UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission File No.: 0-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2230715
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Wireless Boulevard, Hauppauge, New York 11788
(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 436-7100
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of September 11, 1996:
<TABLE>
<CAPTION>
Class of Number of
Common Equity Shares
<S> <C> <C>
Class A Common Stock, 4,977,497
par value $.01
Class B Common Stock, 2,732,249
par value $.01
</TABLE>
<PAGE>
HIRSCH INTERNATIONAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - July 31, 1996
and January 31, 1996 3-4
Consolidated Statements of Income for the
Six and Three Months Ended July 31, 1996 and 1995 5
Consolidated Statements of Cash Flows for the
Six and Three Months Ended July 31, 1996 and 1995 6-7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
Part II. Other Information 17-19
Signatures 20
2
<PAGE>
Part I - Financial Information
Item 1. Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1996 1996
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 8,427,630 $ 6,564,628
SHORT-TERM INVESTMENTS AVAILABLE-FOR-SALE 1,740,776 2,286,194
ACCOUNTS RECEIVABLE, NET OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS
OF $1,748,000 AND $1,041,000, RESPECTIVELY 16,276,440 13,707,328
INVENTORIES, NET (Note 5) 13,317,601 7,969,203
NET INVESTMENT IN SALES-TYPE
LEASES-CURRENT PORTION (Note 4) 1,543,420 1,592,733
DEFERRED INCOME TAXES 1,103,220 1,055,473
OTHER CURRENT ASSETS 678,124 630,295
----------- -----------
TOTAL CURRENT ASSETS 43,087,211 33,805,854
----------- -----------
NET INVESTMENT IN SALES-TYPE
LEASES-NON-CURRENT PORTION (Note 4) 8,047,683 7,052,091
PROPERTY, PLANT AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION AND AMORTIZATION
5,318,535 4,840,530
EXCESS OF COST OVER NET ASSETS ACQUIRED,
NET OF ACCUMULATED AMORTIZATION OF
$73,000 (Note 6) 8,417,492 -
PURCHASED TECHNOLOGIES, NET OF ACCUMULATED
AMORTIZATION OF $462,000 AND $367,000, RESPECTIVELY 876,853 972,508
OTHER ASSETS, NET 1,395,317 1,201,143
----------- -----------
TOTAL ASSETS $67,143,091 $47,872,126
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1996 1996
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
TRADE ACCEPTANCES PAYABLE $ 9,351,458 $ 8,656,094
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 9,828,753 6,774,178
CURRENT MATURITIES OF LONG-TERM DEBT (Note 7) 2,430,175 242,760
INCOME TAXES PAYABLE 848,054 733,009
CUSTOMER DEPOSITS PAYABLE 712,979 552,981
----------- -----------
TOTAL CURRENT LIABILITIES 23,171,419 16,959,022
LONG-TERM DEBT, LESS CURRENT MATURITIES (Note 7) 10,463,613 1,778,626
----------- -----------
TOTAL LIABILITIES 33,635,032 18,737,648
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (Note 3)
PREFERRED STOCK, $.01 PAR VALUE;
AUTHORIZED: 1,000,000 SHARES;
ISSUED: NONE - -
CLASS A COMMON STOCK, $.01 PAR VALUE;
AUTHORIZED: 20,000,000 SHARES,
OUTSTANDING: 4,975,643 AND 3,288,200
SHARES, RESPECTIVELY 49,757 32,882
CLASS B COMMON STOCK, $.01 PAR VALUE;
AUTHORIZED: 3,000,000 SHARES,
OUTSTANDING: 2,732,249 AND 2,868,606
SHARES, RESPECTIVELY 27,322 28,686
ADDITIONAL PAID-IN CAPITAL 12,076,176 11,885,627
UNREALIZED HOLDING LOSS ON SHORT-TERM (985) (15,105)
INVESTMENTS AVAILABLE-FOR-SALE
RETAINED EARNINGS 21,355,789 17,202,388
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 33,508,059 29,134,478
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $67,143,091 $47,872,126
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JULY 31, JULY 31,
-------------------------------- ------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $54,003,581 $42,310,822 $30,135,408 $21,868,114
INTEREST INCOME RELATED 1,603,762 1,307,112 782,823 731,237
----------- ----------- ----------- -----------
TO SALES-TYPE LEASES
TOTAL REVENUE 55,607,343 43,617,934 30,918,231 22,599,351
----------- ----------- ----------- -----------
COST OF GOODS SOLD 35,273,981 28,644,109 19,630,412 15,129,691
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 13,122,755 9,953,216 7,393,568 4,713,038
INTEREST EXPENSE 262,065 220,776 192,868 106,405
OTHER INCOME, NET (131,026) (101,073) (56,260) (45,740)
------------ ------------ ------------ ------------
TOTAL EXPENSES 48,527,775 38,357,028 27,160,588 19,903,394
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 7,079,568 5,260,906 3,757,643 2,695,957
PROVISION FOR INCOME TAXES 2,910,751 2,144,657 1,559,281 1,092,153
----------- ----------- ----------- -----------
NET INCOME $ 4,168,817 $ 3,116,249 $ 2,198,362 $ 1,603,804
=========== =========== =========== ===========
NET INCOME PER SHARE (Note 2) $0.53 $0.42 $0.28 $0.21
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES USED IN THE
CALCULATION OF NET INCOME
PER SHARE (Note 2) 7,902,336 7,490,097 7,920,085 7,499,842
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
July 31,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $4,168,817 $3,116,249
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 676,038 579,999
PROVISION FOR BAD DEBTS 120,709 120,000
PROVISIONS FOR SLOW-MOVING INVENTORIES 35,000 40,000
DEFERRED INCOME TAXES (101,571) (85,503)
LOSS ON DISPOSAL OF ASSETS - 12,212
CHANGES IN ASSETS AND LIABILITIES,
NET OF EFFECTS FROM ACQUISITION:
ACCOUNTS RECEIVABLE 702,240 (179,012)
NET INVESTMENT IN SALES-TYPE LEASES (983,780) (2,039,642)
INVENTORIES (2,305,488) 605,217
OTHER CURRENT ASSETS 27,027 (452,033)
OTHER ASSETS (223,710) (70,612)
TRADE ACCEPTANCES PAYABLE 695,364 180,229
ACCOUNTS PAYABLE AND ACCRUED EXPENSES ( 1,119,065) 393,460
INCOME TAXES PAYABLE 115,045 (39,118)
CUSTOMER DEPOSITS PAYABLE 159,998 (265,001)
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,966,624 1,916,445
----------- -----------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
July 31,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (610,876) (292,390)
ACQUISITION OF SMX, NET OF CASH ACQUIRED (Note 6) (4,585,492) -
SALES OF SHORT-TERM INVESTMENTS 483,975 1,236,141
---------- ----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (4,712,393) 943,751
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS OF BANK FINANCING 7,500,000 -
REPAYMENTS OF LONG-TERM DEBT (2,892,029) (172,665)
EXERCISE OF STOCK OPTIONS 800 -
---------- ------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 4,608,771 (172,665)
---------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 1,863,002 2,687,531
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,564,628 2,746,665
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $8,427,630 $5,434,196
========== ==========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
INTEREST PAID $ 232,307 $ 214,484
========== ==========
INCOME TAXES PAID $2,694,135 $2,512,325
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
The Company purchased all of the capital stock of SMX (see Note 6) for $8,690,000. In connection with the acquisition,
the following activity was recorded:
FAIR VALUE OF ASSETS ACQUIRED $7,241,000
FAIR VALUE OF LIABILITIES ASSUMED (6,541,000)
-----------
NET ASSETS ACQUIRED $ 700,000
==========
CASH PAID (GROSS) FOR NET ASSETS $5,000,000
PROMISSORY NOTES ISSUED FOR NET ASSETS 3,500,000
CLASS A COMMON STOCK ISSUED FOR NET ASSETS 190,000
ACQUISITION COSTS 500,000
----------
TOTAL CONSIDERATION 9,190,000
LESS NET ASSETS ACQUIRED (700,000)
-----------
EXCESS OF COST OVER NET ASSETS ACQUIRED $8,490,000
==========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Six and Three Months Ended July 31, 1996 and July 31, 1995
1. Organization and Basis of Presentation
The accompanying consolidated financial statements as of and for the six
and three month periods ended July 31, 1996 and 1995 include the accounts of
Hirsch International Corp. ("Hirsch"), HAPL Leasing Co., Inc. ("HAPL"), Sewing
Machine Exchange, Inc. ("SMX") and Pulse Microsystems Ltd. ("Pulse" and
collectively with Hirsch, HAPL, and SMX, the "Company"). The operations of SMX
have been included in consolidated operations since June 7, 1996 (the date of
acquisition).
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all the adjustments necessary to present fairly the
results of operations for each of the six and three month periods ended July 31,
1996 and 1995, the financial position at July 31, 1996 and cash flows for the
six and three month periods ended July 31, 1996 and 1995, respectively. Such
adjustments consisted only of normal recurring items. The consolidated financial
statements and notes thereto should be read in conjunction with the Company's
Annual Report on Form 10-K for the fiscal year ending January 31, 1996 as filed
with the Securities and Exchange Commission.
The interim financial results are not necessarily indicative of the results
to be expected for the full year.
2. Net Income Per Share
Net income per share is based on the weighted average number of common
shares outstanding during the period after giving retroactive effect to stock
dividends (See Note 3). Stock options and warrants are considered to be common
stock equivalents and, accordingly, approximately 203,000 and 221,000 and 46,000
and 55,000 common stock equivalent shares have been included in the computation
of earnings per share using the treasury stock method for the six and three
month periods ended July 31, 1996 and 1995, respectively.
3. Stock Dividend
On June 25, 1996, the Company declared a five-for-four stock split effected
in the form of a 25 percent stock dividend which was paid on July 22, 1996. The
par value of the shares remains unchanged at $.01 per share. All numbers of
shares, per share amounts and per share prices in the consolidated financial
statements and notes thereto have been adjusted to reflect this stock split
unless otherwise noted.
8
<PAGE>
4. Net Investment in Sales-Type Leases
<TABLE>
<CAPTION>
July 31, 1996 January 31, 1996
------------- ----------------
<S> <C> <C>
Total Minimum Lease Payments Receivable........... 10,165,318 $9,595,952
Allowance for Estimated Uncollectible
Lease Payments ................................... (337,500) (300,000)
Estimated Residual Value of Leased
Property (Unguaranteed)........................... 2,433,688 1,832,088
Less: Unearned Income............................. (2,670,403) (2,483,216)
----------- -----------
Net Investment.................................... 9,591,103 8,644,824
Less: Current Portion............................. (1,543,420) (1,592,733)
----------- -----------
Long-Term Portion................................. $8,047,683 $7,052,091
========== ==========
5. Inventories, Net
July 31, 1996 January 31, 1996
------------- ----------------
Machines............................................ $ 9,062,233 $6,158,040
Parts............................................... 5,797,866 2,837,165
----------- ----------
14,860,099 8,995,205
Less: Reserve...................................... (1,542,498) (1,026,002)
----------- -----------
Inventories, net.................................... $13,317,601 $7,969,203
=========== ==========
</TABLE>
6. Acquisition of SMX
On June 7, 1996 the Company acquired all of the outstanding capital stock
of SMX. The acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16 "Business Combinations" and
accordingly, the acquired assets and assumed liabilities have been recorded at
their estimated fair market values at the date of acquisition. The fair value of
the assets purchased was approximately $7,241,000 and the fair value of the
liabilities assumed was approximately $6,541,000. The cost in excess of the net
assets acquired including approximately $500,000 in paid and accrued acquisition
costs was capitalized in the amount of approximately $8,490,000. Amortization of
goodwill approximated $73,000 from date of acquisition through July 31, 1996.
The costs incurred to secure the debt financing are approximately $107,000 and
have been capitalized and included in Other Assets, Net in the Consolidated
Balance Sheets. These costs are being amortized over the life of the related
debt agreements.
9
<PAGE>
The purchase price was $8.69 million, paid in the form of a promissory note in
the principal amount of $4.25 million to each of the two shareholders of SMX and
by delivery of an aggregate of 9,375 shares of the Company's Class A Common
Stock. Pursuant to the terms of the promissory notes, the Company was required
to make a principal payment on each note in the amount of $2.5 million on June
13, 1996 with the balance of each note ($1.75 million) payable in 60 equal
monthly installments of principal plus interest beginning July 7, 1996.
Concurrent with the acquisition, the Company entered into 5 year employment
contracts with SMX's former shareholders pursuant to which they received options
to purchase an aggregate of shares of the Company's Class A Common Stock. The
options were issued at fair market value at the date of acquisition and are
exercisable one year from the date of grant for a period of 5 years.
7. Long-Term Debt
<TABLE>
<CAPTION>
July 31, 1996 January 31, 1996
------------- ----------------
<S> <C> <C>
Long-Term Debt (e):
Term Loan (a)....................................... $ 7,500,000 $ 0
Promissory Notes (b)................................ 3,441,666 0
Mortgage (c)........................................ 1,893,375 2,008,126
Other capitalized lease obligations (d)............. 58,747 13,260
Total............................................... 12,893,788 2,021,386
Less: Current maturities............................ (2,430,175) (242,760)
----------- -----------
Long-Term Maturities................................ $10,463,613 $1,778,626
=========== ==========
</TABLE>
(a) On June 10, 1996, the Company entered into a term loan agreement with a
bank (the "Term Loan Agreement") pursuant to which the Company borrowed $7.5
million to fund the acquisition of SMX and to repay SMX's credit facilities. The
loan is repayable in twenty (20) equal quarterly installments of principal plus
interest (as defined in the Term Loan Agreement) beginning September 30, 1996.
The loan has been guaranteed by Hirsch, Pulse and SMX, and requires the Company
to maintain, among others, certain minimum tangible net worth, quick asset ratio
and fixed charge coverage ratio levels, as defined.
(b) In connection with the acquisition of SMX, the Company issued
promissory notes in the principal amount of $4.25 million to each of the two
former shareholders of SMX. Pursuant to the terms of the promissory notes, the
Company was required to make a principal payment on June 13, 1996 with the
balance of each note ($1.75 million) payable in 60 equal monthly
10
<PAGE>
installments of principal plus interest beginning July 7, 1996. The notes
bear interest at the rate (the "Hirsch Rate") defined in the Term Loan Agreement
plus 2% through June 1999 and from July 1999 through maturity at the Hirsch
Rate.
(c) On October 27, 1994, Hirsch entered into a ten year, $2,295,000
mortgage agreement with a bank (the "Mortgage") covering property being used as
its corporate headquarters. The Mortgage bears interest at a fixed rate of 8.8%
and is payable in equal monthly principal installments of $19,125. The Mortgage,
among other matters, restricts additional borrowings by the Company and requires
the company to maintain certain debt service coverage ratio levels, as defined
in the Mortgage. The Company's obligations under the Mortgage are secured by a
lien on the property and related improvements.
(d) The Company leases certain automobiles and equipment under noncancelable
leases expiring at various times through January 1998.
(e) At July 31, 1996 the Company had an unsecured Line of Credit Agreement (the
"Agreement") with a bank for an aggregate of $15,000,000. The Agreement, which
is uncommitted, is for working capital loans, letter of credit and deferred
payment letters of credit, and bear interest at the alternate base rate. There
were no working capital loans outstanding against this Agreement at July 31,
1996.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the six and three month periods ended July 31, 1996 as compared to the
six and three month periods ended July 31, 1995
Net Sales. Net sales for the six and three months ended July 31, 1996 were
$54,004,000 and $30,135,000, an increase of $11,693,000 and $8,267,000, or 27.6%
and 37.8%, respectively, compared to $42,311,000 and $21,868,000 for the six and
three months ended July 31, 1995. Approximately $8,209,000 and $5,522,000 of
such increase was due to the sale of embroidery machinery for the six and three
months ended July 31, 1996. The Company believes that this increase is the
result of the continued strong demand for traditional embroidered products, the
creation of new embroidery applications and markets and the continued strength
of "embroidery entrepreneurs" as a growing segment of the marketplace. The
Company believes that purchasers of smaller embroidery machines are a
significant source of repeat business for the sale of multihead machines as the
entrepreneurs' operations expand. Additionally, approximately $3.8 million of
additional sales were attributable to the acquisition of Sewing Machine
Exchange, Inc. ("SMX") for the period from June 7, 1996 (date of acquisition)
through July 31, 1996. (See Note 6 of Notes to the Consolidated Financial
Statements.)
The Company sells embroidery machines manufactured by Tajima Industries
Ltd. ("Tajima"), Brother Industries Ltd. ("Brother") and through the acquisition
of SMX, Melco Embroidery Systems ("Melco"). Singlehead embroidery machines and
multihead embroidery machines represented 43.9% and 56.1% and 44.3% and 55.7%,
respectively, of the number of embroidery machines sold during the six and three
months ended July 31, 1996 as compared to 40.3% and 59.7% and 36.5% and 63.5%
for the six and three months ended July 31, 1995, respectively.
Revenue from the sale of the Company's computer hardware and software,
parts, service, used machines, application software and embroidery supplies for
the six and three months ended July 31, 1996 aggregated approximately $9,034,000
and $5,619,000, as compared to $5,550,000 and $2,874,000 for the six and three
months ended July 31, 1995.
Interest income related to sales-type leases. HAPL had interest income of
$1,604,000 and $783,000 for the six and three months ended July 31, 1996 as
compared to $1,307,000 and $731,000 for the six and three months ended July 31,
1995, which represents an increase of $297,000 and $52,000, or 22.7% and 7.1%.
This increase is a result of the continued expansion of HAPL's operations.
Cost of Goods Sold. For the six and three months ended July 31, 1996, cost
of goods sold increased $6,630,000 and $4,501,000, or 23.1% and 29.7%, to
$35,274,000 and $19,630,000 from $28,644,000 and $15,130,000 for the six and
three months ended July 31, 1995. The increase was in direct proportion to the
Company's increased sales volume. The fluctuation of the dollar against the yen
has a minimal effect on Tajima equipment gross margins since all currency
fluctuations have been reflected in pricing adjustments in order to maintain
consistent gross margins. Profit margins are consistent throughout the Tajima
and
12
<PAGE>
Brother product lines. Gross margins for the Company's value added products
are generally higher than gross margins on the sale of embroidery machinery.
Selling, General and Administrative ("SG&A") Expenses. For the six and
three months ended July 31, 1996 SG&A increased $3,530,000 and $2,681,000, or
36.8% and 56.9%, to $13,123,000 and $7,394,000 from $9,593,000 and $4,713,000
for the six and three months ended July 31, 1995, respectively. SG&A expenses
increased as a percentage of revenues to 23.6% and 23.9% for the six and three
months ended July 31, 1996, respectively, from 22.0% and 20.9% for the same
periods of the prior year. In order to implement its growth strategy the Company
has hired additional sales and marketing personnel for small machines and
supplies, opened several new sales offices and hired additional software
programmers and technicians. The Company also increased expenditures for
advertising and for participation in trade shows and seminars. The acquisition
of SMX has also contributed to this increase in SG&A. Amortization of the excess
of cost over net assets acquired and acquisition costs has also increased SG&A
costs.
Interest Expense. Interest expense for the six and three months ended July
31, 1996 increased $41,000 and $86,000, or 18.7% and 81.3% as compared to the
six and three month periods ended July 31, 1995. This increase is primarily
attributable to the interest costs related to the debt assumed for the
acquisition of SMX.
Other income, net. Other income, net, consists principally of investment
interest.
Provision for income taxes. The provision for income taxes reflected an
effective tax rate of approximately 41.1% and 41.5% for the six and three months
ended July 31, 1996 as compared to 40.8% and 40.5% for the six and three months
ended July 31, 1995. Differences from the Federal statutory rate consisted
primarily of provisions for state income taxes net of Federal tax benefit. The
increase in the tax rate for the six and three months ended July 31, 1996 is
principally the result of changes in the sales mix which resulted in increased
sales to states and other taxing jurisdictions with higher effective tax rates.
The principal components of the deferred income tax assets result from
allowances and accruals which are not currently deductible for tax purposes and
differences in amortization periods between book and tax bases. There has been
no effect on deferred taxes as a result of the SMX acquisition as the goodwill
is being deducted over 15 years for book and tax bases. The Company has not
established any valuation allowances against these deferred tax assets as
management believes it is more likely than not that the Company will realize
these assets in the future based upon the historical profitable operations of
the Company.
Net Income. Net Income for the six and three months ended July 31, 1996
increased $1,053,000 and $595,000, or 33.8% and 37.1%, to $4,169,000 and
$2,199,000 from $3.116,000 and $1,604,000 for the six and three months ended
July 31, 1995. This increase is due to the continued growth in machine sales in
addition to the contribution to net income from the sale of the Company's value
added products.
13
<PAGE>
Liquidity and Capital Resources
The Company's working capital was $19,916,000 at July 31, 1996, increasing
$3,069,000, or 18.2%, from $16,847,000 at January 31, 1996. The Company has
financed its operations principally through cash generated from operations,
long-term financing of certain capital expenditures and the proceeds from the
Secondary Offering. The acquisition of SMX has been financed through a term loan
agreement with a bank.
During the six months ended July 31, 1996, the Company's cash and cash
equivalents and short-term investments available-for-sale increased by
$1,318,000 to $10,168,000. Net cash of $1,967,000 was provided by the Company's
operating activities principally as a result of the Company's earnings of
$4,169,000. Changes to working capital components resulted in a use of cash of
$2,202,000. Cash provided by increases in the balance of trade acceptances
payable, income taxes payable and customer deposits and decreases in accounts
receivable and other current assets aggregating $1,700,000 was offset by cash
used to increase inventory, net investment in sales-type leases and other assets
aggregating $3,513,000 and a decrease in accounts payable and accrued expenses
of approximately $1,119,000. These changes resulted from expansion of the
Company's business.
The Company purchases foreign currency futures contracts to hedge specific
purchase commitments. Substantially all foreign currency purchase commitments
are matched with specific foreign currency futures contracts. Consequently, the
Company believes that no material foreign currency exchange risk exists relating
to outstanding trade acceptances payable. The cost of such contracts are
included in the cost of inventory. See Note 10(B) of Notes to Consolidated
Financial Statements in the 1996 Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission.
At July 31, 1996, the Company had an uncommitted line of credit agreement
with a bank for $15,000,000. This line, which is unsecured, can be used for
working capital loans, bankers acceptances, letters of credit and deferred
payment letters of credit. This line of credit can be canceled at any time by
either party. This line has been used for letters of credit and deferred payment
letters of credit aggregating approximately $9,351,000 at July 31, 1996. The
absence of this line would impair the Company's ability to purchase Tajima
equipment.
On June 7, 1996 the Company acquired all of the outstanding capital stock
of SMX. This acquisition was accounted for as a purchase and accordingly, the
acquired assets and assumed liabilities were recorded at their estimated fair
market values at the date of acquisition. The cost in excess of fair value of
SMX was recorded as goodwill. The purchase price was $8.69 million, payable in
the form of a promissory note in the principal amount of $4.25 million to each
of the two shareholders of SMX and by delivery of an aggregate of 9,375 shares
of the Company's Class A Common Stock. Pursuant to the terms of the promissory
notes, the Company was required to make a principal payment on each note in the
amount of $2.5 million on June 13, 1996 with the balance of each note ($1.75
million) payable in 60 equal monthly installments of principal plus interest
beginning July 7, 1996. Concurrent with the acquisition, the Company entered
into 5 year employment contracts with SMX's former shareholders.
14
<PAGE>
Based in Chicago, Illinois, SMX is the exclusive distributor in 7
midwestern states of single and multihead machines manufactured by Tajima, and
the exclusive distributor in 11 midwestern states, of 1, 4 and 12 head
embroidery machines and related software manufactured by Melco.
On June 10, 1996, the Company entered into a term loan agreement with a
bank (the "Term Loan Agreement") pursuant to which the Company borrowed $7.5
million to fund the acquisition of SMX and to repay SMX's credit facilities. The
loan is repayable in twenty (20) equal quarterly installments of principal plus
interest (as defined in the Term Loan Agreement) beginning September 30, 1996.
The loan has been guaranteed by Hirsch, Pulse and SMX and requires the Company
to maintain, among others, certain minimum tangible net worth, quick asset ratio
and fixed charge coverage ratio levels, as defined.
HAPL had been party to a $4,000,000 revolving credit agreement (the
"Agreement") which expired on August 19, 1996. There were no borrowings under
this Agreement at July 31, 1996. The Company is presently negotiating terms for
a new agreement.
HAPL sells substantially all of its leases to financial institutions on a
non-recourse basis several months after the commencement of the lease term
thereby reducing its financing requirements. In certain cases, HAPL retains
leases for which it cannot obtain commitments from financing sources. HAPL
Leasing, which was fully activated in May 1993, has closed $73,849,000 in lease
agreements as of July 31, 1996. To date, approximately $66,192,000, or 89.6%, of
the leases have been sold to third party financial institutions on a
non-recourse basis.
On October 27, 1994, Hirsch entered into a ten year, $2,295,000 Mortgage
agreement with a bank (the "Mortgage") for its new corporate headquarters. The
Mortgage bears interest at a fixed rate of 8.8% and is payable in equal monthly
principal installments of $19,125. The obligation under the Mortgage is secured
by a lien on the premises and the related improvements thereon.
The Company believes that its existing cash and funds generated from
operations, together with its existing financing agreements, will be sufficient
to meet its working capital and capital expenditure requirements and to finance
planned growth.
Backlog and Inventory
The ability of the Company to fill orders quickly is an important part of
its customer service strategy. The embroidery machines held in inventory by the
Company are generally shipped within a week from when the customer's orders are
received, and as a result, backlog is not meaningful as an indicator of future
sales.
Inventory at July 31, 1996 of new Tajima and Brother embroidery machines
was $5,394,000 and $1,307,000, respectively, representing approximately one
month's sales which is comparable to historical inventory levels. Inventory of
approximately $2,361,000 consisted of computer software, used machines and other
equipment.
15
<PAGE>
Recent Pronouncements of the Financial Accounting Standards Board
Recent pronouncements of the Financial Accounting Standards Board ("FASB"),
which are not required to be adopted at this date, include Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No.
125") which is effective for transactions occurring after December 15, 1996,
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") and
SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," ("SFAS No. 121") which are effective for fiscal
years beginning December 15, 1995. The Company adopted SFAS No. 121 in the third
quarter of fiscal 1996. The adoption did not have material impact on the
Company's Consolidated Financial Statements. SFAS No. 125 and SFAS No. 123 are
not expected to have a material impact on the Company's Consolidated Financial
Statements.
16
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On June 21, 1996, the Company held its Annual Meeting of Stockholders
(the "Meeting").
(b) At the Meeting, the Stockholders of the Company elected Marvin Broitman
and Douglas Schenendorf as Class A directors and Henry Arnberg, Herbert M.
Gardner, Paul Levine and Tas Tsonis as Class B directors.
(c) In addition to electing directors at the Meeting, the Stockholders of
the Company amended the Company's Certificate of Incorporation to increase the
number of authorized shares of Class A Common Stock from 9,500,000 shares to
20,000,000 shares.
(d) At the Meeting, the Stockholders of the Company approved the amendment
of the Company's 1993 Stock Option Plan to increase the number of Class A Common
Stock authorized for issuance thereunder from 196,875 to 600,000.
(e) The Stockholders of the Company then ratified the bonus provisions of
the Company's employment agreements with its President and Executive Vice
President, and ratified the selection of Deloitte & Touche as the Company's
independent auditors for the fiscal year ending January 31, 1997. The following
sets forth the results of voting on each matter voted upon at the meeting:
1. Election of Directors
<TABLE>
<CAPTION>
For Against
<S> <C> <C>
Marvin Broitman 2,082,856 1,145
Douglas Schenendorf 2,082,856 1,145
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
For Against
<S> <C> <C>
Henry Arnberg 2,582,249 0
Herbert M. Gardner 2,582,249 0
Paul Levine 2,582,249 0
Tas Tsonis 2,582,249 0
</TABLE>
2. Amendment of the Company's Certificate of Incorporation.
<TABLE>
<CAPTION>
For Against
<S> <C> <C>
4,409,774 233,551
</TABLE>
3. Amendment of the Company's 1993 Stock Option Plan.
<TABLE>
<CAPTION>
For Against
<S> <C> <C>
3,587,280 134,254
</TABLE>
4. Ratification of the bonus provisions of the Company's employment
agreements with its President and Executive Vice President.
<TABLE>
<CAPTION>
For Against
<S> <C> <C>
3,576,285 136,381
</TABLE>
5. Ratification of Deloitte & Touche LLP as the Company's independent
auditors for the fiscal year ending January 31, 1997.
<TABLE>
<CAPTION>
For Against
<S> <C> <C>
4,661,089 1,818
</TABLE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Amendment of Certificate of Incorporation
of the Company.
10.1 Employment Agreement between Ronald H. Krasnitz and
Sewing Machine Exchange, Inc.
18
<PAGE>
10.2 Employment Agreement between Martin Krasnitz and Sewing Machine
Exchange, Inc.
10.3 Stock Option Plan, As Amended.
10.4 Term Loan Agreement between The Bank of New York and the Company.
10.5 $7,500,000 Term Loan Note payable by the Company to the order of
The Bank of New York.
27 Financial Data Schedule.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed by the Company on June 19, 1996,
with respect to the Company's acquisition of all of the outstanding capital
stock of Sewing Machine Exchange, Inc. ("SMX") for $8.69 million on June 7,
1996.
A Current Report on Form 8-K/A was filed by the Company on August 16, 1996,
to amend its Current Report on Form 8-K filed June 19, 1996 by submitting the
Financial Statements of SMX and the unaudited pro forma consolidated financial
information of the Company and its subsidiaries.
19
<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 by the
undersigned thereunto duly authorized.
HIRSCH INTERNATIONAL CORP.
Registrant
By: \s\ Henry Arnberg
----------------------------
Henry Arnberg, President and
Chief Executive Officer
By: \s\ Kenneth Shifrin
----------------------------
Kenneth Shifrin,
Chief Financial Officer
Dated: September 13, 1996
20
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
THE CERTIFICATE OF INCORPORATION
OF
HIRSCH INTERNATIONAL CORP.
---------------------------------------------------------
Adopted in accordance with the provisions
of Section 242 of the General Corporation
Law of the State of Delaware
---------------------------------------------------------
The undersigned, Henry Arnberg and Paul Levine, being the President and
Secretary, respectively, of HIRSCH INTERNATIONAL CORP., a corporation organized
and existing under the laws of the State of Delaware, do hereby certify as
follows:
FIRST, that the Certificate of Incorporation of said corporation be amended
as follows:
1. By striking out the whole of ARTICLE FOURTH, as it now exists, and
inserting in lieu and instead thereof a new ARTICLE FOURTH, reading as follows:
"The Corporation may issue three classes of shares as follows:
a. Class A Common Stock. The aggregate number of shares of Class A Common
Stock which the Corporation may issue is 20,000,000 shares with a par value of
$.01. The shares shall be designated as "Class A Common Stock" and shall have
identical rights and privileges in every respect. The dividend rights
attributable to the holders of Class A Common Stock shall be identical to those
of the holders of Class B Common Stock and all stock dividends shall be paid in
Class A Common Stock. Each shareholder of record shall be entitled to one vote
per share on all matters submitted to a vote of the shareholders, except that as
long as the number of outstanding shares of Class B Common Stock equals or
exceeds 400,000 shares, the holders of the Class A Common Stock, voting as a
class, shall be entitled to elect one-third of the Board of Directors and the
holders of the Class B Common Stock, voting as a class, shall be entitled to
elect two-thirds of the Board of Directors.
b. Class B Common Stock. The aggregate number of shares of Class B Common
Stock which the Corporation may issue is 3,000,000 shares with a par value of
$.01. The shares shall be designated as "Class B Common Stock" and shall have
identical rights and privileges in every respect. The dividend rights
attributable to the holders of Class B Common Stock shall be identical to those
of the holders of Class A Common Stock and all stock dividends shall be paid in
Class A Common Stock. Each shareholder of record shall be entitled to one vote
per share on all matters submitted to a vote of the shareholders, except that as
long as the number of outstanding shares of Class B Common Stock equals or
exceeds 400,000 shares, the holders of the Class A Common Stock, voting as a
Class, shall be entitled to elect one-third of the Board
<PAGE>
of Directors and the holders of the Class B Common Stock, voting as a
class, shall be entitled to elect two-thirds of the Corporation's Board of
Directors. A holder of Class B Common Stock may at any time convert any portion
or all of such Stock into Class A Common Stock on a one-for-one basis. In the
event of any disposition of shares of Class B Common Stock, other than to a
holder of Class B Common Stock or to a spouse or child of a holder of Class B
Common Stock or to a trust created for the benefit of a holder of Class B Common
Stock or a spouse or child of a holder of Class B Common Stock, such shares
shall be deemed to be automatically converted into an equal number of fully paid
and non-assessable shares of Class A Common Stock. At such time as the number of
outstanding shares of Class B Common Stock is less than 400,000, all remaining
shares of the Class B Common Stock shall be deemed automatically converted into
an equal number of shares of Class A Common Stock. This article FOURTH may not
be amended to increase the authorized number of shares of Class B Common Stock.
c. Preferred Stock. The aggregate number of shares of Preferred Stock which
the Corporation may issue is 1,000,000, with a par value of $.01. The Preferred
Stock may be issued from time to time in series. The shares of each series shall
be subject not only to the provisions of this Article 4.c, which is applicable
to all series of preferred shares, but also to the additional provisions with
respect to such series as are fixed from time to time by the Board of Directors.
The Board of Directors is hereby authorized and required to fix, in the manner
and to the fullest extent provided and permitted by law, all provisions of the
shares of each series not otherwise set forth in this Certificate, including,
but not limited to:
(1) Designation of Series-Number of Shares. The distinctive designation of
each series and the number of shares constituting such series, which number may
be increased (except where otherwise provided by the Board of Directors in its
resolution creating such series) or decreased (but not below the number of
shares thereof then outstanding) from time to time by resolution of the Board of
Directors;
(2) Dividend Rates and Rights. The annual rate and frequency of payment of
dividends payable on the shares of all series and the dividend rights applicable
thereto, including, in the event of Cumulative Preferred Stock, the date from
which dividends shall be cumulative on all shares of any series issued prior to
the record date for the first dividend on shares of such series;
(3) Redemption. The rights, if any, of the Corporation to redeem; the terms
and conditions of redemption; and the redemption price or prices, if any, for
the shares of each, any, or all series;
(4) Sinking Fund. The obligation, if any, of the Corporation to maintain a
sinking fund for the periodic redemption of shares of any series and to apply
the sinking fund to the redemption of such shares;
(5) Voluntary Liquidation Preferences. The amount payable on shares of each
series in the event of any voluntary liquidation, dissolution, or winding up of
the affairs of the Corporation;
-2-
<PAGE>
(6) Conversion Rights. The rights, if any, of the holders of shares of each
series to convert such shares into the Corporation's Common Stock and the terms
and conditions of such conversion; and
(7) Voting Rights. The voting rights, if any, of the holders of the shares
of each series, and any other preferences, and relative, participating,
optional, or other special rights, and any qualifications, limitations, or
restrictions thereof."
SECOND, that such amendment has been duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
-3-
<PAGE>
IN WITNESS WHEREOF, we have signed this certificate this 24th day of June,
1996.
\s\ Henry Arnberg
-----------------------------
Henry Arnberg, President
\s\ Paul Levine
-----------------------------
Paul Levine, Secretary
-4-
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of the 7th day of June, 1996, by and between
SEWING MACHINE EXCHANGE, INC., an Illinois corporation with offices located at
1840 South Michigan Avenue, Chicago, Illinios 60616 (the "Company") and RONALD
H. KRASNITZ, residing at 9826 Maynard Terrace, Niles, Illinois 60714 (the
"Executive"). W I T N E S S E T H : WHEREAS, simultaneously herewith Hirsch
International Corp. ("Hirsch") has acquired all of the capital stock of the
Company pursuant to the terms of a Stock Purchase Agreement of even date
herewith (the "Purchase Agreement"); and WHEREAS, prior to such acquisition,
Executive owned fifty (50%) percent of the capital stock of and was Chairman of
the Company and heretofore was a full time employee of the Company; and WHEREAS,
pursuant to the terms of the Purchase Agreement, the parties have simultaneously
entered into this Employment Agreement. NOW, THEREFORE, the parties, intending
to be legally bound, agree as follows: 1. Employment. The Company hereby employs
the Executive and Executive agrees to serve the Company and its corporate
"Affiliates" (as such term is defined in Rule 12b-2 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) and to
continue to perform his usual and customary duties together with such other
reasonable duties as shall be assigned to him from time to time by the Board of
Directors of
<PAGE>
the Company and Hirsch. The services to be provided by Executive hereunder
shall be principally provided in the Chicago, Illinois area, although Executive
acknowledges that in the course of his employment hereunder he may be required,
from time to time, to travel on behalf of the Company. 2. Term. The employment
of Executive hereunder shall be effective and commence on the date hereof (the
"Effective Date"), and shall terminate as of the close of business on the fifth
anniversary of the Effective Date (the "Term"). 3. Duties and Nature of
Executive's Services. Executive agrees to serve the Company as President and
Hirsch as a Vice President and director and to serve those companies and their
Affiliates faithfully and to the best of his ability, and to devote his entire
business time, attention, energy, skill and experience to the performance of his
duties hereunder and shall not engage, directly or indirectly, in any other
business, employment or occupation which is competitive with the business of the
Company and its Affiliates. 4. Compensation. 4.1. As full compensation for all
services to be rendered by the Executive to the Company and its Affiliates under
or pursuant to the terms of this Agreement, including service as a director of
the Company and Hirsch, the Company shall pay to the Executive a base salary of
Three Hundred Thousand ($300,000) Dollars per year (the "Base Compensation").
The Base Compensation shall be payable at such regular times and intervals as
the Company customarily pays its employees from time to time. 4.2. During the
term of his employment hereunder, Executive shall be entitled to participate in
all life insurance, medical, retirement, pension and other non-incentive and
non-bonus plans and perquisites of Hirsch now in effect or hereafter adopted and
made generally available by Hirsch to its senior executive officers; provided
that
-2-
<PAGE>
Executive qualifies under and is eligible to participate in such plans and
perquisites in accordance with the terms and subject to the conditions thereof.
The Company shall have the right at any time and from time to time to change
insurance carriers and to modify the scope of coverage and other terms of
insurance policies and other plans covering its senior executive officers. The
Executive shall not be eligible to participate in any executive bonus or other
long-term compensation or incentive plans of Hirsch. 4.3. During the Term, the
Executive shall also be entitled to the full-time use of a Company automobile
(same model BMW currently being used by Executive or its equivalent). The
Company shall purchase all relevant insurance for said automobile (or reimburse
Executive for cost of same) and shall reimburse the Executive for all fuel and
repairs to said automobile. 4.4. The Company shall deduct from the Executive's
Base Compensation, bonus or incentive compensation any federal, state or city
withholding taxes, social security contributions and any other amounts which may
be required to be deducted or withheld by the Company pursuant to any federal,
state or city laws, rules or regulations. 4.5. The Company shall reimburse the
Executive, or cause him to be reimbursed, for all reasonable out-of-pocket
expenses incurred by him in the performance of his duties hereunder or in
furtherance of the business and/or interests of the Company; provided, however,
that the Executive shall have previously furnished to the Company an itemized
account, satisfactory to the Company, in substantiation of such expenditures. 5.
Grant of Stock Option. In addition to the Compensation described in Section 4
hereof, Hirsch has simultaneously entered into a Non-Qualified Stock Option
Agreement with
-3-
<PAGE>
Executive entitling Executive to purchase up to an aggregate of 132,500
shares of Hirsch's Class A Common Stock. 6. Indemnification. The Company
undertakes, to the fullest extent permitted by law, to indemnify and hold the
Executive harmless from and against all claims, damages, losses and expenses,
including reasonable attorneys' fees and disbursements, arising out of the
performance by the Executive of his duties pursuant to this Agreement, in
furtherance of the Company's business and within the scope of his employment. 7.
Termination. 7.1. If the Executive dies or becomes disabled during the Term, his
Base Compensation and all other rights under this Agreement shall terminate at
the end of the month during which death or disability occurs. For purposes of
this Agreement, the Executive shall be deemed to be "disabled" if he has been
unable to perform his duties for six (6) consecutive months or nine (9) months
in any twelve (12) month period, all as determined in good faith by the Board of
Directors of the Company. 7.2. The Company shall, in the manner described in
Section 7.3 hereof, have the right to terminate the employment of Executive
under this Agreement and Executive shall forfeit the right to receive any and
all further payments hereunder, other than the right to receive any compensation
and reimbursements then due and payable to Executive pursuant to Section 4
hereof to the date of termination, if Executive shall commit any of the
following acts or any of the following acts shall occur ("Events of Default"):
(a) Material breach of any of the material provisions or covenants of this
Agreement;
(b) Material breach of any of the material representations,
warranties, covenants or agreements contained in the
Purchase Agreement, except (i) if the existence of such
-4-
<PAGE>
breach is being contested in good faith or (ii) such
breach did not constitute fraud or bad faith by the
Executive and the Company or Hirsch has been fully
indemnified by the Executive with respect to such
breach;
(c) Gross negligence in the performance of his duties or
obligations hereunder, or, without proper cause,
wilful refusal or habitual neglect to perform his
employment duties or obligations under this
Agreement;
(d) Any material act of willful misconduct, dishonesty or
breach of trust which directly or indirectly causes
the Company or any of its Affiliates to suffer any
loss, fine, civil penalty, judgment, claim, damage or
expense;
(e) Indictment for or conviction of, or plea of guilty or
nolo contendere to, a felony or indictable offense
(unless committed in the reasonable, good faith
belief that the Executive's actions were in the best
interests of the Company and its stockholders and
would not violate criminal law);
(f) A court or other tribunal of competent jurisdiction shall
have issued an order prohibiting the Company from
employing Executive; or
(g) Any repeated violation (after written notice) or
material violation of the Company's discipline rules
as set forth in the Company's Employee handbook, a
copy of which has heretofore been delivered to the
Executive, as may be modified from time to time at
the sole discretion of the Company.
7.3. If the Company elects to terminate this Agreement upon the occurrence
of any Event of Default, it shall deliver notice thereof to the Executive,
describing with reasonable detail, the action or omission of the Executive
constituting the act of default (the "Termination Notice"), and thereupon no
further payments of any type shall be made or shall be due or payable to
Executive hereunder, except as provided in Section 7.2 hereof; provided,
however, with respect to any act of default set forth in Clauses (a), (c), (f)
and (g) of Section 7.2 hereof, prior to termination by the Company of
Executive's employment,
-5-
<PAGE>
Executive shall first have an opportunity to cure or remedy such act of
default within thirty (30) days following the Termination Notice. 8. Restrictive
Covenants. 8.1. Covenant Not to Compete. The Executive covenants and undertakes
that, during the period of his employment hereunder and for a period of five (5)
years hereafter, he will not, without the prior written consent of the Company,
directly or indirectly, and whether as principal, agent, officer, director,
employee, consultant, or otherwise, alone or in association with any other
person, firm, company, or other business organization, carry on, or be engaged,
concerned, or take part in, or render services to, or own, share in the earnings
of, or invest in the stock, bonds, or other securities of any person, firm,
company, or other business organization (other than Hirsch) engaged in a
business in the Continental United States which is similar to or in competition
with any of the businesses carried on by the Company, Hirsch, or any Affiliates
thereof (a "Similar Business"); provided, however, that the Executive may invest
in stock, bonds, or other securities of any Similar Business (but without
otherwise participating in the activities of such Similar Business) if (i) such
stocks, bonds, or other securities are listed on any national or regional
securities exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934; and (ii) his investment does not exceed, in the
case of any class of the capital stock of any one issuer, 2% of the issued and
outstanding shares, or in the case of bonds or other securities, 2% of the
aggregate principal amount thereof issued and outstanding. The restrictions
contained in this Section 8.1 shall not be operative if the promissory note of
Hirsch delivered at closing shall be in default and such default shall not be
duly cured or the Company shall be in material breach of a material provision
hereof and,
-6-
<PAGE>
after due notice thereof, the Company shall fail to cure such default
within 30 days after receipt of notice or if such default is not reasonably
capable of being cured within such 30 day period, then the Company shall
undertake to cure the default within such 30 day period and act diligently
thereafter to effect such cure. 8.2. Confidential Information; Covenant not to
Disclose. 8.2.1. During the term of this Agreement and thereafter, Executive
agrees not to divulge, furnish or make accessible to anyone (other than in the
regular course of business of the Company and its Affiliates) any knowledge or
information (whether or not in writing) relating to the business and affairs of
the Company, including, without limitation, knowledge or information with
respect to trade secrets, formulae, computer programs, intellectual or
industrial property, designs, processes, plans or materials (collectively,
"Company Property") of the Company, its parent or any of its Affiliates, or with
respect to any other material proprietary, confidential or non-public aspects of
the business or affairs of the Company and any of its Affiliates. 8.2.2. Any
Company Property (whether or not protected or eligible for protection by common
law or by registered patent, trademark or copyright), relating to the business
of the Company or any of its Affiliates, which Executive may acquire knowledge
of, become privy to, develop or produce while in the employ of the Company,
shall be and remain the exclusive property, right, title and interest of
Company. Executive agrees promptly to execute and deliver to the Company, at the
Company's expense, any and all instruments deemed necessary or convenient by the
Company to effect the disclosure and assignment of all such Company Property to
it.
-7-
<PAGE>
8.2.3. Executive agrees that during the term (including any renewal term)
of this Agreement and for a period of five (5) years thereafter, or, if
Executive's employment by the Company shall be longer than said term, then for a
period of five (5) years following the termination or expiration of his
employment by the Company (whether pursuant to the terms of this Agreement or
otherwise), he will not: (a) directly or indirectly solicit, encourage, assist,
entice, raid or induce any executive, managerial or supervisory level employee
of the Company or any Affiliate to be employed by any person, firm or
corporation other than the Company or any Affiliate; (b) directly or indirectly
approach any employee of the Company or any Affiliate for the purposes specified
in Clause (a) above; or (c) authorize or knowingly approve the taking of any of
the action specified in Clause (a) above by other persons on behalf of any
person, firm or corporation, or assist any person, firm or corporation in taking
any such action. 8.2.4. Executive agrees that during the term of his employment
by the Company (whether pursuant to the terms of this Agreement or otherwise),
he will not enter into on behalf of the Company or any Affiliate, or cause the
Company or any Affiliate to directly or indirectly enter into, any transactions
with any business enterprise in which he, any of his Affiliates or any member of
his immediate family is, to his knowledge, interested as a partner, trustee,
beneficiary, director, officer, attorney-in-fact, employee, shareholder, lender
of money or guarantor, without the prior consent of the Company's board of
directors; provided, however, that nothing contained herein shall restrict any
transactions with any corporation, partnership or business enterprise in which
Executive, any of his
-8-
<PAGE>
Affiliates and/or any member of Executive's immediate family (consisting of
Executive's spouse, siblings and children), individually or in the aggregate,
owns less than two (2%) percent of the publicly traded capital stock or other
equity interests of such corporation, partnership or business enterprise. 8.2.5.
Upon termination of his employment hereunder, Executive will return to the
Company all of the property of the Company and its Affiliates in his possession.
8.2.6. If any provision of this Section 8.2 is held by any court of competent
jurisdiction to be unenforceable because of the scope, duration or area of
applicability, such provision shall be deemed modified to the extent the court
modifies the scope, duration or area of applicability of such provision to make
it enforceable. 8.3. Covenant to Report; Patents, etc. 8.3.1. Executive agrees
to promptly communicate and disclose to the Company in writing all inventions,
discoveries and improvements, in any form whatsoever, (hereinafter "Inventions")
including, without limitation, all software, programs, routines, techniques,
procedures, training aides and instructional manuals conceived, developed or
made by him during his employment by the Company, whether solely or jointly with
others, and whether or not patentable or copyrightable, which relate to any
matters or business of the type carried on or being developed by the Company and
its Affiliates. The Executive shall also promptly communicate and disclose to
the Company all other data obtained by him concerning the business or affairs of
the Company and its Affiliates in the course of his employment by the Company.
8.3.2. All written materials, records and documents made by the Executive or
coming into his possession during the Term concerning the business or affairs
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<PAGE>
of the Company and its Affiliates shall be the sole property of the
Company; and, upon the termination of the Term or upon the request of the
Company during the Term, the Executive shall promptly deliver the same to the
Company. The Executive agrees to render to the Company such reports of the
activities undertaken by the Executive or conducted under the Executive's
direction pursuant hereto during the Term as the Company may request. 9.
Injunction. It is recognized and hereby acknowledged by the Executive that a
breach or violation by the Executive of any of the covenants or agreements
contained in this Agreement may cause irreparable harm and damage to the Company
and its Affiliates, the monetary amount of which may be virtually impossible to
ascertain. As a result, the Executive recognizes and acknowledges that the
Company shall be entitled to an injunction, without posting any bond or security
in connection therewith, from any court of competent jurisdiction enjoining and
restraining any breach or violation of any of the restrictive covenants
contained in Section 8 of this Agreement by the Executive or his associates,
partners or agents, either directly or indirectly, and that such right to
injunction shall be cumulative and in addition to whatever other rights or
remedies the Company may possess. Nothing contained in this Section 9 shall be
construed to prevent the Company from seeking and recovering from the Executive
damages sustained as a result of any breach or violation by the Executive of any
of the covenants or agreements contained in this Agreement, and that in the
event of any such breach, the Company shall avail itself of all remedies
available both at law and at equity. 10. Compliance with Other Agreements. The
Executive represents and warrants to the Company that the execution of this
Agreement by him and the performance of his obligations hereunder will not, with
or without the giving of notice, the passage of time or
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both, conflict with, result in the breach of any provision of or the
termination of, or constitute a default under, any agreement to which the
Executive is a party or by which the Executive is or may be bound. 11.
Miscellaneous. 11.1. Notices. Any notice or other communication to a party under
this Agreement shall be in writing, and if by use of the mail shall be
considered given when mailed by certified mail, return receipt requested, to the
party at the following address or at such other address as the party may specify
by notice to the other in the manner prescribed herein:
If to the Company: c/o Hirsch International Corp.
200 Wireless Boulevard
Hauppauge, New York 11788
Attention: Henry Arnberg, President
With a copy to: Ruskin, Moscou, Evans & Faltischek, P.C.
170 Old Country Road
Mineola, New York 11501
Attention: Raymond S. Evans, Esq.
If to the Executive: Ronald H. Krasnitz
9826 Maynard Terrace
Niles, Illinois 60714
With a copy to: Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610
Attention: David A. Rubenstein, Esq.
11.2. Benefit. This Agreement shall be binding upon and inure to the
benefit of the respective parties hereto and their legal representatives,
successors and assigns. Insofar as the Executive is concerned, this Agreement
being personal, cannot be assigned. 11.3. Validity. The invalidity or
unenforceability of any provisions hereof shall in no way affect the validity or
enforceability of any other provision.
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11.4. Entire Agreement. This Agreement constitutes the entire Agreement
between the parties with respect to the subject matter hereof, and supersedes
all existing agreements between them. It may only be changed or terminated by an
instrument in writing signed by both parties. The covenants of the Executive
contained in Article 8 of this Agreement shall survive the termination of this
Agreement and the expiration of the Term. 11.5. Illinois Law to Govern. This
Agreement shall be governed by, construed and interpreted in accordance with the
laws of the State of Illinois. 11.6. Corporate Action. The execution and
delivery of this Agreement by the Company has been authorized and approved by
all requisite corporate action. 11.7. Waiver of Breach. The failure of either
party to insist on strict adherence to any term of this Agreement on any
occasion shall not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Agreement. Waiver of any term or provision of the Agreement must be in
writing. 11.8. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. 11.9. Paragraph Headings.
Paragraph headings are inserted herein for convenience only and are not intended
to modify, limit or alter the meaning of any provision of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have set their hands and executed
this Agreement as of the day and year first above written. SEWING MACHINE
EXCHANGE, INC.
By: \s\ Kenneth Shifrin
-------------------------------
Kenneth Shifrin, Vice Presdient
\s\ Ronald H. Krasnitz
-------------------------------
Ronald H. Krasnitz
THE UNDERSIGNED HEREBY (a) AGREES TO SECTION 3; (b) GUARANTEES PAYMENT OF
THE AMOUNTS DUE TO EXECUTIVE UNDER SECTION 4 OF THIS AGREEMENT; (c) GUARANTEES
THE COMPANY'S INDEMNIFICATION IN SECTION 6; AND (d) AGREES TO THE OPTION GRANT
DESCRIBED IN SECTION 5 OF THIS AGREEMENT.
HIRSCH INTERNATIONAL CORP.
By: \s\ Henry Arnberg
-------------------------
Henry Arnberg, President
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EXHIBIT 10.2
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of the 7th day of June, 1996, by and between
SEWING MACHINE EXCHANGE, INC., an Illinois corporation with offices located at
1840 South Michigan Avenue, Chicago, Illinois 60616 (the "Company") and MARTIN
KRASNITZ, residing at 330 West Diversy, Chicago, Illinois 60657 (the
"Executive"). W I T N E S S E T H : WHEREAS, simultaneously herewith, Hirsch
International Corp. ("Hirsch") has acquired all of the capital stock of the
Company pursuant to the terms of a Stock Purchase Agreement of even date
herewith (the "Purchase Agreement"); and WHEREAS, prior to said acquisition,
Executive owned fifty (50%) percent of the capital stock of and is President of
the Company and heretofore was a full time employee of the Company; and WHEREAS,
pursuant to the terms of the Purchase Agreement, the parties have simultaneously
entered into this Employment Agreement. NOW, THEREFORE, the parties, intending
to be legally bound, agree as follows:
1. Employment.
The Company hereby employs the Executive and Executive agrees to serve the
Company and its corporate "Affiliates" (as such term is defined in Rule 12b-2
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) and to continue to perform his usual and customary duties together with
such other
<PAGE>
reasonable duties as shall be assigned to him from time to time by the
Board of Directors of the Company and Hirsch. The services to be provided by
Executive hereunder shall be principally provided in the Chicago, Illinois area,
although Executive acknowledges that in the course of his employment hereunder
he may be required, from time to time, to travel on behalf of the Company.
2. Term.
The employment of Executive hereunder shall be effective and commence on
the date hereof (the "Effective Date"), and shall terminate as of the close of
business on the fifth anniversary of the Effective Date (the "Term").
3. Duties and Nature of Executive's Services.
Executive agrees to serve as Vice President of the Company and agrees to
serve the Company and its Affiliates faithfully and to the best of his ability.
During the first two years of the Term, Executive shall devote his entire
business time, attention, energy, skill and experience to the performance of his
duties hereunder and shall not engage, directly or indirectly, in any other
business, employment or occupation which is competitive with the business of the
Company and its Affiliates. During the final three years of the Term, Executive
shall devote only so much time to the performance of his duties hereunder as he
shall determine, it being intended that the time committed shall be only so much
as shall allow Executive to qualify for coverage under the Company's then
existing medical plan for executives of Hirsch; provided, however, that the
Company or Hirsch shall not be required to prosecute any claim against its
medical insurance carrier that shall disclaim liability for medical insurance
coverage as a result of Executive's failure to qualify as a full time employee
of the Company and Executive agrees to indemnify and hold the Company harmless
from any claim by such insurance carrier that it paid claims to Executive
resulting in damage to such carrier, in breach of the Company's (or Hirsch's)
agreement with the carrier.
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<PAGE>
4. Compensation.
4.1. As full compensation for all services to be rendered by the Executive
to the Company or its Affiliates under or pursuant to the terms of this
Agreement, the Company shall pay to the Executive a base salary (the "Base
Compensation") as follows: Two Hundred Fifty-Five Thousand ($255,000) Dollars
per year during the first and second years of the Term, and Thirty Thousand
($30,000) Dollars per year during the third, fourth and fifth years of the Term.
The Base Compensation shall be payable at such regular times and intervals as
the Company customarily pays its employees from time to time.
4.2. During the term of his employment hereunder, Executive shall be
entitled to participate in all life insurance, medical, retirement, pension and
other non-incentive and non-bonus plans and perquisites of Hirsch now in effect
or hereafter adopted and made generally available by Hirsch to its senior
executive officers; provided that Executive qualifies under and is eligible to
participate in such plans and perquisites in accordance with the terms and
subject to the conditions thereof. The Company shall have the right at any time
and from time to time to change insurance carriers and to modify the scope of
coverage and other terms of insurance policies and other plans covering its
senior executive officers. The Executive shall not be eligible to participate in
any executive bonus or other long-term compensation or incentive plans of
Hirsch.
4.3. During the first two years of the Term, the Executive shall also be
entitled to the full-time use of a Company automobile (same model currently
being used by Executive or its equivalent). The Company shall purchase all
relevant insurance for said automobile (or reimburse Executive for cost of same)
and shall reimburse the Executive for all fuel and repairs to said automobile.
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<PAGE>
4.4. The Company shall deduct from the Executive's Base Compensation, bonus
or incentive compensation any federal, state or city withholding taxes, social
security contributions and any other amounts which may be required to be
deducted or withheld by the Company pursuant to any federal, state or city laws,
rules or regulations.
4.5. The Company shall reimburse the Executive, or cause him to be
reimbursed, for all reasonable out-of-pocket expenses incurred by him in the
performance of his duties hereunder or in furtherance of the business and/or
interests of the Company; provided, however, that the Executive shall have
previously furnished to the Company an itemized account, satisfactory to the
Company, in substantiation of such expenditures.
5. Grant of Stock Option. In addition to the Compensation described in
Section 4 hereof, Hirsch has simultaneously entered into a Non-Qualified Stock
Option Agreement with Executive entitling Executive to purchase up to an
aggregate of 132,500 shares of Hirsch's Class A Common Stock.
6. Indemnification. The Company undertakes, to the fullest extent permitted
by law, to indemnify and hold the Executive harmless from and against all
claims, damages, losses and expenses, including reasonable attorneys' fees and
disbursements, arising out of the performance by the Executive of his duties
pursuant to this Agreement, in furtherance of the Company's business and within
the scope of his employment.
7. Termination.
7.1. If the Executive dies or becomes disabled during the Term, his Base
Compensation and all other rights under this Agreement shall terminate at the
end of the month during which death or disability occurs. For purposes of this
Agreement, the Executive shall be deemed to be "disabled" if he has been unable
to perform his duties for
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<PAGE>
six (6) consecutive months or nine (9) months in any twelve (12) month
period, all as determined in good faith by the Board of Directors of the
Company.
7.2. The Company shall, in the manner described in Section 7.3 hereof, have
the right to terminate the employment of Executive under this Agreement and
Executive shall forfeit the right to receive any and all further payments
hereunder, other than the right to receive any compensation and reimbursements
then due and payable to Executive pursuant to Section 4 hereof to the date of
termination, if Executive shall commit any of the following acts or any of the
following acts occur ("Event of Default"): (a) Material breach of any of the
material provisions or covenants of this Agreement;
(b) Material breach of any of the material representations, warranties,
covenants or agreements contained in the Purchase Agreement; except if (i) the
existence of such breach is being contested in good faith or (ii) such breach
did not constitute fraud or bad faith by the Executive and the Company or Hirsch
has been fully indemnified by the Executive with respect to such breach;
(c) Gross negligence in the performance of his duties or obligations
hereunder, or, without proper cause, wilful refusal or habitual neglect to
perform his employment duties or obligations under this Agreement;
(d) Any material act of willful misconduct, dishonesty or breach of trust
which directly or indirectly causes the Company or any of its Affiliates to
suffer any loss, fine, civil penalty, judgment, claim, damage or expense;
(e) Indictment for or conviction of, or plea of guilty or nolo contendere
to, a felony or indictable offense (unless committed in the reasonable, good
faith belief that the Executive's actions were in the best interests of the
Company and its stockholders and would not violate criminal law);
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(f) A court or other tribunal of competent jurisdiction shall have issued
an order prohibiting the Company from employing Executive; or
(g) Any repeated violation (after written notice) or material violation of
the Company's discipline rules as set forth in the Company's Employee handbook,
a copy of which has heretofore been delivered to the Executive, as may be
modified from time to time at the sole discretion of the Company.
7.3. If the Company elects to terminate this Agreement upon the occurrence
of any Event of Default, it shall deliver notice thereof to the Executive,
describing with reasonable detail, the action or omission of the Executive
constituting the act of default (the "Termination Notice"), and thereupon no
further payments of any type shall be made or shall be due or payable to
Executive hereunder, except as provided in Section 7.2 hereof; provided,
however, with respect to any act of default set forth in Clauses (a), (c), (f)
and (g) of Section 7.2 hereof, prior to termination by the Company of
Executive's employment, Executive shall first have an opportunity to cure or
remedy such act of default within thirty (30) days following the Termination
Notice.
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8. Restrictive Covenants.
8.1. Covenant Not to Compete. The Executive covenants and undertakes that,
for the period equal to the longer of his employment with the Company or its
Affiliates or five (5) years from the date hereof, he will not, without the
prior written consent of the Company, directly or indirectly, and whether as
principal, agent, officer, director, employee, consultant, or otherwise, alone
or in association with any other person, firm, company, or other business
organization, carry on, or be engaged, concerned, or take part in, or render
services to, or own, share in the earnings of, or invest in the stock, bonds, or
other securities of any person, firm, company, or other business organization
(other than Hirsch) engaged in a business in the Continental United States which
is similar to or in competition with any of the businesses carried on by the
Company, Hirsch, or any Affiliates thereof (a "Similar Business"); provided,
however, that the Executive may invest in stock, bonds, or other securities of
any Similar Business (but without otherwise participating in the activities of
such Similar Business) if (i) such stocks, bonds, or other securities are listed
on any national or regional securities exchange or have been registered under
Section 12(g) of the Securities Exchange Act of 1934; and (ii) his investment
does not exceed, in the case of any class of the capital stock of any one
issuer, 2% of the issued and outstanding shares, or in the case of bonds or
other securities, 2% of the aggregate principal amount thereof issued and
outstanding. The restrictions contained in this Section 8.1 shall not be
operative if the promissory note of Hirsch delivered at closing shall be in
default and such default shall not be duly cured or the Company shall be in
material breach of a material provision hereof and, after due notice thereof,
the Company shall fail to cure such default within 30 days after receipt of
notice or if such default is not reasonably capable of being cured within such
30
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day period, then the Company shall undertake to cure the default within
such 30 day period and act diligently thereafter to effect such cure.
8.2. Confidential Information; Covenant not to Disclose.
8.2.1. During the term of this Agreement and thereafter, Executive agrees
not to divulge, furnish or make accessible to anyone (other than in the regular
course of business of the Company and its Affiliates) any knowledge or
information (whether or not in writing) relating to the business and affairs of
the Company, including, without limitation, knowledge or information with
respect to trade secrets, formulae, computer programs, intellectual or
industrial property, designs, processes, plans or materials (collectively,
"Company Property") of the Company, its parent or any of its Affiliates, or with
respect to any other material proprietary, confidential or non-public aspects of
the business or affairs of the Company and any of its Affiliates.
8.2.2. Any Company Property (whether or not protected or eligible for
protection by common law or by registered patent, trademark or copyright),
relating to the business of the Company or any of its Affiliates, which
Executive may acquire knowledge of, become privy to, develop or produce while in
the employ of the Company, shall be and remain the exclusive property, right,
title and interest of Company. Executive agrees promptly to execute and deliver
to the Company, at the Company's expense, any and all instruments deemed
necessary or convenient by the Company to effect the disclosure and assignment
of all such Company Property to it.
8.2.3. Executive agrees that during the term (including any renewal term)
of this Agreement and for a period of five (5) years thereafter, or, if
Executive's employment by the Company shall be longer than said term, then for a
period of five (5)
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years following the termination or expiration of his employment by the Company
(whether pursuant to the terms of this Agreement or otherwise), he will not:
(a) directly or indirectly solicit, encourage, assist, entice, raid or
induce any executive, managerial or supervisory level employee of the Company or
any Affiliate to be employed by any person, firm or corporation other than the
Company or any Affiliate;
(b) directly or indirectly approach any employee of the Company or any
Affiliate for the purposes specified in Clause (a) above; or
(c) authorize or knowingly approve the taking of any of the action
specified in Clause (a) above by other persons on behalf of any person, firm or
corporation, or assist any person, firm or corporation in taking any such
action.
8.2.4. Executive agrees that during the term of his employment by the
Company (whether pursuant to the terms of this Agreement or otherwise), he will
not enter into on behalf of the Company or any Affiliate, or cause the Company
or any Affiliate to directly or indirectly enter into, any transactions with any
business enterprise in which he, any of his Affiliates or any member of his
immediate family is, to his knowledge, interested as a partner, trustee,
beneficiary, director, officer, attorney-in-fact, employee, shareholder, lender
of money or guarantor, without the prior consent of the Company's board of
directors; provided, however, that nothing contained herein shall restrict any
transactions with any corporation, partnership or business enterprise in which
Executive, any of his Affiliates and/or any member of Executive's immediate
family (consisting of Executive's spouse, siblings and children), individually
or in the aggregate, owns less than five (5%)
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percent of the publicly traded capital stock or other equity interests of
such corporation, partnership or business enterprise.
8.2.5. Upon termination of his employment hereunder, Executive will return
to the Company all of the property of the Company and its Affiliates in his
possession.
8.2.6. If any provision of this Section 8.2 is held by any court of
competent jurisdiction to be unenforceable because of the scope, duration or
area of applicability, such provision shall be deemed modified to the extent the
court modifies the scope, duration or area of applicability of such provision to
make it enforceable.
8.3. Covenant to Report; Patents, etc.
8.3.1. Executive agrees to promptly communicate and disclose to the Company
in writing all inventions, discoveries and improvements, in any form whatsoever,
(hereinafter "Inventions") including, without limitation, all software,
programs, routines, techniques, procedures, training aides and instructional
manuals conceived, developed or made by him during his employment by the
Company, whether solely or jointly with others, and whether or not patentable or
copyrightable, which relate to any matters or business of the type carried on or
being developed by the Company and its Affiliates. The Executive shall also
promptly communicate and disclose to the Company all other data obtained by him
concerning the business or affairs of the Company and its Affiliates in the
course of his employment by the Company.
8.3.2. All written materials, records and documents made by the Executive
or coming into his possession during the Term concerning the business or affairs
of the Company and its Affiliates shall be the sole property of the Company;
and, upon the termination of the Term or upon the request of the Company during
the Term, the Executive
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shall promptly deliver the same to the Company. The Executive agrees to
render to the Company such reports of the activities undertaken by the Executive
or conducted under the Executive's direction pursuant hereto during the Term as
the Company may request.
9. Injunction. It is recognized and hereby acknowledged by the Executive
that a breach or violation by the Executive of any of the covenants or
agreements contained in this Agreement may cause irreparable harm and damage to
the Company and its Affiliates, the monetary amount of which may be virtually
impossible to ascertain. As a result, the Executive recognizes and acknowledges
that the Company shall be entitled to an injunction, without posting any bond or
security in connection therewith, from any court of competent jurisdiction
enjoining and restraining any breach or violation of any of the restrictive
covenants contained in Section 8 of this Agreement by the Executive or his
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other rights
or remedies the Company may possess. Nothing contained in this Section 9 shall
be construed to prevent the Company from seeking and recovering from the
Executive damages sustained as a result of any breach or violation by the
Executive of any of the covenants or agreements contained in this Agreement, and
that in the event of any such breach, the Company shall avail itself of all
remedies available both at law and at equity.
10. Compliance with Other Agreements. The Executive represents and warrants
to the Company that the execution of this Agreement by him and the performance
of his obligations hereunder will not, with or without the giving of notice, the
passage of time or both, conflict with, result in the breach of any provision of
or the termination of, or
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constitute a default under, any agreement to which the Executive is a party
or by which the Executive is or may be bound.
11. Miscellaneous.
11.1. Notices. Any notice or other communication to a party under this
Agreement shall be in writing, and if by use of the mail shall be considered
given when mailed by certified mail, return receipt requested, to the party at
the following address or at such other address as the party may specify by
notice to the other in the manner prescribed herein:
If to the Company: c/o Hirsch International Corp.
200 Wireless Boulevard
Hauppauge, New York 11788
Attention: Henry Arnberg, President
With a copy to: Ruskin, Moscou, Evans & Faltischek, P.C.
170 Old Country Road
Mineola, New York 11501
Attention: Raymond S. Evans, Esq.
If to the Executive: Martin Krasnitz
330 West Diversy
Chicago, Illinois 60657
With a copy to: Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610
Attention: David A. Rubenstein, Esq.
11.2. Benefit. This Agreement shall be binding upon and inure to the
benefit of the respective parties hereto and their legal representatives,
successors and assigns. Insofar as the Executive is concerned, this Agreement
being personal, cannot be assigned.
11.3. Validity. The invalidity or unenforceability of any provisions hereof
shall in no way affect the validity or enforceability of any other provision.
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11.4. Entire Agreement. This Agreement constitutes the entire Agreement
between the parties with respect to the subject matter hereof, and supersedes
all existing agreements between them. It may only be changed or terminated by an
instrument in writing signed by both parties. The covenants of the Executive
contained in Article 8 of this Agreement shall survive the termination of this
Agreement and the expiration of the Term.
11.5. Illinois Law to Govern. This Agreement shall be governed by,
construed and interpreted in accordance with the laws of the State of Illinois.
11.6. Corporate Action. The execution and delivery of this Agreement by the
Company has been authorized and approved by all requisite corporate action.
11.7. Waiver of Breach. The failure of either party to insist on strict
adherence to any term of this Agreement on any occasion shall not be considered
a waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Agreement. Waiver of any term
or provision of this Agreement must be in writing.
11.8. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.9. Paragraph Headings. Paragraph headings are inserted herein for
convenience only and are not intended to modify, limit or alter the meaning of
any provision of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands and executed
this Agreement as of the day and year first above written.
SEWING MACHINE EXCHANGE, INC.
By: \s\ Kenneth Shifrin
-------------------------------
Kenneth Shifrin, Vice President
\s\ Martin Krasnitz
-------------------------------
Martin Krasnitz
THE UNDERSIGNED HEREBY (a) GUARANTEES PAYMENT OF THE AMOUNTS DUE TO
EXECUTIVE UNDER SECTION 4 OF THIS AGREEMENT; (b) GUARANTEES THE COMPANY'S
INDEMNIFICATION IN SECTION 6 OF THIS AGREEMENT; AND (c) AGREES TO THE OPTION
GRANT DE-CRIBED IN SECTION 5 OF THIS AGREEMENT.
HIRSCH INTERNATIONAL CORP.
By: \s\ Henry Arnberg
--------------------------
Henry Arnberg, President
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EXHIBIT 10.3
HIRSCH INTERNATIONAL CORP.
STOCK OPTION PLAN, AS AMENDED
1. Plan; Purpose; General. The purpose of this Stock Option Plan (the
"Plan") is to advance the interests of Hirsch International Corp. (the
"Company") by enhancing the ability of the Company to attract and retain
selected employees, consultants, advisors to the Board of Directors and
qualified directors (collectively the "Participants") by creating for such
Participants incentives and rewards for their contributions to the success of
the Company, and by encouraging such Participants to become owners of shares of
the Company's Class A Common Stock, par value $0.01 per share, as the title or
par value may be amended (the "Shares").
Options granted pursuant to the Plan may be incentive stock options
("Incentive Options") as defined in the Internal Revenue Code of 1986, as
amended (the "Code") or non-qualified options, or both. The proceeds received
from the sale of Shares pursuant to the Plan shall be used for general corporate
purposes.
2. Effective Date of Plan. The Plan will become effective upon approval by
the Board of Directors (the "Board"), and shall be subject to the approval by
the holders of at least a majority of all Shares present in person and by proxy
and entitled to vote thereon at a meeting of stockholders of the Company within
12 months after the Company has a class of equity securities registered under
the Securities Act of 1933, as amended (the "Act").
<PAGE>
3. Administration of the Plan. The Plan will be administered by the Board
of the Company. The Board will have authority, not inconsistent with the express
provisions of the Plan, to take all action necessary or appropriate thereunder,
to interpret its provisions, and to decide all questions and resolve all
disputes which may arise in connection therewith. Such determinations of the
Board shall be conclusive and shall bind all parties.
The Board may, in its discretion, delegate its powers with respect to the
Plan to an employee benefit plan committee or any other committee (the
"Committee"), in which event all references to the Board hereunder, including
without limitation the references in Section 9, shall be deemed to refer to the
Committee. The Committee shall consist of not fewer than two members. Each of
the members must be a "disinterested person" as that term is defined in Rule
16b-3 adopted pursuant to the Securities Exchange Act of 1934 (the "Exchange
Act"). A majority of the members of the Committee shall constitute a quorum, and
all determinations of the Committee shall be made by the majority of its members
present at a meeting. Any determination of the Committee under the Plan may be
made without notice or meeting of the Committee by a writing signed by all of
the Committee members.
The Board and the Committee, if any, shall have the authority to determine
eligibility, the number of options granted and the exercise price of options.
4. Eligibility. The Participants in the Plan shall be all employees,
consultants, advisors to the Board of Directors and qualified directors of the
Company or any of its present or future subsidiaries (as defined in Section 8)
whether or not they are also officers of the Company. Members of the Committee
are eligible only if they do not exercise any discretion in selecting
Participants who receive grants of options, in determining the number of shares
to be granted to any Participant or in determining the exercise price of
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<PAGE>
any options, or if counsel to the Company may otherwise advise the
Committee that the taking of any such action does not impair the status of such
eligible Committee members as "disinterested persons" within the meaning of
Exchange Act Rule 16b-3.
5. Grant of Options.
(a) The Board shall grant options to Participants that it, in its sole
discretion, selects. Options shall be granted on such terms as the Board shall
determine except that Incentive Options shall be granted on terms that comply
with the Code and Regulations thereunder.
(b) No options shall be granted after December 3, 2003 but options
previously granted may extend beyond that date.
6. Terms and Conditions of Options
(a) Exercise Price. Except as provided in Section 5(b) of this Plan, the
purchase price per Share for Shares issuable upon exercise of options shall be a
minimum of 100% of fair market value on the date of grant and shall be
determined by the Board. For this purpose, "fair market value" will be
determined as set forth in Section 8. Notwithstanding the foregoing, if any
person to whom an option is to be granted owns in excess of ten percent of the
outstanding capital stock of the Company, then no option may be granted to such
person for less than 110% of the fair market value on the date of grant as
determined by the Board.
(b) Period of Options. Unless earlier terminated, options shall terminate
and no longer be exercisable five years from the date of grant.
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(c) Payment for Delivery of Shares. Shares which are subject to options
shall be issued only upon receipt by the Company of full payment of the purchase
price for the Shares as to which the option is exercised. The purchase price
shall be payable by the Participant to the Company either (i) in cash or by
check, bank draft or money order payable to the order of the Company; or (ii)
for Incentive Options, through the delivery of Shares owned by the Participant
for a period of not less than six months and for which the Participant has good
title (free and clear of any liens and encumbrances) having a fair market value
equal to the purchase price; or (iii) for non-qualified options, by a
combination of cash and Shares as provided in (i) and (ii) above.
The Company shall not be obligated to deliver any Shares unless and until,
in the opinion of the Company's counsel, all applicable federal and state laws
and regulations have been complied with, nor, if the outstanding Class A Common
Stock is at the time listed on any securities exchange, unless and until the
Shares to be delivered have been listed (or authorized to be added to the list
upon official notice of issuance) upon such exchange, nor unless or until all
other legal matters in connection with the issuance and delivery of Shares have
been approved by the Company's counsel. Without limiting the generality of the
foregoing, the Company may require from the person exercising an option such
investment representation or such agreement, if any, as counsel for the Company
may consider necessary in order to comply with the Act and applicable state
securities laws.
A Participant shall have the rights of a shareholder only as to Shares
actually acquired by him under the Plan.
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<PAGE>
(d) Vesting. Except for options granted pursuant to Section 5(b) of this
Plan, the Board may impose such vesting restrictions as it sees fit at the time
of grant.
(e) Non-Transferability of Options. Options may not be sold, assigned or
otherwise transferred or disposed of in any manner whatsoever except as provided
in Section 6(g).
(f) Forfeiture of Options upon Termination of Relationship. Except as
otherwise provided in an option agreement between the Company and a Participant,
all previously unexercised options including options which have not vested shall
terminate and be forfeited automatically upon the termination for any reasons
whatsoever of a Participant's status as an employee, consultant on advisor to
the Board. Except as provided in Section 6(g) below, unexercised options granted
to directors shall not terminate or be forfeited in the event such person is no
longer a director of the Company.
(g) Death. If a Participant dies at a time when he is entitled to exercise
an option, then at any time or times within one year after his death (or such
further period as the Board may allow) such options may be exercised, as to all
or any of the Shares which the Participant was entitled to purchase immediately
prior to his death, by his personal representative or the person or persons to
whom the options are transferred by the will or the applicable laws of descent
and distribution, and except as so exercised such options will expire at the end
of such period.
(h) Loans to Exercise Option. If requested by any Participant to whom a
grant of non-qualified options has been made, the Company or any subsidiary may
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loan such person the amount of money necessary to pay the federal income
taxes incurred as a result of the exercise of any options (or guarantee a bank
loan for such purpose), assuming that the Participant is in the maximum federal
income tax bracket six months from the time of exercise and assuming that the
Participant has no deductions which would reduce the amount of such tax owed.
The loan shall be made on or after April 15th of the year following the year in
which the amount of tax is determined as may be requested by the Participant and
shall be made on such terms as the Company or lending bank determines. (i)
Withholding Taxes. To the extent that the Company is required to withhold taxes
for federal income tax purposes in connection with the exercise of any options,
the Company shall have the right to assist the Participant to satisfy such
withholding requirement by (i) the Participant paying the amount of the required
withholding tax to the Company, (ii) the Participant delivering to the Company
Shares of its Class A Common Stock previously owned by the Participant or (iii)
the Participant having the Company retain a portion of the Shares covered by the
option exercise. The number of Shares to be delivered to or withheld by the
Company times the fair market value as defined by Section 9 of this Plan shall
equal the cash required to be withheld. To the extent that the Company elects to
allow the Participant either to deliver or have withheld Shares of the Company's
Class A Common Stock, the Board or the Committee may require him to make such
election only during certain periods of time as may be necessary to comply with
appropriate exemptive procedures regarding the "short-swing" profit provisions
of Section 16(b) of the Exchange Act or to meet certain Code requirements.
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7. Shares Subject to Plan.
(a) Number of Shares and Stock to be Delivered. Shares delivered pursuant
to this Plan shall in the discretion of the Board be authorized but unissued
Shares of Class A Common Stock or previously issued Shares acquired by the
Company. Subject to adjustments as described below, the aggregate number of
Shares which may be delivered under this Plan shall not exceed 600,000 Shares of
Class A Common Stock of the Company. (b) Changes in Stock. In the event of a
stock dividend, stock split or combination of Shares, recapitalization, merger
in which the Company is the surviving corporation or other change in the
Company's capital stock, the number and kind of Shares of stock or securities of
the Company to be subject to the Plan and to options then outstanding or to be
granted thereunder, the maximum number of Shares or securities which may be
delivered under the Plan, the option price and other relevant provisions shall
be appropriately adjusted by the Board, whose determination shall be binding on
all persons. In the event of a consolidation or merger in which the Company is
not the surviving corporation or which results in the acquisition of
substantially all the Company's outstanding stock by a single person or entity,
or in the event of the sale or transfer of substantially all the Company's
assets, all outstanding options shall thereupon terminate. The Board may also
adjust the number of Shares subject to outstanding options, the exercise price
of outstanding options and the terms of outstanding options to take into
consideration material changes in accounting practices or principles,
consolidations or mergers (except those described in the immediately preceding
paragraph), acquisitions or
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<PAGE>
dispositions of stock or property or any other event if it is determined by
the Board that such adjustment is appropriate to avoid distortion in the
operation of the Plan.
8. Definitions.
(a) For purposes of the Plan, a subsidiary is any corporation (i) in which
the Company owns, directly or indirectly, stock possessing 50 percent or more of
the total combined voting power of all classes of stock or (ii) over which the
Company has effective operating control.
(b) The fair market value of the Class A Common Stock shall be deemed to
be:
(i) the closing price of the Company's Class A Common Stock appearing on a
national securities exchange if the Company's common stock is listed on such an
exchange, or if not listed, the average closing bid price appearing on the
National Association of Securities Dealers Automated Quotation System
("NASDAQ");
(ii) if the Shares are not listed on NASDAQ, then the average bid price for
the Company's stock as listed in the National Quotation Bureau's pink sheets;
(iii) if there are no listed bid prices published in the pink sheets, then
the market value shall be based upon the average closing bid price as determined
following a polling of all dealers making a market in the Company's Shares.
9. Indemnification of Board. In addition to and without affecting such
other rights of indemnification as they may have as members of the Board or
otherwise, each member of the Board shall be indemnified by the Company to the
extent legally possible
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<PAGE>
against reasonable expenses, including attorney's fees, actually and
reasonably incurred in connection with any appeal therein, to which he may be a
party by reason of any action taken or failure to act under or in connection
with the Plan, or any option granted thereunder, and against all judgments,
fines and amounts paid by his in settlement thereof; provided that such payment
of amounts so indemnified is first approved by a majority of the members of the
Board who are not parties to such action, suit or proceedings, or by independent
legal counsel selected by the Company, in either case on the basis of a
determination that such member acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company; and
except that no indemnification shall be made in relation to matters as to which
it shall be adjudged in such action, suit or proceeding that such Board member
is liable for a breach of the duty of loyalty, bad faith or intentional
misconduct in his duties; and provide, further that the Board member shall in
writing offer the Company the opportunity, at its own expense, to handle and
defend same.
10. Amendments. The Board may at any time discontinue granting options
under the Plan. The Board may at any time of times amend the Plan or amend any
outstanding option or options for the purpose of satisfying the requirements of
any changes in applicable laws or regulations or for any other purpose which may
at the time be permitted by law, provided that (except to the extent explicitly
required or permitted herein above) no such amendment will, without the approval
of the stockholders of the Company, (a) increase the maximum number of Shares
available under the Plan, (b) reduce the option price of
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<PAGE>
outstanding options or reduce the price at which options may be granted,
(c) extend the time within which options may be granted, (d) amend the
provisions of this Section 10 of the Plan, (e) extend the period of an
outstanding option beyond five years from the date of grant, (f) adversely
affect the rights of any Participant (without his consent) under any options
theretofore granted or (g) be effective if stockholder approval is required by
applicable statute, rule or regulation.
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EXHIBIT 10.4
TERM LOAN AGREEMENT
Dated as of June 10, 1996
HIRSCH INTERNATIONAL CORP., a Delaware corporation having its principal
place of business at 200 Wireless Boulevard, Hauppauge, New York 11788 (the
"Borrower"), HAPL LEASING CO., INC., a New York corporation having its principal
place of business at 200 Wireless Boulevard, Hauppauge, New York 11788 ("HAPL"),
SEWING MACHINE EXCHANGE, INC., an Illinois corporation having its principal
place of business at 1847 South Michigan Avenue, Chicago, Illinois 60616
("SMX"), PULSE MICROSYSTEMS LTD., an Ontario, Canada corporation having its
principal place of business at 200 Wireless Boulevard, Hauppauge, New York 11788
("Pulse", HAPL, SMX and Pulse being individually, a "Guarantor" and
collectively, the "Guarantors"), THE BANK OF NEW YORK, a New York banking
organization, having an office at 1100 Old Country Road, Plainview, New York
11803 ("BNY" or a "Bank") and THE BANK OF NEW YORK, as agent (the "Agent")
hereby agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Adjusted LIBOR Rate" means, with respect to any Eurodollar Loan for any
Interest Period, an interest rate per annum (rounded, if not already a whole
multiple of 1/100 of one (.01%) percent to the nearest 1/100 of one (.01%)
percent) determined by the Agent to be equal to the quotient of (a) the LIBOR
Rate divided by (b) a percentage equal to 100% minus the Eurocurrency Reserve
Requirement as determined by the Agent on the date the Adjusted LIBOR Rate is
determined.
"Agent" means The Bank of New York, or any bank which succeeds to the
position of Agent, as provided in this Agreement.
"Affiliate" means, as to any Person (i) a Person which directly or
indirectly controls, or is controlled by, or is under common control with, such
Person; (ii) a Person
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which directly or indirectly beneficially owns or holds ten (10%) percent
or more of any class of voting stock of, or ten (10%) percent or more of the
equity interest in, such Person; or (iii) a Person ten (10%) percent or more of
the voting stock of which, or ten (10%) or more of the equity interest of which,
is directly or indirectly beneficially owned or held by such Person. The term
control means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person, whether through
the ownership of voting securities, by contract, or otherwise.
"Agreement" means this Term Loan Agreement, as amended, supplemented or
modified from time to time.
"Alternate Base Rate" means, for any day, a rate per annum equal to the
higher of (i) the Prime Rate in effect on such day (computed on the basis of the
actual number of days elapsed over a year of 365 days) or (ii) the Federal Funds
Effective Rate in effect on such day plus 1/2 of 1% (computed on the basis of
the actual number of days elapsed over a year of 360 days). For purposes of this
Agreement any change in the Alternate Base Rate due to a change in the Prime
Rate or the Federal Funds Effective Rate shall be effective on the effective
date of such change in the Prime Rate or the Federal Funds Effective Rate,
respectively. The Agent shall use its best efforts to notify the Borrower of any
change in the Alternate Base Rate, but any failure of the Agent to so notify the
Borrower shall not void or otherwise delay the effectiveness of the change in
the Alternate Base Rate. If for any reason the Agent shall have determined
(which determination shall be conclusive absent manifest error) that it is
unable to ascertain the Federal Funds Effective Rate for any reason, including,
without limitation, the inability or failure of the Agent to obtain sufficient
bids or publications in accordance with the terms thereof, the Alternate Base
Rate shall be determined without regard to clause (ii) of the first sentence of
this definition, as appropriate, until the circumstances giving rise to such
inability no longer exist.
"Alternate Base Rate Loan" means a Loan bearing interest at the Alternate
Base Rate.
"Banks" means BNY and one or more other Banks which becomes one of the
lending Banks under this Agreement. In the event that BNY is the only lending
Bank hereunder, the phrase "Banks" shall mean BNY.
"BNY Term Loan Note" means a promissory note of the Borrower payable to the
order of BNY, in substantially the form of Exhibit A annexed hereto, evidencing
the indebtedness of the Borrower to BNY resulting from the Term Loan made by BNY
to the Borrower pursuant to the Agreement.
"Board of Governors" means the Board of Governors of the Federal Reserve
System of the United States of America.
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"Business Day" means a day of the year on which banks are not required or
authorized to close in New York City, provided that, if the relevant day relates
to a Eurodollar Loan, an Interest Period, or notice with respect to a Eurodollar
Loan, the term "Business Day" shall mean a day on which dealings in dollar
deposits are also carried on in the London interbank market and banks are open
for business in London.
"Capital Lease" means a lease which has been or should be, in accordance
with GAAP, capitalized on the books of the lessee.
"Consolidated Affiliates" means, as to any Person, those Affiliates of such
Person which are consolidated with such Person in the financial statements
delivered pursuant to Section 5.01(b).
"Consolidated Capital Expenditures" means, as to any Person, the aggregate
amount of any expenditures (including purchase money Liens) by such Person and
its Consolidated Affiliates for assets (including fixed assets acquired under
Capital Leases) which it is contemplated will be used or usable in fiscal years
subsequent to the year of acquisition, all computed and consolidated in
accordance with GAAP.
"Consolidated Current Liabilities" means, as to any Person, the aggregate
amount of all liabilities of such Person and its Consolidated Affiliates
(including tax and other proper accruals) which would be properly classified as
current liabilities, all computed and consolidated in accordance with GAAP.
"Consolidated Tangible Net Worth" means, as to any Person, the excess of
(i) such Person's Consolidated Total Assets, less all intangible assets properly
classified as such in accordance with GAAP, including, but without limitation,
patents, patent rights, trademarks, trade names, franchises, copyrights,
licenses, permits and goodwill, over (ii) such Person's Consolidated Total
Liabilities.
"Consolidated Total Assets" means, as to any Person, the aggregate net book
value of the assets of such Person and its Consolidated Affiliates after all
appropriate adjustments in accordance with GAAP (including without limitation,
reserves for doubtful receivables, obsolescence, depreciation and amortization
and excluding the amount of any write-up or revaluation of any asset).
"Consolidated Total Liabilities" means, as to any Person, all of the
liabilities of such Person and its Consolidated Affiliates, including all items
which, in accordance with GAAP, would be included on the liability side of the
balance sheet (other than capital stock, capital surplus and retained earnings)
computed and consolidated in accordance with GAAP.
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"Debt" means, as to any Person, (i) all indebtedness or liability of such
person for borrowed money; (ii) indebtedness of such Person for the deferred
purchase price of property or services (including trade obligations); (iii)
obligations of such Person as a lessee under Capital Leases; (iv) current
liabilities of such Person in respect of unfunded vested benefits under any
Plan; (v) obligations of such Person under letters of credit issued for the
account of such Person; (vi) obligations of such Person arising under acceptance
facilities; (vii) all guaranties, endorsements (other than for collection or
deposit in the ordinary course of business) and other contingent obligations to
purchase, to provide funds for payment, to supply funds to invest in any other
Person, or otherwise to assure a creditor against loss; (viii) obligations
secured by any Lien on property owned by such Person whether or not the
obligations have been assumed; and (ix) all other liabilities recorded as such,
or which should be recorded as such, on such Person's financial statements in
accordance with GAAP.
"Default" means any of the events specified in Section 6.01 of this
Agreement, whether or not any requirement for notice or lapse of time or any
other condition has been satisfied.
"Dollars" and the sign "$" mean lawful money of the United States of
America.
"EBITDA" shall mean, with respect to the Borrower and its Subsidiaries for
any period, the sum of (i) net income, (ii) interest expense, (iii) depreciation
expense, (iv) amortization of intangible assets and (v) federal, state and local
income taxes paid, in each case of the Borrower and its Subsidiaries on a
consolidated basis for such period, computed in accordance with GAAP.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, the regulations promulgated thereunder and the
published interpretations thereof as in effect from time to time.
"ERISA Affiliate" means any trade or business (whether or not incorporated)
which together with any other Person would be treated, with such Person, as a
single employer under Section 4001 of ERISA.
"Eurocurrency Reserve Requirement" means, with respect to the Adjusted
LIBOR Rate for an Interest Period, the daily average of the stated maximum rate
(expressed as a decimal) at which reserves (including any marginal, supplemental
or emergency reserves) are required to be maintained at the beginning of such
Interest Period under any regulation (including, but without limitation,
Regulation D) promulgated by the Board of Governors (or any successor thereto or
other governmental authority having jurisdiction over the Agent by the Agent
against "Eurocurrency liabilities" (as such term is used in Regulation D), but
without benefit or credit for proration, exemptions or offsets that might
otherwise be
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available to the Agent from time to time under Regulation D. Without
limiting the effect of the foregoing, the Eurocurrency Reserve Requirement shall
reflect any other reserves required to be maintained by the Agent against (1)
any category of liabilities that includes deposits by reference to which the
Adjusted LIBOR Rate is to be determined; or (2) any category of extension of
credit or other assets that include loans bearing an Adjusted LIBOR Rate.
"Eurodollar Loan" means a Loan bearing interest at a rate based on the
Adjusted LIBOR Rate in accordance with the provisions of Article II hereof.
"Event of Default" means any of the events specified in Section 6.01 of
this Agreement, provided that any requirement for notice or lapse of time or any
other condition has been satisfied.
"Federal Funds Effective Rate" means, for any day, the Federal Funds
Effective Rate as determined by the Agent.
"Fixed Charge Coverage Ratio" means the ratio of (1) EBITDA minus
Consolidated Capital Expenditures minus treasury stock of the Borrower acquired
during the period tested to (2) the current portion of long term Debt (including
Capital Leases) plus interest expense.
"Funded Debt" means, as to any Person, such Debt of such Person which is
(i) indebtedness or liability for borrowed money; (ii) indebtedness for the
deferred purchase price of property (excluding trade obligations); (iii)
obligations as a lessee under Capital Leases; (iv) obligations under deferred
payment letters of credit and trade acceptances payable.
"Funded Debt to EBITDA Ratio" means the ratio of the Borrower's Funded Debt
to EBITDA, calculated on a rolling four (4) quarter basis.
"GAAP" means Generally Accepted Accounting Principles.
"Generally Accepted Accounting Principles" means those generally accepted
accounting principles and practices which are recognized as such by the American
Institute of Certified Public Accountants acting through the Financial
Accounting Standards Board ("FASB") or through other appropriate boards or
committees thereof and which are consistently applied for all periods so as to
properly reflect the financial condition, operations and cash flows of a Person,
except that any accounting principle or practice required to be changed by the
FASB (or other appropriate board or committee of the FASB) in order to continue
as a generally accepted accounting principle or practice may be so changed. Any
dispute or disagreement between the Borrower and the Agent relating to the
determination of
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Generally Accepted Accounting Principles shall, in the absence of manifest
error, be conclusively resolved for all purposes hereof by the written opinion
with respect thereto, delivered to the Agent, of the independent accountants
selected by the Borrower and approved by the Agent for the purpose of auditing
the periodic financial statements of the Borrower.
"Guarantor" or Guarantors" means one or more of HAPL, SMX or Pulse, and any
other Person required to guarantee the obligations of the Borrower in accordance
with Section 5.01(k) of this Agreement.
"Guaranty" or "Guaranties" means the guaranty or guaranties executed and
delivered by the Guarantors pursuant to Section 3.01(h) of this Agreement.
"Hazardous Materials" includes, without limit, any flammable explosives,
radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic
substances, or related materials defined in the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C.
Sections 9601, et seq.), the Hazardous Materials Transportation Act, as amended
(49 U.S.C. Section 1801 et seq.), the Resource Conservation and Recovery Act, as
amended (42 U.S.C. Sections 9601 et. seq.), and in the regulations adopted and
publications promulgated pursuant thereto, or any other federal, state or local
environmental law, ordinance, rule or regulation.
"Interest Determination Date" means the date on which an Alternate Base
Rate Loan is converted to a Eurodollar Loan and, in the case of a Eurodollar
Loan, the last day of the applicable Interest Period.
"Interest Payment Date" means (i) as to each Eurodollar Loan, the last
Business Day of each calendar quarter during the applicable Interest Period and
the last day of the applicable Interest Period and (ii) as to each Alternate
Base Rate Loan, the last Business Day of each month.
"Interest Period" means as to any Eurodollar Loan, the period commencing on
the date of such Eurodollar Loan and ending on the numerically corresponding day
in the calendar month that is one, two, three or six months thereafter, as the
Borrower may elect (or, if there is no numerically corresponding day, on the
last Business Day of such month); provided, however, (i) that no Interest Period
shall end later than the Maturity Date, (ii) if any Interest Period would end on
a day which shall not be a Business Day, such Interest Period shall be extended
to the next succeeding Business Day unless such next succeeding Business Day
would fall in the next calendar month, in which case such Interest Period shall
end on the next preceding Business Day, (iii) no Interest Period in respect of a
representing a portion of the principal required to be paid in accordance with
Section 2.04 may be selected unless the outstanding Alternate Base Rate Loans
and Eurodollar Loans for which the
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relevant Interest Periods end on or prior to the date of such payment are
in an aggregate amount which will be sufficient to make such payment, (iv)
interest shall accrue from and including the first day of such Interest Period
to but excluding the date of payment of such interest pursuant to Section 2.04,
and (v) no Interest Period of particular duration with respect to a Eurodollar
Loan may be selected by the Borrower if the Agent determines, in its sole, good
faith discretion, that Eurodollar Loans with such maturities are not generally
available.
"Investment" means any stock, evidence of Debt or other security of any
Person, any loan, advance, contribution of capital, extension of credit or
commitment therefor, including without limitation the guaranty of loans made to
others (except for current trade and customer accounts receivable for services
rendered in the ordinary course of business and payable in accordance with
customary trade terms in the ordinary course of business) and any purchase of
(i) any security of another Person or (ii) any business or undertaking of any
Person or any commitment or option to make any such purchase, or any other
investment.
"LIBOR Applicable Margin" shall have the meaning set forth in Section
2.05(b) hereof.
"LIBOR Rate" means the rate per annum (rounded upwards, if necessary to the
nearest one-tenth (1/10th) of one (1%) percent quoted approximately 11:00 a.m.
London time by the Agent two (2) Business Days prior to the requested Interest
Period, for the offering by the Agent to prime commercial banks in the London
interbank market of dollar deposits in immediately available funds for a period,
and in an amount, comparable to such Interest Period and principal amount of
such Eurodollar Loan, respectively.
"Lien" means any mortgage, deed of trust, pledge, security interest,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
other), or preference, priority, or other security agreement or preferential
arrangement, charge, or encumbrance of any kind or nature whatsoever, including,
without limitation, any conditional sale or other title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, and the filing of any financing statement under the Uniform
Commercial Code or comparable law of any jurisdiction to evidence any of the
foregoing.
"Loan" or Loans" means one or both of the Term Loans, and may refer to
Alternate Base Rate Loans and/or Eurodollar Loans, as the context requires.
"Loan Documents" means this Agreement, the Notes, the Guaranties and any
other document executed or delivered pursuant to this Agreement.
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"Material Adverse Change" means, as to any Person, (i) a material adverse
change in the financial condition, business, operations, properties or results
of operations of such Person or (ii) any event or occurrence which could have a
material adverse effect on the ability of such Person to perform its obligations
under the Loan Documents.
"Maturity Date" means the last Business Day of June, 2001.
"Merrill Lynch Facility" means an existing WCMA loan facility with a
principal balance of approximately $2,500,000.00 between SMX and Merrill Lynch.
"Multiemployer Plan" means a Plan described in Section 4001(a)(3) of ERISA
which covers employees of the Borrower or any ERISA Affiliate.
"Note" or "Notes" means one or more of the Term Loan Notes as the context
requires.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permitted Acquisitions" means an acquisition by the Borrower or any
Subsidiary by merger, consolidation or by purchase of a voting majority of the
stock or substantially all of the assets of another Person if all of the
following conditions are met:
(i) Such Person is engaged in substantially the same line of business or
industry as the Borrower;
(ii) The Agent and the Banks shall have received a certificate signed by
the chief financial officer of the Borrower to the effect that (and including
calculations indicating that) on a pro forma basis after giving effect to the
acquisition, (i) all representations and warranties contained in the Loan
Documents remain true, (ii) the Borrower will remain in compliance with all
covenants contained in the Loan Documents, and (iii) no Event of Default has
occurred and is continuing or will occur as a result of the consummation of such
acquisition;
(iii) The Agent and the Banks shall have received at least two (2) years of
historical financial statements of such Person and a set of projections setting
forth in reasonable detail the pro forma effect of such acquisition and showing
compliance by the Borrower with all covenants set forth in Section 5.03 of this
Agreement for the next succeeding four quarters; and
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(iv) Such acquisition has been approved by the Board of Directors (or other
Person(s) performing similar functions) of each of the parties thereto prior to
such acquisition.
"Permitted Investments" means, (i) direct obligations of the United States
of America or any governmental agency thereof, or obligations guaranteed by the
United States of America, provided that such obligations mature within one year
from the date of acquisition thereof; (ii) time certificates of deposit having a
maturity of one year or less issued by any commercial bank organized and
existing under the laws of the United States or any state thereof and having
aggregate capital and surplus in excess of $1,000,000,000.00; (iii) money market
mutual funds having assets in excess of $2,500,000,000; (iv) commercial paper
rated not less than P-1 or A-1 or their equivalent by Moody's Investor Services,
Inc. or Standard & Poor's Corporation, respectively; (v) foreign exchange
contracts with BNY; (vi) treasury stock of the Borrower, or (vii) tax exempt
securities rated Prime 2 or better by Moody's Investor Services, Inc. or A-1 or
better by Standard & Poor's Corporation.
"Person" means an individual, partnership, corporation (including a
business trust), limited liability company, joint stock company, trust,
unincorporated association, joint venture or other entity or a federal, state or
local government, or a political subdivision thereof or any agency of such
government or subdivision.
"Plan" means any employee benefit plan established, maintained, or to which
contributions have been made by the Borrower or any ERISA Affiliate.
"Prime Rate" means the prime commercial lending rate of the Agent as
publicly announced to be in effect from time to time, each change in the Prime
Rate to be effective, on the date such change is announced to be effective.
"Prohibited Transaction" means any transaction set forth in Section 406 of
ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended from time
to time.
"Required Banks" means, at any time, those Banks having, in the aggregate,
sixty six and two-thirds (66 2/3%) percent of the outstanding principal amount
of the Term Loans.
"Regulation D" means Regulation D of the Board of Governors, as the same
may be amended and in effect from time to time.
"Regulation G" means Regulation G of the Board of Governors, as the same
may be amended and in effect from time to time.
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"Regulation T" means Regulation T of the Board of Governors, as the same
may be amended and in effect from time to time.
"Regulation U" means Regulation U of the Board of Governors, as the same
may be amended and in effect from time to time.
"Regulation X" means Regulation X of the Board of Governors, as the same
may be amended and in effect from time to time.
"Reportable Event" means any of the events set forth in Section 4043 of
ERISA.
"Subsidiary" means, as to any Person, any corporation, partnership, joint
venture or other Person whether now existing or hereafter organized or acquired:
(i) in the case of a corporation, of which a majority of the securities having
ordinary voting power for the election of directors (other than securities
having such power only by reason of the happening of a contingency) are at the
time owned by such Person and/or one or more Subsidiaries of such Person or (ii)
in the case of a partnership, limited liability company, joint venture or
similar entity, of which a majority of the partnership, membership or other
ownership interests are at the time owned by such Person and/or one or more of
its Subsidiaries.
"Tajima Agreement" means that certain distribution agreement dated as of
February 21, 1991 among the Borrower, Tajima Industries, Ltd., Nomura Trading
Co., Ltd. and Nomura (America) Corp., as same has been amended from time to
time.
"Term Loans" shall have the meaning assigned in Section 2.01 hereof.
"Term Loan Notes" means the BNY Term Loan Note and any other Term Loan Note
issued to a Bank which becomes one of the lending Banks under this Agreement. In
the event that BNY is the only such lending Bank, the phrase "Term Loan Notes"
shall mean the BNY Term Loan Note.
SECTION 1.02. Computation of Time Periods. In this Agreement in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
means "to but excluding".
SECTION 1.03. Accounting Terms. Except as otherwise herein specifically
provided, each accounting term used herein shall have the meaning given to it
under GAAP.
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ARTICLE II
AMOUNT AND TERMS OF THE TERMS LOANS
SECTION 2.01. The Term Loans. The Banks hereby agree, severally but not
jointly, on the date of this Agreement, and on the terms and conditions and in
reliance upon the representations and warranties hereinafter set forth in this
Agreement, to lend to the Borrower the principal amount of Seven Million Five
Hundred Thousand ($7,500,000.00) Dollars, of which approximately Two Million
Five Hundred Thousand ($2,500,000.00) Dollars shall be lent by the Banks on the
date hereof (the "First Advance") and approximately Five Million ($5,000,000.00)
Dollars shall be lent by the Banks within five (5) Business Days of the date
hereof (the "Second Advance"), and the Borrower agrees to borrow such amounts
from the Banks by executing and delivering to the Agent, for delivery to BNY,
the BNY Term Loan Note. The Term Loans, or portions thereof, shall be Alternate
Base Rate Loans or Eurodollar Loans (or a combination thereof) as the Borrower
may request subject to and in accordance with Section 2.02 hereof. Each Bank may
at its option make any Eurodollar Loan by causing a foreign branch or affiliate
to make such Loan, provided that any exercise of such option shall not affect
the obligation of the Borrower to repay such Loan in accordance with the terms
of the Notes.
SECTION 2.02. Notice of Term Loan Designations. (a) The Borrower may elect
to designate the Term Loans (or a portion thereof) as an Alternate Base Rate
Loan or a Eurodollar Loan by so specifying in the irrevocable notice given
pursuant to this Section 2.02; provided, however, that each Eurodollar Loan
requested of the Agent for any specific Interest Period shall be in the minimum
principal amount of $500,000.00 and in minimum multiples of $100,000.00
thereafter.
(b) The Borrower shall give the Agent irrevocable written, telex,
telephonic (immediately confirmed in writing) or facsimile notice (i) at least
two (2) Business Days' prior to each election to designate each Term Loan (or a
portion thereof) as a Eurodollar Loan, and (ii) prior to 11:00 a.m. on the day
of such Loan of each election to designate the Term Loans (or a portion thereof)
as an Alternate Base Rate Loan, in each case specifying the date (which shall be
a Business Day) thereof and the aggregate principal amount and, if any portion
thereof is to consist of one or more Eurodollar Loans, the respective principal
amounts and Interest Periods for each such Eurodollar Loan; provided that:
(i) if the Borrower shall fail to specify the duration of an Interest
Period with regard to any Eurodollar Loan in its notice, the Interest Period
shall be for a period of one month; and
(ii) if the Borrower shall fail to specify the type of Loan requested, the
request shall be deemed to be a request for an Alternate Base Rate Loan.
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SECTION 2.03. Term Loan Notes. The Term Loans shall be evidenced by the
Term Loan Notes. The Term Loan Notes shall be dated as of the date hereof and
each of the Term Loan Notes shall mature on the Maturity Date at which time the
entire outstanding principal balance and all interest thereon shall be due and
payable. The Term Loan Notes shall be entitled to the benefits and subject to
the provisions of this Agreement.
SECTION 2.04. Repayment of Term Loan Notes. (a) The principal balance of
the Term Loan Notes shall be payable in twenty (20) quarterly installments, due
on the last Business Day of each calendar quarter thereafter beginning on
September 30, 1996 and continuing on the last Business Day of each calendar
quarter thereafter. Each of the first nineteen (19) such quarterly principal
installments shall be in the amount of $375,000.00 and the final such quarterly
principal installments shall be in an amount equal to the then outstanding
principal balance of the Term Loan Notes.
(b) In the event that Tajima gives notice to the Borrower of termination of
the Tajima Agreement, the Borrower shall repay the outstanding principal balance
of the Term Loan Notes over the shorter of (x) the remaining term of the Term
Loan Notes as of the date of such notice, or (y) twelve (12) equal quarterly
installments, commencing on the last Business Day of each calendar quarter
beginning on the first such day after the date of such notice and continuing on
the last Business Day of each calendar quarter thereafter.
(c) All payments of installments on the Term Loan Notes shall be made to
the Agent for the pro rata distributions to the Banks.
SECTION 2.05. Payment of Interest on the Term Loan Notes. (a) In the case
of an Alternate Base Rate Loan, interest shall be payable at a rate per annum
equal to the Alternate Base Rate. Such interest shall be payable to the Agent,
for the distribution to the Banks, on each Interest Payment Date, commencing
with the first Interest Payment Date after the date of such Alternate Base Rate
Loan, on each Interest Determination Date and on the Maturity Date. Any change
in the rate of interest on the Term Loan Notes due to a change in the Alternate
Base Rate shall take effect as of the date of such change in the Alternate Base
Rate.
(b) In the case of a Eurodollar Loan, interest shall be payable at a rate
per annum (computed on the basis of the actual number of days elapsed over a
year of 360 days) equal to the Adjusted LIBOR Rate plus the LIBOR Applicable
Margin.
The LIBOR Applicable Margin shall be determined on the basis of the
Borrower's Funded Debt to EBITDA Ratio, as calculated based on the Borrower's
financial statements for its most recent fiscal quarter. This LIBOR Applicable
Margin shall be determined as follows:
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(i) The initial LIBOR Applicable Margin shall be 100 basis points, and
shall be applicable until delivery of the Borrower's financial statements for
its fiscal quarter ending July 31, 1996 pursuant to Section 5.01(b) hereof
(subject to increase in the event that the Borrower fails to deliver such
statements as required below).
Beginning with delivery of the Borrower's financial statements for the
fiscal quarter ending July 31, 1996, and for each fiscal quarter thereafter.
(x) If the Borrower's Funded Debt to EBITDA Ratio as of the end of such
fiscal quarter is less than 1.25 to 1.00, the LIBOR Applicable Margin shall be
75 basis points.
(y) If the Borrower's Funded Debt to EBITDA Ratio as of the end of such
fiscal quarter is equal to or greater than 1.25 to 1.00 but less than 1.75 to
1.00, the LIBOR Applicable Margin shall be 100 basis points.
(z) If the Borrower's Funded Debt to EBITDA Ratio as of the end of such
fiscal quarter is equal to or greater than 1.75 to 1.00, the LIBOR Applicable
Margin shall be 125 basis points.
In the event that the Borrower fails to deliver any financial statements or
the related certificate within five (5) days of the due date therefor set forth
in Section 5.01(b)(i), (ii) or (iv) hereof, unless an Event of Default is
declared as a result of such failure, the LIBOR Applicable Margin shall be 125
basis points until the Borrower delivers all required financial statements and
certificates.
Upon the occurrence and during the continuance of a Default or an Event of
Default the LIBOR Applicable Margin may, as a result of changes in the
Borrower's Funded Debt to EBITDA Ratio, increase but will not decrease.
Such interest shall be payable to the Agent, for the pro rata distribution
to the Banks on each Interest Payment Date, commencing with the first Interest
Payment Date after the date of such Eurodollar Loan, on each Interest
Determination Date and on the Maturity Date. The Agent shall determine the rate
of interest applicable to each requested Eurodollar Loan for each Interest
Period at 11:00 a.m., New York City time, or as soon as practicable thereafter,
two (2) Business Days prior to the commencement of such Interest Period and
shall notify the Borrower of the rate of interest so determined. Such
determination shall be conclusive absent manifest error.
SECTION 2.06. Conversion and Continuation of Loans. The Borrower shall have
the right, at any time, on two (2) Business Days' prior irrevocable written
notice to the
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Agent (which notice, to be effective, must be received by the Agent not
later than 10:00 a.m., New York City time, on the second (2nd) Business Day
preceding the date of any continuation or conversion), (i) to continue any
Eurodollar Loan or portion thereof into a subsequent Interest Period (subject to
availability) or (ii) to convert an Alternate Base Rate Loan into a Eurodollar
Loan (subject to availability), subject to the following:
(a) no Event of Default shall have occurred and be continuing at the time
of any proposed conversion or continuation;
(b) in the case of a continuation or conversion of fewer than all Loans,
the aggregate principal amount of each Eurodollar Loan continued or converted
shall be in the minimum amount of $500,000.00 and in minimum multiples of
$100,000.00 thereafter;
(c) each continuation or conversion shall be effected by the Bank applying
the proceeds of the new Loan to the Loan (or portion thereof) being continued or
converted;
(d) if the new Loan made as a result of a continuation or conversion shall
be a Eurodollar Loan, the first Interest Period with respect thereto shall
commence on the date of continuation or conversion;
(e) each request for a Eurodollar Loan which shall fail to state an
applicable Interest Period shall be deemed to be a request for an Interest
Period of one month;
(f) unless sufficient Alternate Base Rate Loans are outstanding or other
Eurodollar Loans are outstanding with Interest Periods expiring prior to the
next scheduled installment payment of the Term Loan Notes, and are sufficient to
enable the Borrower to make such installment payments, any Eurodollar Loan, a
portion of which is required to be repaid on any such installment payment date
shall be automatically converted at the end of such Interest Period into an
Alternate Base Rate Loan; and
(g) in the event that the Borrower shall not give notice to continue a
Eurodollar Loan as provided above, such Loan shall automatically be converted
into an Alternate Base Rate Loan at the expiration of the then current Interest
Period.
SECTION 2.07. Use of Proceeds. The proceeds of the Term Loans shall be used
by the Borrower solely for (i) the acquisition of SMX, and (ii) to repay in full
the Merrill Lynch Facility. The proceeds of the First Advance shall be applied
exclusively to the repayment in full the Merrill Lynch Facility and the proceeds
of the Second Advance shall be applied exclusively to repayment of indebtedness
of the Borrower to the principals of SMX incurred as a portion of the purchase
price of SMX. No part of the proceeds of the Term Loans may be used for any
purpose that directly or indirectly violates or is inconsistent with, the
provisions of Regulation G, T, U or X.
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SECTION 2.08. Prepayment. (a) The Borrower shall have the right at any time
and from time to time to prepay any Alternate Base Rate Loan, in whole or in
part, without premium or penalty on the same day on which telephonic notice is
given to the Agent (immediately confirmed in writing) of such prepayment
provided, however, that each such prepayment shall be on a Business Day and
shall be in an aggregate principal amount which is an integral multiple of
$500,000.00 for all Banks in the aggregate.
(b) The Borrower shall have the right at any time and from time to time,
subject to the provisions hereof and of Section 2.09, to prepay any Eurodollar
Loan, in whole or in part, on three (3) Business Days prior irrevocable written
notice to the Agent, provided, however, that such prepayment shall be in an
aggregate principal amount which is an integral multiple of $500,000.00 for all
Banks in the aggregate.
(c) The notice of prepayment under this Section 2.08 shall set forth the
prepayment date and the principal amount of the Loan being prepaid and shall be
irrevocable and shall commit the Borrower to prepay such Loan by the amount and
on the date stated therein. All prepayments shall be accompanied by accrued
interest on the principal amount being prepaid to the date of prepayment. Each
prepayment under this Section 2.08 shall be applied first towards unpaid
interest on the amount being prepaid and then towards the principal in whole or
partial prepayment of Loans by the Borrower. In the absence of such
specification, amounts being prepaid shall be applied to any Alternate Base Rate
Loan then outstanding. Eurodollar Loans may be prepaid only in accordance with
the provisions of paragraph (b) above. All partial prepayments of Loans shall be
applied to installments of principal of the Term Loans in the inverse order of
maturity. All principal payments or prepayments shall be made to the Agent for
the pro rata distribution to the Banks.
SECTION 2.09. Reimbursement by Borrower. (a) The Borrower shall pay to the
Agent, for distributions and reimbursement on behalf of the Banks, upon the
Agent's demand, for any loss incurred or to be incurred by any of the Banks (in
such Bank's sole, reasonable determination) as a result of any prepayment or
conversion (whether voluntarily or by acceleration) of any Eurodollar Loan other
than on the last day of the Interest Period for such Loan, or if the Borrower
fails to borrow the Eurodollar Loan (or is not able to borrow because of an
Event of Default or for any other reason hereunder) after having given the
irrevocable notice provided by Sections 2.02 or 2.06 of this Agreement. Such
reimbursement shall include, but not be limited to, any loss, cost or expense
incurred by any of the Banks in obtaining, liquidating or redeploying any funds
used or to be used in making or maintaining the Eurodollar Loan.
SECTION 2.10. Eurocurrency Reserve Requirement. It is understood that the
cost to the Banks of making or maintaining Eurodollar Loans may fluctuate as a
result of the applicability of, or change in, the Eurocurrency Reserve
Requirement. The Borrower agrees to pay to the Agent on behalf of the Banks from
time to time, as provided in Section
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2.11 below, such amounts as shall be necessary to compensate each Bank for
the portion of the cost of making or maintaining any Eurodollar Loans made by it
resulting from any change in the Eurocurrency Reserve Requirement, it being
understood that the rates of interest applicable to Eurodollar Loans hereunder
have been determined on the basis of the Eurocurrency Reserve Requirement in
effect at the time of determination of the Adjusted LIBOR Rate and that such
rates do not reflect costs imposed on each Bank in connection with any change to
the Eurocurrency Reserve Requirement. It is agreed that for purposes of this
paragraph the Eurodollar Loans made hereunder shall be deemed to constitute
Eurocurrency Liabilities as defined in Regulation D and to be subject to the
reserve requirements of Regulation D without benefit or credit of proration,
exemptions or offsets which might otherwise be available to each Bank from time
to time under Regulation D.
SECTION 2.11. Increased Costs. If, after the date of this Agreement, the
adoption of, or any change in, any applicable law, regulation, rule or
directive, or any interpretation thereof by any authority charged with the
administration or interpretation thereof:
(i) subjects any Bank to any tax with respect to the Notes or on any amount
paid or to be paid under or pursuant to this Agreement or the Notes (other than
any tax measured by or based upon the overall net income of such Bank);
(ii) changes the basis of taxation of payments to any Bank of any amounts
payable hereunder (other than any tax measured by or based upon the overall net
income of such Bank);
(iii) imposes, modifies or deems applicable any reserve, capital adequacy
or deposit requirements against any assets held by, deposits with or for the
account of, or loans made by, any Bank; or
(iv) imposes on the Agent or any Bank any other condition affecting the
Notes or this Agreement; and the result of any of the foregoing is to increase
the cost to the Agent or such Bank of maintaining this Agreement or making the
Loans, or to reduce the amount of any payment (whether of principal, interest or
otherwise) receivable by the Agent or such Bank or to require the Agent or such
Bank to make any payment on or calculated by reference to the gross amount of
any sum received by them, in each case by an amount which the Agent in its sole,
reasonable judgment deems material, then and in any such case:
(a) the Agent shall promptly advise the Borrower of such event, together
with the date thereof, the amount of such increased cost or reduction or payment
and the way in which such amount has been calculated; and
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(b) the Borrower shall pay to the Agent on behalf of such Bank, within ten
(10) days after the advice referred to in subsection (a) hereinabove, such an
amount or amounts as will compensate the Agent or such Bank for such additional
cost, reduction or payment for so long as the same shall remain in effect.
The determination of the Agent as to additional amounts payable pursuant to
this Section 2.11 shall be conclusive evidence of such amounts absent manifest
error and if made in good faith.
SECTION 2.12. Capital Adequacy. If the Agent or either Bank shall have
reasonably determined that, subsequent to the date hereof, any change in the
applicability of any law, rule, regulation or guideline, or the adoption after
the date hereof of any other law, rule, regulation or guideline regarding
capital adequacy, or any change in any of the foregoing or in the interpretation
or administration of any of the foregoing by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by such Bank (or any lending office of such Bank) or such
Bank's holding company with any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency, has or would have the effect of reducing the rate of return
on such Bank's capital or on the capital of such Bank's holding company, if any,
as a consequence of its obligations hereunder to a level below that which such
Bank or such Bank's holding company could have achieved but for such adoption,
change or compliance (taking into consideration such Bank's policies and the
policies of such Bank's holding company with respect to capital adequacy) by an
amount deemed by such Bank to be material, then from time to time the Borrower
shall pay to the Agent on behalf of such Bank such additional amount or amounts
as will reasonably compensate such Bank or its holding company for any such
reduction suffered.
SECTION 2.13. Change in Legality. (a) Notwithstanding anything to the
contrary contained elsewhere in this Agreement, if any change after the date
hereof in law, rule, regulation, guideline or order, or in the interpretation
thereof by any governmental authority charged with the administration thereof,
shall make it unlawful for either of the Banks to make or maintain any
Eurodollar Loan or to give effect to its obligations as contemplated hereby with
respect to a Eurodollar Loan, then, by written notice to the Borrower, the Agent
on behalf of such Bank may:
(i) declare that Eurodollar Loans will not thereafter be made hereunder,
whereupon the Borrower shall be prohibited from requesting such Eurodollar Loans
hereunder unless such declaration is subsequently withdrawn; and
(ii) require that, subject to the provisions of Section 2.09, all
outstanding Eurodollar Loans made by it be converted to an Alternate Base Rate
Loan, whereupon
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all of such Eurodollar Loans shall be automatically converted to an
Alternate Base Rate Loan as of the effective date of such notice as provided in
paragraph (b) below.
(b) For purposes of this Section 2.13, a notice to the Borrower by the
Agent pursuant to paragraph (a) above shall be effective, for the purposes of
paragraph (a) above, if lawful, and if any Eurodollar Loans shall then be
outstanding, on the last day of the then current Interest Period; otherwise,
such notice shall be effective on the date of receipt by the Borrower.
SECTION 2.14. Indemnity. The Borrower will indemnify the Agent and the
Banks against any loss or expense which the Agent or the Banks may sustain or
incur as a consequence of any default in payment or prepayment of the principal
amount of any Loan or any part thereof or interest accrued thereon, as and when
due and payable (at the due date thereof, by notice of prepayment or otherwise),
or the occurrence of any Event of Default, including but not limited to any loss
or expense sustained or incurred in liquidating or employing deposits from third
parties acquired to affect or maintain such Loan or any part thereof. When
claiming under this Section 2.14, the Agent shall provide to the Borrower a
statement, signed by an officer of the Agent, explaining the amount of any such
loss or expense (including the calculation of such amount), which statement
shall, in the absence of manifest error, be conclusive with respect to the
parties hereto.
SECTION 2.15. Change in LIBOR; Availability of Rates. In the event, and on
each occasion, that, on the day the interest rate for any Eurodollar Loan is to
be determined, the Agent shall have determined (which determination, absent
manifest error, shall be conclusive and binding upon the Borrower) that dollar
deposits in the amount of the principal amount of the requested Eurodollar Loan
are not generally available in the London interbank market, or that the rate at
which such dollar deposits are being offered will not adequately and fairly
reflect the cost to the Banks of making or maintaining the principal amount of
such Eurodollar Loan during such Interest Period, such Eurodollar Loan shall be
unavailable. The Agent shall, as soon as practicable thereafter, given written,
telex or telephonic notice of such determination of unavailability to the
Borrower. Any request by the Borrower for an unavailable Eurodollar Loan shall
be deemed to have been a request for an Alternate Base Rate Loan. After such
notice shall have been given and until the Agent shall have notified the
Borrower that the circumstances giving rise to such unavailability no longer
exist, each subsequent request for an unavailable Eurodollar Loan shall be
deemed to be a request for an Alternate Base Rate Loan.
SECTION 2.16. Authorization to Debit Borrower's Account. The Agent is
hereby authorized to debit the Borrower's account maintained with the Agent for
(i) all scheduled payments of principal and/or interest under the Notes, (ii)
the Agent's administrative fee, and (iii) all other amounts due hereunder; all
such debits to be made on the days such payments are due in accordance with the
terms hereof.
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SECTION 2.17. Late Charges, Default Interest. (a) If the Borrower shall
default in the payment of any principal installment of or interest on any Loan
or any other amount becoming due hereunder, the Borrower shall pay to the Agent
for the pro rata distribution to the Banks, interest, to the extent permitted by
law, on such defaulted amount up to the date of actual payment (after as well as
before judgment) at a rate per annum (computed on the basis of the actual number
of days elapsed over a year of 360 days) equal to two (2%) percent in excess of
the interest rate otherwise in effect with respect to the type of Loan in
connection with which the required payments have not been made.
(b) Upon the occurrence and during the continuation of an Event of Default,
the Borrower shall pay to the Agent, for the pro rata distribution to the Banks
interest on all amounts owing under the Notes and this Agreement (after as well
as before judgment) at a rate per annum (computed on the basis of the actual
number of days elapsed over a year of 360 days) equal to two (2%) percent in
excess of the interest rate otherwise in effect hereunder.
SECTION 2.18. Payments. All payments by the Borrower hereunder or under the
Notes shall be made in U.S. dollars in immediately available funds at the office
of the Agent by 12:00 noon, New York City time on the date on which such payment
shall be due. Interest on the Notes shall accrue from and including the date of
each Loan to but excluding the date on which such Loan is paid in full or
refinanced with a Loan of a different type.
SECTION 2.19. Interest Adjustments. (a) If the provisions of this Agreement
or the Notes would at any time otherwise require payment by the Borrower to any
Bank of any amount of interest in excess of the maximum amount then permitted by
applicable law the interest payments shall be reduced to the extent necessary so
that such Bank shall not receive interest in excess of such maximum amount. To
the extent that, pursuant to the foregoing sentence, the Agent shall receive
interest payments on behalf of the Banks hereunder or under the Notes in an
amount less than the amount otherwise provided, such deficit (hereinafter called
the "Interest Deficit") will cumulate and will be carried forward (without
interest) until the termination of this Agreement. Interest otherwise payable to
any Bank hereunder and under the Notes for any subsequent period shall be
increased by such maximum amount of the Interest Deficit that may be so added
without causing such Bank to receive interest in excess of the maximum amount
then permitted by applicable law.
(b) The amount of the Interest Deficit shall be treated as a prepayment
penalty and paid in full at the time of any optional prepayment by the Borrower
of all or any part of the Term Loans. The amount of the Interest Deficit
relating to the Notes at the time of any complete payment of the Notes at that
time outstanding (other than an optional prepayment thereof) shall be cancelled
and not paid.
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SECTION 2.20. Participations, Etc. The Banks shall each have the right at
any time, with or without notice to the Borrower, to sell, assign, transfer or
negotiate all or any part of the Notes or grant participations therein to one or
more banks (foreign or domestic, including an affiliate of the Bank), insurance
companies or other financial institutions, pension funds or mutual funds. The
Borrower and the Guarantors agree and consent to the Banks providing financial
and other information regarding their business and operations to prospective
purchasers or participants and further agree that to the extent that any Bank
should sell, assign, transfer or negotiate all or any part of the Notes, such
Bank shall be forever released and discharged from its obligations under the
Notes and this Agreement to the extent same is sold, assigned, transferred or
negotiated. The rights of the Banks under this Section 2.20 shall be subject to
the provisions of Section 7.05 of this Agreement. Nothing herein or in Section
7.05 shall be construed as limiting the right of any Bank to pledge its Term
Loan Note to a Federal Reserve Bank. Each Bank agrees that in the event that it
provides financial or other information regarding the business of the Borrower
or the Guarantors to prospective purchasers or participants, it will require
that such information be held as confidential information by them on terms
acceptable to such Bank in its reasonable discretion.
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ARTICLE III
CONDITIONS OF LENDING
SECTION 3.01. Conditions Precedent to the Making of the Term Loans. The
obligation of the Banks to make the Term Loans contemplated by this Agreement is
subject to the condition precedent that the Agent shall have received from the
Borrower and the Guarantors on or before the date of this Agreement the
following, each dated such day, in form and substance satisfactory to the Agent
and its counsel:
(a) The BNY Term Loan Note, duly executed and payable to the order of BNY.
(b) Certified (as of the date of this Agreement) copies of the resolutions
of the Board of Directors of the Borrower authorizing the Loans and authorizing
and approving this Agreement and the other Loan Documents and the execution,
delivery and performance thereof and certified copies of all documents
evidencing other necessary corporate action and governmental approvals, if any,
with respect to this Agreement and the other Loan Documents.
(c) Certified (as of the date of this Agreement) copies of the resolutions
of the Boards of Directors and the shareholders of each of the Guarantors,
authorizing and approving this Agreement, their Guaranties and any other Loan
Document applicable to the Guarantors, and the execution, delivery and
performance thereof and certified copies of all documents evidencing other
necessary corporate action and governmental approvals, if any, with respect to
this Agreement, their Guaranties and the other Loan Documents.
(d) A certificate of the Secretary or an Assistant Secretary (attested to
by another officer) of the Borrower certifying: (i) the names and true
signatures of the officer or officers of the Borrower authorized to sign this
Agreement, the Notes and the other Loan Documents to be delivered hereunder on
behalf of the Borrower; and (ii) a copy of the Borrower's by-laws as complete
and correct on the date of this Agreement.
(e) A Certificate of the Secretary or an Assistant Secretary (attested to
by another officer) of each of the Guarantors certifying (i) the names and true
signatures of the officer or officers of the Guarantors authorized to sign this
Agreement, their Guaranties and any other Loan Documents to be delivered
hereunder on behalf of the Guarantors; (ii) a copy of each of the Guarantors'
by-laws as complete and correct on the date of this Agreement; and (iii) the
stock ownership of each Guarantor.
(f) Copies of the certificate of incorporation and all amendments thereto
of the Borrower and the Guarantors certified in each case by the Secretary of
State (or equivalent officer) of the state of incorporation of each of the
Borrower and the Guarantors and a
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certificate of existence and good standing with respect to the Borrower and
the Guarantors from the Secretary of State (or equivalent officer) of the state
of incorporation of the Borrower and the Guarantors) and from the Secretary of
State (or equivalent officer) of any state in which the Borrower or the
Guarantors are authorized to do business.
(g) An opinion of Ruskin, Moscou, Evans & Faltischek, P.C., counsel for the
Borrower and the Guarantors as to certain matters referred to in Article IV
hereof and as to such other matters as the Agent or its counsel may reasonably
request.
(h) From each of the Guarantors, an executed Guaranty.
(i) From the Borrower, copies of all of the Borrower's credit agreements,
loan agreements, indentures, mortgages and other documents relating to the
extension of credit.
(j) From the Borrower, a copy of the Tajima Agreement, together with an
amendment thereto permitting the acquisition of SMX and the conducting by the
Borrower of the business of SMX, including but not limited to the distribution
of other brands of equipment distributed by SMX.
(k) From the Borrower, a facility fee payable to the Agent.
(l) From the Borrower, the Agent's fee.
(m) The Agent and the Banks shall have completed their due diligence
reviews of the Borrower, the results of which shall be satisfactory to the Agent
and the Banks in their sole discretion.
(n) From the Borrower, a copy of all contracts, documents and agreements
relating to the acquisition of SMX, the review of which shall be satisfactory to
the Agent in all respects, and evidence that except for the payment of the
purchase price to be funded by the proceeds of the Term Loans, the acquisition
of SMX has been completed.
(o) The following statements shall be true and the Agent shall have
received a certificate signed by the President or Chief Financial Officer of the
Borrower and each Guarantor dated the date hereof, stating that:
(a) The representations and warranties contained in Article IV of this
Agreement and in the Guaranties are true and correct on and as of such date; and
(b) No Default or Event of Default has occurred and is continuing, or would
result from the making of the Term Loans.
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(p) All legal matters incident to this Agreement and the Loan transactions
contemplated hereby shall be satisfactory to Cullen and Dykman, counsel to the
Agent.
(q) Receipt by the Agent of a certificate executed by the Borrower
confirming that the acquisition of SMX has been completed and directing the
Banks to fund the Term Loans in the manner herein set forth.
(r) Receipt by the Agent of such other approvals, opinions or documents as
the Agent or its counsel may reasonably request.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties. The Borrower and each of the
Guarantors represent and warrant as follows:
(a) On the date hereof, the only Subsidiaries of the Borrower or a
Guarantor are those set forth on Schedule 4.01(a) annexed hereto, which Schedule
accurately sets forth with respect to each such Subsidiary, its name and
address, any other addresses at which it conducts business, its state of
incorporation and each other jurisdiction in which it is qualified to do
business and the identity and share holdings of its stockholders. Except as set
forth on Schedule 4.01(a), all of the issued and outstanding shares of each
Subsidiary which are owned by the Borrower or a Guarantor are owned by the
Borrower or such Guarantor free and clear of any mortgage, pledge, lien or
encumbrance. Except as set forth on Schedule 4.01(a), there are not outstanding
any warrants, options, contracts or commitments of any kind entitling any Person
to purchase or otherwise acquire any shares of common or capital stock or other
equity interest of any Guarantor or any Subsidiary of a Guarantor, nor are there
outstanding any securities which are convertible into or exchangeable for any
shares of the common or capital stock of any Guarantor or any Subsidiary of a
Guarantor.
(b) The Borrower and the Guarantors are each corporations duly
incorporated, validly existing and in good standing under the laws of the States
of their respective incorporation and each has the corporate power to own their
assets and to transact the business in which they are presently engaged and are
duly qualified and are in good standing in such other jurisdictions where
failure to qualify or otherwise maintain such standing could result in a
Material Adverse Change in the Borrower and the Guarantors, taken as a whole.
(c) The execution, delivery and performance by the Borrower and each
Guarantor of the Loan Documents to which they are a party are within the
Borrower's and the Guarantors' corporate power and have been duly authorized by
all necessary corporate action and do not and will not (i) require any consent
or approval of the stockholders of the Borrower or Guarantors; (ii) do not
contravene the Borrower's or any of the Guarantors' certificates of
incorporation, charters or by-laws; (iii) violate any provision of or any law,
rule, regulation, contractual restriction, order, writ, judgment, injunction, or
decree, determination or award binding on or affecting the Borrower or any
Guarantor; (iv) result in a breach of or constitute a default under any
indenture or loan or credit agreement, or any other agreement, lease or
instrument to which the Borrower or any Guarantor is a party or by which it or
its properties may be bound or affected; and (v) result in, or require, the
creation or imposition of any Lien (other than the Lien of the Loan Documents)
upon or with respect to any of the properties now owned or hereafter acquired by
the Borrower or any Guarantor.
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(d) No authorization or approval or other action by, and no notice to or
filing with, any governmental authority or regulatory body is required for the
due execution, delivery and performance by the Borrower or any Guarantor of any
Loan Document to which it is a party, except authorizations, approvals, actions,
notices or filings which have been obtained, taken or made, as the case may be.
(e) The Loan Documents when delivered hereunder will have been duly
executed and delivered on behalf of the Borrower and each Guarantor, as the case
may be, and will be legal, valid and binding obligations of the Borrower and
each Guarantor, as the case may be, enforceable against the Borrower or such
Guarantor in accordance with their respective terms.
(f) The consolidated financial statements of the Borrower, the Guarantors
and their respective Consolidated Affiliates for the fiscal year ended January
31, 1996, copies of which have been furnished to the Agent and the Banks, fairly
present the financial condition of the Borrower and its Consolidated Affiliates
as at such date and the results of operations of the Borrower and its
Consolidated Affiliates for the period ended on such date, all in accordance
with GAAP, and since such date there has been (i) no material increase in the
liabilities of the Borrower and its Consolidated Affiliates and (ii) no Material
Adverse Change in the Borrower and its Consolidated Affiliates.
(g) INTENTIONALLY OMITTED.
(h) There is no pending or threatened action, proceeding or investigation
affecting the Borrower, any Guarantor or any Subsidiary of the Borrower or a
Guarantor, before any court, governmental agency or arbitrator, which may either
in one case or in the aggregate, result in a Material Adverse Change in the
Borrower, any Guarantor or any such Subsidiary.
(i) The Borrower and each Guarantor have filed all federal, state and local
tax returns required to be filed and have paid all taxes, assessments and
governmental charges and levies thereon to be due, including interest and
penalties. The federal income tax liability of the Borrower and each Guarantor
(other than SMX) has been finally determined and satisfied for all taxable years
up to and including the taxable year ending January 31, 1996.
(j) The Borrower, each Guarantor and each Subsidiary of the Borrower or
each Guarantor possess all licenses, permits, franchises, patents, copyrights,
trademarks and trade names, or rights thereto, to conduct their respective
businesses substantially as now conducted and as presently proposed to be
conducted, and neither the Borrower, any Guarantor nor any such Subsidiary are
in violation of any similar rights of others.
(k) To the best of Borrower's knowledge after due inquiry, neither the
Borrower nor the Guarantors are a party to any indenture, loan or credit
agreement or any other
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agreement, lease or instrument or subject to any charter, corporate or
partnership restriction which could result in a Material Adverse Change in the
Borrower and Guarantors, taken as a whole. Neither the Borrower nor any
Guarantor is in default in any respect in the performance, observance, or
fulfillment of any of the obligations or covenants contained in any agreement or
instrument material to its business.
(l) The Borrower is not engaged in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of Regulation
G, T, U or X), and no proceeds of any Loan will be used to purchase or carry any
margin stock or to extend credit to others for the purpose of purchasing or
carrying any margin stock or in any other way which will cause the Borrower to
violate the provisions of Regulations G, T, U or X.
(m) No proceeds of any Loan will be used to acquire any security in any
transaction which is subject to Sections 13 or 14 of the Securities Exchange Act
of 1934.
(n) The Borrower, each Guarantor and each Subsidiary of the Borrower or a
Guarantor are in all material respects in compliance with all federal and state
laws and regulations in all jurisdictions where the failure to comply with such
laws or regulations could result in a Material Adverse Change in the Borrower
and the Guarantors, taken as a whole.
(o) The Borrower, each Guarantor, each Subsidiary of the Borrower or a
Guarantor and each ERISA Affiliate are in compliance in all material respects
with all applicable provisions of ERISA. Neither a Reportable Event nor a
Prohibited Transaction has occurred and is continuing with respect to any Plan;
no notice of intent to terminate a Plan has been filed nor has any Plan been
terminated; no circumstances exist which constitute grounds under Section 4042
of ERISA entitling the PBGC to institute proceedings to terminate, or appoint a
trustee to administrate, a Plan, nor has the PBGC instituted any such
proceedings; neither the Borrower, any Guarantor, any Subsidiary of the Borrower
or a Guarantor, nor any ERISA Affiliate has completely or partially withdrawn
under Sections 4201 or 4204 of ERISA from a Multiemployer Plan; the Borrower,
each Guarantor, each Subsidiary of the Borrower or a Guarantor and each ERISA
Affiliate have met their minimum funding requirements under ERISA with respect
to all of their Plans and the present fair market value of all Plan assets
exceeds the present value of all vested benefits under each Plan, as determined
on the most recent valuation date of the Plan in accordance with the provisions
of ERISA for calculating the potential liability of the Borrower, any Guarantor,
any such Subsidiary or any ERISA Affiliate to PBGC or the Plan under Title IV of
ERISA; and neither the Borrower, any Guarantor, any such Subsidiary nor any
ERISA Affiliate has incurred any liability to the PBGC under ERISA.
(p) The Borrower, each Guarantor and each Subsidiary of the Borrower or a
Guarantor are in compliance with all federal, state or local laws, ordinances,
rules,
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egulations or policies governing Hazardous Materials and neither the
Borrower, any Guarantor nor any such Subsidiary has used Hazardous Materials on,
from, or affecting any property now owned or occupied or hereafter owned or
occupied by the Borrower, any Guarantor or any such Subsidiary in any manner
which violates federal, state or local laws, ordinances, rules, regulations or
policies governing the use, storage, treatment, transportation, manufacture,
refinement, handling, production or disposal of Hazardous Materials, and that to
the best of the Borrower's, Guarantors' and such Subsidiaries' knowledge, no
prior owner of any such property or any tenant, subtenant, prior tenant or prior
subtenant have used Hazardous Materials on, from or affecting such property in
any manner which violates federal, state or local laws, ordinances, rules,
regulations, or policies governing the use, storage, treatment, transportation,
manufacture, refinement, handling, production or disposal of Hazardous
Materials.
(q) The proceeds of the Term Loans shall be used exclusively for the
purposes set forth in Section 2.07.
(r) The properties and assets of the Borrower and the Guarantors are not
subject to any Lien other than those described in Section 5.02(a) hereof.
(s) Neither the business nor the properties of the Borrower, any Guarantor
or any Subsidiary of the Borrower or a Guarantor are affected by any fire,
explosion, accident, strike, hail, earthquake, embargo, act of God or of the
public enemy, or other casualty (whether or not covered by insurance), which
could result in a Material Adverse Change in the Borrower and the Guarantors,
taken as a whole.
(t) The liability of the Guarantors as a result of the execution of their
respective Guaranties and the execution of this Agreement shall not cause the
liabilities (including contingent liabilities) of each of the Guarantors to
exceed the fair saleable value of their respective assets.
(u) The Guarantors acknowledge they have derived or expect to derive a
financial or other advantage from the Loans obtained by the Borrower from the
Bank.
(v) Schedule 4.01(v) is a complete and correct list of all credit
agreements,indentures, purchase agreements, guaranties, Capital Leases,and other
investments, agreements and arrangements presently in effect providing for or
relating to extensions of credit (including agreements and arrangements for the
issuance of letters of credit or for acceptance financing) in respect of which
the Borrower or any Guarantor are in any manner directly or contingently
obligated, and the maximum principal or face amounts of the credit in question,
outstanding or to be outstanding, are correctly stated, and all Liens of any
nature given or agreed to be given as security therefor are correctly described
or indicated in such Schedule.
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ARTICLE V
COVENANTS OF THE BORROWER
SECTION 5.01. Affirmative Covenants. So long as any amount shall remain
outstanding under either of the Term Loan Notes, the Borrower and each of the
Guarantors will, unless Agent and the Required Banks shall otherwise consent in
writing:
(a) Compliance with Laws, Etc. Comply, and cause each Subsidiary of the
Borrower or a Guarantor to comply, in all material respects with all applicable
laws, rules, regulations and orders, where the failure to so comply could result
in a Material Adverse Change in the Borrower, a Guarantor or any such
Subsidiary.
(b) Reporting Requirements. Furnish to the Agent and each of the Banks:
(i) Annual Financial Statements.
(1) As soon as available and in any event within ninety five (95) days
after the end of each fiscal year of the Borrower, a copy of the audited
consolidated financial statements of the Borrower and its Consolidated
Affiliates for such year, including balance sheets with related statements of
income and retained earnings and statements of cash flows, all in reasonable
detail and setting forth in comparative form the figures for the previous fiscal
year (the comparative form of such statements for the fiscal year ending January
31, 1997 may exclude SMX for the fiscal years ending January 31, 1995 and
January 31, 1996), together with an unqualified opinion, prepared by Deloitte &
Touche or such other independent certified public accountants selected by the
Borrower and reasonably satisfactory to the Agent, all such financial statements
to be prepared in accordance with GAAP,
(2) As soon as available and in any event within ninety five (95) days
after the end of each fiscal year of the Borrower, a copy of the consolidating
financial statements of the Borrower and its Consolidated Affiliates for such
year, including balance sheets with related statements of income and retained
earnings and a statement of advances by the Borrower to HAPL, all in reasonable
detail and setting forth in comparative form the figures for the previous fiscal
year, prepared by management of the Borrower, all such financial statements to
be prepared in accordance with GAAP, and
(3) As soon as available and in any event within ninety five (95) days
after the end of each fiscal year of the Borrower, a copy of the consolidated
financial statements of the Borrower and its Consolidated Affiliates (but
excluding HAPL) for such year, including balance sheets with related statements
of income and retained earnings and statements of cash flows, all in reasonable
detail and setting forth in comparative form the figures for the
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previous fiscal year, all such financial statements to be prepared by
management of the Borrower in accordance with GAAP.
(ii) Quarterly Financial Statements.
(1) As soon as available and in any event within fifty (50) days after the
end of each of the first three fiscal quarters of each fiscal year of the
Borrower, a copy of the consolidated financial statements of the Borrower and
its Consolidated Affiliates for such quarter and for year to date, including a
balance sheet with related statements of income and retained earnings and a
statement of cash flows, all in reasonable detail and setting forth in
comparative form the figures for the comparable quarter and comparable year to
date period for the previous fiscal year, all such financial statements to be
prepared by management of the Borrower in accordance with GAAP,
(2) As soon as available and in any event within fifty (50) days after the
end of each of the first three fiscal quarters of each fiscal year of the
Borrower, a copy of the consolidating financial statements of the Borrower and
its Consolidated Affiliates, for such quarter and for year to date, including a
balance sheet with related statements of income and retained earnings and a
statement of advances by the Borrower to HAPL, all in reasonable detail and
setting forth in comparative form the figures for the comparable quarter and
comparable year to date period for the previous fiscal year, all such financial
statements to be prepared by management of the Borrower in accordance with GAAP,
and
(3) As soon as available and in any event within fifty (50) days after the
end of each of the first three fiscal quarters of each fiscal year of the
Borrower, a copy of the consolidated financial statements of the Borrower and
its Consolidated Affiliates (but excluding HAPL) for such quarter and for year
to date, including a balance sheet with related statements of income and
retained earnings and a statement of cash flows, all in reasonable detail and
setting forth in comparative form the figures for the comparable quarter and
comparable year to date period for the previous fiscal year, all such financial
statements to be prepared by management of the Borrower in accordance with GAAP.
(iii) Management Letters. Promptly upon receipt thereof, copies of any
reports submitted to the Borrower or any Guarantor by independent certified
public accountants in connection with examination of the financial statements of
the Borrower and each Guarantor made by such accountants;
(iv) Certificate of No Default. Simultaneously with the delivery of the
financial statements referred to in Section 5.01(b)(i) and (ii), a certificate
of the President or the Chief Financial Officer of the Borrower or Guarantor, as
the case may be, (1) certifying that no Default or Event of Default has occurred
and is continuing, or if a Default or Event of Default has occurred and is
continuing, a statement as to the nature thereof and the action
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which is proposed to be taken with respect thereto; and (2) with
computations demonstrating compliance with the covenants contained in Section
5.03.
(v) Intentionally omitted.
(vi) Notice of Litigation. Promptly after the commencement thereof, notice
of all actions, suits and proceedings before any court or governmental
department, commission, board, bureau, agency, or instrumentality, domestic or
foreign, affecting the Borrower, any Guarantor or any Subsidiary of the Borrower
or a Guarantor which, if determined adversely to the Borrower, any Guarantor or
any such Subsidiary could result in a Material Adverse Change in the Borrower
and the Guarantors, taken as a whole.
(vii) Notice of Defaults and Events of Default. As soon as possible and in
any event within five (5) days after the occurrence of each Default or Event of
Default, a written notice setting forth the details of such Default or Event of
Default and the action which is proposed to be taken by the Borrower with
respect thereto.
(viii) ERISA Reports. Promptly after the filing or receiving thereof,
copies of all reports, including annual reports, and notices which the Borrower
any Guarantor and any Subsidiary of the Borrower or a Guarantor, files with or
receives from the PBGC or the U.S. Department of Labor under ERISA; and as soon
as possible after the Borrower, any Guarantor or any such Subsidiary knows or
has reason to know that any Reportable Event or Prohibited Transaction has
occurred with respect to any Plan or that the PBGC or the Borrower, any
Guarantor or any such Subsidiary has instituted or will institute proceedings
under Title IV of ERISA to terminate any Plan, the Borrower or such Guarantor
will deliver to the Agent a certificate of the President or the Chief Financial
Officer of the Borrower or such Guarantor setting forth details as to such
Reportable Event or Prohibited Transaction or Plan termination and the action
the Borrower or such Guarantor proposes to take with respect thereto;
(ix) Reports to Other Creditors. Promptly after the furnishing thereof,
copies of any statement or report furnished to any other party pursuant to the
terms of any indenture, loan, or credit or similar agreement and not otherwise
required to be furnished to the Agent pursuant to any other clause of this
Section 5.01(b).
(x) Proxy Statements, Etc. Promptly after the sending or filing thereof,
copies of all proxy statements, financial statements and reports which the
Borrower or any Guarantor sends to its stockholders, and copies of all regular,
periodic, and special reports, and all registration statements which the
Borrower or any Guarantor files with the Securities and Exchange Commission or
any governmental authority which may be substituted therefor, or with any
national securities exchange.
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(x) Notice of Termination of Tajima Agreement. Promptly upon receipt
thereof, notice of the cancellation or suspension of the Tajima Agreement, and
notice of the existence of any default or event of default thereunder.
(xi) General Information. Such other information respecting the condition
or operations, financial or otherwise, of the Borrower, any Guarantor or any
Subsidiary of the Borrower or a Guarantor as the Bank may from time to time
reasonably request. (c) Taxes. Pay and discharge, and cause its Subsidiaries to
pay and discharge, all taxes, assessments and governmental charges upon it or
them, its or their income and its or their properties prior to the dates on
which penalties are attached thereto, unless and only to the extent that (i)
such taxes shall be contested in good faith and by appropriate proceedings by
the Borrower, any Guarantor or any such Subsidiary, as the case may be, and (ii)
there be adequate reserves therefor in accordance with GAAP entered on the books
of the Borrower, any Guarantor or any such Subsidiary.
(d) Corporate Existence. Preserve and maintain, and cause its Subsidiaries
to preserve and maintain, their corporate existence and good standing in the
jurisdiction of their incorporation and the rights, privileges and franchises of
the Borrower, each Guarantor and each such Subsidiary in each case where failure
to so preserve or maintain could result in a Material Adverse Change in the
Borrower and the Guarantors, taken as a whole.
(e) Maintenance of Properties and Insurance. (i) Keep, and cause any
Subsidiaries to keep, the respective properties and assets (tangible or
intangible) that are useful and necessary in its business, in good working order
and condition, reasonable wear and tear excepted; and (ii) maintain, and cause
any Subsidiaries to maintain, insurance with financially sound and reputable
insurance companies or associations in such amounts and covering such risks as
are usually carried by companies engaged in similar businesses and owning
properties doing business in the same general areas in which the Borrower, any
Guarantors and any such Subsidiaries operate.
(f) Books of Record and Account. Keep and cause any Subsidiaries to keep,
adequate records and proper books of record and account in which complete
entries will be made in a manner to enable the preparation of financial
statements in accordance with GAAP, reflecting all financial transactions of the
Borrower, the Guarantors, and any such Subsidiaries.
(g) Visitation. At any reasonable time and upon reasonable notice, and from
time to time, permit the Agent or any of the Banks or any agents or
representatives thereof, to examine and make copies of and abstracts from the
books and records of, and visit the properties of, the Borrower or any Guarantor
and to discuss the affairs, finances and accounts of the Borrower or any
Guarantor with any of the respective officers or directors of the Borrower or
such Guarantor or the Borrower's or such Guarantor's independent accountants.
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(h) Performance and Compliance with Other Agreements. Perform and comply
with each of the provisions of each and every agreement the failure to perform
or comply with which could result in a Material Adverse Change in the Borrower
and the Guarantors, taken as a whole.
(i) Pension Funding. Comply with the following and cause each ERISA
Affiliate of the Borrower, any Guarantor or any Subsidiary of the Borrower or a
Guarantor to comply with the following:
(i) engage solely in transactions which would not subject any of such
entities to either a civil penalty assessed pursuant to Section 502(i) of ERISA
or a tax imposed by Section 4975 of the Internal Revenue Code in either case in
an amount in excess of $25,000.00;
(ii) make full payment when due of all amounts which, under the provisions
of any Plan or ERISA, the Borrower, any Guarantor, any such Subsidiary or any
ERISA Affiliate of any of same is required to pay as contributions thereto;
(iii) all applicable provisions of the Internal Revenue Code and the
regulations promulgated thereunder, including but not limited to Section 412
thereof, and all applicable rules, regulations and interpretations of the
Accounting Principles Board and the Financial Accounting Standards Board;
(iv) not fail to make any payments in an aggregate amount greater than
$25,000.00 to any Multiemployer Plan that the Borrower, any Guarantor, any such
Subsidiary or any ERISA Affiliate may be required to make under any agreement
relating to such Multiemployer Plan, or any law pertaining thereto; or
(v) not take any action regarding any Plan which could result in the
occurrence of a Prohibited Transaction.
(j) Licenses. Maintain at all times, and cause each Subsidiary to maintain
at all times, all licenses or permits necessary to the conduct of its business
or as may be required by any governmental agency or instrumentality thereof.
(k) New Subsidiaries and Affiliates. Cause (X) any Subsidiary of the
Borrower or any Guarantor, or (Y) any Affiliate of the Borrower or any Guarantor
engaged in any of the businesses of Hirsch as set forth in Hirsch's initial
public offering prospectus dated as of February 17, 1994 formed after the date
of this Agreement, in each case to become a guarantor of all Debts and other
obligations of the Borrower under this Agreement and to be a party to this
Agreement.
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(l) HAPL Transactions. Cause HAPL to engage in loan transactions not
exceeding the principal amount of $4,000,000.00 in the aggregate only with BNY
or another financial institution, except for other transactions permitted by
HAPL's existing agreement with Chemical Bank.
(m) Agent's Administrative Fee. Pay to the Agent an annual administrative
fee.
SECTION 5.02. Negative Covenants. So long as any amount shall remain
outstanding under the Term Loan Notes, neither the Borrower nor any of the
Guarantors will, without the written consent of the Agent and the Required
Banks:
(a) Liens, Etc. Create, incur, assume or suffer to exist, any Lien, upon or
with respect to any of its properties, now owned or hereafter acquired, except:
(i) Liens in favor of the Banks;
(ii) Liens for taxes or assessments or other government charges or levies
if not yet due and payable or if due and payable if they are being contested in
good faith by appropriate proceedings and for which appropriate reserves are
maintained;
(iii) Liens imposed by law, such as mechanics', materialmen's, landlords',
warehousemen's, and carriers' Liens, and other similar Liens, securing
obligations incurred in the ordinary course of business which are not past due
or which are being contested in good faith by appropriate proceedings and for
which appropriate reserves have been established;
(iv) Liens under workers' compensation, unemployment insurance, Social
Security, or similar legislation;
(v) Liens, deposits, or pledges to secure the performance of bids, tenders,
contracts (other than contracts for the payment of money), leases (permitted
under the terms of this Agreement), public or statutory obligations, surety,
stay, appeal, indemnity, performance or other similar bonds, or other similar
obligations arising in the ordinary course of business;
(vi) Liens described in Schedule 5.02(a), provided that no such Liens shall
be renewed, extended or refinanced;
(vii) Judgment and other similar Liens arising in connection with court
proceedings (other than those described in Section 6.01(f)), provided the
execution or other enforcement of such Liens is effectively stayed and the
claims secured thereby are being actively contested in good faith and by
appropriate proceedings;
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(viii) Easements, rights-of-way, restrictions, and other similar
encumbrances which, in the aggregate, do not materially interfere with the
Borrower's or a Guarantor's occupation, use and enjoyment of the property or
assets encumbered thereby in the normal course of its business or materially
impair the value of the property subject thereto;
(ix) Purchase money Liens on any property hereafter acquired or the
assumption of any Lien on property existing at the time of such acquisition, or
a Lien incurred in connection with any conditional sale or other title retention
agreement or a Capital Lease, provided that:
(1) Any property subject to any of the foregoing is acquired by the
Borrower or any Guarantor in the ordinary course of its respective business and
the Lien on any such property is created contemporaneously with such
acquisition;
(2) The obligation secured by any Lien so created, assumed, or existing
shall not exceed one hundred (100%) percent of lesser of cost or fair market
value of the property acquired as of the time of the Borrower or any Guarantor
acquiring the same;
(3) Each such Lien shall attach only to the property so acquired and fixed
improvements thereon;
(4) The Debt secured by all such Liens shall not exceed Two Million
($2,000,000.00) Dollars at any time outstanding in the aggregate; and
(5) The obligation secured by such Lien is permitted by the provisions of
Section 5.02(b) and the related expenditure is permitted by the provisions of
Section 5.02(a); and
(x) Liens constituting mortgages on real property in an aggregate principal
amount of Five Million ($5,000,000.00) Dollars.
(b) Debt. Create, incur, assume, or suffer to exist, any Debt, except:
(i) Debt of the Borrower under this Agreement or the Notes;
(ii) Debt described in Schedule 5.02(b), provided that no such Debt shall
be renewed, extended or refinanced;
(iii) Intentionally omitted;.
(iv) Accounts payable to trade creditors for goods or services and current
operating liabilities (other than for borrowed money), in each case incurred in
the ordinary
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course of business and paid within the specified time, unless contested in
good faith and by appropriate proceedings;
(v) Debt in respect of letters of credit, deferred payment letters of
credit and trade acceptances payable issued for the account of the Borrower or
any Guarantor;
(vi) Intentionally omitted;
(vii) Debt of the Borrower or any Guarantor secured by purchase money Liens
permitted by Section 5.02(a)(ix);
(viii) Debt of HAPL to BNY or another financial institution in an aggregate
principal amount of not greater than Four Million ($4,000,000.00) Dollars;
(ix) Unsecured revolving credit or line of credit Debt of the Borrower to
one or more financial institutions in the maximum aggregate principal amount of
Twenty Million ($20,000,000.00) Dollars;
(x) Unsecured Debt in connection with Permitted Acquisitions to sellers on
terms and conditions reasonably satisfactory to the Agent and the Banks in an
aggregate principal amount of not greater than Five Million ($5,000,000.00)
Dollars; and
(xi) Debt in connection with mortgage liens permitted pursuant to Section
5.02(a)(x) hereof.
(xii) Debt to the principals of SMX incurred in connection with the
acquisition of SMX in an aggregate principal amount of not greater than Eight
Million Five Hundred Thousand ($8,500,000.00) Dollars, and which Debt is
unsecured except for a Lien in the name "Sewing Machine Exchange, Inc." Such
Debt shall be prepaid in part with the proceeds of the Second Advance within
five (5) Business Days of the date hereof.
(c) Lease Obligations. Create, incur, assume, or suffer to exist any
obligation as lessee for the rental or hire of any real or personal property,
except (i) Capital Leases permitted by Section 5.02(a); (ii) leases existing on
the date of this Agreement and any extensions or renewals thereof; and (iii)
leases (other than Capital Leases) which do not in the aggregate require the
Borrower or any Guarantor to make payments (including taxes, insurance,
maintenance, and similar expenses which the Borrower or any Guarantor is
required to pay under the terms of any lease) in any fiscal year of the Borrower
in excess of $1,000,000.00.
(d) Merger. Merge into, or consolidate with or into, or have merged into
it, any Person (for the purpose of this subsection (d), the acquisition or sale
by the Borrower or any
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<PAGE>
Guarantor by lease, purchase or otherwise, of all, or substantially all, of
the common stock or the assets of any Person or of it shall be deemed a merger
of such Person with the Borrower or any Guarantor) other than in connection with
Permitted Acquisitions, provided that the total aggregate consideration for all
Permitted Acquisitions shall not exceed $5,000,000.00 in the aggregate.
(e) Sale of Assets, Etc. Sell, assign, transfer, lease or otherwise dispose
of any of its assets, (including a saleleaseback transaction) with or without
recourse, except for (i) inventory disposed of in the ordinary course of
business; and (ii) the sale or other disposition of assets no longer used or
useful in the conduct of its business, (iii) saleleaseback transactions which in
the aggregate involve the sale of assets for total consideration of not greater
than $2,000,000.00 Dollars, and (iv) leases sold by HAPL on a non-recourse
basis.
(f) Investments, Etc. Make any Investment other than Permitted Investments.
(g) Transactions With Affiliates. Except in the ordinary course of business
and pursuant to the reasonable requirements of the Borrower's, a Guarantor's or
a Subsidiary's business and upon fair and reasonable terms no less favorable to
the Borrower, or the Guarantor or the Subsidiary than would be obtained in a
comparable arm's length transaction with a Person not an Affiliate, enter into
any transaction, including, without limitation, the purchase, sale, or exchange
of property or the rendering of any service, with any Affiliate.
(h) Prepayment of Outstanding Debt. Pay, in whole or in part, any
outstanding Debt of the Borrower or any Guarantor incurred by the Borrower or
Guarantor in connection with any Permitted Acquisition (other than the
acquisition of SMX), which by its terms is not then due and payable. Debt
incurred in connection with the acquisition of SMX may be prepaid, in whole or
in part, only if the Agent receives a Certificate of No Default in the form set
forth in Section 5.01(b)(iv) hereof from the chief financial officer of the
Borrower dated as of the date of the proposed prepayment.
(i) Guarantees. Guaranty, or in any other way become directly or
contingently obligated for any Debt of any other Person (including any
agreements relating to working capital maintenance, take or pay contracts or
similar arrangements) other than (i) the endorsement of negotiable instruments
for deposit in the ordinary course of business; (ii) guarantees existing on the
date hereof and set forth in Schedule 5.02(i) annexed hereto, or (iii)
guarantees of Debt permitted hereunder.
(j) Change of Business. Materially alter the nature of its business.
(k) Fiscal Year. Change the ending date of its fiscal year from January 31.
(l) Losses. Incur a net loss for any fiscal year.
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(m) Accounting Policies. Change any accounting policies, except as
permitted by GAAP.
(n) Change of Tax Status. Change its tax reporting status as a C
corporation.
(o) Change in Ownership. Fail or cease to maintain the ownership by Paul
Levine and Henry Arnberg, directly or indirectly, of a majority of such classes
of voting stock of the Borrower and the Guarantors such as would enable the
holder thereof to elect a majority of the members of the Board of Directors of
the Borrower and each Guarantor.
(p) Management. Fail to retain each of Henry Arnberg and Paul Levine in a
reasonably active full time capacity in the management of the Borrower and
Guarantors.
(q) Hazardous Material. The Borrower, each Guarantor and each Subsidiary of
the Borrower or a Guarantor shall not cause or permit any property owned or
occupied by the Borrower, any Guarantor or any such Subsidiary to be used to
generate, manufacture, refine, transport, treat, store, handle, dispose,
transfer, produce or process Hazardous Materials, except in compliance with all
applicable federal, state and local laws or regulations nor shall the Borrower,
any Guarantor or any such Subsidiary cause or permit, as a result of any
intentional or unintentional act or omission on the part of the Borrower, any
Guarantor or any such Subsidiary or any tenant or subtenant, a release of
Hazardous Materials onto any property owned or occupied by the Borrower, any
Guarantor or any such Subsidiary or onto any other property. The Borrower, each
Guarantor and each such Subsidiary shall not fail in all material respects to
comply with all applicable federal, state and local laws, ordinances, rules and
regulations, whenever and by whomever triggered, and shall not fail to obtain
and comply with, any and all approvals, registrations or permits required
thereunder. The Borrower and the Guarantors shall execute any documentation
reasonably required by the Agent in connection with the representations,
warranties and covenants contained in this paragraph and Section 4.01 of this
Agreement.
SECTION 5.03. Financial Requirements. So long as any amount shall remain
outstanding under the Term Loan Notes:
(a) Minimum Consolidated Tangible Net Worth. The Borrower and Guarantors
will maintain at all times a Consolidated Tangible Net Worth ("TNW") of not less
than the following, to be tested quarterly:
<TABLE>
<CAPTION>
Period Minimum TNW
<S> <C> <C>
Closing Date through
and including 1/30/97 $19,500,000
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
1/31/97 through and Actual TNW at
including 1/30/98 6/10/96 plus
$5,000,000
1/31/98 through and Actual TNW at
including 1/30/99 6/10/96 plus
$10,000,000
1/31/99 through and Actual TNW at
including 1/30/00 6/10/96 plus
$15,000,000
1/31/00 and thereafter Actual TNW at
6/10/96 plus
$20,000,000
</TABLE>
(b) Consolidated Capital Expenditures. The Borrower, Guarantors and their
respective Subsidiaries will not make Consolidated Capital Expenditures in
excess of One Million ($1,000,000.00) Dollars in the aggregate during any fiscal
year, provided that the Borrower and SMX may make Consolidated Capital
Expenditures in excess of such amount solely for the purchase of a new
building(s) or expansion of its existing building(s) in amounts not in excess of
$5,000,000.00 in the aggregate.
(c) Quick Asset Ratio. The Borrower and the Guarantors will at all times
maintain on a consolidated basis a ratio of (1) the sum of (i) cash on hand or
on deposit in banks, (ii) readily marketable securities issued by the United
States, (iii) readily marketable commercial paper rated "A-2" by Standard and
Poors Corporation (or similar rating by any similar organization which rates
commercial paper), (iv) certificates of deposit or banker's acceptances issued
by commercial banks of recognized standing operating in the United States, and
(v) account receivables to (2) current liabilities of not less than 0.75 to 1.0,
such ratio to be tested quarterly.
(d) Funded Debt to EBITDA Ratio. The Borrower and Guarantors will maintain
at all times on a consolidated basis, a Funded Debt to EBITDA Ratio of not
greater than the following:
<TABLE>
<CAPTION>
Period Funded Debt to EBITDA Ratio
<S> <C> <C>
Closing Date through 2.25 to 1.0
and including 1/30/98
1/31/98 and thereafter 2.00 to 1.0
</TABLE>
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<PAGE>
(e) Fixed Charge Coverage Ratio. The Borrower and Guarantors will maintain
at all times on a consolidated basis a minimum Fixed Charge Coverage Ratio of
not less than 3.50 to 1.0, calculated on a rolling four quarter basis, such
ratio to be tested quarterly.
39
<PAGE>
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. Events of Default. If any of the following events ("Events of
Default") shall occur and be continuing:
(a) The Borrower shall fail to pay any installment of principal of, or
interest on, the Term Loan Notes when due or any fees or other amounts owed in
connection with this Agreement; or
(b) Any representation or warranty made by the Borrower or any Guarantor
herein or in the Loan Documents or which is contained in any certificate,
document, opinion, or financial or other statement furnished at any time under
or in connection with any Loan Document shall prove to have been incorrect in
any material respect when made; or
(c) The Borrower or any Guarantor shall fail to perform any affirmative
covenant contained in Section 5.01 hereof within twenty (20) calendar days of
the date required thereunder, or shall fail to perform any other term, covenant,
or agreement contained in this Agreement in any other Loan Document (other than
the Notes) on its part to be performed or observed; or
(d) The Borrower, any Guarantor, or any Subsidiary of the Borrower or a
Guarantor shall fail to pay any Debt (excluding Debt evidenced by the Term Loan
Notes) of the Borrower, any Guarantor or any such Subsidiary (as the case may
be), or any interest or premium thereon, when due (other than trade payables in
the ordinary course of business of less than $250,000.00 in the aggregate)
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) and such failure shall continue after the applicable grace period, if
any, specified in the agreement or instrument relating to such Debt; or any
other default under any agreement or instrument relating to any such Debt, or
any other event shall occur and shall continue after the applicable grace
period, if any, specified in such agreement or instrument, if the effect of such
default or event is to accelerate, or to permit the acceleration of, the
maturity of such Debt; or any such Debt shall be declared to be due and payable,
or required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof; or
(e) The Borrower, any Guarantor or any Subsidiary of the Borrower or a
Guarantor shall generally not pay its Debts as such Debts become due, or shall
admit in writing its inability to pay its Debts generally, or shall make a
general assignment for the benefit of creditors; or any proceeding shall be
instituted by or against the Borrower, any Guarantor or any such Subsidiary
seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation,
winding up, reorganization, arrangement, adjustment, protection, relief, or
composition of it or its Debts under any law relating to bankruptcy, insolvency
or
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<PAGE>
reorganization or relief of debtors, or seeking the entry of an order for
relief or the appointment of a receiver, trustee, or other similar official for
it or for any substantial part of its property and if instituted against the
Borrower, any Guarantor or any such Subsidiary shall remain undismissed for a
period of 90 days; or the Borrower, any Guarantor or any such Subsidiary shall
take any action to authorize any of the actions set forth above in this
subsection (e); or
(f) Any judgment or order or combination of judgments or orders for the
payment of money, in excess of $500,000.00 in the aggregate, which sum shall not
be subject to full, complete and effective insurance coverage, shall be rendered
against the Borrower, any Guarantor or any Subsidiary of the Borrower or a
Guarantor and either (i) enforcement proceedings shall have been commenced by
any creditor upon such judgment or order or (ii) there shall be any period of 60
consecutive days during which a stay of enforcement of such judgment or order,
by reason of a pending appeal or otherwise, shall not be in effect; or
(g) Any Guarantor shall fail to perform or observe any term or provision of
its Guaranty or any representation or warranty made by any Guarantor (or any of
its officers or partners) in connection with such Guarantor's Guaranty shall
prove to have been incorrect in any material respect when made; or
(h) Any of the following events occur or exist with respect to the
Borrower, any Guarantor, any Subsidiary of the Borrower or a Guarantor, or any
ERISA Affiliate: (i) any Prohibited Transaction involving any Plan; (ii) any
Reportable Event with respect to any Plan; (iii) the filing under Section 4041
of ERISA of a notice of intent to terminate any Plan or the termination of any
Plan; (iv) any event or circumstance that might constitute grounds entitling the
PBGC to institute proceedings under Section 4042 of ERISA for the termination
of, or for the appointment of a trustee to administer, any Plan, or the
institution of the PBGC of any such proceedings; (v) complete or partial
withdrawal under Section 4201 or 4204 of ERISA from a Multiemployer Plan or the
reorganization insolvency, or termination of any Multiemployer Plan; and in each
case above, such event or condition, together with all other events or
conditions, if any, could in the opinion of the Agent subject the Borrower, any
Guarantor, any such Subsidiary or any ERISA Affiliate to any tax, penalty, or
other liability to a Plan, a Multiemployer Plan, the PBGC, or otherwise (or any
combination thereof) which in the aggregate exceeds or may exceed Five Hundred
Thousand ($500,000.00) Dollars.
(i) This Agreement or any other Loan Document, at any time after its
execution and delivery and for any reason, ceases to be in full force and effect
in all material respects or shall be declared to be null and void, or the
validity or enforceability of any document or instrument delivered pursuant to
this Agreement shall be contested by the Borrower, any Guarantor or any party to
such document or instrument or the Borrower, any
41
<PAGE>
Guarantor or any party to such document or instrument shall deny that it
has any or further liability or obligation under any such document or
instrument; or
(j) An event of default specified in any Loan Document other than this
Agreement shall have occurred and be continuing.
SECTION 6.02. Remedies on Default. Upon the occurrence and continuance of
an Event of Default the Agent may by notice to the Borrower (i) declare the Term
Loan Notes, all interest thereon and all other amounts payable under this
Agreement to be forthwith due and payable, whereupon the Term Loan Notes, all
such interest and all such amounts shall become and be forthwith due and
payable, without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived by the Borrower and (ii) proceed to enforce
its rights whether by suit in equity or by action at law, whether for specific
performance of any covenant or agreement contained in this Agreement or any Loan
Document, or in aid of the exercise of any power granted in either this
Agreement or any Loan Document or proceed to obtain judgment or any other relief
whatsoever appropriate to the enforcement of its rights, or proceed to enforce
any other legal or equitable right which the Agent or the Banks may have by
reason of the occurrence of any Event of Default hereunder or under any Loan
Document, provided, however, upon the occurrence of an Event of Default referred
to in Section 6.01(e), the Term Loan Notes, all interest thereon and all other
amounts payable under this Agreement shall be immediately due and payable
without presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived by the Borrower. Any amounts collected pursuant to
action taken under this Section 6.02 shall be applied to the payment of, first,
any costs incurred by the Agent in taking such action, including but without
limitation attorneys fees and expenses, second, to payment of the accrued
interest on the Term Loan Notes and third, to payment of the unpaid principal of
the Term Loan Notes.
SECTION 6.03. Remedies Cumulative. No remedy conferred upon or reserved to
the Agent or the Banks hereunder or in any Loan Document is intended to be
exclusive of any other available remedy, but each and every such remedy shall be
cumulative and in addition to every other remedy given under this Agreement or
any Loan Document or now or hereafter existing at law or in equity. No delay or
omission to exercise any right or power accruing upon any Event of Default shall
impair any such right or power or shall be construed to be a waiver thereof, but
any such right and power may be exercised from time to time and as often as may
be deemed expedient. In order to entitle the Agent or the Banks to exercise any
remedy reserved in this Article VI, it shall not be necessary to give any
notice, other than such notice as may be herein expressly required in this
Agreement or in any Loan Document.
ARTICLE 7
THE AGENT; RELATIONS AMONG BANKS AND BORROWER
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<PAGE>
SECTION 7.01. Appointment, Powers and Immunities of Agent. Each Bank hereby
irrevocably appoints and authorizes the Agent to act as its agent hereunder and
under any other Loan Document with such powers as are specifically delegated to
the Agent by the terms of this Agreement and any other Loan Document, together
with such other powers as are reasonably incidental thereto. The Agent shall
have no duties or responsibilities except those expressly set forth in this
Agreement and any other Loan Document, and shall not by reason of this Agreement
be a trustee or fiduciary for any Bank. The Agent shall not be responsible to
the Banks for any recitals, statements, representations or warranties made by
the Borrower or the Guarantors, or any officer or official of the Borrower or
Guarantors, or any of them, or any other Person contained in this Agreement or
any other Loan Document, or in any certificate or other document or instrument
referred to or provided for in, or received by any of them under, this Agreement
or any other Loan Document, or for the value, legality, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement or any other Loan
Document or any other document or instrument referred to or provided for herein
or therein, except as explicitly provided herein, or for the failure by the
Borrower, the Guarantors, or any of them to perform any of their or its
respective obligations hereunder or thereunder. The Agent may employ agents and
attorneys-in-fact and shall not be responsible, except as to money or securities
received by it or its authorized agents, for the negligence or misconduct of any
such agents or attorneys-in-fact selected by it with reasonable care. Except as
otherwise explicitly provided herein, neither the Agent nor any of its
directors, officers, employees or agents shall be liable or responsible to any
Bank for any action taken or omitted to be taken by it or them hereunder or
under any other Loan Document or in connection herewith or therewith, except for
its or their own gross negligence or wilful misconduct. The Borrower shall pay
any fee agreed to by the Borrower and the Agent with respect to the Agent's
services hereunder.
SECTION 7.02. Reliance by Agent. The Agent shall be entitled to rely upon
any certification, notice or other communication (including any thereof by
telephone, telex, telegram or cable) believed by it to be genuine and correct
and to have been signed or sent by or on behalf of the proper Person or Persons,
and upon advice and statements of legal counsel, independent accountants and
other experts selected by the Agent with reasonable care. The Agent may deem and
treat each Bank as the holder of the Loans made by it for all purposes hereof
unless and until a notice of the permitted transfer thereof satisfactory to, the
Agent signed by such Bank shall have been furnished to the Agent but the Agent
shall not be required to deal with any Person who has acquired a participation
in any Loan from a Bank. As to any matters not expressly provided for by this
Agreement or any other Loan Document, the Agent shall in all cases be fully
protected in acting, or in refraining from acting, hereunder in accordance with
instructions signed by the Required Banks, and such instructions of the Required
Banks and any action taken or failure to act pursuant thereto shall be binding
on all of the Banks and any other holder of all or any portion of any Loan.
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<PAGE>
SECTION 7.03. Defaults. The Agent shall not be deemed to have knowledge of
the occurrence of a Default or Event of Default (other than the non-payment of
principal of or interest on the Loans) unless the Agent has actual knowledge of
any Default or Event of Default or has received notice from a Bank or the
Borrower specifying such Default or Event of Default and stating that such
notice is a "Notice of Default." In the event that the Agent receives such a
notice of, or otherwise has actual knowledge of the occurrence of a Default or
Event of Default, the Agent shall give prompt notice thereof to the Banks (and
shall give each Bank prompt notice of each such non-payment). The Agent shall
(subject to Section 7.08) take such action with respect to such Default or Event
of Default which is continuing as shall be directed by the Required Banks;
provided that, unless and until the Agent shall have received such directions,
the Agent may take such action, or refrain from taking such action, with respect
to such Default or Event of Default as it shall deem advisable in the best
interest of the Banks; and provided further that the Agent shall not be required
to take any such action which it determines to be contrary to law.
SECTION 7.04. Rights of Agent as a Bank. With respect to the Loans made by
it, the Agent in its capacity as a Bank hereunder shall have the same rights and
powers hereunder as any other Bank and may exercise the same as though it were
not acting as the Agent, and the term "Bank" or "Banks" shall, unless the
context otherwise indicates, include the Agent in its capacity as a Bank. The
Agent or any Bank and their respective Affiliates may (without having to account
therefor to any other Bank except as otherwise expressly provided in this
Agreement) accept deposits from, lend money to (on a secured or unsecured
basis), and generally engage in any kind of banking, trust or other business
with, the Borrower, the Guarantors or any of them (and any of their Affiliates);
provided that no payment or lien priority shall be given to the Agent or to any
Bank for any other transaction without the express written approval of all of
the other Banks. In the case of BNY, it may do so as if it were not acting as
the Agent, and the Agent may accept fees and other consideration from the
Borrower, the Guarantors or any of them for services in connection with this
Agreement or otherwise without having to account for the same to the Banks.
Although the Agent or a Bank or any of their respective Affiliates may in the
course of such relationships and relationships with other Persons acquire
information about the Borrower, the Guarantors, their Affiliates and such other
Persons, neither the Agent nor such Bank shall have any duty to the other Banks
or the Agent to disclose such information to the other Banks or the Agent except
as otherwise provided herein with respect to the occurrence of an Event of
Default.
SECTION 7.05. Indemnification of Agent. The Banks agree to indemnify the
Agent (to the extent not reimbursed under Section 8.04 or under the applicable
provisions of any other Loan Document, but without limiting the obligations of
the Borrower and Guarantors under Section 8.04 or such provisions), ratably in
accordance with the aggregate unpaid principal amount of the Loans made by the
Banks (without giving effect to any participation, in all or any portion of such
Loans, sold by them to any other Person), for any
44
<PAGE>
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind and nature
whatsoever which may be imposed on, incurred by or asserted against the Agent in
any way relating to or arising out of this Agreement, any other Loan Document or
any other documents contemplated by or referred to herein or the transactions
contemplated hereby or thereby (including, without limitation, the costs and
expenses which the Borrower and Guarantors are obligated to pay under Section
8.04 or under the applicable provisions of any other Loan Document but
excluding, unless a Default or Event of Default has occurred, normal
administrative costs and expenses incidental to the performance of its agency
duties hereunder) or the enforcement of any of the terms hereof or thereof or of
any such other documents or instruments; provided that no Bank shall be liable
for any of the foregoing to the extent they arise from the gross negligence or
wilful misconduct of the party to be indemnified.
SECTION 7.06. Documents. It is the responsibility of the Borrower to
forward to each Bank, on or before the due dates set forth herein, a copy of
each report, notice or other document required by this Agreement or any other
Loan Document to be delivered to the Agent. The Agent is not responsible for
forwarding such information to the Banks.
SECTION 7.07. Non-Reliance on Agent and Other Banks. Each Bank agrees that
it has, independently and without reliance on the Agent or any other Bank, and
based on such documents and information as it has deemed appropriate, made its
own credit analysis of the Borrower, the Guarantors and their Subsidiaries and
decision to enter into this Agreement and that it will, independently and
without reliance upon the Agent or any other Bank, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own analysis and decisions in taking or not taking action under this Agreement
or any other Loan Document. The Agent shall not be required to keep itself
informed as to the performance or observance by the Borrower or Guarantors of
this Agreement or any other Loan Document or any other document referred to or
provided for herein or therein or to inspect the properties or books of the
Borrower, the Guarantors or any Subsidiary. Except for notices, reports and
other documents and information expressly required to be furnished to the Banks
by the Agent hereunder, the Agent shall not have any duty or responsibility to
any other Bank to provide any Bank with any credit or other information
concerning the affairs, financial condition or business of the Borrower, the
Guarantors or any Subsidiary (or any of their Affiliates) which may come into
the possession of the Agent or of its Affiliates. The Agent shall not be
required to file this Agreement, any other Loan Document or any document or
instrument referred to herein or therein, for record or give notice of this
Agreement, any other Loan Document or any document or instrument referred to
herein or therein, to any Person.
SECTION 7.08. Failure of Agent to Act. Except for action expressly required
of the Agent hereunder, the Agent shall in all cases be fully justified in
failing or refusing to act hereunder unless it shall have received further
assurances (which may include cash collateral)
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<PAGE>
of the indemnification obligations of the Banks under Section 7.05 in
respect of any and all liability and expense which may be incurred by it by
reason of taking or continuing to take any such action.
SECTION 7.09. Resignation of Agent. Subject to the appointment and
acceptance of a successor Agent as provided below, the Agent may resign at any
time by giving written notice thereof to the Banks and the Borrower. Upon any
such resignation, the Required Banks shall have the right to appoint a successor
Agent. If no successor Agent shall have been so appointed by the Required Banks
and shall have accepted such appointment within 30 days after the retiring
Agent's giving of notice of resignation or the Required Banks' removal of the
retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a
successor Agent, which shall be a bank which has an office in New York, New
York. The Required Banks or the retiring Agent, as the case may be, shall upon
the appointment of a Successor Agent promptly so notify the Borrower, the
Guarantors and the other Banks. Upon the acceptance of any appointment as Agent
hereunder by a successor Agent, such successor Agent shall thereupon succeed to
and become vested with all the rights, powers, privileges and duties of the
retiring Agent, and the retiring Agent shall be discharged from its duties and
obligations hereunder. After any retiring Agent's resignation or removal
hereunder as Agent, the provisions of this Article 7 shall continue in effect
for its benefit in respect of any actions taken or omitted to be taken by it
while it was acting as the Agent.
SECTION 7.10. Amendments Concerning Agency Function. The Agent shall not be
bound by any waiver, amendment, supplement or modification of this Agreement or
any other Loan Document which affects its duties hereunder or thereunder unless
it shall have given its prior written consent thereto.
SECTION 7.11. Liability of Agent. The Agent shall not have any liabilities
or responsibilities to the Borrower, the Guarantors or any of them on account of
the failure of any Bank to perform its obligations hereunder or to any Bank on
account of the failure of the Borrower, the Guarantors or any of them to perform
their or its obligations hereunder or under any other Loan Document.
SECTION 7.12. Transfer of Agency Function. Without the consent of the
Borrower, the Guarantors or any Bank, the Agent may at any time or from time to
time transfer its functions as Agent hereunder to any of its offices wherever
located, provided that the Agent shall promptly notify the Borrower, the
Guarantors and the Banks thereof.
SECTION 7.13. Withholding Taxes. Each Bank represents that it is entitled
to receive any payments to be made to it hereunder without the withholding of
any tax and will furnish to the Agent such forms, certifications, statements and
other documents as the Agent may request from time to time to evidence such
Bank's exemption from the withholding of any tax imposed by any jurisdiction or
to enable the Agent to comply with any applicable
46
<PAGE>
laws or regulations relating thereto. Without limiting the effect of the
foregoing, if any Bank is not created or organized under the laws of the United
States of America or any state thereof, in the event that the payment of
interest by the Borrower is treated for U.S. income tax purposes as derived in
whole or in part from sources from within the U.S., such Bank will furnish to
the Agent Form 4224 or Form 1001 of the Internal Revenue Service, or such other
forms, certifications, statements or documents, duly executed and completed by
such Bank as evidence of such Bank's exemption from the withholding of U.S. tax
with respect thereto. The Agent shall not be obligated to make any payments
hereunder to such Bank in respect of any Loan until such Bank shall have
furnished to the Agent the requested form, certification, statement or document.
SECTION 7.14. Several Obligations and Rights of Banks. The failure of any
Bank to make any Loan to be made by it on the date specified therefor shall not
relieve any other Bank of its obligation to make its Loan on such date, but no
Bank shall be responsible for the failure of any other Bank to make a Loan to be
made by such other Bank.
SECTION 7.15. Pro Rata Treatment of Loans, Etc. Except to the extent
otherwise provided, each prepayment and payment of principal of or interest on
Loans of a particular type and a particular Interest Period shall be made to the
Agent for the account of the Banks holding Loans of such type and Interest
Period pro rata in accordance with the respective unpaid principal amounts of
such Loans of such Interest Period held by such Banks.
SECTION 7.16. Sharing of Payments Among Banks. If a Bank shall obtain
payment of any principal of or interest on any Loan made by it through the
exercise of any right of setoff, banker's lien, counterclaim, or by any other
means, it shall share such payment with the other Banks and the amount of such
payment shall be applied to reduce the Loans of all the Banks pro rata in
accordance with the unpaid principal on the Loans held by each of them, and make
such other adjustments from time to time as shall be equitable to the end that
all the Banks shall share the benefit of such payment (net of any expenses which
may be incurred by such Bank in obtaining or preserving such benefit) pro rata
in accordance with the unpaid principal and interest on the Loans held by each
of them. To such end the Banks shall make appropriate adjustments among
themselves if such payment is rescinded or must otherwise be restored. The
Borrower agrees that any Bank so purchasing a participation (or direct interest)
in the loans made by the other Banks may exercise all rights of set off,
banker's lien, counterclaim or similar rights with respect to such participation
(or direct interest). Nothing contained herein shall require any Bank to
exercise any such right or shall affect the right of any Bank to exercise, and
retain the benefits of exercising, any such right with respect to any other
indebtedness of the Borrower. Notwithstanding the foregoing or any other
provision of this Agreement, no right or remedy of any Bank relating to any
assets of the Borrower (including real property, improvements or fixtures) not
covered by this Agreement or the Loan Documents shall in any way be affected by
this Agreement or otherwise with respect to any other indebtedness of the
Borrower to any of the Banks.
47
<PAGE>
SECTION 7.17. Nonreceipt of Funds by Agent. Unless the Agent shall have
received notice from a Bank prior to the date on which such Bank is to provide
funds to the Agent for a Loan to be made by such Bank that such Bank will not
make available to the Agent such funds, the Agent may assume that such Bank has
made such funds available to the Agent on the date of such Loan, and the Agent
in its sole discretion may, but shall not be obligated to, in reliance upon such
assumption, make available to the Borrower on such date a corresponding amount.
If and to the extent that such Bank shall not have so made such funds available
to the Agent, such Bank agrees to repay to the Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the date
such amount is made available to the Borrower until the date such amount is
repaid to the Agent, at the customary rate set by the Agent for the correction
of errors among banks for three Business Days and thereafter at the Prime Rate.
If such Bank shall repay to the Agent such corresponding amount, such amount so
repaid shall constitute such Bank's Loan for purposes of this Agreement. If such
Bank does not pay such corresponding amount forthwith upon Agent's demand
therefor, the Agent shall promptly notify the Borrower, and the Borrower shall
immediately pay such corresponding amount to the Agent with interest thereon,
for each day from the date such amount is made available to the Borrower until
the date such amount is repaid to the Agent, at the rate of interest applicable
at the time to such proposed Loan.
Unless the Agent shall have received notice from the Borrower prior to the
date on which any payment is due to the Banks hereunder that the Borrower will
not make such payment in full, the Agent may assume that the Borrower has made
such payment in full to the Agent on such date and the Agent in its sole
discretion may, but shall not be obligated to, in reliance upon such assumption,
cause to be distributed to each Bank on such due date an amount equal to the
amount then due such Bank. If and to the extent the Borrower shall repay to the
Agent forthwith on demand such amount distributed to such Bank together with
interest thereon, for each day from the date such amount is distributed to such
Bank until the date such Bank repays such amount to the Agent, at the customary
rate set by the Agent for the correction of errors among banks for three
Business Days and thereafter at the Prime Rate.
48
<PAGE>
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. Amendments. Etc. Except as otherwise expressly provided in
this Agreement, any provision of this Agreement may be amended or modified only
by an instrument in writing signed by the Borrower, the Guarantors, the Agent
and the Banks, and any provision of this Agreement may be waived by the Borrower
(if such provision requires performance by the Agent or the Banks) or by the
Agent acting with the consent of the Required Banks (if such provision requires
performance by the Borrower); provided that no amendment, modification or waiver
shall, unless by an instrument signed by all of the Banks or by the Agent acting
with the consent of all of the Banks: (a) increase or extend the term of the
Loans, (b) extend the date fixed for the payment of principal of or interest on
any Loan, (c) reduce the amount of any payment of principal thereof or the rate
at which interest is payable thereon or any fee payable hereunder, (d) alter the
terms of this Section 8.01, (e) amend the definition of the term "Required
Banks", (f) change the fees payable to any Bank except as otherwise provided
herein, (g) permit the Borrower to transfer or assign any of its obligations
hereunder or under the Loan Documents, (h) amend the provisions of Article 7
hereof, or (i) give any payment priority to any Person (including any of the
Banks) over amounts due in connection with the Loans. No failure on the part of
the Agent or any Bank to exercise, and no delay in exercising, any right
hereunder shall operate as a waiver thereof or preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
SECTION 8.02. Notices, Etc. All notices and other communications provided
for hereunder shall be in writing (including telegraphic communication) and
mailed via certified mail, telegraphed, sent by overnight mail delivery service,
sent by facsimile or delivered, if to the Borrower or any Guarantor, at the
address of the Borrower or Guarantor, as the case may be, set forth at the
beginning of this Agreement with a copy to Irvin Brum, Esq., Ruskin, Moscou,
Evans & Faltischek, P.C., 170 Old Country Road, Mineola, New York 11501 and if
to the Agent or any Bank, at the address of the Agent or such Bank set forth at
the beginning of this Agreement to the attention of Hirsch International Corp.
Account Officer, or, as to each party, at such other address as shall be
designated by such party in a written notice complying as to delivery with the
terms of this Section 8.02 to the other parties. All such notices and
communications shall be effective when mailed, telegraphed or delivered, except
that notices to the Bank shall not be effective until received by the Bank.
SECTION 8.03. No Waiver, Remedies. No failure on the part of the Agent or
any Bank to exercise, and no delay in exercising, any right, power or remedy
under any Loan Document, shall operate as a waiver thereof; nor shall any single
or partial exercise of any right under any Loan Document preclude any other or
further exercise thereof or the exercise
49
<PAGE>
Of any other right. The remedies provided in the Loan Documents are
cumulative and not exclusive of any remedies provided by law.
SECTION 8.04. Costs, Expenses and Taxes. The Borrower agrees to pay on
demand all costs and expenses of the Agent and the Banks in connection with the
preparation, execution, delivery and administration of this Agreement, the Term
Loan Notes and any other Loan Documents, including, without limitation, the
reasonable fees and expenses of counsel for the Agent and the Banks with respect
thereto and with respect to advising the Banks as to their respective rights and
responsibilities under this Agreement, and all costs and expenses, if any
(including reasonable counsel fees and expenses), in connection with the
enforcement of this Agreement, the Term Loan Notes and any other Loan Documents.
The Borrower shall at all times protect, indemnify, defend and save harmless the
Agent and the Banks from and against any and all claims, actions, suits and
other legal proceedings, and liabilities, obligations, losses, damages,
penalties, judgments, costs, expenses or disbursements which the Agent or the
Banks may, at any time, sustain or incur by reason of or in consequence of or
arising out of the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby. The Borrower acknowledges that it is
the intention of the parties hereto that this Agreement shall be construed and
applied to protect and indemnify the Agent and the Banks against any and all
risks involved in the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, all of which risks are
hereby assumed by the Borrower, including, without limitation, any and all risks
of the acts or omissions, whether rightful or wrongful, of any present or future
de jure or de facto government or governmental authority, provided that the
Borrower shall not be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from the Agent or any Bank's gross negligence or willful
misconduct. The provisions of this Section 8.04 shall survive the payment of the
Notes and the termination of this Agreement.
SECTION 8.05. Right of Set-off. Upon (i) the occurrence and during the
continuance of any Event of Default and (ii) the declaration of the making of
the Term Loan Notes due and payable pursuant to the provisions of Section 6.02,
the Banks each are hereby authorized at any time and from time to time, to the
fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by the Banks to or for the credit or the
account of the Borrower or any Guarantor against any and all of the obligations
of the Borrower or any Guarantor now or hereafter existing under this Agreement
and the Term Loan Notes, irrespective of whether or not the Agent or the Banks
shall have made any demand under this Agreement or the Term Loan Notes and
although such obligations may be unmatured. The rights of the Banks under this
Section are in addition to all other rights and remedies (including, without
limitation, other rights of set-off) which the Agent and the Banks may have.
50
<PAGE>
SECTION 8.06. Binding Effect. This Agreement shall become effective when it
shall have been executed by the Borrower, the Guarantors, the Agent and the
Banks and thereafter it shall be binding upon and inure to the benefit of the
Borrower, the Guarantors, the Agent and the Banks and their respective
successors and assigns, except that neither the Borrower nor any Guarantor shall
have any right to assign its rights hereunder or any interest herein without the
prior written consent of the Agent and the Banks.
SECTION 8.07. Further Assurances. The Borrower and each Guarantor agree at
any time and from time to time at its expense, upon request of the Agent, the
Banks or their respective counsel, to promptly execute, deliver, or obtain or
cause to be executed, delivered or obtained any and all further instruments and
documents and to take or cause to be taken all such other action the Agent or
any Bank may deem desirable in obtaining the full benefits of this Agreement.
SECTION 8.08. Section Headings, Severability, Entire Agreement. Section and
subsection headings have been inserted herein for convenience only and shall not
be construed as part of this Agreement. Every provision of this Agreement and
each Loan Document is intended to be severable; if any term or provision of this
Agreement, any Loan Document, or any other document delivered in connection
herewith shall be invalid, illegal or unenforceable for any reason whatsoever,
the validity, legality and enforceability of the remaining provisions hereof or
thereof shall not in any way be affected or impaired thereby. All exhibits and
schedules to this Agreement shall be annexed hereto and shall be deemed to be
part of this Agreement. This Agreement and the exhibits and schedules attached
hereto embody the entire Agreement and understanding between the Borrower, the
Guarantors, the Agent and the Banks and supersede all prior agreements and
understandings relating to the subject matter hereof.
SECTION 8.09. Governing Law. This Agreement, the Term Loan Notes and all
other Loan Documents shall be governed by, and construed in accordance with, the
laws of the State of New York.
SECTION 8.10. Waiver of Jury Trial. The Borrower, each Guarantor, the Agent
and the Banks waive all rights to trial by jury on any cause of action directly
or indirectly involving the terms, covenants or conditions of this Agreement or
any Loan Document.
SECTION 8.11. Execution in Counterparts. This Agreement may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
51
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
THE BANK OF NEW YORK, as Agent
By: \s\ Adam Ostrach
- ------------------------------
Adam Ostrach
Vice President
THE BANK OF NEW YORK
By: \s\ Adam Ostrach
- ------------------------------
Adam Ostrach
Vice President
HIRSCH INTERNATIONAL CORP.
By: \s\ Henry Arnberg
- -------------------------------
Henry Arnberg
President
52
<PAGE>
PULSE MICROSYSTEMS, LTD.
By: \s\ Kenneth Shifrin
- ------------------------------
Kenneth Shifrin
Vice President
HAPL LEASING CO., INC.
By: \s\ Henry Arnberg
- -------------------------------
Henry Arnberg
President
SEWING MACHINE EXCHANGE, INC.
By: \s\ Henry Arnberg
- -------------------------------
Henry Arnberg
President
53
<PAGE>
SCHEDULE 4.01(a)
<TABLE>
<CAPTION>
STATE OF
INCORPORATION
AND EACH STATE IN IDENTIFY AND
WHICH IT IS PERCENTAGE OF
SUBSIDIARY'S NAME QUALIFIED TO DO OWNERSHIP OF EACH
AND ADDRESS BUSINESS SHAREHOLDER
<S> <C> <C> <C>
Pulse Microsystems Ltd. June 11, 1982 Borrower - 100%
2660 Meadowvale Boulevard, Canada
Unit No. 10
Mississauga, Ontario
Canada L5N 6M6
HAPL Leasing Co., Inc. April 19, 1990 Borrower - 100%
200 Wireless Boulevard New York
Hauppauge, NY 11757
Sewing Machine Exchange, Inc. August 2, 1965 Borrower - 100%
1840 South Michigan Avenue Illinois
Chicago, IL 60616 Minnesota
Missouri
Michigan
Ohio
</TABLE>
54
<PAGE>
SCHEDULE 4.01 (v)
<TABLE>
<CAPTION>
Nature of Amount of Liens Securing
Creditor Borrower Agreement Credit Credit
<S> <C> <C> <C> <C> <C>
Chemical Bank Hirsch Mortgage* $1,955,000 By Building and
related
improvements
thereon
Chemical Bank HAPL Revolving Credit $0 outstanding Line on substantially
Facility** ($4,000,000 all of HAPL's
available) assets; see filed
UCC-1's
Bank of New York Hirsch Line Letter $9,140,000 unsecured
letters of credit
($15,000,000
available)
Chemical Bank Hirsch Line Letter $0 outstanding unsecured
$$15,000,000
available)
Mitsubishi SMX Finances purchases approximately purchase money
Electronics of sewing $38,000 security interest; see
America, Inc. machines and part outstanding (no filed UCC-3s
more than
$50,000 to be
outstanding)
Bankers Leasing SMX approximately approximately purchase money
Association $25,000 $25,000 security interest and
outstanding outstanding line on substantially
all of SMX's assets;
see filed UCC-1s
</TABLE>
*Guaranteed by all Subsidiaries
**Guaranteed by Borrower and all other Subsidiaries
55
<PAGE>
SCHEDULE 5.02(a)
See Schedule 4.01(v)
56
<PAGE>
SCHEDULE 5.02(b)
See Schedule 4.01(v)
57
<PAGE>
SCHEDULE 5.02(i)
See Schedule 4.01(v)
58
<PAGE>
EXHIBIT A
BNY TERM LOAN NOTE
Garden City, New York
$7,500,000.00 June 10, 1996
FOR VALUE RECEIVED, HIRSCH INTERNATIONAL CORP., a Delaware corporation,
having its principal place of business at 200 Wireless Blvd., Hauppauge, New
York 11788 (the "Borrower") promises to pay to the order of THE BANK OF NEW YORK
("Bank") at its office located at 1100 Old Country Road, Hauppauge, New York
11788, the principal sum of SEVEN MILLION FIVE HUNDRED THOUSAND ($7,500,000.00)
DOLLARS, or so much as has been advanced pursuant to the Agreement (as
hereinafter defined) in twenty (20) quarterly principal installments, each of
the first nineteen (19) such installments being in the principal amount of THREE
HUNDRED SEVENTY FIVE THOUSAND ($375,000.00) DOLLARS, commencing on the last
Business Day of September, 1996, and continuing quarterly thereafter until the
Maturity Date, when any remaining principal amount shall be due and payable.
In the event that Tajima gives notice to the Borrower of termination of the
Tajima Agreement, the Borrower shall repay the outstanding principal balance of
this Term Loan Note over the shorter of (x) the remaining term of this Term Loan
Note as of the date of such notice, or (y) twelve (12) equal quarterly
installments, commencing on the last Business Day of each quarter beginning on
the first such day after the date of such notice and continuing on the last
Business Day of each calendar quarter thereafter.
The Borrower shall pay interest on the unpaid balance of this Note from
time to time outstanding at said office, at the rates of interest, at the times
and for the periods as set forth in the Agreement (as defined below).
All payments including prepayments on this Term Loan Note shall be made in
lawful money of the United States of America in immediately available funds.
Except as otherwise provided in the Agreement, if a payment becomes due and
payable on a day other than a Business Day, the maturity thereof shall be
extended to the next succeeding Business Day, and interest shall be payable
thereon at the rate herein specified during such extension.
This Term Loan Note is the term loan note referred to in that certain Loan
Agreement among Borrower, certain Guarantors, the Agent and the Banks of even
date herewith (the "Agreement"), as such Agreement may be further amended from
time to time, and is subject to prepayment and its maturity is subject to
acceleration upon the terms contained in said
59
<PAGE>
Agreement. All capitalized terms used in this Term Loan Note and not
defined herein shall have the meanings given them in the Agreement.
If any action or proceeding be commenced to collect this Term Loan Note or
enforce any of its provisions, Borrower further agrees to pay all costs and
expenses of such action or proceeding and reasonable attorneys' fees and
expenses and further expressly waives any and every right to interpose any
counterclaim (other than a compulsory counterclaim) in any such action or
proceeding. Borrower hereby submits to the jurisdiction of the Supreme Court of
the State of New York and agrees with Bank that personal jurisdiction over
Borrower shall rest with the Supreme Court of the State of New York for purposes
of any action on or related to this Term Loan Note, the liabilities, or the
enforcement of either or all of the same. Borrower hereby waives personal
service by manual delivery and agrees that service of process may be made by
post-paid certified mail directed to Borrower at Borrower's address designated
in the Agreement or at such other address as may be designated in writing by
Borrower to Bank in accordance with Section 8.02 of the Agreement, and that upon
mailing of such process such service be effective with the same effect as though
personally served. Borrower hereby expressly waives any and every right to a
trial by jury in any action on or related to this Term Loan Note, the
liabilities or the enforcement of either or all of the same.
Bank may transfer this Term Loan Note and may deliver the security or any
part thereof to the transferee or transferees, who shall thereupon become vested
with all the powers and rights above given to Bank in respect thereto, and Bank
shall thereafter be forever relieved and fully discharged from any liability or
responsibility in the matter. The failure of any holder of this Term Loan Note
to insist upon strict performance of each and/or all of the terms and conditions
hereof shall not be construed or deemed to be a waiver of any such term or
condition.
Borrower and all endorsers and Guarantors hereof waive presentment and
demand for payment, notice of non-payment, protest, and notice of protest.
This Term Loan Note shall be construed in accordance with and governed by
the laws of the State of New York.
HIRSCH INTERNATIONAL CORP.
BY: \s\ Henry Arnberg
--------------------------
Henry Arnberg
President
60
EXHIBIT 10.5
BNY TERM LOAN NOTE
Garden City, New York
$7,500,000.00 June 10, 1996
FOR VALUE RECEIVED, HIRSCH INTERNATIONAL CORP., a Delaware corporation,
having its principal place of business at 200 Wireless Blvd., Hauppauge, New
York 11788 (the "Borrower") promises to pay to the order of THE BANK OF NEW YORK
("Bank") at its office located at 1100 Old Country Road, Hauppauge, New York
11788, the principal sum of SEVEN MILLION FIVE HUNDRED THOUSAND ($7,500,000.00)
DOLLARS, or so much as has been advanced pursuant to the Agreement (as
hereinafter defined), in twenty (20) quarterly principal installments, each of
the first nineteen (19) such installments being in the principal amount of THREE
HUNDRED SEVENTY FIVE THOUSAND ($375,000.00) DOLLARS, commencing on the last
Business Day of September, 1996, and continuing quarterly thereafter until the
Maturity Date, when any remaining principal amount shall be due and payable.
In the event that Tajima gives notice to the Borrower of termination of the
Tajima Agreement, the Borrower shall repay the outstanding principal balance of
this Term Loan Note over the shorter of (x) the remaining term of this Term Loan
Note as of the date of such notice, or (y) twelve (12) equal quarterly
installments, commencing on the last Business Day of each quarter beginning on
the first such day after the date of such notice and continuing on the last
Business Day of each calendar quarter thereafter.
The Borrower shall pay interest on the unpaid balance of this Note from
time to time outstanding at said office, at the rates of interest, at the times
and for the periods as set forth in the Agreement (as defined below).
All payments including prepayments on this Term Loan Note shall be made in
lawful money of the United States of America in immediately available funds.
Except as otherwise provided in the Agreement, if a payment becomes due and
payable on a day other than a Business Day, the maturity thereof shall be
extended to the next succeeding Business Day, and interest shall be payable
thereon at the rate herein specified during such extension.
This Term Loan Note is the term loan note referred to in that certain Loan
Agreement among Borrower, certain Guarantors, the Agent and the Banks of even
date herewith (the "Agreement"), as such Agreement may be further amended from
time to time, and is subject
1
<PAGE>
to prepayment and its maturity is subject to acceleration upon the terms
contained in said Agreement. All capitalized terms used in this Term Loan Note
and not defined herein shall have the meanings given them in the Agreement.
If any action or proceeding be commenced to collect this Term Loan Note or
enforce any of its provisions, Borrower further agrees to pay all costs and
expenses of such action or proceeding and reasonable attorneys' fees and
expenses and further expressly waives any and every right to interpose any
counterclaim (other than a compulsory counterclaim) in any such action or
proceeding. Borrower hereby submits to the jurisdiction of the Supreme Court of
the State of New York and agrees with Bank that personal jurisdiction over
Borrower shall rest with the Supreme Court of the State of New York for purposes
of any action on or related to this Term Loan Note, the liabilities, or the
enforcement of either or all of the same. Borrower hereby waives personal
service by manual delivery and agrees that service of process may be made by
post-paid certified mail directed to Borrower at Borrower's address designated
in the Agreement or at such other address as may be designated in writing by
Borrower to Bank in accordance with Section 8.02 of the Agreement, and that upon
mailing of such process such service be effective with the same effect as though
personally served. Borrower hereby expressly waives any and every right to a
trial by jury in any action on or related to this Term Loan Note, the
liabilities or the enforcement of either or all of the same.
Bank may transfer this Term Loan Note and may deliver the security or any
part thereof to the transferee or transferees, who shall thereupon become vested
with all the powers and rights above given to Bank in respect thereto, and Bank
shall thereafter be forever relieved and fully discharged from any liability or
responsibility in the matter. The failure of any holder of this Term Loan Note
to insist upon strict performance of each and/or all of the terms and conditions
hereof shall not be construed or deemed to be a waiver of any such term or
condition.
Borrower and all endorsers and Guarantors hereof waive presentment and
demand for payment, notice of non-payment, protest, and notice of protest.
This Term Loan Note shall be construed in accordance with and governed by
the laws of the State of New York.
HIRSCH INTERNATIONAL CORP.
BY: \s\ Henry Arnberg
--------------------------
Henry Arnberg
President
2
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000915909
<NAME> HIRSCH INTERNATIONAL CORP.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-1-1996
<PERIOD-END> JUL-31-1996
<CASH> 8,427,630
<SECURITIES> 1,740,776
<RECEIVABLES> 18,024,440
<ALLOWANCES> (1,748,000)
<INVENTORY> 13,317,601
<CURRENT-ASSETS> 43,087,211
<PP&E> 7,745,323
<DEPRECIATION> 2,426,788
<TOTAL-ASSETS> 67,143,091
<CURRENT-LIABILITIES> 23,171,419
<BONDS> 0
0
0
<COMMON> 77,079
<OTHER-SE> 33,430,980
<TOTAL-LIABILITY-AND-EQUITY> 67,143,091
<SALES> 54,003,581
<TOTAL-REVENUES> 55,607,343
<CGS> 35,273,981
<TOTAL-COSTS> 48,396,736
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 262,065
<INCOME-PRETAX> 7,079,568
<INCOME-TAX> 2,910,751
<INCOME-CONTINUING> 4,168,817
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,168,817
<EPS-PRIMARY> $0.53
<EPS-DILUTED> $0.53
</TABLE>
