Prime Rate Loans which will constitute Eurodollar Rate
Loans (subject to the limits set forth below) and the Interest Period to be
applicable to such Eurodollar Rate Loans. Subject to the terms and conditions
contained herein, three (3) Business Days after receipt by Lender of such a
request from Borrower, such Prime Rate Loans shall be converted to Eurodollar
Rate Loans or such
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Eurodollar Rate Loans shall continue, as the case may be, PROVIDED, THAT, (i) no
Event of Default, or act, condition or event which with notice or passage of
time or both would constitute an Event of Default shall exist or have occurred
and be continuing, (ii) no party hereto shall have sent any notice of
termination or non-renewal of this Agreement, (iii) Borrower shall have complied
with such customary procedures as are established by Lender and specified by
Lender to Borrower from time to time for requests by Borrower for Eurodollar
Rate Loans, (iv) no more than four (4) Interest Periods may be in effect at any
one time, (v) the aggregate amount of the Eurodollar Rate Loans must be in an
amount not less than US$3,000,000 or an integral multiple of US$1,000,000 in
excess thereof, (vi the maximum amount of the Eurodollar Rate Loans at any time
requested by Borrower shall not exceed the amount equal to eighty (80%) percent
of the lowest principal amount of the Revolving Loans which it is anticipated
will be outstanding during the applicable Interest Period, in each case as
determined by Lender (but with no obligation of Lender to make such Loans), and
(vii) Lender shall have determined that the Interest Period or Adjusted
Eurodollar Rate is available to Lender through the Reference Bank and can be
readily determined as of the date of the request for such Eurodollar Rate Loan
by Borrower. Any request by Borrower to convert Prime Rate Loans to Eurodollar
Rate Loans or to continue any existing Eurodollar Rate Loans shall be
irrevocable. Notwithstanding anything to the contrary contained herein, Lender
and Reference Bank shall not be required to purchase United States Dollar
deposits in the London interbank market or other applicable Eurodollar Rate
market to fund any Eurodollar Rate Loans, but the provisions hereof shall be
deemed to apply as if Lender and Reference Bank had purchased such deposits to
fund the Eurodollar Rate Loans.
(c) Any Eurodollar Rate Loans shall automatically convert to Prime Rate
Loans upon the last day of the applicable Interest Period, unless Lender has
received and approved a request to continue such Eurodollar Rate Loan at least
three (3) Business Days prior to such last day in accordance with the terms
hereof. Any Eurodollar Rate Loans shall, at Lender's option, upon notice by
Lender to Borrower, convert to Prime Rate Loans in the event that this Agreement
shall terminate or not be renewed. Borrower shall pay to Lender, upon demand by
Lender (or Lender may, at its option, charge any loan account of Borrower) any
amounts required to compensate Lender, the Reference Bank or any participant
with Lender for any loss (including loss of anticipated profits), cost or
expense incurred by such person, as a result of the conversion of Eurodollar
Rate Loans to Prime Rate Loans pursuant to any of the foregoing.
(d) Interest shall be payable by Borrower to Lender monthly in arrears not
later than the first day of each calendar month and shall be calculated on the
basis of a three hundred sixty (360) day year and actual days elapsed. The
interest rate on non-contingent Obligations (other than Eurodollar Rate Loans)
shall increase or decrease by an amount equal to each increase or decrease in
the Prime Rate effective on the first day of the month after any change in such
Prime Rate is announced based on the Prime Rate in effect on the last day of the
month in which any such change occurs. In no event shall charges constituting
interest payable by Borrower to Lender exceed the maximum amount or the rate
permitted under any applicable law or regulation, and if any such part or
provision of this Agreement is in contravention of any such law or regulation,
such part or provision shall be deemed amended to conform thereto.
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3.2 CLOSING FEE. Borrower shall pay to Lender as a closing fee the amount
of US$120,000, which shall be fully earned and payable as of the date hereof.
3.3 SERVICING FEE. Borrower shall pay to Lender monthly a servicing fee in
an amount equal to US$2,000 in respect of Lender's services for each month (or
part thereof) while this Agreement remains in effect and for so long thereafter
as any of the Obligations are outstanding, which fee shall be fully earned as of
and payable in advance on the date hereof and on the first day of each month
hereafter.
3.4 UNUSED LINE FEE. Borrower shall pay to Lender monthly an unused line
fee at a rate equal to three-eighths (3/8%) percent per annum calculated upon
the amount by which the Maximum Credit exceeds the average daily principal
balance of the outstanding Revolving Loans and Letter of Credit Accommodations
during the immediately preceding month (or part thereof) while this Agreement is
in effect and for so long thereafter as Lender may continue to make any Loans or
provide any Letter of Credit Accommodations (and including any payments by
Lender or on its behalf for the collection and enforcement of the Obligations
and for the protection, realization, preservation, maintenance or sale,
disposition or other realization upon any of the Collateral and including all
expenses, liabilities and advances incurred or made by Lender, in connection
therewith), which fee shall be payable on the first day of each month in
arrears.
3.5 CHANGES IN LAWS AND INCREASED COSTS OF LOANS.
(a) Notwithstanding anything to the contrary contained herein, all
Eurodollar Rate Loans shall, upon notice by Lender to Borrower, convert to Prime
Rate Loans in the event that (i) any change in applicable law or regulation (or
the interpretation or administration thereof) shall either (A) make it unlawful
for Lender, Reference Bank or any participant with Lender to make or maintain
Eurodollar Rate Loans or to comply with the terms hereof in connection with the
Eurodollar Rate Loans, or (B) shall result in the increase in the costs to
Lender, Reference Bank or any participant of making or maintaining any
Eurodollar Rate Loans by an amount deemed by Lender in good faith to be
material, or (C) reduce the amounts received or receivable by Lender in respect
thereof, by an amount deemed by Lender in good faith to be material or (ii) the
cost to Lender, Reference Bank or any participant of making or maintaining any
Eurodollar Rate Loans shall otherwise increase by an amount deemed by Lender in
good faith to be material. Borrower shall pay to Lender, upon demand by Lender
(or Lender may, at its option, charge any loan account of Borrower) any amounts
required to compensate Lender, the Reference Bank or any participant with Lender
for any loss (including loss of anticipated profits), cost or expense incurred
by such person as a result of the foregoing, including, without limitation, any
such loss, cost or expense incurred by reason of the liquidation or reemployment
of deposits or other funds acquired by such person to make or maintain the
Eurodollar Rate Loans or any portion thereof. A certificate of Lender setting
forth the basis for the determination of such amount necessary to compensate
Lender as aforesaid shall be delivered to Borrower and shall be conclusive,
absent manifest error.
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(b) If any payments or prepayments in respect of the Eurodollar Rate Loans
are received by Lender other than on the last day of the applicable Interest
Period (whether pursuant to acceleration, upon maturity or otherwise), including
any payments pursuant to the application of collections under Section 6.3 or any
other payments made with the proceeds of Collateral, Borrower shall pay to
Lender upon demand by Lender (or Lender may, at its option, charge any loan
account of Borrower) any amounts required to compensate Lender, the Reference
Bank or any participant with Lender for any additional loss (including loss of
anticipated profits), cost or expense incurred by such person as a result of
such prepayment or payment, including, without limitation, any loss, cost or
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by such person to make or maintain such Eurodollar Rate
Loans or any portion thereof.
SECTION 4. CONDITIONS PRECEDENT
4.1 CONDITIONS PRECEDENT TO INITIAL LOANS AND LETTER OF CREDIT
ACCOMMCONDITIONS PRECEDENT TO INITIAL LOANS AND LETTER OF CREDIT ACCOMMODATIONS.
Each of the following is a condition precedent to Lender making the initial
Loans and providing the initial Letter of Credit Accommodations hereunder:
(a) Lender shall have received, in form and substance reasonably
satisfactory to Lender, all documents as Lender may reasonably request to
evidence and effectuate the termination by First Union National Bank to Borrower
and Guarantors of its revolving credit financing arrangements with Borrower and
Guarantors.
(b) Lender shall have received evidence, in form and substance
satisfactory to Lender, that Lender has valid perfected and first priority
security interests in and liens upon the Collateral (other than the Term Loan
Collateral) (and as to the assets and properties of Quad Europe, a first ranking
fixed and floating charge as to all such assets and properties) and any other
property which is intended to be security for the Obligations or the liability
of any Obligor in respect thereof, subject only to the security interests and
liens permitted herein or in the other Financing Agreements;
(c) all requisite corporate action and proceedings in connection with
this Agreement and the other Financing Agreements shall be reasonably
satisfactory in form and substance to Lender, and Lender shall have received all
information and copies of all documents, including records of requisite
corporate action and proceedings which Lender may have reasonably requested in
connection therewith, such documents where requested by Lender or its counsel to
be certified by appropriate corporate officers or Governmental Authority;
(d) no material adverse change shall have occurred in the assets,
business or prospects of Borrower and Obligors since the date of Lender's latest
field examination and no change or event shall have occurred which would impair
the ability of Borrower or any Obligor to perform its obligations hereunder or
under any of the other Financing Agreements to which it is a party or of Lender
to enforce the Obligations or realize upon the Collateral;
(e) Lender shall have received, in form and substance satisfactory
to Lender, the Intercreditor Agreement;
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(f) Lender shall have received originals of the stock certificates
representing all of the issued and outstanding shares of the Capital Stock of
the Subsidiaries of Borrower incorporated under the laws of any State of the
United States of America, the United Kingdom, Mexico and Barbados, in each case
together with stock powers (or other appropriate instruments of transfer) duly
executed in blank with respect thereto;
(g) Lender shall have received, in form and substance satisfactory to
Lender, a guarantee and debenture by each of Quad Europe, Quad Systems Limited
and Quad Systems Holdings Limited in favor of Lender, with respect to the
Obligations of Borrower, duly authorized, executed and delivered by each of Quad
Europe, Quad Systems Limited and Quad Systems Holdings Limited;
(h) Lender shall have completed a field review of the Records and such
other information with respect to the Collateral as Lender may require to
determine the amount of Revolving Loans available to Borrower (including,
without limitation, current perpetual inventory records and/or roll-forwards of
Accounts and Inventory through the date of closing and test counts of the
Inventory in a manner satisfactory to Lender, together with such supporting
documentation as may be necessary or appropriate, and other documents and
information that will enable Lender to accurately identify and verify the
Collateral), the results of which each case shall be satisfactory to Lender, not
more than three (3) Business Days prior to the date hereof;
(i) Lender shall have received, in form and substance satisfactory to
Lender, all consents, waivers, acknowledgments and other agreements from third
persons which Lender may deem necessary or desirable in order to permit, protect
and perfect its security interests in and liens upon the Collateral or to
effectuate the provisions or purposes of this Agreement and the other Financing
Agreements, including, without limitation, Collateral Access Agreements by
owners and lessors of leased premises of Borrower and Quad Europe and by
warehouses at which Collateral is located;
(j) the Excess Availability as determined by Lender, as of the date
hereof (with Excess Availability calculated for this purpose without regard to
any past due trade payables or other obligations), shall be not less than
US$3,000,000 after giving effect to the initial Loans made or to be made and
Letter of Credit Accommodations issued or to be issued in connection with the
initial transactions hereunder;
(k) Lender shall have received, in form and substance satisfactory to
Lender, all agreements with the depository banks and Borrower and Quad Europe
with respect to the Blocked Accounts as Lender may require pursuant to Section
6.3 hereof, duly authorized, executed and delivered by such depository banks and
Borrower and Quad Europe;
(l) Lender shall have received and reviewed UCC search results for all
jurisdictions in which assets of Borrower are located and lien searches from the
appropriate registry in England for Quad Europe, which search results shall be
in form and substance satisfactory to Lender;
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(m) Lender shall have received evidence of insurance and loss payee
endorsements required hereunder and under the other Financing Agreements, in
form and substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee;
(n) Lender shall have received, in form and substance satisfactory to
Lender, such opinion letters of counsel to Borrower with respect to the
Financing Agreements, the security interests and liens of Lender with respect to
the Collateral (and as to assets and properties of Quad Europe, the fixed and
floating charge of Lender with respect thereto) and such other matters as Lender
may request; and
(o) the other Financing Agreements and all instruments and documents
hereunder and thereunder shall have been duly executed and delivered to Lender,
in form and substance satisfactory to Lender.
4.2 CONDITIONS PRECEDENT TO ALL LOANS AND LETTER OF CREDIT ACCOMMODATIONS.
Each of the following is an additional condition precedent to Lender making
Loans and/or providing Letter of Credit Accommodations to Borrower, including
the initial Loans and Letter of Credit Accommodations and any future Loans and
Letter of Credit Accommodations:
(a) all representations and warranties contained herein and in the
other Financing Agreements shall be true and correct in all material respects
with the same effect as though such representations and warranties had been made
on and as of the date of the making of each such Loan or providing each such
Letter of Credit Accommodation and after giving effect thereto, except to the
extent that such representations and warranties expressly relate solely to an
earlier date (in which case such representations and warranties shall have been
true and accurate on and as of such earlier date);
(b) no law, regulation, order, judgment or decree of any Governmental
Authority shall exist, and no action, suit, investigation, litigation or
proceeding shall be pending or threatened in any court or before any arbitrator
or Governmental Authority, which (i) purports to enjoin, prohibit, restrain or
otherwise affect (A) the making of the Loans or providing the Letter of Credit
Accommodations, or (B) the consummation of the transactions contemplated
pursuant to the terms hereof or the other Financing Agreements or (ii) has or
could reasonably be expected to have a material adverse effect on the assets or
business of Borrower or any Guarantor or would impair the ability of Borrower or
any Guarantor to perform its obligations hereunder or under any of the other
Financing Agreements or of Lender to enforce any Obligations or realize upon any
of the Collateral; and
(c) no Event of Default and no act, condition or event which, with
notice or passage of time or both, would constitute an Event of Default, shall
exist or have occurred and be continuing on and as of the date of the making of
such Loan or providing each such Letter of Credit Accommodation and after giving
effect thereto.
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SECTION 5. GRANT OF SECURITY INTEREST
To secure payment and performance of all Obligations, Borrower hereby
grants to Lender a continuing security interest in, a lien upon, and a right of
set off against, and hereby assigns to Lender as security, the following
property and interests in property of Borrower, whether now owned or hereafter
acquired or existing, and wherever located (together with all other collateral
security for the Obligations at any time granted to or held or acquired by
Lender, collectively, the "Collateral"):
5.1 Receivables;
5.2 all other present and future general intangibles (including
Intellectual Property and existing and future leasehold interests in equipment,
real estate and fixtures), chattel paper, documents, instruments, investment
property (including securities, whether certificated or uncertificated,
securities accounts, security entitlements, commodity contracts or commodity
accounts), letters of credit, bankers' acceptances and guaranties;
5.3 all present and future monies, securities and other investment
property, credit balances, deposits, deposit accounts and other property of
Borrower now or hereafter held or received by or in transit to Lender or its
Affiliates or at any other depository or other institution from or for the
account of Borrower, whether for safekeeping, pledge, custody, transmission,
collection or otherwise, and all present and future liens, security interests,
rights, remedies, title and interest in, to and in respect of Receivables and
other Collateral, including (a) rights and remedies under or relating to
guaranties, contracts of suretyship, letters of credit and credit and other
insurance related to the Collateral, (b) rights of stoppage in transit,
replevin, repossession, reclamation and other rights and remedies of an unpaid
vendor, lienor, secured party, (c) goods described in invoices, documents,
contracts or instruments with respect to, or otherwise representing or
evidencing, Receivables or other Collateral, including returned, repossessed and
reclaimed goods, and (d) deposits by and property of account debtors or other
persons securing the obligations of account debtors;
5.4 Inventory;
5.5 Equipment;
5.6 Real Property;
5.7 Records; and
5.8 all products and proceeds of the foregoing, in any form, including
insurance proceeds and all claims against third parties for loss or damage to or
destruction of any or all of the foregoing.
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SECTION 6. COLLECTION AND ADMINISTRATION
6.1 BORROWER'S LOAN ACCOUNT. Lender shall maintain one or more loan
account(s) on its books in which shall be recorded (a) all Loans, Letter of
Credit Accommodations and other Obligations and the Collateral, (b) all payments
made by or on behalf of Borrower and (c) all other appropriate debits and
credits as provided in this Agreement, including fees, charges, costs, expenses
and interest. All entries in the loan account(s) shall be made in accordance
with Lender's customary practices as in effect from time to time.
6.2 STATEMENTS. Lender shall render to Borrower each month a statement
setting forth the balance in the Borrower's loan account(s) maintained by Lender
for Borrower pursuant to the provisions of this Agreement, including principal,
interest, fees, costs and expenses. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent manifest errors or omissions,
be considered correct and deemed accepted by Borrower and conclusively binding
upon Borrower as an account stated unless and except to the extent that Lender
receives a written notice from Borrower of any specific exceptions of Borrower
thereto within sixty (60) days after the date such statement has been mailed by
Lender. Until such time as Lender shall have rendered to Borrower a written
statement as provided above, the balance in Borrower's loan account(s) shall be
presumptive evidence of the amounts due and owing to Lender by Borrower.
6.3 COLLECTION OF ACCOUNTS.
(a) Borrower shall establish and maintain, at its expense, and shall
cause Quad Europe to establish and maintain, at its expense, blocked accounts or
lockboxes and related blocked accounts (in either case, "Blocked Accounts"), as
Lender may specify, with such banks as are acceptable to Lender into which
Borrower and Quad Europe shall promptly deposit and direct their respective
account debtors to directly remit all payments on Receivables and all payments
constituting proceeds of Inventory or other Collateral in the identical form in
which such payments are made, whether by cash, check or other manner. The banks
at which the Blocked Accounts are established shall enter into an agreement, in
form and substance satisfactory to Lender, providing that all items received or
deposited in the Blocked Accounts are the property of Lender, that the
depository bank has no lien upon, or right to setoff against, the Blocked
Accounts, the items received for deposit therein, or the funds from time to time
on deposit therein and that the depository bank will wire, or otherwise
transfer, in immediately available funds, on a daily basis, all funds received
or deposited into the Blocked Accounts to such bank account of Lender as Lender
may from time to time designate for such purpose ("Payment Account"). All items
received or deposited in the Blocked Accounts of Quad Europe shall be
transferred on a daily basis to another Blocked Account in the United States and
from such Blocked Account in the United States shall be transferred on a daily
basis to the Payment Account. Borrower and Quad Europe agree that all payments
made to such Blocked Accounts or other funds received and collected by Lender,
whether in respect of the Receivables, as proceeds of Inventory or other
Collateral or otherwise shall be treated as payments to Lender in respect of the
Obligations and therefore shall constitute the property of Lender to the extent
of the then outstanding Obligations.
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(b) For purposes of calculating the amount of the Loans available to
Borrower, such payments will be applied (conditional upon final collection) to
the Obligations on the Business Day of receipt by Lender of immediately
available funds in the Payment Account provided such payments and notice thereof
are received in accordance with Lender's reasonable, usual and customary
practices as in effect from time to time and within sufficient time to credit
Borrower's loan account on such day, and if not, then on the next Business Day.
For the purposes of calculating interest on the Obligations, such payments or
other funds received will be applied (conditional upon final collection) to the
Obligations one (1) Business Day following the date of receipt of immediately
available funds by Lender in the Payment Account provided such payments or other
funds and notice thereof are received in accordance with Lender's reasonable,
usual and customary practices as in effect from time to time and within
sufficient time to credit Borrower's loan account on such day, and if not, then
on the next Business Day.
(c) Borrower, Quad Europe and all of their respective shareholders,
directors, employees, agents, Subsidiaries or other Affiliates shall, acting as
trustee for Lender, receive, as the property of Lender, any monies, checks,
notes, drafts or any other payment relating to and/or proceeds of Accounts or
other Collateral which come into their possession or under their control and
immediately upon receipt thereof, shall deposit or cause the same to be
deposited in the Blocked Accounts, or remit the same or cause the same to be
remitted, in kind, to Lender. In no event shall the same be commingled with
Borrower's or Quad Europe's own funds. Borrower and Quad Europe agree to
reimburse Lender on demand for any amounts owed or paid to any bank at which a
Blocked Account is established or any other bank or person involved in the
transfer of funds to or from the Blocked Accounts arising out of Lender's
payments to or indemnification of such bank or person. The obligations of
Borrower and Quad Europe to reimburse Lender for such amounts pursuant to this
Section 6.3 shall survive the termination or non-renewal of this Agreement.
6.4 PAYMENTS. All Obligations shall be payable to the Payment Account as
provided in Section 6.3 or such other place as Lender may designate from time to
time. Lender shall apply payments received or collected from Borrower or for the
account of Borrower (including the monetary proceeds of collections or of
realization upon any Collateral) as follows: FIRST, to pay any fees, indemnities
or expense reimbursements then due to Lender from Borrower; SECOND, to pay
interest due in respect of any Loans; THIRD, to pay principal due in respect of
the Loans; and FOURTH, to pay or prepay any other Obligations whether or not
then due, in such order and manner as Lender determines. Notwithstanding
anything to the contrary contained in this Agreement, unless so directed by
Borrower, or unless an Event of Default shall exist or have occurred and be
continuing, Lender shall not apply any payments which it receives to any
Eurodollar Rate Loans, except on the expiration date of the Interest Period
applicable to any such Eurodollar Rate Loans. Upon the request of Borrower,
amounts received by Lender from Borrower pursuant to the foregoing which are not
applied to the Obligations pursuant to the provisions of this Section 6.4 (or
held as cash collateral as provided herein) shall, upon the request of Borrower
received by Lender on or before 11:00 a.m. New York, New York time on any
Business Day, be remitted to
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Borrower, PROVIDED, THAT, no Event of Default, or act, condition or event which
with notice or passage of time or both would constitute an Event of Default,
exists or has occurred and is continuing. To the extent Lender receives any
payments or collections in respect of the Obligations in a currency other than
US Dollars, Lender may, at its option (but is not obligated to), convert such
other currency to US Dollars at the Exchange Rate on such date and in such
market as Lender may reasonably select (regardless as to whether such rate is
the best available rate). Borrower shall pay the costs of such conversion (or
Lender may, at its option, charge such costs to the loan account of Borrower
maintained by Lender). Payments and collections received in any currency other
than in which any outstanding Obligations are denominated will be accepted
and/or applied at the discretion of Lender. At Lender's option, all principal,
interest, fees, costs, expenses and other charges provided for in this Agreement
or the other Financing Agreements may be charged directly to the loan account(s)
of Borrower. Borrower shall make all payments to Lender on the Obligations free
and clear of, and without deduction or withholding for or on account of, any
setoff, counterclaim or defense of any kind. If after receipt of any payment of,
or proceeds of Collateral applied to the payment of, any of the Obligations,
Lender is required to surrender or return such payment or proceeds to any Person
for any reason, then the Obligations intended to be satisfied by such payment or
proceeds shall be reinstated and continue and this Agreement shall continue in
full force and effect as if such payment or proceeds had not been received by
Lender. Borrower shall be liable to pay to Lender, and does hereby indemnify and
hold Lender harmless for the amount of any payments or proceeds surrendered or
returned. This Section 6.4 shall remain effective notwithstanding any contrary
action which may be taken by Lender in reliance upon such payment or proceeds.
This Section 6.4 shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
6.5 TAXES.
(a) Any and all payments by Borrower and Quad Europe to Lender under
this Agreement and any of the other Financing Agreements shall be made free and
clear of, and without deduction or withholding for any Taxes. In addition,
Borrower shall pay all Other Taxes (or Lender may, at its option, pay such Other
Taxes and charge the loan account of any Borrower for such amounts so paid).
(b) Borrower and Quad Europe shall indemnify and hold harmless Lender
for the full amount of Taxes or Other Taxes paid by Lender (including any Taxes
or Other Taxes imposed by any jurisdiction on amounts payable under this
Section, but not including Other Taxes that arise as a result of Lender's
arrangements with the applicable taxing jurisdiction, if any, and not as a
result of this Agreement) and any liability (including penalties, interest and
expenses (including reasonable attorney's fees and expenses) other than those
resulting solely from a failure by Lender to pay any Taxes or Other Taxes which
it is required to pay and for which it received an indemnity payment) arising
therefrom or with respect thereto, whether or not such Taxes or Other Taxes were
correctly or legally asserted by the relevant Governmental Authority. Payment
under this indemnification shall be made within ten (10) days after the date
Lender makes written demand therefor. If such Taxes or Other Taxes were not
correctly or legally asserted, Lender shall, upon Borrower's request and at
Borrower's expense, provide such documents to Borrower, in form and substance
satisfactory to Lender, as Borrower may reasonably request, to enable Borrower
to contest such Taxes or Other Taxes pursuant to appropriate proceedings then
available to Borrower (so long as providing such documents shall not, in the
good faith determination of Lender, have a reasonable likelihood of resulting in
any liability of Lender).
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(c) If Borrower or Quad Europe shall be required by law to deduct or
withhold any Taxes or Other Taxes from or in respect of any sum payable
hereunder to Lender, then:
(i) the sum payable shall be increased as necessary so that after
making all required deductions and withholdings (including deductions and
withholdings applicable to additional sums payable under this Section) Lender
receives an amount equal to the sum it would have received had no such
deductions or withholdings been made;
(ii) Borrower or Quad Europe shall make such deductions and
withholdings;
(iii) Borrower or Quad Europe shall pay the full amount deducted
or withheld to the relevant taxing authority or other authority in accordance
with applicable law; and
(iv) Borrower or Quad Europe shall also pay to Lender, at the time
interest is paid, all additional amounts which Lender specifies as necessary to
preserve the after-tax yield Lender would have received if such Taxes or Other
Taxes had not been imposed.
(d) Within thirty (30) days after the date of any payment by Borrower
or Quad Europe of Taxes or Other Taxes, Borrower or Quad Europe shall furnish to
Lender the original or a certified copy of a receipt evidencing payment thereof,
or other evidence of payment satisfactory to Lender.
(e) If Borrower or Quad Europe otherwise would be required to pay
additional amounts to Lender pursuant to subsection (c) of this Section, then
upon Borrower's written request Lender shall use reasonable efforts at
Borrower's expense (consistent with legal and regulatory restrictions) to file
such forms or documents and take such other action, including changing the
jurisdiction of its lending office so as to eliminate any such additional
payment by Borrower or Quad Europe which may thereafter accrue.
6.6 AUTHORIZATION TO MAKE LOANS. Lender is authorized to make the Loans and
provide the Letter of Credit Accommodations based upon telephonic or other
instructions received from anyone purporting to be an officer of Borrower or
other authorized person or, at the discretion of Lender, if such Loans are
necessary to satisfy any Obligations. All requests for Loans or Letter of Credit
Accommodations hereunder shall specify the date on which the requested advance
is to be made or Letter of Credit Accommodations established (which day shall be
a Business Day) and the amount of the requested Loan. Requests received after
11:00 a.m. New York, New York time on any day shall be deemed to have been made
as of the opening of business on the immediately following Business Day. All
Loans and Letter of Credit Accommodations under this Agreement shall be
conclusively presumed to have been made to, and at the request of and for the
benefit of, Borrower when deposited to the credit of Borrower or otherwise
disbursed or established in accordance with the instructions of Borrower or in
accordance with the terms and conditions of this Agreement.
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6.7 USE OF PROCEEDS. Borrower shall use the initial proceeds of the Loans
provided by Lender to Borrower hereunder only for: (a) payment to each of the
persons listed in the disbursement direction letter furnished by Borrower to
Lender on or about the date hereof and (b) costs, expenses and fees in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Financing Agreements. All other Loans made or Letter of
Credit Accommodations provided by Lender to Borrower pursuant to the provisions
hereof shall be used by Borrower only for general operating, working capital and
other proper corporate purposes of Borrower not otherwise prohibited by the
terms hereof (including loans and other transactions with Affiliates permitted
under Section 9.12 hereof). None of the proceeds will be used, directly or
indirectly, for the purpose of purchasing or carrying any margin security or for
the purposes of reducing or retiring any indebtedness which was originally
incurred to purchase or carry any margin security or for any other purpose which
might cause any of the Loans to be considered a "purpose credit" within the
meaning of Regulation U of the Board of Governors of the Federal Reserve System,
as amended.
SECTION 7. COLLATERAL REPORTING AND COVENANTS
7.1 COLLATERAL REPORTING.
(a) Borrower shall provide, and shall cause Quad Europe to provide,
Lender with the following documents in a form reasonably satisfactory to Lender:
(i) on a regular basis as reasonably required by Lender, a
schedule of sales made, credits issued and cash received (and including with
each such schedule, details of any Receivables which have become, or are
purported to be by the account debtor with respect thereto or otherwise, subject
to any prohibitions or restrictions on charges or assignments);
(ii) on a monthly basis or more frequently as Lender may request,
(A) agings of accounts payable (including the status of payments to owners and
lessors of the leased premises of Borrower and Quad Europe and warehouses and
processors used by Borrower and Quad Europe, (B) agings of accounts receivable
(together with a reconciliation to the previous month's aging and to its general
ledger), (C) perpetual inventory reports by category and location, (D) a report
of amounts of Inventory held by third parties on consignment, as provided to
Borrower by such third parties (with a reconciliation to the perpetual inventory
report of Borrower), (E) inventory reports broken down into the following
categories: Finished Goods, Work-In-Process Finished Goods, Raw Components,
Development and Quad Lease inventory (as such categories are defined in the ETV
Appraisal), (F) a report of the preferential creditors of Quad Europe under the
laws of the United Kingdom substantially in the form of Exhibit B hereto, (G) a
list of any creditors of Quad Europe that impose retention of title provisions
as part of its condition of supply to Borrower, (H) a report, in form
satisfactory to Lender, of Borrowers' aggregate liability under the Copelco
Recourse Agreements, (I) a report of amounts of Inventory located at customer
locations pursuant to lease or rental arrangements with Borrower or Quad Europe,
as lessor, amounts of Inventory located at customer locations for beta-testing,
equipment evaluations or as temporary replacement machines and amounts of
Inventory located at trade shows and other exhibitions and (J) a report as to
the status of the matters referred to in the letter dated January 7, 2000 from
Grant Hanessian, Esq. to Edward D. Rodgers, Esq., which letter is annexed hereto
as Exhibit 7.1(a)(ii)(J);
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(iii) upon Lender's request, (A) copies of customer statements and
credit memos, remittance advices and reports, and copies of deposit slips and
bank statements, (B) copies of shipping and delivery documents, and (C) copies
of purchase orders, invoices and delivery documents for Inventory and Equipment
acquired by Borrower or Quad Europe, as the case may be;
(iv) such other reports as to the Accounts, Inventory and other
Collateral as Lender shall reasonably request from time to time; and
(b) All of the documents, reports and schedules provided by Borrower
to Lender hereunder for Receivables payable in any currency other than US
Dollars and Inventory located outside the United States of America shall set
forth the US Dollar Equivalent for the amount of the Receivables and Value of
the Inventory included in any such documents, reports or schedules.
(c) If any of Borrower's or Quad Europe's records or reports of the
Accounts, Inventory or other Collateral are prepared or maintained by an
accounting service, contractor, shipper or other agent, Borrower hereby
irrevocably authorizes, and shall cause Quad Europe to authorize, such service,
contractor, shipper or agent to deliver such records, reports, and related
documents to Lender and to follow Lender's instructions with respect to further
services at any time that an Event of Default exists or has occurred and is
continuing.
7.2 ACCOUNTS COVENANTS.
(a) Borrower shall notify, and shall cause Quad Europe to notify,
Lender promptly of: (i) any material delay in Borrower's or Quad Europe's
performance of any of its obligations to any account debtor or the assertion of
any material claims, offsets, defenses or counterclaims by any account debtor,
or any material disputes with account debtors, or any settlement, adjustment or
compromise thereof, (ii) all material adverse information relating to the
financial condition of any account debtor of which Borrower becomes aware, (iii)
any event or circumstance which, to Borrower's or Quad Europe's knowledge, would
cause Lender to consider any then existing Accounts as no longer constituting
Eligible Accounts and (iv) details of any creditor of Quad Europe whose ordinary
terms of business include title retention provisions which are not already
specified in Schedule 8.17 hereto. No credit, discount, allowance or extension
or agreement for any of the foregoing shall be granted to any account debtor
without Lender's consent, except in the ordinary course of Borrower's or Quad
Europe's business, as the case may be. So long as no Event of Default exists or
has occurred and is continuing, Borrower and Quad Europe may settle, adjust or
compromise any claim, offset, counterclaim or dispute with any account debtor.
At any time that an Event of Default exists or has occurred and is continuing,
Lender shall, at its option, have the exclusive right to settle, adjust or
compromise any claim, offset, counterclaim or dispute with account debtors or
grant any credits, discounts or allowances.
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(b) Without limiting the obligation of Borrower or Quad Europe to
deliver any other information to Lender, Borrower shall promptly report, and
shall cause Quad Europe to promptly report, to Lender any return of Inventory by
any one account debtor if the Inventory so returned in such case has a value in
excess of US$100,000. At any time that Inventory is returned, reclaimed or
repossessed, the Account (or portion thereof) which arose from the sale of such
returned, reclaimed or repossessed Inventory shall not be deemed an Eligible
Account. In the event any account debtor returns Inventory when an Event of
Default exists or has occurred and is continuing, Borrower shall, or shall cause
Quad Europe to, as the case may be, upon Lender's request, (i) hold the returned
Inventory in trust for Lender, (ii) segregate all returned Inventory from all of
its other property, (iii) dispose of the returned Inventory solely according to
Lender's instructions, and (iv) not issue any credits, discounts or allowances
with respect thereto without Lender's prior written consent.
(c) With respect to each Account: (i) the amounts shown on any invoice
delivered to Lender or schedule thereof delivered to Lender shall be true and
complete in all material respects, (ii) no payments shall be made thereon except
payments immediately delivered to Lender pursuant to the terms of this
Agreement, (iii) no credit, discount, allowance or extension or agreement for
any of the foregoing shall be granted to any account debtor except as reported
to Lender in accordance with this Agreement and except for credits, discounts,
allowances or extensions made or given in the ordinary course of Borrower's or
Quad Europe's business, as the case may be, in accordance with practices and
policies previously disclosed to Lender, (iv) there shall be no material
setoffs, deductions, contras, defenses, counterclaims or disputes existing or
asserted with respect thereto except as reported to Lender in accordance with
the terms of this Agreement, (v) none of the transactions giving rise thereto
will violate any applicable laws or regulations, all documentation relating
thereto will be legally sufficient under such laws and regulations and all such
documentation will be legally enforceable in accordance with its terms.
(d) Lender shall have the right at any time or times, in Lender's name
or in the name of a nominee of Lender, to verify the validity, amount or any
other matter relating to any Account or other Collateral, by mail, telephone,
facsimile transmission or otherwise.
(e) Borrower shall deliver, and cause Quad Europe to deliver, to
Lender, with appropriate endorsement and assignment, with full recourse to
Borrower or Quad Europe, as the case may be, all chattel paper and instruments
which Borrower or Quad Europe now owns or may at any time acquire immediately
upon Borrower's or Quad Europe's receipt thereof, except as Lender may otherwise
agree.
(f) Lender may, at any time or times that an Event of Default exists
or has occurred and is continuing, (i) notify any or all account debtors that
the Accounts have been assigned to Lender and that Lender has a security
interest therein and Lender may direct any or all accounts debtors to make
payment of Accounts directly to Lender, (ii) extend the time of payment of,
compromise, settle or adjust for cash, credit, return of merchandise or
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otherwise, and upon any terms or conditions, any and all Accounts or other
obligations included in the Collateral and thereby discharge or release the
account debtor or any other party or parties in any way liable for payment
thereof without affecting any of the Obligations, (iii) demand, collect or
enforce payment of any Accounts or such other obligations, but without any duty
to do so, and Lender shall not be liable for its failure to collect or enforce
the payment thereof nor for the negligence of its agents or attorneys with
respect thereto and (iv) take whatever other action Lender may deem in good
faith to be necessary or desirable for the protection of its interests. At any
time that an Event of Default exists or has occurred and is continuing, at
Lender's request, all invoices and statements sent to any account debtor shall
state that the Accounts and such other obligations have been assigned to Lender
and are payable directly and only to Lender and Borrower shall deliver, or cause
Quad Europe to deliver, to Lender such originals of documents evidencing the
sale and delivery of goods or the performance of services giving rise to any
Accounts as Lender may require.
7.3 INVENTORY COVENANTS. With respect to the Inventory: (a) Borrower shall
at all times maintain, and shall cause Quad Europe to at all times maintain,
inventory records reasonably satisfactory to Lender, keeping correct and
accurate records itemizing and describing the kind, type, quality and quantity
of Inventory, Borrower's or Quad Europe's cost therefor and daily withdrawals
therefrom and additions thereto; (b) Borrower shall cause Quad Europe to
conduct, a physical count of its respective Inventory at least once each year,
but at any time or times as Lender may request on or after an Event of Default,
and promptly following such physical inventory count shall cause Quad Europe to
supply Lender with a report in the form and with such specificity as may be
reasonably satisfactory to Lender concerning such physical count; (c) Borrower
shall conduct cycle counting of Inventory, PROVIDED, THAT, at the request of
Lender, a physical count of the Inventory of Borrower shall be conducted by
Borrower at least once each year, but at any time or times as Lender may request
on or after an Event of Default, and promptly following such physical inventory
shall supply Lender with a report in the form and with such specificity as may
be reasonably satisfactory to Lender concerning such physical count; (d)
Borrower shall not, and shall cause Quad Europe not to, remove any Inventory
from the locations set forth or permitted herein, without the prior written
consent of Lender, except (i) for sales of Inventory in the ordinary course of
Borrower's or Quad Europe's business, (ii) to move Inventory directly from one
location set forth or permitted herein to another such location, (iii) for
Inventory shipped from the manufacturer thereof to Borrower or Quad Europe which
is in transit to the locations set forth or permitted herein and (iv) upon at
least five (5) days prior written notice to Lender (A) to move Inventory to
customer locations pursuant to such customer's lease or rental arrangements with
Borrower, as lessor, in the ordinary course of business or to customer locations
for beta-testing, equipment evaluations or as temporary replacement machines in
the ordinary course of business, or (B) for Inventory to be used at trade shows
and other exhibitions in the ordinary course of business, PROVIDED, THAT, (1)
such Inventory that is moved or relocated to such customer or trade show
locations pursuant to this Section 7.3(d)(iv) shall be excluded from Eligible
Inventory, (2) the aggregate Value of such Inventory located at customer
locations or trade show locations pursuant to this Section 7.3(d)(iv) shall not
exceed, at any one time, $3,000,000, and (3) Borrower files UCC-1 financing
statements in the appropriate jurisdictions evidencing customer, as debtor
lessee and Borrower, as lessor, in form and substance satisfactory to Lender,
which are duly assigned to Lender and in respect of the
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customer lease arrangements or Inventory that is moved to trade show or
exhibition locations, Lender has filed UCC-1 financing statements, naming
Borrower, as debtor and Lender, as secured party against the Collateral in the
appropriate jurisdiction, PROVIDED, THAT, Borrower shall be obligated to file
such UCC-1 financing statements only in the event that the aggregate Value of
such Inventory located at any particular customer location or trade show
location (other than trade shows in the State of California) pursuant to this
Section 7.3(d)(iv) exceeds $30,000; (e) upon Lender's request, Borrower shall,
and shall cause Quad Europe to, at Borrower's expense, no less than twice in any
twelve (12) month period, but at any time or times as Lender may request on or
after an Event of Default, deliver or cause to be delivered to Lender written
reports or appraisals as to the Inventory in form, scope and methodology
reasonably acceptable to Lender and by an appraiser reasonably acceptable to
Lender, addressed to Lender and upon which Lender is expressly permitted to
rely; (f) Borrower shall, and shall cause Quad Europe to, produce, use, store
and maintain the Inventory with all reasonable care and caution and in
accordance with applicable standards of any insurance and in conformity with
applicable laws (including the requirements of the Federal Fair Labor Standards
Act of 1938, as amended and all rules, regulations and orders related thereto);
(g) Borrower assumes all responsibility and liability arising from or relating
to the production, use, sale or other disposition of the Inventory; (h) Borrower
shall not, and shall cause Quad Europe not to, sell Inventory to any customer on
approval, or any other basis which entitles the customer to return or may
obligate Borrower to repurchase such Inventory other than pursuant to Borrower's
arrangements with Copelco as set forth in the Copelco Recourse Agreements, in
effect on the date hereof; (i) Borrower shall keep the Inventory in good and
marketable condition; and (j) Borrower shall not, and shall cause Quad Europe
not to, without prior written notice to Lender, acquire or accept any Inventory
on consignment or approval.
7.4 EQUIPMENT AND REAL PROPERTY COVENANTS. With respect to the Equipment
and Real Property: (a) upon Lender's request, Borrower shall, at its expense, no
more than once in any twelve (12) month period, but at any time or times as
Lender may request on or after an Event of Default, deliver or cause to be
delivered to Lender written reports or appraisals as to the Equipment and/or the
Real Property (other than leased Real Property) in form, scope and methodology
reasonably acceptable to Lender and by an appraiser reasonably acceptable to
Lender, addressed to Lender and upon which Lender is expressly permitted to
rely; (b) Borrower shall keep the Equipment in good order, repair, running and
marketable condition (ordinary wear and tear excepted); (c) Borrower shall use
the Equipment and Real Property with all reasonable care and caution and in
accordance with applicable standards of any insurance and in material conformity
with all applicable laws; (d) Borrower shall not remove any Equipment from the
locations set forth or permitted herein, except to the extent necessary to have
any Equipment replaced (to the extent permitted under Section 9.7(b) herein),
repaired or maintained in the ordinary course of the business of Borrower or to
move Equipment directly from one location set forth or permitted herein to
another such location and except for the movement of motor vehicles or other
portable Equipment used by or for the benefit of Borrower in the ordinary course
of business; (e) the Equipment is now and shall remain personal property and
Borrower shall not permit any of the Equipment to be or become a part of or
affixed to real property; and (f) Borrower assumes all responsibility and
liability arising from the use of the Equipment and Real Property.
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7.5 POWER OF ATTORNEY. Borrower hereby irrevocably designates and appoints
Lender (and all persons designated by Lender) as Borrower's true and lawful
attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name, to: (a)
at any time an Event of Default has occurred and is continuing (i) demand
payment on Receivables or other Collateral, (ii) enforce payment of Receivables
by legal proceedings or otherwise, (iii) exercise all of Borrower's rights and
remedies to collect any Receivable or other Collateral, (iv) sell or assign any
Receivable upon such terms, for such amount and at such time or times as the
Lender deems advisable, (v) settle, adjust, compromise, extend or renew an
Account, (vi) discharge and release any Receivable, (vii) prepare, file and sign
Borrower's name on any proof of claim in bankruptcy or other similar document
against an account debtor other obligor in respect of any Receivables or other
Collateral, (viii) notify the post office authorities to change the address for
delivery of remittances from account debtors or other obligors in respect of
Receivables or other proceeds of Collateral to an address designated by Lender,
and open and dispose of all mail addressed to Borrower and handle and store all
mail relating to the Collateral; and (ix) do all acts and things which are
necessary, in Lender's determination, to fulfill Borrower's obligations under
this Agreement and the other Financing Agreements and (b) at any time to (i)
take control in any manner of any item of payment in respect of Receivables or
constituting Collateral or otherwise received in or for deposit in the Blocked
Accounts or otherwise received by Lender, (ii) have access to any lockbox or
postal box into which remittances from account debtors or other obligors in
respect of Receivables or other proceeds of Collateral are sent or received,
(iii) endorse Borrower's name upon any items of payment in respect of
Receivables or constituting Collateral or otherwise received by Lender and
deposit the same in Lender's account for application to the Obligations, (iv)
endorse Borrower's name upon any chattel paper, document, instrument, invoice,
or similar document or agreement relating to any Receivable or any goods
pertaining thereto or any other Collateral, including any warehouse or other
receipts, or bills of lading and other negotiable or non-negotiable documents,
(v) clear Inventory the purchase of which was financed with Letter of Credit
Accommodations through U.S. Customs in Borrower's name, Lender's name or the
name of Lender's designee, and to sign and deliver to customs officials powers
of attorney in Borrower's name for such purpose, and to complete in Borrower's
or Lender's name, any order, sale or transaction, obtain the necessary documents
in connection therewith and collect the proceeds thereof, (vi) sign Borrower's
name on any verification of Receivables and notices thereof to account debtors
or other obligors in respect thereof and (vii) execute in Borrower's name and
file any UCC financing statements or amendments thereto. Borrower hereby
releases Lender and its officers, employees and designees from any liabilities
arising from any act or acts under this power of attorney and in furtherance
thereof, whether of omission or commission, except as a result of Lender's own
gross negligence or wilful misconduct as determined pursuant to a final
non-appealable order of a court of competent jurisdiction.
7.6 RIGHT TO CURE. Lender may, at its option, upon notice to Borrower, (a)
cure any default by Borrower under any material agreement with a third party
which affects the Collateral, its value or the ability of Lender to collect,
sell or otherwise dispose of the Collateral or the rights and remedies of Lender
therein or the ability of Borrower to perform its obligations under the other
Financing Agreements, (b) pay or bond on appeal any judgment entered against
Borrower, (c) discharge taxes, liens, security interests or other encumbrances
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at any time levied on or existing with respect to the Collateral and (d) pay any
amount, incur any expense or perform any act which, in Lender's good faith
judgment, is necessary or appropriate to preserve, protect, insure or maintain
the Collateral and the rights of Lender with respect thereto. Lender may add any
amounts so expended to the Obligations and charge Borrower's account therefor,
such amounts to be repayable by Borrower on demand. Lender shall be under no
obligation to effect such cure, payment or bonding and shall not, by doing so,
be deemed to have assumed any obligation or liability of Borrower. Any payment
made or other action taken by Lender under this Section shall be without
prejudice to any right to assert an Event of Default hereunder and to proceed
accordingly.
7.7 ACCESS TO PREMISES. From time to time as requested by Lender, at the
cost and expense of Borrower, (a) Lender or its designee shall have complete
access to all of Borrower's premises during normal business hours and after
written notice to Borrower, or at any time and without notice to Borrower if an
Event of Default exists or has occurred and is continuing, for the purposes of
inspecting, verifying and auditing the Collateral and all of Borrower's and Quad
Europe's books and records, including the Records, and (b) Borrower and Quad
Europe shall promptly furnish to Lender such copies of such books and records or
extracts therefrom as Lender may request, and (c) Lender or its designee may use
during normal business hours such of Borrower's and Quad Europe's personnel,
equipment, supplies and premises as may be reasonably necessary for the
foregoing and if an Event of Default exists or has occurred and is continuing
for the collection of Accounts and realization of other Collateral.
SECTION 8. REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender the following (which
shall survive the execution and delivery of this Agreement), the truth and
accuracy of which are a continuing condition of the making of Loans and
providing Letter of Credit Accommodations by Lender to Borrower:
8.1 CORPORATE EXISTENCE, POWER AND AUTHORITY; SUBSIDIARIES. Borrower is a
corporation duly organized and in good standing under the laws of its state of
incorporation and is duly qualified as a foreign corporation and in good
standing in all states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification
necessary, except for those jurisdictions in which the failure to so qualify
would not have a material adverse effect on Borrower's financial condition,
results of operation or business or the rights of Lender in or to any of the
Collateral. The execution, delivery and performance of this Agreement, the other
Financing Agreements and the transactions contemplated hereunder and thereunder
are all within Borrower's corporate powers, have been duly authorized and are
not in contravention of law or the terms of Borrower's certificate of
incorporation, by-laws, or other organizational documentation, or any indenture,
agreement or undertaking to which Borrower is a party or by which Borrower or
its property are bound. This Agreement and the other Financing Agreements
constitute legal, valid and binding obligations of Borrower enforceable in
accordance with their respective terms. Borrower does not have any Subsidiaries
except as set forth on the Information Certificate.
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8.2 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. All financial
statements relating to Borrower which have been or may hereafter be delivered by
Borrower to Lender have been prepared in accordance with GAAP and fairly present
in all material respects the financial condition and the results of operation of
Borrower as at the dates and for the periods set forth therein. Except as
disclosed in any interim financial statements furnished by Borrower to Lender
prior to the date of this Agreement, there has been no material adverse change
in the assets, liabilities, properties and condition, financial or otherwise, of
Borrower, since the date of the most recent audited financial statements
furnished by Borrower to Lender prior to the date of this Agreement.
8.3 CHIEF EXECUTIVE OFFICE; COLLATERAL LOCATIONS. The chief executive
office of Borrower and Borrower's Records concerning Accounts are located only
at the address set forth on the signature page hereto and its only other places
of business and the only other locations of Collateral, if any, are set forth on
the Information Certificate, subject to the right of Borrower to establish new
locations in accordance with Section 9.2 below and, with respect to Inventory,
subject to the right to relocate such Inventory to such customer locations as
Borrower is permitted pursuant to Section 7.3(d)(iv) hereof. The Information
Certificate correctly identifies any of such locations which are not owned by
Borrower and sets forth the owners and/or operators thereof.
8.4 PRIORITY OF LIENS; TITLE TO PROPERTIES. The security interests and
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and security interests in
and upon the Collateral subject only to the liens indicated on Schedule 8.4
hereto and the other liens permitted under Section 9.8 hereof. Borrower has good
and marketable title to all of its properties and assets subject to no liens,
mortgage, pledges, security interests, encumbrances or charges of any kind,
except those granted to Lender and such others as are specifically listed on
Schedule 8.4 hereto or permitted under Section 9.8 hereof.
8.5 TAX RETURNS. Borrower has filed, or caused to be filed, and has caused
each of its Subsidiaries to file in a timely manner all tax returns, reports and
declarations which are required to be filed by it. All information in such tax
returns, reports and declarations is complete and accurate in all material
respects. Borrower has paid or caused to be paid all taxes due and payable or
claimed due and payable in any assessment received by it, except taxes the
validity of which are being contested in good faith by appropriate proceedings
diligently pursued and available to Borrower and with respect to which adequate
reserves have been set aside on its books. Adequate provision has been made for
the payment of all accrued and unpaid Federal, State, county, local, foreign and
other taxes whether or not yet due and payable and whether or not disputed.
8.6 LITIGATION. Except as set forth on Schedule 8.6 hereto, (i) Borrower
has received no notice of and has no actual or constructive knowledge of any
present investigation by any Governmental Authority pending, or to the best of
Borrower's knowledge threatened, against or affecting Borrower, its assets or
business and (ii) Borrower has received no notice of and has no actual or
constructive knowledge of any pending action, suit, proceeding or claim by any
Person, or to the best of Borrower's knowledge threatened, against Borrower or
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its assets or goodwill, or against or affecting any transactions contemplated by
this Agreement; which, in any of the foregoing events, if adversely determined
against Borrower would result in any material adverse change in the assets or
business of Borrower or would impair the ability of Borrower to perform its
obligations hereunder or under any of the other Financing Agreements to which it
is a party or of Lender to enforce any Obligations or realize upon any
Collateral.
8.7 COMPLIANCE WITH OTHER AGREEMENTS AND APPLICABLE LAWS. Except as set
forth on the Information Certificate or as otherwise disclosed in the Schedules
attached hereto: (i) Borrower nor any of its Subsidiaries is in default in any
material respect under, or in violation in any material respect of any of the
terms of, any material agreement, contract, instrument, lease or other
commitment to which it is a party or by which it or any of its assets are bound
and (ii) to the best of Borrower's knowledge, Borrower and each of its
Subsidiaries is in compliance in all material respects with all applicable
provisions of laws, rules, regulations, licenses, permits, approvals and orders
of any foreign, Federal, State or local Governmental Authority.
8.8 ENVIRONMENTAL COMPLIANCE.
(a) Except as set forth on Schedule 8.8 hereto, to the best of
Borrower's knowledge: (i) neither Borrower nor any of its Subsidiaries have
generated, used, stored, treated, transported, manufactured, handled, produced
or disposed of any Hazardous Materials, on or off its premises (whether or not
owned by it) in any manner which at any time violates, in any material respects
any applicable Environmental Law or any license, permit, certificate, approval
or similar authorization thereunder and (ii) the operations of Borrower and each
of its Subsidiaries complies in all material respects with all applicable
Environmental Laws and all licenses, permits, certificates, approvals and
similar authorizations thereunder.
(b) Except as set forth on Schedule 8.8 hereto, Borrower has not
received any notice of and has no actual or constructive knowledge of any
investigation, proceeding, complaint, order, directive, claim, citation or
notice by any Governmental Authority or any other person nor is any pending or
to the best of Borrower's knowledge threatened, with respect to any
non-compliance with or violation of the requirements of any applicable
Environmental Law in any material respect, by Borrower or any of its
Subsidiaries or the release, spill or discharge, threatened or actual, of any
Hazardous Material or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials or any
other environmental, health or safety matter, which has a material adverse
effect on the Borrower or its business, operations or assets or any properties
at which Borrower has transported, stored or disposed of any Hazardous
Materials.
(c) To the best of Borrower's knowledge, Borrower and its Subsidiaries
have no material liability (contingent or otherwise) in connection with a
release, spill or discharge, threatened or actual, of any Hazardous Materials or
the generation, use, storage, treatment, transportation, manufacture, handling,
production or disposal of any Hazardous Materials.
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(d) Except as set forth on Schedule 8.8 hereto, to the best of
Borrower's knowledge Borrower and its Subsidiaries have all material licenses,
permits, certificates, approvals or similar authorizations required to be
obtained or filed in connection with the operations of Borrower under any
applicable Environmental Law and all of such material licenses, permits,
certificates, approvals or similar authorizations are valid and in full force
and effect.
8.9 EMPLOYEE BENEFITS.
(a) Each Plan is in compliance with the applicable provisions of
ERISA, the Code and other federal or state law. Each Plan which is intended to
qualify under Section 401(a) of the Code has received a favorable determination
letter from the Internal Revenue Service and to the best of the knowledge of the
Borrower, nothing has occurred which would cause the loss of such qualification.
Borrower and its ERISA Affiliates have made all required contributions to any
Plan subject to Section 412 of the Code, and no application for a funding waiver
or an extension of any amortization period pursuant to Section 412 of the Code
has been made with respect to any Plan.
(b) There are no pending or to the best of the knowledge of Borrower
or any Guarantor, threatened claims, actions or lawsuits, or action by any
Governmental Authority, with respect to any Plan. There has been no prohibited
transaction or other violation of the fiduciary responsibility rules by Borrower
and its ERISA Affiliates with respect to any Plan, except for those rules for
which a statutory or administrative exemption exists.
(c) No ERISA Event has occurred or is reasonably expected to occur.
(d) Borrower and its ERISA Affiliates do not participate in a
Multi-employer plan and do not maintain any Plan subject to Title IV of ERISA.
8.10 BANK ACCOUNTS. All of the deposit accounts, investment accounts or
other accounts in the name of or used by Borrower maintained at any bank or
other financial institution are set forth on Schedule 8.10 hereto, subject to
the right of Borrower to establish new accounts in accordance with Section 9.13
below.
8.11 INTELLECTUAL PROPERTY. Borrower and its Subsidiaries own or license or
otherwise have the right to use all Intellectual Property necessary for the
operation of its business as presently conducted or as proposed to be conducted.
As of the date hereof, Borrower and its Subsidiaries do not have any
Intellectual Property registered, or subject to pending applications, in the
United States Patent and Trademark Office or any similar office or agency in the
United States, any State thereof, any political subdivision thereof or in any
other country, other than those described in Schedule 8.11 hereto and have not
granted any licenses with respect thereto other than as set forth in Schedule
8.11 hereto. No event has occurred which permits or would permit after notice or
passage of time or both, the revocation, suspension or termination of such
rights. Except as set forth in Schedule 8.11 hereto, to the best of Borrower's
knowledge no slogan or other advertising device, product, process, method,
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substance or other Intellectual Property or goods bearing or using any
Intellectual Property presently contemplated to be sold by or employed by
Borrower or any of its Subsidiaries infringes any patent, trademark,
servicemark, tradename, copyright, license or other Intellectual Property owned
by any other Person presently and no claim or litigation is pending or, to the
best knowledge of Borrower, threatened against or affecting Borrower contesting
its right to sell or use any such Intellectual Property. Schedule 8.11 sets
forth all of the material agreements or other arrangements of Borrower and its
Subsidiaries pursuant to which Borrower has a license or other right to use any
trademarks, logos, designs, representations or other Intellectual Property owned
by another person as in effect on the date hereof and the dates of the
expiration of such agreements or other arrangements of Borrower and its
Subsidiaries as in effect on the date hereof. No trademark, servicemark or other
Intellectual Property at any time used by Borrower which is owned by another
person, or owned by Borrower subject to any security interest, lien, collateral
assignment, pledge or other encumbrance in favor of any person other than
Lender, is affixed to, incorporated in or used in connection with the
manufacture of any Eligible Inventory or collective of any Receivables, except
to the extent permitted under the term of the license agreements listed on
Schedule 8.11 hereto.
8.12 CAPITALIZATION.
(a) All of the issued and outstanding shares of Guarantors and all of
such Capital Stock has been duly authorized and is fully paid and
non-assessable, free and clear of all claims, liens, pledges and encumbrances of
any kind, except as disclosed in writing to Lender.
(b) Borrower, Quad Europe and Borrower and its Subsidiaries, on a
consolidated basis, are solvent and will continue to be solvent after the
creation of the Obligations, the security interests of Lender and the other
transactions contemplated hereunder, are able to pay their debts as they mature
and have (and have reason to believe they will continue to have) sufficient
capital (and not unreasonably small capital) to carry on their business and all
businesses in which they are about to engage. The assets and properties of
Borrower at a fair valuation and at their present salable value are, and will
be, greater than the Indebtedness of Borrower, and including subordinated and
contingent liabilities computed at the amount which, to the best of Borrower's
knowledge, represents an amount which can reasonably be expected to become an
actual or mature liability.
8.13 LABOR DISPUTES.
(a) There are no collective bargaining or similar agreements between or
applicable to Borrower and any union, labor organization or other bargaining
agent in respect of the employees of Borrower on the date hereof.
(b) There is (i) no significant unfair labor practice complaint pending
against Borrower or, to the best of the knowledge of Borrower, threatened
against it, before the National Labor Relations Board, and no significant
grievance or significant arbitration proceeding arising out of or under any
collective bargaining agreement is pending on the date hereof against Borrower
or, to best of the knowledge of Borrower, threatened against it, and (ii) no
significant strike, labor dispute, slowdown or stoppage is pending against
Borrower or, to the best of the knowledge of Borrower, threatened against
Borrower.
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8.14 CORPORATE NAME; PRIOR TRANSACTIONS. Borrower has not, during the past
five years, been known by or used by any other corporate or fictitious name or
been a party to any merger or consolidation, or acquired all or substantially
all of the assets of any Person, or acquired any of its property or assets out
of the ordinary course of business, except as set forth in the Information
Certificate.
8.15 RESTRICTIONS ON SUBSIDIARIES. Except for restrictions contained in
this Agreement or any other agreement with respect to Indebtedness of Borrower
permitted hereunder as in effect on the date hereof, there are no contractual or
consensual restrictions on Borrower or any of its Subsidiaries which prohibit or
otherwise restrict (a) the transfer of cash or other assets (i) between Borrower
and any of its Subsidiaries or (ii) between any Subsidiaries of Borrower or (b)
the ability of Borrower or any of its Subsidiaries to incur Indebtedness or
grant security interests to Lender in the Collateral or in any other property
which is security for the Obligations.
8.16 MATERIAL CONTRACTS. Schedule 8.16 hereto sets forth all Material
Contracts to which Borrower or Quad Europe is a party or is bound as of the date
hereof. Borrower has delivered true, correct and complete copies of such
Material Contracts to Lender on or before the date hereof. Except as disclosed
in Schedule 8.16 hereto, Borrower and Quad Europe are not in breach of or in
default under any Material Contract and neither has received any notice of the
intention of any other party thereto to terminate any Material Contract.
8.17 RETENTION OF TITLE. Schedule 8.17 hereto contains a list detailing all
creditors of Quad Europe as of the date hereof, if any, whose standard
conditions of supply include retention of title or "Romalpa" provisions.
8.18 ACCURACY AND COMPLETENESS OF INFORMATION. All information furnished by
or on behalf of Borrower in writing to Lender in connection with this Agreement
or any of the other Financing Agreements or any transaction contemplated hereby
or thereby, including all information on the Information Certificate is true and
correct in all material respects on the date as of which such information is
dated or certified and does not omit any material fact necessary in order to
make such information not misleading. No event or circumstance has occurred
which has had or could reasonably be expected to have a material adverse affect
on the business, assets or prospects of Borrower, which has not been fully and
accurately disclosed to Lender in writing.
8.19 SURVIVAL OF WARRANTIES; CUMULATIVE. All representations and warranties
contained in this Agreement or any of the other Financing Agreements shall
survive the execution and delivery of this Agreement and shall be deemed to have
been made again to Lender on the date of each additional borrowing or other
credit accommodation hereunder and shall be conclusively presumed to have been
relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
Borrower shall now or hereafter give, or cause to be given, to Lender.
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SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
9.1 MAINTENANCE OF EXISTENCE. Borrower shall at all times preserve, renew
and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and effect all
permits, licenses, trademarks, tradenames, approvals, authorizations, leases and
contracts to the extent necessary to carry on the business as presently or
proposed to be conducted. Borrower shall give Lender thirty (30) days prior
written notice of any proposed change in its corporate name, which notice shall
set forth the new name and Borrower shall deliver to Lender a copy of the
amendment to the Certificate of Incorporation of Borrower providing for the name
change certified by the Secretary of State of the jurisdiction of incorporation
of Borrower as soon as it is available.
9.2 NEW COLLATERAL LOCATIONS. Borrower may open any new location within the
continental United States provided Borrower (a) gives Lender thirty (30) days
prior written notice of the intended opening of any such new location and (b)
executes and delivers, or causes to be executed and delivered, to Lender such
agreements, documents, and instruments as Lender may deem reasonably necessary
or desirable to protect its interests in the Collateral at such location,
including UCC financing statements.
9.3 COMPLIANCE WITH LAWS, REGULATIONS, ETC.ETC.
(a) Borrower shall, and shall cause each of its Subsidiaries to, at
all times, comply in all material respects with all laws, rules, regulations,
licenses, permits, approvals and orders applicable to it and duly observe, in
all material respects, all requirements of any foreign, Federal, State or local
Governmental Authority applicable to it, including ERISA, the Code, the
Occupational Safety and Health Act of 1970, as amended, the Fair Labor Standards
Act of 1938, as amended, and all applicable statutes, rules, regulations,
orders, permits and stipulations relating to environmental pollution and
employee health and safety, including all applicable Environmental Laws. In no
event shall Borrower and its Subsidiaries be required to pay more than
US$3,000,000 in order to comply with all applicable Environmental Laws during
the term of the Agreement.
(b) At the reasonable request of Lender, or in any event to the extent
required by applicable law, Borrower shall, and cause each of its Subsidiaries
to, establish and maintain, at its expense, a system to assure and monitor its
continued material compliance with all applicable material Environmental Laws in
all of its operations, which system shall include annual reviews of such
material compliance by employees or agents of Borrower and its Subsidiaries who
are familiar with the requirements of applicable material Environmental Laws.
Copies of all environmental surveys, audits, assessments, feasibility studies
and results of remedial investigations shall be promptly furnished, or caused to
be furnished, by Borrower to Lender. Borrower and its Subsidiaries shall respond
as required by any applicable Environmental Law to any material non-compliance
with any of the applicable Environmental Laws in a commercially reasonable
period of time and shall report to Lender on such response.
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(c) Borrower shall, and shall cause each of its Subsidiaries to, give
notice to Lender promptly upon Borrower's or any of its Subsidiaries' receipt of
any notice of, or Borrower's or any of its Subsidiaries' otherwise obtaining
actual knowledge of, (i) the occurrence of any event involving the release,
spill or discharge, threatened or actual, of any Hazardous Material in violation
of applicable Environmental Law in a material respect or (ii) any investigation,
proceeding, complaint, order, directive, claims, citation or notice with respect
to: (A) any non-compliance with or violation of any applicable Environmental Law
by Borrower in any material respect or (B) the release, spill or discharge,
threatened or actual, of any Hazardous Material in violation of applicable
Environmental Law in a material respect or (C) the generation, use, storage,
treatment, transportation, manufacture, handling, production or disposal of any
Hazardous Materials in violation of applicable Environmental Law in a material
respect or (D) any other environmental, health or safety matter, which has a
material adverse effect on Borrower or its business, operations or assets or any
properties at which Borrower transported, stored or disposed of any Hazardous
Materials.
(d) Without limiting the generality of the foregoing, whenever Lender
reasonably determines that there is material non-compliance, or any condition
which requires any action by or on behalf of Borrower or any of its Subsidiaries
in order to avoid any material non-compliance, with any applicable Environmental
Law, Borrower shall, and shall cause each of its Subsidiaries to, at Lender's
request and Borrower's expense: (i) cause an independent environmental engineer
reasonably acceptable to Borrower and Lender to conduct such tests of the site
where Borrower's or any of its Subsidiaries' material non-compliance or alleged
material non-compliance with such applicable Environmental Laws has occurred as
to such material non-compliance and prepare and deliver to Lender a report as to
such material non-compliance setting forth the results of such tests, a proposed
plan for responding to any environmental problems in material violation of
applicable Environmental Law described therein, if any, including an estimate of
the costs thereof and (ii) provide to Lender a supplemental report of such
engineer whenever the scope of such material non-compliance, or Borrower's and
its Subsidiaries' response thereto or the estimated costs thereof, shall change
in any material respect.
(e) Borrower shall, and shall cause each of its Subsidiaries to,
indemnify and hold harmless Lender, its directors, officers, employees, agents,
invitees, representatives, successors and assigns, from and against any and all
losses, claims, damages, liabilities, costs, and expenses (including reasonable
attorneys' fees and legal expenses) incurred by Lender, its directors, officers,
employees, agents, invitees, representatives, successors and assigns in their
capacity as such to the extent directly or indirectly arising out of or
attributable to the use, generation, manufacture, reproduction, storage,
release, threatened release, spill, discharge, disposal or presence of
(individually and collectively referred to as "Release") a Hazardous Material on
any Real Property, including, without limitation, the costs of any repair,
cleanup or other remedial work required under any applicable Environmental Law
or by any Governmental Authority with respect to any Real Property and the
preparation and implementation of any closure, remedial or other required plans.
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9.4 PAYMENT OF TAXES AND CLAIMS. Borrower shall, and shall cause each of
its Subsidiaries to, duly pay and discharge all taxes, assessments,
contributions and governmental charges upon or against it or its properties or
assets, except for taxes the validity of which are being contested in good faith
by appropriate proceedings diligently pursued and available to Borrower or such
Subsidiary, as the case may be, and with respect to which adequate reserves have
been set aside on its books. Borrower shall be liable for any Other Taxes
imposed on Lender as a result of the financing arrangements provided for herein
and Borrower agrees to indemnify and hold Lender harmless with respect to the
foregoing, and to repay to Lender on demand the amount thereof, and until paid
by Borrower such amount shall be added and deemed part of the Loans, PROVIDED,
THAT, nothing contained in this Agreement shall be construed to require Borrower
or any Subsidiary to pay any income or franchise taxes attributable to the
income of Lender from any amounts charged or paid hereunder to Lender. The
foregoing indemnity shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
9.5 INSURANCE.
(a) Borrower shall, and shall cause each of its Subsidiaries to, at
all times, maintain with financially sound and reputable insurers insurance with
respect to the Collateral against loss or damage and all other insurance of the
kinds and in the amounts customarily insured against or carried by corporations
of established reputation engaged in the same or similar businesses and
similarly situated. Said policies of insurance shall be reasonably satisfactory
to Lender as to form, amount and insurer. Borrower shall furnish certificates,
policies or endorsements to Lender as Lender shall require as proof of such
insurance, and, if Borrower fails to do so, Lender is authorized, but not
required, to obtain such insurance at the expense of Borrower. All policies
shall provide for at least thirty (30) days prior written notice to Lender of
any cancellation or reduction of coverage and that Lender may act as attorney
for Borrower in obtaining, and at any time an Event of Default exists or has
occurred and is continuing, adjusting, settling, amending and canceling such
insurance. Borrower shall cause Lender to be named as a loss payee and an
additional insured (but without any liability for any premiums) under such
insurance policies and Borrower shall obtain non-contributory lender's loss
payable endorsements to all insurance policies in form and substance
satisfactory to Lender. Such lender's loss payable endorsements shall specify
that the proceeds of such insurance shall be payable to Lender as its interests
may appear and further specify that Lender shall be paid regardless of any act
or omission by Borrower or any of its Affiliates.
(b) At its option, Lender may apply any insurance proceeds received by
Lender at any time to the cost of repairs or replacement of Collateral and/or to
payment of the Obligations, whether or not then due, in any order and in such
manner as Lender may in good faith determine or hold such proceeds as cash
collateral for the Obligations.
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9.6 FINANCIAL STATEMENTS AND OTHER INFORMATION.
(a) Borrower shall, and shall cause each of its Subsidiaries to, keep
proper books and records in which true and complete entries shall be made of all
dealings or transactions of or in relation to the Collateral and the business of
Borrower and its Subsidiaries, all in accordance with GAAP. Borrower shall
promptly furnish to Lender all such financial and other information as Lender
shall reasonably request relating to the Collateral and the assets, business and
operations of Borrower, and to notify the auditors and accountants of Borrower
that Lender is authorized to obtain such information directly from them. Without
limiting the foregoing, Borrower shall furnish or cause to be furnished to
Lender, the following: (i)(A) within fifteen (15) days after the end of the
first and second fiscal month of each fiscal quarter and (B) within twenty-five
(25) days after the end of the third fiscal month of each fiscal quarter, as to
both clauses (a)(i)(A) and (a)(i)(B) hereof, monthly unaudited consolidated
financial statements, and unaudited consolidating financial statements
(including in each case balance sheets, statements of income and loss,
statements of cash flow, and statements of shareholders' equity), all in
reasonable detail, fairly presenting in all material respects the financial
position and the results of the operations of Borrower and its Subsidiaries as
of the end of and through such fiscal month, certified to be correct in all
material respects by the chief financial officer of Borrower, subject to normal
year-end adjustments and accompanied by a compliance certificate substantially
in the form of Exhibit C hereto, along with a schedule in form reasonably
satisfactory to Lender of the calculations used in determining, as of the end of
such month, whether Borrower was in compliance with the covenant set forth in
Sections 9.18 of this Agreement for such month and (ii) within ninety (90) days
after the end of each fiscal year, audited consolidated financial statements and
audited consolidating financial statements of Borrower and its Subsidiaries
(including in each case balance sheets, statements of income and loss,
statements of cash flow and statements of shareholders' equity), and the
accompanying notes thereto, all in reasonable detail, fairly presenting in all
material respects the financial position and the results of the operations of
Borrower and its Subsidiaries as of the end of and for such fiscal year,
together with the unqualified opinion of independent certified public
accountants, which accountants shall be an independent accounting firm selected
by Borrower and reasonably acceptable to Lender, that such financial statements
have been prepared in accordance with GAAP, and present fairly in all material
respects the results of operations and financial condition of Borrower and its
Subsidiaries as of the end of and for the fiscal year then ended.
(b) Borrower shall, as soon as available, but in any event no later
than the fifteenth (15th) day after the end of each month, deliver to Lender a
report certified by the chief financial officer or other applicable officer of
Borrower, in form and substance satisfactory to Lender, setting forth the
aggregate amount of all loans, dividends, distributions, management fees,
guaranties, investments, capital contributions or other payments (however
characterized or described) made by Borrower during the immediately preceding
month.
(c) Borrower shall promptly notify Lender in writing of the details of
(i) any material loss, damage, investigation, action, suit, proceeding or claim
relating to the Collateral or any other property which is security for the
Obligations or which would result in any material adverse change in Borrower's
business, properties, assets, goodwill or condition, financial or otherwise,
(ii) any Material Contract of Borrower being terminated or amended or any new
Material Contract entered into (in which event Borrower shall provide Lender
with a copy of such Material Contract), (iii) any order, judgment or decree in
excess of US$500,000 shall have been entered against Borrower or any of its
properties or assets, (iv) any notification of a material violation of laws or
regulations received by Borrower, (v) any ERISA Event, and (vi) the occurrence
of any Event of Default or act, condition or event which, with notice or the
passage of time or giving of notice or both, would constitute an Event of
Default.
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(d) Borrower shall promptly after the sending or filing thereof
furnish or cause to be furnished to Lender copies of all reports which Borrower
sends to its stockholders generally and copies of all reports and registration
statements which Borrower files with the Securities and Exchange Commission, any
national securities exchange or the National Association of Securities Dealers,
Inc.
(e) Borrower shall furnish or cause to be furnished to Lender such
budgets, forecasts, projections and other information respecting the Collateral
and the business of Borrower, as Lender may, from time to time, reasonably
request. Lender is hereby authorized to deliver a copy of any financial
statement or any other information relating to the business of Borrower to any
court or other Government Authority or to any participant or assignee or
prospective participant or assignee. Borrower hereby irrevocably authorizes and
directs all accountants or auditors to deliver to Lender, at Borrower's expense,
copies of the financial statements of Borrower and any reports or management
letters prepared by such accountants or auditors on behalf of Borrower and to
disclose to Lender such information as they may have regarding the business of
Borrower. Any documents, schedules, invoices or other papers delivered to Lender
may be destroyed or otherwise disposed of by Lender one (1) year after the same
are delivered to Lender, except as otherwise designated by Borrower to Lender in
writing.
9.7 SALE OF ASSETS, CONSOLIDATION, MERGER, DISSOLUTION, ETC. Borrower
shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly,
(a) merge into or with or consolidate with any other Person or permit
any other Person to merge into or with or consolidate with it, except, THAT,
(i) Borrower may merge with and into or consolidate with any
Guarantor organized under the laws of any State of the United States of America,
PROVIDED, THAT, each of the following conditions is satisfied as determined by
Lender: (A) Lender shall have received not less than thirty (30) days prior
written notice of the intention of Borrower and such Guarantor to so merge or
consolidate and such information with respect thereto as Lender may request, (B)
as of the effective date of the merger or consolidation and after giving effect
thereto, no Event of Default or act, condition or event which with notice or
passage of time or both would constitute an Event of Default, shall exist or
have occurred and be continuing, (C) Lender shall have received true, correct
and complete copies of all agreements, documents and instruments relating to
such merger or consolidation, including, but not limited to, the certificate or
certificates of merger or consolidation to be filed with each appropriate
Secretary of State or other Governmental Authority (and promptly after such
merger or consolidation is effective, as such certificate or certificates of
merger or consolidation have been filed with each appropriate Secretary of State
or other Governmental Authority), (D) the surviving entity of such consolidation
or merger shall be Borrower, (E) Borrower shall, immediately before and
immediately after giving effect to such transaction or series of transactions
have a tangible net worth (including, without limitation, any Indebtedness
incurred or anticipated to be incurred in connection with or in respect of such
transaction or series of transactions) equal to or greater than the tangible net
worth it had immediately prior to such transaction or series of transactions,
and (F) Borrower shall not become obligated with respect to any Indebtedness,
nor any of its property become subject to any lien, pursuant to such merger or
consolidation unless Borrower could incur such Indebtedness or create such lien
hereunder or under the other Financing Agreements;
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(ii) any Guarantor may merge with and into or consolidate with any
other Guarantor organized under the laws of any State of the United States of
America, PROVIDED, THAT, each of the following conditions is satisfied as
determined by Lender: (A) Lender shall have received not less than thirty (30)
days prior written notice of the intention of such Guarantors to so merge or
consolidate and such information with respect thereto as Lender may request, (B)
as of the effective date of the merger or consolidation and after giving effect
thereto, no Event of Default or act, condition or event which with notice or
passage of time or both would constitute an Event of Default, shall exist or
have occurred and be continuing, (C) Lender shall have received true, correct
and complete copies of all agreements, documents and instruments relating to
such merger or consolidation, including, but not limited to, the certificate or
certificates of merger or consolidation to be filed with each appropriate
Secretary of State or other Governmental Authority (and promptly after such
merger or consolidation is effective, as such certificate or certificates of
merger or consolidation have been filed with each appropriate Secretary of State
or other Governmental Authority), and (D) the surviving entity shall immediately
upon the effectiveness of the merger or consolidation expressly confirm in
writing pursuant to an agreement, in form and substance satisfactory to Lender,
its continuing liability in respect of the Obligations and the Financing
Agreements to which it and the Guarantor with which it has merged or
consolidated is or were a party, and execute and deliver such other agreements,
documents and instruments as Lender may reasonably request in connection
therewith; or
(b) sell, assign, lease, transfer, abandon or otherwise dispose of any
Capital Stock or Indebtedness to any other Person or any of its assets to any
other Person, except for
(i) sales of Inventory in the ordinary course of business,
(ii) the disposition of worn-out or obsolete Equipment so long as
(A) the aggregate amount of the proceeds of all such sales shall not exceed
US$500,000, (B) such sales shall be at and on commercially reasonable prices and
terms in BONA FIDE arm's length transactions with persons who are not Affiliates
of Borrower, (C) the proceeds from such sales shall be remitted directly to
First Union National Bank, to the extent that the Indebtedness evidenced by the
Term Loan Note has not been paid in full, but otherwise directly to Lender and
shall be applied to the Obligations in such order and manner as Lender shall
determine or at any time on or after the occurrence of an Event of Default
(without limiting the rights of Lender with respect thereto), at the option of
Lender, held as cash collateral for the Obligations and (D) as of the date of
any such sale and after giving effect thereto, no Event of Default, or act,
condition or event which with notice or passage of time would constitute an
Event of Default shall exist or have occurred and be continuing, provided, that,
so long as each of the conditions set forth in clauses (A) through (E) above
(inclusive) are satisfied as determined by Lender, as to each such sale, Lender
shall upon the written request of Borrower, at the expense of Borrower, execute
and deliver to Borrower such partial releases, in form and substance
satisfactory to Lender, to evidence the release of any such assets so sold by
Borrower from the security interests granted by Borrower to Lender under this
Agreement, such release to only be effective upon the consummation of such sale
and the satisfaction of each of the conditions set forth in clauses (A) through
(E) above (inclusive) with respect thereto,
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(iii) the issuance and sale by Borrower of Capital Stock of
Borrower after the date hereof; PROVIDED, THAT, (A) Lender shall have received
not less than ten (10) Business Days prior written notice of such issuance and
sale by Borrower, which notice shall specify the parties to whom such shares are
to be sold, the terms of such sale, the total amount which it is anticipated
will be realized from the issuance and sale of such stock and the net cash
proceeds which it is anticipated will be received by Borrower from such sale,
(B) Borrower shall not be required to pay any cash dividends or repurchase or
redeem such Capital Stock or make any other payments in respect thereof, (C) the
terms of such Capital Stock, and the terms and conditions of the purchase and
sale thereof, shall not include any terms that include any limitation on the
right of Borrower to request or receive Loans or Letter of Credit Accommodations
or the right of Borrower to amend or modify any of the terms and conditions of
this Agreement or any of the other Financing Agreements or otherwise in any way
relate to or affect the arrangements of Borrower with Lender or are more
restrictive or burdensome to Borrower than the terms of any Capital Stock in
effect on the date hereof, and (D) as of the date of such issuance and sale and
after giving effect thereto, no Event of Default or act, condition or event
which with notice or passage of time or both would constitute an Event of
Default shall exist or have occurred; and except that Borrower may issue Capital
Stock in accordance with the terms of Borrower's Stock Option Plans and Employee
Stock Purchase Plans, each as in effect on the date hereof provided, THAT, (1)
in no event shall Borrower be required to issue, or shall Borrower or Guarantor
issue, Capital Stock pursuant to such stock option plan which would result in a
Change of Control or other Event of Default and (2) Borrower shall give Lender
prior written notice of the material terms of such stock option plan and such
other information with respect thereto as Lender may reasonably request; or
(c) form or acquire any Subsidiaries other than those listed on
the Information Certificate;
(d) wind up, liquidate or dissolve; or
(e) agree to do any of the foregoing.
9.8 ENCUMBRANCES. Borrower shall not, and shall not permit any of its
Subsidiaries to create, incur, assume or suffer to exist any security interest,
mortgage, pledge, lien, charge or other encumbrance of any nature whatsoever on
any of its assets or properties, including the Collateral, EXCEPT:
(a) the security interests and liens of Lender;
(b) liens securing the payment of taxes, either not yet overdue or the
validity of which are being contested in good faith by appropriate proceedings
diligently pursued and available to Borrower or such Subsidiary, as the case may
be and with respect to which adequate reserves have been set aside on its books;
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(c) non-consensual statutory liens (other than liens securing the
payment of taxes) arising in the ordinary course of Borrower's or such
Subsidiary's business (including carriers', ware-housemen's, materialmen's,
landlord's and mechanics' liens) to the extent: (i) such liens secure
Indebtedness which is not overdue or (ii) such liens secure Indebtedness
relating to claims or liabilities which are fully insured and being defended at
the sole cost and expense and at the sole risk of the insurer or being contested
in good faith by appropriate proceedings diligently pursued and available to
Borrower or such Subsidiary, in each case prior to the commencement of
foreclosure or other similar proceedings and with respect to which adequate
reserves have been set aside on its books;
(d) zoning restrictions, easements, licenses, covenants and other
restrictions affecting the use of Real Property which do not interfere in any
material respect with the use of such Real Property or ordinary conduct of the
business of Borrower or such Subsidiary as presently conducted thereon or
materially impair the value of the Real Property which may be subject thereto;
(e) purchase money security interests in Equipment (including Capital
Leases) and purchase money mortgages on Real Property to secure Indebtedness
permitted under Section 9.9(b) hereof;
(f) pledges and deposits of cash by Borrower and its Subsidiaries
after the date hereof in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other types of social security
benefits consistent with the current practices of Borrower and its Subsidiaries
as of the date hereof;
(g) pledges and deposits of cash by Borrower and its Subsidiaries
after the date hereof in the ordinary course of business in respect of
obligations of Borrower under any operating lease of real or personal property;
(h) pledges and deposits of cash by Borrower after the date hereof to
secured the performance of tenders, bids, leases, trade contracts (other than
for the repayment of Indebtedness), statutory obligations and other similar
obligations in each case in the ordinary course of business consistent with the
current practice of Borrower and its Subsidiaries as of the date hereof;
PROVIDED, THAT, (A) in connection with any performance bonds issued by a surety
or other person, not secured solely by the cash deposit, the issuer of such bond
shall have waived in writing any rights in or to, or other interest in, any of
the Collateral in an agreement, in form and substance satisfactory to Lender and
(B) the aggregate amount of all such pledges and deposits of cash permitted
pursuant to Sections 9.8(g) and (h) hereof shall not exceed $250,000 at any time
outstanding;
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(i) security interests and liens on the Collateral of First Union
National Bank to secure the Indebtedness of Borrower to First Union National
Bank permitted under Section 9.9(f) below; and
(j) the security interests and liens set forth on Schedule 8.4
hereto.
9.9 INDEBTEDNESS. Borrower shall not, and shall not permit any of its
Subsidiaries to, incur, create, assume, become or be liable in any manner with
respect to, or permit to exist, any Indebtedness, EXCEPT:
(a) the Obligations;
(b) purchase money Indebtedness (including Capital Leases) to the
extent secured by purchase money security interests in Equipment (including
Capital Leases) and purchase money mortgages on Real Property not to exceed
US$1,000,000 in the aggregate at any time outstanding so long as such security
interests and mortgages do not apply to any property of Borrower other than the
Equipment or real estate so acquired, and the Indebtedness secured thereby does
not exceed the cost of the Equipment or real estate so acquired, as the case may
be;
(c) Indebtedness of Borrower under interest swap agreements, interest
rate cap agreements, interest rate collar agreements, interest rate exchange
agreements and similar contractual agreements entered into for the purpose of
protecting a Person against fluctuations in interest rates; PROVIDED, THAT, such
arrangements are with banks or other financial institutions that have combined
capital and surplus and undivided profits of not less than US$100,000,000 and
are not for speculative purposes and such Indebtedness shall be unsecured;
(d) Indebtedness of Borrower or its Subsidiaries pursuant to loans
permitted under Sections 9.10(f) and (j) hereof.
(e) the Indebtedness set forth on Schedule 9.9 hereto; PROVIDED, THAT,
(i) Borrower may only make regularly scheduled payments of principal and
interest in respect of such Indebtedness in accordance with the terms of the
agreement or instrument evidencing or giving rise to such Indebtedness as in
effect on the date hereof, (ii) Borrower shall not, directly or indirectly, (A)
amend, modify, alter or change the terms of such Indebtedness or any agreement,
document or instrument related thereto as in effect on the date hereof EXCEPT,
THAT, Borrower may, after prior written notice to Lender, amend, modify, alter
or change the terms thereof so as to extend the maturity thereof, or defer the
timing of any payments in respect thereof, or to forgive or cancel any portion
of such Indebtedness (other than pursuant to payments thereof), or to reduce the
interest rate or any fees in connection therewith, or (B) redeem, retire,
defease, purchase or otherwise acquire such Indebtedness, or set aside or
otherwise deposit or invest any sums for such purpose, and (iii) Borrower shall
furnish to Lender all notices or demands in connection with such Indebtedness
either received by Borrower or on its behalf, promptly after the receipt
thereof, or sent by Borrower or on its behalf, concurrently with the sending
thereof, as the case may be; and
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(f) the Indebtedness of Borrower to First Union National Bank arising
pursuant to Term Loan Agreements, PROVIDED, THAT:
(i) the principal amount of such Indebtedness shall not exceed
in the aggregate $1,000,000 after giving effect to the repayments contemplated
under Section 6.7 hereof, less the aggregate amount of all repayments or
repurchases, whether optional or mandatory, of principal in respect thereof,
plus interest thereon at the rate provided for in the Term Loan Agreements as in
effect on the date hereof,
(ii) Lender shall have received true, correct and complete copies
of the Term Loan Agreements and all other agreements, documents and instruments
executed by any Borrower or any Obligor with, to or in favor of First Union
National Bank in connection therewith,
(iii) Borrower may make regularly scheduled payments of principal
and interest in respect of the Indebtedness, PROVIDED, THAT, on the date of any
such payment and after giving effect thereto, no Event of Default, or act,
condition or event which with notice or passage of time or both would constitute
an Event of Default shall exist or have occurred and be continuing,
(iv) Borrower shall not, directly or indirectly, (A) amend,
modify, alter or change any terms of the Term Loan Agreements, EXCEPT THAT
Borrower may, after prior written notice to Lender, amend, modify, alter or
change the terms thereof so as to (1) extend the maturity thereof or defer the
timing of any payments in respect thereof, or (2) to forgive or cancel any
portion of such Indebtedness other than pursuant to payments thereof, or (3) to
reduce the interest rate or any fees in connection therewith, or to release any
liens or security interests in any assets and properties of Borrower, or to (4)
make any provision of the Term Loan Agreements less burdensome or restrictive as
to Borrower than that in effect with respect to the Indebtedness on the date
hereof, or (B) make any principal payments in respect of or redeem, retire,
defease, purchase or otherwise acquire such Indebtedness, or set aside or
otherwise deposit or invest any sums for such purpose (except as permitted in
clause (iii) immediately above), and
(v) Borrower shall furnish to Lender all material notices, demands or
other materials concerning such Indebtedness either received by Borrower or on
its behalf, promptly after receipt thereof, or sent by Borrower, or on its
behalf, concurrently with the sending thereof, as the case may be.
9.10 LOANS, INVESTMENTS, GUARANTEES, ETC. Borrower shall not, and shall not
permit any of its Subsidiaries to, directly or indirectly, make any loans or
advance money or property to any person, or invest in (by capital contribution,
dividend or otherwise) or purchase or repurchase the Capital Stock or
Indebtedness or all or a substantial part of the assets or property of any
person, or guarantee, assume, endorse, or otherwise become responsible for
(directly or indirectly) the Indebtedness, performance, obligations or dividends
of any Person, or form or acquire any Subsidiaries, or agree to do any of the
foregoing, EXCEPT:
(a) the endorsement of instruments for collection or deposit in
the ordinary course of business;
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(b) investments in cash or Cash Equivalents, PROVIDED, THAT, (i) no
Revolving Loans are then outstanding, and (ii) as to any of the foregoing,
unless waived in writing by Lender, Borrower shall take such actions as are
deemed necessary by Lender to perfect the security interest of Lender in such
investments, EXCEPT, THAT, even if Revolving Loans are outstanding, Borrower may
invest in cash or Cash Equivalents on an overnight basis for cash management
purposes;
(c) the existing equity investments of Borrower as of the date hereof
in its Subsidiaries listed on the Information Certificate, PROVIDED, THAT,
Borrower shall have no obligation to make any other investment in, or loans to,
or other payments in respect of, any such Subsidiaries;
(d) guarantees by any Subsidiaries of Borrower of the Obligations
in favor of Lender;
(e) unsecured guarantees by Borrower with respect to the obligations
of Subsidiaries of Borrower incurred by such Subsidiaries in the ordinary course
of business as conducted on the date hereof and arising pursuant to leases by
such Subsidiaries of real property, PROVIDED, THAT, the liability of Borrower
pursuant to such guarantees at any time outstanding shall not in the aggregate
exceed the US Dollar Equivalent of US $1,000,000 with respect to any leased
location;
(f) unsecured loans by any Subsidiary of Borrower to Borrower existing
on the date hereof (as set forth on Schedule 9.10(f) hereto) and after the date
hereof, PROVIDED, THAT, as to any such loan, each of the following conditions is
satisfied as determined by Lender: (i) the Indebtedness arising pursuant to such
loan is subject to, and subordinate in right of payment to, the right of Lender
to receive the prior indefeasible payment and satisfaction in full of all of the
Obligations on terms and conditions acceptable to Lender, (ii) Lender shall have
received, in form and substance reasonably satisfactory to Lender, either (A) a
subordination agreement providing for the terms of the subordination in right of
payment of such Indebtedness of Borrower to the prior final payment and
satisfaction in full of all of the Obligations, duly authorized, executed and
delivered by such Subsidiary and Borrower or (B) a promissory note made by
Borrower evidencing such Indebtedness which provides for the subordination in
right of payment of the Indebtedness of Borrower to such Subsidiary to the prior
payment and satisfaction in full of all of the Obligations, (iii) Borrower shall
not, directly or indirectly make, or be required to make, any payments in
respect of such Indebtedness, except as Lender may otherwise specifically agree
in writing, (iv) each month Borrower shall provide to Lender a report in form
and substance reasonably satisfactory to Lender of the amount of such loans made
in the immediately preceding month, any repayments in connection therewith and
the outstanding amount thereof as of the last day of the immediately preceding
month, and (v) Indebtedness arising pursuant to such loans shall not be
evidenced by a promissory note or other instrument, unless the single original
of such note or other instrument is delivered to Lender to hold as part of the
Collateral duly executed and delivered by Borrower, with such endorsement and/or
assignment by the payee of such note or other instrument as Lender may require;
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(g) unsecured loans by any Subsidiary of Borrower to any other
Subsidiary of Borrower after the date hereof, PROVIDED, THAT, as to any such
loan, each of the following conditions is satisfied as determined by Lender: (i)
each month Borrower shall provide to Lender a report in form and substance
reasonably satisfactory to Lender of the amount of such loans made in the
immediately preceding month, any repayments in connection therewith and the
outstanding amount thereof as of the last day of the immediately preceding
month, (ii) Indebtedness arising pursuant to such loans shall not be evidenced
by a promissory note or other instrument, unless the single original of such
note or other instrument is delivered to Lender to hold as part of the
Collateral duly executed and delivered by such Subsidiary of Borrower, with such
endorsement and/or assignment by the payee of such note or other instrument as
Lender may require and (iii) the Indebtedness arising pursuant to such loans is
permitted under Section 9.9 hereof.
(h) stock or obligations issued to Borrower by any Person (or the
representative of such Person) in respect of Indebtedness of such Person owing
to Borrower in connection with the insolvency, bankruptcy, receivership or
reorganization of such Person or a composition or readjustment of the debts of
such Person; PROVIDED, THAT, the original of any such stock or instrument
evidencing such obligations shall be promptly delivered to Lender, upon Lender's
request, together with such stock power, assignment or endorsement by Borrower
as Lender may request;
(i) obligations of account debtors to Borrower arising from Accounts
which are past due evidenced by a promissory note made by such account debtor
payable to Borrower; PROVIDED, THAT, promptly upon the receipt of the original
of any such promissory note by Borrower, such promissory note shall be endorsed
to the order of Lender by Borrower and promptly delivered to Lender as so
endorsed; and
(j) loans by Borrower to any Subsidiary of Borrower, PROVIDED, that,
as to the making of any such loan, each of the following conditions is satisfied
as determined by Lender (i) each month Borrower shall provide to Lender a report
in form and substance satisfactory to Lender of the amount of such loans made in
the immediately preceding month, any repayments in connection therewith and the
outstanding amount thereof as of the last day of the immediately preceding
month, (ii) the Indebtedness arising pursuant to any such loan shall not be
evidenced by a promissory note or other instrument, unless, the single original
of such note or other instrument is delivered to Lender to hold as part of the
Collateral, with such endorsement and/or assignment by the payee of such note or
other instrument as Lender may require, (iii) as of the date of the making of
such loan and after giving effect thereto, the Borrower is and shall be Solvent,
(iv) such loans shall be permitted to be made and paid under the laws and
regulations applicable to Borrower, and (v) as of the date of the making of any
such loan and in each case after giving effect thereto, no Event of Default or
act, condition or event which with notice or passage of time or both would
constitute an Event of Default, shall exist or have occurred and be continuing;
and
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(k) loans or advances by Borrower to any of its employees, after the
date hereof, or guaranties made by Borrower of indebtedness or obligations of
any of its employees not to exceed the principal amount of $50,000 in the
aggregate at any time outstanding in the ordinary course of Borrower's business
for reasonable and necessary work-related travel, moving, entertainment,
employee assistance and other ordinary business expenses to be incurred by such
employees in connection with their employment with Borrower, PROVIDED, THAT, as
of the date of any such loan or guarantee thereof by Borrower and after giving
effect thereto, no Event of Default shall exist or have occurred and be
continuing;
(l) guarantees by Borrower or any Subsidiary of Borrower made to
secure Indebtedness other than as described in Section 9.10(a) and (d),
PROVIDED, THAT, such guarantees are made in (i) the ordinary course of business
of Borrower with respect to the obligations of Subsidiaries and (ii) do not,
when aggregated with (A) the guarantees permitted under Sections 9.10(e) and (l)
hereof and (B) the Copelco Repurchase Obligations, exceed $1,000,000 of
Indebtedness in the aggregate.
9.11 DIVIDENDS AND REDEMPTIONS. Borrower shall not, and shall not permit
any of its Subsidiaries to, directly or indirectly, declare or pay any dividends
on account of any shares of class of Capital Stock of Borrower now or hereafter
outstanding, or set aside or otherwise deposit or invest any sums for such
purpose, or redeem, retire, defease, purchase or otherwise acquire any shares of
any class of Capital Stock (or set aside or otherwise deposit or invest any sums
for such purpose) for any consideration other than common stock or apply or set
apart any sum, or make any other distribution (by reduction of capital or
otherwise) in respect of any such shares or agree to do any of the foregoing,
EXCEPT THAT any Subsidiary of Borrower may pay dividends or other distributions
in respect of its Capital Stock.
9.12 TRANSACTIONS WITH AFFILIATES. Borrower shall not, and shall not permit
any of its Subsidiaries to, directly or indirectly,
(a) purchase, acquire or lease any property from, or sell, transfer or
lease any property to, any officer, director, agent or other person affiliated
with Borrower, EXCEPT:
(i) in the ordinary course of and pursuant to the reasonable
requirements of Borrower's business and upon fair and reasonable terms no less
favorable to the Borrower than Borrower would obtain in a comparable arm's
length transaction with an unaffiliated person, EXCEPT:
(A) intercompany sales consistent with current practices
in effect on the date hereof,
(B) loans and advances permitted under Sections 9.10(f),
(g) and (j); and
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(ii) the payments by Borrower to TriMark Investment Corporation of
royalties for the licensing of certain trademarks and patents by TriMark
Investment Corporation to Borrower arising pursuant to the Trademark License
Agreement, dated August 25, 1995, between Borrower and TriMark Investment
Corporation and the Patent License Agreement, dated August 25, 1995, between
Borrower and TriMark Investment Corporation (as such agreements are amended or
supplemented from time to time), PROVIDED, THAT, Borrower shall not make any
such payments, unless, as of the date of any such payment and after giving
effect thereto, no Event of Default, or act, condition or event which with
notice or passage of time or both would constitute and Event of Default, shall
exist or have occurred;
(b) make any payments of management, consulting or other fees for
management or similar services, any payments of sales commissions or other fees
for marketing goods or services, any payments of taxes under any tax sharing
agreements, or of any Indebtedness owing to any partner, officer, employee,
shareholder, director or other Affiliate of any Borrower or Guarantor, EXCEPT:
(i) compensation to officers, employees and directors for services
rendered to Borrowers, Guarantors or any of their respective Subsidiaries in the
ordinary course of business and pursuant to reasonable business judgment,
(ii) payments by Subsidiaries in respect of the Indebtedness
owing to Borrower arising pursuant to loans made by Borrower permitted
hereunder,
(iii) payments by any Subsidiary of Borrower in respect of
Indebtedness of such Subsidiary to Borrower.
9.13 ADDITIONAL BANK ACCOUNTS. Borrower shall not, directly or indirectly,
open, establish or maintain any deposit account, investment account or any other
account with any bank or other financial institution, other than the Blocked
Accounts and the accounts set forth in Schedule 8.10 hereto, except: (a) as to
any new or additional Blocked Accounts and other such new or additional accounts
which contain any Collateral or proceeds thereof, with the prior written consent
of Lender and subject to such conditions thereto as Lender may establish and (b)
as to any accounts used by Borrower to make payments of payroll, taxes or other
obligations to third parties, after prior written notice to Lender.
9.14 COMPLIANCE WITH ERISA. Borrower shall and shall cause each of its
ERISA Affiliates to: (a) maintain each Plan in compliance in all material
respects with the applicable provisions of ERISA, the Code and other Federal and
State law; (b) cause each Plan which is qualified under Section 401(a) of the
Code to maintain such qualification; (c) not terminate any of such Plans so as
to incur any liability to the Pension Benefit Guaranty Corporation; (d) not
allow or suffer to exist any prohibited transaction involving any of such Plans
or any trust created thereunder which would subject Borrower or such ERISA
Affiliate to a tax or penalty or other liability on prohibited transactions
imposed under Section 4975 of the Code or ERISA; (e) make all required
contributions to any Plan which it is obligated to pay under Section 302 of
ERISA, Section 412 of the Code or the terms of such Plan; (f) not allow or
suffer to exist any accumulated funding deficiency, whether or not waived, with
respect to any such Plan; or (g) allow or suffer to exist any occurrence of a
reportable event or any other event or condition which presents a material risk
of termination by the Pension Benefit Guaranty Corporation of any such Plan that
is a single employer plan, which termination could result in any liability to
the Pension Benefit Guaranty Corporation.
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9.15 END OF FISCAL YEARS: FISCAL QUARTERS. Borrower shall, for financial
reporting purposes, cause its, and each of its Subsidiaries' (a) fiscal years to
end on September 30 of each year (or the last Sunday of September of each year
as may be required by adherence to a 52-53 week year) and (b) fiscal quarters to
end on March 31, June 30, September 30 and December 31 of each year.
9.16 CHANGE IN BUSINESS. Borrower shall not engage in any business other
than the business of Borrower on the date hereof and any business reasonably
related, ancillary or complimentary to the business in which Borrower is engaged
on the date hereof.
9.17 LIMITATION OF RESTRICTIONS AFFECTING SUBSIDIARIES. Borrower shall not,
directly, or indirectly, create or otherwise cause or suffer to exist any
encumbrance or restriction which prohibits or limits the ability of any
Subsidiary of Borrower to (a) pay dividends or make other distributions or pay
any Indebtedness owed to Borrower or any Subsidiary of Borrower; (b) make loans
or advances to Borrower or any Subsidiary of Borrower, (c) transfer any of its
properties or assets to Borrower or any Subsidiary of Borrower; or (d) create,
incur, assume or suffer to exist any lien upon any of its property, assets or
revenues, whether now owned or hereafter acquired, other than encumbrances and
restrictions arising under (i) applicable law, (ii) this Agreement, (iii)
customary provisions restricting subletting or assignment of any lease governing
a leasehold interest of Borrower or any of its Subsidiaries, (iv) customary
restrictions on dispositions of real property interests found in reciprocal
easement agreements of Borrower or its Subsidiary, (v) any agreement relating to
permitted Indebtedness incurred by a Subsidiary of Borrower prior to the date on
which such Subsidiary was acquired by Borrower and outstanding on such
acquisition date, and (vi) the extension or continuation of contractual
obligations in existence on the date hereof; PROVIDED, THAT, any such
encumbrances or restrictions contained in such extension or continuation are no
less favorable to Lender than those encumbrances and restrictions under or
pursuant to the contractual obligations so extended or continued.
9.18 ADJUSTED TANGIBLE NET WORTH. Borrower shall maintain Adjusted Tangible
Net Worth of not less than their respective amount set forth below at all times
during each period indicated:
MINIMUM ADJUSTED
MONTH TANGIBLE NET WORTH
----- ------------------
From January 1, 2000 through and $11,100,000
including June 30, 2000
From July 1, 2000 through and $12,600,000
including September 30, 2000
From October 1, 2000 through and $13,100,000
including December 31, 2000
From January 1, 2001 through and $13,600,000
including March 31, 2001
From April 1, 2001 and for $14,100,000
each month thereafter
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9.19 YEAR 2000 COMPLIANCE. Borrower shall take, and shall cause each of its
Subsidiaries to take, all action which may be required so that its
computer-based information systems, including, without limitation, all of its
proprietary computer hardware and software and all computer hardware and
software leased or licensed from third parties (and whether supplied by others
or with which Borrower's or such Subsidiary's systems interface) are able to
operate effectively and correctly process data using dates on or after January
1, 2000. Compliance with the foregoing shall mean that the systems will operate
and correctly process data without human intervention such that (a) there is
correct century recognition, (b) calculations properly accommodate same century
and multi-century formulas and date values, (c) all leap years shall be
calculated correctly and (d) the information systems shall otherwise comply with
applicable industry standards and regulatory guidelines regarding the change of
the century and year 2000 compliance. Borrower shall, and shall cause each of
its Subsidiaries to, certify to Lender in writing that its information systems
have been modified, updated and programmed as required by this Section. On and
after November 30, 1999 the computer-based information systems of Borrower and
Guarantors shall be, and with ordinary course upgrading and maintenance, will
continue to be sufficient to permit Borrower to conduct its business without any
adverse effect as a result of the year 2000.
9.20 COSTS AND EXPENSES. Borrower shall pay to Lender on demand all costs,
expenses, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments, supplements
or consents which may hereafter be contemplated (whether or not executed) or
entered into in respect hereof and thereof, including: (a) all costs and
expenses of filing or recording (including Uniform Commercial Code financing
statement filing taxes and fees, documentary taxes, intangibles taxes and
mortgage recording taxes and fees, if applicable); (b) costs and expenses and
fees for insurance premiums, environmental audits, surveys, assessments,
engineering reports and inspections, appraisal fees and search fees, costs and
expenses of remitting loan proceeds, collecting checks and other items of
payment, and establishing and maintaining the Blocked Accounts, together with
Lender's reasonable and customary charges and fees with respect thereto; (c)
charges, fees or expenses charged by any bank or issuer in connection with the
Letter of Credit Accommodations; (d) costs and expenses of preserving and
protecting the Collateral; (e) reasonable costs and expenses paid or incurred in
connection with obtaining payment of the Obligations, enforcing the security
interests and liens of Lender, selling or otherwise realizing upon the
Collateral, and otherwise enforcing the provisions of this Agreement and the
other Financing Agreements or defending any claims made or threatened against
Lender arising out of the transactions contemplated hereby and thereby
(including preparations for and consultations concerning any such matters); (f)
any VAT incurred by Lender; (g) all reasonable out-of-pocket expenses and costs
heretofore and from time to time hereafter incurred by Lender during the course
of periodic field examinations of the Collateral and Borrower's and Guarantors'
operations, plus a per diem charge at the rate of $650 per person per day for
Lender's examiners in the field and office in the United States and at the rate
of ,500 per person per day for Lender's examiners in the field and office
outside the United States; and (h) the reasonable fees and disbursements of
counsel (including legal assistants) to Lender in connection with any of the
foregoing.
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9.21 FURTHER ASSURANCES. At the request of Lender at any time and from time
to time, Borrower shall, at its expense, duly execute and deliver, or cause to
be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing Agreements. Lender may
at any time and from time to time request a certificate from an officer of
Borrower representing that all conditions precedent to the making of Loans and
providing Letter of Credit Accommodations contained herein are satisfied. In the
event of such request by Lender, Lender may, at its option, cease to make any
further Loans or provide any further Letter of Credit Accommodations until
Lender has received such certificate and, in addition, Lender has determined
that such conditions are satisfied. Where permitted by law, Borrower hereby
authorizes Lender to execute and file one or more UCC financing statements
signed only by Lender.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
10.1 EVENTS OF DEFAULT. The occurrence or existence of any one or more of
the following events are referred to herein individually as an "Event of
Default", and collectively as "Events of Default":
(a) (i) Borrower fails to pay when due any of the Obligations or (ii)
Borrower or any Obligor fails to perform any of the covenants contained in
Sections 9.3, 9.4, 9.6, 9.13, 9.14, 9.20 and 9.21 of this Agreement and such
failure shall continue for ten (10) days; PROVIDED, THAT, such ten (10) day
period shall not apply in the case of: (A) any failure to observe any such
covenant which is not capable of being cured at all or within such ten (10) day
period or which has been the subject of a prior failure within a six (6) month
period or (B) an intentional breach of Borrower or any Obligor of any such
covenant or (iii) Borrower fails to perform any of the terms, covenants,
conditions or provisions contained in this Agreement or any of the other
Financing Agreements other than those described in Section 10.1(a)(i) or Section
10.1(a)(ii) above;
(b) any representation, warranty or statement of fact made by Borrower
or any Obligor to Lender in this Agreement, the other Financing Agreements or
any other agreement, schedule, confirmatory assignment or otherwise shall when
made or deemed made be false or misleading in any material respect;
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(c) any Obligor revokes, terminates or fails to perform any of the
terms, covenants, conditions or provisions of any guarantee, endorsement or
other agreement of such party in favor of Lender;
(d) any judgment for the payment of money is rendered against Borrower
or any Obligor in excess of the US Dollar Equivalent of US$250,000 in any one
case or in excess of the US Dollar Equivalent of US$500,000 in the aggregate and
shall remain undischarged or unvacated for a period in excess of thirty (30)
days or execution shall at any time after such thirty (30) days not be
effectively stayed, or any judgment other than for the payment of money, or
injunction, attachment, garnishment or execution is rendered against Borrower or
any Obligor or any of their assets;
(e) Borrower or any Obligor dissolves or suspends or discontinues
doing business;
(f) Borrower, Quad Europe, or Borrower and its Subsidiaries on a
consolidated basis become insolvent (however defined or evidenced), or Borrower
or any Subsidiary of Borrower makes an assignment for the benefit of creditors,
makes or sends notice of a bulk transfer or calls a meeting of its creditors or
principal creditors;
(g) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any bankruptcy,
insolvency, reorganization, receivership, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction now or hereafter in effect
(whether at law or in equity) is filed against Borrower or any Obligor or all or
any part of its properties and such petition or application is not dismissed
within thirty (30) days after the date of its filing or Borrower or any Obligor
shall file any answer admitting or not contesting such petition or application
or indicates its consent to, acquiescence in or approval of, any such action or
proceeding or the relief requested is granted sooner;
(h) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect, or a petition, case, application
or proceeding under any bankruptcy or insolvency laws of the United Kingdom
(including the Insolvency Act of 1986) or any similar law now or hereafter in
effect in any jurisdiction or under any insolvency, arrangement, reorganization,
moratorium, receivership, readjustment of debt, dissolution or liquidation law
or statute of any jurisdiction now or hereafter in effect (whether at a law or
equity) is filed, taken or commenced after the date hereof by Borrower or any
Obligor or for all or any part of its property, including, without limitation,
if Borrower or any Obligor shall: (i) apply for, request or consent to the
appointment of a receiver, administrative receiver, receiver and manager,
judicial custodian, trustee or liquidator of it or of all or a substantial part
of its property and assets, (ii) be unable, or admit in writing its inability,
to pay its debts as they become due, or commit any other act of bankruptcy,
(iii) make a general assignment for the benefit of creditors, (iv) file a
voluntary petition or assignment in bankruptcy or a proposal seeking a
reorganization, compromise, moratorium or arrangement with its creditors, (v)
take advantage of any insolvency or other similar law pertaining to
arrangements, moratoriums, compromises or reorganizations, or admit the material
allegations of a petition or application filed in respect of it in any
bankruptcy, reorganization or insolvency proceeding, or (vi) take any corporate
action for the purpose of effecting any of the foregoing;
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(i) any default by Borrower or any Obligor under any agreement,
document or instrument relating to any Indebtedness for borrowed money owing to
any person other than Lender, or any capitalized lease obligations, contingent
Indebtedness in connection with any guarantee, letter of credit, indemnity or
similar type of instrument in favor of any person other than Lender, in any case
in an amount in excess of US$250,000, which default continues for more than the
applicable cure period, if any, with respect thereto, or any default by Borrower
or any Obligor under any Material Contract, which default continues for more
than the applicable cure period, if any, with respect thereto;
(j) an ERISA Event shall occur which results in or could reasonably be
expected to result in liability of Borrower in an aggregate amount in excess of
US$500,000;
(k) any Change of Control;
(l) the indictment by any Governmental Authority, or as Lender may
reasonably and in good faith determine, the threatened indictment by any
Governmental Authority of Borrower or any Obligor of which Borrower, any Obligor
or Lender receives notice, in either case, as to which there is a reasonable
possibility of an adverse determination, in the good faith determination of
Lender, under any criminal statute, or commencement or threatened commencement
of criminal or civil proceedings against Borrower, pursuant to which statute or
proceedings the penalties or remedies sought or available include forfeiture of
(i) any of the Collateral or (ii) any other property of Borrower which is
necessary or material to the conduct of its business;
(m) there shall be a material adverse change in the business or assets
of Borrower or any Obligor after the date hereof which affects the ability of
Borrower or such Obligor to repay the Obligations or perform its obligations
under this Agreement; or
(n) there shall be an event of default, after the expiration of any
applicable notice and cure period, under any of the other Financing Agreements.
10.2 REMEDIES.
(a) At any time an Event of Default exists or has occurred and is
continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by Borrower or any Obligor, except as such notice or consent is
expressly provided for hereunder or required by applicable law. All rights,
remedies and powers granted to Lender hereunder, under any of the other
Financing Agreements, the Uniform Commercial Code or other applicable law, are
cumulative, not exclusive and enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of equity for
an injunction to restrain a breach or threatened breach by Borrower of this
Agreement or any of the other Financing Agreements. Lender may, at any time or
times, proceed directly against Borrower or any Obligor to collect the
Obligations without prior recourse to the Collateral.
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(b) Without limiting the foregoing, at any time an Event of Default
exists or has occurred and is continuing, Lender may, in its discretion and
without limitation, (i) accelerate the payment of all Obligations and demand
immediate payment thereof to Lender (PROVIDED, THAT, upon the occurrence of any
Event of Default described in Sections 10.1(g) and 10.1(h), all Obligations
shall automatically become immediately due and payable), (ii) with or without
judicial process or the aid or assistance of others, enter upon any premises on
or in which any of the Collateral may be located and take possession of the
Collateral or complete processing, manufacturing and repair of all or any
portion of the Collateral, (iii) require Borrower, at Borrower's expense, to
assemble and make available to Lender any part or all of the Collateral at any
place and time designated by Lender, (iv) collect, foreclose, receive,
appropriate, setoff and realize upon any and all Collateral, (v) remove any or
all of the Collateral from any premises on or in which the same may be located
for the purpose of effecting the sale, foreclosure or other disposition thereof
or for any other purpose, (vi) sell, lease, transfer, assign, deliver or
otherwise dispose of any and all Collateral (including entering into contracts
with respect thereto, public or private sales at any exchange, broker's board,
at any office of Lender or elsewhere) at such prices or terms as Lender may deem
reasonable, for cash, upon credit or for future delivery, with the Lender having
the right to purchase the whole or any part of the Collateral at any such public
sale, all of the foregoing being free from any right or equity of redemption of
Borrower, which right or equity of redemption is hereby expressly waived and
released by Borrower and/or (vii) terminate this Agreement. If any of the
Collateral is sold or leased by Lender upon credit terms or for future delivery,
the Obligations shall not be reduced as a result thereof until payment therefor
is finally collected by Lender. If notice of disposition of Collateral is
required by law, ten (10) days prior notice by Lender to Borrower designating
the time and place of any public sale or the time after which any private sale
or other intended disposition of Collateral is to be made, shall be deemed to be
reasonable notice thereof and Borrower waives any other notice. In the event
Lender institutes an action to recover any Collateral or seeks recovery of any
Collateral by way of prejudgment remedy, Borrower waives the posting of any bond
which might otherwise be required.
(c) For the sole purpose of enabling Lender to exercise the rights and
remedies hereunder, Borrower hereby grants to Lender, to the extent assignable,
an irrevocable, non-exclusive license (exercisable without payment of royalty or
other compensation to Borrower) to use, assign, license or sublicense any of the
trademarks, service-marks, trade names, business names, trade styles, designs,
logos and other source of business identifiers and other Intellectual Property
and general intangibles now owned or hereafter acquired by Borrower, wherever
the same maybe located, including in such license reasonable access to all media
in which any of the licensed items may be recorded or stored and to all computer
programs used for the compilation or printout thereof.
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(d) Lender may apply the cash proceeds of Collateral actually received
by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of the Obligations, in whole or in part and in such order
as Lender may elect, whether or not then due. Borrower shall remain liable to
Lender for the payment of any deficiency with interest at the highest rate
provided for herein and all costs and expenses of collection or enforcement,
including attorneys' fees and legal expenses.
(e) Without limiting the foregoing, upon the occurrence of an Event of
Default or an event which with notice or passage of time or both would
constitute an Event of Default, Lender may, at its option, without notice, (i)
cease making Loans or arranging for Letter of Credit Accommodations or reduce
the lending formulas or amounts of Revolving Loans and Letter of Credit
Accommodations available to Borrower and/or (ii) terminate any provision of this
Agreement providing for any future Loans or Letter of Credit Accommodations to
be made by Lender to Borrower.
10.3 CONFESSION OF JUDGEMENT
(a) Borrower, to the extent permitted by law, and without the further
consent of or notice to Borrower, hereby irrevocably and unconditionally
authorizes the Prothonontary, Clerk of Court, or any attorney of any court of
record in the Commonwealth of Pennsylvania, or any other jurisdiction, as
attorney for Borrower to appear for Borrower in such court and confess judgment
against Borrower and in favor of Lender, at any time on or after an Event of
Default exists or has occurred and is continuing, for all or any portion of the
Obligations (including, but not limited to, principal, interest, fees, costs and
expenses and including attorneys' fees and legal expenses not to exceed ten
(10%) percent of the outstanding and unpaid Obligations), for which this
Agreement or a verified copy hereof shall be sufficient warrant. The authority
to enter judgment shall not be exhausted by one exercise hereof, but, to the
extent permitted by law, shall continue from time to time until final payment
and satisfaction in full of all of the Obligations. The foregoing right and
remedy is in addition to and not in lieu of any other right or remedy available
to Lender under this Agreement, the other Financing Agreements, applicable law
or otherwise.
(b) Borrower, being fully aware of its right to notice and a hearing
concerning the validity of any and all claims that may be asserted against
Borrower by Lender before a judgment can be entered hereunder or before
execution may be levied on such judgment against any and all property of
Borrower, hereby waives each of these rights and agrees and consents to judgment
being entered by confession in accordance with the terms hereof and execution
being levied on such judgment against any and all property of Borrower, in each
case without first giving notice and the opportunity to be heard on the validity
of the claim or claims upon which such judgment is entered.
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SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW
11.1 GOVERNING LAW; CHOICE OF FORUM; SERVICE OF PROCESS; JURY TRIAL WAIVER.
(a) The validity, interpretation and enforcement of this Agreement and
the other Financing Agreements and any dispute arising out of the relationship
between the parties hereto, whether in contract, tort, equity or otherwise,
shall be governed by the internal laws of the State of New York (without giving
effect to principles of conflicts of law).
(b) Borrower and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the Supreme Court of the State of New York and the
United States District Court for the Southern District of New York and waive any
objection based on venue or FORUM NON CONVENIENS with respect to any action
instituted therein arising under this Agreement or any of the other Financing
Agreements or in any way connected with or related or incidental to the dealings
of the parties hereto in respect of this Agreement or any of the other Financing
Agreements or the transactions related hereto or thereto, in each case whether
now existing or hereafter arising, and whether in contract, tort, equity or
otherwise, and agree that any dispute with respect to any such matters shall be
heard only in the courts described above (except that Lender shall have the
right to bring any action or proceeding against Borrower or its property in the
courts of any other jurisdiction which Lender deems necessary or appropriate in
order to realize on the Collateral or to otherwise enforce its rights against
Borrower or its property).
(c) Borrower hereby waives personal service of any and all process
upon it and consents that all such service of process may be made by certified
mail (return receipt requested) directed to its address set forth on the
signature pages hereof and service so made shall be deemed to be completed five
(5) days after the same shall have been so deposited in the U.S. mails, or, at
Lender's option, by service upon Borrower in any other manner provided under the
rules of any such courts. Within thirty (30) days after such service, Borrower
shall appear in answer to such process, failing which Borrower shall be deemed
in default and judgment may be entered by Lender against Borrower for the amount
of the claim and other relief requested.
(d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY
OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT
OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED
HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND LENDER EACH HEREBY
AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL
BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR LENDER MAY FILE AN
ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO
TRIAL BY JURY.
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<PAGE>
(e) Lender shall not have any liability to Borrower (whether in tort,
contract, equity or otherwise) for losses suffered by Borrower in connection
with, arising out of, or in any way related to the transactions or relationships
contemplated by this Agreement, or any act, omission or event occurring in
connection herewith, unless it is determined by a final and non-appealable
judgment or court order binding on Lender, that the losses were the result of
acts or omissions constituting gross negligence or willful misconduct. In any
such litigation, Lender shall be entitled to the benefit of the rebuttable
presumption that it acted in good faith and with the exercise of ordinary care
in the performance by it of the terms of this Agreement.
11.2 WAIVER OF NOTICES. Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on Borrower which Lender may elect to give shall entitle Borrower
to any other or further notice or demand in the same, similar or other
circumstances.
11.3 AMENDMENTS AND WAIVERS. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender, and as to amendments, as also signed by an authorized officer of
Borrower. Lender shall not, by any act, delay, omission or otherwise be deemed
to have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. Any such waiver shall be enforceable only to the extent specifically set
forth therein. A waiver by Lender of any right, power and/or remedy on any one
occasion shall not be construed as a bar to or waiver of any such right, power
and/or remedy which Lender would otherwise have on any future occasion, whether
similar in kind or otherwise.
11.4 WAIVER OF COUNTERCLAIMS. Borrower waives all rights to interpose any
claims, deductions, setoffs or counterclaims of any nature (other then
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.
11.5 INDEMNIFICATION. Borrower shall indemnify and hold Lender, and its
directors, agents, employees and counsel, harmless from and against any and all
losses, claims, damages, liabilities, costs or expenses imposed on, incurred by
or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or transaction related or attendant thereto,
including, without limitation, any and all losses, claims, damages, liabilities,
costs or expenses caused by the negligence (but not the gross negligence or
wilful misconduct) of Lender or Lender's directors, agents, employees and
counsel and further including, without limitation, amounts paid in settlement,
court costs, and the fees and expenses of counsel. To the extent that the
undertaking to indemnify, pay and hold harmless set forth in this Section may be
unenforceable because it violates any law or public policy, Borrower shall pay
the maximum portion which it is permitted to pay under applicable law to Lender
in satisfaction of indemnified matters under this Section. The foregoing
indemnity shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.
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<PAGE>
11.6 CURRENCY INDEMNITY. If, for the purposes of obtaining judgment in any
court in any jurisdiction with respect to this Agreement or any of the other
Financing Agreements, it becomes necessary to convert into the currency of such
jurisdiction (the "Judgment Currency") any amount due under this Agreement or
under any of the other Financing Agreements in any currency other than the
Judgment Currency (the "Currency Due"), then conversion shall be made at the
rate of exchange prevailing on the Business Day before the day on which judgment
is given. For this purpose, "rate of exchange" means the rate at which Lender is
able, on the relevant date, to purchase the Currency Due with the Judgment
Currency. In the event that there is a change in the rate of exchange prevailing
between the Business Day before the day on which the judgment is given and the
date of receipt by Lender of the amount due, Borrower will, on the date of
receipt by Lender, pay such additional amounts, if any, or be entitled to
receive reimbursement of such amount, if any, as may be necessary to ensure that
the amount received by Lender on such date is the amount in the Judgment
Currency which when converted at the rate of exchange prevailing on the date of
receipt by Lender is the amount then due under this Agreement or such other of
the Financing Agreements in the Currency Due. If the amount of the Currency Due
which Lender is able to purchase is less than the amount of the Currency Due
originally due to it, Borrower shall indemnify and save Lender harmless from and
against loss or damage arising as a result of such deficiency. The indemnity
contained herein shall constitute an obligation separate and independent from
the other obligations contained in this Agreement and the other Financing
Agreements, shall give rise to a separate and independent cause of action, shall
apply irrespective of any indulgence granted by Lender from time to time and
shall continue in full force and effect notwithstanding any judgment or order
for a liquidated sum in respect of an amount due under this Agreement or any of
the other Financing Agreements or under any judgment or order.
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS
12.1 TERM.
(a) This Agreement and the other Financing Agreements shall become
effective as of the date set forth on the first page hereof and shall continue
in full force and effect for a term ending on the date three (3) years from the
date hereof (the "Renewal Date"), and from year to year thereafter, unless
sooner terminated pursuant to the terms hereof. Lender or Borrower may terminate
this Agreement and the other Financing Agreements effective on the Renewal Date
or on the anniversary of the Renewal Date in any year by giving to the other
party at least sixty (60) days prior written notice; PROVIDED, THAT, this
Agreement and all other Financing Agreements must be terminated simultaneously.
71
<PAGE>
Upon the effective date of termination or non-renewal of the Financing
Agreements, Borrower shall pay to Lender, in full, all outstanding and unpaid
Obligations and shall furnish cash collateral to Lender in such amounts as
Lender determines are reasonably necessary to secure Lender from loss, cost,
damage or expense, including attorneys' fees and legal expenses, in connection
with any contingent Obligations, including issued and outstanding Letter of
Credit Accommodations and checks or other payments provisionally credited to the
Obligations and/or as to which Lender has not yet received final and
indefeasible payment. Such payments in respect of the Obligations and cash
collateral shall be remitted by wire transfer in Federal funds to such bank
account of Lender, as Lender may, in its discretion, designate in writing to
Borrower for such purpose. Interest shall be due until and including the next
Business Day, if the amounts so paid by Borrower to the bank account designated
by Lender are received in such bank account later than 12:00 noon, New York, New
York time.
(b) No termination of this Agreement or the other Financing Agreements
shall relieve or discharge Borrower of its respective duties, obligations and
covenants under this Agreement or the other Financing Agreements until all
Obligations have been fully and finally discharged and paid, and Lender's
continuing security interest in the Collateral and the rights and remedies of
Lender hereunder, under the other Financing Agreements and applicable law, shall
remain in effect until all such Obligations have been fully and finally
discharged and paid.
(c) If for any reason this Agreement is terminated prior to the end of
the then current term or renewal term of this Agreement, in view of the
impracticality and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Lender's lost
profits as a result thereof, Borrower agrees to pay to Lender, upon the
effective date of such termination, an early termination fee in the amount set
forth below if such termination is effective in the period indicated:
AMOUNT PERIOD
------ ------
(i) Three (3%) percent of From the date hereof to and
the Maximum Credit including January 7, 2001
(ii) Two (2%) percent of From January 8, 2001 to and
the Maximum Credit including January 7, 2002
(iii) One (1%) percent of From January 8, 2002 to and
the Maximum Credit including January 6,
2003 or if the term of this Agreement
is extended, at any time prior to the
end of the then current term.
Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrower agrees
that it is reasonable under the circumstances currently existing. In addition,
Lender shall be entitled to such early termination fee upon the occurrence of
any Event of Default described in Sections 10.1(g) and 10.1(h) hereof, even if
Lender does not exercise its right to terminate this Agreement, but elects, at
its option, to provide financing to Borrower or permit the use of cash
collateral under the United States Bankruptcy Code. The early termination fee
provided for in this Section 12.1 shall be deemed included in the Obligations.
72
<PAGE>
(d) Notwithstanding anything to the contrary contained in Section
12.1(c) above, in the event of the termination of this Agreement by Borrower
prior to the end of the then current term of renewal term of this Agreement and
the full and final repayment of all of the Obligations and the receipt by Lender
of cash collateral all as provided in Section 12.1(a) above with the proceeds of
initial loans and advances by First Union National Bank to Borrower pursuant to
a credit facility provided by First Union National Bank to Borrower, to replace
the financing arrangements provided for herein, Borrower shall not be required
to pay the early termination fee provided for above.
12.2 INTERPRETATIVE PROVISIONS.
(a) All terms used herein which are defined in Article 1 or Article 9
of the Uniform Commercial Code shall have the meanings given therein unless
otherwise defined in this Agreement.
(b) All references to the plural herein shall also mean the singular
and to the singular shall also mean the plural unless the context otherwise
requires.
(c) All references to Borrower and Lender pursuant to the definitions
set forth in the recitals hereto, or to any other person herein, shall include
their respective successors and assigns.
(d) The words "hereof", "herein", "hereunder", "this Agreement" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not any particular provision of this Agreement and as
this Agreement now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
(e) The word "including" when used in this Agreement shall mean
"including, without limitation".
(f) An Event of Default shall exist or continue or be continuing until
such Event of Default is waived in accordance with Section 11.3 or is cured in a
manner satisfactory to Lender, if such Event of Default is capable of being
cured as determined by Lender.
(g) Any accounting term used in this Agreement shall have, unless
otherwise specifically provided herein, the meaning customarily given in
accordance with GAAP, and all financial computations hereunder shall be computed
unless otherwise specifically provided herein, in accordance with GAAP as
consistently applied and using the same method for inventory valuation as used
in the preparation of the financial statements of Borrower most recently
received by Lender prior to the date hereof.
73
<PAGE>
(h) In the computation of periods of time from a specified date to a
later specified date, the word "from" means "from and including", the words "to"
and "until" each mean "to but excluding" and the word "through" means "to and
including".
(i) Unless otherwise expressly provided herein, (i) references herein
to any agreement, document or instrument shall be deemed to include all
subsequent amendments, modifications, supplements, extensions, renewals,
restatements or replacements with respect thereto, but only to the extent the
same are not prohibited by the terms hereof or of any other Financing Agreement,
and (ii) references to any statute or regulation are to be construed as
including all statutory and regulatory provisions consolidating, amending,
replacing, recodifying, supplementing or interpreting the statute or regulation.
(j) The captions and headings of this Agreement are for convenience of
reference only and shall not affect the interpretation of this Agreement.
(k) This Agreement and other Financing Agreements may use several
different limitations, tests or measurements to regulate the same or similar
matters. All such limitations, tests and measurements are cumulative and shall
each be performed in accordance with their terms.
(l) This Agreement and the other Financing Agreements are the result
of negotiations among and have been reviewed by counsel to Lender and the other
parties, and are the products of all parties. Accordingly, this Agreement and
the other Financing Agreements shall not be construed against Lender merely
because of Lender's involvement in their preparation.
12.3 NOTICES. All notices, requests and demands hereunder shall be in
writing and (a) made to a party at its address set forth below, or to such other
address as such party may designate by written notice to the other in accordance
with this provision, and (b) deemed to have been given or made: if delivered in
person, immediately upon delivery; if by telex, telegram or facsimile
transmission, immediately upon sending and upon confirmation of receipt; if by
nationally recognized overnight courier service with instructions to deliver the
next Business Day, one (1) Business Day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing.
12.4 PARTIAL INVALIDITY. If any provision of this Agreement is held to be
invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
74
<PAGE>
12.5 SUCCESSORS. This Agreement, the other Financing Agreements and any
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Borrower and their respective
successors and assigns, except that Borrower may not assign its rights under
this Agreement, the other Financing Agreements and any other document referred
to herein or therein without the prior written consent of Lender. Lender may,
after notice to Borrower, assign its rights and delegate its obligations under
this Agreement and the other Financing Agreements and further may assign, or
sell participations in, all or any part of the Loans, the Letter of Credit
Accommodations or any other interest herein to another financial institution or
other person, in which event, the assignee or participant shall have, to the
extent of such assignment or participation, the same rights and benefits as it
would have if it were the Lender hereunder, except as otherwise provided by the
terms of such assignment or participation; PROVIDED, THAT, with respect to any
such participation, (a) Lender's obligations under this Agreement shall remain
unchanged and (b) Borrower shall continue to deal solely and directly with
Lender in connection with Lender's rights and obligations under this Agreement.
12.6 ENTIRE AGREEMENT. This Agreement, the other Financing Agreements, any
supplements hereto or thereto, and any instruments or documents delivered or to
be delivered in connection herewith or therewith represents the entire agreement
and understanding concerning the subject matter hereof and thereof between the
parties hereto, and supersede all other prior agreements, understandings,
negotiations and discussions, representations, warranties, commitments,
proposals, offers and contracts concerning the subject matter hereof, whether
oral or written. In the event of any inconsistency between the terms of this
Agreement and any schedule or exhibit hereto, the terms of this Agreement shall
govern.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
75
<PAGE>
IN WITNESS WHEREOF, Lender and Borrower have caused these presents to be
duly executed as of the day and year first above written.
LENDER BORROWER
CONGRESS FINANCIAL CORPORATION QUAD SYSTEMS CORPORATION
By: /s/ Kathleen Quinn By: /s/ Anthony R. Drury
-------------------------- ---------------------------------
Title: Senior Vice President Title: Sr. V.P. Finance, CFO
ADDRESS: CHIEF EXECUTIVE OFFICE:
1133 Avenue of the Americas 2405 Maryland Road
New York, New York 10036 Willow Grove, Pennsylvania 19090
Attention: Mr. Laurence S. Forte Attention: Anthony Drury
Telecopier No.: (212) 545-4555 Telecopier No.: (215) 657-4107
76
QUAD SYSTEMS CORPORATION
SUBSIDIARIES OF THE REGISTRANT
1. Quad Europe Limited, an English company
2. Quad Systems 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
8. Quad Systems de Mexico S. A. de C. V., a Mexican Company
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 November 8, 1999 (except for Note 13 as to which the date is
January 7, 2000), 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, 1999.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 10, 2000
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0
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