Exhibit 10.22
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement ("Agreement") is made as of December 20,
1996 between HIRSCH INTERNATIONAL CORP., a Delaware corporation (the "Company"),
and JIMMY L. YATES, residing at 3801 Hollow Creek Road, Fort Worth, Texas 76116
(the "Holder").
RECITALS
WHEREAS, the Holder has simultaneously herewith acquired One Hundred
Thirty-one Thousand Five Hundred Seven (131,507) shares (collectively, the
"Shares") of Common Stock (the "Common Stock") of the Company pursuant to a
certain Stock Purchase Agreement of even date herewith between the Company and
the Holder; and
WHEREAS, the Company has agreed to register the Shares on the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties herein set forth, it is hereby agreed between the
Company and the Holder as follows:
ARTICLE I
REGISTRATION RIGHTS
Section 1.1. Form S-3 and Form S-1 Registration Rights. On or before June
30, 1997, the Company shall file a registration statement on Form S-3 to permit
resale of the Registrable Securities of the Holder during the period of
effectiveness of such Form S-3 registration statement; provided, however, that
in the event that at the time of filing of such registration statement, the
Company is not eligible for use of Form S-3, then the Company shall file a
registration statement on Form S-1 rather than Form S-3. Any such registration
on Form S-3 or Form S-1 shall be subject to the following:
(a) The Company shall take all steps reasonably necessary to cause the
registration on Form S-3 or Form S-1 to become effective, and to remain
effective until December 20, 1997, or until all Shares have been distributed by
the Holder whichever first occurs. Holder shall promptly notify the Company at
such time as all of the Shares have been distributed.
(b) The Company shall not be required to effect more than one (1)
registration on either Form S-3 or Form S-1 pursuant to this Section 1.2;
(c) The Company shall not be required to prepare or effect any registration
pursuant to this Section 1.2 unless the Registrable Securities to be sold by the
Holder represents all of the total Registrable Securities;
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(d) The Company may include in such Form S-3 or Form S-1 registration
statements securities of other selling security holders, without limitation, and
securities offered for its own account;
...provided, however, any such inclusion shall not require the Holder to
immediately sell his Registrable Securities or to participate in any
underwriting, it being contemplated that the Holder may not immediately sell
Registrable Securities at the time of registration but instead will sell
Registrable Securities from time to time thereafter (i) on the NASDAQ National
Market, (ii) otherwise than on the NASDAQ National Market at market prices
prevailing at the time of sale or at negotiated prices, or (iii) by a
combination of the foregoing methods; and
(e) The Company hereby undertakes to use its best effort to meet the
criteria for use of Form S-3 at the earliest possible date and to continue to
qualify for such use until December 20, 1998.
Section 1.2. Expense of Registration. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to
Article I shall be borne by the Company. All Selling Expenses relating to
Registrable Securities by the Holder or other holders shall be borne by the
holders of such securities pro rata on the basis of the number of shares so
registered and to be sold by each.
Section 1.3. Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Article I,
the Company will keep the Holder advised in writing as to the initiation of each
registration, qualification and compliance and as to the completion thereof. At
its expense the Company will:
(a) Keep such registration, qualification or compliance effective until
December 20, 1997 or until the Holder has completed the distribution described
in the registration statement relating thereto, whichever first occurs.
(b) Furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request, but only during
the period that the Company would be required to keep the registration
effective.
(c) Prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
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(d) Use its best efforts to register and qualify the securities covered by
such registration statement under such other securities or Blue Sky laws of such
jurisdictions as shall be reasonably requested by the Holder, provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions.
(e) Notify the Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of material fact or omits to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
Section 1.4. Indemnification. (a) The Company will indemnify the Holder
with respect to which registration, qualification or compliance has been
effected pursuant to this Article I, and each underwriter, if any, and each
person who controls any underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages and liabilities
(or actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances in
which they were made, not misleading, or any violation by the Company of any
rule or regulation promulgated under the Securities Act applicable to the
Company and relating to action or inaction required of the Company in connection
with any such registration, qualification or compliance, and will pay to such
Holder, each such underwriter and each person who controls any such underwriter,
as incurred, any legal and any other expenses reasonably incurred in connection
with investigating, preparing or defending any such claim, loss, damage,
liability or action, provided that the Company will not be liable in any such
case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Holder or underwriter and stated to be specifically for use therein.
(b) The Holder will, if Registrable Securities held by such Holder are
included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such holder, each of its officers, directors or partners and each person
controlling such holder within the meaning of Section 15 of the Securities Act,
against all expenses, claims, losses, damages and liabilities (or actions in
respect thereof) including any of the foregoing incurred in settlement of any
litigation commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a
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material fact contained in any such registration statement, prospectus,
offering circular or other document, or any amendment or supplement thereto,
incident to any such registration, qualification or compliance or based on any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading, or any violation by the
Holder of any rule or regulation promulgated under the Securities Act applicable
solely to the Holder (which is not otherwise applicable to or violated by the
Company) and relating to action or inaction required solely of the Holder (and
not relating to or required of the Company) in connection with such
registration, qualification or compliance, and will pay to the Company, such
holders, such directors, officers, partners, persons, underwriters or control
persons, as incurred, any legal or any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document or any amendment or supplement thereto in reliance upon and in
conformity with written information which shall have been furnished to the
Company by such Holder; provided, however, that the obligations of such Holder
hereunder shall be limited to an amount equal to the net proceeds to such Holder
of Registrable Securities sold as contemplated herein.
(c) Each party entitled to indemnification under this Section 1.4 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at its own
expense, and provided, further, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Article I unless such failure resulted in actual
detriment to the Indemnifying Party. Notwithstanding the above, however, if
representation of one or more Indemnified Parties by the counsel retained by the
Indemnifying Party would be inappropriate due to actual conflicting interests
between such Indemnified Parties (the "Conflicting Indemnified Parties") and any
other party represented by such counsel in such proceeding, then such
Conflicting Indemnified Parties shall have the right to retain one separate
counsel, chosen by the holders of a majority of the Registrable Securities
included in the registration, at the expense of the Indemnifying Party. No
Indemnifying Party, (i) in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation, or (ii)
shall be liable for amounts paid in any settlement if such settlement is
effected without the consent of the Indemnifying Party.
Section 1.5. Information by Holder. The Holder of Registrable Securities
included in any registration shall furnish to the Company such information on
the distribution proposed by such
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Holder as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification or
compliance referred to in this Article I.
Section 1.6. Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Restricted Securities to the public without
registration, the Company agrees to:
(a) Use its best efforts to make and keep public information available, as
those terms are understood and defined in Rule 144 under the Securities Act at
all times after the date hereof.
(b) Use its best efforts to file with the Commission in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Securities Exchange Act of 1934, as amended (at any time it is subject to
such reporting requirements).
(c) So long as the Holder owns any Restricted Securities, to furnish to the
Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144 (at any time after
90 days after the effective date of the first registration statement filed by
the Company for an offering of its securities to the general public) and of the
Securities Act and the Securities Exchange Act of 1934 (at any time after it has
become subject to such reporting requirements) and a copy of the most recent
annual or quarterly report of the Company.
Section 1.7. Transfer of Registration Rights. The rights to cause the
Company to register securities granted under Article I may not be assigned
without the prior written consent of the Company in each instance, except
pursuant to will or the laws of descent and distribution. No transferee,
assignee or other person purporting to exercise rights under this Article I who
is not a signatory to this Agreement shall be entitled to do so unless and until
such person agrees to be bound by the terms of this Article I.
Section 1.8. "Market Stand Off" Agreement. The Holder hereby agrees that it
shall not, to the extent required by the Company and an underwriter of Common
Stock (or other securities) of the Company, sell or otherwise transfer or
dispose (other than to donees who agree to be similarly bound) of any
Registrable Securities during the ninety (90) day period following the effective
date of a registration statement of the Company filed under the Securities Act;
provided, however, that such agreement shall not apply to Registrable Securities
being registered and sold pursuant to such registration statement.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of the
Holder until the end of such ninety (90) day period.
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ARTICLE II
MISCELLANEOUS
Section 2.1. Governing Law. This Agreement shall be governed in all
respects by the laws of the State of New York.
Section 2.2. Successors and Assigns. Except as otherwise provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors and permitted assigns of the parties hereto. No assignment of this
Agreement may be made by either party at any time, without the other party's
prior written consent.
Section 2.3. Entire Agreement; Amendment. This Agreement constitutes the
full and entire understanding and agreement between the parties with regard to
the subjects hereof. Except as expressly provided herein, neither this Agreement
nor any term hereof may be amended, waived, discharged or terminated other than
by a written instrument signed by the party against whom enforcement of any such
amendment, waiver, discharge or termination is sought
Section 2.4. Notices, Etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger
addressed (a) if to the Company, at 200 Wireless Boulevard, Hauppauge, New York
11788, Attention: General Counsel, or at such other address as the Company shall
have furnished to the Holder in writing and (b) if to the Holder, at such
address as is set forth on the signature page hereto, or at such other address
as the Holder shall have furnished to the Company in writing. Each such notice
or other communication shall for all purposes of this Agreement be treated as
effective or having been given when delivered if delivered personally, or, if
sent by mail, at the earlier of its receipt or 72 hours after the same has been
deposited in a regularly maintained receptacle for the deposit of the United
States mail, addressed and postage prepaid as aforesaid.
Section 2.5. Delays or Omissions. Except as expressly provided herein, no
delay or omission to exercise any right, power or remedy accruing to the Company
or the Holder upon any breach or default of any party under this Agreement,
shall impair any such right, power or remedy of the Company or such Holder nor
shall it be construed to be a waiver of any such breach or default, or any
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of the
Company or any Holder of any breach or default under this Agreement, or any
waiver on the part of any such party of any provisions or conditions of this
Agreement, must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to the Company or the Holder, shall be
cumulative and not alternative.
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Section 2.6. Counterparts. This Agreement may be executed in any number of
counterparts, each of which may be executed by only one of the parties hereto,
each of which shall be enforceable against the party actually executing such
counterpart, and all of which together shall constitute one instrument.
Section 2.7. Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provisions; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
Section 2.8. Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
Section 2.9. Definitions. As used in this Agreement, the following terms
have the meanings specified or referred to in this Section 2.9:
"Agreement" has the meaning specified in the first paragraph of this
Agreement.
"Commission" or "SEC" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
"Company" has the meaning specified in the first paragraph of this
Agreement.
"Form S-1 and Form S-3" shall mean such forms, as currently identified, for
registration of securities under the Securities Act, or any substantially
similar, equivalent or successor forms under the Securities Act.
"Holders" shall mean the persons named on the signature page hereof and any
permitted transferee of registration rights.
"Registrable Securities" means Shares which have not been sold to the
public, and shares of the Company's Common Stock issued with respect to the
Shares upon any stock split, stock dividend, recapitalization, or similar event,
which have not been sold to the public, which, in each case, are not eligible
for resale in reliance upon Rule 144 under the Securities Act.
"Registration Expenses" shall mean all expenses incurred by the Company in
complying with Article I hereof, including, without limitation, all
registration, qualification, listing and filing fees, printing expenses, escrow
fees, fees and disbursements of counsel for the Company, blue sky fees and
expenses, and the expense of any special audits incident to or required by any
such registration (but excluding the compensation of regular employees of the
Company, which shall be paid in any event by the Company).
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"Restricted Securities" shall mean any share certificate representing
Registrable Securities bearing a legend restricting further public distribution
thereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale and all fees and disbursements of counsel for
any holder.
IN WITNESS WHEREOF, each of the undersigned has caused the foregoing
Agreement to be executed by one of its duly authorized officers as of the date
first above written.
HIRSCH INTERNATIONAL CORP.
By:_____________________________
Its:_______________________
----------------------------------
JIMMY L. YATES
8
Exhibit 21.1
LIST OF SUBSIDIARIES
OF THE REGISTRANT
HAPL Leasing Co., Inc., a New York corporation
Hirsch Equipment Connection, Inc., a Delaware corporation
Pulse Microsystems Ltd., a Canadian corporation
Sedeco, Inc., a Texas corporation
Sewing Machine Exchange, Inc., an Illinois corporation
Tajima USA, Inc., a Delaware corporation
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000915909
<NAME> Hirsch International Corp.
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> Jan-31-1997
<PERIOD-START> Feb-01-1996
<PERIOD-END> Jan-31-1997
<CASH> 7,864,662
<SECURITIES> 2,595,601
<RECEIVABLES> 24,339,001
<ALLOWANCES> (2,578,000)
<INVENTORY> 15,768,865
<CURRENT-ASSETS> 51,778,511
<PP&E> 9,480,379
<DEPRECIATION> (3,238,242)
<TOTAL-ASSETS> 83,695,804
<CURRENT-LIABILITIES> 28,819,514
<BONDS> 0
0
0
<COMMON> 80,449
<OTHER-SE> 41,601,807
<TOTAL-LIABILITY-AND-EQUITY> 83,695,804
<SALES> 122,195,444
<TOTAL-REVENUES> 125,438,784
<CGS> 80,819,751
<TOTAL-COSTS> 80,819,751
<OTHER-EXPENSES> 29,070,201
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 832,337
<INCOME-PRETAX> 15,170,269
<INCOME-TAX> 6,402,320
<INCOME-CONTINUING> 8,767,949
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<EPS-PRIMARY> $1.10
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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) (Zip Code)
Registrant's telephone number, including area code: (516) 436-7100
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the 4,354,506 shares of Class A Common Stock
held by non-affiliates of the Company as of April 11, 1997 is $83,824,240.50.
Indicate the number of shares outstanding of each of the registrant's
classes of common equity, as of the latest practicable date:
Class of Number of
Common Equity Shares
Class A Common Stock 5,312,666
par value $.01
Class B Common Stock 2,732,249
par value $.01
The information required by Part III of this Form 10-K is incorporated by
reference from the Registrant's definitive proxy statement to be filed with the
Commission on or before May 30, 1997.
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PART I
Item 1. Business
General
Founded in 1970, Hirsch International Corp. ("Hirsch" or the "Company") has
become a leading single source provider of electronic computer-controlled
embroidery machinery and related value-added products and services. The Company
offers a complete line of technologically advanced single-head and multi-head
embroidery machines, proprietary application software, a diverse line of
embroidery supplies, accessories and proprietary products, and a range of
equipment financing options. In addition, Hirsch provides a comprehensive
customer service program, user training and software support. The Company
believes its broad product offerings together with its related value-added
products and services place it in a strong competitive position within its
marketplace. From fiscal year 1993 to fiscal year 1997, the Company's net sales
increased at a 29.4% compound annual rate to $122.2 million, while net income
increased at a 47.5% compound annual rate to $8.8 million.
The Company's customers range from large operators who run numerous
machines to individuals who customize products on a single machine. Principal
customer groups include: (i) contract embroiderers, who serve manufacturers that
outsource their embroidery requirements; (ii) manufacturers, who use embroidery
to embellish their apparel, accessories, towels, linens and other products with
decorative appeal; and (iii) embroidery entrepreneurs, who produce customized
products for individuals, sports leagues, school systems, fraternal
organizations, promotional advertisers and other groups.
Hirsch has certain exclusive United States rights to sell new embroidery
machines manufactured by Tajima Industries Ltd. ("Tajima"). Tajima, located in
Nagoya, Japan, is one of the world's leading manufacturers of embroidery
machines, and is regarded as a technological innovator and producer of high
quality, reliable and durable embroidery equipment. The Company has exclusive
right to distribute Tajima small (one through six head) machines in the
continental United States and Hawaii and large (six and higher head) machines in
39 states. The exclusive rights to distribute large machines in the nine Western
states and Hawaii in which Hirsch does not have such distribution rights, is
held by an unrelated third party.
The Company and Tajima have had a 20-year relationship, and Hirsch believes
it is Tajima's largest distributor in the world. Hirsch collaborates with Tajima
in the development of new embroidery equipment and enhancements to existing
equipment. To date, all Tajima equipment has been assembled in Japan. Hirsch
recently announced the formation of a subsidiary, Tajima USA, Inc. ("Tajima
USA"), which initially will assemble Tajima machines with up to six heads in the
United States to provide additional manufacturing capacity. The Company
anticipates that this manufacturing capacity will enable it to reduce its
inventory carrying costs to its customers.
In addition to offering a complete line of technologically-advanced
embroidery machines and customer training, support and service, Hirsch provides
an array of value-added products and services to its customers. The Company's
software subsidiary, Pulse Microsystems Ltd. ("Pulse"), develops and supplies
application software programs which enhance and simplify the embroidery process,
enable customization of designs and reduce production costs. Pulse has designed
and delivered the majority of its proprietary application software programs to
operate in the Microsoft(R) Windows 95TM environment, which Hirsch believes will
further enhance and simplify ease of use and user flexibility. The Company's
leasing subsidiary, HAPL Leasing Co., Inc. ("HAPL Leasing"), provides a range of
equipment financing options to customers wishing to finance equipment purchases.
Hirsch also sells a broad range of embroidery supplies, accessories and
proprietary embroidery products through Company's Embroidery Supply Warehouse
division ("ESW").
The Company's equipment and value-added products are marketed and sold by
sales and marketing personnel, whose efforts are augmented by trade journal
advertising, informational "open house" seminars and trade
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shows. Hirsch believes its reputation, knowledge of the marketplace,
exclusive Tajima distribution rights, industry expertise and innovation will
enable it to continue to increase the overall size of the embroidery equipment
market and its market share.
The Embroidery Industry
The embroidery industry has evolved from an industry characterized by
commercial embroiders using relatively simple labor intensive machinery with
limited production capabilities to an industry characterized by rapid growth and
technological change. The development of electronic computer-controlled
embroidery machines has led to new embroidery applications and markets, cost
savings, higher profit margins and production efficiencies. These machines offer
superior design flexibility, increased speed, the ability to embroider finished
products, the ability to efficiently embroider up to twelve colors at a time,
automatic thread trimming, and other labor-saving improvements. The embroidery
industry also benefitted from the sudden growth, beginning in the late 1980s, in
the use of licensed products by apparel and other manufacturers. Licensed names,
logos and designs provided by, among others, professional and collegiate sports
teams and the entertainment industry appear on caps, shirts, outerwear, luggage
and other softgoods for sale at affordable prices. In addition, the intricacy of
the designs capable of being embroidered and the availability of tandem
applications, those which include both embroidery and chenille, began to attract
broad fashion appeal and more recently commercial appeal for special event
promotional marketing. Embroidery equipment may contain single or multiple
sewing heads, each sewing head consisting of a group of needles which are fed by
spools of thread attached to the equipment. The design and production
capabilities of the sewing heads are enhanced through the integration of
computers and specialized software applications.
Business Strategy
The Company's objective is to establish and maintain long-term
relationships with its customers by providing them with a single source solution
for their embroidery equipment and related services and financing needs. To
achieve this goal, the Company has developed a comprehensive approach under
which it (i) sells a broad range of Tajima embroidery machines, (ii) develops
and supplies proprietary application software programs for embroidery machines,
(iii) sells a broad range of embroidery supplies, accessories and proprietary
products, (iv) provides leasing options to customers to finance equipment
purchases, (v) provides comprehensive customer training in the use of the
embroidery machines and related application software, and (vi) supports and
services the embroidery machines. The Company believes that this comprehensive
approach positions it to become its customers' preferred vendor for their
embroidery equipment and related services, supplies, and financing needs. To
complement its comprehensive approach effectively and efficiently, the Company's
business strategy includes the following:
Comprehensive Embroidery Machine Selection. The Company believes that
offering Tajima embroidery equipment provides it with a competitive advantage
because Tajima produces technologically advanced embroidery machines that are of
high quality, reliable and durable. The Company markets and distributes over 80
models of embroidery machines, ranging in size from one head per machine,
suitable for sampling and small production runs, to 30 heads per machine,
suitable for high production runs for embroidered patches and small piece goods
which become parts of garments of other soft goods.
Pulse Microsystem Software. The Company's Pulse subsidiary offers a wide
range of proprietary application software which enhances and simplifies the
embroidery process. The Company has designed and delivered a majority of its
proprietary application software products to operate in the Microsoft(R) Windows
95TM environment which the Company believes will enhance creativity, ease of use
and user flexibility. The Company intends to aggressively market its software
with embroidery equipment and as an upgrade to its installed base of
approximately 12,000 embroidery machines. The Company believes that these
products have broad appeal to purchasers of single-head and multi-head
embroidery machines and present opportunities for the Company to
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increase sales of embroidery equipment and software as the Company
continues to emphasize marketing activities. Pulse intends to continue to
automate the process of creating embroidery applications in order to open new
markets, reduce costs and increase production efficiencies. Pulse has increased
the number of its software developers and will continue to develop software that
enhances new features in the embroidery machines being introduced.
Financing Options. The Company's HAPL Leasing subsidiary offers its
customers the option to lease rather than purchase embroidery equipment. The
Company believes that HAPL Leasing's programs increase opportunities to sell
equipment by reducing the initial capital commitment required of a potential
purchaser. HAPL Leasing's programs are attractive to purchasers who desire to
begin or expand embroidery operations while limiting their initial capital
investment.
Embroidery Supplies, Accessories and Proprietary Products. The Company's
ESW division offers a broad range of embroidery supplies, accessories and
proprietary products. ESW is an integral part of the Company's single source
strategy. The Company's expanding marketing efforts will be directed toward
telemarketing, trade publication, advertising, catalog mailers and trade show
participation. ESW offers proprietary products together with a full line of
consumable supplies, parts and materials utilized in the embroidery process and
continues to develop special purpose embroidery replacement parts and products
that are more durable and simplify the embroidery process.
Customer Support and Service. The Company provides comprehensive customer
training, support and service for the embroidery machines and software that it
sells. The Company's customer service department includes service technicians
operating out of its headquarters and 22 regional offices. After the Company
delivers an embroidery machine to a customer, its trained personnel assist in
the installation of the machine and with setup and operation. The Company has a
staff of service representatives who provide assistance to its customers by
telephone. Most customer problems or inquiries can be handled by telephone, but
when necessary the Company dispatches one of its service technicians to the
customer. In addition, the Company provides at its facilities introductory and
advanced training programs developed by the Company to assist customers in the
use and operation of the embroidery machines it sells.
Growth Strategy
The Company has developed a number of complementary growth strategies,
including the following:
Grow with Embroidery Equipment Customers. The continuing growth of the
embroidery industry and the increasing number of embroidery entrepreneurs who
sell customized products into specialized niche markets presents the Company
with the opportunity to grow with its customers. The Company believes that
purchasers of smaller embroidery machines are a significant source of future
business for larger multi-head machines as their operations expand. The
Company's customer support personnel work with customers to assist them in
expanding their operations. By establishing a relationship through the sale of a
smaller embroidery machine, the Company strives to establish itself as the
customers' preferred vendor for larger multi-head machines. New uses for
embroidery machines in the sewing of apparel also present the Company with an
opportunity to grow with its customers and sell to new customers.
Increase Penetration in Recently Acquired New Equipment Distribution
Markets. The Company believes that it has excellent opportunities for growth in
the distribution territories acquired in the acquisitions of Sewing Machine
Exchange, Inc. ("SMX") and Sedeco, Inc. ("Sedeco," and collectively referred to
as "Recent Acquisitions") and in the western states where the Company has the
exclusive right to distribute small Tajima machines. The Company anticipates
that the introduction of its approach to marketing and customer training,
support and service will allow it to further penetrate the potential customer
base in these markets.
4
<PAGE>
Expand Sales of Value-Added Product and Services. Once a relationship with
a customer is established by the sale of a new or used embroidery machine, the
Company seeks to increase its sales by supplying software developed by Pulse and
a broad range of embroidery supplies and equipment through ESW. Offering the
customer leasing options through HAPL Leasing also presents the Company with an
opportunity to increase its revenues. In those regions of the United States into
which the Company has recently expanded through acquisitions and obtaining the
right to distribute small Tajima machines, the Company believes that it has a
particularly strong opportunity to expand sales of its value-added products and
services. Historically, the Company's sales of software products, leasing
activities and sales of ESW products have been concentrated in the states where
it has had the exclusive right to distribute embroidery machines. The Company
believes that expanding this area will allow it to better market its value-added
products and services. To facilitate this growth, the Company is establishing
ESW warehouses at the same locations as certain sales offices. In addition,
ESW's product line also is offered to all users of embroidery equipment in the
United States through trade publications, print advertising, catalogue mailers
and trade show participation.
In addition, HAPL Leasing has assembled a talented and aggressive staff of
regionalized sales and support personnel to blanket this expanded territory.
This regional sales approach is establishing HAPL Leasing's presence in the
midwest, southwest and on the west coast, and will increase their momentum in
sales and profitability. Pulse continues to set the software standard in the
embroidery industry with the release of Version 7 of its Signature(R) product
line. The user-friendly operating environment of Version 7 places the focus on
the creative end of designing which should revolutionize the art of digitizing.
In addition, the patented chenille software developed by Pulse has been
positively received by Tajima and has been displayed with their chenille
embroidery machines at international trade shows.
Establish Assembly Operations. The Company recently announced plans to
assemble Tajima embroidery machines in the United States through its subsidiary,
Tajima USA, initially in configurations of up to six heads. This assembly
facility will be located near the Company's headquarters. As a result, the
Company expects to be able to better manage its inventory. Presently, the
Company's current ordering cycle for these machines is approximately four to
five months prior to delivery to the Company. The Company also believes that
establishing this assembly facility will further strengthen its relationship
with Tajima.
Embroidery Equipment
Embroidery equipment may contain single or multiple sewing heads. The
Company markets and distributes over 80 models of embroidery machines, ranging
in size from one head per machine, suitable for sampling and small production
runs, to 30 heads per machine, suitable for high production runs for embroidered
patches and small piece goods which become part of garments or other soft goods.
The selling prices of these machines range from $20,000 to $180,000. Each sewing
head consists of a group of needles which are fed by spools of thread attached
to the equipment. The needles operate in conjunction with each other to
embroider the thread into the cloth or other surface in such configuration as to
produce the intended design. Thread flowing to each needle can be of the same or
varying colors. Each head creates a design and heads operating at the same time
create the same size and shape designs, although designs created at the same
time can differ in color. Thus, a 30 head machine with all heads operating
simultaneously creates an identical design on thirty surfaces. The design and
production capabilities are enhanced through the integration of computers and
specialized software applications.
Recent Product Developments. The Company often collaborates with Tajima in
the development of embroidery products. Over the past few years, Tajima has
introduced the following embroidery products: (i) wide Cap embroidery system,
which expands the small sewing field on finished caps to a 270 degree continuous
arc; (ii) the multi-color chenille embroidery machine, which enables
embroiderers to create more elaborate and colorful designs with chenille
stitches; (iii) the tandem chenille and embroidery machine, making it possible
to incorporate both chenille and embroidery into the same design; and (iv) the
Emblaser machine, which incorporates embroidery and laser technology into one
system, reduces production time and increases production efficiencies. The
Company
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believes that the greater variety of embroidered products that these
machines can produce will result in demand for these products presenting an
opportunity for growth for the Company.
Value Added Products
Software
All Tajima machines can be networked through Pulse software. The
computerization of the embroidery industry has led to a demand for more advanced
application software. Pulse, a strategic acquisition in 1994, is a developer and
supplier of a wide range of application software programs which enhance and
simplify the embroidery process. Pulse's computer-aided design software packages
are targeted at different functions performed by embroiderers, all in an
integrated product line. These products range from a basic lettering package
that permits the embroiderer to design names and letters for use on the product
to be embroidered to sophisticated packages that permit the creation and editing
of intricate designs, logos and insignias through the use of scanners and
computers.
Pulse also offers database products and business management tools to its
customers, including its Passport Embroidery Network which allows a single user
to network embroidery machines of any make or model. Additionally, it is a
production management system that provides users with the ability to monitor
production, diagnostic information and operator efficiency in real time.
In October 1995, Pulse introduced the Signature software product line which
enables designers to operate in the Microsoft(R) Windows 95TM environment. The
Signature software's TRUE TYPE functionality facilitates the creation of
embroidered lettering from any standard computer font. An On-Screen Digitizing
feature accommodates imported computer images and then, using many new artistic
features, easily digitizes them. This on-screen method is a quick and easy way
to create custom-embroidered designs with professional results.
In addition, Pulse has developed application software that uses bar codes
to recognize embroidery designs and embroidered lettering for the uniform
industry. Bar coding will facilitate the expedient and accurate retrieval of
designs from design databases. Pulse also developed application software to be
integrated with the new Tajima chenille and laser embroidery machines.
Leasing
In order to become a single source provider to the embroidery industry, the
Company formed HAPL Leasing in 1990. The Company believes that it is the only
embroidery equipment distributor with a captive leasing subsidiary providing the
Company with a unique competitive advantage.
Approximately 34.8% of the Company's revenues from sales were financed
through HAPL Leasing for the year ended January 31, 1997, compared to 35.3% for
the year ended January 31, 1996. HAPL Leasing minimizes its leasing risk by
selling substantially all of its sales-type leases to financial institutions on
a non-recourse basis. The selling price of the leases to financial institutions
generally will be a lump sum equal to the sales price of the embroidery
equipment leased, plus a portion of the finance charges paid by the lessee. In
addition, at the end of the lease term, the residual value of the embroidery
equipment may revert to HAPL Leasing or HAPL Leasing sells the equipment to the
lessee at terms agreed upon in the original lease agreement. Each lease
generally has a term of three to five years. As of January 31, 1997, HAPL
Leasing had sold approximately 90% of its leases on a non-recourse basis.
In some cases, third party funding sources condition their purchase of
leases on the establishment of a payment history. HAPL Leasing also retains
selected leases for which it has not obtained a purchase commitment from its
funding sources. In each case where a lease is retained, HAPL Leasing applies
its policies and procedures and knowledge of the industry to determine whether
to enter into the lease, including an evaluation of the
6
<PAGE>
purchaser's business prospects and the creditworthiness of the principals.
HAPL Leasing sells these leases if financing becomes available at a later date.
HAPL Leasing is continuing to increase the number of funding sources and
works with its funding sources to develop new lease programs attractive to the
embroidery industry.
Embroidery Supply Warehouse
ESW offers a broad range of embroidery supplies including threads, needles,
thread cone winders, embroidery hoops, embroidery backings and embroiderable
products such as caps, t-shirts, jackets, sweat suits, sweatshirts and canvas
bags. In addition, ESW develops embroidery products based on the recommendations
of embroiderers. ESW also distributes the Universal Hooper, a manual hooping
device, a machine thread rack upgrade called "Quick Thread" and specially sized
embroidering hoops for unusual applications.
ESW also recently introduced "Hoopless Air Clamps," a proprietary product
that allows manufacturers to apply embroidery to unfinished flat pieces without
the need for a hoop. The Company anticipates that this product will benefit
clothing manufacturers by reducing labor costs and production time.
Other products recently introduced by, ESW include: "Power Hoops;" Tajima
Hoops; 3-D Embroidery Foam, which allows embroiderers to add new multi-media,
multi-dimensional embroidery to a design using existing equipment; steamers,
which remove wrinkles and hoop marks; cleaning guns, which remove stains that
occur during the embroidery process; and Peggy's Stitch Eraser, an electric
stitch remover that allows embroiderers to quickly and efficiently remove bobbin
thread from sewn garments.
Marketing and Customer Support
The Company has been selling embroidery equipment since 1976 and believes
it is the leading distributor of Tajima equipment in the world. The Company
reinforces recognition of its name through trade journal advertising and
participation in seminars and over 25 trade shows annually. The Company's
growing sales staff is headed by Paul Levine, Executive Vice President and Chief
Operating Officer of the Company, and currently consists of salespeople who
maintain frequent contact with customers in order to understand each customer's
needs. Through its reputation, knowledge of the marketplace, investment in
infrastructure and experience in the industry, the Company believes it is
increasing its market share.
The Company believes that a key element in its success has been focus on
customer service, and investment in sales support and training, infrastructure
and technology to support operations. The Company provides at its facilities
extensive two to five day training programs developed by the Company to assist
customers in the use and operation of the embroidery machines it sells.
Customers are trained in the operation of embroidery machines as well as in
embroidery techniques and the embroidery industry in general. The Company
provides proprietary videotapes and manuals as training tools. Company personnel
also provide technical and software support by telephone, field maintenance
services and quality control testing, as well as advice with respect to matters
generally affecting embroidery operations.
The Company also has developed an internal training center for its
employees at its Cleveland training center. The program educates employees about
the embroidery industry, the history of embroidery and the Company, embroidery
techniques and the operation of embroidery machines. Service technicians receive
an intensive training program in addition to the aforementioned program. Senior
service technicians also receive formal training from Japan for several weeks
and receive technical updates from Tajima throughout the year. The Company will
continue to dedicate resources to education and training as the foundation for
providing the highest level of customer service.
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In addition, the Company collaborates with its customers and Tajima in
connection with the development of new embroidery equipment and applications to
meet the specialized needs of the Company's customers. Current projects include
the development of embroidery applications for a major automobile manufacturer,
collaborations with high end designer clothing manufacturers to reduce
production costs and increase efficiency and further development of Pulse
software to be integrated with the Tajima chenille and laser machines.
The Company provides the customer with a one-year warranty against
malfunctions from defects in material or workmanship on the Tajima machines it
distributes. The warranty covers parts and labor. Tajima provides the Company
with a one-year warranty that covers substantially all of the Company's warranty
costs.
Supplier Relationships with Tajima
Three separate distributorship agreements govern the Company's right to
distribute Tajima embroidery equipment in the United States.
The Company has two separate distributorship agreements with Tajima which,
collectively, provide the Company the exclusive right to distribute Tajima's
complete line of standard embroidery, chenille embroidery and certain specialty
embroidery machines in 39 States. The main agreement (the "East Coast/Midwest
Agreement") which covers 33 States, became effective on February 21, 1991, has a
term of 20 years and contains a renewal provision which permits successive five
year renewals upon mutual agreement of the parties. The East Coast/Midwest
Agreement is terminable by Tajima and/or the Company on not less than two years'
prior notice except that Tajima cannot terminate the East Coast/Midwest
Agreement prior to February 20, 1998. The second agreement (the "Southwest
Agreement") covers six states, became effective on February 21, 1997 and has a
term of five years. Under the third distributorship agreement, which covers nine
western states and Hawaii, the Company is the exclusive distributor of Tajima's
single, two, four and six head machines as well as chenille or chenille/standard
embroidery machines with less than four heads or two stations, respectively (the
"West Coast Agreement"). The West Coast Agreement has a term of five years
initially terminates on February 20, 2002, and contains a renewal provision
which permits successive five year renewals upon mutual agreement of the
parties.
Each of the agreements may be terminated if the Company fails to achieve
certain minimum sales quotas. Furthermore, the East Coast/Midwest Agreement may
be terminated if Henry Arnberg and Paul Levine (or in certain circumstances,
their spouses and children) fail to own a sufficient number of shares of voting
stock to elect a majority of the Company's Board of Directors. The Southwest
Agreement may be terminated if the Company fails to remain the sole shareholder
of its subsidiary that is the party to the Southwest Agreement. The West Coast
Agreement may be terminated should any material change occur in the current
Class B shareholders, directors or officers of the Company.
Although there can be no assurance, management of the Company believes that
the likelihood of the loss of Tajima as a source of supply is remote because:
(i) the Company has a 20 year relationship with Tajima and is Tajima's largest
distributor; (ii) Tajima's success in the United States is, in large part,
attributable to the Company's knowledge of the marketplace as well as the
Company's reputation for customer support; and (iii) the Company and Pulse
support Tajima's development activities and the Pulse software enhances the
Tajima product line.
Other Supplier Relationships
The Company purchases personal computers which are integrated with the
embroidery machines it distributes. ESW obtains its supplies from many different
sources. The Company believes that alternate sources of supply are readily
available.
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Customers
The Company's customers range from large operators who run numerous
machines to individuals who customize products on a single machine. Principal
customer groups include: (i) contract embroiderers, who serve manufacturers that
outsource their embroidery requirements; (ii) manufacturers, who use embroidery
to embellish their apparel, accessories, towels, linens and other products with
decorative appeal; and (iii) embroidery entrepreneurs, who produce customized
products for individuals, sports leagues, school systems, fraternal
organizations, promotional advertisers and other groups. The Company's customers
include: Fruit of the Loom, Russell Licensed Products, Logo 7, Healthtex, Five
B's, Osh Kosh B'Gosh, Avanti Lines and William Carter Company.
Competition
The Company competes with distributors, such as Macpherson, Inc., a
distributor of Barudan multi-head embroidery machines and Meistergram
single-head embroidery machines, as well as with smaller distributors. The
Company also competes with original equipment manufacturers, such as Brother
International and Melco Embroidery Systems ("Melco"), which distribute products
directly into the Company's markets. The Company believes it competes against
these distributors on the basis of knowledge, experience, name recognition,
customer service and the quality of the embroidery equipment it distributes.
Further, the Company's customers are subject to competition from importers
of embroidered products, which could affect the Company's operations.
The Company's success is dependent, in part, on the ability of Tajima to
continue producing products which are technologically superior and price
competitive with those of other manufacturers.
Pulse's software products compete against products developed by several
companies from around the world. The primary competitors are Wilcom Pty., an
Australian corporation, Gunold & Stickma GmbH, a German corporation and Melco.
The Company believes that Pulse competes on the basis of ease of use,
functionality and the range of software applications it markets.
HAPL Leasing competes principally with equipment leasing brokers
specializing in the embroidery industry and other financing sources such as
banks and other financial institutions. The Company believes that it competes on
the basis of HAPL Leasing's favorable pricing and because the Company is a
single source provider of embroidery equipment, customer service and support and
value added products.
ESW competes with a division of Melco and other vendors of embroidery
supplies. The Company believes that the market for embroidery supplies is
fragmented and that ESW will benefit from the breadth of its product line,
development of proprietary products and the fact that the Company is a single
source provider.
Patents and Copyrights
The Pulse software has copyright protection under Canadian law and the
Berne Convention which also affords it protection in the United States. Certain
of the Pulse software has also been granted United States copyright
registrations. The following patents have been granted in the United States:
"Method For Modifying Embroidery Design Programs", "Embroidery Design System",
"Method For Creating Self-Generating Embroidery Pattern" and "Method for
Automatically Generating Chain Stitches," and two patents entitled "Method for
Automatically Generating A Chenille-Filled Embroidery Stitch Pattern." Pulse
also has several other patents pending in the United States Patent and Trademark
Office. Pulse also has the following patent pending in the European Patent
Offices: "Method for Modifying Embroidery Design Programs," and the following
patents pending in the Japanese Patent office: "Method for Modifying Embroidery
Design Programs," "Method for Automatically Generating Chain Stitches" and
"Method For Automatically Generating A Chenille-Filled Embroidery Stitch
9
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Pattern." Pulse believes these protections are sufficient to prevent
unauthorized third party uses of such property rights. Neither Pulse nor the
Company is aware of any patents or other intellectual property rights of third
parties which would prevent the use of Pulse's intellectual property. The
Company continues to seek intellectual property protection for Pulse products.
Employees
As of March 31, 1997, the Company employed approximately 325 persons
engaged in sales for the Company, ESW, HAPL Leasing and Pulse, customer service
and supplies, product development, and finance administration and management.
None of the Company's employees is represented by unions. The Company believes
its relationship with employees is good.
Item 2. Properties
The Company's corporate headquarters is in Hauppauge, New York in a 50,000
square foot facility. This property houses the Company's executive offices, the
Northeast sales office, customer service, software support and warehouse space.
Additionally, both HAPL Leasing and ESW operate out of this facility. On October
27, 1994, the Company entered into a ten year, $2,295,000 Mortgage agreement
with a bank 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 Company's obligations under the Mortgage are secured by a lien on
the premises and the related improvements thereon.
In March 1997, the Company entered into a five year lease for a 25,000
square foot factory facility in Bohemia, New York where its subsidiary, Tajima
USA, Inc., will operate a machine assembly facility. The lease provides for
lease payments of approximately $132,000 per annum.
In addition to the Company's headquarters, the Company owns one satellite
office and leases 22 regional satellite offices. These offices consist of
regional sales offices, training centers, repair centers and warehouse and
showroom space.
Item 3. Legal Proceedings
There are no material legal proceedings pending against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of Security holders during
the fourth quarter of its most recent fiscal year.
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PART II
Item 5. Market For Common Equity and Related Stockholder Matters
(a) The Company's outstanding Common Stock consists of two classes, Class A
Common Stock and Class B Common Stock. The Class A Common Stock, par value $.01
per share, trades on the NASDAQ Stock Market under the symbol HRSH. The
following table sets forth for each period indicated the high and low sale
prices for the Class A Common Stock as reported on the NASDAQ National Market.
Trading began in the Class A Common Stock on February 17, 1994.
Fiscal 1996 High Low
First Quarter ended April 30, 1995........................$ 8.48 $ 6.23
Second Quarter ended July 31, 1995........................$10.40 $ 6.88
Third Quarter ended October 31, 1995......................$12.20 $ 8.80
Fourth Quarter ended January 31, 1995.....................$12.00 $ 8.80
Fiscal 1997
First Quarter ended April 30, 1996........................$13.20 $10.20
Second Quarter ended July 31, 1996........................$17.60 $12.60
Third Quarter ended October 31, 1996......................$19.25 $15.25
Fourth Quarter ended January 31, 1997.....................$23.00 $17.25
The sale prices have been adjusted to reflect two 5-for-4 stock splits paid
in the form of a 25% stock divided effected July 25, 1995 and July 22, 1996.
(b) As of April 21, 1997, the Company believes that there were
approximately 3,395 beneficial owners of its Class A Common Stock.
(c) The Company intends to retain earnings for use in operations and
expansion of its business and therefore does not anticipate paying cash
dividends on the Class A Common Stock or the Class B Common Stock in the
foreseeable future. The future payment of dividends is within the discretion of
the Board of Directors and will be dependent, among other things, upon earnings,
capital requirements, financing agreement covenants, the financial condition of
the Company and applicable law. The Class A Common Stock and Class B Common
Stock share ratably in any dividends declared by the Company on its Common
Stock. Any stock dividends on the Class A Common Stock and the Class B Common
Stock will be paid in shares of Class A Common Stock.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The consolidated financial statement data as of
January 31, 1997 and 1996 and for the fiscal years ended January 31, 1997, 1996
and 1995 are derived from, and are qualified by reference to, the audited
Consolidated Financial Statements included elsewhere herein and should be read
in conjunction with those Consolidated Financial Statements and the Notes
thereto. The consolidated financial statement data as of January 31, 1995, 1994
and 1993 and for the fiscal years ended January 31, 1994 and 1993 are derived
from audited Consolidated Financial Statements not included herein.
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<TABLE>
<CAPTION>
Year Ended January 31,
(in thousands)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Sales........................... $122,195 $87,974 $70,709 $49,959 $43,584
Interest income related to sales-type 3,243 3,022 1,617 571 37
leases..............................
Cost of goods sold.................. 80,820 58,836 47,881 35,452 30,628
Selling, general and administrative 29,070 20,638 16,155 10,520 9,614
expenses............................
Income before income taxes.......... 15,170 11,402 8,159 4,272 3,078
Income taxes........................ 6,402 4,837 3,335 1,663(1) 1,226
Net income (5)...................... 8,768 6,565 4,823 2,609(1) 1,853
Income per share.................... $ 1.10 $ 0.87 $ 0.66 $ 0.49(1) $ 0.35
======= ======= ======= ========== =======
Shares used in the calculation of net
income per share (5)................ 7,972 7,512 7,335 5,332 5,332
</TABLE>
<TABLE>
<CAPTION>
January 31,
(in thousands of dollars)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital..................... $22,959 $16,847(3) $10,363(2) $ 1,674 $ 5,351
Total assets........................ 83,696 47,872(3) 37,504(2) 21,349 15,149
Long-term debt, less current 13,194(4) 1,779 2,696 776 935
maturities..........................
Stockholders' equity................ 41,682 29,134(3) 20,636(2) 7,830 6,287
</TABLE>
(1) Income taxes, net income and income per share for the fiscal year ended
January 31, 1994 reflect, on a pro forma basis, the federal and regular state
income taxes which would have been incurred if the Company had been taxed as a C
Corporation under the Code and applicable state statutes during such period.
(2) In February 1994, in connection with its initial public offering (the
"IPO"), the Company received net proceeds of $7,353,000, after deducting
expenses of the IPO.
(3) In January 1996, in connection with a second public offering of its
Class A Common Stock (the Second Offering"), the Company received net proceeds
of $1,906,000, after deducting expenses of the Second Offering.
(4) Included in long-term debt, less current maturities at January 31, 1997
is $11,645,000 of debt relating to the Company's Recent Acquisitions.
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(5) Income per share figures and shares used in calculation of net income
per share have been retroactively adjusted to refle ct a 5% stock dividend paid
in August 1994 and two 5-for-4 stock splits paid in the form of a 25% stock
dividend effected July 1995 and July 1996.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When used herein, the words "anticipate,"
"believe," "estimate" and "expect" and similar expressions as they relate to the
Company or its management are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from the results expressed in or implied by these
forward-looking statements. As used herein, "fiscal year" refers to the fiscal
year ending January 31 of the identified calendar year.
General
Hirsch is a leading single source supplier of electronic
computer-controlled embroidery machinery and related value-added products and
services to the embroidery industry. The Company offers a complete line of
technologically advanced single-head and multi-head embroidery machines,
proprietary application software and a diverse line of embroidery supplies,
accessories and proprietary products. Hirsch believes its comprehensive customer
service, user training, software support and broad product offerings combine to
place the Company in a superior competitive position within its marketplace. The
Company sells embroidery machines manufactured by Tajima.
The Company's focus during the past several years has been on growth and
expansion. The acquisitions of Sewing Machine Exchange, Inc. ("SMX") and Sedeco,
Inc. ("Sedeco") increased the area in which the Company is the exclusive
distributor of Tajima embroidery equipment from 26 states to 39 states. These
acquisitions (the "Recent Acquisitions") were accounted for as Purchases in
accordance with Accounting Principles Board Opinion on No. 16, "Business
Combination." See Note 3 of Notes to Consolidated Financial Statements. In
January 1997, Tajima granted the Company the exclusive right to distribute small
(one through six head) Tajima embroidery machines in nine western states and
Hawaii. With this expansion of the Company's small machine territory to the West
Coast, Hirsch now has the exclusive right to distribute Tajima small machines in
the continental United States and Hawaii. Hirsch also announced the formation of
its newest subsidiary, Tajima USA which has been created for the sole purpose of
assembling Tajima embroidery machines in the United States. Production at Tajima
USA will consist of models in configurations of up to six heads per machine.
With the full assistance and support of Tajima, Hirsch expects the facility to
be in operation by June 1997.
The Company's growth has also resulted from rapid technological change in
embroidery equipment and related application software, the continued strong
demand for embroidered products, the creation of new embroidery applications and
the continued strength of "embroidery entrepreneur," who produce customized
products for individuals, sports leagues, school systems, fraternal
organizations, promotional advertisers and other groups, as a growing segment of
the marketplace. The Company believes that the purchasers of smaller embroidery
machines are a significant source of future business for the sale of multi-head
embroidery machines as the entrepreneurs' operations expand.
The Company's revenues have increased at a compound annual growth rate of
31.7% from $72,326,000 in fiscal year 1995 to $125,439,000 in fiscal year 1997.
Revenue growth from fiscal year 1995 to fiscal year 1997 has benefitted from an
increase in revenue from the sale of embroidery machinery of approximately
$40,958,000 from $60,753,000 in fiscal year 1995 to $101,711,000 in fiscal year
1997. Revenue for fiscal year 1997 also benefitted from $14,500,000 in revenues
from the newly acquired distribution territories. The revenue contribution from
value-added products divisions has increased from approximately 7.5% of total
revenues in fiscal year 1995
13
<PAGE>
to approximately 9% of total revenue in fiscal year 1997 which has also
contributed significantly to the Company's growth during this period.
Earnings per share have increased at a compound annual growth rate of 29.1%
from $.66 per share for fiscal year 1995 to $1.10 per share for fiscal year 1997
and, net income has increased at a compound annual growth rate of 35% from
$4,823,000 for fiscal year 1995 to $8,768,000 for fiscal year 1997. Growth in
earnings per share and net income is the result of consistent margins on the
sale of embroidery machinery and the growth in the sale of higher margin
value-added products. The net income contribution from the Company's value-added
products has increased from approximately 24% in fiscal year 1995 to
approximately 34% in fiscal year 1997. After consideration of amortization
expense for the excess of cost over net assets acquired and interest expense for
the incurred debt, the net income contributions from the Recent Acquisitions
were nominal in fiscal year 1997.
Results of Operations
The following table presents certain income statement items expressed as a
percentage of total revenue for the fiscal years ended January 31, 1995, 1996
and 1997.
<TABLE>
<CAPTION>
Year Ended January 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales....................................................... 97.4% 96.7% 97.8%
Interest income related to sales-type leases.................... 2.6% 3.3% 2.2%
------ ------ --------
Total revenue................................................... 100.0% 100.0% 100.0%
Costs of goods sold............................................. 64.4% 64.7% 66.2%
Selling, general and administrative expenses.................... 23.2% 22.7% 22.3%
Interest expense, net........................................... 0.7% 0.4% 0.5%
Other income, net............................................... (0.3%) (0.3%) (0.3%)
------ ------ --------
Income before income taxes...................................... 12.0% 12.5% 11.3%
Provision for income taxes...................................... 5.0% 5.3% 4.6%
------ ------ --------
Net income...................................................... 7.0% 7.2% 6.7%
====== ====== ========
</TABLE>
Fiscal Year 1997 as Compared to Fiscal Year 1996
Net Sales. Net sales for fiscal year 197 were $122,195,000, an
increase of $34,221,000, or 38.9%, compared to $87,974,000 for fiscal year 1996.
Approximately $25,347,000, or 74.1%, of this increase was due to the sale of
embroidery machinery for fiscal year 1997. The sale of embroidery machines
represented approximately $101,710,000 or 83.2%, and $76,363,000 or 86.8%, of
net sales for fiscal years 1997 and 1996, respectively. The Company believes
that this increase is the result of the continued strong demand for embroidered
products, the creation of new embroidery applications and markets and the
continued strength of "embroidery entrepreneurs" as a growing segment of the
marketplace. Additionally, technological advances and innovations in embroidery
equipment have opened up new marketing opportunities.
The expansion of the Company's distribution territory through the
Recent Acquisitions also resulted in increased reenues for fiscal year 1997.
Approximately $12,500,000 of sales were attributable to the acquisition of SMX
for the period from June 7, 1996 through January 31, 1997, and approximately
$2,000,000 of sales were attributable to the acquisition of Sedeco for the
period from December 20, 1996 through January 31, 1997 (See Note 3 of Notes to
Consolidated Financial Statements).
The Company's revenues have also grown in lrge part as a result in the
growth in sales of the single-head embroidery machine. Single-head embroidery
machines and multi-head embroidery machines represented 45.6% and 54.4%,
respectively, of the number of embroidery machines sold during fiscal year 1997
as compared to 39.8% and 60.2% for fiscal year 1996, respectively.
14
<PAGE>
The Company previously sold embroidery machines manufactured by Brother
Industries Ltd. ("Brother") and, through the acquisition of SMX, Melco
Embroidery Systems ("Melco"). However, effective October 16, 1996, the Company
discontinued the distribution of Brother embroidery machines. In addition, the
Company came to a mutual agreement with Melco effective December 31, 1996 in
which the Company discontinued the distribution of Melco embroidery equipment
through SMX.
Revenue from the sale of the Company's proprietary application software,
embroidery supplies, accessories and proprietary products for fiscal year 1997
aggregated approximately $20,485,000, as compared to $11,611,000, which
represents an increase of approximately 76.4% for fiscal year 1996. This
increase is primarily attributable to the increase in revenues from the sale of
embroidery machines.
Interest income related to sales-type leases. HAPL Leasing's interest
income increased 7.3% to $3,243,000 for fiscal year 1997 from $3,022,000 for the
comparable period of the prior year. This increase is a result of the continued
expansion of HAPL Leasing's operations and staff. In order to increase market
share, HAPL Leasing reduced its rates in certain instances, which resulted in
growth that was not proportionate to the growth in revenues from the sale of
embroidery machines.
Cost of Goods Sold. For fiscal year 1997, cost of goods sold increased
$21,984,000, or 37.4%, to $80,820,000 from $58,836,000 for fiscal year 1996. The
increase was in direct proportion to the Company's increased sales volume. The
fluctuation of the dollar against the yen had a minimal effect on Tajima
equipment gross margins since currency fluctuations generally have been
reflected in pricing adjustments in order to maintain consistent gross margins
on machine revenues. 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 fiscal year 1997
SG&A expenses increased $8,432,000, or 40.9%, to $29,070,000 from $20,638,000
for fiscal year 1996. SG&A expenses increased as a percentage of revenues to
23.2% from 22.7%. This increase in SG&A expenses as a percentage of revenues is
primarily attributable to the following factors:
o The Company made a significant investment in its infrastructure as it
relates to its growth strategy and the West Coast Expansion. Additional sales,
marketing, training, administrative and technical support personnel were hired
to support this growth. The Company also entered into leases for several new
sales offices and incurred start up costs related to these offices. The Company
also increased expenditures for advertising and for participation in trade
shows.
o Expenses incurred in connection with the Recent Acquisitions.
Interest Expense. Interest expense for fiscal year 1997 increased $435,000,
or 109.7%, from $397,000 in fiscal year 1996 to $832,000 in fiscal year 1997.
This increase is directly attributable to the increased interest costs related
to the additional debt incurred in connection with the Recent Acquisitions.
Provision for Income Taxes. The provision for income taxes reflected an
effective tax rate of approximately 42.2% for fiscal year 1997 as compared to
42.4% for fiscal year 1996. Differences from the federal statutory rate
consisted primarily of provisions for state income taxes net of Federal tax
benefit. 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 was no
effect on deferred taxes as a result of the SMX acquisition, which was accounted
for as an asset purchase for tax purposes. The goodwill related to the SMX
acquisition is being amortized over 15 years for both book and tax purposes. The
goodwill related to the Sedeco acquisition, which was accounted for as a stock
purchase for tax purposes, resulted in a permanent difference since it is not
deductible for tax purposes. The Company has not established any
15
<PAGE>
valuation allowances against these deferred tax assets because 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 fiscal year 1997 increased $2,203,000, or 33.6%,
to $8,768,000 from $6,565,000 for fiscal year 1996. This increase was 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. The net margin decreased to
6.99% in fiscal year 1997 from 7.21% in fiscal year 1996. This decrease is
attributable to the increase in SG&A expenses.
Fiscal Year 1996 as Compared to Fiscal Year 1995
Net Sales. Net sales for the fiscal year 1996 were $87,974,000, an increase
of $17,265,000, or 24.4%, compared to $70,709,000 for the fiscal year 1995.
Approximately $15,609,000 of this increase was the result of increased sales of
embroidery machinery. The sale of embroidery machines represented approximately
$76,363,000 or 86.8% and approximately $80,753,000 or 85.9% of net sales for
fiscal years 1996 and 1995, respectively. The Company believes that this
increase resulted from the continued strong demand for traditional embroidered
products, the expanding number of new embroidery applications and markets and
the emergence of embroidery entrepreneurs as a growing segment of the
marketplace.
The increase in single-head machine sales has attributed to the overall
increase in net sales. Single-head and multi-head embroidery machines
represented 39.8% and 60.2%, respectively, of the number of embroidery machines
sold during fiscal year 1996 as compared to 38.0% and 62.0%, respectively, for
fiscal year 1995.
Revenues from the sale of the Company's proprietary application software,
embroidery supplies, accessories, proprietary embroidery products and used
machines for fiscal year 1996 aggregated approximately $11,611,000 as compared
to $9,956,000 for fiscal year 1995, which represents an increase of
approximately 16.6% for fiscal year 1995. This increase is primarily
attributable to the increase in revenue from the sale of embroidery machines.
Interest Income Related to Sales-Type Leases. HAPL Leasing had interest
income of $3,022,000 for fiscal year 1996 compared to $1,617,000 for fiscal year
1995. This increase was a result of the continued expansion of HAPL Leasing's
operations.
Cost of Goods Sold. For fiscal year 1996, cost of goods sold increased
$10,954,000, or 22.9%, to $58,836,000 from $47,881,000 for fiscal year 1995.
This increase was in direct proportion to the Company's increased sales volume.
The devaluation of the dollar against the yen had a minimal effect on Tajima
equipment gross margins since all currency fluctuations were generally reflected
in pricing adjustments. Profit margins were consistent throughout the Tajima and
Brother product lines.
Selling, General and Administrative ("SG&A") Expenses. For fiscal year
1996, SG&A expenses increased $4,483,000, or 27.8%, to $20,638,000 from
$16,155,000 for fiscal year 1995. SG&A expenses increased as a percentage of
revenues to 22.7% from 22.3%. This increase was primarily attributable to the
Company's investment in its infrastructure. In order to implement its growth
strategy, the Company hired additional sales and marketing personnel dedicated
to small machine sales, opened or expanded eight sales offices, hired additional
software programmers and support staff and expanded the embroidery supplies,
sales and marketing staff. The Company also increased expenditures for
advertising and participation at trade shows and seminars.
Interest Expense. Interest expense for fiscal year 1996 increased $40,000,
or 11.3%, to $397,000 from $357,000 fiscal year 1995. This increase was a result
of the mortgage on the Company's new corporate headquarters.
16
<PAGE>
Provision for Income Taxes. The provision for income taxes reflected an
effective tax rate of approximately 42.4% for fiscal year 1996 as compared to
40.9% for fiscal year 1995. Differences from the Federal statutory rate
consisted primarily of provisions for state income taxes net of Federal tax
benefits. The increase in the tax rate for fiscal year 1996 was principally the
result of changes in the sales mix which resulted in increased sales to states
with higher effective tax rates and increased sales of software which are taxed
in a jurisdiction with a higher effective tax rate. The principal components of
the deferred income tax assets resulted from allowances and accruals which were
not deductible for tax purposes and differences in amortization periods between
book and tax bases. The Company has not established any valuation allowances
against these deferred tax assets because 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 fiscal year 1996 increased $1,742,000, or 36.1%,
to $6,565,000 from $4,823,000 for fiscal year 1995. The Company's net margin
increased from 6.7% in fiscal year 1995 to 7.2% in fiscal year 1996. These
increases were primarily due to the continued growth in the sale of embroidery
equipment and increased sales of the Company's value-added products.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $22,959,000 at January 31, 1997,
increasing $6,112,000, or 36.3%, 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 completed in January 1996. The acquisition of SMX
was financed through a term loan agreement with a bank. The acquisition of
Sedeco was financed through borrowings against the $30 million Revolving Credit
Facility described below (See Note 8 of Notes to Consolidated Financial
Statements).
During fiscal year 1997, the Company's cash and cash equivalents and
short-term investments available-forsale increased by $1,609,000 to $10,460,000.
Net cash of $3,422,000 was provided by the Company's operating activities
principally as a result of the Company's earnings of $8,768,000. Changes to
working capital components resulted in a use of cash of approximately
$7,598,000. Cash provided by increases in the balance of trade acceptances
payable, income taxes payable and customer deposits aggregating approximately
$5,889,000 was offset by cash used to increase inventory, accounts receivable,
net investment in sales-type leases and other assets aggregating $10,885,000 and
a decrease in accounts payable and accrued expenses of approximately $2,602,000.
These changes resulted from expansion of the Company's business and the
acquisitions during the year.
The Company purchases foreign currency futures contracts to hedge specific
purchase commitments. Substantially all foreign currency purchases 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 11(B) of Notes to Consolidated
Financial Statements.
Revolving Credit Facility and Borrowings
In January 1997, The Company entered into a $30,000,000 Revolving Credit
Facility with two banks (the "Revolving Credit Facility"). The Revolving Credit
Facility is to be used for working capital loans, letters of credit and deferred
payment letters of credit and bear interest as defined in the Revolving Credit
Facility. The terms of the Revolving Credit Facility restrict additional
borrowings by the Company and require the Company to maintain certain minimum
tangible net worth, quick asset ratio and fixed charge coverage levels as
defined. The Revolving Credit Facility also provides a $15,000,000 sub-Facility
to finance acquisitions (as defined therein), under which approximately
$4,446,000 was outstanding at January 31, 1997 to finance the Sedeco acquisition
and repay its
17
<PAGE>
outstanding credit facilities (see Notes 3 and 8 (C) of Notes to
Consolidated Financial Statements). The Revolving Credit Facility had also been
used for letters of credit and deferred payment letters of credit aggregating
approximately $13,332,000 at January 31, 1997. There were no working capital
loans outstanding at January 31, 1997.
On June 10, 1996, the Company entered into a term loan agreement with a
bank (the "Term Loan Agreement") pursuant to which the bank lent $7,500,000 to
the Company to fund the acquisition of SMX and to repay SMX's credit facilities
under which approximately $6,750,000 was outstanding on January 31, 1997. The
loan is repayable in twenty equal quarterly installments of principal and
interest (as defined in the Term Loan Agreement) commencing 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 Leasing 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. HAPL Leasing, which
was fully activated in May 1993, has closed $93,953,000 in lease agreements as
of January 31, 1997. As of February 28, 1997, approximately $84,782,000, or
90.2%, of the leases have been sold to third party financial institutions on a
non-recourse basis.
Future Capital Requirements
The Company believes its existing cash and funds generated from operations,
together with amounts available under the Revolving Credit Facility, 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 the date the customer's orders
are received, and as a result, backlog is not meaningful as an indicator of
future sales.
Inventory at January 31, 1997 of new Tajima embroidery machines was
$9,151,000 representing approximately one month's sales which is comparable to
historical inventory levels. Inventory of approximately $3,094,000 consisted of
computer software, used machines and other equipment, supplies and accessories.
Inflation
The Company does not believe that inflation has had, or will have in the
foreseeable future, a material impact upon the Company's operating results.
Recent Pronouncements of the Financial Accounting Standards Board
Earnings Per Share and Capital Structure. 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. 129, "Disclosure of Information about Capital Structure" ("SFAS No.
129") and SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 129 and
128 specify guidelines as to the method of computation as well as presentation
and disclosure requirements for earnings per share ("EPS"). The objective of
these statements is to simplify the calculation and to make the U.S. standard
for computing EPS more compatible with the EPS standards of other countries and
with that of the International Accounting Standards Committee. These statements
are effective for fiscal years ending after December 15, 1997 and earlier
application is not permitted.
18
<PAGE>
SFAS 129 and 128 will have an impact on the Company's EPS calculation and
disclosure requirements but management cannot predict the outcome at this time.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Debt. SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" ("SFAS No. 125") is
effective for transactions occurring after December 15, 1996, although many
provisions have been effectively deferred by the issuance of SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125"
until after December 15, 1997 for certain transactions. Adoption of these
pronouncements are not expected to have a material impact on the Company's
consolidated financial statements.
Stock-Based Compensation. The Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") for fiscal year 1997. As discussed in
Note 2 of Notes to Consolidated Financial Statements, the Company continues to
account for its stock-based awards using the intrinsic value method in
accordance with APB No, 25, "Accounting for Stock Issued to Employees" and its
related interpretations. Accordingly, no compensation expense has been
recognized in the consolidated financial statements for employee stock
arrangements. SFAS No. 123 requires disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method as of the
beginning of fiscal year 1996. The Company's calculations were made using the
Black-Scholes option pricing model. If the computed fair values of the 1997
awards had been amortized to expense over the vesting period of the awards, pro
forma net income for fiscal year 1997 would have been approximately $8,494,000
($1.07 per share). The impact of SFAS No. 123 on pro forma net income for fiscal
year 1996 was zero. However, the impact of outstanding non-vested stock options
has been excluded from the pro forma calculation; accordingly, the pro forma
adjustments for fiscal years 1997 and 1996 are not indicative of future period
pro forma adjustments, when the calculation will apply to all applicable stock
options.
Item 8. Financial Statements And Supplementary Data
The information contained in pages F-1 through F-23 hereof.
Item 9. Changes In And Disagreement With Accountants On Accounting and
Financial Disclosure
None
19
<PAGE>
PART IV
Item 10. Exhibits, Financial Statement Schedules And Reports On Form 8-K
<TABLE>
<CAPTION>
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS PAGE(S)
<S> <C>
Index to Consolidated Financial Statements F-1
Independent Auditor's Reports F-2
Consolidated Balance Sheets as of January 31, 1997 and 1996 F-3
Consolidated Statements of Income for the years ended January 31, F-5
1997, 1996 and 1995
Consolidated Statements of Stockholder's Equity for the years ended F-6
January 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended January F-7
31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements F-9 - F-23
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULES
None
(a)(3) EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
Number
<S> <C>
*3.1 Amended and Restated Certificate of Incorporation of the Registrant
*3.2 By-Laws of the Company
*4.1 Specimen of Class A Common Stock Certificate
*4.2 Specimen of Class B Common Stock Certificate
***10.1 $7,500,000 Term Loan Agreement, Dated as of June 10, 1996,
among Hirsch International Corp., HAPL Leasing Co., Inc., Sewing Machine
Exchange, Inc., Pulse Microsystems, Ltd. and The Bank of New York
10.2 $30,000,000 Revolving Credit Facility Dated as of January 7, 1997 among Hirsch
International Corp., HAPL Leasing Co., Inc., Sewing Machine Exchange, Inc.,
Pulse Microsystems, Ltd., Sedeco, Inc., The Bank of New York and Fleet Bank,
N.A.
**10.3 $2,295,000 Mortgage Note from Hirsch International Corp. to Chemical
Bank
**10.4 Mortgage between Hirsch International Corp. and Chemical Bank
**10.5 Guaranty of Payment of HAPL Leasing Col, Inc. and Pulse Microsystems Ltd. to
Chemical Bank
****10.6 Stock Purchase Agreement, dated June 7, 1996, by and
among Hirsch International Corp. and Ronald H. Krasnitz and Martin Krasnitz
*****10.7 Stock Purchase Agreement, Dated December 20, 1996 by and between
Hirsch International Corp. and Jimmy L. Yates
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
*10.8 Employment Agreement between Henry Arnberg and the Registrant
*10.9 Employment Agreement between Paul Levine and the Registrant
*10.10 Employment Agreement between Kenneth Shifrin and the Registrant
*10.11 Employment Agreement between Tas Tsonis and the Registrant
*10.12 Employment Agreement between Brian Goldberg and Pulse Microsystems Ltd.
***10.13 Employment Agreement between Ronald H. Krasnitz and Sewing Machine Exchange,
Inc.
***10.14 Employment Agreement between Martin Krasnitz and Sewing Machine Exchange, Inc.
10.15 Employment Agreement between Jimmy L. Yates and Sedeco, Inc.
*10.16 Distributorship Agreement Dated February 21, 1991 together with Supplements and
Amendments Thereto, among Tajima Industries Ltd., Nomura Trading Co. Ltd.,
Nomura (America) Corp. and Hirsch International Corp. ("Hirsch Distributorship
Agreement")
10.17 Amendment Number Two to Hirsch Distributorship Agreement, Dated June 7, 1996
10.18 Distributorship Agreement, Dated February 21, 1991, together with Supplement Dated
February 21, 1996, among Tajima Industries Ltd., Nomura Trading Co. Ltd., Nomura
(America) Corp., and Sedeco, Inc.
10.19 West Coast Distributorship Agreement, Dated February 21, 1997, among Tajima
Industries Ltd., Nomura Trading Co. Ltd. and Nomura (America) Corp., and Hirsch
International Corp.
***10.20 Stock Option Plan, as Amended
#10.21 1994 Non-Employee Director Stock Option Plan
10.22 Registration Rights Agreement, Dated December 20, 1996, between Hirsch
International Corp. and Jimmy L. Yates
10.23 Non-Qualified Stock Option Agreement between Hirsch International Corp. and Jimmy
L. Yates, Dated December 6, 1996
10.24 Non-Qualified Stock Option Agreement between Hirsch International Corp. and
Ronald H. Krasnitz, Dated June 7, 1996
10.25 Non-Qualified Stock Option Agreement between Hirsch International Corp. and Martin
Krasnitz, Dated June 7, 1996
21.1 List of Subsidiaries of the Registrant
</TABLE>
- ----------------
*Incorporated by reference from the Registrant's Registration Statement on
Forms S-1, Registration Number 33- 72618
**Incorporated by reference from the Registrant's Form 10-K filed for the
fiscal year ended January 31, 1995.
#Incorporated by reference from the Registrant's Registration Statement on
Form S-1, Registration No. 33-80563.
***Incorporated by reference from the Registrant's Form 10-Q filed for the
quarter ended July 31, 1996.
****Incorporated by reference from Registrant's Form 8-K filed with the
Commission on June 19, 1996.
*****Incorporated by reference from Registrant's Form 8-K filed with the
Commission on January 3, 1997.
(b)(1) REPORTS ON FORM 8-K
A report on Form 8-K was filed by the Company on January 3, 1997, with
respect to the Company's acquisition of all the outstanding capital stock of
Sedeco, Inc. for $6.6 million on December 20, 1996.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HIRSCH INTERNATIONAL CORP.
--------------------------
By: \s\Henry Arnberg
---------------------------
Henry Arnberg, President
Dated: May 1, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
\s\Henry Arnberg Chairman of the Board of Directors, President May 1, 1997
- ---------------------- and Chief Executive Officer (Principal Executive
Henry Arnberg Officer)
\s\Paul Levine Executive Vice President, Chief Operating May 1, 1997
- ---------------------- Officer and Secretary (Principal Operating
Paul Levine Officer)
\s\Tas Tsonis Vice President and Director May 1, 1997
- ----------------------
Tas Tsonis
\s\Kenneth Shifrin Vice President-Finance and Chief Financial May 1, 1997
- ---------------------- Officer (Principal Accounting and Financial
Kenneth Shifrin Officer)
\s\Ronald Krasnitz Vice President and Director May 1, 1997
- ----------------------
Ronald Krasnitz
\s\Herbert M. Gardner Director May 1, 1997
- ----------------------
Herbert M. Gardner
\s\Marvin Broitman Director May 1, 1997
- ----------------------
Marvin Broitman
\s\Douglas Schenendorf Director May 1, 1997
- ----------------------
Douglas Schenendorf
</TABLE>
<PAGE>
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets as of January 31, 1997 and 1996 F-3
Consolidated Statements of Income for the years ended
January 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Stockholders' Equity for the years
ended January 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the years ended
January 31, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Hirsch International Corp.
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of Hirsch
International Corp. and Subsidiaries as of January 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended January 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Hirsch
International Corp. and Subsidiaries as of January 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Jericho, New York
March 11, 1997
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31,
1997 1996
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 7,864,662 $ 6,564,628
Short-term investments available-for-sale 2,595,601 2,286,194
Accounts receivable, net of an allowance for
doubtful accounts of approximately $2,578,000
and $1,041,000, respectively 21,761,001 13,707,328
Net investment in sales-type leases-
current portion (Note 5) 1,715,164 1,592,733
Inventories, net (Notes 4 and 11) 15,768,865 7,969,203
Deferred income taxes (Note 9) 1,298,250 1,055,473
Other current assets 774,968 630,295
---------------- ---------------
Total Current Assets 51,778,511 33,805,854
---------------- ---------------
Net investment in sales-type leases - non-current
portion (Note 5) 9,179,421 7,052,091
Excess of cost over net assets acquired, net of
accumulated amortization of approximately
$383,000 and $0, respectively (Note 3) 14,043,331 -
Purchased technologies, net of accumulated
amortization of approximately $558,000 and
$367,000, respectively 781,196 972,508
Property, plant and equipment, net of accumulated
depreciation and amortization (Notes 6 and 8) 6,242,137 4,840,530
Other assets (Notes 3 and 9) 1,671,208 1,201,143
---------------- ---------------
Total Assets $ 83,695,804 $ 47,872,126
================ ===============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31,
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Trade acceptances payable (Note 11) $ 13,331,834 $ 8,656,094
Accounts payable and accrued expenses (Note 7) 10,159,556 6,774,178
Current maturities of long-term debt (Note 8) 2,429,500 242,760
Income taxes payable (Note 9) 1,541,561 733,009
Customer deposits payable 1,357,063 552,981
---------------- ---------------
Total Current Liabilities 28,819,514 16,959,022
Long-term debt, less current maturities (Note 8) 13,194,034 1,778,626
---------------- ---------------
Total Liabilities 42,013,548 18,737,648
---------------- ---------------
Commitments and Contingencies (Notes 8 and 11)
Stockholders' Equity (Notes 1 and 10): 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,
5,312,666 and 3,288,200 shares, respectively 53,127 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 15,626,059 11,885,627
Unrealized holding gain (loss) on short-term
investments available-for-sale 20,827 (15,105)
Retained earnings 25,954,921 17,202,388
---------------- ---------------
Total Stockholders' Equity 41,682,256 29,134,478
---------------- ---------------
Total Liabilities and Stockholders' Equity $ 83,695,804 $ 47,872,126
================ ===============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended January 31,
1997 1996 1995
<S> <C> <C> <C>
Net sales $ 122,195,444 $ 87,974,185 $ 70,708,874
Interest income related to sales-type leases 3,243,340 3,022,239 1,617,292
--------------- ------------- -------------
Total revenue 125,438,784 90,996,424 72,326,166
--------------- ------------- -------------
Cost of goods sold (Note 11) 80,819,751 58,835,780 47,881,483
Selling, general and administrative
expenses 29,070,201 20,638,144 16,154,880
Interest expense (Note 8) 832,337 396,976 356,595
Other income, net (453,774) (276,702) (225,465)
--------------- ------------- -------------
Total expenses 110,268,515 79,594,198 64,167,493
--------------- ------------- -------------
Income before income taxes 15,170,269 11,402,226 8,158,673
Provision for income taxes (Note 9) 6,402,320 4,837,294 3,335,355
--------------- ------------- -------------
Net income $ 8,767,949 $ 6,564,932 $ 4,823,318
=============== ============= =============
Net income per share $1.10 $0.87 $0.66
===== ===== =====
Weighted average number of shares used in
the calculation of net income per share (Note 10D) 7,971,630 7,511,694 7,335,080
=============== ============= ==============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Additional
(Note 10) (Note 10) Paid-In Unrealized Retained Holding Gain
Shares Amount Shares Amount Capital (Loss) Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings
Balance, February 1, 1994 250,000 $2,500 3,000,000 $ 30,000 $ 227,442 $ - $ 7,570,151 $ 7,830,093
Proceeds from initial public offering
of common stock, net (Note 1) 1,187,500 11,875 (56,250) (562) 7,341,276 - - 7,352,589
Issuance of shares in connection with
acquisition (Note 1) 156,250 1,562 - - 660,939 - - 662,501
Transfer of Class B stock to Class A
stockholder 10,000 100 (10,000) (100) - - - -
Stock dividend (5%) 226,879 2,269 - - 1,741,833 - (1,744,102) -
Unrealized holding loss (Note 2C) - - - - - (32,880) - (32,880)
Net income - - - - - - 4,823,318 4,823,318
--------- ------- --------- -------- ------------ --------- ------------ ------------
Balance, January 31, 1995 1,830,629 18,306 2,933,750 29,338 9,971,490 (32,880) 10,649,367 20,635,621
Proceeds from public offering of
common stock, net (Note 1) 265,144 2,652 (65,144) (652) 1,906,160 - - 1,908,160
Stock dividend (25%) (Note 10D) 1,191,115 11,911 - - - - (11,911) -
Exercise of stock options 1,312 13 - - 7,977 - - 7,990
Unrealized holding gain (Note 2C) - - - - - 17,775 - 17,775
Net income - - - - - - 6,564,932 6,564,932
--------- ------- ---------- -------- ------------ --------- ------------ ------------
Balance, January 31, 1996 3,288,200 32,882 2,868,606 28,686 11,885,627 (15,105) 17,202,388 29,134,478
Issuance of shares in connection
with acquisitions (Note 3) 143,668 1,437 - - 2,636,407 - - 2,637,844
Transfer of Class B to Class A
stockholder 136,357 1,364 (136,357) (1,364) - - - -
Stock dividend (25%) (Note 10D) 1,541,580 15,416 - - - - (15,416) -
Exercise of stock options and warrants 202,861 2,028 - - 1,104,025 - - 1,106,053
Unrealized holding gain (Note 2C) - - - - - 35,932 - 35,932
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income - - - - - - 8,767,949 8,767,949
--------- ------- ---------- -------- ------------ --------- ------------ ----------
Balance, January 31, 1997 5,312,666 $53,127 2,732,249 $ 27,322 $15,626,059 $ 20,827 $25,954,921 $41,682,256
========= ======= ========== ======== ============ ========= ============ ==========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended January 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,767,949 $ 6,564,932 $4,823,318
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,763,464 1,142,018 896,860
Provision for bad debts 433,225 578,402 435,798
Provision for slow-moving inventories 230,000 419,667 92,627
Loss on disposal of assets 18,303 61,615 12,513
Deferred income taxes (192,885) (288,428) (330,775)
Changes in operating assets and liabilities:
Accounts receivable (5,011,589) (5,592,861) (4,157,208)
Net investment in sales-type leases (2,287,261) (1,899,759)
(859,699)
Inventories (2,777,864) (1,244,337)
(1,125,485)
Other current assets (61,033) (113,933)
(330,884)
Other assets (746,954) (403,271)
(222,567)
Trade acceptances payable 4,675,740 1,346,590
1,939,775
Accounts payable and accrued expenses (2,602,069) 1,351,833
1,914,887
Income taxes payable 408,552 15,809 551,196
Customer deposits payable 804,082 (245,386) 56,886
------------- ------------- -------------
Net cash provided by operating activities 3,421,660 1,692,891 3,697,242
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures (1,446,437) (1,123,125)
(4,505,712)
Acquisition of Pulse Microsystems Ltd. - -
(750,000)
Acquisition of Sewing Machine Exchange, Inc. (4,973,222) - -
Acquisition of Sedeco, Inc. (4,153,038) - -
Short-term investments:
(Purchases) proceeds (392,116) 1,226,854
------------- ------------
Net cash (used in) provided by
investing activities (10,964,813) 103,729 (8,926,513)
------------- ------------- -------------
</TABLE>
F-8
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended January 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from public offering $ - $ 2,325,000 $8,251,000
Repayment of short-term notes payable - - (2,436,967)
Proceeds of long-term debt 11,946,305 - 2,295,000
Repayments of long-term debt (4,209,171) (311,647) (139,709)
Dividends paid - - (750,000)
Proceeds from exercise of stock options and warrants 1,106,053 7,990 -
------------- ------------- ----------
Net cash provided by
financing activities 8,843,187 2,021,343
------------- -------------
7,219,324
Increase in cash and cash equivalents 1,300,034 3,817,963
1,990,053
Cash and cash equivalents, beginning of period 6,564,628 2,746,665 756,612
------------- ------------- ----------
Cash and cash equivalents, end of period $ 7,864,662 $ 6,564,62
============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 796,419 $ 387,431 $339,127
============= ============= ==========
339,127
Income taxes paid $ 5,788,038 $ 4,842,640 $3,125,648
============= ============= ===========
Non-cash investing and financing activities:
Property and equipment returned in
satisfaction of capital lease $ - $ (622,295) $ -
============= ============= ==========
Satisfaction of capital lease obligation $ - $ 691,052 $ -
============= ============= ==========
</TABLE>
The Company purchased all of the capital stock of SMX and Sedeco (see Note
3) for $8,690,000 and $6,565,000, respectively. In connection with the
acquisitions the following activity was recorded:
F-9
<PAGE>
<TABLE>
<CAPTION>
SMX Sedeco
<S> <C> <C>
Fair value of assets acquired $ 6,360,000 $4,359,000
Fair value of liabilities assumed (7,711,000) (1,378,000)
----------- ------------
Net assets acquired $1,351,000 2,981,000
============ ============
Cash paid (gross) for net assets $ 5,000,000 $4,165,000
Promissory notes issued for net assets 3,500,000 -
Class A common stock issued for net assets 238,000 2,400,000
Acquisition costs 755,000 548,000
------------- -------------
Total consideration 9,493,000 7,113,000
Less net assets acquired 1,351,000 (2,981,000)
Less accumulated amortization (361,000) (22,000)
Less offset of promissory notes (550,000) -
------------- -------------
Excess of cost over net assets acquired $ 9,933,000 $ 4,110,000
============= =============
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1997, 1996 and 1995
NOTE 1 - BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Hirsch International Corp. ("Hirsch"), HAPL Leasing Co., Inc. ( "HAPL" or "HAPL
Leasing"), Pulse Microsystems Ltd. ("Pulse"), Sewing Machine Exchange, Inc.
("SMX") and Sedeco, Inc. ("Sedeco") (collectively, the "Company"). The
operations of SMX and Sedeco are included in consolidated operations since their
acquisitions on June 7, 1996 and December 20, 1996, respectively (see Note 3).
The Company is a single source provider of sophisticated equipment and
valued added products and services to the embroidery industry. The embroidery
equipment and value added products sold by the Company are widely used by
contract embroiderers, large and small manufacturers of apparel and fashion
accessories, retail stores and embroidery entrepreneurs servicing specialized
niche markets. HAPL Leasing provides leasing services to customers of the
Company.
During fiscal 1995, the Company consummated an initial public offering (the
"IPO") of Class A common stock. The Company sold 1,000,000 shares at $8.00 per
share. Net proceeds of $7,353,000, after offering expenses of approximately
$898,000, were received by the Company.
Concurrent with the IPO, the Company acquired all of the outstanding
capital stock of Pulse. The acquisition of Pulse has been accounted for as a
purchase and accordingly, the acquired assets have been recorded at their
estimated fair market values at the date of acquisition. The cost in excess of
fair value of Pulse has been recorded as purchased technologies and is being
amortized over a period of seven years.
On January 24, 1996, the Company consummated a secondary public offering of
Class A common stock (the "Second Offering"). The Company sold 200,000 shares at
$12.375 per share. Another 800,000 shares were sold by certain of the Company's
officers. Net proceeds of approximately $1,906,000, after offering expenses of
approximately $417,000, were received by the Company. On February 15, 1996, the
underwriters exercised their over-allotment option to purchase an additional
150,000 shares from certain of the Company's officers.
Amounts of shares and per share amounts in this note have not been adjusted
to reflect stock dividends or stock splits (see Note 10D).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of Consolidation - The consolidated financial statements
include the accounts of
F-11
<PAGE>
the Company and its wholly-owned subsidiaries. All intercompany balances
and transactions have been eliminated in consolidation.
F-12
<PAGE>
(B) Revenue Recognition - The Company distributes embroidery equipment
which it offers for ------------------- sale or lease. Revenue related to the
sale of equipment is recorded at the time of shipment. Lease contracts which
meet the criteria of Statement of Financial Accounting Standards No. 13,
"Accounting For Leases" are accounted for as sales-type leases. Under this
method, revenue is recognized as a sale at the later of the time of shipment or
acceptance by the lessee in an amount equal to the present value of the rental
payments under the lease term (usually 36-60 months). The difference between the
total lease payments and the present value is amortized over the term of the
lease so as to produce a constant periodic rate of return on the net investment
in the lease. To date, all leases issued by the Company and HAPL Leasing have
been sales-type leases. The operating method of accounting for leases would be
followed for lease contracts not meeting the above criteria. Under this method
of accounting, aggregate rental revenue would be recognized over the term of the
lease.
Service revenues and costs are recognized when services are provided. Sales
of computer hardware and software are recognized when shipped provided that no
significant vendor and post-contract and support obligations remain and
collection is probable.
(C) Cash Equivalents and Short-Term Investments Available-For-Sale - Cash
equivalents consist of money market accounts with initial maturities of three
months or less. Short-term investments consist primarily of tax-exempt bonds. In
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", the Company has stated
short-term investments available-for-sale at market value.
(D) Allowance for Doubtful Accounts - The Company provides an allowance for
doubtful accounts determined by a specific identification of individual accounts
and a general reserve to cover other accounts based on historical experience.
The Company writes off receivables upon determination that no further
collections are probable.
(E) Inventories - Inventories consisting of machines and parts are stated
at the lower of cost or market. Cost for machinery is determined by specific
identification and for all other items on a first-in, first-out basis. Reserves
are established to record provisions for slow moving inventories in the period
in which it becomes reasonably evident that the product is not salable or the
market value is less than cost.
(F) Foreign Operations - Assets and liabilities of the Company's foreign
subsidiary are translated at year-end exchange rates. Results of operations are
translated using the average exchange rate prevailing throughout the year. Gains
and losses from foreign currency transactions are included in net income and are
not significant.
The Company makes only limited use of derivative financial instruments and
does not use them for trading purposes. Trade acceptances payable are
denominated in Japanese yen and are related to the purchase of equipment from
the Company's major supplier. The Company purchases foreign currency forward
contracts (which are usually approximately six months in duration) to hedge the
risk associated with fluctuations in foreign currency exchange rates (see Note
11B). The cost of such contracts are included in the cost of the related
machinery in inventory.
F-13
<PAGE>
(G) Property, Plant and Equipment - Property, plant and equipment are
stated at cost less accumulated depreciation and amortization. Capitalized
values of property under leases are amortized over the life of the lease or the
estimated life of the asset, whichever is less. Depreciation and amortization
are provided on the straight-line or declining balance methods over the
following estimated useful lives:
Asset Category Lives in Years
---------------- --------------
Building 39
Furniture and fixtures 5-7
Machinery and equipment 5-7
Automobiles 3-5
Leasehold improvements 5-20
(H) Software Development Costs - The development of new software products
and enhancements to existing products are expensed as incurred until
technological feasibility has been established. After technological feasibility
is established, any additional costs would be capitalized in accordance with
Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed". Capitalized
software costs are amortized on a straight-line basis over the estimated useful
product lives (normally three years) commencing in the month following product
release. During the years ended January 31, 1997 and 1996, the Company
capitalized approximately $364,000 and $252,000 of software development costs,
respectively. Such costs are included in other assets on the accompanying
consolidated balance sheets. Amortization expense for the years ended January
31, 1997 and 1996 was approximately $84,000 and $21,000, respectively. No
software development costs were capitalized in fiscal 1995.
(I) Impairment of Long-Lived Assets - In accordance with Statement of
Financial Accounting Standards No. 121, "Accounting For the Impairment of
Long-Lived Assets and For Long- Lived Assets To Be Disposed Of" ("SFAS 121"),
the Company reviews its long-lived assets, including property, plant and
equipment, identifiable intangibles and purchased technologies, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be fully recoverable. To determine recoverability of its
long- lived assets, the Company evaluates the probability that future
undiscounted net cash flows, without interest charges, will be less than the
carrying amount of the assets. Impairment is measured at fair value. SFAS 121
had no effect on the Company's consolidated financial statements.
(J) Leases - Leases (in which the Company is lessee) which transfer
substantially all of the risks and benefits of ownership are classified as
capital leases, and assets and liabilities are recorded at amounts equal to the
lesser of the present value of the minimum lease payments or the fair value of
the leased properties at the beginning of the respective lease terms. Interest
expense relating to the lease liabilities is recorded to effect constant rates
of interest over the terms of the leases. Leases which do not meet such criteria
are classified as operating leases and the related rentals are charged to
expense as incurred.
(K) Income Taxes - The Company accounts for income taxes pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). SFAS No. 109 requires recognition of deferred tax
assets and liabilities for the expected future tax
F-14
<PAGE>
consequences of events that have been included in the Company's
consolidated financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the differences between the
financial accounting and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
(L) 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 and splits (see Note 10D). Stock options
are considered to be common stock equivalents and, accordingly, have been
included in the computation of earnings per share for the years ended January
31, 1997, 1996 and 1995, respectively, using the Treasury Stock Method.
(M) Stock-based Compensation - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees" ("APB 25").
(N) Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(O) Fair Value of Financial Instruments - Financial instruments consist
primarily of investments in cash, short-term investments, trade account
receivables, accounts payable and debt obligations. At January 31, 1997 and
1996, the fair value of the Company's financial instruments approximated the
carrying value (see Note 2C).
NOTE 3 - ACQUISITIONS
(A) Acquisition of Sewing Machine Exchange - 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" ("APB 16") and accordingly, the acquired
assets and assumed liabilities have been recorded at their estimated fair market
values at the date of acquisition. The cost in excess of fair value of SMX is
being amortized over a 15-year period.
The purchase price was $8,690,000, paid in the form of a promissory note in
the principal amount of $4,250,000 to each of the two former 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 $2,500,000 on June 13,
1996 with the balance of each note ($1,750,000) payable in 60 equal monthly
installments of principal and interest beginning July 7, 1996 (see Note 8B).
These notes were subsequently reduced by $550,000 related to certain guarantees
in the stock purchase agreement regarding inventory and accounts receivable.
Concurrent with the acquisition, the Company entered into five-year employment
contracts with SMX's former shareholders pursuant to which they received 331,250
options to purchase shares of Hirsch Class A common stock (see Note 10B). The
options were issued at fair market value at the date of acquisition and vest in
four annual installments of 25
F-15
<PAGE>
percent each on the first, second, third, and fourth anniversary of the
date of grant and expire five years from the date thereof.
F-16
<PAGE>
(B) Acquisition of Sedeco - On December 20, 1996 the Company acquired all
of the outstanding capital stock of Sedeco. The acquisition was accounted for as
a purchase in accordance with APB 16 and accordingly, the acquired assets and
assumed liabilities have been recorded at their estimated fair market value
(pending final purchase price allocation) at the date of acquisition. The costs
in excess of fair value of Sedeco is being amortized over a 15-year period.
The purchase price was $6,565,000, paid in the form of $4,165,000 in cash
and $2,400,000 in the Company's Class A common stock. Concurrent with the
acquisition, the Company entered into a five-year employment contract with
Sedeco's former shareholder pursuant to which 60,300 options to purchase shares
of Hirsch Class A common stock (see Note 10B) were issued. The options were
issued at fair market value at the date of acquisition and vest in four annual
installments of 25 percent each on the first, second, third, and fourth
anniversary of the date of grant and expire five years from the date of grant.
On the basis of a pro forma consolidation of the results of operations as
if the acquisitions of SMX and Sedeco had taken place at the beginning of fiscal
1996, management believes that the acquisitions would not have had a material
effect on the reported amounts for fiscal 1997 and 1996. Such pro forma amounts
are not necessarily indicative of what the actual consolidated results might
have been if the acquisitions had been effective at the beginning of fiscal
1996.
NOTE 4 - INVENTORIES
January 31,
1997 1996
---- ----
Machines $ 12,244,563 $6,158,040
Parts and accessories 5,527,352 2,837,165
Less: Reserve for slow moving inventory (2,003,050) (1,026,002)
--------------- --------------
Total $15,768,865 $ 7,969,203
=============== ==============
NOTE 5 - NET INVESTMENT IN SALES-TYPE LEASES
January 31,
1997 1996
---- ----
Total minimum lease payments receivable $ 11,141,379 $ 9,595,952
Estimated residual value of leased
property (unguaranteed) 3,058,948 1,832,088
Reserve for estimated uncollectible
lease payments (337,500) (300,000)
Less: Unearned income (2,968,242 ) (2,483,216)
--------------- --------------
Net investment 10,894,585 8,644,824
Less: Current portion 1,715,164 1,592,733
--------------- --------------
Non-current portion $ 9,179,421 $ 7,052,091
=============== ==============
F-17
<PAGE>
At January 31, 1997 future annual lease payments receivable (including
estimated residual values) under sales-type leases are as follows:
Fiscal Year Ending January 31,
1998 $ 2,808,430
1999 2,693,405
2000 2,567,790
2001 2,373,487
2002 2,093,999
Thereafter 1,663,216
---------------
$ 14,200,327
===============
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
January 31,
1997 1996
---- ----
Land and building $ 3,288,137 $ 2,767,355
Machinery and equipment 3,039,794 1,996,191
Furniture and fixtures 1,373,929 880,773
Automobiles 670,056 275,421
Leasehold improvements 1,368,845 658,875
-------------- -----------
Total at cost 9,740,761 6,578,615
Less: Accumulated depreciation and amortization (3,238,242) (1,738,085)
Reserve for assets held for sale (260,382) -
--------------- ----------
Property, plant and equipment, net $ 6,242,137 $4,840,530
============== ===========
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
January 31,
1997 1996
---- ----
Accounts payable $ 4,640,688 $ 2,863,371
Accrued commissions payable 818,969 845,746
Accrued payroll costs 832,529 685,435
Accrued warranty costs 625,635 365,635
Other accrued expenses 3,241,735 2,013,991
--------------- -------------
Total accounts payable and accrued expenses $ 10,159,556 $ 6,774,178
=============== =============
NOTE 8 - LONG-TERM DEBT
January 31,
1997 1996
---- ----
Term Note (A) $ 6,750,000 $ -
Promissory Notes (B) 2,541,662 -
Sedeco acquisition (C) 4,446,305 -
Mortgage (D) 1,778,625 2,008,126
Other 106,942 13,260
------------- ------------
Total (E) 15,623,534 2,021,386
Less: Current maturities 2,429,500 242,760
-------------- ------------
Long-term maturities $ 13,194,034 $ 1,778,626
============== ============
F-18
<PAGE>
(A) On June 10, 1996, the Company entered into a term loan agreement with a
bank (the "Term Loan Agreement") pursuant to which the bank lent $7,500,000 to
the Company to fund the acquisition of SMX and to repay SMX's credit facilities.
The loan is repayable in 20 equal quarterly installments of principal and
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 $4,250,000 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 ($1,750,000) payable in 60 equal monthly installments of principal and
interest beginning July 7, 1996. The notes bear interest at the rate (the
"Hirsch Rate") defined in the Hirsch Term Agreement plus two percent through
June 1999 and from July 1999 through maturity at the Hirsch Rate. Pursuant to
the terms of the Stock Purchase Agreement, the former shareholders of SMX made
certain guarantees with respect to collectibility of accounts receivable and
salability of inventory among other things. In the fourth quarter, these notes
were reduced by approximately $550,000 (See Note 3).
(C) In connection with the purchase of Sedeco, the Company borrowed
approximately $4,446,000 to fund the acquisition and repay Sedeco's credit
facilities. The amounts were borrowed under the provisions of the Revolving
Credit Facility (see E) and bear interest as defined therein. The Revolver
matures three years from the closing date at which point, any amounts used to
fund acquisitions thereunder will convert to a term loan facility and be paid in
12 equal quarterly installments over a three-year period. At January 31, 1997,
all amounts outstanding thereunder were classified in Long-Term Debt on the
Balance Sheets.
(D) 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 percent and is
payable in equal monthly principal installments of $19,125. The terms of the
Mortgage, among other things, restrict additional borrowings by the Company, and
require the Company to maintain certain debt service coverage ratio levels, as
defined in the Mortgage. The obligation under the Mortgage is secured by a lien
on the premises and the related improvements thereon.
(E) The Company has a $30,000,000 Revolving Credit Facility with two banks
(the "Facility"). The Facility is for working capital loans, letters of credit,
and deferred payment letters of credit and bear interest as defined in the
Facility. The terms of the Facility, among other things, restrict additional
borrowings by the Company and require the Company to maintain, among other
things, certain minimum tangible net worth, quick asset ratio and fixed charge
coverage levels, as defined. The Facility also provides a $15,000,000 sub-limit
to finance acquisitions (as defined therein), under which approximately
$4,446,000 was outstanding at January 31,1997 for the Sedeco acquisition(see
Notes 3 and 8C). This Facility has also been used for letters of credit and
deferred payment letters of credit aggregating approximately $13,332,000 at
January 31, 1997. There were no working capital loans outstanding against this
Facility at January 31, 1997.
F-19
<PAGE>
The Company had an unsecured Line of Credit Agreement with a bank in the
prior year, to finance working capital loans, lines of credit and deferred
payment letters of credit. This line had been used for letters of credit and
deferred payment letters of credit aggregating approximately $8,656,000 at
January 31, 1996.
Long-term debt (including capitalized lease obligations) of the Company at
January 31, 1997 matures as follows:
Fiscal Year Ending January 31,
1998 $ 2,429,500
1999 2,479,259
2000 6,911,201
2001 2,194,297
2002 979,500
Thereafter 629,777
--------------
$ 15,623,534
<TABLE>
<CAPTION>
NOTE 9 - INCOME TAXES
The provision for income taxes for each of the periods presented herein is
as follows:
January 31,
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Current:
Federal $ 4,841,997 $3,855,262 $2,831,498
State 1,753,208 1,270,460 834,632
------------- ----------- ---------
Total current 6,595,205 5,125,722 3,666,130
------------- ------------- ---------
Deferred:
Federal (100,052) (223,811) (252,960)
State (92,833) (64,617) (77,815)
-------------- ------------- ----------
Total deferred (192,885) (288,428) (330,775)
-------------- ------------- ----------
Total provision for income taxes $ 6,402,320 $ 4,837,294 $3,335,355
============= ============= ==========
</TABLE>
The tax effects of temporary differences that give rise to deferred income
tax assets at January 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
January 31, 1997 January 31, 1996
------------------------------- -----------------------
Net Net Net Net
Current Long-Term Current Long-Term
Deferred Deferred Deferred Deferred
Tax Assets Tax Assets Tax Assets Tax Assets
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Accounts receivable $ 589,178 $ - $ 413,946 $ -
Inventories 487,142 - 450,239 -
Accrued warranty costs 152,068 - 147,241 -
Other accrued expenses 69,862 - 44,047 -
Purchased technologies - 131,492 - 92,365
Net investments in sales-type leases
(allowance for doubtful accounts) - 140,470 - 120,810
Capitalized software development
costs - (201,139) - (92,460)
------------- ----------- ------------ -------------
Total $ 1,298,250 $ 70,823 $ 1,055,473 $ 120,715
============= =========== ============ =============
</TABLE>
F-20
<PAGE>
Valuation allowances for such deferred tax assets have not been established
as 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 long-term deferred tax assets are included in other assets on the
accompanying consolidated balance sheets.
A reconciliation of the differences between the federal statutory tax rate
of 34 percent and the Company's effective income tax rate is as follows:
Year Ended January 31,
1997 1996 1995
Federal statutory income tax rate 34.0% 34.0% 34.0%
State income taxes, net of Federal benefit 8.4 7.5 6.1
Permanent differences (0.2) 0.9 0.8
----------------------- --------
Effective income tax rate 42.2% 42.4% 40.9%
========== ====== ======
NOTE 10 - STOCKHOLDERS' EQUITY
(A) Common Stock - The Class A Common Stock and Class B Common Stock has
authorizations of 20,000,000 and 3,000,000 shares, respectively. The Class A
Common Stock and Class B Common Stock are substantially identical in all
respects, except that the holders of Class B Common Stock elect two-thirds of
the Company's Board of Directors (as long as the number of shares of Class B
Common Stock outstanding equals or exceeds 400,000), while the holders of Class
A Common Stock elect one-third of the Company's Board of Directors. Each share
of Class B Common Stock automatically converts into one share of Class A Common
Stock upon transfer to a non-Class B common stockholder. At the same time, the
Board approved the authorization of 1,000,000 shares of preferred stock to be
issued from time to time, in such series and with such designations, rights and
preferences as the Board may subsequently determine. The stock splits and the
changes in authorized capital have been retroactively reflected for all periods
presented herein.
(B) Stock Option Plans - The Company maintains two stock options plans
pursuant to which an aggregate of 984,375 shares of Common Stock may be granted.
The 1993 Stock Option Plan was adopted by the Board of Directors in
December 1993 and was approved by the stockholders of the Company on July 28,
1994 (the "1993 Plan").
The 1993 Plan has 750,000 shares of Common Stock reserved for issuance upon
the exercise of options designated as either (i) incentive stock options
("ISOs") under the Internal Revenue Code of 1986, as amended (the "Code"), or
(ii) non-qualified options. ISOs may be granted under the Stock Option Plan to
employees and officers of the Company. Nonqualified options may be granted to
consultants, directors (whether or not they are employees), employees or
officers of the Company.
F-21
<PAGE>
Stock option transactions during the years ended January 31, 1997, 1996 and
1995 for the 1993 Plan are summarized below:
<TABLE>
<CAPTION>
Weighted
Shares Price Range Average Price
Options granted 53,467 $4.88 - $5.89 $ 5.43
--------- ------------- ------------
<S> <C> <C> <C>
Options outstanding - January 31, 1995 53,467 $4.88 - $5.89 $ 5.43
Options granted 11,720 $9.12 - $10.04 $ 9.73
Options exercised (1,640) $4.88 $ 4.88
--------- ------------------ ------------
Options outstanding - January 31, 1996 63,547 $4.88 - $10.04 $ 6.21
Options granted 255,625 $10.20 - $17.05 $ 14.94
Options exercised (4,602) $4.88 $ 4.88
Options canceled (5,625) $14.50 $ 14.50
---------- ----------------- -----------
Options outstanding - January 31, 1997 308,945 $4.88 - $17.05 $ 13.23
========== ================= ===========
Options exercisable at January 31, 1997 51,127 $4.88 - $10.04 $ 5.76
========== ================= ============
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exercisable Price
<S> <C> <C> <C> <C> <C> <C>
$ 4.88 - $ 5.89 47,225 2.5 $ 5.43 47,225 $5.43
$ 9.12 - $10.20 11,720 3.5 $ 9.83 3,902 $9.73
$14.50 - $17.05 250,000 4.5 $15.00 - -
----------- ----------
308,945 51,127
=========== ==========
</TABLE>
All options granted for the fiscal year ended January 31, 1995 are
exercisable one year from the date of grant and expire five years from the date
of grant. All options issued subsequent to the fiscal year ended January 31,
1995 vest in three annual installments of 33-1/3 percent each on the first,
second, and third anniversary of the date of grant. There are 435,188 shares
available for future grants under the 1993 Plan. Approximately 5,625 options
have been canceled under this plan.
The 1994 Non-Employee Director Stock Option Plan (the "Directors Plan") was
adopted by the Board of Directors in September 1994, and was approved by the
Stockholders of the Company in June 1995. The Directors Plan has 234,375 shares
of Common Stock reserved for issuance. Pursuant to the terms of the Directors
Plan, each independent unaffiliated Director shall automatically be granted,
subject to availability, without any further action by the Board of Directors or
the Stock Option Committee: (i) a non-qualified option to purchase 7,500 shares
of Common Stock upon their election to the Board of Directors; and (ii) a non-
F-22
<PAGE>
qualified option to purchase 2,500 shares of Common Stock on the date of
each annual meeting of stockholders following their election to the Board of
Directors. The exercise price under each option is the fair market value of the
Company's Common Stock on the date of grant. Each option has a five-year term
and vests in three annual installments of 33-1/3 percent each on the first,
second, and third anniversary of the date of grant. Options granted under the
Directors Plan are generally not transferable during an optionee's lifetime but
are transferable at death by will or by the laws of descent and distribution. In
the event an optionee ceases to be a member of the Board of Directors (other
than by reason of death or disability), then the non-vested portion of the
option immediately terminates and becomes void and any vested but unexercised
portion of the option may be exercised for a period of 180 days from the date
the optionee ceased to be a member of the Board of Directors. In the event of
death or permanent disability of an optionee, all options accelerate and become
immediately exercisable until the scheduled expiration date of the option.
Stock option transactions during the years ended January 31, 1997, 1996 and
1995 for the Directors Plan are summarized below:
<TABLE>
<CAPTION>
Weighted
Shares Price Range
====== ===========
Average Price
-------------
<S> <C> <C> <C>
Options granted 35,157 $ 5.36 $ 5.36
-------- -------- -----------
Options outstanding - January 31, 1995 35,157 $ 5.36 $ 5.36
Options granted 11,718 $ 9.12 $ 9.12
--------- ----------------- -----------
Options outstanding - January 31, 1996 46,875 $5.36 - $9.12 $ 6.30
Options granted 9,375 $15.50 $ 15.50
--------- ----------------- -----------
Options outstanding - January 31, 1997 56,250 $5.36 - $15.50 $ 7.83
========= ================= ===========
Options exercisable at January 31, 1997 27,344 $5.36 - $9.12 5.90
========= ================= ===========
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ 5.36 35,157 2.5 $ 5.36 23,438 $5.36
$ 9.12 11,718 3.5 $ 9.12 3,906 $9.12
$ 15.50 9,375 4.5 $15.50 - -
----------- ----------
56,250 27,344
=========== ==========
</TABLE>
There are 178,125 shares available for future grants under the Directors
Plan. No options have been exercised or canceled under this plan.
In connection with the acquisitions of Sedeco, SMX, and Pulse,
approximately 427,000 nonplan options have been issued as follows:
F-23
<PAGE>
<TABLE>
<CAPTION>
Weighted
Shares Price Range Average Price
------- ----------- -------------
<S> <C> <C> <C>
Options granted - Pulse acquisition 35,892 $ 4.88 $ 4.88
---------- ---------------- ---------
Options outstanding -
January 31, 1995 and 1996 35,892 $ 4.88 $ 4.88
Options granted - SMX and Sedeco
acquisitions 391,550 $16.20 - $18.25 $ 16.52
---------- --------------- ----------
Options outstanding -
January 31, 1997 427,442 $ 4.88 - $18.25 $ 15.54
========== ================ ==========
Options exercisable at January 31, 1997 35,892 $ 4.88 $ 4.88
========== ================ ===========
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exercisable Price
------------------- ----------- ----------------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 4.88 35,892 2.5 $ 4.88 35,892 $4.88
$ 16.20 331,250 4.5 $16.20 - -
$ 18.25 60,300 4.75 $18.25 - -
----------- ----------
427,422 35,892
=========== ==========
The options issued in connection with the Pulse acquisition are exercisable
and have a life of five years. The options issued in connection with the SMX and
Sedeco acquisitions vest in four annual installments of 25 percent each in the
first, second, third, and fourth anniversary of the date of grant and expire
five years from the date of grant. No options have been exercised or canceled.
In addition, pursuant to the IPO, the underwriters received warrants to
purchase from the Company 205,080 shares of Class A Common Stock. The warrants
are exercisable for a period of four years commencing one year after the date of
the IPO at exercise prices ranging from 107 percent to 128 percent of the
initial public offering price. During the fiscal year ended January 31, 1997,
198,300 warrants were exercised at a price of $5.56 per share. Approximately
6,780 are exercisable at a price of $5.90 per share.
(C) Additional Stock Plan Information - As discussed in Note 2, the Company
continues to account for its stock-based awards using the intrinsic value method
in accordance with APB 25 and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123") requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions for 1997 and 1996: expected life, five
years following vesting; stock volatility, 28 percent, risk free interest rate
of 6.0 percent and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. If the computed fair values of the 1997 awards had
been amortized to expense over the vesting period of the awards, pro forma net
income would have been approximately $8,494,000 ($1.07 per share). The impact of
SFAS 123 on pro forma net income for 1996 was zero. However, the impact of
outstanding non-vested stock options granted prior to February 1, 1995 has been
excluded from the pro forma calculation; accordingly, the 1997 and 1996 pro
forma adjustments are not indicative of future period pro forma adjustments,
when the calculation will apply to all applicable stock options.
F-25
<PAGE>
(D) Stock Dividend - On June 25, 1996 and June 23, 1995, the Company
declared five-for-four stock splits effected in the form of 25 percent stock
dividends which were paid on July 22, 1996 and July 24, 1995 to stockholders of
record on July 8, 1996 and July 10, 1995, respectively. The par value of the
shares remains unchanged at $.01 per share.
Unless otherwise noted, all numbers of shares, per share amounts and per
share prices in the consolidated financial statements and notes thereto have
been adjusted to reflect the stock dividends and splits.
(E) Profit Sharing Plan - The Company has a voluntary contribution profit
sharing plan (the "Plan"), which complies with Section 401(k) of the Internal
Revenue Code. Employees who have attained the age of 21 and have one year of
continuous service are eligible to participate in the Plan. The Plan permits
employees to make a voluntary contribution of pre-tax dollars to a pension
trust, with a matching contribution by the Company up to a maximum of two
percent of an eligible employee's annual compensation. The Company contributed
approximately $78,000, $59,000 and $54,000, for the years ended January 31,
1997, 1996 and 1995, respectively. The Company funds all amounts when due.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
(A) Minimum Operating Lease Commitments - The Company has operating leases
for various automobiles and sales and service locations. The annual aggregate
rental commitments required under these leases, except for those providing for
month-to-month tenancy, are as follows:
Fiscal Year Ending January 31,
1998 $ 531,548
1999 360,117
2000 186,720
2001 109,680
2002 88,567
Thereafter 38,260
-------------
Total $ 1,314,892
=============
Rent expense was approximately $617,000, $264,000 and $235,000 for the
years ended January 31, 1997, 1996 and 1995, respectively.
(B) Foreign Currency Contracts - In connection with the purchase of
equipment from its major supplier, the Company purchases foreign currency
forward contracts (which usually approximate six months in duration) to hedge
the risk associated with fluctuations in foreign currency exchange rates
relating to all trade acceptances payable and certain firm purchase commitments.
The costs of such contracts are included in the cost of the related machinery in
inventory.
At January 31, 1997, the Company held foreign currency contracts for the
purchase of Japanese yen amounting to approximately $58,000,000.
F-26
<PAGE>
(C) Litigation - The Company is a defendant in various litigation matters,
all arising in the normal course of business. Based upon discussion with Company
counsel, management does not expect that these matters will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
(D) Employment Agreements - The Company has five-year employment agreements
with the Company's senior executives. These employment agreements provided that
each executive receive minimum annual compensation of $350,000 for the remainder
of the term of the employment agreement. In addition, each employment agreement
provides for an annual bonus equal to five percent of pre-tax profits of the
Company. The Company also entered into a five-year employment agreement with
another officer of the Company, who will receive annual compensation of $100,000
with a bonus equal to two percent of pre-tax profits of the Company. The Company
also has five-year employment agreements with the former shareholders of Pulse,
providing each with an annual base salary of $300,000 and an annual bonus based
on annual pre-tax profits of Pulse.
(E) Dependency Upon Major Supplier - During the fiscal years ended January
31, 1997, 1996 and 1995, the Company made purchases of approximately
$69,000,000, $47,000,000 and $40,000,000, respectively, from Tajima Industries
Ltd. ("Tajima"), the manufacturer of the embroidery machines the Company sells.
This amounted to approximately 83, 80 and 82 percent of the Company's total
purchases for the years ended January 31, 1997, 1996 and 1995, respectively.
The Company has two separate distributorship agreements with Tajima which,
collectively, provide the Company the exclusive right to distribute Tajima's
complete line of embroidery machines in 39 states. The main agreement (the "East
Coast / Midwest Agreement") which covers 33 states, including the original
Hirsch territory and the additional states acquired in the SMX territory, became
effective on February 21, 1991, has a term of 20 years and contains a renewal
provision which permits successive five year renewals upon mutual agreement of
the parties. The East Coast / Midwest Agreement is terminable by Tajima and/or
the Company on not less than two years' prior notice except that Tajima cannot
terminate the East Coast / Midwest Agreement prior to February 20, 1998. The
second agreement (the "Southwest Agreement") covers the six states acquired in
the Sedeco territory, became effective on February 21, 1997 and has a term of
five years.
In the states of Arizona, California, Hawaii, Idaho, Montana, Nevada,
Oregon, Utah, Washington and Wyoming, the Company is the exclusive distributor
of Tajima's single, two, four, and six-head machines as well as chenille or
chenille/standard embroidery machines with less than four heads or two stations,
respectively (the "West Coast Agreement"). The West Coast Agreement has a term
of five years and contains a renewal provision which permits successive
five-year renewals upon mutual agreement of the parties. Tajima may terminate
the West Coast Agreement or its exclusivity on 30 days written notice or upon a
material change in the current Class B shareholders in which case, the West
Coast Agreement can be terminated earlier.
The minimum purchase of embroidery machines for 1996 was met. The minimum
quantity to be sold in 1997 is 1,503 machines in various designations as
defined.
F-27
<PAGE>
There are several manufacturers of multihead embroidery equipment. Although
management of the Company believes that the likelihood of the loss of Tajima as
a supply source is remote, if Tajima terminated the current distributor
relationship with the Company, management believes that it could establish a
similar arrangement with another manufacturer of embroidery equipment.
* * * * * *
F-28
</TABLE>
Exhibit 10.2
LOAN AGREEMENT
Dated as of January 7, 1997
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 2660 Meadowvale Boulevard, Unit 10, Mississauga,
Ontario, Canada L5N6M6 ("Pulse") and SEDECO, INC., a Texas corporation having
its principal place of business at 1124 W. Fuller Avenue, Fort Worth, Texas
76115 ("Sedeco")(HAPL, SMX, Pulse and Sedeco being individually, a "Guarantor"
and collectively, the "Guarantors"), THE BANK OF NEW YORK, a New York banking
organization, having an office at 1401 Franklin Avenue, Garden City, New York
11530 ("BNY" or a "Bank") FLEET BANK, N.A., a national banking association,
having an office at 300 Broad Hollow Road, Melville, New York ("Fleet" or a
"Bank") and THE BANK OF NEW YORK, as agent for the Banks (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):
"ABR Applicable Margin" shall have the meaning set forth in Sections 2.04
and 2.13 of this Agreement.
"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.
"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 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%)
<PAGE>
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.
"Agent" means The Bank of New York, or any bank which succeeds to the
position of Agent, as provided in this Agreement.
"Aggregate Outstandings" means, at any time, the aggregate of (i) the
principal amount of outstanding Revolving Credit Loans and (ii) L/C Exposure.
"Agreement" means this Loan Agreement, as amended, supplemented or modified
from time to time.
"Alternate Base Rate" means, for any day, an interest 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 365/366 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.
"Arranger" means BNY Capital Markets, Inc.
"Bank" or "Banks" means one or more, as the context requires, of BNY, Fleet
and each other lender which becomes a party to this Agreement.
- 2 -
<PAGE>
"BNY Existing Facility" means the line of credit made available to the
Borrower by BNY prior to the date of this Agreement.
"BNY Existing Term Loan Agreement" means the Term Loan Agreement dated as
of June 10, 1996 among the Borrower, HAPL, Pulse, SMX, BNY as Agent, and BNY and
Fleet as lending banks, as it may be amended or supplemented from time to time.
"Board of Governors" means the Board of Governors of the Federal Reserve
System of the United States of America.
"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.
"Commitment" means, with respect to each Bank, the aggregate obligations of
such Bank to (i) make Revolving Credit Loans to the Borrower pursuant to the
terms and conditions of the Agreement and (ii) participate in Letters of Credit
issued pursuant to the terms and conditions of this Agreement, in each case in
the aggregate Dollar amount set forth in Schedule 1.01-A annexed hereto.
"Commitment Letter" means the letter from BNY to the Borrower, dated
November 21, 1996 pursuant to which BNY agreed to extend sixty (60%) percent of
a credit facility as described therein to the Borrower and the Arranger agreed
to use its best efforts to arrange, structure and syndicate such credit
facility.
"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 Debt or 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)
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which would be properly classified as current liabilities, all computed and
consolidated in accordance with GAAP.
"Consolidated Funded Debt" means, as to the Borrower and its Consolidated
Affiliates, the aggregate of the Funded Debt of the Borrower and its
Consolidated Affiliates, 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.
"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.
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"Dollars" and the sign "$" mean lawful money of the United States of
America.
"EBITDA" means, as to the Borrower and its Consolidated Affiliates for any
period, the sum of (i) net income (excluding extraordinary gains and excluding
extraordinary losses), (ii) interest expense, (iii) depreciation expense, (iv)
amortization of intangible assets and (v) federal, state and local income taxes
paid, in each case measured for the Borrower and its Consolidated Affiliates on
a consolidated basis for such period, computed and consolidated 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 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.
"Existing Letters of Credit" means those letters of credit issued by BNY
under the BNY Existing Facility as described in
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Schedule 1.01-B annexed hereto and which are, on the date of this
Agreement, unexpired and on which no presentment has been made.
"Federal Funds Effective Rate" means, for any period, a fluctuating
interest rate per annum equal for each day during such period to the weighted
average of the rates on overnight federal funds transactions with members of the
Federal Reserve System arranged by federal funds brokers, as published for such
day (or, if such day is not a Business Day for the next preceding Business Day)
by the Federal Reserve Bank of New York, or, if such rate is not so published
for any day which is a Business Day, the average of the quotations for such day
on such transactions received by the Agent from three (3) federal funds brokers
of recognized standing selected by it.
"Fee Letter" means the letter dated November 21, 1996 from BNY to the
Borrower in which the Borrower agreed to pay certain fees in connection with the
credit facility as described therein.
"Fixed Charge Coverage Ratio" means, as to the Borrower and its
Consolidated Affiliates for any period, the ratio of (i) the difference between
(a) EBITDA for such period and (b) the sum of (x) Consolidated Capital
Expenditures for such period and (y) the amount of treasury stock of the
Borrower acquired during such period to (ii) the sum of (a) the current portion
(as of the last day of such period) of long term Debt (including Capital
Leases), (b) interest expense for such period and (c) dividends payable in cash
during such period on preferred stock described in clause (v) of the definition
of "Funded Debt". The Fixed Charge Coverage Ratio shall be measured and tested
at the end of each fiscal quarter and for a period covering the four (4) fiscal
quarters then ended.
"Funded Debt" means, as to any Person, such Debt of such Person which is
(i) all indebtedness or liability for borrowed money; (ii) all indebtedness or
liability for the deferred purchase price of property (excluding trade
obligations); (iii) all obligations as a lessee under Capital Leases; (iv) all
obligations to reimburse the Issuing Bank for the amount of all unmatured drafts
accepted or deferred payment obligations incurred under Letters of Credit, and
(v) all liabilities of such Person under any preferred stock which, at the
option of the holder or upon the occurrence of one or more certain events, is
redeemable by such holder, or which, at the option of such holder is convertible
into Debt.
"Funded Debt to EBITDA Ratio" means, as to the Borrower and its
Consolidated Affiliates for any period, the ratio of (i) Consolidated Funded
Debt (as of the last day of such period) to (ii) EBITDA for such period. The
Funded Debt to EBITDA Ratio shall be measured and tested at the end of each
fiscal quarter and, in
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the case of EBITDA, for a period covering the four (4) fiscal quarters then
ended.
"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 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, Pulse or Sedeco,
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) or Section 5.01(k) of
this Agreement.
"HAPL Facility" means a revolving credit facility in the maximum principal
amount of $5,000,000.00 which may be made available by BNY and one or more other
banks to HAPL.
"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
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the case of a Eurodollar Loan, the last day of the applicable Interest
Period.
"Interest Payment Date" means (i) as to each Eurodollar Loan, (a) in the
case of Eurodollar Loans with Interest Periods of less than three (3) months,
the last day of such Interest Period and (b) in the case of Eurodollar Loans
with Interest Periods of three (3) months or more, 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 or the Term Loan Maturity Date, as
applicable, (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 Eurodollar Loan
representing a portion of the principal required to be paid in accordance with
Section 2.13 may be selected unless the outstanding Alternate Base Rate Loans
and Eurodollar Loans for which the 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,
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.
"Issuing Bank" means BNY.
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"Letters of Credit" means trade letters of credit and standby letters of
credit issued by the Issuing Bank for the account of the Borrower pursuant to
the terms and conditions of this Agreement. Letters of Credit shall include, for
all purposes under this Agreement, Existing Letters of Credit.
"L/C Documents" means all documents required to be executed and delivered
by the Borrower in connection with the issuance of Letters of Credit in
accordance with the usual and customary practices of the Issuing Bank.
"L/C Exposure" means, at any time, the aggregate of (i) the amount
available to be drawn on all outstanding Letters of Credit, (ii) the aggregate
amount of all unmatured drafts accepted and deferred payment obligations
incurred by the Issuing Bank under any Letters of Credit (including such
unmatured drafts accepted and/or deferred payment obligations incurred by BNY
prior to the date of this Agreement and as identified on Schedule 1.01-C annexed
hereto), and (iii) the amount of any payments made by the Issuing Bank under any
Letters of Credit that has not been reimbursed by the Borrower.
"LIBOR Applicable Margin" shall have the meaning set forth in Sections 2.04
and 2.13 of this Agreement.
"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 Revolving Credit Loans and Term Loans, or both as
the context requires, 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, the L/C
Documents, the Commitment Letter, the Fee
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Letter and any other document executed or delivered pursuant to this
Agreement.
"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 January 7, 2000.
"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 Revolving Credit Notes or 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 Acquisition" means an acquisition by the Borrower or any
Subsidiary by merger, consolidation or by purchase of a voting majority of the
stock of another Person or the purchase of all or substantially all of the
assets of another Person (or of a division or other operating component of
another Person) (an "Acquisition") if all of the following conditions are met:
(i) The majority of such Person's revenue is derived from one or more of
the following lines of business: (a) distribution of embroidery equipment, (b)
embroidery related software, (c) distribution of embroidery supplies, (d)
embroidery design, and/or (e) embroidery equipment servicing;
(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: (a) all representations and warranties contained in the Loan
Documents will remain true and correct, (b) the Borrower will remain in
compliance with all covenants contained in the Loan Documents, and (c) no
Default or Event of Default has occurred and is continuing or will occur as a
result of the consummation of the Acquisition; and
(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 (with those stated assumptions set forth below) the
pro forma effect of the Acquisition and showing compliance by the Borrower with
all covenants set forth in Section 5.03 of this
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Agreement for the next succeeding four quarters. The projections to be
delivered hereunder shall include and specify the assumptions used to prepare
such projections regarding growth of sales, margins on sales and cost savings
resulting from the Acquisition.
"Permitted Acquisition Loans" means Revolving Credit Loans, the proceeds of
which are used to fund Permitted Acquisitions.
"Permitted Acquisition Sublimit" means Ten Million ($10,000,000.00)
Dollars.
"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 two years 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 the Banks; (vi) treasury stock of the Borrower, (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 or (viii) Inter Company Transactions
permitted by Section 5.02(r) or Section 5.02(s).
"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.
"Quick Asset Ratio" means, as to the Borrower and its Consolidated
Affiliates, as of any date, the ratio of (i) the sum
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of (a) cash on hand or on deposit in banks, (b) readily marketable
securities issued by the United States, (c) readily marketable commercial paper
rated "A-2" by Standard and Poors Corporation (or having a similar rating by any
similar organization which rates commercial paper), (d) certificates of deposit
or banker's acceptances issued by commercial banks of recognized standing
operating in the United States, and (e) accounts receivable to (ii) Consolidated
Current Liabilities.
"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.
"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.
"Required Banks" means, (i) at any time while there are Revolving Credit
Loans outstanding, those Banks having, in the aggregate, sixty six and two
thirds (66 2/3%) percent of such Revolving Credit Loans, (ii) at any time while
there are no Revolving Credit Loans outstanding but the Total Commitment is
available, those Banks having, in the aggregate, sixty six and two thirds (66
2/3%) percent of the Total Commitment, and, (iii) after the Maturity Date, those
Banks having, in the aggregate, sixty six and two-thirds (66 2/3%) percent of
the outstanding principal amount of the Term Loans.
"Revolving Credit Loan" or "Revolving Credit Loans" means one or more, as
the context requires, of the revolving credit loans made by the Banks to the
Borrower pursuant to the terms and conditions of this Agreement.
"Revolving Credit Note" or "Revolving Credit Notes" means one or more, as
the context requires, of the promissory notes of the Borrower payable to the
order of each of the Banks, in substantially the form of Exhibit A annexed
hereto, evidencing the indebtedness of the Borrower to each such Bank resulting
from Revolving Credit Loans made by such Bank to the Borrower pursuant to this
Agreement.
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"Sedeco Tajima Agreement" means that certain distribution agreement dated
as of February 21, 1991 among Sedeco, Tajima Industries Ltd., Nomura Trading
Co., Inc. and Nomura (America) Corp., as same has been amended from time to
time.
"Subsidiary" means, as to any Person, any corporation, partnership, limited
liability company, 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 Loan" or "Term Loans" means one or more, as the context requires, of
the term loans made by the Banks to the Borrower pursuant to the terms and
conditions of this Agreement.
"Term Loan Installment Date" shall mean (i) the day that is ninety (90)
days after the making of the Term Loans and (ii) the same day of each third
month thereafter.
"Term Loan Maturity Date" means the third anniversary of the making of the
Term Loans by the Banks, but not later than January 6, 2003.
"Term Loan Note" or "Term Loan Notes" means one or more, as the context
requires, of the promissory notes of the Borrower payable to the order of each
of the Banks, in substantially the form of Exhibit B annexed hereto, evidencing
the indebtedness of the Borrower to each such Bank resulting from the Term Loan
made by such Bank to the Borrower pursuant to this Agreement.
"Total Commitment" means the aggregate of the Commitments of each of the
Banks, which, on the date of this Agreement, is Thirty Million ($30,000,000.00)
Dollars.
"Unused Facility Fee" means the fee payable pursuant to Section 2.06 of
this Agreement.
SECTION 1.02. Computation of Time Periods. In this Agreement in the
computation of periods of time from a specified date to a
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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 LOANS
SECTION 2.01. The Revolving Credit Loans. (a) The Banks agree, severally
but not jointly, on the terms and subject to the conditions of this Agreement,
and in reliance upon the representations and warranties of the Borrower and the
Guarantors set forth in this Agreement that the Banks will, until the Maturity
Date, lend to the Borrower such Revolving Credit Loans as the Borrower may
request from time to time, which Loans may be borrowed, repaid and reborrowed,
provided, however, that (w) the Aggregate Outstandings at any one time shall not
exceed the Total Commitment as it may be reduced pursuant to Section 2.07
hereof, (x) each Bank's pro rata share of Revolving Credit Loans and L/C
Exposure shall not exceed its Commitment, (y) the aggregate principal amount of
Permitted Acquisition Loans made during the term of this Agreement shall not
exceed the Permitted Acquisition Sublimit and (z) if all or any part of a
Permitted Acquisition Loan is repaid, such amount may not be reborrowed as a
Permitted Acquisition Loan.
(b) Each Revolving Credit Loan shall be an Alternate Base Rate Loan or a
Eurodollar Loan (or a combination thereof) as the Borrower may request subject
to and in accordance with Section 2.02. Any 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 such Bank's
Revolving Credit Note. Subject to the other provisions of this Agreement,
Revolving Credit Loans of more than one type may be outstanding at the same time
provided, however, that not more than six (6) Eurodollar Loans may be
outstanding at the same time.
SECTION 2.02. Notice of Revolving Credit Loans.
(a) 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 Revolving Credit Loan comprised in whole or
in part of one or more Eurodollar Loans (subject to availability) and (ii) prior
to 11:00 a.m. on the day of each Revolving Credit Loan consisting solely of an
Alternate Base Rate Loan. Upon receipt of such notice, the Agent shall promptly
notify each Bank of the contents thereof and of the amount, type and other
relevant information regarding the Loan requested. Thereupon, each Bank shall,
not later than 2:00 p.m. (New York time), transfer immediately available funds
equal to such Bank's share of the requested borrowing to the Agent, which,
provided the conditions of Section 3.01 and 3.02 of this Agreement have been
met, shall thereupon transfer immediately available funds equal to the requested
borrowing to the Borrower's account with the Agent. If a notice of borrowing is
received by the Agent after
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11:00 a.m. on a Business Day, such notice shall be deemed to have been
given on the next succeeding Business Day. Any Bank's failure to make any
requested Loan shall not relieve any other Bank of its obligation to make such
Loan, but such other Bank shall not be liable for such failure of the first
Bank.
(b) Each notice given pursuant to this Section 2.02 shall specify the date
of such borrowing, the amount thereof and whether such Loan is to be (or what
portion or portions thereof are to be) an Alternate Base Rate Loan or a
Eurodollar Loan and, if such Loan or any portion thereof is to consist of one or
more Eurodollar Loans, the principal amounts thereof and Interest Period or
Interest Periods with respect thereto. If no election as to a type of Loan is
specified in such notice, such Loan (or portion thereof as to which no election
is specified) shall be an Alternate Base Rate Loan. If no election as to the
Interest Period is specified in such notice with respect to any Eurodollar Loan,
the Borrower shall be deemed to have selected an Interest Period of one month's
duration and if a Eurodollar Loan is requested when such Loans are not
available, the Borrower shall be deemed to have requested an Alternate Base Rate
Loan.
(c) The Borrower shall have the right, on such notice to the Agent as is
required pursuant to (a) above, (x) to continue any Eurodollar Loan or a portion
thereof into a subsequent Interest Period (subject to availability) and (y) to
convert an Alternate Base Rate Loan into a Eurodollar Loan (subject to
availability) subject to the following:
(i) if a Default or an Event of Default shall have occurred and be
continuing at the time of any proposed conversion or continuation only Alternate
Base Rate Loans shall be available;
(ii) in the case of a continuation or conversion of fewer than all Loans,
the aggregate principal amount of each Eurodollar Loan continued or into which a
Loan is converted shall be in the minimum principal amount of $250,000.00 and in
minimum increased multiples of $100,000.00;
(iii) each continuation or conversion shall be effected by each Bank
applying the proceeds of the new Loan to the Loan (or portion thereof) being
continued or converted;
(iv) 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;
(v) 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's duration and each request for a Eurodollar Loan made when
such Loans are not
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available shall be deemed to be a request for an Alternate Base Rate Loan;
(vi) 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.
(d) Unless the Agent shall have received notice from a Bank prior to 2:00
p.m. (New York time) on the requested date, that such Bank will not make
available to the Agent the Loan requested to be made on such date, the Agent may
assume that such Bank has made such Loan available to the Agent on such date in
accordance with Section 2.01(a) and the Agent in its sole discretion may, in
reliance upon such assumption, make available to the Borrower on such date a
corresponding amount on behalf of such Bank. If and to the extent such Bank
shall not have so made available to the Agent the Loan requested to be made on
such date and the Agent shall have so made available to the Borrower a
corresponding amount on behalf of such Bank, such Bank shall, on demand, pay to
the Agent such corresponding amount together with interest thereon, at the
Federal Funds Effective Rate, for each day from the date such amount shall have
been so made available by the Agent to the Borrower until the date such amount
shall have been repaid to the Agent. If such Bank does not pay such
corresponding amount promptly upon the Agent's demand therefor, the Agent shall
promptly notify the Borrower and the Borrower shall, not later than one (1)
Business Day following such notice, repay such corresponding amount to the Agent
together with accrued interest thereon at the applicable rate or rates provided
in Section 2.04.
SECTION 2.03. Revolving Credit Notes. (a) Each Revolving Credit Loan shall
be (i) in the case of each Alternate Base Rate Loan in the minimum principal
amount of $100,000.00, and in minimum increased multiples of $100,000.00 and
(ii) in the case of each Eurodollar Loan in the minimum principal amount of
$250,000.00 and in minimum increased multiples of $100,000.00 (except that, if
any such Alternate Base Rate Loan so requested shall exhaust the remaining
available Commitment, such Alternate Base Rate Loan may be in an amount equal to
the amount of the remaining available Commitment). Each Revolving Credit Loan
shall be evidenced by the Revolving Credit Notes. Each Revolving Credit Note
shall be dated the date hereof and be in the principal amount set forth next to
the applicable Bank's name on the signature pages hereto, and shall mature on
the Maturity Date, at which time the entire outstanding principal balance and
all interest thereon shall be due and payable. Each Revolving Credit Note shall
be entitled to the benefits and subject to the provisions of this Agreement.
(b) At the time of the making of each Revolving Credit Loan and at the time
of each payment of principal thereon, each Bank is hereby authorized by the
Borrower to make a notation on the
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schedule annexed to its Revolving Credit Note of the date and amount, and
the type and Interest Period, if applicable, of the Revolving Credit Loan or
payment, as the case may be. Failure to make a notation with respect to any
Revolving Credit Loan shall not limit or otherwise affect the obligation of the
Borrower hereunder or under the applicable Revolving Credit Note with respect to
such Revolving Credit Loan, and any payment of principal by the Borrower shall
not be affected by the failure to make a notation thereof on said schedule.
SECTION 2.04. Payment of Interest on the Revolving Credit 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 plus the ABR Applicable
Margin. Such interest shall be payable on each Interest Payment Date, commencing
with the first Interest Payment Date after the date of such Alternate Base Rate
Loan and on the Maturity Date. Any change in the rate of interest on the
Revolving Credit Notes due to a change in the Alternate Base Rate or a change in
the ABR Applicable Margin shall take effect as of the date of such change in the
Alternate Base Rate or ABR Applicable Margin, as applicable.
(b) In the case of a Eurodollar Loan, interest shall be payable at a rate
per annum equal to the Adjusted LIBOR Rate plus the LIBOR Applicable Margin.
Such interest shall be payable on each Interest Payment Date, commencing with
the first Interest Payment Date after the date of such Eurodollar Loan and on
the Maturity Date. In the event Eurodollar Loans are available, 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 use its best efforts to notify the Borrower and the
Banks of the rate of interest so determined. Such determination shall be
conclusive absent manifest error.
(c) The ABR Applicable Margin and the LIBOR Applicable Margin shall each be
determined on the basis of the Borrower's Funded Debt to EBITDA Ratio, as
calculated based on the Borrower's consolidated financial statements for its
most recent fiscal quarter. The ABR Applicable Margin and the LIBOR Applicable
Margin shall be determined as follows:
(i) The initial ABR Applicable Margin shall be -0- basis points and 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
year ending January 31, 1997 pursuant to Section 5.01(b) hereof (subject to
increase in the event that the Borrower fails to deliver such statements as
required below).
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Beginning with delivery of the Borrower's financial statements for the
fiscal year ending January 31, 1997, and for each fiscal quarter thereafter:
(ii) 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 ABR Applicable Margin shall be -0-
basis points and the LIBOR Applicable Margin shall be 75 basis points.
(iii) 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 1.85 to
1.00, the ABR Applicable Margin shall be -0- basis points and the LIBOR
Applicable Margin shall be 100 basis points.
(iv) If the Borrower's Funded Debt to EBITDA Ratio as of the end of such
fiscal quarter is equal to or greater than 1.85 to 1.00 but less than 2.00 to
1.00, the ABR Applicable Margin shall be -0- basis points and the LIBOR
Applicable Margin shall be 125 basis points.
(v) If the Borrower's Funded Debt to EBITDA Ratio as of the end of such
fiscal quarter is equal to or greater than 2.00 to 1.00, the ABR Applicable
Margin shall be -0- basis points and the LIBOR Applicable Margin shall be 150
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 ABR Applicable Margin shall be -0-
basis points and the LIBOR Applicable Margin shall be 150 basis points until the
Borrower delivers all required financial statements and certificates at which
time the ABR Applicable Margin and the LIBOR Applicable Margin shall be
redetermined as provided for in this Section 2.04.
Upon the occurrence and during the continuance of a Default or an Event of
Default the ABR Applicable Margin and the LIBOR Applicable Margin may, as a
result of changes in the Borrower's Funded Debt to EBITDA Ratio, increase but
will not decrease.
(d) All interest shall be paid to the Agent for the pro rata distribution
to the Banks.
SECTION 2.05. Use of Proceeds. (a) The proceeds of the Revolving Credit
Loans shall be used by the Borrower (i) to repay any indebtedness owing to BNY
under the Existing BNY Facility, (ii) to refinance the promissory notes issued
in connection with the acquisition of Sedeco, (iii) to finance working capital
of the Borrower and, subject to the limitations set forth in Section
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5.02(r) and Section 5.02(s), to finance working capital of its Subsidiaries
and (iv) subject to the Permitted Acquisition Sublimit, to finance Permitted
Acquisitions. No part of the proceeds of any Loan may be used for any purpose
that directly or indirectly violates or is inconsistent with, the provisions of
Regulations G, T, U or X.
(b) Letters of Credit shall be issued exclusively to finance trade
transactions and other commercial transactions related to the working capital
needs of the Borrower and its Subsidiaries.
SECTION 2.06. Fees. (a) The Borrower agrees to pay to the Agent, for the
pro rata distribution to the Banks, from the date of this Agreement and for so
long as the Total Commitment remains in effect, on the first Business Day of
each calendar quarter, and on any day that the Total Commitment is reduced or
terminated, an Unused Facility Fee computed at a rate per annum as determined
below (computed on the basis of the actual number of days elapsed over 360 days)
on the average daily unused amount of the Total Commitment, such Unused Facility
Fee being payable for the calendar quarter, or part thereof, preceding the
payment date. The Unused Facility Fee shall be determined as follows, 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.
(i) The initial Unused Facility Fee shall be 0.15% per annum and shall be
applicable until delivery of the Borrower's financial statements for its fiscal
year ending January 31, 1997 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 year ending January 31, 1997, and for each fiscal quarter thereafter:
(ii) 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 Unused Facility Fee shall be 0.10%
per annum.
(iii) 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 1.85 to
1.00, the Unused Facility Fee shall be 0.15% per annum.
(iv) If the Borrower's Funded Debt to EBITDA Ratio as of the end of such
fiscal quarter is equal to or greater than 1.85 to 1.00 but less than 2.00 to
1.00, the Unused Facility Fee shall be 0.20% per annum.
(v) If the Borrower's Funded Debt to EBITDA Ratio as of the end of such
fiscal quarter is equal to or greater than
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2.00 to 1.00, the Unused Facility Fee shall be 0.25% per annum.
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 Unused Facility Fee shall be 0.25% per
annum 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 Unused Facility Fee may, as a result of changes in the Borrower's
Funded Debt to EBITDA Ratio, increase but will not decrease.
(b) The Borrower agrees to pay to the Agent, for its services as Agent
hereunder, those fees, charges and expenses as the Borrower and the Agent may
mutually agree in a separate writing.
SECTION 2.07. Reduction of Commitment. (a) Upon at least three (3) Business
Days' prior written notice to the Agent, the Borrower may irrevocably elect to
have the unused Total Commitment terminated in whole or reduced in part
provided, however, that any such partial reduction shall be in a minimum amount
of $1,000,000.00, or whole multiples thereof. The Total Commitment, once
terminated or reduced, shall not be reinstated without the express written
approval of the Agent and the Banks. Any reduction to the Total Commitment shall
be applied pro rata to the respective Commitments of each Bank.
(b) In the event that the Borrower, Tajima Industries Ltd., or any other
party to the Tajima Agreement gives notice that it intends to terminate the
Tajima Agreement, the Total Commitment shall automatically, and without notice
from the Agent or the Banks, terminate and the Aggregate Outstandings shall be
paid or provided for as provided in Section 2.08 of this Agreement.
(c) In the event that by March 31, 1997 the Borrower fails to provide the
Agent with a document evidencing that the term of the Sedeco Tajima Agreement is
extended by the parties thereto until the Maturity Date or beyond, or in the
event that before or after any such extension, any party thereto gives notice
that it intends to terminate the Sedeco Tajima Agreement, then, upon notice from
the Agent (i) the Permitted Acquisition Sublimit shall be reduced to
$4,165,000.00 and shall be further and permanently reduced by the amount of each
principal payment made pursuant to clause (iii) below; (ii) the Total Commitment
shall be reduced to $25,000,000.00 (and the Commitments of each Bank shall be
reduced pro-rata) and (iii) if such document is not received by June 29, 1997,
the aggregate amount of all Permitted Acquisition Loans used to fund the Sedeco
Acquisition (including, without limitation, amounts used
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to pay the Borrower's Debt owing to Jimmy L. Yates, shall be prepaid in
four (4) equal principal installments, beginning on June 30, 1997 and continuing
on each of the three (3) succeeding 90th days thereafter until such amount has
been paid in full.
(d) Notwithstanding the provisions of clause (c) above, in the event that
any time prior to the Maturity Date, the Borrower provides the Agent with a
document evidencing that the term of the Sedeco Tajima Agreement is extended
until the Maturity Date or beyond, then (i) the Permitted Acquisition Sublimit
shall be increased to $10,000,000.00 (of which only $5,865,000.00 will be
available for Permitted Acquisitions other than the Sedeco Acquisition); (ii)
the Total Commitment shall be increased to $30,000,000.00 (and the Commitments
of each Bank shall be increased pro rata); and (iii) the Borrower may reborrow
those Permitted Acquisition Loans used to fund the Sedeco Acquisition and which
were repaid pursuant to clause (c) above.
(e) In the event that the Borrower fails to deliver to the Agent the
opinion of counsel required by Section 3.05 of this Agreement, the Permitted
Acquisition Sublimit shall be reduced to $4,165,000.00, all of which will have
been allocated to the acquisition of Sedeco.
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 one (1) Business Day's prior irrevocable
written notice to the Agent provided, however, that each such prepayment shall
be on a Business Day and shall be in an aggregate principal amount which is in
the minimum amount of $100,000.00 and in increased integral multiples of
$100,000.00.
(b) The Borrower shall have the right at any time and from time to time,
subject to the provisions of this Agreement, including but without limitation
Section 2.21, 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 each such prepayment shall be on a Business Day and shall be in an
aggregate principal amount which is in the minimum amount of $250,000.00 and in
increased integral multiples of $100,000.00.
(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 as specified by the Borrower. In the absence of such
specification,
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amounts being prepaid shall be applied first to any Alternate Base Rate
Loan then outstanding and then to Eurodollar Loans in the order of the nearest
expiration of their Interest Periods.
(d) At any time that the Aggregate Outstandings exceed the Total
Commitment, the Borrower shall first, prepay so much of the Revolving Credit
Loans as shall exceed the Commitment and second, if Aggregate Outstandings still
exceed the Commitment, deposit with the Agent for the benefit of the Issuing
Bank cash collateral for any undrawn and outstanding Letters of Credit in an
amount equal to the amount by which the remaining Aggregate Outstandings exceed
the Total Commitment. Any such prepayments shall be applied as set forth in (c)
above and if such prepayments of Revolving Credit Loans shall result in a
prepayment of a Eurodollar Loan other than on the last day of its Interest
Period, such prepayment shall be subject to the reimbursement required by
Section 2.21.
(e) In the event that the Borrower, Tajima Industries Ltd. or any other
party to the Tajima Agreement gives notice that it intends to terminate the
Tajima Agreement, the Total Commitment shall terminate and the then outstanding
principal balance of Revolving Credit Loans (including Permitted Acquisition
Loans) shall be repaid in equal quarterly installments, each due on the first
day of each calendar quarter, beginning with the first such day after said
notice of termination. Such outstanding balance shall be payable over the
shorter of (i) twelve (12) quarterly installments or (ii) the number of full
calendar quarters between the date of notice of termination and the Maturity
Date. The payments required by this sub-section (e) shall be applied as set
forth, and subject to the other provisions of, this Section 2.08.
SECTION 2.09. The Term Loans. The Banks hereby agree, severally but not
jointly, on the Maturity Date, and on the terms and conditions and in reliance
upon the representations and warranties of the Borrower and the Guarantors
hereinafter set forth in this Agreement, and provided no Default or Event of
Default has occurred and is continuing, or would result from the making of the
Term Loan, to convert the then outstanding principal balance of Permitted
Acquisition Loans to a Term Loan and the Borrower agrees to convert such amounts
by executing and delivering to the Agent, for delivery to the Banks, the Term
Loan Notes. 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 2.10 hereof. Any 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 2.10. Notice of Term Loan Designations. (a) The Borrower may elect
to designate the Term Loan (or a portion thereof) as an Alternate Base Rate Loan
or a Eurodollar Loan by so
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specifying in the irrevocable notice given pursuant to this Section 2.10;
provided, however, that each Eurodollar Loan requested of the Agent for any
specific Interest Period shall be in the minimum principal amount of $250,000.00
and in minimum integral 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 each election to designate each Term Loan (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.
(c) Upon receipt of such notice, the Agent shall promptly notify each Bank
of the contents thereof and of the amount, type and other relevant information
regarding the Loan requested.
SECTION 2.11. Term Loan Notes. The Term Loans shall be evidenced by the
Term Loan Notes. The Term Loan Notes shall be dated as of the Maturity Date and
each of the Term Loan Notes shall mature on the Term Loan 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 2.12. Repayment of Term Loan Notes. (a) The principal balance of
each of the Term Loan Notes shall be payable in twelve (12) equal quarterly
installments, each due on a Term Loan Installment Date, beginning on the first
such day after the Maturity Date and continuing on each Term Loan Installment
Date thereafter. Each of the first eleven (11) of such quarterly principal
installments shall be in an amount equal to one twelfth (1/12th) of the
principal amount of the Permitted Acquisition Loans so converted to the Term
Loan and the final such quarterly principal installment shall be in an amount
equal to the then aggregate outstanding principal balance of the Term Loan
Notes.
(b) All payments of installments on the Term Loan Notes shall be made to
the Agent for the pro rata distributions to the Banks.
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SECTION 2.13. 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 plus the ABR Applicable Margin. 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 Alternate Base Rate Loan, on each Interest Determination
Date and on the Term Loan Maturity Date. Any change in the rate of interest on
the Term Loan Notes due to a change in the Alternate Base Rate or a change in
the ABR Applicable Margin shall take effect as of the date of such change in the
Alternate Base Rate or the ABR Applicable Margin.
(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. 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 Term Loan 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.
(c) The ABR Applicable Margin and the LIBOR Applicable Margin shall each 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. The ABR Applicable Margin and the LIBOR Applicable Margin shall
be determined as set forth in Section 2.04(c) of this Agreement.
SECTION 2.14. Conversion and Continuation of Loans. The Borrower shall have
the right, at any time, on such notice to the Agent as set forth in Section
2.10(b) of this Agreement, (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 Default or 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 $250,000.00 and in increased integral
multiples of $100,000.00;
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(c) each continuation or conversion shall be effected by each 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 2.15. Use of Proceeds. The proceeds of the Term Loans shall be used
by the Borrower exclusively to refinance the Permitted Acquisition Loans. No
part of the proceeds of any Term Loan may be used for any purpose that directly
or indirectly violates or is inconsistent with, the provisions of Regulation G,
T, U or X.
SECTION 2.16. 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 one (1) Business Day's prior irrevocable
written notice to the Agent provided, however, that each such prepayment shall
be on a Business Day and shall be in an aggregate minimum principal amount of
$250,000.00 and in increased integral multiples of $100,000.00.
(b) The Borrower shall have the right at any time and from time to time,
subject to the provisions hereof and of Section 2.21, 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 minimum principal amount of $250,000.00 and in increased integral
multiples of $100,000.00.
(c) The notice of prepayment under this Section 2.16 shall set forth the
prepayment date and the principal amount of the Loan
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being prepaid and shall be irrevocable and shall commit the Borrower to pay
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 2.16 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. All
prepayments shall be applied first to any Alternate Base Rate Loans then
outstanding and then to Eurodollar Loans outstanding in the order of the nearest
expiration of their Interest Periods. All partial prepayments of the Term 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 2.17. 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 2.18 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 2.18. 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 or the Letter of Credit Issuer to any tax with
respect to the Notes, the Letters of Credit or on any amount paid or to be paid
under or pursuant to this Agreement, the Notes or the Letters of Credit (other
than any tax measured by or based upon the overall net income of such Bank or
the Letter of Credit Issuer);
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(ii) changes the basis of taxation of payments to any Bank or the Letter of
Credit Issuer of any amounts payable hereunder (other than any tax measured by
or based upon the overall net income of such Bank or the Letter of Credit
Issuer);
(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 the Letter of Credit Issuer; or
(iv) imposes on the Agent, any Bank or the Letter of Credit Issuer, any
other condition affecting the Notes, the Letters of Credit or this Agreement;
and the result of any of the foregoing is to increase the cost to the Agent, a
Bank or the Letter of Credit Issuer of maintaining this Agreement, making the
Loans or issuing the Letters of Credit, or to reduce the amount of any payment
(whether of principal, interest or otherwise) receivable by the Agent, any Bank
or the Letter of Credit Issuer or to require the Agent, any Bank or the Letter
of Credit Issuer 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
(b) the Borrower shall pay to the Agent on behalf of itself, such Bank or
the Letter of Credit Issuer, within ten (10) days after the advice referred to
in subsection (a) hereinabove, such an amount or amounts as will compensate the
Agent, the Bank or the Letter of Credit Issuer 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 2.18 shall be conclusive evidence of such amounts absent manifest
error and if made in good faith.
SECTION 2.19. Capital Adequacy. If the Agent, any Bank or the Letter of
Credit Issuer 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 the
Letter of Credit Issuer (or any lending office of such Bank or the Letter of
Credit Issuer) or such
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Bank's or the Letter of Credit Issuer'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 or the Letter of Credit
Issuer's capital or on the capital of such Bank's or the Letter of Credit
Issuer's holding company, if any, as a consequence of its obligations hereunder
to a level below that which such Bank or the Letter of Credit Issuer or such
Bank's or the Letter of Credit Issuer's holding company could have achieved but
for such adoption, change or compliance (taking into consideration such Bank's
or the Letter of Credit Issuer's policies and the policies of such Bank's or the
Letter of Credit Issuer's holding company with respect to capital adequacy) by
an amount deemed by such Bank or the Letter of Credit Issuer to be material,
then from time to time the Borrower shall pay to the Agent on behalf of such
Bank or the Letter of Credit Issuer such additional amount or amounts as will
reasonably compensate such Bank or the Letter of Credit Issuer or its or their
holding company or companies for any such reduction suffered.
SECTION 2.20. 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 any 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 by such Bank
hereunder, whereupon the Borrower shall be prohibited from requesting such
Eurodollar Loans from such Bank hereunder unless such declaration is
subsequently withdrawn; and
(ii) require that, subject to the provisions of Section 2.21, all
outstanding Eurodollar Loans made by it be converted to an Alternate Base Rate
Loan, whereupon 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 2.20, 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.
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SECTION 2.21. Funding Losses. (a) The Borrower agrees to compensate each
Bank for any loss or expense which such Bank may sustain or incur as a
consequence of (a) default by the Borrower in payment when due of the principal
amount of or interest on any Eurodollar Loan, (b) default by the Borrower in
making a borrowing of, conversion into or continuation of Eurodollar Loans after
the Borrower has given a notice requesting the same in accordance with the
provisions of this Agreement, (c) default by the Borrower in making any
prepayment after the Borrower has given a notice thereof in accordance with the
provisions of this Agreement or (d) the making of a prepayment of Eurodollar
Loans on a day which is not the last day of an Interest Period with respect
thereto, including, without limitation, in each case, any such loss (including,
without limitation, loss of margin) or expense arising from the reemployment of
funds obtained by it or from amounts payable by such Bank to lenders of funds
obtained by it in order to make or maintain such Loans. Such compensation may
include an amount equal to the excess, if any, of (i) the amount of interest
which would have accrued on the amount so prepaid, or not so borrowed, converted
or continued, for the period from the date of such prepayment or of such failure
to borrow, convert or continue to the last day of such Interest Period (or, in
the case of a failure to borrow, convert or continue, the Interest Period that
would have commenced on the date of such failure) in each case at the applicable
rate of interest for such Loans provided for herein, including, the LIBOR
Applicable Margin included therein, if any, over (ii) the amount of interest (as
reasonably determined by such Bank) which would have accrued to such Bank on
such amount by placing such amount on deposit for a comparable period with
leading banks in the interbank eurodollar market. This covenant shall survive
the termination of this Agreement and the payment of the Loans and all other
amounts payable hereunder. When claiming under this Section 2.21, the claiming
Bank shall provide to the Borrower a statement, signed by an officer of such
Bank, 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 2.22. 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
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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 2.23. 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 and/or commissions or
fees under the Notes and the Letters of Credit, (ii) the Agent's fees, 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.
SECTION 2.24. 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 amount due under any Letter of Credit, or any other amount becoming due
hereunder, the Borrower shall pay to the Agent for the pro rata distribution to
the Banks or the Issuing Bank, as applicable, 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
or Letter of Credit reimbursement 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 the Aggregate Outstandings (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 2.25. Payments. All payments by the Borrower hereunder, under the
Notes or under the Letters of Credit 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.
SECTION 2.26. Interest Adjustments. (a) If the provisions of this
Agreement, the Notes or the L/C Documents would at any time otherwise require
payment by the Borrower to any Bank or the Issuing 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 or
the Issuing 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 or the
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Issuing Bank hereunder, under the Notes or under the L/C Documents 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 or the Issuing Bank hereunder, under the Notes or under the L/C
Documents for any subsequent period shall be increased by such maximum amount of
the Interest Deficit that may be so added without causing such Bank or the
Issuing 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 at the
time of any complete payment of the Term Loans at that time outstanding (other
than an optional prepayment thereof) shall be cancelled and not paid.
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ARTICLE IIA
THE LETTERS OF CREDIT
SECTION 2A.01. Letters of Credit. (a) On the terms and conditions set forth
herein, (i) the Issuing Bank agrees, from time to time on any Business Day
during the period from the date of this Agreement to the Maturity Date to issue
Letters of Credit for the account of the Borrower and (ii) the Banks severally
agree to participate in Letters of Credit issued for the account of the
Borrower. Within the foregoing limits, and subject to the other terms and
conditions hereof, the Borrower's ability to obtain Letters of Credit shall be
fully revolving, and, accordingly, the Borrower may, during the foregoing
period, obtain Letters of Credit to replace Letters of Credit which have expired
or which have been drawn upon and reimbursed.
(b) The Issuing Bank has no obligation to Issue any Letter of Credit if:
(i) any order, judgment or decree of any governmental authority or
arbitrator purports by its terms to enjoin or restrain the Issuing Bank from
issuing such Letter of Credit or any requirement of law applicable to the
Issuing Bank or any request or directive (whether or not having the force of
law) from any governmental authority with jurisdiction over the Issuing Bank
prohibits, or requests that the Issuing Bank refrain from, the issuance of
commercial or standby letters of credit generally or such Letter of Credit in
particular or imposes upon such Issuing Bank with respect to such Letter of
Credit any restriction, reserve or capital requirement (for which such Issuing
Bank is not otherwise compensated hereunder) not in effect on the date of this
Agreement, or imposes upon the Issuing Bank any unreimbursed loss, cost or
expense which was not applicable on the date of this Agreement and which the
Issuing Bank in good faith deems material to it;
(ii) the Issuing Bank has received written notice from any Bank, the Agent
or the Borrower, on or prior to the Business Day prior to the requested date of
issuance of such Letter of Credit, that one or more of the applicable conditions
contained in Article III is not then satisfied;
(iii) the expiry date of any requested Letter of Credit is (x) more than
one (1) year from its date of issuance or (y) later than five (5) Business Days
prior to the Maturity Date;
(iv) the aggregate L/C Exposure, after giving effect to the requested
Letter of Credit, under all standby Letters of Credit shall exceed
$2,250,000.00; or
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(v) any requested Letter of Credit is not in form and substance acceptable
to the Issuing Bank, or the issuance of a Letter of Credit violates any
applicable policies of the Issuing Bank.
SECTION 2A.02. Issuance of Letters of Credit. Each Letter of Credit shall
be issued upon the request of the Borrower (which request shall be irrevocable),
received by the Issuing Bank in accordance with arrangements between the Issuing
Bank and the Borrower to provide the Issuing Bank electronically with the
information necessary to issue, amend or renew Letters of Credit. The
arrangements between the Borrower and the Issuing Bank are set forth in the L/C
Documents (other than the Letters of Credit) between the Issuing Bank and the
Borrower. To the extent any term in any such L/C Documents (other than a Letter
of Credit) conflicts with or is inconsistent with the terms of this Agreement,
the term most favorable to the Issuing Bank shall apply, and an Issuing Bank may
exercise its rights under either such L/C Document or this Agreement vis-a-vis
the Borrower, but subject in any event to the provisions herein with respect to
sharing and notification. If any such inconsistency exists, the Agent and the
Banks shall not be deemed to have waived any rights hereunder, nor shall the
Issuing Bank be deemed to have waived any rights under such L/C Document, by
reason of such inconsistency.
SECTION 2A.03. Participations of Banks. (a) Immediately upon the issuance
of each Letter of Credit, each Bank shall be deemed to, and hereby irrevocably
unconditionally agrees to, purchase from the Issuing Bank a participation in
such Letter of Credit, each drawing thereunder in any amount and each draft
accepted or deferred payment obligation incurred in any amount under such Letter
of Credit equal in each case to the product of (i) the pro rata share (expressed
as a percentage) of each Bank, represented by the percentage that each Bank's
Commitment bears to the Total Commitment, times (ii) the maximum amount
available to be drawn under such Letter of Credit and the amount of such
drawing, accepted draft or deferred payment obligation, respectively. Each
issuance of a Letter of Credit shall be deemed to utilize the Commitment of each
Bank by an amount equal to the amount of such participation.
(b) The Issuing Bank will promptly notify the Borrower of any drawing under
a Letter of Credit. The Borrower shall reimburse the Issuing Bank on each date
that any amount is paid by the Issuing Bank under any Letter of Credit (each
such date, an "Honor Date") at such time(s) as are agreed upon by the Borrower
and the Issuing Bank, in an amount equal to the amount so paid by the Issuing
Bank. If the Borrower fails to reimburse the Issuing Bank for the full amount of
any drawing under any Letter of Credit at such agreed upon time on the Honor
Date, such Issuing Bank will promptly notify the Agent and the Agent will
promptly notify each Bank thereof. The Honor Date shall, in every case, be (i)
not later than seventy
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(70) days beyond the date when the beneficiary of the Letter of Credit
makes presentment of the required documents under the Letter of Credit or (ii)
not later than five (5) Business Days prior to the Maturity Date.
(c) Upon receipt of any notice from the Agent of any failure by the
Borrower to reimburse the Issuing Bank, each Bank shall make available to the
Agent for the account of the Issuing Bank its pro rata share of the amount of
such reimbursement. If, after receipt of such notice, any Bank fails to transfer
its pro rata share of the amount of such reimbursement to the Agent, interest
shall accrue on such Bank's obligation to make such payment from the Honor Date
to the date such Bank makes such payment, at a rate per annum equal to the
Federal Funds Effective Rate in effect from time to time during such period. Any
failure of the Agent to give notice to the Banks on an Honor Date or in
sufficient time to enable any Bank to effect such payment on such date shall not
relieve such Bank from its obligations under this subsection (c).
(d) Each Bank's payment to the Issuing Bank pursuant to Section 2A.03(c)
shall be deemed payment in respect of and in satisfaction of its participation
in such Letter of Credit.
(e) Each Bank's obligation to make payment in respect of its participation
in Letters of Credit, shall be absolute and unconditional and without recourse
to the Issuing Bank and shall not be affected by any circumstance, including (i)
any setoff, counterclaim, recoupment, defense or other right which such Bank may
have against the Issuing Bank, the Borrower or any other Person for any reason
whatsoever; (ii) the occurrence or continuance of a Default or any Event of
Default; or (iii) any other circumstance, happening or event whatsoever, whether
or not similar to any of the foregoing.
(f) Notwithstanding anything herein to the contrary, no Bank shall have any
liability to BNY for any reimbursement or other obligation in connection with
unmatured drafts accepted and/or deferred payment obligations incurred by BNY
prior to the date of this Agreement and as identified on Schedule 1.01-C.
SECTION 2A.04. Repayment of Participations. (a) Upon receipt by the Issuing
Bank of (i) reimbursement from the Borrower for any payment made by the Issuing
Bank under a Letter of Credit with respect to which any Bank has paid for its
participation in such Letter of Credit or (ii) payment of interest thereon, the
Issuing Bank will pay such amounts to the Agent in the same funds as those
received by the Issuing Bank. The Agent shall promptly distribute to each Bank
its pro rata share thereof.
(b) If the Agent or any Issuing Bank is required at any time to return to
the Borrower, or to a trustee, receiver, liquidator, custodian, or any official
in any insolvency proceeding, any
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portion of the payments made by the Borrower to the Agent or to the Issuing
Bank pursuant to Section 2A.04(a) in reimbursement of a payment made under a
Letter of Credit or interest thereon or fees relating thereto or as a result of
a setoff, each Bank shall, on demand of the Agent or the Issuing Bank, as the
case may be, forthwith return to the Agent or the Issuing Bank, as the case may
be, the amount of its pro rata share of any amounts so returned by the Agent or
the Issuing Bank plus interest thereon from the date such demand is made to the
date such amounts are returned by such Bank to the Agent or the Issuing Bank, at
a rate per annum equal to the Federal Funds Effective Rate in effect from time
to time.
(c) If any event described in subsection (b) above occurs, the obligation
of the Borrower in respect of the payment or setoff required to be returned
shall be revived and continued in full force and effect as if such payment had
not been make or such setoff had not been effected.
SECTION 2A.05 Role of the Issuing Bank. (a) The Issuing Bank shall not have
any responsibility to obtain any document in connection with paying any draw
under a Letter of Credit (other than any required sight or time draft,
certificate and other documents expressly required by the Letter of Credit) or
to ascertain or inquire as to the validity or accuracy of any such document or
the authority of the Person executing or delivering any such document.
(b) Neither the Issuing Bank nor any of its correspondents or assignees
shall be liable to any Bank for: (i) any action taken or omitted in connection
herewith at the request or with the approval of the Banks (including the
Required Banks, as applicable); (ii) any action taken or omitted in the absence
of gross negligence or willful misconduct; or (iii) the due execution,
effectiveness, validity or enforceability of any L/C Document.
(c) The Borrower hereby assumes all risks of the acts or omissions of any
beneficiary or transferee with respect to its use of any Letter of Credit;
provided, however, that this assumption is not intended to, and shall not,
preclude the Borrower's pursuing such rights and remedies as it may have against
the beneficiary or transferee at law or under any other agreement. Neither the
Agent, nor any of its officers, directors or employees, nor any of the
respective correspondents, participants or assignees of the Issuing Bank, shall
be liable or responsible for any of the matters described in clauses (i) through
(vii) of Section 2A.06; provided, however, that the Borrower may have a claim
against the Issuing Bank, and the Issuing Bank may be liable to the Borrower, to
the extent of any direct, as opposed to consequential or exemplary, damages
suffered by the Borrower which the Borrower proves were caused by the Issuing
Bank's willful misconduct or gross negligence or the Issuing Bank's willful
failure to pay under any Letter of Credit after the presentation to it by the
beneficiary of a
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required sight or time draft and certificate(s) strictly complying with the
terms and conditions of a Letter of Credit. In furtherance and not in limitation
of the foregoing: (i) the Issuing Bank may accept documents that appear on their
face to be in order, without responsibility for further investigation,
regardless of any notice or information to the contrary; and (ii) the Issuing
Bank shall not be responsible for the validity or sufficiency of any instrument
transferring or assigning or purporting to transfer or assign a Letter of Credit
or the rights or benefits thereunder or proceeds thereof, in whole or in part,
which may prove to be invalid or ineffective for any reasons.
SECTION 2A.06. Obligations Absolute. The obligations of the Borrower under
this Agreement and any L/C Documents to reimburse the Issuing Bank for a drawing
under a Letter of Credit shall be unconditional and irrevocable, and shall be
paid strictly in accordance with the terms of this Agreement and the L/C
Documents under all circumstances, including the following:
(i) any lack of validity or enforceability of this Agreement or any L/C
Document;
(ii) any change in the time, manner or place of payment of, or in any other
term of, all or any of the obligations of the Borrower in respect of any Letter
of Credit or any other amendment or waiver of or any consent to departure from
all or any of the L/C Documents;
(iii) the existence of any claim, setoff, defense or other right that the
Borrower may have at any time against any beneficiary or any transferee of any
Letter of Credit (or any Person for whom any such beneficiary or any such
transferee may be acting), the Issuing Bank or any other Person, whether in
connection with this Agreement, the transactions contemplated hereby or by the
L/C Documents or any unrelated transaction;
(iv) any draft, demand, certificate or other document presented under any
Letter of Credit proving to be forged, fraudulent, invalid or insufficient in
any respect or any statement therein being untrue or inaccurate in any respect;
or any loss or delay in the transmission or otherwise of any document required
in order to make a drawing under any Letter of Credit;
(v) any payment by the Issuing Bank under a Letter of Credit against
presentation of a draft or certificate that does not strictly comply with the
terms of any Letter of Credit; or any payment made by the Issuing Bank under any
Letter of Credit to any Person purporting to be a trustee in bankruptcy,
debtor-in-possession, assignee for the benefit of creditors, liquidator,
receiver or other representative of or
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successor to any beneficiary or any transferee of any Letter of Credit,
including any arising in connection with any insolvency proceeding;
(vi) any exchange, release or non-perfection of any collateral, or any
release or amendment or waiver of or consent to departure from any other
guarantee, for all or any of the obligations of the Borrower in respect of any
Letter of Credit; or
(vii) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing, including any other circumstance that might
otherwise constitute a defense available to, or a discharge of, the Borrower.
SECTION 2A.07. Uniform Customs and Practices. The Uniform Customs and
Practices for Documentary Credits as published by the International Chamber of
Commerce most recently at the time of issuance of any Letter of Credit shall
(unless otherwise expressly provided in the Letters of Credit) apply to the
Letters of Credit.
SECTION 2A.08. Fees and Commissions. (a) In the case of trade Letters of
Credit payable on sight, the Borrower shall pay to the Agent a payment
commission equal to 0.25% of the amount drawn, payable on the date of
presentment of the required documents under the Letter of Credit.
(b) In the case of trade Letters of Credit payable at a stated time, the
Borrower shall pay to the Agent a per annum commission on the average amount of
drafts accepted and deferred payment obligations as outstanding from the date of
presentment of required documents under the Letter of Credit to the date of
payment, equal to (i) 0.75% during such periods when the Borrower's Funded Debt
to EBITDA Ratio (as determined from the Borrower's most recent financial
statements) is less than 2.00 to 1.00 and (ii) 1.25% when the Borrower's Funded
Debt to EBITDA Ratio is equal to or greater than 2.00 to 1.00. Such commission
shall be payable on the Honor Date.
(c) In the case of standby Letters of Credit, the Borrower shall pay to the
Agent a per annum fee equal to the LIBOR Applicable Margin, as in effect from
time to time, on the average amount issued and available to be drawn on standby
Letters of Credit (computed on the basis of a year of 360 days for actual days
elapsed), payable quarterly in arrears.
(d) In the case of all Letters of Credit, the Borrower shall pay to the
Issuing Bank its usual and customary letter of credit fees as established from
time to time, including without limitation, fees, commissions and charges for
issuance, payment, processing amendment and expiration.
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(e) In the case of the fees and commissions set forth in (a), (b) and (c)
above, same shall be paid to the Agent for the pro rata distribution to the
Banks.
(f) Notwithstanding anything herein to the contrary, any amounts payable by
the Borrower with respect to unmatured drafts accepted and/or deferred payment
obligations incurred by BNY prior to the date of this Agreement and as
identified on Schedule 1.01-C annexed hereto, shall be paid to BNY for its own
account.
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ARTICLE III
CONDITIONS OF LENDING
SECTION 3.01. Conditions Precedent to the Making of the Initial Revolving
Credit Loan and the Issuing of the Initial Letter of Credit. The obligation of
the Banks to make the initial Revolving Credit Loans contemplated by this
Agreement and the obligation of the Issuing Bank to issue the initial Letter of
Credit issued after the date of this Agreement contemplated by this Agreement
are each subject to the condition precedent that the Agent, the Banks and the
Issuing Bank 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) A Revolving Credit Note, duly executed by the Borrower and payable to
the order of each of the Banks.
(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 the Letters
of Credit 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'
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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 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 (i) 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 and (ii) of Cantey & Hanger, L.L.P. with respect to Sedeco, concerning
such 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 Sedeco Tajima Agreement.
(k) From the Borrower, the fees and expenses to be paid pursuant to this
Agreement, the Commitment Letter and the Fee Letter.
(l) The Agent and the Banks shall, prior to the date of this Agreement,
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.
(m) From the Borrower, a copy of all contracts, documents and agreements
relating to the acquisition of Sedeco, the review of which shall be satisfactory
to the Banks and their counsel in all respects, and evidence that the
acquisition of Sedeco has been completed.
(n) From the Borrower, a copy of an amendment to the BNY Existing Term Loan
Agreement executed by each of the parties thereto, in form and substance
satisfactory to the Agent and its counsel, which conforms the covenants therein
to those set forth in Article V of this Agreement.
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(o) From the Borrower, a waiver, in form and substance satisfactory to the
Agent and its counsel, by which The Chase Manhattan Bank consents to this
Agreement and the transactions contemplated hereby.
(p) Intentionally omitted.
(q) 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:
(i) The representations and warranties contained in Article IV of this
Agreement and in the other Loan Documents are true and correct on and as of such
date; and
(ii) No Default or Event of Default has occurred and is continuing, or
would result from the making of the initial Revolving Credit Loans or the
issuance of the initial Letter of Credit, as applicable.
(r) All legal matters incident to this Agreement and the Loan transactions
contemplated hereby shall be satisfactory to Cullen and Dykman, counsel to the
Agent.
(s) Receipt by the Agent of such other approvals, opinions or documents as
the Agent or its counsel may reasonably request.
SECTION 3.02. Conditions Precedent to All Revolving Credit Loans and all
Letters of Credit. The obligation of the Banks to make each Revolving Credit
Loan and the obligation of the Issuing Bank to issue Letters of Credit shall
each be subject to the further condition precedent that on the date of such
Revolving Credit Loan or Letter of Credit:
(a) The following statements shall be true and the Agent shall have
received a certificate signed by the President or the Chief Financial Officer of
the Borrower dated the date of such Revolving Credit Loan or Letter of Credit,
stating that:
(i) The representations and warranties contained in Article IV of this
Agreement and in the other Loan Documents are true and correct in all material
respects on and as of such date as though made on and as such date (provided
that the representation made in Section 4.01(f) shall be deemed made as to the
then most recent fiscal year and interim period financial statements delivered
to the Agent and the Banks); and
(ii) No Default or Event of Default has occurred and is continuing, or
would result from such Revolving Credit Loan or Letter of Credit.
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(b) The Agent shall have received such other approvals, opinions or
documents as the Agent or its counsel may reasonably request.
SECTION 3.03. Conditions Precedent to the Making of Permitted Acquisition
Loans. The obligation of the Banks to make each Revolving Credit Loan which is
Permitted Acquisition Loan shall be subject to the further conditions precedent
that on the date of such Revolving Credit Loan:
(a) The Agent and the Banks shall have received, at least ten (10) Business
Days prior to such request, the certificate and information required under the
definition of Permitted Acquisition.
(b) The Agent and the Banks shall have received copies of all contracts,
documents and agreements relating to the Permitted Acquisition (the "Acquisition
Documents"), and evidence that except for the payment of that portion of the
purchase price to be funded by the proceeds of any Permitted Acquisition Loans,
the Permitted Acquisition has been completed in accordance with the terms of the
Acquisition Documents previously furnished and that no condition or material
obligation on the part of the acquired Person has been waived.
SECTION 3.04. Conditions Precedent to the Making of the Term Loan. The
obligation of each Bank to make its share of the Term Loan shall be subject to
the condition precedent that the Agent and the Banks shall have received on or
before the Maturity Date all of the documents required by Section 3.01, 3.02 and
3.03 and each of the following, in form and substance satisfactory to the Agent
and its counsel:
(a) A Term Loan Note, duly executed by the Borrower and payable to the
order of each of the Banks.
(b) The following statements shall be true and the Agent shall have
received a certificate signed by the President or the Chief Financial Officer of
the Borrower and each Guarantor dated the Maturity Date, stating that:
(i) The representations and warranties contained in Article IV of this
Agreement and in the other Loan Documents are true and correct in all material
respects on and as of the Maturity Date as though made on and as of such date
(provided that the representation made in Section 4.01(f) shall be deemed made
as to the then most recent fiscal year and interim period financial statements
delivered to the Agent and the Banks); and (ii) No Default or Event of Default
has occurred and is continuing, or would result from the making of the Term
Loan.
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(c) Additional Documentation. The Agent shall have received such other
approvals, opinions, or documents as the Agent or its counsel may reasonably
request.
SECTION 3.05 Special Condition Precedent. The Borrower shall deliver to the
Agent, on or before February 28, 1997, an opinion of Illinois counsel with
respect to SMX, concerning certain matters referred to in Article IV hereof and
as to such other matters as the Agent or its counsel may reasonably request. The
failure of the Borrower to deliver such opinion shall result in the provisions
of Section 2.07(d) becoming effective.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties. On the date of this
Agreement, on each date that the Borrower requests a Revolving Credit Loan or a
Letter of Credit and on the date the Term Loan is made, the Borrower and each of
the Guarantors represent and warrant as follows:
(a) Subsidiaries. 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 the Borrower or 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 the Borrower or a Guarantor.
(b) Good Standing. 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) Due Execution, etc. 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 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
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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; or (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.
(d) No Consents Required. 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) Validity and Enforceability. 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) Financial Statements. The consolidated financial statements of the
Borrower, the Guarantors and their respective Consolidated Affiliates for the
fiscal year ended January 31, 1996, and for the most recent interim fiscal
period, 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 dates and the results of operations of the Borrower and its
Consolidated Affiliates for the periods ended on such dates, all in accordance
with GAAP, and since such dates (and each succeeding January 31) 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) No Litigation. There is no pending or, to the Borrower's knowledge,
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.
(h) Taxes. 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
has been
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finally determined and satisfied for all taxable years up to and including
the taxable year ending January 31, 1996.
(i) Licenses, etc. 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.
(j) Burdensome Agreements. To the best of Borrower's knowledge after due
inquiry, neither the Borrower nor any of the Guarantors are a party to any
indenture, loan or credit agreement or any other 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.
(k) Margin Stock. 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.
(l) Compliance With Laws. 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.
(m) ERISA. 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
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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.
(n) Hazardous Materials. 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, regulations 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.
(o) Use of Proceeds. The proceeds of the Revolving Credit Loans shall be
used exclusively for the purposes set forth in Section 2.05(a) of this
Agreement. Letters of Credit shall be used exclusively for the purposes set
forth in Section 2.05(b) of this Agreement. The proceeds of the Term Loans shall
be used exclusively for the purposes set forth in Section 2.15 of this
Agreement.
(p) No Liens. 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.
(q) Casualties. 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.
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(r) Solvency of Guarantors. 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.
(s) Advantage to Guarantors. 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.
(t) Credit Agreements. Schedule 4.01(t) 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 is 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 and neither the Borrower nor
any Guarantor is in default with respect to its obligations thereunder.
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ARTICLE V
COVENANTS OF THE BORROWER
SECTION 5.01. Affirmative Covenants. So long as (i) the Total Commitment
shall be in effect, (ii) any amount shall remain outstanding under any of the
Notes, or (iii) any Letter of Credit, accepted draft or deferred payment
obligation under a Letter of Credit is outstanding, the Borrower and each of the
Guarantors will, unless the 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 a balance sheet 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 and Sedeco 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, and
(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 (x) the aggregate advances by the Borrower to HAPL,
(y) the aggregate advances by the Borrower to Sedeco, and (z) the aggregate
advances by the Borrower to all Subsidiaries other than HAPL or Sedeco, 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.
(ii) Quarterly Financial Statements.
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(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, and
(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 (x) the aggregate advances by the Borrower to HAPL, (y) the
aggregate advances by the Borrower to Sedeco, and (z) the aggregate advances by
the Borrower to all Subsidiaries other than HAPL or Sedeco, 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 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
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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.
(xi) Notice of Termination of Tajima Agreement or Sedeco Tajima Agreement.
Promptly upon receipt thereof, notice of the cancellation or suspension of the
Tajima Agreement or the Sedeco Tajima Agreement or of any notice by any party
thereto of its intent to cancel or suspend the Tajima Agreement or the Sedeco
Tajima Agreement, and notice of the existence of any default or event of default
thereunder.
(xii) General Information. Such other information respecting the condition
or operations, financial or otherwise, of the
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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.
(h) Performance and Compliance with Other Agreements. Perform and comply
with each of the provisions of each and every agreement
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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 (i) any Subsidiary of the
Borrower or any Guarantor, or (ii) 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, in either case
formed after the date of this Agreement, to (x) become a guarantor of all
obligations of the Borrower under this Agreement and the other Loan Documents
and (y) become a party to this Agreement.
(l) Agent's Administrative Fee. Pay to the Agent an annual administrative
fee as set forth in the Fee Letter.
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(m) Prepayment of Sedeco Mortgage. Prepay, not later than January 31, 1997
all amounts outstanding under the existing mortgage loan owing from Sedeco to
Bank One, Texas N.A. (as described in Schedule 5.02(b)) and provide, not later
than February 28, 1997 evidence to the Agent (i) of such prepayment and the
satisfaction of such mortgage and related security documents and (ii) of the
release by Bank One, Texas N.A. of any security interest in any personal
property of Sedeco.
SECTION 5.02. Negative Covenants. So long as (i) the Total Commitment shall
be in effect, (ii) any amount shall remain outstanding under any of the Notes,
or (iii) any Letter of Credit, accepted draft or deferred payment obligation
under a Letter of Credit is outstanding, 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 securing Debt permitted by Section 5.02;
(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
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such Liens is effectively stayed and the claims secured thereby are being
actively contested in good faith and by appropriate proceedings;
(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 5.03(b); and
(x) Liens constituting mortgages on real property in an aggregate principal
amount not to exceed 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, the Notes or the Letters of
Credit;
(ii) Debt described in Schedule 5.02(b), provided that no such Debt shall
be renewed, extended or refinanced;
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(iii) 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 course of business and paid within the specified time, unless
contested in good faith and by appropriate proceedings;
(iv) Debt of the Borrower or any Guarantor secured by purchase money Liens
permitted by Section 5.02(a)(ix);
(v) Debt of HAPL under the HAPL Facility;
(vi) Unsecured Debt owing to Jimmy L. Yates in the principal amount of
$4,165,000.00 incurred in connection with the acquisition of Sedeco which is due
and payable on January 19, 1997.
(vii) Debt in connection with mortgage liens permitted pursuant to Section
5.02(a)(x) hereof;
(viii) Debt to the principals of SMX incurred in connection with the
acquisition of SMX in an aggregate principal amount of not greater than
$3,266,664.00, and which Debt is unsecured except for a Lien in the name "Sewing
Machine Exchange, Inc."; and
(ix) Debt owing to BNY in connection with unmatured drafts accepted and/or
deferred payment obligations incurred by BNY prior to the date of this Agreement
and as described on Schedule 1.01-C annexed hereto.
(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 $2,000,000.00.
(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 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 (i) a merger of a Subsidiary into its parent corporation or (ii) in
connection with Permitted Acquisitions, provided that the total aggregate
consideration for all Permitted Acquisitions (including the consideration for
the acquisition of Sedeco and all Permitted Acquisition Loans) shall not exceed
$15,000,000.00 in the aggregate during the term of this Agreement.
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(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, (iv) leases sold by HAPL on a non-recourse basis and
(v) leases sold by HAPL on a recourse basis, provided that the aggregate
liability of HAPL for such recourse does not exceed $1,000,000.00 at any time.
(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 (other than the Loans) of the Borrower or any Guarantor which
by its terms is not then due and payable (other than the Loans), provided,
however that (i) Debt incurred in connection with the acquisition of SMX or
Sedeco may be prepaid, in whole or in part, but only if the Agent receives a
Certificate of No Default (after giving effect to such payment ) 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 and (ii) the Sedeco
mortgage referred to in Section 5.01(m) shall be prepaid as described therein.
(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.
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(l) Losses. Incur a net loss for any fiscal year.
(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.
(r) HAPL Transactions. (i) Permit HAPL to incur Debt for borrowed money
other than pursuant to the HAPL Facility and (ii) engage in any transaction
involving a loan, advance, capital or other contribution or any other
transaction pursuant to which cash or other assets are transferred from the
Borrower to HAPL (an "Inter Company Transaction"), other than transactions which
at any time do not exceed the lesser of (x) the difference between (i) one
hundred (100%) percent of the net present value of HAPL's lease receivables and
(2) the principal amount outstanding under the HAPL Facility or (y) the
following amounts: (a) from the date of this
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Agreement until January 31, 1998, $12,500,000.00; (b) from January 31, 1998
until January 31, 1999, $16,500,000.00; and (c) from January 31, 1999 and
thereafter, $21,000,000.00.
(s) Inter Company Transactions. Engage in any transaction involving a loan,
advance, capital or other contribution or any other transaction pursuant to
which cash or other assets are transferred from the Borrower to any Subsidiary
(an "Inter Company Transaction") (other than HAPL, for which Inter Company
Transactions are governed by Section 5.02(r)), if the aggregate (i) Inter
Company Transactions with Sedeco would exceed $5,000,000.00 at any time or (ii)
Inter Company Transactions with all Subsidiaries other than HAPL or Sedeco would
exceed $2,000,000.00 at any time.
SECTION 5.03. Financial Requirements. So long as (i) the Total Commitment
shall be in effect, (ii) any amount shall remain outstanding under any of the
Notes, or (iii) any Letter of Credit, accepted draft or deferred payment
obligation under a Letter of Credit is outstanding:
(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:
Period Minimum TNW
From the date of this Agreement until $23,000,000.00
January 31, 1997
From January 31, 1997 until $25,000,000.00
January 31, 1998
From January 31, 1998 and until $30,000,000.00
January 31, 1999
From January 31, 1999 and until $35,000,000.00
January 31, 2000
From January 31, 2000 and $40,000,000.00
thereafter
(b) Consolidated Capital Expenditures. The Borrower, the Guarantors and
their respective Subsidiaries will not make Consolidated Capital Expenditures in
excess of Two Million ($2,000,000.00) Dollars in the aggregate during any fiscal
year, provided that the Borrower, the Guarantors and their respective
Subsidiaries may make Consolidated Capital Expenditures in excess of such amount
solely for the purchase of a new building(s) or
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expansion of their 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 a Quick Asset Ratio 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, to be
tested quarterly, of not greater than the following:
Period Funded Debt to EBITDA Ratio
From the date of this Agreement 2.50 to 1.0
until January 31, 1998
From January 31, 1998 and 2.25 to 1.0
thereafter.
(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, such ratio to be tested quarterly.
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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, any of the Notes when due, or any fees or other amounts owed in
connection with this Agreement or the Borrower shall fail to reimburse the
Letter of Credit Issuer for any draw, accepted draft, deferred payment
obligations or any other amounts owed in connection with any Letters of Credit
when due; 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 Notes or
the Letters of Credit) 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
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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
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 $500,000.00;
or
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(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 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, and at the request of the Required Banks
shall, by notice to the Borrower take any or all of the following actions: (i)
terminate the Commitment, (ii) declare the Notes, all interest thereon and all
other amounts payable under this Agreement to be forthwith due and payable, and
(iii) demand that the Borrower provide the Letter of Credit Issuer with cash
collateral for any undrawn Letters of Credit and any accepted drafts or deferred
payment obligations under any Letters of Credit, whereupon the Commitment shall
be terminated, the Notes, all such interest, all such cash collateral and all
such other 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 (iv) 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 Commitment shall be immediately terminated, the Notes, all
interest thereon, all such cash collateral 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 provide cash collateral to the Letter of Credit Issuer
for any undrawn Letters of Credit, accepted drafts or deferred payment
obligations, third, to payment of the accrued interest on the Notes and fourth,
to payment of the unpaid principal of the Notes.
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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.
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ARTICLE VII
THE AGENT; RELATIONS AMONG BANKS AND BORROWER
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
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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.
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
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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 their respective percentages of the Total Commitment (without
giving effect to any participation in all or any portion of the Total Commitment
sold by them to any other Person), for any 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
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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, or 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) 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, 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 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
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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 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.
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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.
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
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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.
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<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 Required 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 Commitment or 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 or the Letters of Credit. 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.
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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 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 in connection with the preparation,
execution, delivery and administration of this Agreement, the Notes, the Letters
of Credit and any other Loan Documents, including, without limitation, the
reasonable fees and expenses of counsel for the Agent 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 Notes, the Letters of Credit 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 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
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against any and all of the obligations of the Borrower or any Guarantor now
or hereafter existing under this Agreement and the 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.
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.
SECTION 8.07. Successors and Assigns. (a) The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that the Borrower may not assign or
otherwise transfer any of its rights under this Agreement without the prior
written consent of all Banks.
(b) Any Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in its Commitment or
any or all of its Loans. In the event of any such grant by a Bank of a
participating interest to a Participant, whether or not upon notice to the
Borrower and the Agent, such Bank shall remain responsible for the performance
of its obligations hereunder, and the Borrower and the Agent shall continue to
deal solely and directly with such Bank in connection with such Bank's rights
and obligations under this Agreement. Any agreement pursuant to which any Bank
may grant such a participating interest shall provide that such Bank shall
retain the sole right and responsibility to enforce the obligations of the
Borrower hereunder including, without limitation, the right to approve any
amendment, modification or waiver of any provision of this Agreement; provided
that such participation agreement may provide that such Bank will not agree to
any modification, amendment or waiver of this Agreement described in clauses (a)
through (i) of Section 8.01 without the consent of the Participant. The Borrower
agrees that each Participant shall, to the extent provided in its participation
agreement, be entitled to the benefits of this Article VIII with respect to its
participating interest. An assignment or other transfer which is not permitted
by subsection (c) or (d) below shall be given effect for purposes of this
Agreement only to the extent of a participating interest granted in accordance
with this subsection (b).
(c) (i) Any Bank may at any time assign to one or more banks or other
institutions (each an"Assignee") all, or a proportionate part (equivalent to an
initial Commitment of not less than $5,000,000) of all, of its rights and
obligations under this Agreement and the Notes, and such Assignee shall assume
such rights and obligations, pursuant to an Assignment and Assumption Agreement
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in substantially the form of Exhibit C hereto executed by such Assignee and
such transferor Bank, with, so long as no Default or Event of Default has
occurred and is continuing, (and subject to) the subscribed consent of the
Borrower, which shall not be unreasonably withheld, and the Agent; provided that
if an Assignee is an affiliate of such transferor Bank, no such consent shall be
required. Upon execution and delivery of such instrument and payment by such
Assignee to such transferor Bank of an amount equal to the purchase price agreed
between such transferor bank and such Assignee, such Assignee shall be a Bank
party to this Agreement and shall have all the rights and obligations of a Bank
with a Commitment as set forth in such instrument of assumption, and the
transferor Bank shall be released from its obligations hereunder to a
corresponding extent, and no further consent or action by any party shall be
required.
(ii) Upon the consummation of any assignment pursuant to this subsection
(c), the transferor Bank, the Agent and the Borrower shall make appropriate
arrangements so that, if required, a new Note is issued to the Assignee. In
connection with any such assignment, the tranferor Bank shall pay to the Agent
an administrative fee for processing such assignment in the amount of $3,500.00.
If the Assignee is not incorporated under the laws of the United States of
America or a state thereof, it shall deliver to the Borrower and the Agent
certification as to exemption from deduction or withholding of any Unites States
federal income taxes in accordance with Section 7.13.
(d) Any Bank may at any time assign all or any portion of its rights under
this Agreement and its Note to a Federal Reserve Bank. No such assignment shall
release the transferor Bank from its obligations hereunder.
SECTION 8.08. 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 8.09. 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
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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 provided,
however, that to the extent that the provisions of the Commitment Letter and/or
the Fee Letter are not inconsistent with the provisions of this Agreement and
the other Loan Documents but are cumulative with respect thereto, such
provisions of the Commitment Letter and the Fee Letter shall survive the
execution and delivery of this Agreement.
SECTION 8.10. Governing Law. This Agreement, the Notes and all other Loan
Documents shall be governed by, and construed in accordance with, the laws of
the State of New York.
SECTION 8.11. 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 8.12. 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
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shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
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:____________________________
Adam Ostrach, Vice President
THE BANK OF NEW YORK
By:____________________________
Adam Ostrach, Vice President
FLEET BANK, N.A.
By:____________________________
Alice Adelberg
Vice President
HIRSCH INTERNATIONAL CORP.
By:____________________________
Kenneth Shifrin
Chief Financial Officer
PULSE MICROSYSTEMS, LTD.
By:____________________________
Kenneth Shifrin
Vice President
HAPL LEASING CO., INC.
By:____________________________
Kenneth Shifrin
Vice President
SEWING MACHINE EXCHANGE, INC.
By:____________________________
Kenneth Shifrin
Vice President
SEDECO, INC.
By:____________________________
Kenneth Shifrin
Vice President
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<PAGE>
SCHEDULE 1.01-A
Commitments of Each Bank
The Bank of New York - $18,000,000.00
Fleet Bank, N.A. - $12,000,000.00
<PAGE>
SCHEDULE 1.01-B
Existing Letters of Credit
<PAGE>
SCHEDULE 1.01-C
Unmatured Drafts Accepted and
Deferred Payment Obligations
<PAGE>
SCHEDULE 4.01(a)
STATE OF INCORPORATION IDENTITY AND
AND EACH STATE IN WHICH PERCENTAGE OF
SUBSIDIARY'S NAME IT IS QUALIFIED TO DO OWNERSHIP OF
AND ADDRESS BUSINESS EACH SHAREHOLDER
<PAGE>
SCHEDULE 4.01 (t)
Nature of Amount of Liens Securing
Creditor Agreement Credit Credit
<PAGE>
SCHEDULE 5.02(a)
Creditor Amount Property Subject to Lien
<PAGE>
SCHEDULE 5.02(b)
Creditor Amount
<PAGE>
SCHEDULE 5.02(i)
Description of All Guaranties:
<PAGE>
EXHIBIT A
REVOLVING CREDIT NOTE
$_________________ Garden City, New York
__________, 199_
FOR VALUE RECEIVED, on the Maturity Date, HIRSCH INTERNATIONAL CORP., a
Delaware corporation, having its principal place of business at 200 Wireless
Boulevard, Hauppauge, New York 11788 ("Borrower"), promises to pay to the order
of __________________ ("Bank") at the office of The Bank of New York, as Agent,
located at 1401 Franklin Avenue, Garden City, New York 11530, the principal sum
of the lesser of: (a) ________________ ($___________) DOLLARS; or (b) the
aggregate unpaid principal amount of all Revolving Credit Loans made by Bank to
Borrower pursuant to the Agreement (as defined below). Borrower shall pay
interest on the unpaid principal balance of this Note from time to time
outstanding, at said office, at the rates of interest, at the times and for the
periods set forth in the Agreement. All payments including prepayments on this
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.
Borrower hereby authorizes Bank to enter from time to time the amount of each
Loan to Borrower and the amount of each payment on a Loan on the schedule
annexed hereto and made a part hereof. Failure of Bank to record such
information on such schedule shall
<PAGE>
not in any way effect the obligation of Borrower to pay any amount due
under this Note. This Note is one of the Revolving Credit Notes referred to in
that certain Loan Agreement among Borrower, certain Guarantors, The Bank of New
York, as Agent, [The Bank of New York] [Fleet Bank, N.A.] and Bank of even date
herewith (the "Agreement"), as such Agreement may be amended from time to time,
and is subject to prepayment and its maturity is subject to acceleration upon
the terms contained in said Agreement. All capitalized terms used in this Note
and not defined herein shall have the meanings given them in the Agreement. If
any action or proceeding be commenced to collect this Note or enforce any of its
provisions, Borrower further agrees to pay all costs and expenses of such action
or proceeding and attorneys' fees and expenses and further expressly waives any
and every right to interpose any 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 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 the Borrower at the Borrower's address set forth above or at such other
address as may be designated in writing by the 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
<PAGE>
jury in any action on or related to this Note, the liabilities or the
enforcement of either or all of the same. Subject to the provisions of the
Agreement, Bank may transfer this 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 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 Note
shall be construed in accordance with and governed by the laws of the State of
New York. HIRSCH INTERNATIONAL CORP.
By ----------------------------------
Kenneth Shifrin
Chief Financial Officer
<PAGE>
Schedule of Revolving Credit Loans
Amount of
Principal Unpaid Name of
Making Amount of Type of Paid or Principal Person Making
Date Loan Loan Prepaid Balance Notation
<PAGE>
EXHIBIT B
TERM LOAN NOTE
Garden City, New York
$_______________ _____________, 199_
FOR VALUE RECEIVED, HIRSCH INTERNATIONAL CORP., a Delaware corporation,
having its principal place of business at 200 Wireless Boulevard, Hauppauge, New
York 11788 ("Borrower") promises to pay to the order of _____________ ("Bank")
at the office of The Bank of New York, as Agent, located at 1401 Franklin
Avenue, Garden City, New York 11530, the principal sum of _____________
($___________) DOLLARS in twelve (12) quarterly principal installments, each of
the first eleven (11) such installments being in the principal amount of
$_____________, commencing on the first Term Loan Installment Date after the
date hereof and continuing on each Term Loan Installment Date thereafter until
the twelfth (12th) Term Loan Installment Date, when any remaining principal
amount shall be due and payable. 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.
<PAGE>
This Term Loan Note is one of the Term Loan Notes referred to in that
certain Loan Agreement among Borrower, certain Guarantors, The Bank of New York,
as Agent, [The Bank of New York] [Fleet Bank, N.A.] and Bank dated as of January
7, 1997 (the "Agreement"), as such Agreement may be amended from time to time,
and is subject 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 attorneys' fees and expenses and
further expressly waives any and every right to interpose any 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 7.02 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
<PAGE>
related to this Term Loan Note, the liabilities or the enforcement of
either or all of the same. Subject to the provisions of the Agreement, 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:___________________________
Kenneth Shifrin
Chief Financial Officer
Exhibit 10.15
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of the 20th day of December, 1996, by and
between SEDECO, INC., a Texas corporation with offices located at 1124 West
Fuller Street, Fort Worth, Texas 76115 (the "Company") and JIMMY L. YATES,
residing at 3801 Hollow Creek Road, Fort Worth, Texas 76116 (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 one hundred (100%)
percent of the capital stock of and was 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 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 Fort Worth, Texas area, although Executive acknowledges that in
<PAGE>
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 to serve the Company and its Affiliates faithfully and
to the best of his ability. During the first three (3) years of the Term,
Executive shall devote his entire business time, attention, energy, skill and
experience to the performance of his duties hereunder. During the last two (2)
years of the Term, Executive shall devote a majority of his business time,
attention, energy, skill and experience to the performance of his duties
hereunder. During the Term, Executive 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, if requested, 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 for the first two (2) years of employment,
a base salary of Two Hundred Thousand ($200,000) Dollars for the third and
fourth year of employment, and a base salary of One Hundred Fifty Thousand
($150,000) Dollars for the fifth year of employment (the "Base Compensation").
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<PAGE>
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, and except to the extent
that greater benefits are provided for herein, in which case this Agreement
shall be controlling, 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 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.
-3-
<PAGE>
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.
4.6. The Executive currently owns a life insurance policy insuring his life
in the policy face amount of $654,000.00. The Company agrees to continue to make
all required premium payments on such policy until such time as the policy is
fully paid up. All dividends generated by such policy shall be applied to the
payment of policy premiums.
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 60,300 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
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<PAGE>
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 by Executive of any of the material representations,
warranties, covenants or agreements contained in the Purchase Agreement, except
(i) if 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
-5-
<PAGE>
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, 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
-6-
<PAGE>
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 (as defined
in the Purchase Agreement) 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 day period, then the Company
shall fail to 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
-7-
<PAGE>
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 a
customer lists, price lists, 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) 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
-8-
<PAGE>
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 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;
-9-
<PAGE>
provided, however, property of the Company shall not be considered to
include items currently in Executive's office, including art work, photographs,
hunting trophies and similar items.
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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<PAGE>
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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<PAGE>
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: Jimmy L. Yates
3801 Hollow Creek Road
Fort Worth, Texas 76116
With a copy to: Cantey & Hanger, LLP
2100 Burnett Plaza
801 Cherry Street
Fort Worth, Texas 76102
Attention: Dean A. Tetirick, 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.
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<PAGE>
11.3. Validity. The invalidity or unenforceability of any provisions hereof
shall in no way affect the validity or enforceability of any other provision.
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. Texas Law to Govern. This Agreement shall be governed by, construed
and interpreted in accordance with the laws of the State of Texas.
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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<PAGE>
11.10. Enforcement. In the event either party resorts to a lawsuit or
initiation of arbitration to enforce this Agreement, the prevailing party shall
be entitled to recover the reasonable costs of pursuing a lawsuit or
arbitration, including court costs and reasonable attorney's fees.
IN WITNESS WHEREOF, the parties hereto have set their hands and executed
this Agreement as of the day and year first above written.
SEDECO, INC.
By: ________________________________
Kenneth Shifrin, Vice President
--------------------------------
JIMMY L. YATES
THE UNDERSIGNED HEREBY (a) AGREES TO SECTION 3; (b) GUARANTEES PAYMENT OF
THE AMOUNTS DUE TO EXECUTIVE (OR THIRD PARTIES ON BEHALF OF 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:-------------------------
Henry Arnberg, President
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AMENDMENT NUMBER TWO
TO DISTRIBUTORSHIP AGREEMENT
Exhibit 10.17
AMENDMENT dated as of this 7th day of June, 1996, among TAJIMA
INDUSTRIES, LTD. ("TAJIMA"), NOMURA TRADING CO., LTD. ("NTC"), NOMURA
NOMURA (AMERICA) CORP. ("NAC"),
and HIRSCH INTERNATIONAL CORP.("DISTRIBUTOR").
WHEREAS, DISTRIBUTOR intends to purchase either (a) all of the common stock
("STOCK") of Sewing Machine Exchange, Inc. ("SMX") from Ronald H. Krasnitz and
Martin Krasnitz or (b) the business and assets ("Business") of SMX; and
WHEREAS, pursuant to agreement dated February 21, 1991, as amended,
including amendment dated February 20, 1996, among SMX, TAJIMA, NTC and NAC
(collectively the "Tajima-SMX Agreement"), SMX distributes TAJIMA products; and
WHEREAS, pursuant to agreement dated February 21, 1991, as amended, among
DISTRIBUTOR, TAJIMA, NTC and NAC (the "Tajima-Distributor Agreement"),
DISTRIBUTOR distributes TAJIMA Products;
NOW, THEREFORE, it is hereby agreed as follows;
1. At such time through June 30, 1996 that DISTRIBUTOR acquires the Stock
or Business of SMX, of which DISTRIBUTOR will give prompt notice to TAJIMA, NTC
and NAC, the Tajima SMX Agreement will be deemed terminated and of no further
force or effect ("Termination").
2. Simultaneously with such Termination, the Tajima Distributor Agreement
will be deemed amended in the following respects:
(a) Clause 1(b) - "TERRITORY" of DISTRIBUTOR shall be expanded to include
also Illinois, Iowa, Minnesota, Nebraska, North Dakota, South Dakota and
Wisconsin; and
(b) Clause 5(a) - the minimum quantity of PRODUCTS to be purchased by
DISTRIBUTOR through February 20, 1997 shall be the same as previously agreed to
be purchased by the DISTRIBUTOR and SMX, including the TMEX-C machines less the
quantity purchased by SMX since February 20, 1996.
(c) Clause 2(d) - SMX, a wholly-owned subsidiary of DISTRIBUTOR, shall be
permitted to continue the existing embroidery equipment distribution business of
SMX without violating the terms of the Tajima-Distributor Agreement.
3. In all other respects, the Tajima-Distributor Agreement is ratified
approved and confirmed.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused the Amendment to be
executed by their duly authorized representatives as of the day and year first
above written.
TAJIMA INDUSTRIES LTD. NOMURA (AMERICA) CORP.
\s\ Hitoshi Tajima \s\ Masami Ikeuchi
- --------------------------- ------------------------------
Hitoshi Tajima Masami Ikeuchi
President President
NOMURA TRADING CO., LTD. HIRSCH INTERNATIONAL CORP.
\s\ Takeshi Ito \s\ Henry Arnberg
- --------------------------- -----------------------------
Takeshi Ito Henry Arnberg
General Manager of President
Machinery Division
CONSENTED TO as of this 7th day of June, 1996
SEWING MACHINE EXCHANGE, INC.
\s\ Ronald H. Krasnitz
- ------------------------------
Ronald H. Krasnitz
Chairman
2
Exhibit 10.18
DISTRIBUTORSHIP AGREEMENT
THIS AGREEMENT, made and entered into effective as from the 21st day of
February, 1991, by and among Tajima Industries, Ltd., a company incorporated and
existing under the laws of Japan and having its principal office at 19-22
Shirakabe 3-chome, Higashi- ku, Nagoya 461, Japan ("TAJIMA"); Nomura Trading
Co., Ltd., a company incorporated and existing under the laws of Japan and
having its main office at Shin-Yaesuguchi Bldg., 2- 1, Yaesu 2-chome, Chuo-ku,
Tokyo 104, Japan ("NTC"); Nomura (America) Corp., a company incorporated and
existing under the laws of New York State and having its main office at 60 East
42nd Street, New York, N.Y. 10165, U.S.A. ("NAC"); and Sedeco, Inc., a
corporation incorporated and existing under the laws of Texas State and having
its principal office at 1124 West Fuller Avenue, Fort Worth, Texas, 76115,
U.S.A. ("DISTRIBUTOR");
WITNESSETH:
WHEREAS, Tokai Industrial Sewing Machine Co., Ltd. ("TOKAI") is the
manufacturer of the PRODUCTS (as defined in Clause 1 (a) below), which are sold
exclusively for TOKAI by TAJIMA and which are marketed in the United States by
NTC and NAC;
WHEREAS, DISTRIBUTOR has substantial technical expertise and marketing
know-how with respect to the distribution of high quality multi-head embroidery
machines in the TERRITORY (as defined in Clause 1 (b) below);
WHEREAS, TAJIMA, NTC and NAC are willing to appoint DISTRIBUTOR as their
sole distributor of the PRODUCTS in the said TERRITORY on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
promises and covenants herein contained, the parties hereby agree as follows:
CLAUSE 1. DEFINITIONS
(a) The term "PRODUCTS" shall mean the models of "TAJIMA" brand multi-head
embroidery machines such as TMCE-S, TME-H, TME-HC, TMEF-H, TMEF-HC, TMEG,
TMM-HC, TMLE and TMRG manufactured by TOKAI, and may hereafter be amended from
time to time by written notice to DISTRIBUTOR.
(b) The term "TERRITORY" shall mean the States of Arkansas, Colorado,
Louisiana, New Mexico, Oklahoma and Texas and shall not include any other areas.
CLAUSE 2. APPOINTMENT AND RESPONSIBILITIES
(a) Subject to the terms and conditions contained herein, TAJIMA, NTC and
NAC hereby jointly agree to appoint DISTRIBUTOR as the exclusive distributor of
the
<PAGE>
PRODUCTS within the TERRITORY, and DISTRIBUTOR hereby accepts such
appointment.
(b) DISTRIBUTOR shall use its best efforts to promote the maximum sale and
distribution of the PRODUCTS within the TERRITORY, and shall devote such time as
is necessary for effective promotion of the PRODUCTS. In connection therewith
DISTRIBUTOR shall maintain an active and effective commercial organization
designed to maximize sales of the PRODUCTS.
(c) DISTRIBUTOR shall not have the right to sell and/or distribute the
PRODUCTS, either directly or indirectly, to any area than the TERRITORY.
However, DISTRIBUTOR may sell in any area other than the TERRITORY upon the
written consent from NAC, which will be issued after being agreed upon between
NAC and the party having sales right in such area.
(d) During the term of this Agreement, DISTRIBUTOR shall not in the
TERRITORY, directly, indirectly, or in conjunction with any third party, solicit
orders for, distribute, sell, or manufacture, products of any type which are
competitive with the PRODUCTS, or assist, inspire, or promote others in such
activities.
CLAUSE 3. ORDER AND PAYMENT
(a) DISTRIBUTOR shall, with respect to the calendar quarter commencing on
April 1, 1991, and for all calendar quarters thereafter during the term of this
Agreement, submit to TAJIMA through NAC a quarterly report setting forth its
forecast of the quantity of the PRODUCTS which DISTRIBUTOR expects to purchase
for such quarter. The forecast with respect to the calendar quarter commencing
on April 1, 1991 shall be submitted to NAC no later than February 28, 1991, and
each such subsequent forecast shall be submitted to NAC not later than sixty
(60) days prior to the first day of the relevant quarter.
(b) DISTRIBUTOR agrees to make all purchases of the PRODUCTS by submitting
purchase orders for the PRODUCTS to NAC. All such sales by and between NAC and
DISTRIBUTOR shall be upon the terms and conditions contained in the NAC'S form
of "Confirmation of Sale", including, but not limited to, price, delivery, risk
of loss, retention of title, and payment (the "INDIVIDUAL CONTRACT").
Provided, however, in the event of a conflict between the terms of any such
Confirmation of Sale and this Agreement, the terms and conditions of this
Agreement shall control.
(c) DISTRIBUTOR agrees to buy the PRODUCTS based on the current price list
provided by NAC. The said price list may be modified from time to time by
written notice to DISTRIBUTOR, and, any such modification shall apply to all
orders submitted on or after the date of written notice to DISTRIBUTOR of such
modification.
<PAGE>
CLAUSE 4. TERM
The initial term of this Agreement shall be for a period of one (1) year,
from the date first set forth above through February 20, 1992. Thereafter, the
term of this Agreement shall be renewable for successive one (1) year period,
provided that a written agreement to such effect shall be executed by the
parties hereto with respect to each such renewal not later than two (2) months
prior to the expiration of the then-effective term.
CLAUSE 5. MINIMUM PURCHASE QUANTITY
(a) During the initial one (1) year term of this Agreement, TAJIMA shall
sell and DISTRIBUTOR shall purchase on a yearly basis not less than the minimum
quantities of the PRODUCTS specified below:
Forty Five (45) units
(b) In the event that this Agreement shall be renewed beyond the initial
one (1) year term, the minimum quantity DISTRIBUTOR shall be required to
purchase for each such additional year shall be as defined in the written
agreement setting forth such renewal.
CLAUSE 6. REPORTS
To facilitate proper planning and production by TAJIMA and TOKAI, in
addition to the quarterly reports required pursuant to paragraph (a) of Clause 3
above, DISTRIBUTOR shall submit a written report to TAJIMA via NAC describing
the latest market conditions and trends in the TERRITORY, and such other market
and customer information as TAJIMA may request, at least once every calendar
quarter during the term of this Agreement.
CLAUSE 7. PROMOTION
(a) DISTRIBUTOR shall carry out advertising and promotional activities for
the PRODUCTS within the TERRITORY to an extent and in a manner that is customary
in the trade (or as NTC and NAC shall otherwise reasonably specify) in order to
promote sales of the PRODUCTS effectively. All costs and expenses associated
with such advertising and promotional activities, including, without limitation,
costs and expenses relating to consultants, mailings, preparation of samples,
and customer solicitations and contacts, shall be borne by DISTRIBUTOR.
(b) TAJIMA shall, without charge and at the request of DISTRIBUTOR, furnish
DISTRIBUTOR with such reasonable quantities of samples and advertising materials
as TAJIMA may determine to be necessary or desirable to support DISTRIBUTOR's
advertising and promotional activities.
(c) (1) TAJIMA grants to the DISTRIBUTOR the exclusive right to use the
TOKAI
<PAGE>
or TAJIMA trademark (collectively the "TRADEMARK") in the TERRITORY in
connection with the promoting, marketing, advertising, and selling of the
PRODUCTS, and the DISTRIBUTOR agrees to market the PRODUCTS under the TRADEMARK.
(2) The TRADEMARK is and shall remain the exclusive property of TOKAI and
TAJIMA respectively, and nothing contained herein shall give to the DISTRIBUTOR
any interest in the TRADEMARK, except the right to use them in connection with
the promoting, marketing, advertising, and selling of the PRODUCTS. Upon
expiration of this Agreement or its earlier termination, for whatever cause, the
DISTRIBUTOR shall abandon at once any use of the TRADEMARK or any mark or name
confusingly similar thereto.
(3) The DISTRIBUTOR agrees to take all reasonable steps to protect the
TRADEMARK and to ensure TOKAI's and TAJIMA's continuing exclusive ownership and
right to use the TRADEMARK in the TERRITORY. In the event that the DISTRIBUTOR
becomes aware that any person (the "INFRINGER") is engaging in any activity
which infringes the TRADEMARK, the DISTRIBUTOR shall promptly notify TOKAI or
TAJIMA, as the case may be, of the details of such sales or activities and the
identity of the INFRINGER. Thereafter, if either TOKAI or TAJIMA should, in its
sole discretion, decide to institute an infringement action against the
INFRINGER in any court, the DISTRIBUTOR shall cooperate with TOKAI or TAJIMA, as
the case may be, in the prosecution of such litigation.
CLAUSE 8. WARRANTY
(a) TAJIMA warrants the PRODUCTS against defective material and workmanship
for a period of one (1) year from the date such PRODUCTS are shipped (the
shipping date shall be determined by the B/L date) from Japan. The obligations
of TAJIMA under this warranty shall be limited to providing for the repair or
replacement, in accordance with the warranty adjustment policies of TAJIMA, of
any PRODUCTS and/or parts found defective and of which TAJIMA is advised by
DISTRIBUTOR or a customer within one hundred eighty (180) days from the date of
delivery of the defective PRODUCTS and/or parts to the customer; provided
always, however, that the date of receipt by TAJIMA of such notice falls
strictly within one (1) year of the warranty term as provided in the foregoing
of this paragraph (a). The repair or replacement of defective PRODUCTS and/or
parts shall be at TAJIMA's expense, except that the DISTRIBUTOR or customer
shall have the obligation to return such defective PRODUCTS or parts to NAC.
(b) The warranty set forth in this Clause 8 is contingent upon proper use
in the application for which the PRODUCTS are intended and shall be void as to:
the PRODUCTS which have been modified or altered; the PRODUCTS which have been
subjected to negligence, misuse, accident, or unusual physical stress; or the
<PAGE>
PRODUCTS used in contravention of the procedures, instructions,
recommendations, and warnings specified in the TAJIMA's operation manual or
otherwise by TAJIMA.
(c) THIS WARRANTY IS EXPRESSLY MADE IN LIEU OF ANY AND ALL OTHER WARRANTIES
EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR
A PARTICULAR PURPOSE, WHICH WARRANTIES TOKAI, TAJIMA, NAC AND NTC HEREBY
EXPRESSLY DISCLAIM. TOKAI'S, TAJIMA'S, NAC'S AND NTC'S SOLE OBLIGATION SHALL BE
THE EXPRESS WARRANTY GIVEN IN CLAUSE 8, PARAGRAPH (A) ABOVE, AND TOKAI, TAJIMA,
NAC AND NTC SHALL IN NO EVENT BE LIABLE FOR ANY OTHER INCIDENTAL, INDIRECT,
SPECIAL, CONSEQUENTIAL OR OTHER DAMAGES OR LOSS (INCLUDING WITHOUT LIMITATION
LOST PROFITS), WHETHER ARISING IN CONTRACT OR TORT, WHETHER FORESEEABLE OR
UNFORESEEABLE, ARISING OUT OF THE DESIGN, MANUFACTURE, SALE, USE, OR REPAIR OF
THE PRODUCTS.
CLAUSE 9. RESOLUTION OF CUSTOMER DISPUTES
As among TAJIMA, TOKAI, NAC, NTC and DISTRIBUTOR, DISTRIBUTOR shall be
solely and exclusively responsible for any and all claims and liabilities with
respect to third parties arising from the purchase or use of the PRODUCTS
consequent to any sale of the PRODUCTS within the TERRITORY, except as provided
in Clause 8 (b) hereof.
CLAUSE 10. TERMINATION OR NON-RENEWAL
(a) In the event that any default shall be committed by any of the parties
hereto in the performance of its obligations hereunder or under the INDIVIDUAL
CONTRACT, the party or parties suffering from such default shall notify the
offending party of such default in writing and shall demand correction. If such
default is not corrected within thirty (30) days from the date of notification
thereof, the suffering party or parties shall have the right to terminate this
Agreement by a written notification to that effect to the offending party.
(b) Should any material change occur in the current shareholders,
directors, or officers of DISTRIBUTOR, or should there occur any direct or
indirect change in control of DISTRIBUTOR, the other parties hereto shall have
the right at their discretion to determine such change to constitute a material
breach hereof, and notwithstanding the generality provided in the foregoing
paragraph (a) may forthwith terminate this Agreement by a notice to DISTRIBUTOR
in writing.
(c) Notwithstanding paragraph (a) above, this Agreement shall terminate
automatically without written notification upon the bankruptcy, receivership,
insolvency, liquidation, dissolution or corporate reorganization of any of the
parties hereto, or upon any assignment by any of the parties hereto for the
benefit of creditors.
(d) Notwithstanding anything in this Agreement to the contrary, TAJIMA may
terminate
<PAGE>
this Agreement or terminate the exclusivity granted hereunder by providing
written notice to DISTRIBUTOR within thirty (30) days after the end of any year
in which DISTRIBUTOR fails to purchase the minimum quantities of the PRODUCTS
specified in Clause 5 hereof.
(e) In the event that TAJIMA issues notice to terminate this Agreement,
TAJIMA shall repurchase the PRODUCTS which have been shipped (the shipping date
shall be determined by the B/L date) from Japan within 120 days prior to the
date of said notice, at the price at which the PRODUCTS were sold to
DISTRIBUTOR. TAJIMA's obligation to repurchase the PRODUCTS hereunder shall only
apply to unused, salable PRODUCTS that have not been altered or damaged in any
way. Additionally, in such event, any or all purchase orders outstanding from
DISTRIBUTOR may be cancelled or completed at TAJIMA's option.
(f) In the event that DISTRIBUTOR issues notice to terminate this
Agreement, all purchase orders for the PRODUCTS outstanding at that time shall
be completed, and DISTRIBUTOR shall remain responsible for the performance of
all obligations associated therewith.
(g) Upon the expiration or earlier termination of this Agreement for any
cause whatsoever, DISTRIBUTOR agrees to return to TAJIMA all advertising and
promotional materials, price lists, technical documents, documents outlining
terms and conditions of sale, and any other information embodied in tangible
form in the possession of DISTRIBUTOR.
(h) DISTRIBUTOR hereby expressly waives any rights it may have to recover
any damages from TAJIMA, NAC or NTC, and any other rights which it may have
against TAJIMA, NAC or NTC as a result of the termination of this Agreement.
CLAUSE 11. ASSIGNMENTS
DISTRIBUTOR shall not assign this Agreement or any of its rights and
obligations hereunder either directly or indirectly to any other person or
entity without the prior written consent of all of the other parties hereto.
CLAUSE 12. CONFIDENTIALITY
(a) Each of the parties hereto shall treat and maintain as confidential all
materials and information provided by the other parties pursuant to this
Agreement, and each party shall use its best efforts to cause all shareholders,
directors, officers, employees, and agents of such party to keep such materials
and information confidential.
(b) The materials and information to be kept confidential pursuant to
provisions of the foregoing paragraph shall include, without limitation, any and
all data concerning assembly, operations, technical drawings, instruction
manuals, computer software and other information relating to the PRODUCTS. Such
information shall remain the
<PAGE>
exclusive property of TAJIMA, shall not be used, copied or reproduced by
DISTRIBUTOR without the consent of TAJIMA, and shall be protected at least to
the same extent that DISTRIBUTOR protects its own strictly confidential
information.
(c) The obligations set forth in this Clause 12 shall survive any
termination of this Agreement.
CLAUSE 13. NO WAIVER
The failure of any party hereto to enforce at any time or for any period of
time any of its rights or entitlements under any provision of this Agreement
shall not be construed as a waiver of such provision or of the rights of such
party subsequently to demand enforcement of such provision.
CLAUSE 14. FORCE MAJEURE
No party hereto shall be liable in any manner for failure or delay in the
fulfillment of all or any part of this Agreement where such failure or delay
results directly or indirectly from act of God, war, warlike hostilities,
sanctions, mobilizations, blockade, embargo, detention, revolution, riot,
looting, strike, lockout, labor dispute, plague or other epidemics, fire, flood,
act of government, inability to obtain materials or supplies, or any other
causes or circumstances beyond the reasonable control of such party.
CLAUSE 15. ARBITRATION AND APPLICABLE LAW
All disputes which may arise between some or all of the parties hereto
arising out of, in relation to or in connection with this Agreement or the
breach hereof shall be finally settled by arbitration held in Japan pursuant to
the rules of conciliation and arbitration of the Japan Commercial Arbitration
Association. Any award resulting from such arbitration shall be final and
binding upon the parties concerned, and judgment upon the award rendered may be
entered in any court of competent jurisdiction or application may be made to
such court for judicial acceptance of such award and an order of enforcement, as
the case may be. This Agreement shall be governed, construed and enforced in
accordance with the laws of Japan.
CLAUSE 16. ENTIRE AGREEMENT AND GOVERNING LANGUAGE
This Agreement cancels and supersedes all previous agreements, written or
oral, and contains the entire understanding of the parties hereto with respect
to the subject matter hereof and shall not be amended or modified except in
writing and signed by each of the parties hereto. This Agreement is executed in
both the Japanese and English languages, but in the event of any discrepancy
between such texts the Japanese version shall control.
CLAUSE 17. NOTICES
All notices hereunder shall be given (i) by hand, (ii) by registered or
certified mail return receipt requested, (iii) by recognized overnight courier
delivery service, or (iv) by
<PAGE>
telecopy, answerback requested, to the addresses first above written or to
such addresses or telecopy numbers as may be subsequently designated by the
concerned. Any such notice shall be effective for all purposes of this Agreement
on the date (A) of receipt if delivered personally, (B) ten (10) days after
posting if transmitted by mail, (C) three (3) days after delivery to a
recognized overnight courier service, or (D) one (1) day after transmission with
confirmed answerback, if transmitted by telecopy.
CLAUSE 18. NO ORAL MODIFICATION
No waiver, modification or change of this Agreement or the terms and
conditions herein contained shall be valid or binding on either party unless
agreed to in writing by competent officers of each of the parties hereto.
CLAUSE 19. HEADINGS
The headings as used herein are for convenience of reference only and shall
not define or limit the provisions hereof.
CLAUSE 20. HOLIDAYS
Should any of the dates set forth herein on which notice is required to be
given or action taken by any party fall on a Saturday, Sunday or holiday either
as recognized by Japan or the United States, then the date on which such notice
is required to be given or action taken shall be the next business day following
such Saturday, Sunday or holiday.
CLAUSE 21. INDEPENDENT CONTRACTOR
The relationship established between TAJIMA, NAC, NTC and DISTRIBUTOR by
this Agreement is solely that of seller and buyer. The DISTRIBUTOR is an
independent contractor and is in no way the legal representative of TOKAI,
TAJIMA, NAC, or NTC. In no event is DISTRIBUTOR authorized to, nor shall it,
assume or incur any obligation of any kind, express or implied, on behalf of
TOKAI, TAJIMA, NAC or NTC. The DISTRIBUTOR shall at all times identify himself
as an independent contractor who has been appointed as a distributor for the
PRODUCTS in the TERRITORY.
CLAUSE 22. SEVERABILITY
If any one or more of the provisions of this Agreement should be found to
be illegal or unenforceable, then all other provisions hereof shall be given
effect separately therefrom and shall not be affected thereby. If any covenant
set forth herein is found to be illegal or unenforceable, it is the intention of
the parties that such covenant shall not thereby be terminated, but shall be
deemed amended to the extent necessary to render it valid and enforceable.
<PAGE>
CLAUSE 23. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original and all of which shall evidence the same agreement,
and it shall not be necessary in making proof of this Agreement to produce or
account for more than one such counterpart.
CLAUSE 24. U.N. CONVENTION
The parties hereto hereby agree that the United Nations Convention of
Contracts for the International Sale of Goods shall not apply to this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the day and year first
above written.
TAJIMA INDUSTRIES LTD.
("TAJIMA")
\s\ Hitoshi Tajima
Name: Hitoshi Tajima
Title: President
NOMURA TRADING CO., LTD.
("NTC")
\s\ Keigo Ohba
Name: Keigo Ohba
Title: General Manager of
Machinery Division
NOMURA (AMERICA) CORP.
("NAC")
\s\ Shiori Sasaki
Name: Shiori Sasaki
Title: President
<PAGE>
SECEDO, INC.
("DISTRIBUTOR")
\s\ Jim Yates
Name: Jim Yates
Title: President
<PAGE>
NOMURA TRADING CO., LTD.
TOKYO HEAD OFFICE
HIGASHI-KANDA DAIJI BLDG.
7-8, HIGASHI-KANDA 1-CHOME, CHIYODA-KU
TOKYO 101, JAPAN
TELEX NO. J63367 (NOMURA A J63367)
REF. NO._______________________ TOKYO, December 20, 1996
SEDECO Inc.
1116 West Fuller Street
Fort Worth, Texas 76115
U.S.A.
Gentlemen:
This AGREEMENT dated December 20, 1996, shall confirm certain provisions
relating to the Distributorship Agreement dated February 21, 1991, as
supplemented and amended December 15, 1991, December 15, 1992, December 15, 1993
and December 16, 1996, by and between TAJIMA INDUSTRIES, LTD. ("TAJIMA"), NOMURA
TRADING CO., LTD. ("NTC"), NOMURA (AMERICA) CORP. ("NAC") and SEDECO INC.
("DISTRIBUTOR").
WHEREAS the parties hereto agree that:
1. CLAUSE 4. "TERM" -
The term of the Distributorship Agreement is extended for a period of five
years, i.e. from February 21, 1997 through and including February 20, 2002.
2. CLAUSE 5. "MINIMUM PURCHASE QUANTITY" shall be amended to read as
follows:
CLAUSE 5. MINIMUM SALES QUANTITY
(a) During the term of this Agreement, DISTRIBUTOR shall sell on a yearly
basis in the TERRITORY not less than the minimum sales quantities of the
PRODUCTS. The minimum sales quantities of each year shall be determined by the
parties concerned not later than the end of each calendar year. Individual sale
shall be established if DISTRIBUTOR makes delivery the PRODUCTS to its end user.
<PAGE>
(b) Distributor shall submit to TAJIMA via NAC a monthly report in writing
as to the sales quantities not later than the 10th day of the following calendar
month. In the event that DISTRIBUTOR receives a request from NAC, DISTRIBUTOR
shall submit to NAC evidence of sale including the date of sale, the name of
customer, the model name and quantity of the PRODUCTS and the machine number of
the PRODUCTS.
(c) In the event that this Agreement shall be renewed beyond the initial
five (5) years term, the minimum quantity DISTRIBUTOR shall be required to sell
for each such additional year shall be as defined in the written agreement
setting forth such renewal.
3. CLAUSE 5 "MINIMUM SALES QUANTITY" provision (a)
The minimum sales quantity for the period February 21, 1997 through
February 20, 1998 shall be as follows:
Multi-head (4 Series) 80 units
TMEX-C 72 units
TMFX-C 60 units
Subsequent year quantities shall be determined by the parties in accordance
with CLAUSE 5 of the Distribution Agreement.
4. Clause 10 (b) TERMINATION OR NON-RENEWAL of the Agreement shall be
amended to read as follows:
(b) Should HIRSCH INTERNATIONAL CORP. ("HIRSCH") fail to remain the sole
shareholder of DISTRIBUTOR, the other parties hereto shall have the right at
their discretion to determine whether such failure of HIRSCH to remain the sole
shareholder of DISTRIBUTOR shall, constitute a material breach hereof, and
notwithstanding the generality provided in the foregoing paragraph (a) may
forthwith terminate this Agreement by a notice to DISTRIBUTOR in writing.
5. CLAUSE 10. "TERMINATION OR NON RENEWAL" -
The following provision shall be added to the original items (a) to (h):
(i) DISTRIBUTOR shall notify TAJIMA via NAC of any actual or expected
material change in the current Class B shareholders, directors, or officers of
itself or of any subsidiary which acts as a distributor hereunder prior to 90
days of the date of any such change.
In all other respects the terms of the Distribution Agreements referred to
above remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Amendment to be
executed by their duly authorized representatives as of the day and year first
above written.
TAJIMA INDUSTRIES LTD. NOMURA (AMERICA) CORP.
\s\ Hitoshi Tajima \s\ Masami Ikeuchi
- -------------------------- ---------------------------
Hitoshi Tajima Masami Ikeuchi
President President
NOMURA TRADING CO., LTD. SEDECO INC.
\s\ Noboru Takahara \s\ Henry Arnberg
- --------------------------- ----------------------------
Noboru Takahara Henry Arnberg
General Manager of Chairman of the Board
Machinery Division
Exhibit 10.19
WEST COAST DISTRIBUTORSHIP AGREEMENT
THIS AGREEMENT, made and entered into effective as from the 21st day of
February, 1997, by and among Tajima Industries, Ltd., a company incorporated and
existing under the laws of Japan and having its principal office at 19-22
Shirakabe 3-chome, Higashiku, Nagoya 461, Japan ("TAJIMA"); Nomura Trading Co.,
Ltd., a company incorporated and existing under the laws of Japan and having its
main office at 7-8, Higashi-Kanda 1- chome, Chiyoda-ku, Tokyo 101, Japan
("NTC"); Nomura (America) Corp., a company incorporated and existing under the
laws of New York State and having its main office at 60 East 42nd Street, New
York, N.Y. 10165, U.S.A. ("NAC"); and Hirsch International Corp., a corporation
incorporated and existing under the laws of New York State and having its
principal office at 200 Wireless Blvd., Hauppauge, New York 11788, U.S.A.
("DISTRIBUTOR");
WITNESSETH:
WHEREAS, Tokai Industrial Sewing Machine Co., Ltd. ("TOKAI") is the
manufacturer of the PRODUCTS (as defined in Clause 1 (a) below), which are sold
exclusively for TOKAI by TAJIMA and which are marketed in the United States by
NTC and NAC;
WHEREAS, DISTRIBUTOR has substantial technical expertise and marketing
know-how with respect to the distribution of high quality embroidery machines in
the TERRITORY (as defined in Clause 1 (b) below);
WHEREAS, TAJIMA, NTC and NAC are willing to appoint DISTRIBUTOR as their
sole distributor of the PRODUCTS in the said TERRITORY on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
promises and covenants herein contained, the parties hereby agree as follows:
CLAUSE 1. DEFINITIONS
(a) The term "PRODUCTS" shall mean the models of "TAJIMA" brand embroidery
machines such as TMFX-C Series and TMEX-C Series manufactured by TOKAI, and may
hereafter be amended from time to time by written notice to DISTRIBUTOR.
(b) The term "TERRITORY" shall mean the States of Arizona, California,
Hawaii, Idaho, Montana, Nevada, Oregon, Utah, Washington and Wyoming and shall
not include any other areas.
CLAUSE 2. APPOINTMENT AND RESPONSIBILITIES
(a) Subject to the terms and conditions contained herein, TAJIMA, NTC and
NAC
<PAGE>
hereby jointly agree to appoint DISTRIBUTOR as the exclusive distributor of
the PRODUCTS within the TERRITORY, and DISTRIBUTOR hereby accepts such
appointment.
(b) DISTRIBUTOR shall use its best efforts to promote the maximum sale and
distribution of the PRODUCTS within the TERRITORY, and shall devote such time as
is necessary for effective promotion of the PRODUCTS. In connection therewith
DISTRIBUTOR shall maintain an active and effective commercial organization
designed to maximize sales of the PRODUCTS.
(c) DISTRIBUTOR shall not have the right to sell and/or distribute the
PRODUCTS, either directly or indirectly, to any area than the TERRITORY.
However, DISTRIBUTOR may sell in any area other than the TERRITORY upon the
written consent from NAC, which will be issued after being agreed upon between
NAC and the party having sales right in such area.
(d) During the term of this Agreement, DISTRIBUTOR shall not in the
TERRITORY, directly, indirectly, or in conjunction with any third party, solicit
orders for, distribute, sell, or manufacture, products of any type which are
competitive with the PRODUCTS, or assist, inspire, or promote others in such
activities.
CLAUSE 3. ORDER AND PAYMENT
(a) DISTRIBUTOR shall, with respect to the calendar quarter commencing on
April 1, 1997, and for all calendar quarters thereafter during the term of this
Agreement, submit to TAJIMA through NAC a quarterly report setting forth its
forecast of the quantity of the PRODUCTS which DISTRIBUTOR expects to purchase
for such quarter. The forecast with respect to the calendar quarter commencing
on April 1, 1997 shall be submitted to NAC no later than February 28, 1997, and
each such subsequent forecast shall be submitted to NAC not later than sixty
(60) days prior to the first day of the relevant quarter.
(b) DISTRIBUTOR agrees to make all purchases of the PRODUCTS by submitting
purchase orders for the PRODUCTS to NAC. All such sales by and between NAC and
DISTRIBUTOR shall be upon the terms and conditions contained in the NAC's form
of "Confirmation of Sale", including, but not limited to, price, delivery, risk
of loss, retention of title, and payment (the "INDIVIDUAL CONTRACT").
Provided, however, in the event of a conflict between the terms of any such
Confirmation of Sale and this Agreement, the terms and conditions of this
Agreement shall control.
(c) DISTRIBUTOR agrees to buy the PRODUCTS based on the current price list
provided by NAC. The said price list may be modified from time to time by
written
2
<PAGE>
notice to DISTRIBUTOR, and, any such modification shall apply to all orders
submitted on or after the date of written notice to DISTRIBUTOR of such
modification.
CLAUSE 4. TERM
The initial term of this Agreement shall be for a period of five (5) years,
from the date first set forth above through February 20, 2002. Thereafter, the
term of this Agreement shall be renewable for successive five (5) years period,
provided that a written agreement to such effect shall be executed by the
parties hereto with respect to each such renewal not later than two (2) months
prior to the expiration of the theneffective term.
CLAUSE 5. MINIMUM SALES QUANTITY
(a) During the term of this agreement, DISTRIBUTOR shall sell on a yearly
basis in the TERRITORY not less than the minimum sales quantities of the
PRODUCTS specified below:
One Hundred (100) units of TMFX-C Series and One Hundred and Twenty (120)
units of TMEX-C Series for the first year ending February 20, 1998.
The minimum sales quantities of the second year onwards shall be determined
by the parties concerned not later than the end of each calendar year.
Individual sale shall be established if DISTRIBUTOR makes delivery the
PRODUCTS to its end user.
(b) Distributor shall submit to TAJIMA via NAC a monthly report in writing
as to the sales quantities not later than the 10th day of the following calendar
month. In the event that DISTRIBUTOR receives a request from NAC, DISTRIBUTOR
shall submit to NAC evidence of sale including the date of sale, the name of
customer, the model name and quantity of the PRODUCTS and the machine number of
the PRODUCTS.
(c) In the event that this Agreement shall be renewed beyond the initial
five (5) year term, the minimum quantity DISTRIBUTOR shall be required to sell
for each such additional year shall be as defined in the written agreement
setting forth such renewal.
CLAUSE 6. REPORTS
To facilitate proper planning and production by TAJIMA and TOKAI, in
addition to the quarterly reports required pursuant to paragraph (a) of Clause 3
above, DISTRIBUTOR shall submit a written report to TAJIMA via NAC describing
the
3
<PAGE>
latest market conditions and trends in the TERRITORY, and such other market
and customer information as TAJIMA may request, at least once every calendar
quarter during the term of this Agreement.
CLAUSE 7. PROMOTION
(a) DISTRIBUTOR shall carry out advertising and promotional activities for
the PRODUCTS within the TERRITORY to an extent and in a manner that is customary
in the trade (or as NTC and NAC shall otherwise reasonably specify) in order to
promote sales of the PRODUCTS effectively. All costs and expenses associated
with such advertising and promotional activities, including, without limitation,
costs and expenses relating to consultants, mailings, preparation of samples,
and customer solicitations and contacts, shall be borne by DISTRIBUTOR.
(b) TAJIMA shall, without charge and at the request of DISTRIBUTOR, furnish
DISTRIBUTOR with such reasonable quantities of samples and advertising materials
as TAJIMA may determine to be necessary or desirable to support DISTRIBUTOR's
advertising and promotional activities.
(c) (1) TAJIMA grants to the DISTRIBUTOR the exclusive right to use the
TOKAI or TAJIMA trademark (collectively the "TRADEMARK") in the TERRITORY in
connection with the promoting, marketing, advertising, and selling of the
PRODUCTS, and the DISTRIBUTOR agrees to market the PRODUCTS under the TRADEMARK.
(2) The TRADEMARK is and shall remain the exclusive property of TOKAI and
TAJIMA respectively, and nothing contained herein shall give to the DISTRIBUTOR
any interest in the TRADEMARK, except the right to use them in connection with
the promoting, marketing, advertising, and selling of the PRODUCTS. Upon
expiration of this Agreement or its earlier termination, for whatever cause, the
DISTRIBUTOR shall abandon at once any use of the TRADEMARK or any mark or name
confusingly similar thereto.
(3) The DISTRIBUTOR agrees to take all reasonable steps to protect the
TRADEMARK and to ensure TOKAI's and TAJIMA's continuing exclusive ownership and
right to use the TRADEMARK in the TERRITORY. In the event that the DISTRIBUTOR
becomes aware that any person (the "INFRINGER") is engaging in any activity
which infringes the TRADEMARK, the DISTRIBUTOR shall promptly notify TOKAI or
TAJIMA, as the case may be, of the details of such sales or activities and the
identity of the INFRINGER. Thereafter, if either TOKAI or TAJIMA should, in its
sole discretion, decide to institute an infringement action against the
INFRINGER in any court, the DISTRIBUTOR shall cooperate with TOKAI or
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TAJIMA, as the case may be, in the prosecution of such litigation.
CLAUSE 8. WARRANTY
(a) TAJIMA warrants the PRODUCTS against defective material and workmanship
for a period of one (1) year from the date such PRODUCTS are shipped (the
shipping date shall be determined by the B/L date) from Japan. The obligations
of TAJIMA under this warranty shall be limited to providing for the repair or
replacement, in accordance with the warranty adjustment policies of TAJIMA, of
any PRODUCTS and/or parts found defective and of which TAJIMA is advised by
DISTRIBUTOR or a customer within one hundred eighty (180) days from the date of
delivery of the defective PRODUCTS and/or parts to the customer; provided
always, however, that the date of receipt by TAJIMA of such notice falls
strictly within one (1) year of the warranty term as provided in the foregoing
of this paragraph (a). The repair or replacement of defective PRODUCTS and/or
parts shall be at TAJIMA's expense, except that the DISTRIBUTOR or customer
shall have the obligation to return such defective PRODUCTS or parts to NAC.
(b) The warranty set forth in this Clause 8 is contingent upon proper use
in the application for which the PRODUCTS are intended and shall be void as to:
the PRODUCTS which have been modified or altered; the PRODUCTS which have been
subjected to negligence, misuse, accident, or unusual physical stress; or the
PRODUCTS used in contravention of the procedures, instructions, recommendations,
and warnings specified in the TAJIMA's operation manual or otherwise by TAJIMA.
(c) THIS WARRANTY IS EXPRESSLY MADE IN LIEU OF ANY AND ALL OTHER WARRANTIES
EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR
A PARTICULAR PURPOSE, WHICH WARRANTIES TOKAI, TAJIMA, NAC AND NTC HEREBY
EXPRESSLY DISCLAIM. TOKAI'S, TAJIMA'S, NAC'S AND NTC'S SOLE OBLIGATION SHALL BE
THE EXPRESS WARRANTY GIVEN IN CLAUSE 8, PARAGRAPH (A) ABOVE, AND TOKAI, TAJIMA,
NAC AND NTC SHALL IN NO EVENT BE LIABLE FOR ANY OTHER INCIDENTAL, INDIRECT,
SPECIAL, CONSEQUENTIAL OR OTHER DAMAGES OR LOSS (INCLUDING WITHOUT LIMITATION
LOST PROFITS), WHETHER ARISING IN CONTRACT OR TORT, WHETHER FORESEEABLE OR
UNFORESEEABLE, ARISING OUT OF THE DESIGN, MANUFACTURE, SALE, USE, OR REPAIR OF
THE PRODUCTS.
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CLAUSE 9. RESOLUTION OF CUSTOMER DISPUTES
As among TAJIMA, TOKAI, NAC, NTC and DISTRIBUTOR, DISTRIBUTOR shall be
solely and exclusively responsible for any and all claims and liabilities with
respect to third parties arising from the purchase or use of the PRODUCTS
consequent to any sale of the PRODUCTS within the TERRITORY, except as provided
in Clause 8 (b) hereof.
CLAUSE 10. TERMINATION OR NON-RENEWAL
(a) In the event that any default shall be committed by any of the parties
hereto in the performance of its obligations hereunder or under the INDIVIDUAL
CONTRACT, the party or parties suffering from such default shall notify the
offending party of such default in writing and shall demand correction. If such
default is not corrected within thirty (30) days from the date of notification
thereof, the suffering party or parties shall have the right to terminate this
Agreement by a written notification to that effect of the offending party.
(b) Should any material change occur in ______ current Class B
shareholders, directors, or officers of DISTRIBUTOR, or should there occur any
direct or indirect change in control of DISTRIBUTOR, the other parties hereto
shall have the right at their discretion to determine such change to constitute
a material breach hereof, and notwithstanding the generality provided in the
foregoing paragraph (a) may forthwith terminate this Agreement by a notice to
DISTRIBUTOR in writing.
(c) DISTRIBUTOR shall notify TAJIMA via NAC of any actual or expected
material change in the current Class B shareholders, directors, or officers of
itself or of any subsidiary which acts as a distributor hereunder prior to 90
days of the date of any such change.
(d) Notwithstanding paragraph (a) above, this Agreement shall terminate
automatically without written notification upon the bankruptcy, receivership,
insolvency, liquidation, dissolution or corporate reorganization of any of the
parties hereto, or upon any assignment by any of the parties hereto for the
benefit of creditors.
(e) Notwithstanding anything in this Agreement to the contrary, TAJIMA may
terminate this Agreement or terminate the exclusivity granted hereunder by
providing written notice to DISTRIBUTOR within thirty (30) days after the end of
any year in which DISTRIBUTOR fails to purchase the minimum quantities of the
PRODUCTS specified in Clause 5 hereof.
(f) In the event that TAJIMA issues notice to terminate this Agreement,
TAJIMA shall repurchase the PRODUCTS which have been shipped (the shipping date
shall be determined by the B/L date) from Japan within 120 days prior to the
date of said
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<PAGE>
notice, at the price at which the PRODUCTS were sold to DISTRIBUTOR.
TAJIMA's obligation to repurchase the PRODUCTS hereunder shall only apply to
unused, salable PRODUCTS that have not been altered or damaged in any way.
Additionally, in such event, any or all purchase orders outstanding from
DISTRIBUTOR may be cancelled or completed at TAJIMA's option.
(g) In the event that DISTRIBUTOR issues notice to terminate this
Agreement, all purchase orders for the PRODUCTS outstanding at that time shall
be completed, and DISTRIBUTOR shall remain responsible for the performance of
all obligations associated therewith.
(h) Upon the expiration or earlier termination of this Agreement for any
cause whatsoever, DISTRIBUTOR agrees to return to TAJIMA all advertising and
promotional materials, price lists, technical documents, documents outlining
terms and conditions of sale, and any other information embodied in tangible
form in the possession of DISTRIBUTOR.
(i) DISTRIBUTOR hereby expressly waives any rights it may have to recover
any damages from TAJIMA, NAC or NTC, and any other rights which it may have
against TAJIMA, NAC or NTC as a result of the termination of this Agreement.
CLAUSE 11. ASSIGNMENTS
DISTRIBUTOR shall not assign this Agreement or any of its rights and
obligations hereunder either directly or indirectly to any other person or
entity without the prior written consent of all of the other parties hereto.
CLAUSE 12. CONFIDENTIALITY
(a) Each of the parties hereto shall treat and maintain as confidential all
materials and information provided by the other parties pursuant to this
Agreement, and each party shall use its best efforts to cause all shareholders,
directors, officers, employees, and agents of such party to keep such materials
and information confidential.
(b) The materials and information to be kept confidential pursuant to
provisions of the foregoing paragraph shall include, without limitation, any and
all data concerning assembly, operations, technical drawings, instruction
manuals, computer software and other information relating to the PRODUCTS. Such
information shall remain the exclusive property of TAJIMA, shall not be used,
copied or reproduced by DISTRIBUTOR without the consent of TAJIMA, and shall be
protected at least to the same extent that DISTRIBUTOR protects its own strictly
confidential information.
(c) The obligations set forth in this Clause 11 shall survive any
termination of this Agreement.
7
<PAGE>
CLAUSE 13. NO WAIVER
The failure of any party hereto to enforce at any time or for any period of
time any of its rights or entitlements under any provision of this Agreement
shall not be construed as a waiver of such provision or of the rights of such
party subsequently to demand enforcement of such provision.
CLAUSE 14. FORCE MAJEURE
No party hereto shall be liable in any manner for failure or delay in the
fulfillment of all or any part of this Agreement where such failure or delay
results directly or indirectly from act of God, war warlike hostilities,
sanctions, mobilizations, blockade, embargo, detention, revolution, riot,
looting, strike, lockout, labor dispute, plague or other epidemics, fire, flood,
act of government, inability to obtain materials or supplies, or any other
causes or circumstances beyond the reasonable control of such party.
CLAUSE 15. ARBITRATION AND APPLICABLE LAW
All disputes which may arise between some or all of the parties hereto
arising out of, in relation to or in connection with this Agreement or the
breach hereof shall be finally settled by arbitration held in Japan pursuant to
the rules of conciliation and arbitration of the Japan Commercial Arbitration
Association. Any award resulting from such arbitration shall be final and
binding upon the parties concerned, and judgement upon the award rendered may be
entered in any court of competent jurisdiction or application may be made to
such court for judicial acceptance of such award and an order of enforcement, as
the case may be. This Agreement shall be governed, construed and enforced in
accordance with the laws of Japan.
CLAUSE 16. ENTIRE AGREEMENT AND GOVERNING LANGUAGE
This Agreement cancels and supersedes all previous agreements, written or
oral, and contains the entire understanding of the parties hereto with respect
to the subject matter hereof and shall not be amended or modified except in
writing and signed by each of the parties hereto. This Agreement is executed in
both the Japanese and English languages, but in the event of any discrepancy
between such texts the Japanese version shall control.
CLAUSE 17. NOTICES
All notices hereunder shall be given (i) by hand, (ii) by registered or
certified mail return receipt requested, (iii) by recognized overnight courier
delivery service or (iv) by telecopy, answerback requested, to the addresses
first above written or to such addresses or telecopy numbers as may be
subsequently designated by the concerned.
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<PAGE>
Any such notice shall be effective for all purposes of this Agreement on
the date (A) of receipt if delivered personally, (B) ten (10) days after posting
if transmitted by mail, (C) three (3) days after delivery to a recognized
overnight courier service, or (D) one (1) day after transmission with confirmed
answerback, if transmitted by telecopy.
CLAUSE 18. NO ORAL MODIFICATION
No waiver, modification or change of this Agreement or the terms and
conditions herein contained shall be valid or binding on either party unless
agreed to in writing by competent officers of each of the parties hereto.
CLAUSE 19. HEADINGS
The headings as used herein are for convenience of reference only and shall
not define or limit the provisions hereof.
CLAUSE 20. HOLIDAYS
Should any of the dates set forth herein on which notice is required to be
given or action taken by any party fall on a Saturday, Sunday or holiday either
as recognized by Japan or the United States, then the date on which such notice
is required to be given or action taken shall be the next business day following
such Saturday, Sunday or holiday.
CLAUSE 21. INDEPENDENT CONTRACTOR
The relationship established between TAJIMA, NAC, NTC and DISTRIBUTOR by
this Agreement is solely that of seller and buyer. The DISTRIBUTOR is an
independent contractor and is in no way the legal representative of TOKAI,
TAJIMA, NAC, or NTC. In no event is DISTRIBUTOR authorized to, nor shall it,
assume or incur any obligation of any kind, express or implied, on behalf of
TOKAI, TAJIMA, NAC or NTC. The DISTRIBUTOR shall at all times identify himself
as an independent contractor who has been appointed as a distributor for the
PRODUCTS in the TERRITORY.
CLAUSE 22. SEVERABILITY
If any one or more of the provisions of this Agreement should be found to
be illegal or unenforceable, then all other provisions hereof shall be given
effect separately therefrom and shall not be affected thereby. If any covenant
set forth herein is found to be illegal or unenforceable, it is the intention of
the parties that such covenant shall not thereby be terminated, but shall be
deemed amended to the extent necessary to render it valid and enforceable.
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<PAGE>
CLAUSE 23. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original and all of which shall evidence the same agreement,
and it shall not be necessary in making proof of this Agreement to produce or
account for more than one such counterpart.
CLAUSE 24. U.N. CONVENTION
The parties hereto hereby agree that the United Nations Convention of
Contracts for the International Sale of Goods shall not apply to this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the day and year first
above written.
TAJIMA INDUSTRIES LTD.
("TAJIMA")
\s\ Hitoshi Tajima
------------------------
Name: Hitoshi Tajima
Title: President
NOMURA TRADING CO., LTD.
("NTC")
\s\ Noboru Takahara
------------------------
Name: Noboru Takahara
Title: General Manager of
Machinery Division
NOMURA (AMERICA) CORP.
("NAC")
\s\ Masami Ikeuchi
------------------------
Name: Masami Ikeuchi
Title: President
HIRSCH INTERNATIONAL CORP.
("DISTRIBUTOR")
\s\ Henry Arnberg
------------------------
Name: Henry Arnberg
Title: President
11
HIRSCH INTERNATIONAL CORP.
NON-QUALIFIED STOCK OPTION AGREEMENT
AGREEMENT, made and entered into this 20th day of December, 1996, between
HIRSCH INTERNATIONAL CORP., a Delaware corporation with its principal place of
business at 200 Wireless Boulevard, Hauppauge, New York 11788 (the
"Corporation"), and JIMMY L. YATES, residing at 3801 Hollow Creek Road, Fort
Worth, Texas 76116 (the "Optionee").
WHEREAS, simultaneously herewith the Corporation has entered into an
employment agreement with the Optionee pursuant to which the Corporation has
agreed to grant to the Optionee an option to purchase an aggregate of Sixty
Thousand Three Hundred (60,300) authorized but unissued shares of the
Corporation's Class A Common Stock, par value $.01 per share (the "Common
Shares"), upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, for good and valuable consideration paid by the Optionee to
the Corporation, the receipt and sufficiency of which is hereby acknowledged,
and the mutual covenants hereinafter set forth, the parties agree as follows:
1. Grant of Option. The Corporation hereby grants to the Optionee the right
and option to purchase all or any part of an aggregate of Sixty Thousand Three
Hundred (60,300) Common Shares (subject to adjustment as provided in Paragraph 6
hereof) on the terms and conditions set forth herein (the "Option").
2. Purchase Price. The purchase price of Common Shares covered by the
Option shall be the closing bid price of the Corporation's Class A Common Stock
on the date hereof as reported by NASDAQ (subject to adjustment as provided in
Paragraph 6 hereof).
<PAGE>
3. Vesting of Option. The Option granted hereby shall be exercisable as to
(i) Fifteen Thousand Seventy-Five (15,075) Common Shares commencing one year
from the date hereof, (ii) an additional Fifteen Thousand Seventy-Five (15,075)
Common Shares commencing two years from the date hereof, (iii) an additional
Fifteen Thousand Seventy-Five (15,075) Common Shares commencing three years from
the date hereof, and (iv) an additional Fifteen Thousand Seventy-Five (15,075)
Common Shares commencing four years from the date hereof.
4. Method of Exercising Option. If the Optionee elects to exercise the
Option, he may do so in whole or in part (to the extent that it is exercisable
in accordance with its terms) by giving written notice to the Corporation,
specifying therein the number of Common Shares which he then elects to purchase.
Such notice shall be accompanied by payment of the full purchase price of the
Common Shares by cash or by a certified check payable to the order of the
Corporation.
As soon as practicable after receipt by the Corporation of such notice and
of payment in full of the purchase price of all the Common Shares with respect
to which the Option has been exercised, a certificate or certificates
representing such Common Shares shall be issued in the name of the Optionee and
shall be delivered to the Optionee. All Common Shares shall be issued only upon
receipt by the Corporation of the Optionee's representation that the Common
Shares are purchased for investment and not with a view toward distribution
thereof.
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<PAGE>
5. Availability of Shares. The Corporation, during the term of this Option,
shall keep available at all times the number of shares of common stock required
to satisfy the Option.
The Corporation shall utilize its best efforts to comply with the
requirements of each regulatory commission or agency having jurisdiction in
order to issue and sell the Common Shares to satisfy the Option. Such compliance
will be a condition precedent to the right to exercise the Option. The inability
of the Corporation to effect such compliance with any such regulatory commission
or agency which counsel for the Corporation deems necessary for the lawful
issuance and sale of the Common Shares to satisfy this Option shall relieve the
Corporation from any liability for failure to issue and sell the Common Shares
to satisfy the Option for such period of time as such compliance is not
effectuated.
6. Adjustments. If prior to the exercise of any option granted hereunder
the Corporation shall have effected one or more stock split-ups, stock
dividends, or other increases or reductions of the number of shares of its
common stock outstanding without receiving compensation therefor in money,
services or property, the number of Common Shares subject to the option hereby
granted shall (a) if a net increase shall have been effected in the number of
outstanding shares of the Corporation's Common Shares, be proportionately
increased and the cash consideration payable per Common Share shall be
proportionately reduced; and (b) if a net reduction shall have been effected in
the number of outstanding shares of the Corporation's Common Shares, be
proportionately reduced and the cash consideration payable per Common Share be
proportionately increased.
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<PAGE>
7. Non-Transferability of Option and Common Shares. The holder of this
Option, by acceptance hereof, represents, warrants and agrees as follows:
(a) Optionee is acquiring the Option for his own account and not with a
view to the resale or distribution thereof.
(b) This Option and the right to purchase the Common Shares hereunder is
personal to the Optionee and shall not be transferred by Optionee other than by
will or the laws of descent and distribution and may be exercised during
Optionee's lifetime only by the Optionee or the Optionee's guardian or legal
representative. The Option may not be pledged or otherwise hypothecated.
(c) The holder hereof has been advised and understands that the Option has
been issued in reliance upon exemptions from registration under the Securities
Act and applicable state statutes; the exercise of the Option and resale of the
Option and the Common Shares have not been registered under the Securities Act
or applicable state statutes and must be held and may not be sold, transferred,
or otherwise disposed of for value unless (i) they are subsequently registered
under the Securities Act or (ii) unless an exemption from such registration is
available and the Optionee has furnished the Corporation with notice of such
proposed transfer and the Corporation's legal counsel, in its reasonable
opinion, shall deem such proposed transfer to be so exempt.
8. Stockholder's Rights. The Optionee shall not have any of the rights of a
stockholder with respect to the Common Shares until such shares have been issued
after the due exercise of the Option.
9. Acknowledgements. The Optionee hereby acknowledges that:
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<PAGE>
(a) The Option is not intended to qualify as an incentive stock option
under Section 422A of the Internal Revenue Code of 1986, as amended, and that
the tax benefits associated with incentive stock options will not be available
in connection with the granting and exercise of the Option or the sale of the
Common Shares.
(b) If Optionee exercises the Option, he must bear the economic risk of the
investment in the Common Shares for an indefinite period of time since the
Common Shares will not have been registered under the Act and cannot be sold by
Optionee unless they are registered under the Act or an exemption therefrom is
available thereunder.
(c) The Corporation shall place stop transfer orders with its transfer
agent against the transfer of the Common Shares in the absence of registration
under the Act or an exemption therefrom.
(d) In the absence of registration, the certificates evidencing the Common
Shares shall bear the following legend: THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") AND ARE "RESTRICTED SECURITIES" WITHIN THE
MEANING OF RULE 144 PROMULGATED UNDER THE SECURITIES ACT. THE SECURITIES HAVE
BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED WITHOUT
COMPLYING WITH RULE 144 IN THE ABSENCE OF EFFECTIVE REGISTRATION OR OTHER
COMPLIANCE UNDER THE SECURITIES ACT.
10. Withholding and Deductions. Notwithstanding anything to the contrary
contained herein, if at any time specified herein for the making of any payment
of cash or any delivery of Common Shares to the Optionee, any law or regulation
of any governmental authority having jurisdiction in the premises shall require
the Corporation to withhold, to
-5-
<PAGE>
make any deduction for any taxes or take any other action in connection
with the payment or delivery then to be made, such payment or delivery, as the
case may be, shall be deferred until such withholding or deduction shall have
been adequately provided for, in the opinion of the Board of Directors of the
Corporation. 11. Registration Rights. The Corporation agrees to promptly file a
registration statement on Form S-8 (the "Registration Statement") with the
Securities and Exchange Commission with respect to the Common Shares. 12.
Termination of Option. To the extent not heretofore exercised, this Option shall
terminate at 5:00 P.M. New York City time on December 19, 2001. 13. Notices. All
notices, requests, deliveries, payments, demands and other communication which
are required or permitted to be given under this Agreement shall be in writing
and shall either be delivered personally or sent by certified mail, return
receipt requested, postage prepaid, to the parties at their respective addresses
as first set forth above, or to such other address as either shall have
specified by notice in writing to the other, and shall be deemed duly given
hereunder when so delivered or mailed, as the case may be. 14. Waiver. The
waiver by any party hereto of a breach of any provision of this Agreement shall
not operate or be construed as a waiver of any other or subsequent breach. 15.
Entire Agreement. This Agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof. 16. Successors and Assigns.
This Agreement shall inure to the benefit of and be binding upon the parties
hereto and to the extent not prohibited herein, their
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<PAGE>
respective heirs, successors, assigns and representatives. Nothing in this
Agreement, expressed or implied, is intended to confer on any person other than
the parties hereto and as provided above, their respective heirs, successors,
assigns and representatives any rights, remedies, obligations or liabilities.
17. Validity and Construction. The validity and construction of this Option
shall be governed by the laws of the State of Delaware. Such construction is
vested in the board and its construction shall be final and conclusive. IN
WITNESS WHEREOF, the Corporation has caused this Option Agreement to be executed
by its proper corporate officers thereunto duly authorized.
HIRSCH INTERNATIONAL CORP.
By:________________________________________
Henry Arnberg, President
----------------------------------------
JIMMY L. YATES, Optionee
-7-
Exhibit 10.24
HIRSCH INTERNATIONAL CORP.
NON-QUALIFIED STOCK OPTION AGREEMENT
AGREEMENT, made and entered into this 7th day of June, 1996, between HIRSCH
INTERNATIONAL CORP., a Delaware corporation with its principal place of business
at 200 Wireless Boulevard, Hauppauge, New York 11788 (the "Corporation"), and
RONALD H. KRASNITZ, residing at 9826 Maynard Terrace, Niles, Illinois 60714 (the
"Optionee").
WHEREAS, simultaneously herewith the Corporation has entered into an
employment agreement with the Optionee pursuant to which the Corporation has
agreed to grant to the Optionee an option to purchase an aggregate of One
Hundred Thirty-Two Thousand Five Hundred (132,500) authorized but unissued
shares of the Corporation's Class A Common Stock, par value $.01 per share (the
"Common Shares"), upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, for good and valuable consideration paid by the Optionee to
the Corporation, the receipt and sufficiency of which is hereby acknowledged,
and the mutual covenants hereinafter set forth, the parties agree as follows:
1. Grant of Option. The Corporation hereby grants to the Optionee the right
and option to purchase all or any part of an aggregate of One Hundred Thirty-Two
Thousand Five Hundred (132,500) Common Shares (subject to adjustment as provided
in Paragraph 6 hereof) on the terms and conditions set forth herein (the
"Option").
2. Purchase Price. The purchase price of Common Shares covered by the
Option shall be $20.25 per share (subject to adjustment as provided in Paragraph
6 hereof).
<PAGE>
3. Vesting of Option. The Option granted hereby shall be exercisable as to
(i) 33,125 Common Shares commencing one year from the date hereof, (ii) an
additional 33,125 Common Shares commencing two years from the date hereof, (iii)
an additional 33,125 Common Shares commencing three years from the date hereof,
and (iv) an additional 33,125 Common Shares commencing four years from the date
hereof.
4. Method of Exercising Option. If the Optionee elects to exercise the
Option, he may do so in whole or in part (to the extent that it is exercisable
in accordance with its terms) by giving written notice to the Corporation,
specifying therein the number of Common Shares which he then elects to purchase.
Such notice shall be accompanied by payment of the full purchase price of the
Common Shares by cash or by a certified check payable to the order of the
Corporation.
As soon as practicable after receipt by the Corporation of such notice and
of payment in full of the purchase price of all the Common Shares with respect
to which the Option has been exercised, a certificate or certificates
representing such Common Shares shall be issued in the name of the Optionee and
shall be delivered to the Optionee. All Common Shares shall be issued only upon
receipt by the Corporation of the Optionee's representation that the Common
Shares are purchased for investment and not with a view toward distribution
thereof.
5. Availability of Shares. The Corporation, during the term of this Option,
shall keep available at all times the number of shares of common stock required
to satisfy the Option.
-2-
<PAGE>
The Corporation shall utilize its best efforts to comply with the
requirements of each regulatory commission or agency having jurisdiction in
order to issue and sell the Common Shares to satisfy the Option. Such compliance
will be a condition precedent to the right to exercise the Option. The inability
of the Corporation to effect such compliance with any such regulatory commission
or agency which counsel for the Corporation deems necessary for the lawful
issuance and sale of the Common Shares to satisfy this Option shall relieve the
Corporation from any liability for failure to issue and sell the Common Shares
to satisfy the Option for such period of time as such compliance is not
effectuated.
6. Adjustments. If prior to the exercise of any option granted hereunder
the Corporation shall have effected one or more stock split-ups, stock
dividends, or other increases or reductions of the number of shares of its
common stock outstanding without receiving compensation therefor in money,
services or property, the number of Common Shares subject to the option hereby
granted shall (a) if a net increase shall have been effected in the number of
outstanding shares of the Corporation's Common Shares, be proportionately
increased and the cash consideration payable per Common Share shall be
proportionately reduced; and (b) if a net reduction shall have been effected in
the number of outstanding shares of the Corporation's Common Shares, be
proportionately reduced and the cash consideration payable per Common Share be
proportionately increased.
7. Non-Transferability of Option and Common Shares. The holder of this
Option, by acceptance hereof, represents, warrants and agrees as follows:
-3-
<PAGE>
(a) Optionee is acquiring the Option for his own account and not with a
view to the resale or distribution thereof.
(b) This Option and the right to purchase the Common Shares hereunder is
personal to the Optionee and shall not be transferred by Optionee other than by
will or the laws of descent and distribution and may be exercised during
Optionee's lifetime only by the Optionee or the Optionee's guardian or legal
representative. The Option may not be pledged or otherwise hypothecated.
(c) The holder hereof has been advised and understands that the Option has
been issued in reliance upon exemptions from registration under the Securities
Act and applicable state statutes; the exercise of the Option and resale of the
Option and the Common Shares have not been registered under the Securities Act
or applicable state statutes and must be held and may not be sold, transferred,
or otherwise disposed of for value unless (i) they are subsequently registered
under the Securities Act or (ii) unless an exemption from such registration is
available and the Optionee has furnished the Corporation with notice of such
proposed transfer and the Corporation's legal counsel, in its reasonable
opinion, shall deem such proposed transfer to be so exempt.
8. Stockholder's Rights. The Optionee shall not have any of the rights of a
stockholder with respect to the Common Shares until such shares have been issued
after the due exercise of the Option.
9. Acknowledgements. The Optionee hereby acknowledges that:
(a) The Option is not intended to qualify as an incentive stock option
under Section 422A of the Internal Revenue Code of 1986, as amended, and that
the
-4-
<PAGE>
tax benefits associated with incentive stock options will not be available
in connection with the granting and exercise of the Option or the sale of the
Common Shares.
(b) If Optionee exercises the Option, he must bear the economic risk of the
investment in the Common Shares for an indefinite period of time since the
Common Shares will not have been registered under the Act and cannot be sold by
Optionee unless they are registered under the Act or an exemption therefrom is
available thereunder.
(c) The Corporation shall place stop transfer orders with its transfer
agent against the transfer of the Common Shares in the absence of registration
under the Act or an exemption therefrom.
(d) In the absence of registration, the certificates evidencing the Common
Shares shall bear the following legend: THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") AND ARE "RESTRICTED SECURITIES" WITHIN THE
MEANING OF RULE 144 PROMULGATED UNDER THE SECURITIES ACT. THE SECURITIES HAVE
BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED WITHOUT
COMPLYING WITH RULE 144 IN THE ABSENCE OF EFFECTIVE REGISTRATION OR OTHER
COMPLIANCE UNDER THE SECURITIES ACT.
10. Withholding and Deductions. Notwithstanding anything to the contrary
contained herein, if at any time specified herein for the making of any payment
of cash or any delivery of Common Shares to the Optionee, any law or regulation
of any governmental authority having jurisdiction in the premises shall require
the Corporation to withhold, to make any deduction for any taxes or take any
other action in connection with the payment or delivery then to be made, such
payment or delivery, as the case may be, shall be deferred
-5-
<PAGE>
until such withholding or deduction shall have been adequately provided
for, in the opinion of the Board of Directors of the Corporation.
11. Registration Rights. The Corporation agrees to promptly file a
registration statement on Form S-8 (the "Registration Statement") with the
Securities and Exchange Commission with respect to the Common Shares.
12. Termination of Option. To the extent not heretofore exercised, this
Option shall terminate at 5:00 P.M. New York City time on June 7, 2001.
13. Notices. All notices, requests, deliveries, payments, demands and other
communication which are required or permitted to be given under this Agreement
shall be in writing and shall either be delivered personally or sent by
certified mail, return receipt requested, postage prepaid, to the parties at
their respective addresses as first set forth above, or to such other address as
either shall have specified by notice in writing to the other, and shall be
deemed duly given hereunder when so delivered or mailed, as the case may be.
14. Waiver. The waiver by any party hereto of a breach of any provision of
this Agreement shall not operate or be construed as a waiver of any other or
subsequent breach.
15. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof.
16. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and to the extent not prohibited herein,
their respective heirs, successors, assigns and representatives. Nothing in this
Agreement, expressed or implied, is intended to confer on any person other than
the parties hereto and as
-6-
<PAGE>
provided above, their respective heirs, successors, assigns and
representatives any rights, remedies, obligations or liabilities.
17. Validity and Construction. The validity and construction of this Option
shall be governed by the laws of the State of Delaware. Such construction is
vested in the board and its construction shall be final and conclusive.
IN WITNESS WHEREOF, the Corporation has caused this Option Agreement to be
executed by its proper corporate officers thereunto duly authorized.
HIRSCH INTERNATIONAL CORP.
By:________________________________________
Henry Arnberg, President
----------------------------------------
RONALD H. KRASNITZ, Optionee
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Exhibit 10.25
HIRSCH INTERNATIONAL CORP.
NON-QUALIFIED STOCK OPTION AGREEMENT
AGREEMENT, made and entered into this 7th day of June, 1996, between HIRSCH
INTERNATIONAL CORP., a Delaware corporation with its principal place of business
at 200 Wireless Boulevard, Hauppauge, New York 11788 (the "Corporation"), and
MARTIN KRASNITZ, residing at residing at 330 West Diversey, Chicago, Illinois
60657 (the "Optionee").
WHEREAS, simultaneously herewith the Corporation has entered into an
employment agreement with the Optionee pursuant to which the Corporation has
agreed to grant to the Optionee an option to purchase an aggregate of One
Hundred Thirty-Two Thousand Five Hundred (132,500) authorized but unissued
shares of the Corporation's Class A Common Stock, par value $.01 per share (the
"Common Shares"), upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, for good and valuable consideration paid by the Optionee to
the Corporation, the receipt and sufficiency of which is hereby acknowledged,
and the mutual covenants hereinafter set forth, the parties agree as follows:
1. Grant of Option. The Corporation hereby grants to the Optionee the right
and option to purchase all or any part of an aggregate of One Hundred Thirty-Two
Thousand Five Hundred (132,500) Common Shares (subject to adjustment as provided
in Paragraph 6 hereof) on the terms and conditions set forth herein (the
"Option").
<PAGE>
2. Purchase Price. The purchase price of Common Shares covered by the
Option shall be $20.25 per share (subject to adjustment as provided in Paragraph
6 hereof).
3. Vesting of Option. The Option granted hereby shall be exercisable as to
(i) 33,125 Common Shares commencing one year from the date hereof, (ii) an
additional 33,125 Common Shares commencing two years from the date hereof, (iii)
an additional 33,125 Common Shares commencing three years from the date hereof,
and (iv) an additional 33,125 Common Shares commencing four years from the date
hereof.
4. Method of Exercising Option. If the Optionee elects to exercise the
Option, he may do so in whole or in part (to the extent that it is exercisable
in accordance with its terms) by giving written notice to the Corporation,
specifying therein the number of Common Shares which he then elects to purchase.
Such notice shall be accompanied by payment of the full purchase price of the
Common Shares by cash or by a certified check payable to the order of the
Corporation.
As soon as practicable after receipt by the Corporation of such notice and
of payment in full of the purchase price of all the Common Shares with respect
to which the Option has been exercised, a certificate or certificates
representing such Common Shares shall be issued in the name of the Optionee and
shall be delivered to the Optionee. All Common Shares shall be issued only upon
receipt by the Corporation of the Optionee's representation that the Common
Shares are purchased for investment and not with a view toward distribution
thereof.
5. Availability of Shares. The Corporation, during the term of this Option,
shall keep available at all times the number of shares of common stock required
to satisfy the Option.
-2-
<PAGE>
The Corporation shall utilize its best efforts to comply with the
requirements of each regulatory commission or agency having jurisdiction in
order to issue and sell the Common Shares to satisfy the Option. Such compliance
will be a condition precedent to the right to exercise the Option. The inability
of the Corporation to effect such compliance with any such regulatory commission
or agency which counsel for the Corporation deems necessary for the lawful
issuance and sale of the Common Shares to satisfy this Option shall relieve the
Corporation from any liability for failure to issue and sell the Common Shares
to satisfy the Option for such period of time as such compliance is not
effectuated.
6. Adjustments. If prior to the exercise of any option granted hereunder
the Corporation shall have effected one or more stock split-ups, stock
dividends, or other increases or reductions of the number of shares of its
common stock outstanding without receiving compensation therefor in money,
services or property, the number of Common Shares subject to the option hereby
granted shall
(a) if a net increase shall have been effected in the number of outstanding
shares of the Corporation's Common Shares, be proportionately increased and the
cash consideration payable per Common Share shall be proportionately reduced;
and
(b) if a net reduction shall have been effected in the number of
outstanding shares of the Corporation's Common Shares, be proportionately
reduced and the cash consideration payable per Common Share be proportionately
increased.
7. Non-Transferability of Option and Common Shares. The holder of this
Option, by acceptance hereof, represents, warrants and agrees as follows:
-3-
<PAGE>
(a) Optionee is acquiring the Option for his own account and not with a
view to the resale or distribution thereof.
(b) This Option and the right to purchase the Common Shares hereunder is
personal to the Optionee and shall not be transferred by Optionee other than by
will or the laws of descent and distribution and may be exercised during
Optionee's lifetime only by the Optionee or the Optionee's guardian or legal
representative. The Option may not be pledged or otherwise hypothecated.
(c) The holder hereof has been advised and understands that the Option has
been issued in reliance upon exemptions from registration under the Securities
Act and applicable state statutes; the exercise of the Option and resale of the
Option and the Common Shares have not been registered under the Securities Act
or applicable state statutes and must be held and may not be sold, transferred,
or otherwise disposed of for value unless (i) they are subsequently registered
under the Securities Act or (ii) unless an exemption from such registration is
available and the Optionee has furnished the Corporation with notice of such
proposed transfer and the Corporation's legal counsel, in its reasonable
opinion, shall deem such proposed transfer to be so exempt.
8. Stockholder's Rights. The Optionee shall not have any of the rights of a
stockholder with respect to the Common Shares until such shares have been issued
after the due exercise of the Option.
9. Acknowledgements. The Optionee hereby acknowledges that:
(a) The Option is not intended to qualify as an incentive stock option
under Section 422A of the Internal Revenue Code of 1986, as amended, and that
the
-4-
<PAGE>
tax benefits associated with incentive stock options will not be available
in connection with the granting and exercise of the Option or the sale of the
Common Shares.
(b) If Optionee exercises the Option, he must bear the economic risk of the
investment in the Common Shares for an indefinite period of time since the
Common Shares will not have been registered under the Act and cannot be sold by
Optionee unless they are registered under the Act or an exemption therefrom is
available thereunder.
(c) The Corporation shall place stop transfer orders with its transfer
agent against the transfer of the Common Shares in the absence of registration
under the Act or an exemption therefrom.
(d) In the absence of registration, the certificates evidencing the Common
Shares shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND ARE
"RESTRICTED SECURITIES" WITHIN THE MEANING OF RULE 144 PROMULGATED UNDER THE
SECURITIES ACT. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD OR TRANSFERRED WITHOUT COMPLYING WITH RULE 144 IN THE ABSENCE OF EFFECTIVE
REGISTRATION OR OTHER COMPLIANCE UNDER THE SECURITIES ACT.
10. Withholding and Deductions. Notwithstanding anything to the contrary
contained herein, if at any time specified herein for the making of any payment
of cash or any delivery of Common Shares to the Optionee, any law or regulation
of any governmental authority having jurisdiction in the premises shall require
the Corporation to withhold, to make any deduction for any taxes or take any
other action in connection with the payment or delivery then to be made, such
payment or delivery, as the case may be, shall be deferred
-5-
<PAGE>
until such withholding or deduction shall have been adequately provided
for, in the opinion of the Board of Directors of the Corporation.
11. Registration Rights. The Corporation agrees to promptly file a
registration statement on Form S-8 (the "Registration Statement") with the
Securities and Exchange Commission with respect to the Common Shares.
12. Termination of Option. To the extent not heretofore exercised, this
Option shall terminate at 5:00 P.M. New York City time on June 7, 2001.
13. Notices. All notices, requests, deliveries, payments, demands and other
communication which are required or permitted to be given under this Agreement
shall be in writing and shall either be delivered personally or sent by
certified mail, return receipt requested, postage prepaid, to the parties at
their respective addresses as first set forth above, or to such other address as
either shall have specified by notice in writing to the other, and shall be
deemed duly given hereunder when so delivered or mailed, as the case may be.
14. Waiver. The waiver by any party hereto of a breach of any provision of
this Agreement shall not operate or be construed as a waiver of any other or
subsequent breach.
15. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof.
16. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and to the extent not prohibited herein,
their respective heirs, successors, assigns and representatives. Nothing in this
Agreement, expressed or implied, is intended to confer on any person other than
the parties hereto and as
-6-
<PAGE>
provided above, their respective heirs, successors, assigns and
representatives any rights, remedies, obligations or liabilities.
17. Validity and Construction. The validity and construction of this Option
shall be governed by the laws of the State of Delaware. Such construction is
vested in the board and its construction shall be final and conclusive.
IN WITNESS WHEREOF, the Corporation has caused this Option Agreement to be
executed by its proper corporate officers thereunto duly authorized.
HIRSCH INTERNATIONAL CORP.
By:__________________________________
Henry Arnberg, President
----------------------------------
MARTIN KRASNITZ, Optionee
-7-
