<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 1-12230
ADVANCED DEPOSITION TECHNOLOGIES, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2865714
(State of Organization) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
580 MYLES STANDISH INDUSTRIAL PARK, TAUNTON, MASSACHUSETTS 02780
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
(508) 823-0707
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 __
As of October 31, 1998, there were 4,250,919 shares of Common Stock, $0.01
par value, of the issuer outstanding.
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NUMBER
<S> <C>
Item 1. Financial Statements
Condensed and Consolidated Balance Sheets (unaudited): 1-2
September 30, 1998 and December 31, 1997
Condensed and Consolidated Statements of Operations 3
(unaudited): for the Three Months and Nine Months
ended September 30, 1998 and September 30, 1997
Condensed and Consolidated Statements of Cash Flows 4
(unaudited): for the Nine Months ended September 30, 1998
and September 30, 1997
Notes to Condensed and Consolidated Financial 5-8
Statements
Item 2. Management's Discussion and Analysis of Financial 9-15
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports filed on Form 8-K 16
</TABLE>
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 119 $ 919
Investment in marketable securities 33 155
Accounts receivable, net of reserve for doubtful accounts of $221 and $135
at September 30, 1998 and December 31, 1997, respectively 8,123 7,084
Amount due from related party 200 --
Inventories 4,115 3,347
Prepaid expenses and other current assets 112 69
------------ -----------
Total current assets 12,702 11,574
PROPERTY AND EQUIPMENT, net of accumulated depreciation 6,939 6,331
OTHER ASSETS, net of accumulated amortization 5,921 6,038
------------ -----------
Total assets $ 25,562 $ 23,943
============ ===========
</TABLE>
The Condensed and Consolidated Balance Sheet at December 31, 1997, has been
derived from the audited financial statements of the Company at that date.
See Notes to Condensed and Consolidated Financial Statements
1
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- ---------
<S> <C> <C>
CURRENT LIABILITIES
Due to financing institutions $ 3,152 $ 3,709
Accounts payable 4,787 4,092
Accrued liabilities 698 543
Current maturities of long-term debt 564 525
Bridge financing -- 1,000
--------- ---------
Total current liabilities 9,201 9,869
LONG-TERM OBLIGATIONS
Revolving line of credit 713 974
Long-term obligations, net of current maturities 4,638 2,324
--------- ---------
Total liabilities 14,552 13,167
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 1,029 795
--------- ---------
STOCKHOLDERS' EQUITY;
Preferred stock, $0.01 par value
1,000,000 shares authorized, none issued -- --
Common stock, $0.01 par value,
10,000,000 shares authorized, 4,286,560 shares issued,
4,255,350 and 4,262,950 shares outstanding at
September 30, 1998 and December 31, 1997, respectively 43 43
Common stock purchase warrants 1,594 1,594
Additional paid-in capital 9,592 9,581
Accumulated deficit (1,256) (1,153)
Foreign currency translation adjustment 136 (19)
Unrealized loss on marketable securities (44) --
--------- ---------
10,065 10,046
Less treasury stock, 31,210 and 17,610 shares at cost at September 30, 1998
and December 31, 1997, respectively (84) (65)
--------- ---------
Total stockholders' equity 9,981 9,981
--------- ---------
Total liabilities and stockholders' equity $ 25,562 $ 23,943
========= =========
</TABLE>
The Condensed and Consolidated Balance Sheet at December 31, 1997, has been
derived from the audited financial statements of the Company at that date.
See Notes to Condensed and Consolidated Financial Statements
2
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------
1998 1997 1998 1997
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 6,346 $ 1,899 $ 18,285 $ 8,171
Royalties, license fees and other 500 -- 500 400
---------- ---------- ---------- ----------
6,846 1,899 18,785 8,571
COST OF REVENUES 5,612 1,793 15,125 6,702
---------- ---------- ---------- ----------
Gross Profit 1,234 106 3,660 1,869
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 625 367 2,388 1,194
RESEARCH AND DEVELOPMENT EXPENSES 42 109 177 357
AMORTIZATION EXPENSE 73 37 215 109
---------- --------- ---------- ---------
Operating income (loss) 494 (407) 880 209
INTEREST EXPENSE, NET OF
INTEREST INCOME (208) (45) (566) (118)
OTHER INCOME (EXPENSE) 67 (32) (36) (58)
---------- --------- ---------- ---------
Income (loss) before income taxes and minority 353 (484) 278 33
Interest
INCOME TAXES 177 -- 231 --
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED SUBSIDIARY 44 -- 150 --
---------- ---------- ---------- ----------
Net income (loss) $ 132 $ (484) $ (103) $ 33
========== ========== ========== ==========
BASIC AND FULLY DILUTED NET INCOME (LOSS) PER WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING
$ 0.03 $ (0.12) $ (0.02) $ 0.01
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,264,476 3,964,702 4,267,394 3,952,029
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING
DILUTION 4,264,736 3,964,702 4,267,394 4,104,693
========== ========== ========= =========
</TABLE>
See Notes to Condensed and Consolidated Financial Statements
3
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities $ 149 $ (161)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,590) (382)
Decrease (increase) in investment in marketable securities 78 (17)
Increase in other assets (113) (47)
-------- ---------
Net cash used in investing activities (1,625) (446)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayment) borrowings under revolving line of credit (261) 391
Net repayments to financial institutions (557) --
Repayment of bridge financing (1,000) --
Net borrowings (repayment) of long term obligations 2,347 (397)
Purchase of treasury stock (19) --
Exercise of stock options 11 1
Proceeds from redemption of common stock purchase warrants -- 184
Purchase of warrants -- (18)
-------- ---------
Net cash provided by financing activities 521 161
-------- ---------
Net effect of exchange rates on cash and cash equivalents 155 --
-------- ---------
NET DECREASE IN CASH (800) (446)
CASH AND CASH EQUIVALENTS, beginning of period 919 1,170
-------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 119 $ 724
======== =========
</TABLE>
See Notes to Condensed and Consolidated Financial Statements
4
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998
1.) GENERAL
The accompanying unaudited condensed and consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial reporting and with the instructions to Form 10-QSB and
Item 310 (b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Reference should be made to the financial
statements and related notes included in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997, which was filed with the
Securities and Exchange Commission on April 6, 1998.
In the opinion of the management of the Company, the accompanying financial
statements reflect all adjustments that were of a normal recurring nature
necessary for a fair presentation of the Company's results of operations and
changes in financial position for the three and nine month periods ended
September 30, 1998 and September 30, 1997. Operating results for the three and
nine month periods ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998.
2.) SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed and consolidated financial statements reflect
the application of certain significant accounting policies, including those
described below.
a. Principals of consolidation
The accompanying condensed and consolidated financial statements include
the Company and its majority owned and wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
b. Revenue recognition
The Company recognizes revenues on its product sales upon shipment and
royalties and license fees as earned. During the three months ended September
30, 1998, the Company licensed the use of certain patented materials to a
company owned by a person who is both a stockholder and an officer of the
Company. The amount of revenue recognized during the three months ended
September 30, 1998, as a result of this licensing agreement was $200,000. The
Company also licensed the use of certain patented materials during the three
months ended September 30, 1998, to a company with whom the Company has signed a
letter of intent to acquire a minimum 40% equity position. The amount of
revenue recognized during the three months ended September 30, 1998, as a result
of this licensing agreement was $300,000, all of which is included in Accounts
Receivable.
c. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
5
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Raw materials $ $2,059 $ 1,812
Work in process 469 731
Finished goods 1,938 1,182
---------- ----------
4,466 3,725
Less: Reserves for obsolescence 351 378
---------- ----------
Total $ 4,115 $ 3,347
========== ==========
</TABLE>
d. Net Income (Loss) per Common Share
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). The new
accounting standard established standards for computing and presenting earnings
per share. The Company has restated 1997 income per share to conform to the new
standards.
e. Reclassifications
Certain balances in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
f. Comprehensive income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
which requires that all components of comprehensive and total comprehensive
income be reported on one of the following: a statement of income and
comprehensive income, a statement of comprehensive income or a statement of
stockholders equity. Comprehensive income is comprised of net income and all
changes to stockholders' equity except those due to investment by owners
(changes in paid in capital) and distributions to owners (dividends). For
interim reporting purposes, SFAS 130 requires disclosure of total comprehensive
income.
Total comprehensive income (unaudited) is as follows (in thousands):
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 132 $ (484) $ (103) $ 33
Foreign currency translation adjustment 108 -- 155 --
Marketable securities unrealized loss (44) -- (44) --
-------- -------- -------- --------
Total comprehensive income $ 196 $ (484) $ 8 $ 33
======== ======== ======== ========
</TABLE>
6
<PAGE>
3.) CASH AND CASH EQUIVALENTS
The Company considers all investments purchased with original maturities
of less than three months to be cash equivalents. Cash and cash equivalents
consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Cash $ 119 $ 919
---------- ----------
Total $ 119 $ 919
========== ==========
</TABLE>
4.) INVESTMENT IN MARKETABLE SECURITIES
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Investments" ("SFAS
115"), effective January 1, 1994. As of September 30, 1998 and December 31,
1997, investments in marketable securities that are classified as available-for-
sale and are recorded at fair value, consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31, 1997
1998
----------------- -----------------
<S> <C> <C>
Equity instruments $ 33 $ 155
---------- ----------
Total $ 33 $ 155
========== ==========
</TABLE>
5.) COMMON STOCK PURCHASE WARRANTS
The Company's Redeemable Common Stock Purchase Warrants (the "IPO
Warrants") expired on March 8, 1997. Approximately 78,000 IPO Warrants were
exercised during the first quarter of 1997, resulting in net proceeds to the
Company of approximately $183,000.
In May 1998, the Company reduced the conversion price of the Class B
Common Stock Redeemable Warrants (the "B Warrants") from $5.00 per share to
$3.75 per share. In addition, the Company extended the expiration date of the B
Warrants from May 12, 1998 to July 31, 1998 (the "Extended Period"), and
increased the number of warrants required to purchase one share of Common
7
<PAGE>
Stock from one B Warrant to two B Warrants. The B Warrants expired on
July 31,1998. No B Warrants were exercised during the Extended Period.
6.) ACQUISITIONS
In December 1997, the Company acquired 65% of the outstanding common stock
of Alexander Boxall, S.A. ("ABSA"), located in Madrid, Spain for $2,884,688 in
cash, a secured note of $990,000 and 280,000 shares of the Company's common
stock having a fair value of $1,034,000. The acquisition was recorded under the
purchase method whereby the net assets acquired were recorded at their fair
market values and the excess of cost over the fair value of the net assets
acquired of approximately $3,581,000 was allocated to goodwill and is being
amortized over 25 years.
Effective October 1, 1998, the Company, through ABSA, acquired 80% of the
outstanding common stock of Kidamai, SDN of Malaysia ("Kidamai"), a capacitor
assembly company with 1997 sales of less than $1,000,000, for approximately
$350,000 in the form of the cancellation of amounts due ABSA for product sales.
The acquisition will be recorded under the purchase method of accounting whereby
the net assets acquired will be recorded at their fair market value and the
excess of cost over the fair value of the net assets acquired will be allocated
to goodwill and amortized over 25 years. The fair value of the assets acquired
has not been determined.
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL
- -------
Advanced Deposition Technologies, Inc. (the "Company" or "A. D. TECH"),
is a technology leader in developing and manufacturing high-resolution,
patterned, vacuum-metalized coatings for a variety of energy management
applications for use in industrial, commercial and consumer products. Included
among these are product offerings for electronic capacitors, microwave and
standard food packaging, security holograms, retroreflective films, barrier
packaging, electronic article surveillance (EAS) and electric static discharge
(ESD). In December, 1997, the Company acquired 65% of the common stock of
Alexander Boxall, S.A. of Madrid, Spain ("ABSA"), a manufacturer of electronic
capacitors used for lighting and motor run applications. The Company's revenue
to date has been primarily from sales to the capacitor and microwave packaging
markets.
RECENT DEVELOPMENTS
- -------------------
In response to the operating losses experienced during the first quarter
of 1998 resulting from sharply reduced demand for BROWN & CRISP bags, the
Company instituted cost containment and reduction initiatives that included
salary reductions, layoffs, organizational restructuring and formal cost cutting
programs. The results of these initiatives, in addition to improved performance
of ABSA and technology licensing fees, resulted in an improvement in the
Company's second and third quarter results. It is expected that as production
levels increase for metalized film products, the Company will be well positioned
to generate consistent profits. Although the Company has taken orders for BROWN
& CRISP bags, sales of BROWN & CRISP bags will not match the amount sold in
1997.
On July 27, 1998, the Company closed on its debt restructuring with its
bank. Under the new financing arrangement, the balance owed on the Company's
existing bridge loan and a portion of the balance on its revolving line of
credit will be repaid over 3 years. In addition, on September 24, 1998, the
Company closed on a new $2,000,000 loan facility with its bank for the purchase
of machinery and equipment to expand its production capacity. Amounts advanced
under this facility are to be repaid over 5 years commencing in October 1999.
The Company consummated its acquisition of the majority of the common stock
of Kidamai SDN of Malaysia ("Kidamai"), a capacitor assembly company with 1997
sales of less than $1,000,000 on September 30, 1998. The effective date of the
acquisition is October 1, 1998. The Company believes that this acquisition will
provide it with additional economies of scale and a greater ability to market
its metalized film and capacitor products throughout the Far East. Kidamia will
be accounted for as a subsidiary of ABSA.
The Company executed a Letter of Intent to acquire 40% of the outstanding
capital stock of MicroPak, AB of Sweden ("MicroPak") during the third quarter of
1998. The Company expects that the acquisition will be consummated in December
1998. MicroPak has been an active sales agent for the Company in Europe for the
Company's proprietary and patented microwave materials and products.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Revenues. Revenues increased to $6,846,000 for the three months ended
September 30, 1998, as compared to $1,899,000 for the three months ended
September 30, 1997. The increase
9
<PAGE>
is primarily due to the effect of the consolidation of the sales of ABSA.
Excluding the effect of the consolidation of the sales of ABSA, revenue for the
three months ended September 30, 1998 increased by 158% due to revenues
generated from technology licensing fees and higher sales of metalized films,
partially offset by lower sales of BROWN & CRISP bags.
Cost of Revenues. Cost of revenues increased to $5,612,000 (88.4% of
product sales) for the three months ended September 30, 1998, compared to
$1,793,000 (94.4% of product sales) for the three months ended September 30,
1997. The increase in cost of revenues was primarily due to the effect of the
consolidation of the cost of revenues of ABSA. Excluding the effect of the
consolidation of the cost of revenues of ABSA, cost of revenues increased by
$525,000 due to higher costs associated with higher sales of metalized film,
partially offset by reduced sales of BROWN & CRISP bags. The decrease in cost of
revenues as a percentage of product sales was the result of increased technology
licensing fees, the effect of the consolidation of sales of relatively higher
margin ABSA products and lower raw material prices, partially offset by reduced
sales of BROWN & CRISP bags.
Gross Profit. Gross profit increased to $1,234,000 (19.4% of product
sales) for the three months ended September 30, 1998, compared to $106,000 (5.6%
of product sales) for the three months ended September 30, 1997. The increase in
gross profit was due to the effect of the consolidation of the gross profit of
ABSA, increased technology licensing fees, increased sales of metalized films
and lower prices for raw materials, partially offset by lower sales of BROWN &
CRISP bags. Excluding the effect of the consolidation of the gross profit of
ABSA and the increased technology licensing revenue, gross profit increased by
$88,000 due to higher sales of metalized films and lower raw material prices,
partially offset by reduced sales of BROWN & CRISP bags.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $625,000 (9.8% of product sales) for the three months
ended September 30, 1998, compared to $367,000 (19.3% of product sales) for the
three months ended September 30, 1997. This increase was primarily due to the
effect of the consolidation of selling, general and administrative expenses of
ABSA. Higher professional fees also contributed to the increase.
Research and Development. Research and development expenses decreased to
$42,000 for the three months ended September 30, 1998, compared to $109,000 for
the three months ended September 30, 1997. Research and development expenditures
were higher in 1997 due to, among other reasons, the costs associated with
developing High Energy Density materials that are now past the research stage.
Amortization. Amortization expenses increased to $73,000 during the three
months ended September 30, 1998, compared to $37,000 for the three months ended
September 30, 1997 primarily due to the additional amortization of the goodwill
recognized in the ABSA acquisition.
Operating Income (Loss). The Company generated operating income of $494,000
for the three months ended September 30, 1998, compared to operating loss of
$407,000 for the three months ended September 30, 1997. The increase in
operating income was the result of operating income generated by technology
licensing fees, the consolidation of ABSA operating income, increased sales of
metalized film and lower raw material prices, partially offset by reduced sales
of BROWN & CRISP bags and higher selling, general and administrative expenses.
Net Interest Expense. Net interest expense increased to $208,000 for the
three months ended September 30, 1998, compared to $45,000 for the three months
ended September 30, 1997. The increase is due to the effects of consolidating
the net interest expense of ABSA, the cost of financing the ABSA acquisition and
higher debt balances as a result of equipment purchases.
10
<PAGE>
Other Income (Expense). Other income totaled $67,000 during the three
months ended September 30, 1998, compared to other expense of $32,000 for the
three months ended September 30, 1997. Other income and expense includes, among
other items, income from insurance settlements and the amortization of costs
associated with the new financing arrangements entered into during 1997 and
1998.
Income Taxes. Income taxes increased to $177,000 for the three months ended
September 30, 1998, compared to an insignificant amount for the three months
ended September 30, 1997. Income tax expense was attributable to the profits
generated by ABSA.
Minority Interest. Minority interest totaled $44,000 for the three months
ended September 30, 1998, resulting from the net income after taxes of ABSA
attributable to the minority shareholder.
Net Income (Loss). The Company generated net income of $132,000 during the
three months ended September 30, 1998, as compared to net loss of $484,000 for
the three months ended September 30, 1997 as a result of the factors discussed
above.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenues increased to $18,785,000 for the nine months ended
September 30, 1998, as compared to $8,571,000 for the nine months ended
September 30, 1997, primarily due to the effect of the consolidation of the
sales of ABSA. Excluding the effect of the consolidation of the sales of ABSA,
revenues decreased by 8% due to reduced demand for BROWN & CRISP bags, partially
offset by increased sales of metalized films and technology licensing fees.
Cost of Revenues. Cost of revenues increased to $15,125,000 (82.7% of
product sales) for the nine months ended September 30, 1998, compared to
$6,702,000 (82.0% of product sales) for the nine months ended September 30,
1997. The increase in cost of revenues is primarily due to the effect of the
consolidation of the cost of revenues of ABSA. Excluding the effects of the
consolidation of the cost of revenues of ABSA, cost of revenues decreased by
$340,000 due to reduced sales of BROWN & CRISP bags, partially offset by
additional costs associated with increased sales of metalized film. Cost of
revenues as a percentage of product sales for the nine months ended September
30, 1998, increased from the nine months ended September 30, 1997 due to reduced
sales of BROWN & CRISP bags, partially offset by the effect of consolidating the
sales of relatively higher margin ABSA products, increased technology licensing
fees and increased sales of metalized films.
Gross Profit. Gross profit increased to $3,660,000 (20.0% of product
sales) for the nine months ended September 30, 1998, compared to $1,869,000
(22.9% of product sales) for the nine months ended September 30, 1997. The
increase in gross profit resulted from the effect of the consolidation of the
gross profit of ABSA. Excluding the effect of consolidating the gross profit of
ABSA, gross profit decreased by $313,000 due to reduced shipments of BROWN &
CRISP bags, partially offset by lower raw material prices, increased sales of
metalized film and increased technology licensing fees. Gross profit as a
percentage of product sales decreased due the reduced sales of higher margin
BROWN & CRISP bags, partially offset by the effect of the consolidation of sales
of relatively higher margin ABSA products, lower raw material prices, increased
sales of metalized film and increased technology licensing fees.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $2,388,000 (13.0% of product sales) for the nine months
ended September 30, 1998, compared to $1,194,000 (14.6% of product sales) for
the nine months ended September 30, 1997. This increase was primarily due to the
consolidation of the selling, general and administrative expenses of ABSA and to
a lesser extent from increased professional fees.
11
<PAGE>
Research and Development. Research and development expenses decreased to
$177,000 for the nine months ended September 30, 1998, compared to $357,000 for
the nine months ended September 30, 1997. Research and development expenditures
were higher in 1997 due to, among other reasons, the costs associated with
developing High Energy Density materials that are now past the research stage.
Amortization. Amortization expense increased to $215,000 during the nine
months ended September 30, 1998, compared to $109,000 for the nine months ended
September 30, 1997 primarily due to the amortization of the goodwill recognized
in the ABSA acquisition.
Operating Income. The Company generated operating income of $880,000 for
the nine months ended September 30, 1998, compared to operating income of
$209,000 for the nine months ended September 30, 1997. The increase in operating
income resulted primarily from the effects of the consolidation of the operating
income of ABSA and to a lesser extent, by increased technology licensing fees,
lower raw material prices and higher sales of metalized film, partially offset
by a decrease in sales of BROWN & CRISP bags.
Net Interest Expense. Net interest expense increased to $566,000 for the
nine months ended September 30, 1998, compared to $118,000 for the nine months
ended September 30, 1997. The increase is due to the effects of consolidating
the net interest expense of ABSA, the cost of financing the ABSA acquisition and
higher debt balances as a result of equipment purchases.
Other Income (Expense). Other expense decreased to $36,000 during the
nine months September 30, 1998, compared to $58,000 for the nine months ended
September 30, 1997. Other income (expense) includes, among other items, income
from insurance settlements and the amortization of costs associated with the new
financing arrangements entered into during 1997 and 1998.
Income Taxes. Income taxes were $231,000 for the nine months ended
September 30, 1998, compared to an insignificant amount for the nine months
ended September 30, 1997. Income tax expense was attributable to the profits
generated by ABSA.
Minority Interest. Minority interest totaled $150,000 for the nine months
ended September 30, 1998 resulting from the net income after taxes of ABSA
attributable to the minority shareholder.
Net Income (Loss). The Company generated a net loss of $103,000 for the
nine months ended September 30, 1998, compared to net income of $33,000 for the
nine months ended September 30, 1997, as a result of the factors discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company had working capital of approximately $3,615,000 at September
30, 1998, compared to working capital of $1,705,000 at December 31, 1997. The
increase in working capital primarily reflects the reclassification of
$1,000,000 bridge loan from a current liability to a non-current liability as a
result of the Company's restructuring of its financing arrangement with its bank
on July 24, 1998 (described below) and, to a lesser extent, cash flow from
operations.
The Company generated cash from operating activities of $149,000 for the
nine months ended September 30, 1998, compared to cash used of $161,000 during
the nine months ended September 30, 1997. Cash flow from operations for the
nine months ended September 30, 1998 resulted primarily from non-cash charges to
income and increases in accounts payable, partially offset by increases in
inventory and accounts receivable.
12
<PAGE>
The Company used $1,625,000 in cash for investing activities during the
nine month period ended September 30, 1998, primarily to purchase property and
equipment to add manufacturing capacity and to increase the efficiency of
existing equipment. At present, the Company has purchase commitments totaling
$1,500,000 for equipment scheduled to be delivered in the first quarter of 1999.
The Company expects to finance this equipment purchase primarily through the M&E
Loan described below.
On July 24, 1998, the Company and its principal lender entered into an
amended Credit Agreement (the "Amended Credit Agreement") that restructured the
terms of the Company's existing line-of-credit facility and two term loan
facilities and waived certain defaults thereunder. The Amended Credit Agreement
provides for a line-of-credit facility of up to $2,000,000, based on percentages
of its eligible accounts receivable, raw materials and finished goods
inventories (the "Line of Credit"), as well as term loans in the aggregate
principal amount of $3,750,000 (the "Term Loans"). Each of these facilities
matures on July 24, 2001.
The Company uses the Line of Credit for working capital. Borrowings under
the Line of Credit bear interest at a rate per annum equal to the bank's prime
lending rate plus 1%. The Company had drawn down approximately $713,000 of the
Line of Credit as of September 30, 1998. The Term Loans are to be repaid in 29
monthly payments of $62,500, commencing January 1999 with a balloon payment of
$1,875,000 in July 2001. Interest is payable monthly at the bank's prime rate
plus 1.25%. The new Term Loans allowed the Company to repay a $1,000,000 bridge
note incurred in connection with the acquisition of ABSA and move approximately
$1,165,000 of its previous revolving line of credit balance into a term note
structure.
On September 24, 1998, the Company closed on a line of credit with its
principal lender for the purchase of machinery and equipment (the "M&E Loan").
The M&E Loan allows the Company to borrow up to $2,000,000 for the purchase of
machinery and equipment. Interest is payable monthly at the bank's prime rate
plus 1.25%. The M&E Loan is to be repaid over 60 equal monthly installments
commencing on October 1999. The Company had drawn down approximately $240,000 of
the M&E Loan as of September 30, 1998.
The Amended Credit Agreement and the M&E Loan require the Company to
maintain certain financial ratios and tangible net worth levels, among others.
The Company is in compliance with all of the Amended Credit Agreement and M&E
Loan covenants.
Management believes that the Company's cash, cash equivalents together
with its credit facilities and expected cash flows from operations, will provide
sufficient funds to meet the Company's current and future cash requirements and
allow the Company to continue its marketing and development efforts.
SEASONAL REVENUES
- -----------------
Historically, the Company has experienced lower sales to the electronic
capacitor market during the third quarter, particularly in July. Based on market
research conducted by the Company, it believes that demand for the Company's
other products, including microwave food packaging, does not experience
similarly timed seasonal variations and could, in the future, offset lower third
quarter sales in the electronic capacitor market.
INFLATION
- ---------
During 1998 and 1997, supplies of raw materials used by the Company have
been adequate to meet demand and prices for these raw materials have decreased
slightly. The Company does not foresee any near-term changes in either the
supply or prices of its raw materials.
13
<PAGE>
IMPACT OF THE YEAR 2000 ISSUE
- -----------------------------
The Year 2000 Issue refers to potential problems with computer systems or
any equipment with computer chips or software that use dates where the date has
been stored as just two digits (e.g. 98 for 1998). On January 1, 2000, any clock
or date recording mechanism incorporating date sensitive software that uses only
two digits to represent the year may recognize a date using 00 as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar business activities.
The Company has addressed the Year 2000 Issue by conducting a review of its
information technology and non-information technology systems to determine the
extent of any Year 2000 problems. As a result of that review, the Company has
determined that its information technology systems as installed, including its
primary operating, manufacturing, procurement and accounting systems, correctly
define the Year 2000. The Company has also determined that several non-
information technology systems do not correctly define the Year 2000. Both
determinations have been independently verified by outside consultants who have
employed standard testing devices.
The Company is currently investigating insurance coverage in connection
with potential problems as a result of the Year 2000 Issue.
The Company has projected the cost to rectify the existing non-compliant
systems to be approximately $20,000, representing approximately 10% of the
Company's Information Technology budget for 1998. The Company anticipates and
that these systems will be Year 2000 compliant by March 1999. No other
Information Technology projects have been deferred as a result of the Year 2000
project. At this time, the Company cannot accurately assets the risks associated
with the non-compliance of its non-information technology systems. While it is
understood by the Company that such non-compliance could have a material
adverse effect on the Company's business, results of operations or financial
condition, at this time management has not determined the entire potential level
of risk.
In addition, the Company has developed a strategic plan to estimate the
potential risks related to third parties with whom it has relationships. The
third parties include suppliers and customers. Within the next several months
the Company will distribute inquiry letters to its major suppliers and
customers, which will be followed by subsequent internal evaluations of the
responses received. Upon learning that certain third parties are not Year 2000
compliant, the Company may be required to replace any suppliers who are not able
to correct their systems before the Year 2000. Management does not currently
have a plan for dealing with its customers whose systems are not Year 2000
compliant.
While the Company cannot predict what impact the Year 2000 problem may
have on third parties, it does not currently believe that it will incur material
costs in resolving potential Year 2000 problems with its customers and
suppliers.
Until the Company's plan has been completed, the Company cannot
accurately asses the potential risks associated with non-compliance of its
external third parties. While it is understood by the Company that the potential
effect could have a material adverse effect on the Company's business, results
of operations or financial condition, at this time management has not determined
the entire potential level of risk.
14
<PAGE>
At the present time, the Company has not developed a contingency plan.
The Company will continue to monitor the need for a contingency plan based on
the results of its Year 2000 compliance strategic plan.
BUSINESS FACTORS
- ----------------
This report may contain certain forward-looking statements that are
subject to certain risks and uncertainties. These statements include statements
regarding (i) the Company's ability to realize economies of scale and to expand
its sales and production capacity; (ii) the expected effect of the Kidamai
acquisition; (iii) the Company's liquidity; (iv) the Company's Year 2000
readiness; (v) the Company's future sale of BROWN & CRISP bags; (vi) the supply
and prices of raw materials; (vii) expected revenues and (viii) financing future
purchases of equipment. Such statements are based on management's current
expectations and are subject to a number of factors and uncertainties that could
cause actual results to differ materially from those described in the forward-
looking statements. The Company cautions investors that there can be no
assurance that actual results or business conditions will not differ materially
from those projected or suggested in such forward-looking statements as a result
of various factors, including, but not limited to, the following: uncertainties
regarding the performance advantages of the Company's PMP products and products
in development, market responses to pricing actions, continued competitive
factors and pricing pressures, the timely acceptance of new products, inventory
risk due to shifts in market demand, the development of competing or superior
technologies or products from other manufacturers, many of which have
substantially greater financial, technical and other resources than the Company,
the Company's ability to close the Kidamai acquisition on favorable terms;
dependence on key personnel, the variation in the Company's operating results,
technological change, the Company's ability to develop and protect proprietary
products and technologies, the availability of additional capital on acceptable
terms, if at all, to fund expansion, and general economic conditions. For
further information, refer to the more specific risks and uncertainties
discussed throughout this report.
15
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports filed on Form 8-K
(a) See Exhibit Index
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Advanced Deposition Technologies, Inc.
--------------------------------------
Registrant
November 16, 1998 /s/ Glenn J. Walters
- ----------------- --------------------------------------
Glenn J. Walters
Chief Executive Officer, President
And Treasurer
November 16, 1998 /s/ Mark R. Thomas
- ----------------- --------------------------------------
Mark R. Thomas
Chief Financial Officer
17
<PAGE>
EXHIBIT Index
-------------
Exhibit Description
------- -----------
10.1 Revolving Credit and Term Loan Agreement
dated July 8, 1996, between the Company and
the National Bank of Canada
10.2 Modification No. 1 to Revolving Credit and
Term Loan Agreement, dated December 18,
1997, between the Company and National Bank
of Canada
10.3 Modification No.2 to Revolving Credit and
Term Loan Agreement, dated June 18. 1998,
between the Company and National Bank of
Canada
10.4 Modification No. 3 to Revolving Credit and
Term Loan Agreement, dated September 23,
1998, between the Company and National Bank
of Canada
11.1 Computation of Net Income (Loss) Per
Share
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 10.1
REVOLVING CREDIT AND TERM LOAN AGREEMENT
Dated as of July 8, 1996
BETWEEN
ADVANCED DEPOSITION TECHNOLOGIES, INC.
AND
NATIONAL BANK OF CANADA
____________________________________________
<PAGE>
REVOLVING CREDIT AND TERM LOAN AGREEMENT
----------------------------------------
THIS REVOLVING CREDIT AND TERM LOAN AGREEMENT is made as of July 8,
1996, between ADVANCED DEPOSITION TECHNOLOGIES, INC., a Delaware corporation
having its principal place of business and chief executive office at Myles
Standish Industrial Park, Taunton, Massachusetts 02780 (the "Borrower"), on the
one hand, and NATIONAL BANK OF CANADA, a Canadian chartered bank with an address
at One Federal Street, 27th Floor, Boston, Massachusetts 02110, on the other
hand.
SECTION 1. DEFINITIONS.
-----------
1.1 Definitions. As used herein, the following terms shall have
-----------
the following meanings:
"Account" or "Accounts Receivable" means all of the Borrower's rights
to payment for goods sold or leased or for services rendered, all proceeds
thereof, all instruments pertaining thereto, all guarantees and security
therefor, all goods or services which gave rise thereto and the rights
pertaining to such goods, including rights to reclamation and stoppage in
transit and all rights of an unpaid seller of goods or services, and all related
insurance; provided that any guarantees and security therefor will not be
--------
considered Accounts for purposes of calculating the Borrowing Base.
"Affiliate" means, with reference to any person, (including an
individual, a corporation, a partnership, a trust, any trade or business and any
governmental agency or instrumentality), (i) any director, officer or employee
of that person, (ii) any other person controlling, controlled by or under direct
or indirect common control of that person, (iii) any other person directly or
indirectly holding 5% or more of any class of the capital stock or other equity
interests (including options, warrants, convertible securities and similar
rights) of that person and (iv) any other person 5% or more of any class of
whose capital stock or other equity interests (including options, warrants,
convertible securities and similar rights) is held directly or indirectly by
that person. For purposes of Sections 3.5 and 5.1(ix), "Affiliate" means,
within the meaning of Section 414 of the Code, (i) any member of a controlled
group of corporations which includes the Borrower, (ii) any trade or business,
whether or not incorporated, under common control with the Borrower, (iii) any
member of an affiliated service group which includes the Borrower, and (iv) any
member of a group treated as a single employer by regulation.
"Agreement" means this Loan Agreement, including the Exhibits hereto,
as originally executed, or if this Agreement is amended, varied or supplemented
from time to time, as so amended, varied or supplemented.
"Average Unused Commitment" for any period of time means the daily
average difference between the Revolving Credit Maximum Amount and the principal
amount of Revolving Loans actually outstanding hereunder during such period.
-1-
<PAGE>
"Base Rate" means the rate of interest announced from time to time by
the Lender at its office in New York, New York as its U.S. Prime Lending Rate.
"Borrower Security Agreement" means, collectively, the Security
Agreement of even date between the Lender and the Borrower.
"Borrowing Base" means an amount equal to the sum of (i) 80% of the
unpaid face amount of all Eligible Accounts, plus (ii) 40% of all Eligible
Inventory (provided that for purposes of this clause (ii), the amount determined
--------
by applying such percentage shall not exceed $1,000,000).
"Borrowing Base Report" shall have the meaning set forth in Section
5.1(vi).
"Business Day" means any day on which the head office of the Lender is
open for transactions of all of its normal and customary business.
"Capital Expenditures" means the amount of any expenditure for fixed
assets, computer software, leasehold improvements, capital leases under GAAP,
installment purchases of machinery and equipment, acquisitions of real estate,
expenditures from any construction in progress account of the Borrower and other
similar expenditures which are required to be capitalized on a balance sheet
pursuant to GAAP.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means any and all real and personal property of the
Borrower, whether tangible or intangible, in which the Lender now has, is
granted by this Agreement, the Borrower Security Agreement or otherwise, or
hereafter acquires a security interest or any other lien, including, without
limitation, by way of mortgage or assignment, to secure the Obligations.
"Collateral Assignment" means the Collateral Assignment of Printpack
Documents of even date between the Lender and the Borrower.
"Current Assets" means all assets of the Borrower which may properly
be classified as current assets in accordance with GAAP, after eliminating all
intercompany items, and provided that (a) notes and accounts receivable shall be
--------
included only if good and collectible as determined by the Borrower in
accordance with established practice consistently applied and, (i) with respect
to such notes, only if payable on demand or within one year from the date as of
which Current Assets are to be determined and if not directly or indirectly
renewable or extendible at the option of the debtors, by their terms, or by the
terms of any instrument or agreement relating thereto, beyond such year, and
(ii) with respect to such accounts receivable, only if payable and outstanding
not more than 90 days after the date of the shipment of goods or other
transaction out of which any such account receivable arose; and such notes and
accounts receivable shall be taken at their face value less reserves determined
to be sufficient in accordance with GAAP; and (b) inventory shall be included
only if and to the extent that the
-2-
<PAGE>
same shall consist of raw materials, work in process, saleable finished goods
ready and available for shipment to purchasers thereof and tools and supplies.
"Current Liabilities" means all liabilities of the Borrower maturing
on demand or within one year from the date as of which Current Liabilities are
to be determined, and such other liabilities as may properly be classified as
current liabilities in accordance with generally accepted accounting principles,
after eliminating all intercompany items.
"Default" means an event or condition that, but for the requirement
that time elapse or notice be given, or both, would constitute an Event of
Default.
"EBIT" means, for any period, an amount equal to Net Income for such
period plus the following, to the extent deducted in computing such Net Income:
(i) Interest Charges, (ii) Taxes on income imposed by any governmental authority
including but not limited to federal, state, local or foreign country
authorities or political subdivisions thereof, and (iii) all extraordinary
items.
"Eligible Account" means an Account Receivable owing to the Borrower
which:
(a) is not unpaid more than 90 days after invoice date;
(b) arose in the ordinary course of the Borrower's business
as a result of services which have been performed for or
the sale of goods which have been shipped to the account
debtor;
(c) is the legal, valid and binding obligation of the
account debtor thereunder, is assignable, is owned by
the Borrower free and clear of all Encumbrances (except
in favor of the Lender) and is not evidenced by a
promissory note or other instrument (other than an
invoice);
(d) is not owing from any account debtor which is an
Affiliate or which is not located in the United States;
(e) has not been reduced and is not subject to reduction, as
against the Borrower, its agents or the Lender, by any
offset, counterclaim, adjustment, credit, allowance or
other defense, and as to which there is no (and no basis
for any) return, rejection, loss or damage of or to the
goods giving rise thereto, or any request for credit or
adjustments;
(f) is not uncollectible for any reason, including, without
limitation, any bankruptcy, insolvency or other
financial difficulty of the account debtor, or any
impediment to the assertion of a claim or commencement
of an action against the account debtor, all as
determined by the Lender in its reasonable discretion,
and is not owing from an account debtor who has accounts
payable owing to the Borrower of which 25% or more of
such accounts payable are not Eligible Accounts;
(g) is not owing from any Affiliate or supplier to the
Borrower;
-3-
<PAGE>
(h) is owing from an account debtor located in the United
States, Canada or Puerto Rico, unless such Account is (i) backed by a
letter of credit in favor of the Borrower and otherwise in form and
substance acceptable to the Lender, and all of the Borrower's rights under
such letter of credit, including without limitation the Borrower's rights
to collect any proceeds or amounts thereunder, have been duly and validly
assigned to the Lender and to no other party (and the financial institution
issuing such letter of credit has acknowledged such assignment without
objection or reservation), or (ii) insured under insurance policies in form
and substance acceptable to the Lender and which are issued by insurers
acceptable to the Lender, and all of the Borrower's rights under such
insurance policies, including without limitation the Borrower's rights to
collect any proceeds or amounts thereunder, have been duly and validly
assigned to the Lender and to no other party (and the insurance companies
issuing such policies have acknowledged such assignment without objection
or reservation);
(i) is owing from an account debtor which is other than the
United States of America or any department, agency or
instrumentality thereof; and
(j) has not been designated by the Lender in its reasonable
discretion as unacceptable for any reason by notice to the Borrower.
"Eligible Inventory" means Inventory of the Borrower:
(a) which consists of finished goods or raw materials;
(b) which is new and unused, in first-class condition, and
merchantable and saleable through normal trade channels;
(c) calculated at such lesser of fair market value or cost
determined on the "first-in, first-out" current cost basis in accordance
with GAAP;
(d) as to which the Borrower has good title, free and clear
of all Encumbrances (except in favor of the Lender); and
(e) has not been designated by the Lender in its reasonable
discretion as unacceptable for any reason by notice to the Borrower.
"Encumbrances" shall have the meaning set forth in Section 5.6.
"Environmental Laws" means any and all applicable federal, state and
local environmental, health or safety statutes, laws, regulations, rules,
ordinances, policies and rules common law (whether now existing or hereafter
enacted or promulgated), of all federal, state and local governmental
authorities, agencies, commissions, boards, bureaus or departments which may now
or hereafter have jurisdiction over the Borrower, and all applicable judicial
and administrative and regulatory decrees, judgments and orders, including
common law rulings and determinations, relating to injury to, or the protection
of, real or personal property or human
-4-
<PAGE>
health or the environment, including, without limitation, all requirements
pertaining to reporting, licensing, permitting, investigation, remediation and
removal of emissions, discharges, releases or threatened releases of Hazardous
Materials, chemical substances, pollutants or contaminants whether solid, liquid
or gaseous in nature, into the environment or relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of such Hazardous Materials, chemical substances, pollutants or
contaminants.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations thereunder.
"Event of Default" shall have the meaning set forth in Section 6.1.
"GAAP" means generally accepted accounting principles, consistently
applied.
"Hazardous Material" means any substance (i) the presence of which
requires or may hereafter require notification, investigation or remediation
under any Environmental Law; (ii) which is or becomes defined as a "hazardous
waste" or "hazardous material" or "hazardous substance" or "controlled
industrial waste" or "pollutant" or "contaminant" under any present or future
Environmental Law or amendments thereto including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
Section 9601 et seq.) and any applicable local statutes and the regulations
-- ---
promulgated thereunder; (iii) which is toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and is
regulated by any governmental authority, department, commission, board, agency
or instrumentality of the United States, any state of the United States, or any
political subdivision thereof to the extent any of the foregoing has or had
jurisdiction over the Borrower; or (iv) without limitation, which contains
gasoline, diesel fuel or other petroleum products, asbestos or polychlorinated
biphenyls ("PCB's").
"Indebtedness" with respect to any person means and includes, without
duplication, (i) all items which, in accordance with GAAP, would be included as
a liability on the balance sheet of such person, (ii) the face amount of all
banker's acceptances and of all letters of credit issued by any bank for the
account of such person and all drafts drawn thereunder, (iii) the total amount
of all indebtedness secured by any Encumbrance to which any property or asset of
such person is subject, whether or not the indebtedness secured thereby shall
have been assumed, and (iv) the total amount of all indebtedness and obligations
of others which such person has directly or indirectly guaranteed, endorsed
(otherwise than for collection or deposit in the ordinary course of business),
discounted with recourse or agreed (contingently or otherwise) to purchase or
repurchase or otherwise acquire, including, without limitation, any agreement
(a) to advance or supply funds to such other person to maintain working capital,
equity capital, net worth or solvency, or (b) otherwise to assure or hold
harmless such other person against loss in respect of its obligations.
"Initial Financial Statement" shall have the meaning set forth in
Section 3.6.
-5-
<PAGE>
"Insolvent" or "Insolvency" means that there shall have occurred one
or more of the following events with respect to a person: death; dissolution;
liquidation; termination of existence; "insolvent" or "insolvency" within the
meaning of the United States Bankruptcy Code or other applicable statute; such
person's inability to pay its debts as they come due or failure to have adequate
capital to conduct its business; such person's failure to have assets having a
fair saleable value net of any cost to dispose of such assets in excess of the
amount required to pay the probable liability on its then existing debts
(including unmatured, unliquidated and contingent debts); appointment of a
receiver of any part of the property of, execution of a trust mortgage or an
assignment for the benefit of creditors by, or the filing of a petition in
bankruptcy or the commencement of any proceedings under any bankruptcy or
insolvency laws or any laws relating to the relief of debtors, readjustment of
indebtedness or reorganization of debtors by or against such person, or the
offering of a plan to creditors or such person for composition or extension,
except for an involuntary proceeding commenced against such person which is
dismissed within 45 days after the commencement thereof without the entry of an
order for relief or the appointment of a trustee.
"Interest Charges" means, for any period, without duplication, all
interest and all amortization of debt discount and expense on any particular
Indebtedness for which such calculations are being made, all as determined in
accordance with GAAP. Computations of Interest Charges on a pro forma basis for
--- -----
Indebtedness having a variable interest rate shall be calculated at the rate in
effect on the date of any determination.
"Inventory" means all of the Borrower's goods, merchandise and other
personal property, now owned or hereafter acquired by the Borrower, which are
held for sale or lease or are furnished or to be furnished under contracts of
service, or are finished goods, work in process, raw materials, materials used
or consumed or to be used or consumed in the Borrower's business.
"Landlord Waivers" means, collectively, the separate Landlord Waivers
which have been, or are at any time, executed and delivered to the Lender by the
landlord under any Lease to which the Borrower is a party.
"Leases" means any agreement, whether written or oral, granting a
person the right to occupy space in a structure or real estate for any period of
time or any capital lease or other lease of or agreement to use personal
property.
"Loan" means a loan made to the Borrower by the Lender pursuant to
Section 2 of this Agreement, and "Loans" means all of such loans, collectively.
"Loan Account" means the account or accounts on the books of the
Lender in which will be recorded Loans and advances made by the Lender to the
Borrower pursuant to this Agreement, payments made on such Loans and other
appropriate debits and credits as provided by this Agreement.
"Loan Documents" means, collectively, this Agreement, the Notes, the
Borrower Security Agreement, the Landlord Waivers, the Solvency Certificate, the
PTO Agreement, the Collateral
-6-
<PAGE>
Assignment, and any other agreements, instruments or documents referred to
herein or therein and/or delivered in connection herewith (including, without
limitation, the agreements and other instruments listed or described in the
Closing Checklist attached hereto as Exhibit C), and all schedules, exhibits and
---------
annexes thereto.
"Maturity Date" means July 8, 1999.
"Net Income" means the consolidated gross revenues of the Borrower for
the period in question, less all expenses and other proper charges (including
taxes on income), all determined in accordance with GAAP but in any event,
excluding from Net Income (without duplication): (i) any gain or loss,
amortization or deduction arising from any write-up of assets, except to the
extent inclusion thereof shall be approved in writing by the Lender; (ii)
earnings of any Subsidiary accrued prior to the date it became a Subsidiary;
(iii) the net earnings of any business entity (other than a Subsidiary) in which
the Borrower or any of their respective Subsidiaries has an ownership interest,
except to the extent such net earnings shall have actually been received by the
Borrower or such Subsidiaries in the form of cash distributions; (iv) any gains
or losses on the sale or other disposition of investments or fixed or capital
assets; (v) the proceeds of any life insurance policy; (vi) any deferred or
other credit representing any excess of the equity of any Subsidiary at the date
of acquisition thereof over the amount invested in such Subsidiary; and (vii)
any reversal of any contingency reserve, except to the extent that provision for
such contingency reserve shall be made from income arising during such period.
"Notes" means, collectively, the Revolving Credit Note and the Term
Note.
"Obligations" means any and all obligations of the Borrower or either
of them to the Lender of every kind and description, direct or indirect,
absolute or contingent, primary or secondary, due or to become due, now existing
or hereafter arising, regardless of how they arise or by what agreement or
instrument they may be evidenced or whether evidenced by any agreement or
instrument, and includes obligations to perform acts and to refrain from acting
as well as obligations to pay money.
"Operating Cash Flow" means, for any fiscal period, an amount equal
to: (i) EBIT, plus (ii) the aggregate amount of depreciation, amortization and
other non-cash charges taken in accordance with GAAP during such period, minus
(iii) Capital Expenditures made by the Borrower during such period.
"Participant" shall have the meaning set forth in Section 7.
"Person" or "persons" means any individual, corporation, partnership,
trust, trade, business and governmental agency and instrumentality.
"Plans" shall mean, collectively, each "employee pension benefit plan"
and each "employee welfare benefit Plan" (each as defined in ERISA) maintained
by the Borrower.
-7-
<PAGE>
"PTO Agreement" means the Patent and Trademark Security Agreement of
even date between the Lender and the Borrower.
"Restricted Payment" means (i) any cash or property dividend,
distribution or other payment, direct or indirect, to any person who directly or
indirectly holds an equity interest in the Borrower on account of any shares of
any class of capital stock or any equity interest of the Borrower or otherwise,
except (a) regular compensation and bonuses paid to employees in the ordinary
course of business and consistent with past practices, and (b) a dividend
payable solely in shares of common stock of the Borrower; and (ii) any
redemption, retirement, purchase or other acquisition, direct or indirect, of
any shares of any class of capital stock or other equity interest of the
Borrower, or of any warrants, rights or options to acquire any such shares,
except to the extent the consideration therefor consists of shares of common
stock of the Borrower.
"Revolving Credit Maximum Amount" means $3,000,000.
"Revolving Credit Note" shall have the meaning set forth in Section
2.1.1.
"Revolving Loan" shall have the meaning set forth in Section 2.1.1.
"Security Documents" means, collectively, (i) the Loan Documents and
(ii) all other agreements, instruments or contracts (a) to which, at the
relevant time of reference to the term "Security Documents" the Borrower or any
property or assets of the Borrower shall be bound or affected, and (b) by which
any of the Obligations shall be evidenced or under or in respect of which the
Lender or any of its agents or representatives shall have, at such time, any
rights or interests as security for the payment or performance of all or any
part of the Obligations.
"Senior Indebtedness" means, at any given date as of which the amount
thereof shall be determined, the result of (i) all Indebtedness of the Borrower
as of such date minus (ii) Subordinated Debt as of such date.
"Solvency Certificate" means the Solvency Certificate of even date
from the Borrower to the Bank.
"Subordinated Debt" means any Indebtedness of the Borrower which is
subordinated to the Obligations on terms and conditions satisfactory to the
Lender.
"Subsidiary" means any corporation, association, joint stock company,
business trust or other similar organization of which 50% or more of the
ordinary voting power for the election of a majority of the members of the board
of directors or other governing body of such entity is held or controlled by the
Borrower or a Subsidiary of the Borrower; or any other such organization the
management of which is directly or indirectly controlled by the Borrower or a
Subsidiary of the Borrower through the exercise of voting power or otherwise; or
any joint venture, whether incorporated or not, in which the Borrower has a 50%
ownership interest or any other entity which would be consolidated with the
Borrower in presenting its financial statements in accordance with generally
accepted accounting principles.
-8-
<PAGE>
"Tangible Net Worth" means the amount which is equal to the
consolidated net worth of the Borrower computed in accordance with GAAP and with
inventory and cost of goods sold determined on a "first in, first out" basis,
and minus (i) to the extent not otherwise approved in advance by Lender, any
writeup in the book value of any asset of any Borrower resulting from
revaluation thereof after the date of the Initial Financial Statement, (ii) the
book value, net of applicable reserves, of all intangible assets of the
Borrower, including, without limitation, goodwill, trademarks, trade names,
copyrights, patents and any similar rights, and unamortized debt discount and
expense, (iii) the value, if any, attributable to any capital stock of the
Borrower held in treasury, (iv) the value, if any, attributable to any notes or
subscriptions receivable due from stockholders in respect of capital stock, and
(v) intercompany accounts with the Borrower's Subsidiaries and Affiliates
(including receivables due from such Subsidiaries and Affiliates).
"Taxes" means, any and all taxes (including, without limitation,
income, receipts, franchise, ad valorem or excise taxes, transfer or gains taxes
or fees, use taxes, withholding, payroll or minimum taxes) imposed on, or
otherwise payable by, or for which responsibility for payment, withholding or
collection lies with, the Borrower by any governmental authority, federal, state
or otherwise, including any taxes imposed on any of the Borrower's Subsidiaries
or other Affiliates for which the Borrower may be liable under applicable law or
by agreement to which the Borrower is a party or by which it is bound or subject
to, and including, but not limited to, any interest, penalties or additions to
tax with respect thereto.
"Term Loan" shall have the meaning set forth in Section 2.2.1.
"Total Debt Service" means, for any period, the sum of (i) Interest
Charges on all Indebtedness for such period, plus (ii) the aggregate amount of
all regularly scheduled principal payments made or coming due during such period
in respect of the Loans or any other Indebtedness for borrowed money or any
capital lease (to the extent the Lender from time to time permits such
Indebtedness to be incurred.)
"Total Liabilities" means, at any date as of which the amount thereof
shall be determined, all obligations of the Borrower that should, as determined
in accordance with GAAP, be classified as liabilities on the balance sheet of
the Borrower, including, in any event, all Indebtedness of the Borrower.
"Working Capital" means the excess of Current Assets over Current
Liabilities.
For all purposes of this Agreement and the other Security Documents,
except as otherwise expressly provided herein or therein or unless the context
otherwise requires:
-9-
<PAGE>
(i) references to any person defined in this Section 1 refer to such
person and its successor in title and assigns or (as the case may be) his
successors, assigns, heirs, executors, administrators and other legal
representatives;
(ii) references to any agreement, instrument or document defined in this
Section 1 refer to such document as originally executed, or if subsequently
varied or supplemented from time to time, as so varied or supplemented and in
effect at the relevant time of reference thereto;
(iii) words importing the singular only shall include the plural and vice
----
versa, and the words importing the masculine gender shall include the feminine
- -----
gender and vice versa, and all references to dollars shall be United States
---- -----
Dollars; and
(iv) accounting terms not otherwise defined in this Agreement or any of
the other Security Documents have the meanings assigned to them in accordance
with GAAP.
SECTION 2. LOANS.
------
2.1 Revolving Loans.
---------------
2.1.1 Upon the terms and subject to the conditions of this Agreement,
and in reliance upon the representations, warranties and covenants of the
Borrower made herein, the Lender agrees to make loans ("Revolving Loans") to the
Borrower, at the Borrower's request from time to time, from and after the date
hereof and prior to the Maturity Date, provided that the principal amount of
--------
Revolving Loans outstanding at any time shall not exceed the lesser of (i) the
Revolving Credit Maximum Amount and (ii) the Borrowing Base at such time, and
provided, further, that at the time the Borrower requests a Revolving Loan and
- -------- -------
after giving effect to the making thereof there has not occurred and is not
continuing any Default or Event of Default. The Borrower agrees that it shall
be an Event of Default if at any time the Revolving Loans outstanding shall
exceed the lesser of (i) the Revolving Credit Maximum Amount and (ii) the
Borrowing Base at such time, unless the Borrower shall, upon notice of such
excess from the Lender, promptly pay cash to the Lender to be credited to the
Loan Account in such amount as shall be necessary to eliminate the excess. All
requests for Revolving Loans shall be in such form and shall be made in such
manner as shall be agreed between the Borrower and the Lender in accordance with
the Lender's customary practices. The Revolving Loans shall be evidenced by a
Revolving Credit Note (the "Revolving Credit Note") substantially in the form of
Exhibit A-1 hereto.
- -----------
2.1.2 The Borrower may prepay outstanding Revolving Loans and the
Revolving Credit Note in whole or in part at any time without premium or
penalty, except as otherwise provided in Section 2.3.5. Amounts so paid in
respect of the Revolving Loans and the Revolving Credit Note and other amounts
may be borrowed and reborrowed from time to time as provided in Section 2.1.1.
On the Maturity Date, the Borrower shall repay all outstanding Revolving Loans
and the Revolving Credit Note, together with all unpaid interest thereon and all
fees and other amounts due hereunder.
-10-
<PAGE>
2.2 The Term Loan.
-------------
2.2.1 Upon the terms and subject to the conditions of this Agreement, and
in reliance upon the representations, warranties and covenants of the Borrower
made herein, the Lender agrees to lend to the Borrower, on a joint and several
basis, the sum of $2,600,000 on the date hereof (the "Term Loan") to be
evidenced by a Term Note (the "Term Note") substantially in the form of Exhibit
-------
A-2 attached hereto.
- ---
2.2.2 The principal of the Term Loan shall be payable in thirty-six
installments, with each of the first thirty-five such payments to be in the
amount of $43,333.33 and to be payable on the first day of each month (or the
first Business Day thereafter, if such day is not a Business Day) commencing on
August 1, 1996, and with the last of such thirty-six payments to be in the
amount of $1,083,333.45 and to be payable, along with any additional unpaid
principal of the Term Loan and all unpaid interest thereon, on the Maturity
Date.
2.2.3 The Borrower may prepay the Term Loan and the Term Note in whole or
in part, without premium or penalty, except as otherwise provided in Section
2.3.5, at any time and from time to time upon five (5) days' prior written
notice to the Lender. The principal amount of the Term Loan so prepaid shall be
at least $100,000 (unless the principal amount of the Term Loan shall be less
than $100,000, in which event the prepayment may be equal to such unpaid
principal amount) or a multiple of $100,000, in excess of $100,000, provided
--------
that the Borrower shall also pay accrued interest on the principal so prepaid to
the date of such prepayment and all fees and charges payable on or before the
date of such prepayment. Prepayments shall be applied against unpaid
installments of principal of the Term Loan in inverse order of maturity of such
installments. The Borrower shall not be permitted to reborrow any part of the
principal of the Term Loan so prepaid at any time or under any circumstances.
2.3 Interest, Fees and Prepayment.
-----------------------------
2.3.1 Revolving Loans shall bear interest at a rate per annum equal to
3/4% above the Base Rate in effect from time to time; and the Term Loan shall
bear interest at a rate per annum equal to 1% above the Base Rate in effect from
time to time; provided that if an Event of Default shall occur, then at the
--------
option of the Lender the unpaid balance of the Loans shall bear interest, to the
extent permitted by law, compounded monthly at an interest rate equal to 3%
above the Base Rate in effect on the day such Event of Default occurs, until
such Event of Default is cured or waived. Interest on Loans (not at the time
overdue) shall be payable monthly in arrears on the first Business Day of each
month commencing with August 1, 1996. Any change in the Base Rate shall result
in a change on the same day in the rate of interest to accrue from and after
such day on the unpaid balance of principal of the Loans.
2.3.2. The Borrower shall pay to the Lender any and all reasonable charges
customarily made by the Lender against Borrower.
2.3.3 The Borrower authorizes the Lender to charge to any deposit or other
account which the Borrower may maintain with the Lender the interest, fees,
charges, taxes and
-11-
<PAGE>
expenses provided for in this Agreement or any other document executed or
delivered in connection herewith, and upon making any such change to such
account, the Lender shall notify the Borrower thereof in accordance with its
customary practices.
2.3.4 If, after the date hereof, the Lender shall have determined that the
adoption of any applicable law, rule, regulation, guideline, directive or
request (whether or not having the force of law) regarding capital requirements
for banks or bank holding companies, or any change therein, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by the Lender with any of the foregoing imposes or
increases a requirement by the Lender to allocate capital resources to the
Lender's commitment to make Loans hereunder which has or would have the effect
of reducing the return on the Lender's capital to a level below that which the
Lender could have achieved (taking into consideration the Lender's then existing
policies with respect to capital adequacy and assuming full utilization of the
Lender's capital) but for such adoption, change or compliance by any amount
deemed by the Lender to be material, then: (i) the Lender shall promptly after
its determination of such occurrence give notice thereof to the Borrower; and
(ii) to the extent that the costs of such increased capital requirements are not
reflected in the Base Rate, the Borrower and the Lender shall thereafter attempt
to negotiate in good faith, within 30 days following the date the Borrower
receive such notice, an adjustment payable hereunder that will adequately
compensate the Lender in light of the circumstances. If the Lender and the
Borrower are unable to agree to such adjustment within 30 days following the
date upon which the Borrower receive such notice, then commencing on the date of
such notice (but no earlier than the effective date of any such increased
capital requirement), the fees payable hereunder shall increase by an amount
that will, in the Lender's reasonable determination, provide adequate
compensation.
2.3.5 In the event that all of the Loans are prepaid in whole or in part
prior to the Maturity Date pursuant to Sections 2.1.2 or 2.2.3, respectively,
the Borrower shall pay to the Lender a prepayment fee equal to that percentage
of the amount of the outstanding Loans so prepaid which is set forth below:
-12-
<PAGE>
<TABLE>
<CAPTION>
Date of Prepayment Percentage of Total
------------------ -------------------
Loans Prepaid
-------------------
<S> <C>
On or before the date which is one 3%
year from the date hereof
After the date which is one year 2%
from the date hereof, but on or
before the date which is two years
from the date hereof
After the date which is two years 1%
from the date hereof, but before
the Maturity Date
</TABLE>
2.3.6 The Borrower shall pay to the Lender an annual audit fee in the
amount of $5,000, plus expenses incurred, at the time each such field audit is
conducted.
2.3.7 In addition to the interest described above, the Borrower shall pay
to the Lender on the first Business Day of each fiscal quarter of the Borrower,
commencing September 30, 1996, a commitment fee equal to one-quarter of one
percent (1/4%) per annum of the Average Unused Amount during the preceding
quarter, such commitment fee to be payable quarterly in arrears.
SECTION 3. REPRESENTATIONS AND WARRANTIES.
------------------------------
The Borrower hereby warrants and covenants as follows:
3.1 Organization and Qualification. The Borrower (i) is a corporation
------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware, (ii) has all requisite corporate power and authority to own
its property and conduct its business as now conducted and as presently
contemplated; and (iii) except as set forth in Exhibit B, is duly qualified and
---------
in good standing in each jurisdiction (which jurisdictions are listed on
Exhibit B hereto) where the nature of its properties or its business (present or
- ------- -
proposed) requires such qualification, except where the failure to so qualify is
not likely to have a material adverse effect on the condition (financial or
otherwise), properties, business or prospects of the Borrower. Since the date
of the Initial Financial Statement, the Borrower has continued to engage in
substantially the same business as that in which it was then engaged and is
engaged in no unrelated business.
3.2 Corporate Authority; Valid Obligations; Approvals. The execution,
-------------------------------------------------
delivery and performance of the Loan Documents and the transactions and other
documents contemplated hereby and thereby are within the Borrower's corporate
authority, have been authorized by all
-13-
<PAGE>
necessary corporate proceedings on the part of the Borrower, and do not and will
not contravene any provision of law, its charter documents or its by-laws, or
contravene any provisions of, or constitute a Default or Event of Default
hereunder or a default under any other agreement, instrument, judgment, order,
decree, permit, license or undertaking binding upon or applicable to the
Borrower or any of its properties, or result in the creation, other than in
favor of the Lender, of any mortgage, pledge, security interest, lien,
encumbrance or charge upon any of the properties or assets of the Borrower. The
Loan Documents have been duly executed and delivered and constitute the legal,
valid and binding obligations of the Borrower enforceable in accordance with
their terms. The execution, delivery and performance of the Loan Documents and
the transactions and other documents contemplated hereby and thereby do not
require any approval or consent of, or filing or registration with, any person,
except filings under the Uniform Commercial Code in connection with the
Collateral consisting of personalty and fixtures.
3.3 Title to Properties; Absence of Liens. The Borrower has good and
-------------------------------------
marketable title to all of its properties, assets and rights of every name and
nature now purported to be owned by it, which properties, assets and rights
include all those necessary to permit the Borrower to conduct its business as
such business was conducted on the date of the Initial Financial Statement
(including, without limitation, all patents, copyrights, trademarks, tradenames
and service marks necessary for the conduct of its business), free from all
liens, charges and encumbrances whatsoever except for insubstantial and
immaterial defects in title and liens, charges or encumbrances permitted under
Section 5.6. All such properties, assets and rights, and to the best of the
Borrower's knowledge, all properties which are material to the business of the
Borrower which are leaseholds, are free and clear of all title defects or
objections, liens, claims, charges, security interests and other Encumbrances of
any nature whatsoever, and are not, in the case of real property, subject to any
rights of way, building, use or other restrictions, easements, exceptions,
variances, reservations or limitations of any nature whatsoever except, with
respect to all such properties and assets, (i) provisions of existing building
and zoning laws, (ii) liens for current taxes not yet due, and (iii)
Encumbrances permitted under Section 5.6.
3.4 Location of Records and Collateral; Name Change. The Borrower shall
-----------------------------------------------
give the Lender written notice of each location at which Collateral is or will
be kept and each office of the Borrower at which the records of the Borrower
pertaining to Accounts Receivable and contract rights are kept. All Collateral
owned by the Borrower is and shall be kept at such locations as appear on
Exhibit B hereto, and all records of the Borrower pertaining to Accounts and
- ---------
contract rights are and shall be kept at the location set forth therefor on
Exhibit B (or, in each case, as appears in a notice delivered pursuant to the
- ---------
previous sentence). The Borrower shall give the Lender 30 days' prior written
notice of any change in its name or corporate form or any change in the name or
names under which the Borrower's business is transacted.
3.5 Compliance. The Borrower (i) has all necessary permits, approvals,
----------
authorizations, consents, licenses, franchises, registrations and other rights
and privileges (including without limitation patents, trademarks, trade names
and copyrights) to allow it to own and operate its business without any
violation of law or the rights of others, (ii) is duly authorized, qualified and
licensed under and in compliance with all applicable laws, regulations,
authorizations and orders
-14-
<PAGE>
of public authorities (including, without limitation, Environmental Laws and
laws relating to ERISA or to employee benefit plans generally), and (iii) has
performed all obligations required to be performed by it under, and is not in
default under or in violation of, its certificate of incorporation or other
charter documents, or any agreement, lease, mortgage, note, bond, indenture,
license or other instrument or undertaking to which it is a party or by which
any of it or any of its properties are bound, and the Borrower has not received
any notice by any governmental authority or third party with respect to the
generation, storage, or disposal or release or threat of release of Hazardous
Materials, or with respect to any violation of any Environmental Laws. The
Borrower and each Affiliate has fulfilled its obligations under the minimum
funding standards of ERISA and the Code with respect to each Plan and is in
compliance in all material respects with the applicable provisions of ERISA and
the Code, and has not incurred any liability to the Pension Benefit Guaranty
Corporation or a Plan under Title IV of ERISA, and no "prohibited transaction"
or "reportable event" (as such terms are defined in ERISA) has occurred with
respect to any Plan.
3.6 Financial Statements. The Borrower has furnished to the Lender its
--------------------
audited balance sheet as of December 31, 1995 and the related statements of
earnings and retained earnings and cash flows for the year then ended, which
were prepared in accordance with GAAP, certified by independent certified public
accountants acceptable to the Lender and fairly present the financial position
of the Borrower as at the close of business on such date and the results of its
operations for the year then ended. The Borrower has also furnished to the
Lender its unaudited balance sheet and statement of income as at March 31, 1996
and for the three month period then ended (the "Initial Financial Statement"),
which was prepared in accordance with GAAP certified by the chief financial
officer of the Borrower and fairly presents the financial position of the
Borrower as at the close of business on such date and the results of its
operations for the three month period then ended, subject to normal year-end
audit adjustments, none of which will be materially adverse. At the date
hereof, the Borrower has no Indebtedness or other liabilities, whether accrued,
absolute, contingent or otherwise, and whether due or to become due, that are
not set forth on the Initial Financial Statement. Since the Initial Financial
Statement there have been no material adverse changes, individually or in the
aggregate, in the business, condition (financial or otherwise), results of
operations, assets or liabilities of the Borrower.
3.7 Events of Default. As of the date of this Agreement, no Default or
-----------------
Event of Default exists.
3.8 Taxes. The Borrower has filed all federal, state and other tax
-----
returns required to be filed for all Taxes, and has fully paid (or has
established adequate reserves in accordance with GAAP for the payment of) all
Taxes, assessments and other such governmental charges due from the Borrower.
The Borrower has not executed any waiver that would have the effect of extending
the applicable statute of limitations in respect of any Tax.
3.9 Labor Relations; Litigation. The Borrower is not engaged in any
---------------------------
unfair labor practice and there is no litigation, proceeding, governmental
investigation (administrative or judicial) or labor dispute or complaint,
pending or, to the best knowledge of the Borrower, threatened against the
Borrower, which, if decided adversely to the Borrower, could have a
-15-
<PAGE>
materially adverse effect on the business, condition (financial or otherwise),
results of operations or assets of the Borrower or on the ability of the
Borrower to perform its obligations under the Security Documents or under any
other agreement or document contemplated hereby or thereby, nor to its knowledge
is any substantial basis for any such litigation or labor dispute known to
exist.
3.10 Environmental Matters.
---------------------
(a) The Borrower has obtained all permits, licenses and other
authorizations which are required under all Environmental Laws. The Borrower is
in compliance with the terms and conditions of all such permits, licenses and
authorizations, and is also in compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in any applicable Environmental Law or in any
regulation, code, plan, order, decree, judgment, injunction, notice or demand
letter issued, entered, promulgated or approved thereunder.
(b) No notice, notification, demand, request for information, citation,
summons or order has been issued, no complaint has been filed, no penalty has
been assessed and no investigation or review is pending or, to the best of the
Borrower's knowledge, threatened by any governmental or other entity with
respect to any alleged failure by the Borrower to have any permit, license or
authorization required in connection with the conduct of its business or with
respect to any Environmental Laws, including, without limitation, Environmental
Laws relating to the generation, treatment, storage, recycling, transportation,
disposal or release of any Hazardous Materials. The Borrower has not been
identified in writing as a potentially responsible party (as that term has been
construed pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, or any similar state or local laws) with
respect to any site.
(c) No material oral or written notification of a release of a Hazardous
Material has been filed by or on behalf of the Borrower. No property now or, to
the best of the Borrower's knowledge, previously owned, leased or used by the
Borrower is listed or proposed for listing on the National Priorities List under
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, or on any similar state list of sites requiring investigation
or clean-up.
(d) There are no liens or encumbrances arising under or pursuant to any
Environmental Laws on any of the real property or properties owned, leased or
used by the Borrower, and no governmental actions have been taken or, to the
best of the Borrower's knowledge, are in process which could subject any of such
properties to such liens or encumbrances or, as a result of which the Borrower
would be required to place any notice or restriction relating to the presence of
Hazardous Materials at any property owned by it in any deed to such property.
(e) Neither the Borrower nor, to the best knowledge of the Borrower, any
previous owner, tenant, occupant or user of any property owned, leased or used
by the Borrower, has (i) engaged in or permitted any operations or activities
upon or any use or occupancy of such property, or any portion thereof, for the
purpose of or in any way involving the handling, manufacture,
-16-
<PAGE>
treatment, storage, use, generation, release, discharge, refining, dumping or
disposal (whether legal or illegal, accidental or intentional) of any Hazardous
Materials on, under, in or about such property, except to the extent commonly
used in day-to-day operations of such property in connection with the Borrower's
business thereon and in such case, only in compliance with all Environmental
Laws, or (ii) transported any Hazardous Materials to, from or across such
property except to the extent commonly used in day-to-day operations of such
property in connection with the conduct of the Borrower's business thereon and,
in such case, only in compliance with all Environmental Laws; nor to the best
knowledge of the Borrower have any Hazardous Materials migrated from other
properties upon, about or beneath such property, nor, to the best knowledge of
the Borrower, are any Hazardous Materials presently, deposited, stored or
otherwise located on, under, or about such property except to the extent
commonly used in day-to-day operations of such property and, in such case, only
in compliance with all Environmental Laws.
3.11 Restrictions on the Borrower. The Borrower is not party to or bound
----------------------------
by any contract, agreement or instrument, nor subject to any charter or other
corporate restriction which will, under current or foreseeable conditions,
materially and adversely affect its business, condition (financial or
otherwise), results of operations or assets.
3.12 Contracts with Affiliates, Etc. Except for agreements or
------------------------------
transactions (in each case) in the ordinary course of business and on an arm's-
length basis, the Borrower is not a party to or otherwise bound by any
agreements, instruments or contracts (whether written or oral) with any
Affiliate.
3.13 Disclosure. No representations and warranties made by the Borrower
----------
in this Agreement, any other Loan Document or in any other agreement,
instrument, document, certificate, statement or letter furnished to the Lender
by or on behalf of the Borrower, and no other factual information heretofore or
contemporaneously furnished by or on behalf of the Borrower to the Lender, in
connection with any of the transactions contemplated by any of the Loan
Documents contains (as of the date given) any untrue statement of fact or omits
to state a fact necessary in order to make the statements contained therein not
misleading in any material respect in light of the circumstances in which they
are made. Except as disclosed herein, there is no fact known to the Borrower
which materially adversely affects, or which would in the future materially
adversely affect, the business, condition (financial or otherwise), results of
operations or assets of the Borrower.
3.14 Solvency. Both before and after giving effect to all Indebtedness
--------
incurred by the Borrower hereunder, and with Inventory valued on a "first in-
first out" basis, the Borrower (i) will not be left with unreasonably small
capital with which to engage in its business, even allowing for reasonable
margins for error in the projections of the Borrower's future performance (ii)
will not have incurred Indebtedness beyond its ability to pay such Indebtedness
as it matures, and (iii) will have assets (both tangible and intangible) having
a present fair salable value in excess of the amount required to pay the
probable liability on its then existing debts (whether matured or unmatured,
liquidated or unliquidated, absolute fixed or contingent).
-17-
<PAGE>
3.15 Collateral. All of the Obligations of the Borrower to the Lender
----------
under or in respect of the Loan Documents will, at all times from and after the
execution and delivery of each of the Security Documents, be entitled to the
benefits of and be secured by each of such Security Documents to the extent
provided therein.
3.16 Subsidiaries. As of the date hereof, the Borrower has no
------------
Subsidiaries.
SECTION 4. CONDITIONS OF LOANS.
-------------------
4.1 Conditions to Initial Revolving Loan and Term Loan. The obligation of
--------------------------------------------------
the Lender to make the initial Revolving Loan and the Term Loan is subject to
the fulfillment to the satisfaction of the Lender on the date hereof of the
following conditions precedent:
4.1.1 Receipt by the Lender of all of the agreements, documents,
instruments, certificates and opinions listed or described on the Closing
Checklist attached hereto as Exhibit C, in form and substance satisfactory to
---------
the Lender, and duly authorized, executed and delivered by the parties thereto
(as applicable), along with such additional instruments, certificates, opinions
and other documents as the Lender shall reasonably request.
4.1.2 The representations and warranties contained herein shall be
true and accurate on and as of the date hereof, the Borrower shall have
performed and complied with all covenants and conditions required herein to be
performed or complied with by it prior to the making of such Loans, and no
Default shall be continuing or result from the Loans to be made on the date
hereof or the transactions contemplated hereby.
4.1.3 Without limiting anything contained in Section 4.1.1:
(a) The Lender shall be satisfied that the financial statements
referred to in Section 3.6 fairly present the financial condition of the
Borrower as at the close of business on the respective dates thereof and the
results of operations for the periods then ended, and that there has been no
material adverse change in the business, condition (financial or otherwise),
results of operations or assets of the Borrower since the date of the Initial
Financial Statement, including no new pending or threatened adverse litigation.
(b) The Security Documents and the appropriate financing statements
and other documents in respect thereto and necessary to enable the Lender to
perfect a legal, valid and enforceable first-priority lien and security interest
thereunder, shall have been duly executed by the Borrower, and filed or
recorded, as applicable, in all appropriate filing offices or other locations
necessary for the perfection of such first-priority interests, and all other
actions necessary for the perfection of such interests shall have been
completed. The Lender shall have received satisfactory evidence that such
insurance as is required by the Security Documents to be in effect in respect of
all property and fixtures of the Borrower is in effect and the interest of the
Lender as mortgagee, loss payee and additional insured has been duly endorsed
upon all instruments of insurance issued in respect of such property.
-18-
<PAGE>
4.1.4 No change in applicable law or regulation shall have occurred
as a consequence of which it shall have become and continue to be unlawful (i)
for the Lender to perform any of its agreements or obligations under any of the
Loan Documents to which it is a party on the date hereof, or (ii) for the
Borrower to perform any of its agreements or obligations under any of the Loan
Documents to which it is a party on the date hereof.
4.1.5 The Lender shall have received facility fees in the aggregate
amount of $28,000 from the Borrower.
4.2 Conditions to all Loans. The obligation of the Lender to make
-----------------------
any Loan is subject to the fulfillment to the satisfaction of the Lender
immediately prior to or contemporaneously with each such Loan of each of the
following conditions: (i) the representations and warranties contained herein
or otherwise made in writing by or on behalf of the Borrower pursuant hereto or
in connection with the transactions contemplated hereby shall be true and
correct at the time of each such Loan (except to the extent that any such
representation and warranty expressly relates to an earlier date, in which case
such representation and warranty shall continue to be true and correct as of
such earlier date) with and without giving effect to the Loans to be made at
such time and the application of the proceeds thereof, (ii) no Default or Event
of Default shall be continuing or result from such Loan, (iii) no material
adverse change in the condition (financial or otherwise), business operations or
properties of the Borrower shall have occurred since the date of this Agreement
and (iv) no change shall have occurred in any law or regulation or
interpretation thereof that, in the opinion of counsel for the Lender, would
make it illegal or against the policy of any governmental agency or authority
for the Lender to make any Loans (or such Loan) hereunder.
The making of each Loan shall be deemed to be a representation and warranty
by the Borrower on the date of the making of such Loan as to the accuracy of the
facts referred to in subsection (i) of this Section 4.2.
SECTION 5. COVENANTS.
---------
During the term of this Agreement and so long as any Indebtedness of the
Borrower in respect of any Loan remains outstanding:
5.1 Financial Statements and Other Reporting Requirements. The
-----------------------------------------------------
Borrower shall furnish (or, with respect to Section 5.1(vii), cause to be
delivered) to the Lender:
(i) as soon as available to the Borrower, but in any event within 90
days after each fiscal year-end, the consolidated and consolidating balance
sheets of the Borrower as at the end of, and related statements of income,
retained earnings and cash flow for, such year prepared in accordance with
GAAP and certified by independent certified public accountants satisfactory
to the Lender that such statements present fairly the financial position of
the Borrower prepared in accordance with GAAP applied in a manner
consistent with the Borrower's past practices; and concurrently with such
financial statements, a written statement by such independent certified
public accountants that, in
-19-
<PAGE>
the making of the audit necessary for their report and opinion upon such
financial statements, they have obtained no knowledge of any Default or
Event of Default, or, if in the opinion of such accountant such Default or
Event of Default exists, they shall disclose in such written statement the
nature and status thereof;
(ii) as soon as available to the Borrower, but in any event within 30
days after the end of each fiscal month of each fiscal year of the
Borrower, the balance sheet of the Borrower as at the end of, and related
statements of income and retained earnings for, the portion of the fiscal
year then ended and for the month then ended, prepared by management of the
Borrower in accordance with GAAP applied in a manner consistent with the
audited financial statements required by clause (i) above (subject to
normal year-end audit adjustments, none of which shall be materially
adverse) and certified pursuant to the report to be delivered to the Lender
under clause (iv) of this Section 5.1;
(iii) promptly as they become available, a copy of each report
(including any so-called management letters) submitted to the Borrower by
independent certified public accountants in connection with each annual
audit of the books of the Borrower by such accountants or in connection
with any interim audit thereof pertaining to any phase of the business of
the Borrower;
(iv) concurrently with each delivery by the Borrower of financial
statements pursuant to clause (i) or clause (ii) of this Section 5.1, a
chief financial officer's report in substantially the form of Exhibit D
---------
hereto, and including, without limitation, computations in reasonable
detail evidencing compliance with the covenants contained in Sections 5.14,
5.15, 5.16, and 5.17, inclusive;
(v) within 20 days after the end of each fiscal month of the
Borrower, a detailed aged trial balance of all Accounts Receivable and all
accounts payable of the Borrower as of the last day of such month, along
with a report and designation of the Borrower's Inventory, setting forth an
analysis of the value of such Inventory by location and classification as
of such last day of such month and otherwise in form and substance
satisfactory to the Lender;
(vi) within five Business Days after the close of each fiscal month of
the Borrower, a Borrowing Base certificate (the "Borrowing Base Report") in
substantially the form of Exhibit E hereto, provided that the Lender
--------- --------
reserves the right in its sole discretion to require the Borrower to
deliver a Borrowing Base Certificate within three Business Days after the
close of each one-week fiscal period of the Borrower;
(vii) as soon as available to the Borrower, but in any event at least
30 days prior to each fiscal year-end of the Borrower, annual pro forma
--- -----
projections and budgets for the Borrower's next fiscal year, including,
without limitation, projected balance sheets, statements of income,
retained earnings and cash flows, prepared on a quarter-by-quarter basis,
prepared by the management of the Borrower consistent with past practice
and otherwise acceptable in form and substance to the Lender;
-20-
<PAGE>
(viii) promptly after obtaining knowledge of the existence thereof,
notice of (a) the occurrence of any event which constitutes a Default or
Event of Default or the occurrence of any condition or event that the
Borrower reasonably believes could lead to a Default or Event of Default,
in each case specifying the nature and duration thereof and the action
being or proposed to be taken with respect thereto, (b) the occurrence of
any condition or event with respect to the Borrower or any Affiliate which
could be expected to constitute a material adverse change in, or to have a
material adverse effect on, the business, condition (financial or
otherwise), results of operations or assets of the Borrower, specifying the
nature and duration thereof and the action being or proposed to be taken
with respect thereto, (c) any litigation or any investigative proceedings
of a governmental agency or authority or any other person commenced or
threatened against the Borrower, any Affiliate or any Plan which could be
expected to have a material adverse effect on the business, condition
(financial or otherwise), results of operations or assets of the Borrower,
or the issuance of any judgment, award, decree, order or other
determination in or relating to any such litigation or proceedings, (d) the
occurrence of a reportable event (as defined in ERISA) or any
communications to, or receipt of communications from, the Pension Benefit
Guaranty Corporation, the United States Department of Labor or the Internal
Revenue Service by the Borrower or any Affiliate relating to any Plan,
along with copies of all such communications, (e) the adoption by the
Borrower of any stock option or executive compensation plan, whether or not
subject to ERISA, and any Plan subject to ERISA, or the substantial
modification of any such plan, along with the vesting and funding schedules
and other principal provisions thereof, (f) any communications given or
received by the Borrower relating to compliance with, any violation or
potential violation of, or any liability or potential liability under, any
Environmental Law, along with copies of all such communications, and (g)
the occurrence of any default under, or the termination of, the Borrower's
contract(s) with James River; and
(ix) from time to time, such other financial data and other
information about the Borrower as the Lender may reasonably request.
5.2 Conduct of Business. The Borrower will maintain its corporate
-------------------
existence, continue to have a fiscal year ending December 31 of each year
(unless otherwise agreed to in writing by the Lender) and remain or engage in
substantially the same business as that in which it is now engaged and in no
unrelated business, and will duly observe and comply in all respects with all
applicable laws and all requirements of any governmental authorities relative to
it, its assets or to the conduct of its business, including applicable
Environmental Laws, and will maintain and keep in full force and effect all
licenses and permits necessary to the proper conduct of its business. Upon
forming any Subsidiary, the Borrower will deliver to the Lender the Borrower's
and such Subsidiary's agreement, satisfactory to counsel for the Lender, that
such Subsidiary shall be bound by the terms and conditions of this Agreement,
the other Security Documents and the related documents and instruments as the
Borrower hereunder and thereunder.
-21-
<PAGE>
5.3 Maintenance and Insurance. The Borrower will maintain and keep its
-------------------------
properties in good repair, working order and condition so that its business may
be properly and advantageously conducted at all times, and will comply with the
provisions of all Leases to which it is a party or under which it occupies
property so as to prevent any material loss or forfeiture thereof or thereunder.
The Borrower at all times will maintain liability and casualty insurance with
such insurance companies, in such amounts against such hazards and liabilities
and for such purposes as is customary in the industry for companies of
established reputation engaged in the same or similar businesses and owning or
operating similar properties. The Lender shall be named as mortgagee, loss
payee and additional insured under the Borrower's policies of insurance and
shall be given 30 days' advance written notice of any cancellation thereof. If
the Borrower fails to provide any such insurance, the Lender, in its sole
discretion, may provide such insurance and charge the cost (plus applicable
interest) to the Loan Account or to the Borrower's deposit accounts with the
Lender. The Lender shall not, by the fact of approving, disapproving,
accepting, obtaining or failing to obtain any such insurance, incur liability
for the form or legal sufficiency of insurance contracts, solvency of insurance
companies or payment of lawsuits, and the Borrower hereby expressly assumes full
responsibility therefor and liability, if any, thereunder. Upon request of the
Lender from time to time, the Borrower shall furnish to the Lender certificates
or other evidence satisfactory to the Lender of compliance with the foregoing
insurance provisions. The provisions of this Section 5.3 shall be deemed to be
supplemental to, but not duplicative of, the provisions of any of the Security
Documents that require the maintenance of insurance.
5.4 Taxes. The Borrower will pay or cause to be paid all Taxes, assessments
-----
or governmental charges on or against it or its properties prior to such taxes
becoming delinquent, except for any tax, assessment or charge which is being
contested in good faith by proper legal proceedings and with respect to which
adequate reserves have been established and are being maintained in accordance
with GAAP, provided that no enforcement action to enforce a lien has been
--------
commenced against the Borrower with respect to any such tax, assessment or
charge. The provisions of this Section 5.4 shall be deemed to be supplemental
to, but not duplicative of the provisions of any of the Security Documents that
require payment of Taxes.
5.5 Limitation of Indebtedness. Except with the prior written consent of
--------------------------
the Lender, the Borrower will not create, incur, assume or suffer to exist, or
in any manner become or be liable directly or indirectly with respect to, any
Indebtedness except: (i) the Obligations; (ii) Indebtedness for borrowed money
existing on the date of this Agreement listed and described (but only to the
extent so listed and described) on Exhibit B hereto; (iii) Indebtedness for the
---------
purchase price of capital assets (including Indebtedness incurred under capital
leases, as determined in accordance with GAAP) incurred in the ordinary course
of business consistent with past practices, to the extent such purchase is
permitted by Section 5.14 and subject to the limitations set forth in Section
5.6; (iv) Indebtedness for Taxes or other charges, subject, however, to the
limitations set forth in Section 5.4; and (v) Indebtedness on open account for
the purchase price of services, materials and supplies incurred by the Borrower
in the ordinary course of business (not as a result of borrowing), so long as
all of such open account Indebtedness shall be promptly paid and discharged when
due or in conformity with customary trade terms and practices, except for any
such open account Indebtedness which is being
-22-
<PAGE>
contested in good faith by the Borrower and as to which adequate reserves have
been established and are being maintained in accordance with GAAP and as to
which no Encumbrance has been placed on any property of the Borrower.
5.6 Restrictions on Liens. The Borrower will not create, incur, assume or
---------------------
suffer to exist any mortgage, pledge, security interest, lien or other charge or
encumbrance, including the lien or retained security title of a conditional
vendor (collectively "Encumbrances") upon or with respect to any property or
assets, real or personal, tangible or intangible, of the Borrower, or assign or
otherwise convey any right to receive income, except: (i) Encumbrances existing
on the date of this Agreement and listed and described (but only to the extent
so listed and described) on Exhibit B hereto; (ii) Encumbrances in favor of the
---------
Lender; (iii) Encumbrances securing Indebtedness for the purchase price of
capital assets (including rights of lessors under capital leases) to the extent
such Indebtedness is permitted by Section 5.5(iii), provided that (a) each such
--------
Encumbrance is given solely to secure the purchase price of, or the lease
obligations under, such property, does not extend to any other property of the
Borrower and is given at the time of acquisition of such property, and (b) the
Indebtedness secured thereby does not exceed the lesser of the cost of such
property or its fair market value at the time of acquisition; (iv) liens for
taxes, fees, assessments and other governmental charges to the extent that
payment of the same is not required in accordance with the provisions of Section
5.4; or (v) liens incurred or deposits made in the ordinary course of the
Borrower's business in connection with workers' compensation, unemployment
insurance, social security and other similar laws, or liens of mechanics,
laborers, materialmen, carriers and warehousemen arising by operation of law to
secure payment for labor, materials, supplies or services incurred in the
ordinary course of the Borrower's business, but only if the payment thereof is
not at the time required and such liens do not, individually or in the
aggregate, materially detract from the value or limit the use of any property
subject thereto.
5.7 Mergers, Acquisitions and Purchases and Sales of Assets. The Borrower
-------------------------------------------------------
will not consolidate or merge with or into any other corporation or other
entity, acquire the assets or stock of any entity (except with the prior written
consent of the Lender, which consent will not be unreasonably withheld) or sell,
lease, transfer or otherwise dispose of or discount any portion of its assets
(including any note, instrument or account), other than finished goods and the
disposition of scrap, waste and obsolete items in the ordinary course of the
Borrower's business.
5.8 Investments and Loans. The Borrower will not make or have outstanding
---------------------
at any time any investments in or loans to any other person, whether by way of
advance, guaranty, extension of credit, capital contribution, purchase of
stocks, notes, bonds or other securities or evidences of Indebtedness, or
acquisition of limited or general partnership interests or interests in any
limited liability company or partnership, other than: (i) in direct obligations
of the United States of America, maturing within one year of their issuance;
(ii) in time certificates of deposit or repurchase agreements, maturing within
one year of their issuance, from banks in the United States having capital,
surplus and undivided profits in excess of $200,000,000; (iii) in short-term
commercial paper carrying the highest rating by Moody's or Standard and Poor's
rating services and issued by corporations headquartered in the United States,
in currency of the United States; (iv) in shares of money-market mutual funds
having assets in excess of $100,000,000 and substantially all of the assets of
which consist of investments referred to in clauses (i) through
-23-
<PAGE>
(iii), inclusive, above; and (v) advances to employees for business related
expenses to be incurred in the ordinary course of business and consistent with
past practices in an amount not to exceed $50,000 in the aggregate outstanding
at any one time, provided that no such advances to any single employee shall
--------
exceed $10,000 in the aggregate.
5.9 Restricted Payments The Borrower shall not, directly or indirectly
-------------------
(through any Affiliate or otherwise), declare, pay or make any Restricted
Payment.
5.10 ERISA Compliance. None of the Borrower, any Plan or any fiduciary
----------------
thereof shall (i) engage in any "prohibited transaction" or incur, whether or
not waived, any "accumulated funding deficiency" (both as defined in ERISA and
the Code, (ii) fail to satisfy any additional funding requirements set forth in
Section 412 of the Code and Section 302 of ERISA, or (iii) terminate or withdraw
from participation in any Plan in a manner which could result in the imposition
of a lien on any property of, or impose a substantial withdrawal liability on,
the Borrower. The Borrower and each Plan shall comply in all material respects
with ERISA.
5.11 Inspection by the Lender; Books and Records. The Borrower will permit
-------------------------------------------
the Lender and its designees, at any reasonable time and from time to time, to
visit and inspect the properties and assets of the Borrower, to examine and make
copies of the books and records of the Borrower and to discuss the affairs,
finances and accounts of the Borrower with appropriate officers. The Borrower
will keep adequate books and records of account in which true and complete
entries will be made reflecting all of its business and financial transactions,
and such entries will be made in accordance with GAAP and applicable law.
5.12 Use of Proceeds. The Borrower will use the proceeds of the Revolving
---------------
Credit Loans and the Loan solely for its working capital needs and repayment of
existing Indebtedness. No portion of any Loans shall be used for the purpose of
purchasing or carrying any "margin security" or "margin stock" as such terms are
used in Regulations G, U or X of the Board of Governors of the Federal Reserve
System.
5.13 Transactions with Affiliates. The Borrower will not, directly or
----------------------------
indirectly, enter into any transaction with any Affiliate except in the ordinary
course of business on terms that are no less favorable to the Borrower than
those which might be obtained at the time in a comparable arm's-length
transaction with any person who is not an Affiliate.
5.14 Minimum Tangible Net Worth. The Borrower will not permit its Tangible
--------------------------
Net Worth at any fiscal quarter-end specified below to be less than the amount
identified below as applicable to such fiscal quarter:
-24-
<PAGE>
<TABLE>
<CAPTION>
Minimum
Fiscal Quarter-End Tangible Net Worth
------------------ ------------------
<S> <C>
For any fiscal quarter
ending on or after
June 30, 1996
through and including
September 30, 1996 $4,000,000
For any fiscal quarter
ending on or after
December 31, 1996
through and including
September 30, 1997 $7,800,000
For any fiscal quarter
ending on or after
December 31, 1997
through and including
September 30, 1998 $8,700,000
For any fiscal quarter
ending on or after
December 31, 1998
through the Maturity Date $9,600,000
</TABLE>
5.15 Senior Indebtedness to Tangible Net Worth. The Borrower will
-----------------------------------------
not permit the ratio of (i) Senior Indebtedness to (ii) Tangible Net Worth at
any fiscal quarter-end specified below to be more than the ratio identified
below as applicable to such fiscal quarter:
Fiscal Quarter-End Ratio
------------------ -----
For any fiscal quarter
ending on or after
December 31, 1996
through and including
September 30, 1998 1.0 to 1.0
For any fiscal quarter
ending on or after
December 31, 1998
through the Maturity Date .75 to 1.0
-25-
<PAGE>
5.16 Operating Cash Flow to Total Debt Service. The Borrower will
-----------------------------------------
not permit the ratio of (i) Operating Cash Flow to (ii) Total Debt Service, as
at each fiscal quarter-end of the Borrower for the four consecutive fiscal
quarters then ending, commencing with the four consecutive fiscal quarters
ending December 31, 1996, to be less than 2.0 to 1.0.
5.17 Working Capital. The Borrower shall not permit its Working Capital
---------------
to be less than $1,500,000 at any time.
5.18 Fiscal Year. The Borrower shall have respective fiscal years
-----------
ending on December 31 of each year or shall notify the Lender of any change in
such fiscal year (whereupon the Lender shall have the right to modify the timing
of the financial covenants hereunder accordingly in order to correspond to any
such change in the fiscal year of the Borrower).
5.19 Operating Accounts; Escrow Account. The Borrower will maintain
----------------------------------
its primary checking and operating accounts with the Lender, and will establish
an escrow account with the Lender for Payment of all past due accounts payable.
5.20 Capital Expenditures. Except with the prior written consent of
--------------------
the Lender (which consent will not be unreasonably withheld), the Borrower will
not make any Capital Expenditures in excess of $1,000,000 in any fiscal year.
SECTION 6. EVENTS OF DEFAULT; ACCELERATION.
-------------------------------
6.1 The following shall constitute events of default (individually,
an "Event of Default"):
(i) (A) default in the payment, when due or payable, of any Obligation
for the payment of money, which default shall continue for more than five (5)
days, provided, that such five (5) day period shall not apply to a default in
--------
the payment of any Obligations due or payable on the Maturity Date; or (B)
default in the performance, when due, of any Obligation by the Borrower or by
any endorser, guarantor or surety for any Obligation (other than the payment
provisions described in subparagraph (A) above), which default shall continue
for more than fifteen (15) days, provided that such fifteen (15) day period
--------
shall not apply to a default in the payment, performance or observation of any
Obligations under Section 2 of the Agreement or under Sections 5.3, 5.5 through
5.9, inclusive, and 5.11 through 5.20, inclusive, of the Agreement; or
(ii) the making by the Borrower of any material misrepresentation to
the Lender contained in this Agreement or any other Loan Document or otherwise,
whether or not for the purpose of obtaining credit or an extension of credit; or
(iii) issuance of an injunction or attachment against property of the
Borrower or any endorser, guarantor or surety for any Obligation which is not
dismissed or bonded, to the satisfaction of the Lender, within thirty (30) days
after issuance; or
-26-
<PAGE>
(iv) calling of a meeting of creditors, appointment of a committee of
creditors or liquidating agents or offering of a composition or extension to
creditors by, for or with the consent or acquiescence of the Borrower or any
endorser, guarantor or surety for any Obligation; or
(v) Insolvency of the Borrower or any endorser, guarantor or surety
for any Obligation; or
(vi) the occurrence of any material default under any agreement, note
or other instrument evidencing or relating to any obligation of the Borrower to
any other Person for the payment of money; or
(vii) any money judgment or judgments aggregating in excess of $25,000
is entered against the Borrower or any endorser, guarantor or surety for any
Obligation; or
(viii) the occurrence of any change in the condition or affairs
(financial or otherwise) of the Borrower or any endorser, guarantor or surety
for any Obligation, which causes the Lender in good faith to deem itself
insecure; or
(ix) any Security Document, or any covenant, agreement or obligation
contained therein or evidenced thereby, shall cease in any material respect to
be legal, valid, binding or enforceable against the Borrower or any other person
bound thereby, or shall be canceled, terminated, revoked or rescinded, or shall
be claimed in writing by the Borrower to be so cancelled, terminated, revoked or
rescinded; or
(x) any action at law, suit in equity or other legal proceeding to
cancel, revoke or rescind any Security Document shall be commenced by or on
behalf of the Borrower or any other person bound thereby, or by any court or any
other governmental or regulatory authority or agency of competent jurisdiction;
or any court or any other governmental or regulatory authority or agency of
competent jurisdiction shall make a determination that, or shall issue a
judgment, order, decree or ruling to the effect that, any one or more of the
Security Documents, or any one or more of the obligations of the Borrower or any
other person under any one or more of the Security Documents, are illegal,
invalid or unenforceable in any material respect in accordance with the terms
thereof; or
(xi) any change in equity ownership of the Borrower, other than as a
result of transfers for estate planning purposes or transfers among existing
equity holders on the date hereof; or
(xii) any failure by Glenn Walters for any reason to cease to be
actively involved in strategic planning and decision-making for the Borrower
unless the Lender has determined in its sole discretion that the occurrence of
such event will not have a material adverse effect on the business, properties
or condition (financial or otherwise) of the Borrower.
6.2 If an Event of Default shall occur and be continuing, the Lender
may, at its option, (i) declare any or all of the Obligations of the Borrower to
the Lender to be immediately due and
-27-
<PAGE>
payable without further notice or demand, whereupon the same shall become
immediately due and payable without presentment, demand, protest or other notice
of any kind, all of which are hereby waived by the Borrower, (ii) limit, suspend
or terminate the Borrower's right to borrow hereunder, and (iii) exercise any
rights and remedies under the Security Documents and law, provided that upon the
--------
occurrence of an Event of Default described in Sections 6.1(iv) or (v), the
actions described in clauses (i) and (ii) above shall automatically be deemed to
have been taken by the Lender.
SECTION 7. SET OFF; PARTICIPATIONS.
-----------------------
Any deposits or other sums at any time credited by or due from the
Lender to the Borrower may, without notice (any such notice being expressly
waived hereby) and to the fullest extent permitted by law and without regard to
any source of payment whatsoever, at any time during the continuance of an Event
of Default, be applied to or set off against Obligations which were then due.
The Borrower may invite any financing institution (including any bank,
insurance company, savings bank or savings and loan association) which may
consider investing or participating in the Loans (each such financing
institution being referred to in this Section as a "Participant") to rely upon
all of the representations, warranties, covenants and other provisions of this
Agreement, the Notes, the Security Documents and any other agreements,
instruments and documents referred to herein or thereon or contemplated hereby
or thereby in making such investment or participation and agrees that its
becoming a Participant in the Loans shall constitute an acceptance of such offer
and shall make the Participant a creditor of the Borrower and a Lender
hereunder. Any Participant may exercise the rights of set-off given to the
Lender in this Section 7 with respect to any outstanding indebtedness of the
Borrower to such Participant hereunder.
The Borrower shall cooperate with the Lender in providing information
to any potential Participant with such Participant's consideration of its
investment or participation in the Loans.
-28-
<PAGE>
SECTION 8. GENERAL.
-------
8.1 Written Notices. Any notices, expressly required by this
---------------
Agreement to be in writing, to any party hereto shall be deemed to have been
given when delivered by hand, when sent by telecopier, when delivered to any
overnight delivery service freight pre-paid or 3 days after deposit in the
mails, postage prepaid, and addressed to such party at its address given at the
beginning of this Agreement or at any other address specified in writing.
Written notices to the Borrower shall be sent to the attention of Glenn J.
Walters, President, Advanced Deposition Technologies, Inc., Myles Standish
Industrial Park, Taunton, Massachusetts 02780, with a copy to Andrew Myers,
Esq., O'Connor Broude & Aronson, 950 Winter Street, Suite 2300, Waltham, MA
02154, and written notices to the Lender shall be sent to the attention of
Edward T. Paslawski, Vice President, National Bank of Canada, One Federal
Street, Boston, Massachusetts 02110, with a copy to Philip A. Herman, Esq.,
Goulston & Storrs, P.C., 400 Atlantic Avenue, Boston, Massachusetts 02110-3333.
Any notice, unless otherwise specified, shall be in writing.
8.2 No Waivers. No failure or delay by the Lender in exercising any
----------
right, power or privilege hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided are cumulative and not exclusive of any rights or
remedies otherwise provided by law.
8.3 Further Assurances. The Borrower shall do, make, execute and
------------------
deliver all such additional and further acts, things, assurances, and
instruments as the Lender may reasonably require more completely to vest in and
assure to the Lender its rights hereunder and under the Notes, in the Collateral
and to carry into effect the provisions and intent of this Agreement, the Notes
and the other Security Documents.
8.4 Governing Law. This Agreement, the Notes and the other Security
-------------
Documents shall be deemed to be contracts made under seal and shall be construed
in accordance with and governed by the laws of the Commonwealth of Massachusetts
(without regard to conflicts of laws rules). Any legal action or proceeding
arising out of or relating to this Agreement or any Obligation may be instituted
in the courts of the Commonwealth of Massachusetts or of the United States of
America for the District of Massachusetts, and the Borrower hereby irrevocably
submits to the jurisdiction of each such court in any such action or proceeding;
provided, however, that the foregoing shall not limit the Lender's rights to
- -------- -------
bring any legal action or proceeding in any other appropriate jurisdiction. In
litigation or the preparation thereof, the Lender shall be entitled to select
its own counsel.
8.5 Expenses, Taxes and Indemnification.
-----------------------------------
(a) The Borrower will pay and indemnify and hold the Lender harmless
against all taxes (other than taxes on the income of the Lender), charges and
expenses of every kind or description, including without limitation attorneys'
fees and expenses and the costs and expenses of field audits and commercial
finance exams, reasonably incurred or expended by the Lender in connection with
or in any way related to the Lender's relationship with the Borrower, whether
-29-
<PAGE>
hereunder or otherwise, including, without limitation, those incurred or
expended in connection with the preparation, execution, delivery, interpretation
or amendment of this Agreement, the Notes, the other Security Documents and any
related agreement, instrument or document, the making of the Loans, the
supervision, protection and collection of and realization upon any Collateral,
and the protection or enforcement of the Lender's rights hereunder and under the
Notes and the other Security Documents.
(b) The Borrower shall absolutely and unconditionally indemnify and hold the
Lender harmless against any and all claims, demands, suits, actions, causes of
action, damages, losses, settlement payments, obligations, costs, expenses and
all other liabilities whatsoever which shall at any time or times be incurred or
sustained by the Lender or by any of its shareholders, directors, officers,
employees, subsidiaries, affiliates or agents (except any of the foregoing
incurred or sustained as a result of the gross negligence or willful misconduct
of the Lender) on account of, or in relation to, or in any way in connection
with, associated with or ancillary to this Agreement, the Notes, the other
Security Documents and the other documents executed or delivered in connection
herewith, and the arrangements or transactions contemplated herein or therein,
whether or not all or any of the transactions contemplated by, associated with
or ancillary to this Agreement or any of such documents are ultimately
consummated.
8.6 Amendments, Waivers, Etc. This Agreement, the Notes, the other Security
------------------------
Documents and any provision hereof or thereof may be waived, discharged or
terminated only by an instrument in writing signed by the Lender and may be
amended only by an instrument in writing signed by the Borrower and the Lender.
8.7 Binding Effect of Agreement. This Agreement shall be binding upon and
---------------------------
inure to the benefit of the Borrower and the Lender and their respective
successors and assigns. The Lender may sell, assign or otherwise transfer all
or any portion of its right, title and interest in, and its obligations under,
this Agreement, the Loans made and to be made hereunder, or, pursuant to Section
7, grant participations in its right, title and interest herein and therein.
The Borrower may not assign or transfer its rights or obligations hereunder.
8.8 Computation of Interest and Fees, Etc. Interest, fees and charges shall
--------------------------------------
be computed daily on the basis of a year of 360 days and paid for the actual
number of days for which due. If the due date for any payment of principal is
extended by operation of law, interest shall be payable for such extended time.
If any payment required by this Agreement becomes due on a day on which banks in
Boston, Massachusetts are required or permitted by law or an appropriate
authority to remain closed, such payment may be made on the next succeeding day
on which such banks are open, and such extension shall be included in computing
interest in connection with such payment. All payments required of the Borrower
hereunder or under the Notes shall be made in lawful money of the United States
of America in federal or other funds immediately available to the recipient
thereof at the prescribed place of payment.
8.9 Entire Agreement; Miscellaneous. This Agreement, including the exhibits
-------------------------------
hereto, sets forth the entire agreement and understanding of the parties hereto
in respect of the subject matter contained herein, and supersedes all prior
agreements, promises, covenants, arrangements,
-30-
<PAGE>
communications, representations, warranties, whether oral or written, by any
officer, employee or representative of any party hereto. The captions for the
sections of this Agreement are for ease of reference only and are not an
integral part of this Agreement. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures hereto and thereto were
upon the same instrument. The provisions of this Agreement are severable, and if
any of these provisions shall be held by any court of competent jurisdiction to
be unenforceable, such holdings shall not affect or impair any other provision
hereof.
8.10 WAIVER OF JURY TRIAL. THE BORROWER HEREBY IRREVOCABLY WAIVES TRIAL BY
--------------------
JURY IN ANY JURISDICTION AND IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH,
OR ARISING OUT OF THIS AGREEMENT, THE OBLIGATIONS, OR ANY INSTRUMENT OR DOCUMENT
DELIVERED PURSUANT HERETO OR THERETO, OR ANY CLAIM OR DISPUTE HOWSOEVER ARISING,
BETWEEN THE BORROWER AND THE LENDER. THIS WAIVER SHALL BE EFFECTIVE AGAINST THE
BORROWER FOR EACH DOCUMENT EXECUTED BY THE BORROWER OR THE LENDER AND DELIVERED
TO THE LENDER OR THE BORROWER, AS THE CASE MAY BE, WHETHER OR NOT SUCH DOCUMENT
SHALL CONTAIN A WAIVER OF JURY TRIAL. THE BORROWER FURTHER ACKNOWLEDGES THAT
ALL DOCUMENTS DELIVERED BY THE LENDER OR THE BORROWER ARE SUBJECT TO THIS WAIVER
OF JURY TRIAL AS TO ANY ACTION THAT MAY BE BROUGHT AS TO ANY OF SUCH DOCUMENTS,
AND CONFIRMS THAT THE FOREGOING WAIVERS ARE INFORMED AND FREELY MADE.
-31-
<PAGE>
WITNESS the execution hereof under seal on the day and year first above
written.
BORROWER:
ADVANCED DEPOSITION TECHNOLOGIES, INC.
By: /s/ Glenn J. Walters
-----------------------------------
Title: Chief Executive Officer,
President and Treasurer
LENDER:
NATIONAL BANK OF CANADA
By: /s/ Edward Paslawski
-----------------------------------
Title: Vice President Manager
-32-
<PAGE>
EXHIBIT 10.2
ADVANCED DEPOSITION TECHNOLOGIES, INC.
Myles Standish Industrial Park
Taunton, Massachusetts 02780
Dated as of: December 18, 1997
National Bank of Canada
One Federal Street, 27th Floor
Boston, Massachusetts 02110
Re: Modification No. 1 to Revolving Credit and Term Loan Agreement
--------------------------------------------------------------
Ladies and Gentlemen:
We refer to the Revolving Credit and Term Loan Agreement, dated as of July
8, 1996 (as from time to time amended and in effect, the "Agreement"), between
Advanced Deposition Technologies, Inc. (the "Borrower") and National Bank of
Canada (the "Lender"). Terms used in this letter of agreement which are not
defined herein, but which are defined in the Agreement, shall have the same
respective meanings herein as therein.
We have requested you to provide us with a $1,000,000 bridge loan to enable
us to acquire 65% of the capital stock of Alexander Boxall S.A. ("Alexander"),
and to make the amendments to the Agreement necessitated thereby. You have
advised us that you are prepared and would be pleased to provide such bridge
loan and to make the amendments so requested by us on the condition that we join
with you in this letter of agreement.
Accordingly, in consideration of these premises, the promises, mutual
covenants and agreements contained in this letter of agreement, and fully
intending to be legally bound by this letter of agreement, we hereby agree with
you as follows:
ARTICLE I
---------
AMENDMENTS TO AGREEMENT
-----------------------
Effective as of December 18, 1997 (in this letter of agreement, the
"Modification Date"), the Agreement is amended as follows:
-1-
<PAGE>
(a) The term "Loan Agreement" shall, wherever used in the Agreement or
any of the other Loan Documents, be deemed to also mean and include any
amendments, restatements and modifications thereof.
(b) The term "Loan Documents" shall, wherever used in the Agreement or any
of the other Loan Documents, be deemed to also mean and include Modification No.
1, the Escrow Letter and the Pledge Agreement.
(c) The definition of "Notes" contained in Section 1.1 of the Agreement is
amended to read in its entirety as follows:
"`Notes' means, collectively, the Revolving Credit Note, the Term Note and
the Bridge Note."
(d) The term "Obligations" shall, wherever used in the Agreement or any of
the other Loan Documents, be deemed to also mean and include all obligations of
the Borrower to the Lender under or in respect of Modification No. 1, the Bridge
Note, the Escrow Letter and the Pledge Agreement.
(e) The following nine new definitions are added at the end of Section 1.1
of the Agreement:
"Boxall Purchase Agreement" means the Share Purchase Deed to be entered
into in December, 1997 between Mr. Alexander Peter Boxall and the Borrower.
"Bridge Loan" shall have the meaning set forth in Section 2.2.1(A).
"Bridge Loan Maturity Date" means June 18, 1998.
"Bridge Note" shall have the meaning set forth in Section 2.2.1(A).
"Escrow Letter" means the Escrow Agreement dated as of the First
Modification Date among the Borrower, the Lender and Uria & Menendez.
"First Modification Date" means December 18, 1997.
"Modification No. 1" means that certain letter agreement dated as of
December 18, 1997 between the Borrower and Lender, upon the terms of which
the Agreement was modified and amended.
"Nunez Purchase Agreement" means the Share Purchase Deed to be entered into
in December, 1997 between Mr. Pedro Nunez - Barranco Guembe and the
Borrower.
-2-
<PAGE>
"Pledge Agreement" means that certain Stock Pledge Agreement to be entered
into in December, 1997 between the Borrower and the Lender, upon the terms
of which all of the issued and outstanding shares of capital stock of
Alexander owned by the Borrower will be pledged to the Lender in order to
secure the Obligations (and shall also include any share pledge agreement
governed by the laws of the Kingdom of Spain and relating to said capital
stock)."
(f) The following new Section 2.2(A) is inserted immediately following
Section 2.2 of the Agreement:
"2.2(A) Bridge Note.
-----------
2.2.1(A) Upon the terms and subject to the conditions of this
Agreement (including Modification No. 1), and in reliance upon the
representations, warranties and covenants of the Borrower made herein and
therein, the Lender agrees to lend to the Borrower the sum of $1,000,000 on
the First Modification Date (the "Bridge Loan") to be evidenced by a Bridge
Note (the "Bridge Note") substantially in the form of Annex A to
-------
Modification No. 1.
2.2.2(A) The principal of the Bridge Loan shall be payable in a
single payment on the Bridge Loan Maturity Date, along with all unpaid
interest and any other amounts due thereon.
2.2.3(A) The Borrower may prepay the Bridge Loan and the Bridge
Note in whole or in part, without premium or penalty, at any time and from
time to time upon five (5) days' prior written notice to the Lender. The
principal amount of the Bridge Loan so prepaid shall be at least $100,000
(or a multiple of $100,000 in excess of $100,000), unless the principal
amount of the Bridge Loan shall be less than $100,000, in which event the
prepayment may be equal to such unpaid principal amount, provided that the
--------
Borrower shall also pay accrued interest on the principal so prepaid to the
date of such prepayment and all fees and charges payable on or before the
date of such prepayment. In addition, in the event that Alexander incurs
indebtedness for borrowed money from a lender other than the Lender
(whether institutional or otherwise, but excluding its existing factoring
arrangements), or in the event there is any redemption of Alexander's
outstanding warrants or stock options, then the proceeds of such
refinancing or redemption shall, immediately upon the receipt thereof, be
used to prepay the Bridge Loan and the Bridge Note. The Borrower shall not
be permitted to reborrow any part of the principal of the Bridge Loan so
prepaid at any time or under any circumstances."
(f) The first three lines of Section 2.3.1 of the Agreement are amended to
read in their entirety as follows:
"2.3.1 Revolving Loans shall bear interest at a rate per annum
equal to 3/4% above the Base Rate in effect from time to time; the Term
Loan shall bear interest at a
-3-
<PAGE>
rate per annum equal to 1% above the Base Rate in effect from time to time;
and the Bridge Loan shall bear interest at a rate per annum equal to 1.25%
above the Base Rate in effect from time to time;"
(g) Section 2.3.1 of the Agreement is amended by inserting, immediately
following the date "August 1, 1996" in the ninth line thereof, the following
proviso:
", provided, however, that interest on the Bridge Loan shall be payable
-------- -------
commencing with January 2, 1998"
(h) Section 5.5 of the Agreement is amended: (i) by deleting the word
"and" at the end of clause (iv) thereof; and (ii) by inserting, immediately
following the word "Borrower" in the last line thereof, the following:
"; and (vi) Indebtedness of the Borrower to Pedro Nunez-Barranco Guembe in
the principal amount of $990,000 under a certain Promissory Note dated the
First Modification Date (as in effect and delivered to the Lender on such
date) (the "Nunez Note"), provided that (a) such Indebtedness shall at all
--------
times remain unsecured by any liens or encumbrances, (b) no payments or
prepayments of principal, interest or any other amounts of any kind
whatsoever shall be made on or in respect of such Indebtedness, and (c) the
Nunez Note shall not be amended or changed without the prior written
consent of the Lender.
(i) Section 5.7 of the Agreement is amended by inserting the following new
second sentence:
"Notwithstanding the foregoing, it is understood and agreed that the
Borrower may acquire 15% of the capital stock of Alexander upon the terms
contained in the Boxall Purchase Agreement and 50% of the capital stock of
Alexander upon the terms contained in the Nunez Purchase Agreement, in each
case as in effect and delivered to the Lender, and in any event on terms
and conditions reasonably satisfactory to Lender."
(j) The first sentence of Section 5.12 of the Agreement is amended to read
in its entirety as follows:
"The Borrower will use the proceeds of the Revolving Loans and the Term
Loans solely for its working capital needs and repayment of existing
Indebtedness, and will use the proceeds of the Bridge Loan solely for the
acquisition of the capital stock of Alexander referred to in Section 5.7."
(k) Section 6.1 of the Agreement is amended: (i) by deleting the period at
the end of clause (xii) thereof and inserting in its place the following: ";
or"; and (ii) by inserting, immediately following the said clause (xii), the
following new clauses (xiii), (xiv), (xv) and (xvi):
-4-
<PAGE>
"(xiii) any failure by (a) the Borrower to deliver to the Lender, on
or before the fifth business day following the consummation of the
acquisition of the capital stock of Alexander referred to in Section 5.7,
an originally executed Pledge Agreement governed by the laws of the
Commonwealth of Massachusetts, along with stock certificates representing
65% of the capital stock of Alexander and related stock powers executed in
blank, (b) the Borrower to deliver duly executed originals of the UCC-1
financing statements referred to in Article III(i)(F) below, (c) your legal
counsel, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., to deliver to
the Lender, a legal opinion reasonably satisfactory to the Lender, and (d)
your legal counsel, Uria Menendez, to deliver to the Lender a legal opinion
relating to the Pledge Agreement governed by the laws of the Commonwealth
of Massachusetts; or
(xiv) in the event that the acquisition of the capital stock of
Alexander is consummated, the failure by the Borrower to deliver to the
Lender, on or before the date upon which the acquisition of the capital
stock of Alexander referred to in Section 5.7 is consummated, duly executed
original counterparts of the documents and instruments referred to in
Article III(f)(i)(B), and Article III(f)(v); or
(xv) in the event that the purchase agreements relating to the
acquisition of the capital stock of Alexander referred to in Section 5.7
are not signed and delivered and all of the conditions precedent thereunder
have not been satisfied (including obtaining any required governmental
consent) on or before December 19, 1997, the failure of the Borrower to
repay to the Lender in full on December 23, 1997 in immediately available
funds all amounts advanced under the Bridge Note, together with accrued and
unpaid interest and other amounts due thereunder, provided that if all of
--------
the foregoing has occurred other than obtaining the governmental consent
and the sole reason for the failure to obtain the governmental consent is
the inability to obtain a hearing on December 19, 1997 and is not a result
of any denial of consent, then the Borrower shall have until December 26,
1997 to obtain such governmental consent and give evidence thereof to the
Lender (it being agreed that any failure to obtain such consent on such
date shall be an Event of Default hereunder); or
(xvi) the failure of the Borrower to deliver to the Lender, within 30
days after the Modification Date, a Pledge Agreement governed by the laws
of the Kingdom of Spain in form and substance satisfactory to the Lender,
together with a favorable legal opinion from the Borrower's Spanish counsel
in form and substance satisfactory to the Lender; or
(xvii) any payment or prepayment of principal of any kind whatsoever
shall be made on or in respect of the Nunez Note, or any default or event
of default shall occur thereunder."
-5-
<PAGE>
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower represents and warrants to you as follows:
(a) Representations in Agreement: Each of the representations and
----------------------------
warranties made by or on behalf of the Borrower to you in the Agreement or any
other Loan Document, as amended through this letter of agreement, was true and
correct when made and is true and correct on and as of the Modification Date
with the same full force and effect as if each of such representations and
warranties had been made by the Borrower on the date hereof and in this letter
of agreement, except to the extent that such representations and warranties
relate solely to a prior date.
(b) No Events of Default: No Default or Event of Default exists on the
--------------------
Modification Date (after giving effect to all of the arrangements and
transactions contemplated by this letter of agreement).
(c) Binding Effect of Documents. This letter of agreement has been duly
---------------------------
executed and delivered to you by the Borrower and is in full force and effect as
of the date hereof, and the agreements and obligations of the Borrower contained
herein and therein constitute legal, valid, and binding obligations of the
Borrower enforceable against the Borrower in accordance with their respective
terms.
ARTICLE III
-----------
PROVISIONS OF GENERAL APPLICATION
---------------------------------
(a) No Other Changes. Except as otherwise expressly provided by this letter
----------------
of agreement, all of the terms, conditions and provisions of the Agreement and
each of the other Loan Documents remain unaltered. The Agreement and this
letter of agreement shall be read and construed as one agreement.
(b) Governing Law. This letter of agreement is intended to take effect as a
-------------
sealed instrument and shall be deemed to be a contract under the laws of the
Commonwealth of Massachusetts. This letter of agreement and the rights and
obligations of each of the parties hereto shall be governed by and interpreted
and determined in accordance with the laws of the Commonwealth of Massachusetts.
(c) Binding Effect; Assignment. This letter of agreement shall be binding
-------------- ----------
upon and inure to the benefit of each of the parties hereto and their respective
successors in title and assigns.
(d) Counterparts. This letter of agreement may be executed in any number of
------------
counterparts, but all such counterparts shall together constitute but one and
the same agreement.
-6-
<PAGE>
In making proof of this letter of agreement, it shall not
be necessary to produce or account for more than one counterpart thereof signed
by each of the parties hereto.
(e) Conflict with Other Agreements. If any of the terms of this letter of
------------------------------
agreement shall conflict in any respect with any of the terms of the Agreement
or any other Loan Document, the terms of this letter of agreement shall be
controlling.
(f) Conditions Precedent (or Subsequent). This letter of agreement shall
------------------------------------
become effective as of the Modification Date, but only if (except as otherwise
expressly noted in clauses (k)(xiii) and (k)(xiv) of Article I above with
respect to items which are permitted to be delivered after the Modification
Date):
(i) The Borrower has delivered or caused to be delivered to the Lender
the following instruments and documents, each of which shall be in form and
substance satisfactory to the Lender:
(A) A due diligence report prepared by BDO Seidman with respect to
Alexander;
(B) A signed copy of the Boxall Purchase Agreement and the Nunez
Purchase Agreement, together with related purchase documents with
respect to the acquisition of Alexander;
(C) An insurance certificate or other evidence of insurance in
scope, content and amount satisfactory to the Lender with respect to
the assets of Alexander;
(D) An original Bridge Note and Pledge Agreement duly signed on
behalf of the Borrower, together with stock certificates representing
65% of the capital stock of Alexander and related stock powers executed
in blank (it being understood and agreed, however, that the Pledge
Agreement governed by the laws of the Commonwealth of Massachusetts may
be signed upon delivery of such certificates to the Lender, which
delivery shall occur not later than five business days following the
date upon which the acquisition of the capital stock of Alexander
referred to in Section 5.7 has been consummated);
(E) Board of director resolutions, good-standing and legal
existence certificates, an incumbency certificate, and confirmation
that its charter documents and by-laws have not been modified since
July 8, 1996;
(F) Duly executed UCC-1 financing statements relating to the
capital stock to be pledged under the Pledge Agreement;
-7-
<PAGE>
(G) A favorable legal opinion from the Borrower's U.S. counsel in
or substantially in the form of the opinion delivered in connection
with the July 8, 1996 transaction;
(H) A favorable legal opinion from the Borrower's Spanish counsel
in form and substance satisfactory to the Lender; and
(I) A signed copy of the Escrow Letter.
(ii) The Borrower shall have delivered to the Lender a non-refundable
closing fee in the amount of $15,000.
(iii) No material adverse change shall have occurred in the financial
condition of the Borrower or Alexander in the judgment of the Lender.
(iv) No material litigation shall be pending or threatened that in the
Lender's judgment would have a material adverse effect upon the
creditworthiness or business of the Borrower.
(v) Each of the conditions precedent specified in the Boxall Purchase
Agreement and the Nunez Purchase Agreement shall have been duly satisfied
and completed on or prior to the Modification Date, notwithstanding any
waiver or modification thereof.
-8-
<PAGE>
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this letter of agreement and return
such counterpart to the undersigned, whereupon this letter of agreement, as so
accepted by you, shall become a binding agreement between you and the
undersigned.
Very truly yours,
The Borrower:
------------
ADVANCED DEPOSITION TECHNOLOGIES, INC.
By: /s/ Glenn J. Walters
---------------------------------------------
Title: Chief Executive Officer, President and
Treasurer
The foregoing agreement is hereby accepted by the undersigned as of December
18, 1997.
The Lender:
----------
NATIONAL BANK OF CANADA
By: /s/ Edward Paslawski
---------------------------------------
Title: Vice President Manager
-9-
<PAGE>
EXHIBIT 10.3
ADVANCED DEPOSITION TECHNOLOGIES, INC.
Myles Standish Industrial Park
Taunton, Massachusetts 02780
Dated as of: June 18, 1998
National Bank of Canada
One Federal Street, 27th Floor
Boston, Massachusetts 02110
Re: Modification No. 2 to Revolving Credit and Term Loan Agreement
--------------------------------------------------------------
Ladies and Gentlemen:
We refer to the Revolving Credit and Term Loan Agreement, dated as of July
8, 1996 (as from time to time amended and in effect, the "Agreement"), between
Advanced Deposition Technologies, Inc. (the "Borrower") and National Bank of
Canada (the "Lender"). Terms used in this letter of agreement which are not
defined herein, but which are defined in the Agreement, shall have the same
respective meanings herein as therein.
We have requested you (i) to re-advance the Term Loan in the new principal
amount of $2,750,000 ("Term Loan A") and (ii) to convert the $1,000,000 Bridge
Loan into an additional term loan ("Term Loan B"), each upon the terms and
conditions hereinafter set forth, (iii) to extend the Maturity Date of the
Revolving Loan and the Term Loans to July 8, 2001, and (iv) to make the
amendments to the Agreement necessitated thereby. You have advised us that you
are prepared and would be pleased to provide such loans and to make the
amendments so requested by us on the condition that we join with you in this
letter of agreement.
Accordingly, in consideration of these premises, the promises, mutual
covenants and agreements contained in this letter of agreement, and fully
intending to be legally bound by this letter of agreement, we hereby agree with
you as follows:
ARTICLE I
---------
AMENDMENTS TO AGREEMENT
-----------------------
Effective as of June 18, 1998 (in this letter of agreement, the
"Modification Date"), the Agreement is amended as follows:
C-1
<PAGE>
(a) The terms "Agreement" and "Loan Agreement" shall, wherever used in
the Agreement or any of the other Loan Documents, be deemed to also mean and
include any amendments, restatements and modifications thereof.
(b) The term "Loan Documents" shall, wherever used in the Agreement or
any of the other Loan Documents, be deemed to also mean and include Modification
No. 2 and the Notes and any other documents executed and delivered in connection
therewith.
(c) The definition of "Maturity Date" contained in Section 1.1 of the
Agreement is amended to read in its entirety as follows:
"Maturity Date" means July 8, 2001.
(d) The definition of "Notes" contained in Section 1.1 of the Agreement
is amended to read in its entirety as follows:
"Notes" means, collectively, the Revolving Credit Note and the Term
Notes.
(e) The definition of "Revolving Credit Maximum Amount" contained in
Section 1.1 of the Agreement is amended to read in its entirety as follows:
"Revolving Credit Maximum Amount" means $2,000,000.
(f) The definition of "Term Note" contained in Section 1.1 of the
Agreement is changed to "Term Notes" and is amended to read in its entirety as
follows:
"Term Notes" shall mean Term Note A and Term Note B, collectively.
(g) The term "Obligations" shall, wherever used in the Agreement or any
of the other Loan Documents, be deemed to also mean and include all obligations
of the Borrower to the Lender under or in respect of Modification No. 2 and the
Term Notes.
(h) The definitions of "Bridge Loan", "Bridge Loan Maturity Date",
"Bridge Note" and "Term Loan" contained in Section 1.1 of the Agreement are
hereby deleted in their entirety.
(i) The following seven new definitions are added at the end of Section
1.1 of the Agreement:
"Modification No. 2" means that certain letter agreement dated as of
June 18, 1998 between the Borrower and Lender, upon the terms of which the
Agreement was further modified and amended.
"Second Modification Date" means June 18, 1998.
C-2
<PAGE>
"Term Loan A" shall have the meaning set forth in Section 2.2.1.
"Term Loan B" shall have the meaning set forth in Section 2.2.1(A).
"Term Loans" shall mean Term Loan A and Term Loan B, collectively.
"Term Note A" shall have the meaning set forth in Section 2.2.1.
"Term Note B" shall have the meaning set forth in Section 2.2.1(A).
(j) Section 2.2 of the Agreement is amended in its entirety to read as
follows:
"2.2 Term Loan A.
-----------
2.2.1 Upon the terms and subject to the conditions of this Agreement, and
in reliance upon the representations, warranties and covenants of the Borrower
made herein, the Lender agrees to lend to the Borrower the sum of $2,750,000 on
the Second Modification Date ("Term Loan A") to be evidenced by a Term Note
("Term Note A") substantially in the form of Exhibit A-2 attached hereto.
-----------
2.2.2 The principal of Term Loan A shall be payable in thirty (30)
installments, with each of the first twenty-nine (29) such payments to be in the
amount of $45,833.33 and to be payable on the first day of each month (or the
first Business Day thereafter, if such day is not a Business Day) commencing on
January 1, 1999, and with the last of such thirty payments to be in the amount
of $1,420,833.50 and to be payable, along with any additional unpaid principal
of Term Loan A and all unpaid interest thereon, on the Maturity Date.
2.2.3 The Borrower may prepay Term Loan A and Term Note A in whole or in
part, without premium or penalty, except as otherwise provided in Section 2.3.5,
at any time and from time to time upon five (5) days' prior written notice to
the Lender. The principal amount of Term Loan A so prepaid shall be at least
$100,000 (unless the principal amount of Term Loan A shall be less than
$100,000, in which event the prepayment may be equal to such unpaid principal
amount) or a multiple of $100,000, in excess of $100,000, provided that the
--------
Borrower shall also pay accrued interest on the principal so prepaid to the date
of such prepayment and all fees and charges payable on or before the date of
such prepayment. Prepayments shall be applied against unpaid installments of
principal of Term Loan A in inverse order of maturity of such installments. The
Borrower shall not be permitted to reborrow any part of the principal of Term
Loan A so prepaid at any time or under any circumstances."
(k) Section 2.2(A) of the Agreement is amended in its entirety to read as
follows:
"2.2(A) Term Loan B.
-----------
2.2.1(A) Upon the terms and subject to the conditions of this
Agreement, and in reliance upon the representations, warranties and
covenants of the Borrower made
C-3
<PAGE>
herein, the Lender agrees to lend to the Borrower the sum of $1,000,000 on
the Second Modification Date ("Term Loan B") to be evidenced by a Term Note
("Term Note B") substantially in the form of Exhibit A-3 attached hereto.
-----------
2.2.2(A) The principal of the Term Loan shall be payable in thirty
(30) installments, with each of the first twenty-nine (29) such payments to
be in the amount of $16,666.67 and to be payable on the first day of each
month (or the first Business Day thereafter, if such day is not a Business
Day) commencing on January 1, 1999, and with the last of such thirty
payments to be in the amount of $516,666.60 and to be payable, along with
any additional unpaid principal of Term Loan B and all unpaid interest
thereon, on the Maturity Date.
2.2.3(A) The Borrower may prepay the Term Loan B and Term Note B in
whole or in part, without premium or penalty, except as otherwise provided
in Section 2.3.5, at any time and from time to time upon five (5) days'
prior written notice to the Lender. The principal amount of the Term Loan B
so prepaid shall be at least $100,000 (or a multiple of $100,000 in excess
of $100,000), unless the principal amount of the Term Loan B shall be less
than $100,000, in which event the prepayment may be equal to such unpaid
principal amount, provided that the Borrower shall also pay accrued
--------
interest on the principal so prepaid to the date of such prepayment and all
fees and charges payable on or before the date of such prepayment. In
addition, in the event that (i) Alexander Boxall S.A. ("Alexander") incurs
indebtedness for borrowed money from a lender other than the Lender
(whether institutional or otherwise, but excluding its existing factoring
arrangements and lease obligations), or (ii) in the event there is any
redemption of Alexander's outstanding warrants or stock options, then the
proceeds of such refinancing or redemption shall, immediately upon the
receipt thereof, be used to prepay the Term Loan B and the Term Note B.
The Borrower shall not be permitted to reborrow any part of the principal
of the Term Loan B so prepaid at any time or under any circumstances."
(l) The first three lines of Section 2.3.1 of the Agreement are amended
to read in their entirety as follows:
"2.3.1 Revolving Loans shall bear interest at a rate per annum equal
to 1% above the Base Rate in effect from time to time; and each of the Term
Loans shall bear interest at a rate per annum equal to 1.25% above the Base
Rate in effect from time to time;"
(m) The second full sentence of Section 2.3.1 of the Agreement is
amended in its entirety to read as follows:
"Interest on Loans (not at the time overdue) shall be payable
monthly in arrears on the first Business Day of each month commencing with
July 1, 1998."
(n) Section 2.3.5 of the Agreement is amended in its entirety to read as
follows:
C-4
<PAGE>
"2.3.5 In the event that all of the Loans are prepaid in whole or in part
prior to the Maturity Date pursuant to Sections 2.1.2 or 2.2.3,
respectively, the Borrower shall pay to the Lender a prepayment fee equal
to that percentage of the amount of the outstanding Loans so prepaid which
is set forth below:
<TABLE>
<CAPTION>
Date of Prepayment Percentage of Total
------------------ -------------------
Loans Prepaid
-------------
<S> <C>
On or before the date which is one 3%
year from the Second Modification
Date
After the date which is one year 2%
from the Second Modification Date,
but on or before the date which is
two years from the Second
Modification Date
After the date which is two years 1%"
from the Second Modification Date,
but before the Maturity Date
</TABLE>
(o) The first sentence of Section 5.1(ii) of the Agreement is amended
in its entirety to read as follows:
"The Borrower will use the proceeds of the Revolving Loans and
the Term Loans solely for its working capital needs and repayment
of existing Indebtedness."
(p) The first four lines of Section 5.12 of the Agreement are amended
to read in their entirety as follows:
"(ii) as soon as available to the Borrower, but in any event
within 30 days after the end of each fiscal quarter of each
fiscal year of the Borrower, the balance sheet of the Borrower as
at the end of, and related statements of income and retained
earnings for, the portion of the fiscal year then ended and for
such quarter".
(q) Section 3.16 of the Agreement is amended in its entirety to read
as follows:
"As of the date hereof, the Borrower has no Subsidiaries other
than Alexander Boxall S.A."
(r) Section 5.14 of the Agreement is amended in its entirety to read
as follows:
C-5
<PAGE>
"5.14 Minimum Tangible Net Worth. The Borrower will not permit its
--------------------------
Tangible Net Worth at any fiscal quarter-end specified below to be less
than the amount identified below as applicable to such fiscal quarter:
<TABLE>
<CAPTION>
Minimum
Fiscal Quarter-End Tangible Net Worth
------------------ ------------------
<S> <C>
For any fiscal quarter
ending on or after
June 30, 1998
through and including
December 31, 1998 $5,150,000
For the fiscal quarter
ending March 31, 1999 $5,400,000
For the fiscal quarter
ending June 30, 1999 $5,650,000
For the fiscal quarter
ending September 30, 1999 $5,900,000
For any fiscal quarter
ending on or after
December 31, 1999
through the Maturity Date $6,000,000."
</TABLE>
C-6
<PAGE>
(s) Section 5.15 of the Agreement is amended in its entirety to read as
follows:
"5.15 Senior Indebtedness to Tangible Net Worth. The Borrower
-----------------------------------------
will not permit the ratio of (i) Senior Indebtedness to (ii) Tangible Net
Worth at any fiscal quarter-end specified below to be more than the ratio
identified below as applicable to such fiscal quarter:
Fiscal Quarter-End Ratio
------------------ -----
For any fiscal quarter
ending on or after
June 30, 1998
through the Maturity Date 2.5 to 1.0."
(t) Section 5.16 of the Agreement is amended in its entirety to read as
follows:
"5.16 Operating Cash Flow to Total Debt Service. The Borrower
-----------------------------------------
will not permit the ratio of (i) Operating Cash Flow to (ii) Total Debt
Service, as at each fiscal quarter-end of the Borrower for the four
consecutive fiscal quarters then ending, commencing with the four
consecutive fiscal quarters ending December 31, 1998, to be less than 1.1
to 1.0."
(u) Section 5.17 of the Agreement is amended in its entirety to read as
follows:
"5.17 Working Capital. The Borrower shall not permit its
---------------
Working Capital to be less than $500,000 at any time."
(v) Section 5.20 of the Agreement is amended in its entirety to read as
follows:
"5.20 Capital Expenditures. Except with the prior written
--------------------
consent of the Lender (which consent will not be unreasonably withheld),
the Borrower will not make any Capital Expenditures in excess of $2,000,000
in any fiscal year."
(w) Exhibits A-1 and A-2 to the Agreement are replaced in their entirety
by the forms of Revolving Credit Note and Term Note A set forth in Annex A and
Annex B, respectively, to this Modification No. 2.
(x) The form of Term Note B set forth in Annex C to this Modification No.
2 is added as Exhibit A-3 to the Agreement.
C-7
<PAGE>
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower represents and warrants to you as follows:
(a) Representations in Agreement: Each of the representations and
----------------------------
warranties made by or on behalf of the Borrower to you in the Agreement or any
other Loan Document, as amended through this letter of agreement, was true and
correct when made and is true and correct on and as of the Modification Date
with the same full force and effect as if each of such representations and
warranties had been made by the Borrower on the date hereof and in this letter
of agreement, except to the extent that such representations and warranties
relate solely to a prior date.
(b) No Events of Default: No Default or Event of Default exists on the
--------------------
Modification Date (after giving effect to all of the arrangements and
transactions contemplated by this letter of agreement).
(c) Binding Effect of Documents. This letter of agreement has been duly
---------------------------
executed and delivered to you by the Borrower and is in full force and effect as
of the date hereof, and the agreements and obligations of the Borrower contained
herein and therein constitute legal, valid, and binding obligations of the
Borrower enforceable against the Borrower in accordance with their respective
terms.
ARTICLE III
-----------
PROVISIONS OF GENERAL APPLICATION
---------------------------------
(a) No Other Changes. Except as otherwise expressly provided by this letter
----------------
of agreement, all of the terms, conditions and provisions of the Agreement and
each of the other Loan Documents remain unaltered. The Agreement and this
letter of agreement shall be read and construed as one agreement. Except to the
extent specifically amended hereby, the provisions of the Agreement shall remain
unmodified, and the Agreement, as amended hereby, is hereby confirmed as being
in full force and effect, and the Borrower hereby ratifies and confirms all of
its agreements and obligations contained therein or in the other Loan Documents.
(b) Governing Law. This letter of agreement is intended to take effect as a
-------------
sealed instrument and shall be deemed to be a contract under the laws of the
Commonwealth of Massachusetts. This letter of agreement and the rights and
obligations of each of the parties hereto shall be governed by and interpreted
and determined in accordance with the laws of the Commonwealth of Massachusetts.
C-8
<PAGE>
(c) Binding Effect; Assignment. This letter of agreement shall be binding
-------------- ----------
upon and inure to the benefit of each of the parties hereto and their respective
successors in title and assigns.
(d) Counterparts. This letter of agreement may be executed in any number of
------------
counterparts, but all such counterparts shall together constitute but one and
the same agreement. In making proof of this letter of agreement, it shall not
be necessary to produce or account for more than one counterpart thereof signed
by each of the parties hereto.
(e) Conflict with Other Agreements. If any of the terms of this letter of
------------------------------
agreement shall conflict in any respect with any of the terms of the Agreement
or any other Loan Document, the terms of this letter of agreement shall be
controlling.
(f) Conditions Precedent (or Subsequent). This letter of agreement shall
------------------------------------
become effective as of the Modification Date, but only if:
(i) The Borrower has delivered or caused to be delivered to the Lender
the following instruments and documents, each of which shall be in form and
substance satisfactory to the Lender:
(A) An original Revolving Credit Note in the form of Annex A
hereto duly signed on behalf of the Borrower;
(B) An original Term Note A in the form of Annex B hereto duly
signed on behalf of the Borrower;
(C) An original Term Note B in the form of Annex C hereto duly
signed on behalf of the Borrower;
(D) An updated written appraisal of the Borrower's machinery and
equipment prepared by an appraiser satisfactory to the Lender;
(E) Board of directors resolutions, good-standing and legal
existence certificates, an incumbency certificate, and confirmation
that its charter documents and by-laws have not been modified since
July 8, 1996; and
(F) A favorable legal opinion from the Borrower's U.S. counsel in
or substantially in the form of the opinion delivered in connection
with the December 29, 1997 Modification No. 1.
Promptly following its receipt of the Notes described in items
(A), (B) and (C) above, the Lender will return to the Borrower the
original $3,000,000 Revolving Credit Note, $2,600,000 Term Note and
$1,000,000 Bridge Note for cancellation.
C-9
<PAGE>
(ii) The Borrower shall have delivered to the Lender a non-refundable
closing fee in the amount of $37,500.
(iii) No material adverse change shall have occurred in the financial
condition of the Borrower or Alexander in the judgment of the Lender.
(iv) No material litigation shall be pending or threatened that in
the Lender's judgment would have a material adverse effect upon the
creditworthiness or business of the Borrower.
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this letter of agreement and return
such counterpart to the undersigned, whereupon this letter of agreement, as so
accepted by you, shall become a binding agreement between you and the
undersigned.
Very truly yours,
The Borrower:
------------
ADVANCED DEPOSITION TECHNOLOGIES, INC.
By: /s/ Glenn J. Walters
---------------------------------------------
Title: Chief Executive Officer, President and
Treasurer
C-10
<PAGE>
The foregoing agreement is hereby accepted by the undersigned as of June 18,
1998.
The Lender:
----------
NATIONAL BANK OF CANADA
By: /s/ Edward Paslawski
----------------------------------
Title: Vice President Manager
C-11
<PAGE>
EXHIBIT 10.4
ADVANCED DEPOSITION TECHNOLOGIES, INC.
Myles Standish Industrial Park
Taunton, Massachusetts 02780
Dated as of: September 23, 1998
National Bank of Canada
One Federal Street, 27th Floor
Boston, Massachusetts 02110
Re: Modification No. 3 to Revolving Credit and Term Loan Agreement
--------------------------------------------------------------
Ladies and Gentlemen:
We refer to the Revolving Credit and Term Loan Agreement, dated as of July
8, 1996 (as from time to time amended and in effect, the "Agreement"), between
Advanced Deposition Technologies, Inc. (the "Borrower") and National Bank of
Canada (the "Lender"). Terms used in this letter of agreement which are not
defined herein, but which are defined in the Agreement, shall have the same
respective meanings herein as therein.
We have requested you (i) to make available a new loan facility in the
amount of $2,000,000 (the "M&E Loan") to enable us to purchase new equipment for
use in our business, and (ii) to make the amendments to the Agreement
necessitated thereby. You have advised us that you are prepared and would be
pleased to provide such loans and to make the amendments so requested by us on
the condition that we join with you in this letter of agreement.
Accordingly, in consideration of these premises, the promises, mutual
covenants and agreements contained in this letter of agreement, and fully
intending to be legally bound by this letter of agreement, we hereby agree with
you as follows:
ARTICLE I
---------
AMENDMENTS TO AGREEMENT
-----------------------
Effective as of September 23, 1998 (in this letter of agreement, the
"Modification Date"), the Agreement is amended as follows:
<PAGE>
(a) The terms "Agreement" and "Loan Agreement" shall, wherever used in the
Agreement or any of the other Loan Documents, be deemed to also mean and include
any amendments, restatements and modifications thereof.
(b) The term "Loan Documents" shall, wherever used in the Agreement or any
of the other Loan Documents, be deemed to also mean and include Modification No.
3, the M&E Note and all other documents executed and delivered in connection
therewith.
(c) The definition of "Notes" contained in Section 1.1 of the Agreement is
amended to read in its entirety as follows:
"Notes" means, collectively, the Revolving Credit Note, the Term Notes and
the M&E Note.
(d) The term "Obligations" shall, wherever used in the Agreement or any of
the other Loan Documents, be deemed to also mean and include all obligations of
the Borrower to the Lender under or in respect of Modification No. 3 and the M&E
Note.
(e) The following six new definitions are added at the end of Section 1.1
of the Agreement:
"Modification No. 3" means that certain letter agreement dated as of
September 23, 1998 between the Borrower and the Lender, upon the terms
of which the Agreement was further modified and amended.
"Third Modification Date" means September 23, 1998.
"M&E Loan" shall have the meaning set forth in Section 2.2(B).
"M&E Loan Conversion Date" means January 31, 1999.
"M&E Loan Maturity Date" means October 1, 2004.
"M&E Note" shall have the meaning set forth in Section 2.2(B).
(f) The following new Section 2.2(B) is inserted immediately following
Section 2.2(A) of the Agreement:
"2.2(B) M&E Loan.
--------
2.2.1(B) Upon the terms and subject to the conditions of this
Agreement, and in reliance upon the representations, warranties and covenants of
the Borrower made herein, the Lender agrees to lend to the Borrower, at the
Borrower's request from time to time, from and after the Third Modification Date
and prior to the M&E Loan Conversion Date, a sum not in excess of $2,000,000
(the "M&E Loan") to be evidenced by an M&E
-2-
<PAGE>
Note (the "M&E Note") substantially in the form of Exhibit A-4 attached hereto,
-----------
provided that the principal amount of the M&E Loan requested at any time shall
- --------
not exceed 80% of the invoice price of new equipment to be purchased by the
Borrower with the proceeds thereof (less the sum of applicable shipping costs
and sales taxes). In order to permit the Lender to determine the foregoing, the
Borrower shall deliver a copy of the actual invoice to the Lender, along with
evidence of the applicable shipping costs and sales taxes, prior to the making
of any M&E Loan. In addition, the M&E Loan (or any portion thereof) will not be
advanced by the Lender until the Borrower has provided the Lender with
satisfactory evidence that the Lender will have, upon the making of the M&E Loan
(or any portion thereof), a perfected, first-priority security interest in the
equipment purchased with the proceeds of the M&E Loan (or portion thereof).
Notwithstanding the preceding sentence, it is agreed that a perfected, first-
priority security interest in favor of the Lender will not be required on the
date of the first advance of the M&E Loan in the amount of $540,000, so long as
the vendor of the equipment being purchased with the proceeds of said advance,
General Vacuum Engineering, has first delivered to the Lender a letter in or
substantially in the following form:
"To Whom it may Concern:
We agree that all deposits (including, without limitation, a deposit
in the amount of $540,000) shall be completely and immediately refundable
in full in the event machinery on order with General Vacuum Engineering by
Advanced Deposition Technologies, Inc. is not delivered on a timely basis
in accordance with machine specifications. It is agreed that delivery will
be made on or before June, 1999. Furthermore, we agree that National Bank
of Canada has a first-priority security interest with respect to said
deposits and equipment and that we will not interfere in any way whatsoever
with this priority position.
Sincerely yours,
General Vacuum Engineering"
2.2.2(B) The principal of the M&E Loan outstanding on the M&E Loan
Conversion Date shall be payable in sixty (60) consecutive equal monthly
installments, on the first day of each month (or the first Business Day
thereafter, if such day is not a Business Day) commencing on October 1, 1999,
and with the last of such sixty payments to be payable, along with all unpaid
interest thereon, on the M&E Loan Maturity Date.
2.2.3(B) The Borrower may prepay the M&E Loan and the M&E Note in whole or
in part, without premium or penalty, except as otherwise provided in Section
2.3.5, at any time and from time to time upon five (5) days' prior written
notice to the Lender. The principal amount of the M&E Loan so prepaid shall be
at least $100,000 (unless the principal amount of the M&E Loan shall be less
than $100,000, in which event the prepayment may be equal to such unpaid
principal amount) or a multiple of $100,000 in excess of $100,000, provided that
--------
the Borrower shall also pay accrued
-3-
<PAGE>
interest on the principal so prepaid to the date of such prepayment and all fees
and charges payable on or before the date of such prepayment. Prepayments shall
be applied against unpaid installments of principal of the M&E Loan in inverse
order of maturity of such installments. The Borrower shall not be permitted to
reborrow any part of the principal of the M&E Loan so prepaid at any time or
under any circumstances."
(g) The first three lines of Section 2.3.1 of the Agreement are amended to
read in their entirety as follows:
"2.3.1 Revolving Loans shall bear interest at a rate per annum equal to
1% above the Base Rate in effect from time to time; and each of the Term
Loans and the M&E Loan shall bear interest at a rate per annum equal to
1.25% above the Base Rate in effect from time to time;"
(h) The first sentence of Section 5.1(ii) of the Agreement is amended in
its entirety to read as follows:
"The Borrower will use the proceeds of (i) the Revolving Loans and the
Term Loans solely for its working capital needs, and (ii) the M&E Loan
for the purchase of new equipment to the extent permitted herein."
(i) Section 5.15 of the Agreement is amended in its entirety to read as
follows:
"5.15 Senior Indebtedness to Tangible Net Worth. The Borrower will
-----------------------------------------
not permit the ratio of (i) Senior Indebtedness to (ii) Tangible Net Worth
at any fiscal quarter-end specified below to be more than the ratio
identified below as applicable to such fiscal quarter:
Fiscal Quarter-End Ratio
------------------ -----
For the fiscal quarters
ending on June 30, 1998
and September 30, 1998 2.5 to 1.0
For any fiscal quarter
ending on or after
December 31, 1998
through the Maturity Date 3.0 to 1.0."
(j) The form of M&E Note set forth in Annex A to this Modification No. 3 is
added as Exhibit A-4 to the Agreement.
-4-
<PAGE>
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower represents and warrants to you as follows:
(a) Representations in Agreement: Each of the representations and
----------------------------
warranties made by or on behalf of the Borrower to you in the Agreement or any
other Loan Document, as amended through this letter of agreement, was true and
correct when made and is true and correct on and as of the Modification Date
with the same full force and effect as if each of such representations and
warranties had been made by the Borrower on the date hereof and in this letter
of agreement, except to the extent that such representations and warranties
relate solely to a prior date.
(b) No Events of Default: No Default or Event of Default exists on the
--------------------
Modification Date (after giving effect to all of the arrangements and
transactions contemplated by this letter of agreement).
(c) Binding Effect of Documents. This letter of agreement has been duly
---------------------------
executed and delivered to you by the Borrower and is in full force and effect as
of the date hereof, and the agreements and obligations of the Borrower contained
herein and therein constitute legal, valid, and binding obligations of the
Borrower enforceable against the Borrower in accordance with their respective
terms.
ARTICLE III
-----------
PROVISIONS OF GENERAL APPLICATION
---------------------------------
(a) No Other Changes. Except as otherwise expressly provided by this letter
----------------
of agreement, all of the terms, conditions and provisions of the Agreement and
each of the other Loan Documents remain unaltered. The Agreement and this
letter of agreement shall be read and construed as one agreement. Except to the
extent specifically amended hereby, the provisions of the Agreement shall remain
unmodified, and the Agreement, as amended hereby, is hereby confirmed as being
in full force and effect, and the Borrower hereby ratifies and confirms all of
its agreements and obligations contained therein or in the other Loan Documents.
(b) Governing Law. This letter of agreement is intended to take effect as a
-------------
sealed instrument and shall be deemed to be a contract under the laws of the
Commonwealth of Massachusetts. This letter of agreement and the rights and
obligations of each of the parties hereto shall be governed by and interpreted
and determined in accordance with the laws of the Commonwealth of Massachusetts.
-5-
<PAGE>
(c) Binding Effect; Assignment. This letter of agreement shall be binding
-------------- ----------
upon and inure to the benefit of each of the parties hereto and their respective
successors in title and assigns.
(d) Counterparts. This letter of agreement may be executed in any number of
------------
counterparts, but all such counterparts shall together constitute but one and
the same agreement. In making proof of this letter of agreement, it shall not
be necessary to produce or account for more than one counterpart thereof signed
by each of the parties hereto.
(e) Conflict with Other Agreements. If any of the terms of this letter of
------------------------------
agreement shall conflict in any respect with any of the terms of the Agreement
or any other Loan Document, the terms of this letter of agreement shall be
controlling.
(f) Conditions Precedent. This letter of agreement shall become effective
--------------------
as of the Modification Date, but only if:
(i) The Borrower has delivered or caused to be delivered to the Lender
the following instruments and documents, each of which shall be in form and
substance satisfactory to the Lender:
(A) An original M&E Note in the form of Annex A hereto duly signed
on behalf of the Borrower;
(B) Board of directors resolutions, good-standing and legal
existence certificates, an incumbency certificate, and confirmation
that its charter documents and by-laws have not been modified since
July 8, 1996;
(C) A favorable legal opinion from the Borrower's U.S. counsel in
or substantially in the form of the opinion delivered in connection
with the June 18, 1998 Modification No. 2;
(D) An insurance certificate or other evidence of insurance in
scope, content and amount satisfactory to the Lender with respect to
equipment to be purchased with the proceeds of the M&E Loan; and
(E) If an advance is being requested on the Modification Date
under the M&E Loan, then a copy of the invoice for the equipment
proposed to be purchased and any related information which may be
requested by the Lender.
(ii) No material adverse change shall have occurred in the financial
condition of the Borrower in the judgment of the Lender.
-6-
<PAGE>
(iii) No material litigation shall be pending or threatened that in
the Lender's judgment would have a material adverse effect upon the
creditworthiness or business of the Borrower.
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this letter of agreement and return
such counterpart to the undersigned, whereupon this letter of agreement, as so
accepted by you, shall become a binding agreement between you and the
undersigned.
Very truly yours,
The Borrower:
------------
ADVANCED DEPOSITION TECHNOLOGIES, INC.
By: /s/ Glenn J. Walters
---------------------------------------------
Title: Chief Executive Officer,
President and Treasurer
-7-
<PAGE>
The foregoing agreement is hereby accepted by the undersigned as of
September 23, 1998.
The Lender:
----------
NATIONAL BANK OF CANADA
By: /s/ Keith Broyles
-----------------------------------
Title: Vice President Manager
-8-
<PAGE>
Exhibit 11.1 Computation of Net Income (Loss) Per Share of Common Stock
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Denominator for basic income (loss) per
share:
Potential dilutive common shares 4,264,476 3,964,702 4,267,394 3,952,029
Stock options 260 -- -- 139,478
Stock warrants -- -- -- 13,186
-------------- -------------- -------------- --------------
Denominator for diluted income (loss) per
share: 4,264,736 3,964,702 4,267,394 4,104,693
============== ============== ============== ==============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-QSB AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 119,000
<SECURITIES> 33,000
<RECEIVABLES> 8,323,000
<ALLOWANCES> 221,000
<INVENTORY> 4,115,000
<CURRENT-ASSETS> 12,702,000
<PP&E> 13,907,000
<DEPRECIATION> 6,968,000
<TOTAL-ASSETS> 26,562,000
<CURRENT-LIABILITIES> 9,201,000
<BONDS> 0
0
0
<COMMON> 9,635,000
<OTHER-SE> 346,000
<TOTAL-LIABILITY-AND-EQUITY> 25,562,000
<SALES> 18,285,000
<TOTAL-REVENUES> 18,785,000
<CGS> 15,125,000
<TOTAL-COSTS> 15,125,000
<OTHER-EXPENSES> 2,816,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 566,000
<INCOME-PRETAX> 278,000
<INCOME-TAX> 231,000
<INCOME-CONTINUING> (103,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (103,000)
<EPS-PRIMARY> (0.02)<F1>
<EPS-DILUTED> (0.02)<F1>
<FN>
<F1>EPS-PRIMARY AND EPS-DILUTED REPRESENT EARNINGS PER SHARE-BASIC AND EARNINGS
PER SHARE-DILUTED, RESPECTIVELY.
</FN>
</TABLE>
