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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-23686
PC SERVICE SOURCE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1703687
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
2350 Valley View Lane
Dallas, Texas 75234
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 481-4000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE 5,773,820
(Title of class) (Number of Shares Outstanding
as of March 23, 1999)
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 voting stock held by nonaffiliates of the
registrant is approximately $4,580,940. This amount was calculated by reducing
the total number of shares of the registrant's common stock outstanding by the
total number of shares of common stock held by officers and directors, and
stockholders owning in excess of 5% of the registrant's common stock, and
multiplying the remainder by the average of the bid and asked price for the
registrant's common stock on March 23, 1998, as reported on the National
Association of Securities Dealers, Inc. Automated Quotation System. The
information provided shall in no way be construed as an admission that any
officer, director, or more than 5% stockholder of the registrant may be deemed
an affiliate of the registrant or that such person is the beneficial owner of
the shares reported as being held by such person, and any such inference is
hereby disclaimed.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement concerning the
1999 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A are
incorporated by reference into Part III of this report. The Proxy Statement will
be filed with the Commission not later than 120 days after the Registrant's
fiscal year ended December 31, 1998.
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PART I
ITEM 1. BUSINESS.
GENERAL
PC Service Source, Inc. ("PCSS" or the "Company") is the leading
provider of logistics services ("Service Logistics") to the personal computer
("PC") hardware repair industry. Service Logistics distribution includes
sourcing and distributing spare parts, inventory management, warranty claims
processing, parts repair and related functions. Service Logistics also includes
notebook repair. The foundation of the Company's Service Logistics is its
ability to provide accurate, efficient and rapid delivery of repair parts or
repaired units to its customers. PCSS is the largest independent distributor of
parts used in the repair of PCs in North America, distributing over 440,000
different parts to approximately 20,000 PC service providers such as independent
service organizations, original equipment manufacturers' service operations and
PC resellers (collectively, "Service Providers"). Service Providers purchase
replacement parts for the service and repair of PCs and peripherals. These parts
may be purchased directly from the Original Equipment Manufacturer ("OEM") or
from any of the hundreds of independent distributors, the largest of which is
PCSS. The Company currently maintains in its inventory over 24,000 different
parts. These parts include printer parts, logic boards, controllers, disk
drives, monitors, memory boards, cables and related hardware. PCSS has
established vendor relationships for repair parts with over 30 leading OEMs,
including Canon, Compaq, Dell, Epson, Hewlett-Packard, IBM, Lexmark, Okidata and
Toshiba. To complement its distribution operations, PCSS seeks to supply
additional value-added services to OEMs and Service Providers to allow OEMs and
Service Providers to outsource a substantial portion of their Service Logistics.
PCSS has leveraged its Service Logistics capabilities and strong vendor
relationships to establish outsourcing arrangements with OEMs. Under the terms
of an OEM outsourcing arrangement, the OEM may re-route authorized Service
Providers, customers and dealers to the Company for some or all of the OEM's
warranty and non-warranty parts business.
See "Business -- Services."
PCSS believes an important factor in an OEM's decision to outsource
Service Logistics functions is the extent to which such an arrangement relieves
the OEM of functions outside of the OEM's core competencies. These service and
warranty logistics areas often include repair activities. To support this
function and encourage OEMs to consider outsourcing functions to PCSS, the
Company commenced its own repair operations through PC Service Source Repair
Services ("PCSS Repair Services") during 1995 (formerly known as Cyclix
Engineering Corporation). The principal business objectives of PCSS Repair
Services are to provide centralized rapid turnaround notebook computer repair,
and subsystem repair capabilities to OEMs. PCSS believes its repair capabilities
through PCSS Repair Services are an important aspect of the full range of
value-added services it offers to OEMs.
The Company's principal executive offices and mailing address are 2350
Valley View Lane, Dallas, Texas 75234, and its telephone number is (972)
481-4000. The Company was incorporated in Delaware in January 1990. PCSS Repair
Services, a wholly-owned subsidiary of the Company, was incorporated in Texas in
June 1995. PCSS Repair Services was originally formed as an eighty-five percent
(85%) owned subsidiary of the Company. The balance of PCSS Repair Services was
owned by members of management of PCSS Repair Services. In 1998, the Company
repurchased the minority interests held by management of PCSS Repair Services.
Hi-Tek Services, Inc., a wholly-owned subsidiary of PCSS Repair Services, was
incorporated in California in April 1989.
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OPERATIONS
PCSS conducts its parts distribution and processing business
principally from its 155,200 square foot distribution center at its Alliance
Airport facility located in the Dallas/Fort Worth Metroplex. Recognizing the
immediate demands of its service customers, PCSS established an automated and
integrated order processing and distribution system which allows the Company to
provide efficient and accurate delivery of products on a next day basis. The
Company has also established a system of "work cells" for receiving, recording
and warehousing daily supply shipments. All parts maintained in the Company's
inventory are bar coded and tracked throughout the facility through radio
frequency scanning equipment that is integrated with the Company's computer
network. Parts are received daily from OEMs and other suppliers, bar coded and
shelved in the Company's warehouse for quick access based on real-time daily
demand.
In addition, many PC and peripheral replacement parts are
remanufactured from returned goods in need of repair. For example, a part may no
longer work because one of its many components is defective. When a Service
Provider purchases a replacement for a defective part, the defective part
("core") may often be returned for credit. The core may then be repaired and
resold as a remanufactured part. Service Providers often prefer remanufactured
parts because they have performance specifications equivalent to newly
manufactured parts at a lower cost. This aspect of the PC parts business
requires that the Company distribute new or remanufactured parts to its
customers, collect defective but repairable parts and then administer the
remanufacturing of those parts which are offered for resale. Therefore, unlike
many distribution businesses, products flow to and from the Company and its
customers, and to and from its suppliers. In addition to new parts being
received and shelved daily, cores are also received daily from customers, sorted
and distributed to the Company's remanufacturing subcontractors, including PCSS
Repair Services. Following the remanufacturing of a core, it is bar coded and
replaced in inventory.
Under the terms of the Company's OEM outsourcing arrangements, the OEMs
re-route calls from authorized service providers, customers and dealers to the
Company for some or all of the OEM's warranty and non-warranty parts business.
Typically, when an OEM receives a call from an authorized Service Provider,
customer or dealer for a warranty or non-warranty part, the OEM will re-route
the call via a dedicated T-1 phone line directly to the Company's call center
for handling and order processing. Service Providers and other customers of the
Company can make purchases 24 hours a day, 365 days a year by credit card, cash
on delivery, or, for approved accounts, by open account. Small and medium volume
Service Providers typically call through a regionally specific toll free phone
number to access a team of dedicated account representatives to place orders for
next-day delivery. A larger volume customer typically has a representative or
team of representatives dedicated to its account.
Utilizing its high capacity Computer Telephony Integrated system, the
Company's call center automatically routes customer calls, including calls
re-routed to the Company by an OEM, to the appropriate account representative.
Each account representative has a work station that provides access to the
Company's information system, through which the account representative may
retrieve detailed information about accounts, products and the status of all
orders. Through the information system's imaging and direct fax capabilities,
the account representative may access exploded-view diagrams of a majority of
parts in inventory from the account representative's work station and fax the
image to the Service Provider to confirm the identification of the ordered part.
Once the order is placed, the account representative immediately transmits the
order to the distribution center where the part is picked, packed and shipped in
accordance with the Service Provider's request, usually the same day the order
is placed.
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Service Providers may also place orders directly over the Internet
through PC SERVICENET(R). PC SERVICENET, located on the Internet at
http://www.pcservice.com/partsnet.htm, provides customers with an Internet
web-based real-time purchasing and ordering system, which enables customers to
place an order electronically, check parts availability and pricing, and the
status of pending orders. Because many of the Company's customers are familiar
with and have ready access to the Internet, the Company has expanded its
Internet customer service functions to include additional features, such as
warranty processing programs.
SERVICES
The Company offers a wide range of value-added Service Logistics to
Service Providers and OEMs. These services capabilities, in combination with the
Company's core distribution expertise, effectively allow PCSS to handle many of
the hardware related post-sales support functions for its customers. PCSS offers
these Service Logistics in two formats, Service Provider alliances and OEM
outsourcing arrangements, each based on the demands of its customers.
Service Provider Alliances. Typically, a substantial portion of a
Service Provider's cost structure is attributable to parts inventory ownership
and logistics management for these materials. The Company offers a range of
services directed at minimizing this cost burden of the Service Provider. These
support services include inventory management, parts sourcing, warranty claims
administration, vendor returns, management reporting and inventory liquidation
and consignment. Because this type of support generally requires a high level of
process integration between the Service Provider and the Company, the Company
seeks to provide these services through long term alliances. Under these
arrangements, the Company becomes the primary source of specified parts for the
Service Provider. The Service Provider benefits from this alliance with the
Company because these value-added services decrease the Service Provider's
inventory carrying costs, improve service and permit the Service Provider to
devote less of its capital to these business functions.
The Company has entered into Service Provider alliances with CompUSA,
TSS and Vanstar (which has subsequently merged with InaCom), among others. See
"Business--Customers and Suppliers." Generally, these types of arrangements may
be terminated by either party at any time, but the Company enters into Service
Provider alliances with the expectation that these arrangements will lead to
long-term relationships or contracts with those parties.
OEM Logistics Outsourcing. PCSS seeks arrangements with OEMs of PCs and
peripherals to handle a defined portion of the related parts distribution and
warranty processing functions. Under the terms of such an OEM outsourcing
arrangement, the OEM directs some or all of its customers and dealers to the
Company for some or all of the OEM's warranty and non-warranty parts business.
PCSS believes these arrangements benefit OEMs by reducing infrastructure needs,
reducing the amount of capital committed by the OEM to the non-core segments of
its business and improving customer service and responsiveness. The Company
believes that as a specialist in managing the key business functions associated
with parts distribution, which includes its expertise in two-way distribution
logistics, the Company is able to provide parts and related Service Logistics at
lower costs and greater reliability than the manufacturers themselves can
provide such services. The Company has entered into arrangements with OEMs such
as Compaq, Dell and Toshiba for handling limited functions for those OEMs.
In November 1998, the Company entered into an agreement with
Hewlett-Packard, which represented the Company's first full Service Logistics
outsourcing program. PCSS was selected to be the exclusive
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provider of in-warranty and a provider of post-warranty spare parts support for
HP's Pavilion line of desktop computers. This support encompasses all Pavilion
desktop models, including parts distribution logistics and warranty transaction
processing, for HP's on-site service provider, inventory forecasting and
planning, as well as return-to-vendor repair logistics to meet HP defined
service levels. This partnership represents the first to utilize the full
Service Logistics outsourcing capabilities offered by PCSS. This arrangement and
the other arrangements referred to above may generally be terminated by either
party at any time. The Company, however, has entered into them with the
expectation that these arrangements will lead to long-term relationships with
these parties.
Repair. In June 1995, PCSS established PCSS Repair Services, a provider
of parts repair outsourcing services, to further enhance the broad array of
Service Logistics offered by the Company to its OEM customers. The Company also
conducts a portion of its subsystem repair operations through PCSS Repair
Services. In 1998, the Company expanded the operations of PCSS Repair Services
to include the repair of notebook computers on an expedited basis, generally
within 24 hours of when the broken unit is received. The Company also
consolidated the west coast repair facility of PCSS Repair Services with its
Irving, Texas facility during 1998.
PCSS believes that its repair capabilities through PCSS Repair Services
are an important aspect of the full range of value-added services it offers to
OEMs in an effort to outsource larger functions of the OEM's service and
warranty logistics functions. The offerings of PCSS Repair Services include
rapid turnaround notebook repair, subsystem repair and component refurbishment.
Regarding the notebook repair operations, the Company is capable of receiving,
repairing and shipping the repaired notebooks back to the customer within
24-hours of its receipt. Subsystem repair is provided at the component-level for
LCD panels, computer boards and power supplies. PCSS Repair Services has entered
into notebook repair arrangements with Gateway, Apple and Dell. These
arrangements may generally be terminated by either party at any time, but the
Company enters into them with the expectation that these arrangements will lead
to long-term relationships with those parties.
CertiParts(TM). PCSS has also recently created a private brand of
remanufactured parts that are tested and reworked by the Company prior to sale.
Many of the Company's customers prefer a remanufactured part over a new part
because the remanufactured part often has the performance specifications
equivalent to a new part, but costs less. CertiParts was developed to fill this
recognized market demand for reliable, competitively priced parts.
MANAGEMENT INFORMATION SYSTEMS
The Company maintains sophisticated information systems to improve
efficiency, process orders, monitor operations, manage inventory risks, offer
faster and higher levels of service, and provide innovative Service Logistics to
OEMs and Service Providers. These on-line systems provide management with
information concerning sales, inventory levels, customer payments and other
operations which are essential for the Company to operate efficiently and to
enable it to offer additional services. The Company has invested in advanced
telecommunications, voice response equipment, electronic mail and messaging,
automated fax technology, radio frequency scanning and bar-coding and automated
inventory management.
The Company maintains a sophisticated call center utilizing an Aspect
switch, which is integrated with the Company's information system. The
information system is a Unix server based Hewlett-Packard 9000 series of
computers utilizing an Informix based system customized to the Company's
requirements.
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The CTI system is an essential element of the call center's operation,
automatically routing customer calls to the appropriate account representative,
providing the account representative with all account information relevant to
the call being answered and monitoring capabilities which is used by management
to improve efficiency and customer services. The Company compiles and analyzes
data on, among other things, the amount of time a customer waits until the
customer's call is answered, the accuracy of information conveyed by account
representatives, as well as the status of any particular shipment. During 1998,
the call center handled approximately 2,100,000 calls, allowing PCSS to ship
approximately 957,000 packages. Each account representative has a work station
that provides access to the Company's information system, through which the
account representative may retrieve detailed information about customers,
products and the status of all orders. Through the information system's imaging
and direct fax capabilities, the account representative may access exploded-view
diagrams of a majority of parts in inventory from the account representative's
work station and fax the image to the customer to confirm the identification of
the ordered part.
PCSS has also developed capabilities which allow pre-approved customers
to place orders via the world wide web, reducing the order processing costs for
both the Company and the customer. The Company believes that this capability
will increasingly become a requirement by many customers and some suppliers and,
accordingly, the Company will continue to invest in enhancing those
capabilities.
SALES AND MARKETING
The Company views Service Logistics as a value-added service business.
As such, sustaining the growth of the Company is dependent upon building and
maintaining relationships and loyalties with Service Providers as well as OEMs.
The Company maintains a Service Provider sales force. Account managers are
assigned to maintain relationships with the Company's largest national accounts
and are assigned other accounts based on the customers' market segment. The
Company also has a separate sales force focusing on OEM repair and outsourcing
arrangements. The Company's sales representatives visit major OEMs, Service
Providers and attend various trade shows.
The Company advertises its parts and services in recognized trade
magazines, participates at trade shows, distributes news releases, and makes
direct mailings to potential customers. Customers rely upon the Company's
advertisements, newsletters and frequent mailings as a source for product
information, including pricing. In addition, the Company maintains a presence on
the world-wide web at http://www.pcservice.com. The Company has applied for or
registered its PC SERVICESOURCE(R), RIGHT PARTS RIGHT NOW(R), PC SERVICENET(R),
CERTIPARTS(TM), PARTS POINTK, PC PARTS NETK and PC WINK marks and related design
service marks. The Company also conducts customer satisfaction surveys and
purchases market research data to maintain continuous insight into marketplace
trends and requirements.
The Company provides comprehensive training to its sales and account
representatives regarding technical characteristics of products and the
Company's policies and procedures. Each new account representative attends a
three-week course given by the Company. In addition, the Company's ongoing
training program for sales and account representatives is supplemented by
product seminars offered by OEMs.
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CUSTOMERS AND SUPPLIERS
PCSS sells parts to customers throughout the United States, Canada and
Latin America, as well as in other countries. In 1999, Vanstar, which accounted
individually for approximately 16% of the Company's net revenues in 1998,
notified the Company of its intention to cancel the exclusive contract with the
Company effective as of June 1999. Although the Company anticipates still doing
business with Vanstar, any such business after June 1999 will not be on an
exclusive basis and may be significantly less than in 1998 and prior years.
The Company sells a variety of parts to approximately 20,000 Service
Providers, including Best Buy, Circuit City, Decision One, Tandy Services and
Wang. In addition, the Company has entered into Service Provider alliances with
CompUSA, TSS and Vanstar (which has subsequently merged with InaCom), among
others. PCSS also entered into outsourcing arrangements with OEMs, such as
Compaq, Dell, Hewlett-Packard and Toshiba to outsource various service logistics
functions. See "Business -- Services." These arrangements with Service Providers
and OEMs may generally be terminated by either party at any time, but the
Company has entered into them with the expectation that these arrangements will
lead to long-term relationships with these parties.
The Company depends on numerous suppliers (including more than 30
leading OEMs) to provide the Company with the parts it sells. There are
generally no long-term supply agreements governing the Company's relationships
with its major suppliers. The Company's primary supply arrangements are thus
subject to termination or curtailment at any time, with little or no advance
notice. Although management expects no such loss to occur, the refusal or
inability of any major manufacturer to ship to the Company, or an increase in
prices charged to the Company as compared to the prices charged by such
manufacturers to Service Providers, could have a material adverse effect on the
Company.
COMPETITION
The Company is the leading provider of Service Logistics to the PC
repair and maintenance industry. These Service Logistics include distribution
and sourcing of spare parts, inventory management, warranty claims, parts
remanufacturing and related functions. Management believes that the Company is
the largest independent distributor of parts used in the repair of PCs in North
America, distributing over 440,000 different parts for PCs (of which it
maintains over 24,000 in its inventory) to approximately 20,000 service and
maintenance providers.
The market for the Company's products is large but fragmented.
Competition in the industry is widespread and comes from other independent
distributors (including various small independents) that are not affiliated with
an OEM, as well as from the OEMs themselves. When OEMs act as distributors, they
typically distribute only their own products. Independent distributors typically
distribute a variety of manufacturers' parts. Among the Company's major
independent competitors is The Cerplex Group, EFTC Corp., Genicom Corp. and
Sequel Inc. Certain of these competitors, such as the OEMs, are large and have
substantially greater financial and other resources than the Company.
The Company believes that its growth is attributable to its ability to
consistently process customer orders and supply needed parts on demand, with
rapid delivery, and at competitive prices. Management believes that these
competitive factors will continue to govern customer decisions in the
foreseeable future.
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EMPLOYEES
As of March 1, 1999, the Company had 922 full time employees, of which
183 were in the customer service center, 183 were in administration, 43 were in
sales, 124 were warehouse services and 389 were engineers or technicians. The
Company is not party to any collective bargaining agreement and believes
relations with its employees are satisfactory.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws and
regulations relating to worker safety and health, environmental regulations, and
other matters applicable to businesses in general. The Company does not believe
that these regulations as currently in effect have a material effect on its
business.
ITEM 2. PROPERTIES.
All but one of the Company's properties are located within the
Dallas/Fort Worth Metroplex area. In 1995, the Company entered into a 10-year
office lease in Dallas, Texas. The Company leases approximately 82,250 square
feet in this facility which houses the Company's corporate offices, account
representatives and information systems.
In 1995, the Company entered into a 10-year build-to-suit lease for a
155,200 square foot distribution center near the Alliance Airport near Fort
Worth, Texas, out of which parts are received, processed and shipped. The
Company has a build-to-suit lease option for an additional 100,000 square feet
at that location.
The Company has a lease that expires in June 2001, for approximately
81,500 square foot facility in Irving, Texas which houses the remanufacturing
operations of PCSS Repair Services. The Company has the option to renew the
lease for an additional 3-year term.
The Company has a lease for approximately 50,500 square feet in a
facility in Hayward, California, which the Company used for its west coast
remanufacturing operations of PCSS Repair Services. In connection with the
Company's decision to consolidate its west coast manufacturing operations with
its Irving, Texas, facility, the Company has provided the landlord with its
written notice terminating this lease. The Company's obligations under this
lease run through January 2001, unless this facility is leased to another tenant
prior to such time.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to various pending and threatened litigation
from time to time in the ordinary course of business. Although all litigation
involves some degree of uncertainty, in the opinion of management, liabilities,
if any, arising from such litigation or threat thereof are not expected to have
a material adverse effect on the Company's business, financial condition or
results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
As contemplated in the Company's Proxy Statement which was mailed to
stockholders beginning November 4, 1998, the Company's stockholders considered
and approved at a special meeting of stockholders held on December 18, 1998, a
proposal to amend the Company's Stock Option Plan to increase the number of
authorized shares from 1,000,000 to 1,500,000. This proposal was approved at the
December 18, 1998, special meeting and the number of votes cast for and against,
as well as the number of abstentions, were as follows:
<TABLE>
<S> <C>
For: 3,191,184
Against: 903,602
Abstentions 8,600
</TABLE>
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the Nasdaq National Market
("Nasdaq") under the symbol "PCSS."
For the periods indicated below, the following table sets forth the
high and low closing prices of the Company's common stock as reported on Nasdaq.
<TABLE>
<CAPTION>
1998 CLOSING PRICES 1997 CLOSING PRICES
------------------- -------------------
CALENDAR PERIOD LOW HIGH LOW HIGH
--------------- --- ---- --- ----
<S> <C> <C> <C> <C>
January 1-March 31 $4.38 $5.81 $6.13 $9.88
April 1-June 30 3.88 5.44 5.50 8.25
July 1-September 30 2.50 4.25 6.00 8.00
October 1-December 31 2.19 4.38 4.78 6.50
</TABLE>
As of March 23, 1999, there were 98 record holders of the Company's
common stock. The Company estimates that there were approximately 2,100
beneficial owners of its common stock as of the same date. The Company has not
declared or paid any cash dividends on the common stock since its organization.
Under the terms of the Company's revolving bank line of credit, the Company's
ability to pay cash dividends to its stockholders is restricted.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial information regarding the Company's
financial position and operating results for the five-year period ended December
31, 1998, are derived from the audited consolidated financial statements of the
Company. The data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and related notes included elsewhere in this
report.
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
OPERATING RESULTS: YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues ............................ $ 160,773 $ 131,843 $ 110,146 $ 68,690 $ 42,267
Cost of revenues(1) ..................... 115,807 94,159 78,001 49,766 30,171
--------- --------- --------- --------- ---------
Gross margin ......................... 44,966 37,684 32,145 18,924 12,096
Operating expenses:
Selling, general and administrative(1) 47,930 33,271 26,457 17,241 8,746
Restructuring charges(1) ............. 2,969 -- -- -- --
Loss incurred from terminated supply
agreement(2) ....................... -- -- -- 1,935 --
Depreciation and amortization ........ 4,674 3,504 2,151 1,510 384
--------- --------- --------- --------- ---------
Total operating expenses ....... 55,573 36,775 28,608 20,686 9,130
--------- --------- --------- --------- ---------
Earnings (loss) from operations ...... (10,607) 909 3,537 (1,762) 2,966
Net interest expense (income) ........... 1,605 739 577 473 (115)
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes .. (12,212) 170 2,960 (2,235) 3,081
Income tax expense (benefit) ............ -- 64 1,089 (730) 1,186
--------- --------- --------- --------- ---------
Net earnings (loss) ................. $ (12,212) $ 106 $ 1,871 $ (1,505) $ 1,895
========= ========= ========= ========= =========
Earnings (loss) per share - basic ....... $ (2.12) $ 0.02 $ 0.38 $ (0.39) $ 0.52
Earnings (loss) per share - diluted ..... $ (2.12) $ 0.02 $ 0.35 $ (0.39) $ 0.46
Weighted average common shares
outstanding - basic ................. 5,762 5,750 4,970 3,900 3,631
Weighted average common shares
outstanding - diluted ............... 5,762 5,882 5,285 3,900 4,103
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: DECEMBER 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $ 6,192 $23,737 $23,494 $15,310 $10,702
Total assets 62,734 55,158 50,174 33,127 20,015
Long-term debt 2,677 8,695 3,059 10,165 873
Stockholders' equity 20,140 32,334 32,196 11,603 13,081
</TABLE>
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(1) The 1998 net loss includes pretax charges totaling $6.4 million related
to certain non-recurring items, including a $3.0 million charge in
connection with the consolidation of the repair operations, which is
captioned as restructuring charges; $2.2 million of charges related to
severance and other expenses included in selling, general and
administrative expenses and $1.2 million, net, resulting from a review
of policies, procedures and methodologies undertaken by management
included in cost of revenues. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(2) 1995 results include a non-recurring, pre-tax charge of $1.9 million
related to the supply agreement with Intelogic Trace, Inc. ("Intelogic")
which was terminated in connection with the bankruptcy of Intelogic.
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<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
PC Service Source, Inc. (the "Company") provides logistics services
("Service Logistics") to the personal computer ("PC") hardware repair industry.
Service Logistics distribution includes sourcing and distributing spare parts,
inventory management, warranty claims processing, parts repair and related
functions. Service Logistics also includes notebook repair. During the third
quarter of 1998, the Company underwent certain management changes, which
included the appointment of a new Chief Executive Officer and Chief Financial
Officer. Management then initiated and completed a comprehensive review of the
Company's strategies and business focus. In connection with this review,
management reviewed the policies, procedures and methodologies previously
utilized by the Company to value its assets and liabilities, and recorded
approximately $6.4 million of non-recurring charges in the fourth quarter of
1998. The major components of the charges were (a) a $3.0 million charge in
connection with the consolidation of the Company's west coast repair facility
into its Irving, Texas facility, which included future lease commitments,
severance and the write-off of goodwill associated with the west coast
operations, (b) a $2.2 million charge related to severance in connection with a
reduction of workforce and other expenses included in selling, general and
administrative expenses and (c) charges totaling $1.2 million, net, resulting
from management's review and modification of existing policies, procedures and
methodologies for valuing the Company's assets and liabilities included in cost
of revenues.
RESULTS OF OPERATIONS
The following table displays the Company's statements of operations as
a percentage of net revenues for the three years ended December 31, 1998:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 72.0 71.4 70.8
-------- -------- --------
Gross margin 28.0 28.6 29.2
-------- -------- --------
Operating expenses:
Selling, general and administrative 29.8 25.2 24.0
Restructuring charges 1.9 -- --
Depreciation and amortization 2.9 2.7 2.0
-------- -------- --------
Total operating expenses 34.6 27.9 26.0
-------- -------- --------
Earnings (loss) from operations (6.6) 0.7 3.2
Net interest expense 1.0 0.6 0.5
-------- -------- --------
Earnings (loss) before income taxes (7.6) 0.1 2.7
Income tax expense -- -- 1.0
-------- -------- --------
Net earnings (loss) (7.6)% 0.1% 1.7%
======== ======== ========
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
The Company recognized a 21.9% increase in net revenues for the year
ended December 31, 1998, with $160.8 million in revenues compared to $131.8
million for the year ended December 31, 1997. The
-10-
<PAGE> 12
increase in net revenues is primarily the result of a contract to provide
service parts on a exclusive basis to Vanstar that began in the first quarter of
1998. In addition, the Company increased its notebook repair services business
in 1998.
In February 1999, Vanstar notified the Company of its intention to
terminate the exclusive contract with the Company effective as of June 1999.
Although the Company anticipates that it will continue to do business with
Vanstar after June 1999, any such business will not be on an exclusive basis and
may be significantly less than in 1998.
Gross margin as a percentage of net revenues decreased to 28.0% from
28.6% in 1997. Since the gross margin is different for each line of computer
spare parts which the Company sells, changes in the mix of parts sold by the
Company during a particular period affect the Company's gross margin. The
decrease in gross margin was due to significantly lower repair service margins
in 1998, which were the result of initiating several major customer
relationships, as well as a 200% increase in the repair business.
Selling, general and administrative expenses as a percentage of net
revenues rose to 29.8% in 1998 from 25.2% in 1997. The primary reasons for this
increase were (a) deficiencies in the freight monitoring, control and billing
process, which were identified and corrected in the second quarter of 1998, (b)
increased personnel related costs for the conversion of the Company's automated
warehouse management system, (c) a charge related to a discontinued,
unprofitable warranty processing program, (d) changes related to management's
review and modification of the policies, procedures and methodologies for
valuing the Company's assets and liabilities and (e) increased occupancy costs
primarily related to the repair services operations. During the fourth quarter
1998, the Company reviewed its various customer programs and segmented those
programs based on customer requirements. Specific service levels, business terms
and conditions and targeted profit levels were identified, implemented and
established for each customer category. Management believes that the
segmentation of customers and expense reduction programs should reduce selling,
general and administrative expenses as a percentage of net revenues in 1999.
Restructuring charges totaled 1.9% as a percent of net revenues in
1998. The charges totalled $3.0 million in connection with the consolidation of
the Company's west coast repair facility into its Irving, Texas facility which
included future lease commitments, severance and the write-off of goodwill
associated with the west coast operations.
Depreciation and amortization increased as a percentage of net revenues
to 2.9% in 1998 compared to 2.7% in 1997. This increase was due to the 1998
capital expenditures and recognizing a full year of depreciation on the
significant 1997 capital expenditures.
Net interest expense increased slightly in 1998 to 1.0% of net revenues
over 0.6% of net revenues in 1997. The increase is attributable to significantly
greater average borrowings during 1998 versus 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
The Company recognized nearly a 20% increase in net revenues for the
year ended December 31, 1997, with $131.8 million in revenues compared to $110.1
million for the year ended December 31, 1996. All components of revenue
contributed to the increase.
Gross margin as a percentage of net revenues declined from 29.2% in
1996 to 28.6% in 1997. The reduction in gross margin as a percentage of revenues
was due to a decision to reduce the number of parts offered for sale on an
exchange basis from approximately 9,000 skus to less than 1,500 skus. This shift
was
-11-
<PAGE> 13
made in recognition of the improvements made in the Company's programs to
acquire remanufactured, or used parts, as many of the parts formerly offered for
sale as an exchange are now available as a remanufactured part. The gross margin
decline resulted from the inventory value of the exchange parts, many of which
were new when acquired, being substantially in excess of their market value as a
remanufactured part. Had this shift in inventory product mix not taken place,
gross margin as a percentage of revenue would have been consistent with 1996.
Selling, general and administrative expenses as a percentage of net
revenues rose from 24% in 1996 to 25.2% in 1997. The primary reasons for this
increase were the hiring, training and development of personnel needed to
support the increase in business mainly in the call center and distribution
center, and additions to senior management necessary to grow and improve the
business. Management does not believe this level of selling, general and
administrative expenses is appropriate over the long term. However, to meet
expected revenue growth PCSS must hire associates in anticipation of additional
revenue as the period to recruit, hire and train account representatives can be
six weeks or more. The Company experienced fluctuating average daily revenues
throughout 1997 which made forecasting revenue, as well as required manning,
difficult. PCSS is pursuing a number of productivity initiatives to lower
selling, general and administrative expenses as a percent of revenues in 1998,
including a new warehouse management system, expected to be operational in the
first quarter, a call center activity monitoring system and a review of the
Company's various customer programs to discontinue those which do not generate
an appropriate profit margin.
Depreciation and amortization increased as a percentage of net revenues
to 2.7% in 1997 compared to 2.0% in 1996. This increase was due to recognizing a
full years depreciation on the significant capital expenditures made in 1996 and
1997.
Interest expense (net) increased slightly in 1997 to .6% of net
revenues over .5% of net revenues in 1996. The increase is attributable to
greater borrowings in 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of the quarter ended December 31, 1998, the Company was not in
compliance with the financial covenants under its revolving credit facility with
NationsBank, N.A. The Company received a waiver from NationsBank, N.A., with
respect to the covenants and negotiated the terms of an amendment to this
facility which contained revised financial covenants. On March 11, 1999, the
Company entered into a new $25.0 million Revolving Line of Credit and Security
Agreement with PNC Bank, National Association, the proceeds which were in part
used to retire the revolving line of credit with NationsBank, N.A. The new
Revolving Line of Credit carries a floating interest rate based on either LIBOR
or the PNC prime rate, which were 7.4% and 10.25%, respectively, on March 11,
1999, is due in March 2002 and is secured by substantially all of the assets of
the Company. As of March 11, 1999, the Company had $12.0 million outstanding
under the new Revolving Line of Credit and $7.1 million of availability. The new
credit facility prohibits the payment of dividends to common stockholders and
contains customary covenants. The Company must also maintain a fixed charge
coverage ratio (as defined in the Revolving Line of Credit). As of the date of
this report on Form 10-K, the Company is in compliance with its new covenants.
With the exception of 1997, the Company has historically been a net
user of cash from operations, and has financed its working capital requirements
and its capital expenditures from revolving credit, capital leases and equity
financing. Cash used by operating activities during the year ended December 31,
1998 is $2.1 million compared with cash provided by operating activities in 1997
of $3.0 million. The change in cash used in operating activities to cash
provided by operating activities is primarily due to the $12.2 million loss
-12-
<PAGE> 14
in 1998 compared to $0.1 million earnings in 1997, the increases in inventories
and accounts receivable partially offset by the increase in accrued liabilities
and accounts payable.
Cash used in investing activities was $6.2 million for the year ended
December 31, 1998. Capital expenditures totaled $5.8 million, $5.0 million and
$3.2 million in 1998, 1997 and 1996, respectively. Capital expenditures during
1998 included improvements to the Company's management information systems,
furniture and fixtures, and leasehold equipment at the Company's repair
facility. The Company anticipates capital expenditures of approximately $3.0 to
$4.0 million in 1999 for improvements and modifications to the Company
information systems, warehouse equipment and other necessary equipment. The
Company believes these expenditures are required to support and manage future
profit growth of its business.
The Company believes that its cash and its borrowing capability,
together with equipment financing related to capital expenditures for the
purchase of equipment, will be sufficient to meet its 1999 working capital and
capital expenditure requirements
EFFECTS OF INFLATION
The Company believes that the effects of inflation on its operations
have not been material during the past three years.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Investments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for
fiscal years beginning after June 15, 1999. SFAS 133 established accounting and
reporting standards for derivative instruments embedded in other contracts and
for hedging activities. Application of this accounting standard is not expected
to have a material impact on the Company's consolidated financial position,
results of operations or liquidity.
YEAR 2000
The Company's management recognizes the need to ensure that its
operations and relationships with vendors, customers and other third parties
will not be adversely impacted by the Year 2000 issue. The Year 2000 problem is
a result of computer programs being written using two digits rather than four to
define the applicable year. Based on its assessment, the Company determined a
portion of its software and certain hardware will require modification or
replacement so that those systems will properly utilize dates beyond December
31, 1999. Although the Company's assessment indicated that the significant
information technology systems would not be affected, that assessment however,
indicated that the software and hardware used in the Company's telephone
equipment would be at risk. The affected systems are the Company's primary
sources of receiving customer orders. Except for the telephone equipment, which
will be replaced in 1999, the Company believes it has mitigated the Year 2000
issue by modifying or replacing the affected hardware and software.
The Company has also established a program to review its product line
and identify date-sensitive parts and the level of Year 2000 compliance that the
part supports. This program is to ensure that customers receive products that
are Year 2000 compliant, or at a minimum, are made aware of products that are
not compliant. The Company also depends on the systems of its suppliers and
customers. Consequently, the Company is in the process of receiving adequate
assurances from its suppliers and customers that those systems on which the
Company relies are or will be Year 2000 compliant before the end of 1999.
-13-
<PAGE> 15
To the extent possible, the Company will develop and implement
contingency plans designed to allow continued operations in the event of failure
of the Company's or third party systems to be Year 2000 compliant. These
contingency plans have been developed and are expected to be implemented by the
end of 1999.
Management estimates that the total cost of the above initiatives to be
$500,000. The Company is expensing all costs associated with these systems
changes as the costs are incurred. As of December 31, 1998, approximately
$150,000 has been expensed.
Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of the Year 2000 program. Should the
critical applications fail to perform properly in response to the Year 2000
issue, the Company could be unable to receive and ship a substantial number of
orders received by its telephone systems. The amount of potential lost revenue
cannot be reasonably estimated at this time. Further, the failure of the Company
or third parties upon which the Company relies, to identify Year 2000 issues and
successfully and timely resolve them could have a material adverse impact on the
results of operations and the financial condition of the Company.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
The Company occasionally makes forward-looking statements concerning
its plans, goals, product and service offerings, and anticipated financial
performance. These forward-looking statements may generally be identified by
introductions such as "outlook" for an upcoming period of time, or words and
phrases such as "should", "expect", "hope", "plans", "projected", "believes",
"forward-looking" (or variants of those words and phrases) or similar language
indicating the expression of an opinion or view concerning the future.
These forward-looking statements are subject to risks and uncertainties
based on a number of factors and actual results or events may differ materially
from those anticipated by such forward-looking statements. These factors
include, but are not limited to: the growth rate of the Company's revenue and
market share; the consummation of new, and the non-termination of, existing OEM
outsourcing arrangements and service provider alliances; the Company's ability
to effectively manage its business functions while growing the Company's
business in a rapidly changing environment; the ability of the Company to adapt
and expand its services in such an environment; the effective and efficient
purchasing of parts and processing of sales orders; and the quality of the
Company's plans and strategies, and the ability of the Company to execute such
plans and strategies.
In addition, forward-looking statements concerning the Company's
expected revenue or earnings levels are subject to many additional uncertainties
applicable to competitors generally and to general economic conditions over
which the Company has no control. The Company does not plan to generally
publicly update prior forward-looking statements for unanticipated events or
otherwise and, accordingly, prior forward-looking statements should not be
considered to be "fresh" simply because the Company has not made additional
comments on those forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are affected by changes in interest rates due to
the impact those changes have on the interest expense payable by the Company
under its variable rate debt revolving line of credit, for which the outstanding
balance was $14.2 million as of December 31, 1998. A 1.0% change in the
underlying
-14-
<PAGE> 16
LIBOR or Prime rate would result in a $142,000 change in the annual amount of
interest on such debt. This amount is determined by considering the impact of
the hypothetical interest rates on the Company's revolving line of credit
outstanding as of December 31, 1998.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements together with the report
thereon of Ernst & Young LLP and KPMG LLP are included in this report commencing
at Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During May and June 1998, the Company requested several independent
accounting firms, including its existing independent auditor, to submit a
proposal for providing audit and tax services to the Company. KPMG LLP, the
Company's independent auditor at that time, advised the Company that it would
not be participating in the request for proposal and resigned as the Company's
independent auditor. At a meeting held on June 17, 1998, the Audit Committee of
the Board of Directors of the Company approved the engagement of Ernst & Young
LLP, as its independent auditor for the fiscal year ending December 31, 1998, to
replace the firm of KPMG LLP.
The audit reports of KPMG LLP on the Company's financial statements
for the past two fiscal years did not contain an adverse opinion or a disclaimer
of opinion, nor were they qualified or modified as to uncertainty, audit scope,
or accounting principles. In connection with the audits of the Company's
financial statements for each of the two fiscal years ended December 31, 1997,
and December 31, 1996, and the subsequent interim period through June 11, 1998,
there were no disagreements with KPMG LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of KPMG LLP, would have caused KPMG
LLP to make reference to the subject matter in its reports. KPMG LLP furnished
the Company with a letter addressed to the Securities and Exchange Commission
stating it agreed with the foregoing statements. A copy of that letter, dated
June 18, 1998, is filed as Exhibit 99.1 to the Company's Report on Form 8-K
filed in June 1998.
-15-
<PAGE> 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the heading "Election of Directors" of
the definitive proxy statement for the Company's 1999 Annual Meeting of
Stockholders is incorporated by reference in this Form 10-K Annual Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the heading "Executive Compensation" of
the definitive proxy statement for the Company's 1999 Annual Meeting of
Stockholders is incorporated by reference in this Form 10-K Annual Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the heading "Ownership of Common Stock
by Certain Beneficial Owners and Management" of the definitive proxy statement
for the Company's 1999 Annual Meeting of Stockholders is incorporated by
reference in this Form 10-K Annual Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the headings "Election of Directors --
Board Meetings and Committees of the Board," "Election of Directors --
Compensation of Directors" and "Certain Transactions" of the definitive proxy
statement for the Company's 1999 Annual Meeting of Stockholders is incorporated
by reference in this Form 10-K Annual Report.
-16-
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS
The following financial statements of the Company and its subsidiaries
are filed as a part of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Auditors.........................................................F-1
Consolidated Balance Sheets - December 31, 1998 and 1997................................F-3
Consolidated Statements of Operations -- For the Three Years
Ended December 31, 1998...............................................................F-5
Consolidated Statements of Stockholders' Equity -- For the Three Years
Ended December 31, 1998...............................................................F-6
Consolidated Statements of Cash Flows -- For the Three Years
Ended December 31, 1998...............................................................F-7
Notes to Consolidated Financial Statements..............................................F-8
</TABLE>
The following consolidated financial statement schedule of the Company
is filed as a part of this report:
Financial Statement Schedule
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts -- For the Three Years
Ended December 31, 1998..............................................................F-19
</TABLE>
All other financial statement schedules have been omitted because they
are not applicable or the required information is shown in the consolidated
financial statements and notes thereto.
REPORTS ON FORM 8-K
On December 9, 1998, the Company filed a report on Form 8-K reporting
the Company's adoption and approval of its Amended and Restated Bylaws. The
Amended and Restated Bylaws include a requirement of timely prior notice for
director nominations or other business that a stockholder wishes to properly
bring before a meeting of stockholders.
-17-
<PAGE> 19
The following exhibits are filed as a part of this report:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- - ------ -------
<S> <C>
3.1+++ Restated Certificate of Incorporation of the Company
3.2++ Amended and Restated Bylaws of the Company
4.1+ Specimen Certificate evidencing Common Stock
4.2* Certificate of Designations of Series A Junior
Participating Preferred Stock
10.1* Revolving Credit and Security Agreement by and among the
Company, its subsidiaries and PNC Bank, National
Association, as lender and as agent
10.2 +v Stock Option Plan, including form of Stock Option
Agreements, as amended
10.3* Rights Plan
10.4* Stock Price Appreciation Plan
10.5+v Director Compensation Plan
10.6v Employee Stock Purchase Plan
10.7* Fifth Amendment to Stock Option Plan
16v+ Resignation of KPMG LLP
21* Subsidiaries of the Company
23.1* Consent of Ernst & Young LLP
23.2* Consent of KPMG LLP
27* Financial Data Schedule
</TABLE>
- - ----------
+ Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2, Registration Number 33-76068-D, initially
filed with the Securities and Exchange Commission on March 4,
1994, and declared effective on March 4, 1994, and declared
effective on March 28, 1994.
++ Previously filed as an exhibit to the Company's report on Form 8-K
filed with the Securities and Exchange Commission on December 9,
1998.
+++ Previously filed as an exhibit to the Company's report on Form
S-8, Registration Number 33-98176, filed with the Securities and
Exchange Commission on October 17, 1995.
+v Previously filed as an exhibit to the Company's report on Form
10-K for the year ended December 31, 1995, filed with the
Securities and Exchange Commission on March 31, 1996.
v Previously filed as an exhibit to the Company's Registration
Statement on Form S-1, Registration Number 333-03977, initially
filed with the Securities and Exchange Commission on May 17, 1996,
and declared effective on May 28, 1996.
v+ Previously filed as an exhibit to the Company's report on Form 8-K
filed with the Securities and Exchange Commission on June 18,
1998.
* Filed herewith.
-18-
<PAGE> 20
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.
PC SERVICE SOURCE, INC.
March 31, 1999 By: /s/ Avery More
----------------------------------------
Avery More, Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated on March 31, 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
<S> <C>
/s/ Avery More Chairman of the Board and Chief Executive Officer
- - ----------------------------- (Principal Executive Officer)
Avery More
/s/ Robert J. Boutin Senior Vice President, Chief Financial Officer and
- - ----------------------------- Secretary, Director, (Principal Financial and
Robert J. Boutin Accounting Officer)
/s/ Morti Tenenhaus Director
- - -----------------------------
Morti Tenenhaus
/s/ Robert S. Leff Director
- - -----------------------------
Robert S. Leff
/s/ Edward Raymund Director
- - -----------------------------
Edward Raymund
/s/ Jay Haft Director
- - -----------------------------
Jay Haft
Director
- - -----------------------------
Mark Hilz
</TABLE>
<PAGE> 21
Report of Independent Auditors
The Board of Directors and Stockholders of PC Service Source, Inc.
We have audited the accompanying consolidated balance sheet of PC
Service Source, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedule
listed in the index at Item 14. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PC
Service Source, Inc. and subsidiaries at December 31, 1998, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
Ernst & Young LLP
Dallas, Texas
February 12, 1999, except
for the last paragraph
of Note 1 and the first
paragraph of Note 3,
for which the date is
March 11, 1999
F-1
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
PC Service Source, Inc.:
We have audited the accompanying consolidated balance sheet of PC Service
Source, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1997 and 1996. In connection with the audits of
the consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index for the years ended
December 31, 1997 and 1996. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PC Service Source,
Inc. and subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the years ended December 31, 1997 and 1996,
in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein for the
years ended December 31, 1997 and 1996.
KPMG LLP
Dallas, Texas
February 13, 1998
F-2
<PAGE> 23
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash $ 940 $ 717
Accounts receivable, less allowance for doubtful accounts of $974
and $977 at 1998 and 1997, respectively 19,212 15,973
Inventories, less reserve for obsolescence of $6,469 and $2,407 at
1998 and 1997, respectively 22,031 17,511
Income taxes receivable 699 668
Deferred income taxes 1,102 1,190
Other current assets 1,023 1,098
-------- --------
Total current assets 45,007 37,157
-------- --------
Property and equipment
Computer equipment 17,367 13,612
Furniture and fixtures 7,009 5,660
Leasehold improvements 1,993 1,284
-------- --------
26,369 20,556
Accumulated depreciation and amortization (11,288) (7,030)
-------- --------
Net property and equipment 15,081 13,526
-------- --------
Goodwill, net of accumulated amortization of $451 and $222 at
1998 and 1997, respectively 1,819 3,206
Other assets, net 827 1,269
-------- --------
Total Assets $ 62,734 $ 55,158
======== ========
</TABLE>
F-3
<PAGE> 24
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Current liabilities:
Accounts payable $ 14,058 $ 8,864
Accrued liabilities 9,129 3,403
Current portion of obligations under capital leases 1,399 1,153
Revolving line of credit 14,229 --
-------- --------
Total current liabilities 38,815 13,420
-------- --------
Long-term debt - revolving line of credit -- 5,535
Obligations under capital leases, excluding current portion 2,677 3,160
Deferred income taxes 1,102 709
Commitments and contingencies -- --
Stockholders' equity
Preferred stock, $.01 par value. Authorized 5,000,000 shares;
none issued -- --
Common stock, $.01 par value. Authorized 20,000,000 shares; issued 5,906,582
and 5,891,082 shares at December 31, 1998 and 1997, respectively 59 59
Additional paid-in capital 30,996 30,978
Retained earnings (accumulated deficit) (9,125) 3,087
Less treasury stock, at cost (132,762 common shares) (1,790) (1,790)
-------- --------
Total stockholders' equity 20,140 32,334
-------- --------
Total Liabilities and Stockholders' Equity $ 62,734 $ 55,158
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 25
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net revenues $ 160,773 $ 131,843 $ 110,146
Cost of revenues 115,807 94,159 78,001
--------- --------- ---------
Gross margin 44,966 37,684 32,145
--------- --------- ---------
Operating expenses:
Selling, general and administrative 47,930 33,271 26,457
Depreciation and amortization 4,674 3,504 2,151
Restructuring charges 2,969 -- --
--------- --------- ---------
Total operating expenses 55,573 36,775 28,608
--------- --------- ---------
Earnings (loss) from operations (10,607) 909 3,537
Net interest expense 1,605 739 577
--------- --------- ---------
Earnings (loss) before income taxes (12,212) 170 2,960
Income tax expense -- 64 1,089
--------- --------- ---------
Net earnings (loss) $ (12,212) $ 106 $ 1,871
========= ========= =========
Earnings (loss) per share
Basic $ (2.12) $ .02 $ .38
========= ========= =========
Diluted $ (2.12) $ .02 $ .35
========= ========= =========
Weighted average common shares outstanding
Basic 5,762 5,750 4,970
========= ========= =========
Diluted 5,762 5,882 5,285
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 26
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Retained
Common stock Additional earnings Total
------------------- paid-in (accumulated) Treasury stockholders'
Shares Amount capital deficit) stock equity
------ ------ ------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 3,955,371 $ 40 $ 10,494 $ 1,110 $ (41) $ 11,603
Issuance of stock 1,439,000 14 18,531 -- -- 18,545
Exercise of stock options 150,129 2 442 -- (267) 177
Exercise of stock warrants 335,082 3 1,479 -- (1,482) --
Net earnings -- -- -- 1,871 -- 1,871
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 5,879,582 59 30,946 2,981 (1,790) 32,196
Issuance of stock 1,500 -- 10 -- -- 10
Exercise of stock options 10,000 -- 22 -- -- 22
Net earnings -- -- -- 106 -- 106
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 5,891,082 59 30,978 $ 3,087 $ (1,790) $ 32,334
Exercise of stock options 15,500 -- 18 -- -- 18
Net loss -- -- -- (12,212) -- (12,212)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1998 5,906,582 $ 59 $ 30,996 $ (9,125) $ (1,790) $ 20,140
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 27
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(12,212) $ 106 $ 1,871
Adjustments to reconcile net earnings (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 4,674 3,504 2,151
Deferred income taxes 481 (181) 753
Stock issuance for directors' compensation -- 10 24
Restructuring charges 2,969 -- --
Changes in operating assets and liabilities:
Accounts receivable (3,239) (2,995) (2,727)
Inventories (4,520) 2,079 (5,913)
Other current assets 75 (335) (51)
Accounts payable 5,194 1,043 (1,055)
Accrued liabilities 4,476 803 697
Income taxes receivable/payable (31) (706) 118
Other, net 78 (360) (195)
-------- -------- --------
Net cash provided by (used in) operating activities (2,055) 2,968 (4,327)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (5,813) (4,999) (3,244)
Acquisitions (384) (2,451) (1,975)
-------- -------- --------
Net cash used in investing activities (6,197) (7,450) (5,219)
-------- -------- --------
Cash flows from financing activities:
Net revolving debt borrowings (payments) 8,694 2,482 (5,881)
Proceeds from sale-leaseback transaction 963 -- --
Principal payments under capital (1,200) (955) (454)
lease obligations Net proceeds from public offering -- -- 18,521
Proceeds from exercise of common stock options 18 22 177
-------- -------- --------
Net cash provided by financing activities 8,475 1,549 12,363
-------- -------- --------
Net increase (decrease) in cash 223 (2,933) 2,817
Cash at beginning of year 717 3,650 833
-------- -------- --------
Cash at end of year $ 940 $ 717 $ 3,650
======== ======== ========
Supplemental cash flow disclosures:
Interest paid $ 1,493 $ 612 $ 545
======== ======== ========
Income taxes paid (refunded), net $ (461) $ 856 $ 225
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 28
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 AND 1997
(In thousands, except share and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
PC Service Source, Inc. and Subsidiaries (the "Company") are
providers of logistic services ("Service Logistics") to the
personal computer ("PC") hardware repair industry. Service
Logistics distribution includes sourcing and distributing spare
parts, inventory management, warranty claims processing, parts
remanufacturing and related functions, and are provided to
customers throughout the United States, Canada and Latin America,
as well as other countries. Service Logistics also includes
notebook repair.
The net revenues, gross margin and total assets of the Service
Logistics-distribution business account for in excess of 90% of
the related total amounts before intersegment eliminations for
1998, 1997 and 1996.
(b) Basis of Consolidation
The consolidated financial statements include the accounts of PC
Service Source, Inc. and its wholly and majority owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(c) Inventories
Inventories are stated at the lower of average cost or market and
consist primarily of new and remanufactured personal computer
parts.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation is
calculated on the straight-line method over the estimated useful
lives of assets, which range from 3 to 5 years. Leasehold
improvements are amortized using the straight-line method over
the lesser of the estimated useful lives of the assets or the
remaining term of the lease, which range from 5 to 7 years.
(e) Goodwill
Goodwill represents the excess of purchase price over fair value
of net assets acquired and is amortized on a straight-line basis
over the expected periods to be benefitted of 7 and 15 years.
F-8
<PAGE> 29
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 AND 1997
(In thousands, except share and per share amounts)
(f) Revenue Recognition
Revenue is recognized upon completion of services normally
represented by shipment to the customer.
(g) Advertising Costs
Advertising costs are expensed as incurred. Advertising costs
amounted to $596, $826 and $812 in 1998, 1997 and 1996,
respectively.
(h) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(i) Use of Estimates
The preparation of the consolidated 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 the disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and
expenses during the reported periods. Actual results could differ
from those estimates.
(j) Comprehensive Income
The Company adopted Statement of Financial Standards No. 130
(SFAS 130), Reporting Comprehensive Income, in the first quarter
of 1998, which requires companies to disclose comprehensive
income separately from net income from operations. Comprehensive
income is defined as the change in equity during a period from
transactions and other events and circumstances from
non-ownership sources. It includes all changes in equity during a
period, except those resulting from investments by owners and
distributions to owners. Comprehensive income (loss) is equal to
net earnings (loss) as presented on the Consolidated Statements
of Operations for the years ended December 31, 1998, 1997 and
1996.
F-9
<PAGE> 30
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 AND 1997
(In thousands, except share and per share amounts)
(k) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
Long-lived assets and certain identifiable intangible assets are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
(l) Noncash Financing and Investing Activities
Capital lease obligations of $963, $1,368 and $2,866 were
incurred for computer equipment and furniture and fixtures in
1998, 1997 and 1996, respectively.
In 1997 and 1996, 1,500 and 1,500 shares of common stock,
respectively, were issued to directors in lieu of cash payments
for an expense of $10 and $24, respectively.
In 1996, 128,038 shares of treasury stock were acquired upon the
exercise of stock options and warrants.
(m) Reclassification
Certain previously reported financial information has been
reclassified to conform to the 1998 presentation.
(n) Fair Value of Financial Instruments
The carrying values of cash, accounts receivable and accounts
payable approximate fair value due to the short-term maturity of
these instruments. The carrying value of the revolving line of
credit outstanding approximates the estimated fair value since
the obligation bears interest at current market rates.
(o) Significant Customer
In 1998, one customer accounted for approximately 16% of
revenues. No other customer accounted for 10% or more in revenues
in 1998 and no customer accounted for 10% or more in 1997 or
1996.
In February 1999, this customer notified the Company of its
intention to terminate the exclusive contract with the Company
effective as of June 1999. Although the Company
F-10
<PAGE> 31
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 AND 1997
(In thousands, except share and per share amounts)
anticipates that it will continue to do business with this
customer after June 1999, any such business will not be on an
exclusive basis and may be significantly less than in 1998.
(2) INCOME TAXES
Income tax expense for the years ended December 31 is presented below.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $ (633) $ 247 $ 272
Deferred 384 (166) 777
State:
Current 152 (2) 64
Deferred 97 (15) (24)
------- ------- -------
$ -- $ 64 $ 1,089
======= ======= =======
</TABLE>
The reconciliation of income taxes at the federal statutory rate of 34% to
the effective tax rate for the years ended December 31 is presented below.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income taxes (benefit) at federal statutory rate (34.0)% 34.0% 34.0%
State taxes, net of federal income tax benefit (2.1)% 2.7% 2.7%
Change in valuation allowance 30.9% -- % -- %
Other 5.2% 0.9% 0.1%
----- ---- ----
Effective rate -- % 37.6% 36.8%
===== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at December
31 are presented below.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Inventory costs 2,072 537
Net operating loss carryforwards 1,434 --
Accrued expenses 899 190
Accounts receivable 363 361
Other 104 102
Valuation allowance (3,770) --
------- -------
Total deferred tax asset 1,102 1,190
Deferred tax liability - depreciation 1,102 709
------- -------
Net deferred tax asset $ -- $ 481
======= =======
</TABLE>
F-11
<PAGE> 32
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 AND 1997
(In thousands, except share and per share amounts)
The Company plans to carryback net operating losses of approximately $1,539
generated in 1998 to offset taxable income from previous years. The Company
has net operating loss carryforwards of $3,725, which expires in the year
2012.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of the deferred tax
assets will not be realized. As a result of this consideration, a valuation
allowance of $3,770 is recorded as of December 31, 1998.
(3) REVOLVING LINE OF CREDIT
On March 11, 1999, the Company entered into a new $25,000 Revolving Line of
Credit and Security Agreement with PNC Bank, National Association, which
matures in March 2002 and is secured by substantially all of the assets of
the Company. The proceeds of this facility were used in part to retire the
then outstanding balance under a revolving line of credit with NationsBank,
N.A. described below. The new credit facility has interest payable on the
outstanding balance at a rate of 2.50% above the then current London
Interbank Offering Rate (LIBOR) for LIBOR advances (7.4%) and the PNC prime
rate advances (10.25%) as of March 11, 1999. As of March 11, 1999, the
Company had $11,955 outstanding under the new Revolving Line of Credit and
approximately $7,100 of availability. The total availability is calculated
from the eligible accounts receivable and inventory as specified by the
agreement. The new credit facility prohibits the payment of dividends to
common stockholders and contains customary covenants, including a
limitation on the amount of indebtedness the Company may incur. The Company
must also maintain a fixed charge coverage ratio (as defined in the
Revolving Line of Credit).
The Company had a $20,000 Revolving Bank Credit Line (the Credit Line) of
which $14,229 was outstanding as of December 31, 1998 that was scheduled to
mature in June 1999. Outstanding borrowings under the Credit Line were
collateralized by substantially all of the assets of the Company.
Interest was payable on the outstanding borrowings at a rate of 1.00% to
3.50% above LIBOR for LIBOR advances (8.58% at December 31, 1998) and 0.00%
to 2.00% above the prime rate for base rate advances (9.75% at December 31,
1998). The weighted average interest rates were 8.44%, 8.34% and 9.29% for
1998, 1997 and 1996, respectively.
(4) LEASES
The Company entered into capital leases for computer equipment and
furniture and fixtures expiring in various years through 2003. Most
recently, in 1998, the Company entered into a $963 capital lease through a
sale-lease back transaction. Depreciation of assets under capital leases is
included in depreciation and amortization expense. Interest rates on
capitalized leases vary from 6.06% to 10.69% and are imputed based on the
lower of the Company's incremental borrowing rate at the inception of each
lease or the lessor's implicit rate.
F-12
<PAGE> 33
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 AND 1997
(In thousands, except share and per share amounts)
Property held under capital leases, which is included in property and
equipment, at December 31, 1998 and 1997, is presented below.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Computer equipment $4,156 $3,193
Furniture and fixtures 2,849 2,849
------ ------
7,005 6,042
Less accumulated amortization 3,297 2,039
------ ------
$3,708 $4,003
====== ======
</TABLE>
The Company leases office and warehouse distribution space and equipment
under various noncancellable operating leases with terms from three to ten
years. Certain of the leases contain renewal options ranging up to five
years. Total rental expense under operating leases was $2,430, $2,126 and
$1,665 in 1998, 1997, and 1996, respectively.
Future minimum lease payments under capital leases and noncancellable
operating leases, excluding closed locations, are presented below.
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
1999 $ 1,720 $ 2,312
2000 1,452 2,221
2001 999 2,114
2002 415 1,963
2003 142 1,986
Thereafter -- 3,224
----------- -----------
Total minimum lease payments 4,728 $ 13,820
Less amount representing interest 652 ===========
-----------
Present value of net minimum lease payments 4,076
Less current portion of obligations under capital leases 1,399
-----------
Obligations under capital leases, excluding current portion $ 2,677
===========
</TABLE>
(5) STOCKHOLDERS' EQUITY
In June 1996, the Company issued 1,437,500 shares of common stock to the
public. The net proceeds of this secondary public offering were $18,521 net
of offering costs of $1,604. The net proceeds were used to pay
approximately $11,400 outstanding under the Company's revolving bank credit
facility. The balance of the net proceeds was added to the Company's
working capital for general operating purposes.
F-13
<PAGE> 34
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 AND 1997
(In thousands, except share and per share amounts)
At December 31, 1998, the Company had reserved 1,574,918 shares of common
stock for future issuances in connection with its stock option plan, stock
price appreciation plan, employee stock purchase plan and outstanding
warrants.
(6) STOCK OPTIONS
In 1992, the Company adopted a stock option plan (the Plan) pursuant to
which the Company's Board of Directors may grant incentive and nonqualified
options to officers and key employees. The Plan authorizes grants of
options to purchase up to 1,500,000 shares (increased from 1,000,000 shares
in 1998) of authorized but unissued common stock. Stock options are granted
with an exercise price not less than the stock's fair market value at the
date of grant. Stock options generally become exercisable and vest at a
rate of 33% per year from the date of grant and generally carry an
expiration date of ten years subsequent to the date of grant. At December
31, 1998, there were 153,250 additional shares available for grant under
the Plan.
In March 1998, the Compensation Committee of the Board of Directors
approved a program under which certain option holders canceled their
existing option agreements in exchange for a new agreement covering a
reduced number of options with an exercise price of $4.75, the fair market
value of the Company's common stock at March 1, 1998. The Company cancelled
agreements covering 460,500 options with exercise prices ranging from $9.00
to $14.50, in exchange for agreements covering 318,250 options. The new
option agreements vest over three years.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for the Plan and, accordingly, no compensation
cost has been recognized for its stock options in the consolidated
financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options since January 1995
under SFAS No. 123, Accounting for Stock-Based Compensation, the Company's
net earnings (loss) would be adjusted to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net earnings (loss):
As reported $ (12,212)$ 106 $ 1,871
Pro forma (12,364) (264) 1,643
Earnings (loss) per share as reported:
Basic (2.12) .02 .38
Diluted (2.12) .02 .35
Earnings (loss) per share-pro forma:
Basic (2.15) (.05) .33
Diluted (2.15) (.05) .31
</TABLE>
F-14
<PAGE> 35
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 AND 1997
(In thousands, except share and per share amounts)
The following schedule utilizes the Black Scholes option-pricing model
with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected volatility 49.8% 57.7% 58.4%
Risk-free interest rate 5.53 - 5.65% 5.67 - 6.83% 5.24 - 6.64%
Expected life 4 years 5 years 5 years
</TABLE>
Following is a summary of activity in the Plan during 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
average average average
1998 exercise 1997 exercise 1996 exercise
Options price Options price Options price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 746,900 $ 7.70 630,500 $ 7.75 624,129 $ 5.46
Granted 1,024,250 5.31 305,500 9.00 212,000 11.84
Exercised (15,500) 2.25 (10,000) 2.25 (150,129) 2.96
Cancelled (648,900) 8.80 (179,100) 10.39 (55,500) 10.57
---------- -------- --------
Outstanding at end of year 1,106,750 4.85 746,900 7.70 630,500 7.75
========== ======== ========
Options exercisable at
year end 161,500 $ 1.93 275,900 $ 5.64 224,500 $ 5.25
========== ======== ======== ========= ======== =========
Weighted average fair
value of options granted
during the year $ 1.42 $ 3.85 $ 6.68
========== ======== ========
</TABLE>
The exercise price for options outstanding at December 31, 1998, ranged
from $0.25 to $8.00.
(7) STOCK WARRANTS AND OTHER
In October 1998, the Company approved a Stock Price Appreciation Plan
pursuant to which a total of 200,000 shares of the Company's common stock
will be available for issuance to certain employees of the Company if the
closing price per share exceeds $15.00 for twenty consecutive trading days
prior to February 28, 2002.
F-15
<PAGE> 36
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 AND 1997
(In thousands, except share and per share amounts)
In March 1994, the Company issued 100,000 warrants with an exercise price
of $10.80. Of those warrants, 85,082 were exercised in 1996. The balance of
the warrants expire in April 2000.
In January 1994, the Company issued 250,000 warrants with an exercise price
of $2.25 which included a net exercise provision which allowed the holder
to surrender the warrant in exchange for the number of shares of stock
equal to the difference between the total number of shares under the
warrant and the number of shares at fair market value equal to the total
exercise price. The warrants were surrendered in 1996 resulting in the
issuance of 209,821 shares. No warrants remain outstanding.
(8) EARNINGS (LOSS) PER SHARE
Basic earnings per share is computed by dividing net earnings (loss) by the
weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Diluted earnings (loss) per share
is the same as basic earnings (loss) per share for 1998 because the impact
of potentially dilutive securities was anti-dilutive.
The following table sets forth the computation of the basic and diluted
earnings (loss) per share.
<TABLE>
<CAPTION>
Years Ended
December 31
-----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net earnings (loss) $(12,212) $ 106 $ 1,871
======== ======== ========
Weighted average common shares
outstanding-basic 5,762 5,750 4,970
Employee stock options and other -- 132 315
-------- -------- --------
Weighted average common shares
outstanding-diluted 5,762 5,882 5,285
======== ======== ========
Earnings (loss) per share:
Basic $ (2.12) $ 0.02 $ 0.38
Diluted $ (2.12) $ 0.02 $ 0.35
</TABLE>
At December 31, 1998, 1,121,668 employee stock options and other
potentially dilutive securities were excluded from the weighted average
common shares outstanding diluted computation for the year ended December
31, 1998 because their impact would be anti-dilutive.
F-16
<PAGE> 37
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 AND 1997
(In thousands, except share and per share amounts)
(9) BENEFIT PLANS
The Company sponsors a defined contribution plan under Section 401(k) of
the Internal Revenue Code. Employees who have attained the age of 21 and
completed one full quarter of service are eligible to participate.
Participation may begin on January 1, April 1, July 1, or October 1
following the full quarter of service. Eligible employees may contribute
from 1% to 15% of their annual compensation subject to limitations. The
Company matches 100% of the first 4% an employee contributes. Employee
contributions vest immediately while the Company contributions vest 100% at
the end of the second year of employment. In 1998, 1997 and 1996 the
Company contributed $543, $454 and $299, respectively.
In 1996, the Company adopted an Employee Stock Purchase Plan (the Purchase
Plan) covering all employees that have attained the age of 21 and completed
one year of service. Under the Purchase Plan, eligible participants may
purchase stock of the Company at not less than 85% of its market value as
of the date the option to purchase is offered to the employees; employees
have one year to make sufficient contributions to pay the exercise price.
No shares have been issued under the Purchase Plan. At December 31, 1998,
100,000 shares were available for future issuance.
(10) COMMITMENTS AND CONTINGENCIES
The Company is subject to various pending and threatened litigation from
time to time in the ordinary course of business. Although all litigation
involves some degree of uncertainty, in the opinion of management,
liabilities, if any, arising from such litigation or threat thereof are not
expected to have a material adverse impact on the Company's business,
financial conditions or results of operation.
(11) RESTRUCTURING
In December 1998, the Company decided to consolidate its west coast repair
facility into the Irving, Texas facility resulting in restructuring charges
of approximately $3,000. The charges included $1,700 for the write-off of
goodwill associated with the west coast operation, $700 for future lease
commitments, $400 for severance for approximately 40 employees which
represented substantially all of the employees of the facility and $200 for
the write-down of fixed assets. Completion of the closure of the west coast
repair facility is expected to occur by June 1999, although lease payments
are expected to continue through January 2001. No amounts have been paid in
1998 related to the liabilities recorded for future lease commitments or
severance.
F-17
<PAGE> 38
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 AND 1997
(In thousands, except share and per share amounts)
(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues $38,497 $38,309 $42,865 $41,102
Gross margin 11,209 11,328 12,349 10,080
Net earnings (loss) 168 (2,241) 46 (10,185)
Earnings (loss) per share:
Basic .03 (.39) .01 (1.77)
Diluted .03 (.39) .01 (1.77)
</TABLE>
The fourth quarter 1998 results include pretax charges totaling $6,400
related to certain non-recurring items. The major components of the charges
were: a non-recurring $3,000 charge in connection with the consolidation of
the repair operations (see note 11), which is included as restructuring
charges; a $2,200 charge related to severance and other expenses included
in selling, general and administrative expenses; and a $1,200 charge
resulting from a review of policies, procedures and methodologies
undertaken by management, included in cost of revenue. In addition, the
fourth quarter includes a tax provision of $1,200 which reverses tax
benefits previously taken, primarily in the second quarter.
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues $32,421 $31,711 $33,495 $34,216
Gross margin 8,986 9,472 9,916 9,310
Net earnings (loss) 447 271 5 (617)
Earnings (loss) per share:
Basic .08 .05 .00 (.11)
Diluted .08 .05 .00 (.11)
</TABLE>
F-18
<PAGE> 39
SCHEDULE II
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Additions
---------
Balance at Charged to Charged Balance at
Beginning costs and to other end
Description of period expenses accounts Deductions of period
----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Accounts receivable -
allowance for doubtful accounts
1998 $ 977 $1,257 -- $1,260 (A) $974
1997 384 1,727 -- 1,134 (A) 977
1996 267 505 -- 388 (A) 384
</TABLE>
(A) Write-off of uncollectible accounts, net of recoveries.
<TABLE>
<CAPTION>
Additions
---------
Balance at Charged to Charged Balance at
Beginning costs and to other end
Description of period expenses accounts Deductions of period
----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Inventories -
reserve for obsolescence
1998 $2,407 $6,499 $ -- $2,437(B) $6,469
1997 3,218 231 -- 1,042(B) 2,407
1996 2,341 781 1,171 1,075(B) 3,218
</TABLE>
(B) Write down of inventory.
F-19
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- - ------ -------
<S> <C>
3.1+ Restated Certificate of Incorporation of the Company
3.2++ Amended and Restated Bylaws of the Company
4.1+ Specimen Certificate evidencing Common Stock
4.2* Certificate of Designations of Series A Junior Participating Preferred Stock
10.1* Revolving Credit and Security Agreement by and among the Company, its
subsidiaries and PNC Bank, National Association, as lender and as agent
10.2 +v Stock Option Plan, including form of Stock Option Agreements, as amended
10.3* Rights Plan
10.4* Stock Price Appreciation Plan
10.5+v Director Compensation Plan
10.6v Employee Stock Purchase Plan
10.7* Fifth Amendment to Stock Option Plan
16v+ Resignation of KPMG LLP
21* Subsidiaries of the Company
23.1* Consent of Ernst & Young LLP
23.2* Consent of KPMG LLP
27* Financial Data Schedule
</TABLE>
- - -------------------------
+ Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2, Registration Number 33-76068-D, initially
filed with the Securities and Exchange Commission on March 4,
1994, and declared effective on March 4, 1994.
++ Previously filed as an exhibit to the Company's report on Form
8-K filed with the Securities and Exchange Commission on December
9, 1998.
+++ Previously filed as an exhibit to the Company's report on Form
S-8, Registration Number 33-98176, filed with the Securities and
Exchange Commission on October 17, 1995.
+v Previously filed as an exhibit to the Company's report on Form
10-K for the year ended December 31, 1995, filed with the
Securities and Exchange Commission on March 31, 1996.
v Previously filed as an exhibit to the Company's Registration
Statement on Form S-1, Registration Number 333-03977, initially
filed with the Securities and Exchange Commission on May 17,
1996, and declared effective on May 28, 1996.
v+ Previously filed as an exhibit to the Company's report on Form
8-K filed with the Securities and Exchange Commission on June 18,
1998.
* Filed herewith.
<PAGE> 1
EXHIBIT 4.2
CERTIFICATE OF DESIGNATIONS
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
PC SERVICE SOURCE, INC.
Pursuant to Section 151
of the
General Corporation Law
of the State of Delaware
PC Service Source, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation (the "Board of Directors" or the
"Board") as required by Section 151 of the General Corporation Law at a meeting
duly called and held on December 7, 1998:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors in accordance with the provisions of the Amended and Restated
Certificate of Incorporation of the Corporation (the "Restated Certificate of
Incorporation"), the Board does hereby create, authorize and provide the
issuance upon exercise of the Rights of the Series A Junior Participating
Preferred Stock, par value $0.0001 per share, of the Corporation and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, and limitations thereof as follows:
SECTION 1. DESIGNATION AND AMOUNT. The shares of this series shall be
designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock"), and the number of shares constituting the Series A Preferred
Stock shall be 10,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series A Preferred Stock to a number less than the
number of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Corporation
convertible into Series A Preferred Stock.
Page 1 of 5
<PAGE> 2
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the rights of the holders of any shares of any series of
preferred stock (or any other stock) ranking prior and superior to the Series A
Preferred Stock with respect to dividends, the holders of shares of Series A
Preferred Stock shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the last day of March, June, September and December
in each year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series A Preferred
Stock, in an amount (if any) per share (rounded to the nearest cent), subject to
the provision for adjustment hereinafter set forth, equal to 1000 times the
aggregate per share amount of all cash dividends, and 1000 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock, par
value $0.01 per share (the "Common Stock"), of the Corporation or a subdivision
of the outstanding shares of Common Stock (by reclassification or otherwise),
declared on the Common Stock since the immediately preceding Quarterly Dividend
Payment Date or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of Series A
Preferred Stock. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under the preceding sentence
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).
(C) Dividends due pursuant to paragraph (A) of this Section shall begin
to accrue and be cumulative on outstanding shares of Series A Preferred Stock
from the Quarterly Dividend Payment Date next preceding the date of issue of
such shares, unless the date of issue of such shares is prior to the record date
for the first Quarterly Dividend Payment Date, in which case dividends on such
shares shall begin to accrue from the date of issue of such shares, or unless
the date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of Series
A Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series A Preferred Stock entitled
Page 2 of 5
<PAGE> 3
to receive payment of a dividend or distribution declared thereon, which record
date shall be not more than 60 days prior to the date fixed for the payment
thereof.
SECTION 3. VOTING RIGHTS. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 1000 votes
on all matters submitted to a vote of the stockholders of the Corporation. In
the event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the number of votes per share to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided the Restated Certificate of
Incorporation, including any other certificate of designations creating a series
of preferred stock or any similar stock, or by law, the holders of shares of
Series A Preferred Stock and the holders of shares of Common Stock and any other
capital stock of the Corporation having general voting rights shall vote
together as one class on all matters submitted to a vote of stockholders of the
Corporation.
(C) Except as set forth herein, or as otherwise required by law,
holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
SECTION 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all
Page 3 of 5
<PAGE> 4
such parity stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then entitled; or
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such junior stock in exchange for shares of any stock of the Corporation ranking
junior (as to dividends and upon dissolution, liquidation or winding up) to the
Series A Preferred Stock.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
SECTION 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
preferred stock and may be reissued as part of a new series of preferred stock
subject to the conditions and restrictions on issuance set forth herein or in
the Restated Certificate of Incorporation, including any Certificate of
Designations creating a series of preferred stock or any similar stock, or as
otherwise required by law.
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any
liquidation, dissolution or winding up of the Corporation the holders of shares
of Series A Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
1000 times the aggregate amount to be distributed per share to holders of shares
of Common Stock plus an amount equal to any accrued and unpaid dividends. In the
event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under the preceding sentence
shall be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
SECTION 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal
Page 4 of 5
<PAGE> 5
to 1000 times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount set forth in
the preceding sentence with respect to the exchange or change of shares of
Series A Preferred Stock shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
SECTION 8. AMENDMENT. The Restated Certificate of Incorporation shall
not be amended in any manner, including in a merger or consolidation, which
would alter, change, or repeal the powers, preferences or special rights of the
Series A Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of at least two-thirds of the outstanding shares of Series A
Preferred Stock, voting together as a single class.
SECTION 9. RANK. The Series A Preferred Stock shall rank, with respect
to the payment of dividends and upon liquidation, dissolution and winding up,
junior to all series of the Corporation's preferred stock.
IN WITNESS WHEREOF, this Certificate of Designation is executed on
behalf of the Corporation by its Chairman of the Board and attested by its
Secretary this 7th day of December, 1998.
Attest: PC SERVICE SOURCE, INC.
By: /s/ Robert J. Boutin By: /s/ Avery More
------------------------------- -----------------------------------
Robert J. Boutin, Secretary Avery More, Chairman of the Board
Page 5 of 5
<PAGE> 1
EXHIBIT 10.1
REVOLVING CREDIT
AND
SECURITY AGREEMENT
PNC BANK, NATIONAL ASSOCIATION
(AS LENDER AND AS AGENT)
WITH
PC SERVICE SOURCE, INC.,
CYCLIX ENGINEERING CORPORATION
AND
HI-TEK SERVICES, INC.
(BORROWERS)
March 11, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C> <C>
I. DEFINITIONS..............................................................................................1
1.1. Accounting Terms................................................................................1
1.2. General Terms...................................................................................1
1.3. Uniform Commercial Code Terms..................................................................15
1.4. Certain Matters of Construction................................................................15
II. ADVANCES, PAYMENTS......................................................................................16
2.1. (a) Revolving Advances....................................................................16
(b) Discretionary Rights..................................................................17
2.2. Procedure for Revolving Advances Borrowing.....................................................17
2.3. Disbursement of Advance Proceeds...............................................................19
2.4. Maximum Advances...............................................................................20
2.5. Repayment of Advances..........................................................................20
2.6. Repayment of Excess Advances...................................................................20
2.7. Statement of Account...........................................................................21
2.8. Letters of Credit..............................................................................21
2.9. Issuance of Letters of Credit..................................................................21
2.10. Requirements For Issuance of Letters of Credit.................................................22
2.11. Additional Payments............................................................................23
2.12. Manner of Borrowing and Payment................................................................23
2.13. Use of Proceeds................................................................................25
2.14. Defaulting Lender..............................................................................25
III. INTEREST AND FEES.......................................................................................26
3.1. Interest ......................................................................................26
3.2. Letter of Credit Fees..........................................................................27
3.3. (a) Closing Fee...........................................................................28
(b) Facility Fee ..................................................................28
3.4. (a) Collateral Management Fee.............................................................28
(b) Collateral Monitoring Fee.............................................................28
3.5. Computation of Interest and Fees...............................................................28
3.6. Maximum Charges................................................................................29
3.7. Increased Costs................................................................................29
3.8. Basis For Determining Interest Rate Inadequate or Unfair.......................................30
3.9. Capital Adequacy...............................................................................31
IV. COLLATERAL; GENERAL TERMS...............................................................................31
4.1. Security Interest in the Collateral............................................................31
4.2. Perfection of Security Interest................................................................32
4.3. Disposition of Collateral......................................................................32
4.4. Preservation of Collateral.....................................................................32
4.5. Ownership of Collateral........................................................................33
4.6. Defense of Agent's and Lenders' Interests......................................................33
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
Page
<S> <C> <C> <C>
4.7. Books and Records..............................................................................34
4.8. Financial Disclosure...........................................................................34
4.9. Compliance with Laws...........................................................................34
4.10. Collateral Inspection and Monitoring...........................................................34
4.11. Insurance ....................................................................................35
4.12. Failure to Pay Insurance.......................................................................36
4.13. Payment of Taxes...............................................................................36
4.14. Payment of Leasehold Obligations...............................................................36
4.15. Receivables....................................................................................36
(a) Nature of Receivables.................................................................36
(b) Solvency of Customers.................................................................37
(c) Locations of Borrower.................................................................37
(d) Collection of Receivables.............................................................37
(e) Notification of Assignment of Receivables.............................................37
(f) Power of Agent to Act on Borrowers' Behalf............................................38
(g) No Liability .........................................................................38
(h) Establishment of a Lockbox Account, Dominion Account..................................39
(i) Adjustments ..................................................................39
4.16. Inventory .....................................................................................39
4.17. Maintenance of Equipment.......................................................................39
4.18. Exculpation of Liability.......................................................................39
4.19. Environmental Matters..........................................................................40
4.20. Financing Statements...........................................................................42
V. REPRESENTATIONS AND WARRANTIES..........................................................................42
5.1. Authority .....................................................................................42
5.2. Formation and Qualification....................................................................43
5.3. Survival of Representations and Warranties.....................................................43
5.4. Tax Returns....................................................................................43
5.5. Financial Statements...........................................................................43
5.6. Corporate Name.................................................................................44
5.7. O.S.H.A. and Environmental Compliance..........................................................44
5.8. Solvency; No Litigation, Violation, Indebtedness or Default....................................44
5.9. Patents, Trademarks, Copyrights and Licenses...................................................46
5.10. Licenses and Permits...........................................................................46
5.11. Default of Indebtedness........................................................................46
5.12. No Default ....................................................................................47
5.13. No Burdensome Restrictions.....................................................................47
5.14. No Labor Disputes..............................................................................47
5.15. Margin Regulations.............................................................................47
5.16. Investment Company Act.........................................................................47
5.17. Disclosure ....................................................................................47
5.18. Swaps .........................................................................................47
5.19. Conflicting Agreements.........................................................................47
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<CAPTION>
Page
<S> <C> <C> <C>
5.20. Application of Certain Laws and Regulations....................................................48
5.21. Business and Property of Borrower..............................................................48
5.22 Year 2000 .....................................................................................48
VI. AFFIRMATIVE COVENANTS...................................................................................48
6.1. Payment of Fees................................................................................48
6.2. Conduct of Business and Maintenance of Existence and Assets....................................48
6.3. Violations ....................................................................................49
6.4. Government Receivables.........................................................................49
6.5 Fixed Charge Coverage..........................................................................49
6.6. Execution of Supplemental Instruments..........................................................49
6.7. Payment of Indebtedness........................................................................49
6.8. Standards of Financial Statements..............................................................49
VII. NEGATIVE COVENANTS......................................................................................50
7.1. Merger, Consolidation, Acquisition and Sale of Assets..........................................50
7.2. Creation of Liens..............................................................................50
7.3. Guarantees ....................................................................................50
7.4. Investments....................................................................................50
7.5. Loans .........................................................................................51
7.6. Capital Expenditures...........................................................................51
7.7. Dividends ....................................................................................51
7.8. Indebtedness...................................................................................51
7.9. Nature of Business.............................................................................51
7.10. Transactions with Affiliates...................................................................51
7.11. Leases ........................................................................................52
7.12. Subsidiaries...................................................................................52
7.13. Fiscal Year and Accounting Changes.............................................................52
7.14. Pledge of Credit...............................................................................52
7.15. Amendment of Articles of Incorporation, By-Laws................................................52
7.16. Compliance with ERISA..........................................................................52
7.17. Prepayment of Indebtedness.....................................................................53
VIII. CONDITIONS PRECEDENT....................................................................................53
8.1. Conditions to Initial Advances.................................................................53
(a) Note .................................................................................53
(b) Filings, Registrations and Recordings.................................................53
(c) Corporate Proceedings of Borrowers....................................................53
(d) Incumbency Certificates of Borrowers..................................................53
(e) Certificates .........................................................................54
(f) Good Standing Certificates............................................................54
(g) Legal Opinion ........................................................................54
(h) No Litigation ........................................................................54
(i) Collateral Examination................................................................54
(j) Fees .................................................................................54
</TABLE>
(iii)
<PAGE> 5
<TABLE>
<CAPTION>
Page
<S> <C> <C> <C>
(k) Insurance ............................................................................54
(l) Payment Instructions..................................................................55
(m) Blocked Accounts .....................................................................55
(n) Consents .............................................................................55
(o) No Adverse Material Change............................................................55
(p) Leasehold Agreements..................................................................55
(q) Contract Review ......................................................................55
(r) Closing Certificate ..................................................................55
(s) Borrowing Base .......................................................................55
(t) Undrawn Availability..................................................................56
(u) Other ................................................................................56
8.2. Conditions to Each Advance.....................................................................56
(a) Representations and Warranties........................................................56
(b) No Default ...........................................................................56
(c) Maximum Advances .....................................................................56
IX. INFORMATION AS TO BORROWERS.............................................................................56
9.1. Disclosure of Material Matters.................................................................56
9.2. Schedules ....................................................................................57
9.3. Environmental Reports..........................................................................57
9.4. Litigation ....................................................................................57
9.5. Material Occurrences...........................................................................57
9.6. Government Receivables.........................................................................58
9.7. Annual Financial Statements....................................................................58
9.8. Quarterly Financial Statements.................................................................58
9.9. Monthly Financial Statements...................................................................59
9.10. Other Reports..................................................................................59
9.11. Additional Information.........................................................................59
9.12. Projected Operating Budget.....................................................................59
9.13. Notice of Suits, Adverse Events................................................................60
9.14. ERISA Notices and Requests.....................................................................60
9.15. Additional Documents...........................................................................61
X. EVENTS OF DEFAULT.......................................................................................61
XI. LENDERS' RIGHTS AND REMEDIES AFTER DEFAULT..............................................................64
11.1. Rights and Remedies............................................................................64
11.2. Agent's Discretion.............................................................................65
11.3. Setoff ........................................................................................65
11.4. Rights and Remedies not Exclusive..............................................................65
XII. WAIVERS AND JUDICIAL PROCEEDINGS........................................................................65
12.1. Waiver of Notice...............................................................................65
12.2. Delay .........................................................................................65
</TABLE>
(iv)
<PAGE> 6
<TABLE>
<CAPTION>
Page
<S> <C> <C> <C>
12.3. Jury Waiver....................................................................................65
XIII. EFFECTIVE DATE AND TERMINATION..........................................................................66
13.1. Term ..........................................................................................66
13.2. Termination....................................................................................66
XIV. REGARDING AGENT.........................................................................................67
14.1. Appointment....................................................................................67
14.2. Nature of Duties...............................................................................67
14.3. Lack of Reliance on Agent and Resignation......................................................68
14.4. Certain Rights of Agent........................................................................68
14.5. Reliance ......................................................................................69
14.6. Notice of Default..............................................................................69
14.7. Indemnification................................................................................69
14.8. Agent in its Individual Capacity...............................................................69
14.9. Delivery of Documents..........................................................................70
14.10. Borrowers' Undertaking to Agent...............................................................70
XV. BORROWING AGENCY........................................................................................70
15.1. Borrowing Agency Provisions....................................................................70
15.2. Waiver of Subrogation..........................................................................71
XVI. MISCELLANEOUS...........................................................................................71
16.1. Governing Law..................................................................................71
16.2. Entire Understanding...........................................................................72
16.3. Successors and Assigns; Participations; New Lenders............................................73
16.4. Application of Payments........................................................................75
16.5. Indemnity .....................................................................................75
16.6. Notice ........................................................................................75
16.7. Survival ......................................................................................77
16.8. Severability...................................................................................77
16.9. Expenses ......................................................................................77
16.10. Injunctive Relief..............................................................................77
16.11. Consequential Damages..........................................................................77
16.12. Captions ......................................................................................78
16.13. Counterparts; Telecopied Signatures............................................................78
16.14. Construction...................................................................................78
16.15. Confidentiality; Sharing Information...........................................................78
16.16. Publicity .....................................................................................79
</TABLE>
(v)
<PAGE> 7
REVOLVING CREDIT
AND
SECURITY AGREEMENT
Revolving Credit and Security Agreement dated March 11, 1999 among PC
Service Source, Inc., a corporation organized under the laws of the State of
Delaware ("PC Service"), Cyclix Engineering Corporation d/b/a PC Service Source
Repair Services, a corporation organized under the laws of the State of Texas
("Cyclix") and Hi-Tek Services, Inc., a corporation organized under the laws of
the State of California ("Hi-Tek"), (PC Service, Cyclix and Hi-Tek, each a
"Borrower" and collectively "Borrowers"), the financial institutions which are
now or which hereafter become a party hereto (collectively, the "Lenders" and
individually a "Lender") and PNC BANK, NATIONAL ASSOCIATION, a national banking
association ("PNC"), as agent for Lenders (PNC, in such capacity, the "Agent").
IN CONSIDERATION of the mutual covenants and undertakings herein
contained, Borrowers, Lenders and Agent hereby agree as follows:
I. DEFINITIONS.
1.1. Accounting Terms. As used in this Agreement, the Note, or any
certificate, report or other document made or delivered pursuant to this
Agreement, accounting terms not defined in Section 1.2 or elsewhere in this
Agreement and accounting terms partly defined in Section 1.2 to the extent not
defined, shall have the respective meanings given to them under GAAP; provided,
however, whenever such accounting terms are used for the purposes of determining
compliance with financial covenants in this Agreement, such accounting terms
shall be defined in accordance with GAAP as applied in preparation of the
audited financial statements of Borrowers for the fiscal year ended December 31,
1998.
1.2. General Terms. For purposes of this Agreement the following terms
shall have the following meanings:
"Accountants" shall have the meaning set forth in Section 9.7
hereof.
"Advances" shall mean and include the Revolving Advances which
shall include Equipment Advances and outstanding Letters of Credit.
"Advance Rates" shall have the meaning set forth in Section
2.1(a) hereof.
"Affiliate" of any Person shall mean (a) any Person (other
than a Subsidiary) which, directly or indirectly, is in control of, is
controlled by, or is under common control with such Person, or (b) any Person
who is a director or officer (i) of such Person, (ii) of any Subsidiary of such
Person or (iii) of any Person described in clause (a) above. For
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purposes of this definition, control of a Person shall mean the power, direct or
indirect, (x) to vote 5% or more of the securities having ordinary voting power
for the election of directors of such Person, or (y) to direct or cause the
direction of the management and policies of such Person whether by contract or
otherwise.
"Agent" shall have the meaning set forth in the preamble to
this Agreement and shall include its successors and assigns.
"Authority" shall have the meaning set forth in Section
4.19(d).
"Base Rate" shall mean the prime commercial lending rate of
PNC publicly announced as its "prime rate" in effect from time to time, such
rate to be adjusted automatically, without notice, on the effective date of any
change in such rate. This rate of interest is determined from time to time by
PNC as a means of pricing some loans to its customers and is neither tied to any
external rate of interest or index nor does it necessarily reflect the lowest
rate of interest actually charged by PNC to any particular class or category of
customers of PNC.
"Base Rate Loan" shall mean any Advance that bears interest
based upon the Base Rate.
"Blocked Accounts" shall have the meaning set forth in Section
4.15(h).
"Borrower" or "Borrowers" shall have the meaning set forth in
the preamble to this Agreement and shall extend to all permitted successors and
assigns of such Persons.
"Borrowers' Account" shall have the meaning set forth in
Section 2.7.
"Borrowing Agent" shall mean PC Service.
"Business Day" shall mean with respect to Eurodollar Rate
Loans, any day on which commercial banks are open for domestic and international
business, including dealings in Dollar deposits in London, England and New York,
New York and with respect to all other matters, any day other than a day on
which commercial banks in New York are authorized or required by law to close.
"CERCLA" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. ss. 9601 et seq.
"Change of Control" shall mean (a) the occurrence of any event
(whether in one or more transactions) which results in both (i) a transfer of
control of any Borrower to any Person who is not an Original Owner and (ii) the
direct or indirect ownership by the
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Original Owner of less than 20% of the securities having ordinary voting power
for the election of directors of any Borrower, or (b) any merger or
consolidation of or with any Borrower or sale of all or substantially all of the
property or assets of any Borrower, other than as permitted by Section 7.1
hereof. For purposes of this definition, "control of any Borrower" shall mean
the power, direct or indirect (x) to vote 30% or more of the securities having
ordinary voting power for the election of directors of any Borrower or (y) to
direct or cause the direction of the management and policies of any Borrower by
contract or otherwise.
"Charges" shall mean all taxes, charges, fees, imposts, levies
or other assessments, including, without limitation, all net income, gross
income, gross receipts, sales, use, ad valorem, value added, transfer,
franchise, profits, inventory, capital stock, license, withholding, payroll,
employment, social security, unemployment, excise, severance, stamp, occupation
and property taxes, custom duties, fees, assessments, liens, claims and charges
of any kind whatsoever, together with any interest and any penalties, additions
to tax or additional amounts, imposed by any taxing or other authority, domestic
or foreign (including, without limitation, the PBGC or any environmental agency
or superfund), upon the Collateral, any Borrower or any of its Affiliates.
"Closing Date" shall mean March 11, 1999 or such other date as
may be agreed to by the parties hereto.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time and the regulations promulgated thereunder.
"Collateral" shall mean and include:
(a) all Receivables;
(b) all Equipment;
(c) all General Intangibles;
(d) all Inventory;
(e) all of each Borrower's right, title and interest
in and to (i) its respective goods and other property including, but not limited
to, all merchandise returned or rejected by Customers, relating to or securing
any of the Receivables; (ii) all of each Borrower's rights as a consignor, a
consignee, an unpaid vendor, mechanic, artisan, or other lienor, including
stoppage in transit, setoff, detinue, replevin, reclamation and repurchase;
(iii) all additional amounts due to any Borrower from any Customer relating to
the Receivables; (iv) other property, including warranty claims, relating to any
goods securing this Agreement; (v) all of each Borrower's contract rights,
rights of payment which
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<PAGE> 10
have been earned under a contract right, instruments, documents, chattel paper,
warehouse receipts, deposit accounts, money, securities and investment property;
(vi) if and when obtained by any Borrower, all real and personal property of
third parties in which such Borrower has been granted a lien or security
interest as security for the payment or enforcement of Receivables; and (vii)
any other goods, personal property or real property now owned or hereafter
acquired in which any Borrower has expressly granted a security interest or may
in the future grant a security interest to Agent hereunder, or in any amendment
or supplement hereto or thereto, or under any other agreement between Agent and
any Borrower;
(f) all of each Borrower's ledger sheets, ledger
cards, files, correspondence, records, books of account, business papers,
computers, computer software (owned by any Borrower or in which it has an
interest), computer programs, tapes, disks and documents relating to (a), (b),
(c), (d) or (e) of this Paragraph; and
(g) all proceeds and products of (a), (b), (c), (d),
(e) and (f) in whatever form, including, but not limited to: cash, deposit
accounts (whether or not comprised solely of proceeds), certificates of deposit,
insurance proceeds (including hazard, flood and credit insurance), negotiable
instruments and other instruments for the payment of money, chattel paper,
security agreements, documents, eminent domain proceeds, condemnation proceeds
and tort claim proceeds.
"Commitment Percentage" of any Lender shall mean the
percentage set forth below such Lender's name on the signature page hereof as
same may be adjusted upon any assignment by a Lender pursuant to Section 16.3(b)
hereof.
"Commitment Transfer Supplement" shall mean a document in form
and substance satisfactory to Agent and properly completed by which the
Purchasing Lender purchases and assumes a portion of the obligation of Lenders
to make Advances under this Agreement.
"Consents" shall mean all filings and all licenses, permits,
consents, approvals, authorizations, qualifications and orders of governmental
authorities and other third parties, domestic or foreign, necessary to carry on
any Borrower's business, including, without limitation, any Consents required
under all applicable federal, state or other applicable law.
"Controlled Group" shall mean all members of a controlled
group of corporations and all trades or businesses (whether or not incorporated)
under common control which, together with any Borrower, are treated as a single
employer under Section 414 of the Code.
"Customer" shall mean and include the account debtor with
respect to any
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<PAGE> 11
Receivable and/or the prospective purchaser of goods, services or both with
respect to any contract or contract right, and/or any party who enters into or
proposes to enter into any contract or other arrangement with any Borrower,
pursuant to which such Borrower is to deliver any personal property or perform
any services.
"Default" shall mean an event which, with the giving of notice
or passage of time or both, would constitute an Event of Default.
"Default Rate" shall have the meaning set forth in Section 3.1
hereof.
"Defaulting Lender" shall have the meaning set forth in
Section 2.14(a) hereof.
"Depository Accounts" shall have the meaning set forth in
Section 4.15(h) hereof.
"Documents" shall have the meaning set forth in Section 8.1(c)
hereof.
"Dollar" and the sign "$" shall mean lawful money of the
United States of America.
"Early Termination Date" shall have the meaning set forth in
Section 13.1 hereof.
"Earnings Before Interest and Taxes" shall mean for any period
the sum of (i) net income (or loss) of Borrowers on a consolidated basis for
such period (excluding extraordinary gains and losses, plus (ii) all interest
expense of Borrowers on a consolidated basis for such period, plus (iii) all
charges against income of Borrowers on a consolidated basis for such period for
federal, state and local taxes actually paid.
"EBITDA" shall mean for any period the sum of (i) Earnings
Before Interest and Taxes for such period plus (ii) depreciation expenses for
such period, plus (iii) amortization expenses for such period.
"Eligible Inventory" shall mean and include Inventory
excluding work in process, with respect to each Borrower valued at the lower of
cost or market value, determined on a first-in-first-out basis, which is not, in
Agent's reasonable opinion, obsolete, slow moving or unmerchantable and which
Agent, in its reasonable discretion, shall not deem ineligible Inventory, based
on such considerations as Agent may from time to time deem appropriate
including, without limitation, whether the Inventory is subject to a perfected,
first priority security interest in favor of Agent and whether the Inventory
conforms to all standards imposed by any governmental agency, division or
department thereof which has regulatory authority over such goods or the use or
sale thereof. Eligible
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<PAGE> 12
Inventory shall include all Inventory in-transit for which title has passed to a
Borrower, which is insured to the full value thereof and for which Agent shall
have in its possession (a) all negotiable bills of lading properly endorsed and
(b) all non-negotiable bills of lading issued in Agent's name.
"Eligible Receivables" shall mean and include with respect to
each Borrower, each Receivable of such Borrower arising in the ordinary course
of such Borrower's business, except no Receivable shall be an Eligible
Receivable if:
(a) it arises out of a sale made by any Borrower to an
Affiliate of any Borrower or to a Person controlled by an Affiliate of any
Borrower;
(b) it is due or unpaid more than one hundred twenty (120)
days after the original invoice date;
(c) fifty percent (50%) or more of the Receivables from the
Customer are not deemed Eligible Receivables hereunder. Such percentage may, in
Agent's sole discretion, be increased or decreased from time to time;
(d) any covenant, representation or warranty contained in this
Agreement with respect to such Receivable has been breached;
(e) the Customer shall (i) apply for, suffer, or consent to
the appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its property
or call a meeting of its creditors, (ii) admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of its
present business, (iii) make a general assignment for the benefit of creditors,
(iv) commence a voluntary case under any state or federal bankruptcy laws (as
now or hereafter in effect), (v) be adjudicated a bankrupt or insolvent, (vi)
file a petition seeking to take advantage of any other law providing for the
relief of debtors, (vii) acquiesce to, or fail to have dismissed, any petition
which is filed against it in any involuntary case under such bankruptcy laws, or
(viii) take any action for the purpose of effecting any of the foregoing;
(f) the sale is to a Customer outside the United States of
America, Puerto Rico or Canada unless the sale is on letter of credit, guaranty
or acceptance terms, in each case acceptable to Agent in its sole discretion;
(g) the sale to the Customer is on a bill-and-hold, guaranteed
sale, sale-and-return, sale on approval, consignment or any other repurchase or
return basis or is evidenced by chattel paper;
(h) the Customer is the United States of America, any state or
any
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<PAGE> 13
department, agency or instrumentality of any of them, unless the applicable
Borrower assigns its right to payment of such Receivable to Agent pursuant to
the Assignment of Claims Act of 1940, as amended (31 U.S.C. Sub-Section 3727 et
seq. and 41 U.S.C. Sub-Section 15 et seq.) or has otherwise complied with other
applicable statutes or ordinances;
(i) the goods giving rise to such Receivable have not been
shipped and delivered to and accepted by the Customer or the services giving
rise to such Receivable have not been performed by the applicable Borrower and
accepted by the Customer or the Receivable otherwise does not represent a final
sale;
(j) the Receivables of the Customer exceed a credit limit
determined by Agent, in its sole discretion, to the extent such Receivable
exceeds such limit;
(k) the Receivable is subject to any offset, deduction,
defense, dispute, or counterclaim, the Customer is also a creditor or supplier
of a Borrower or the Receivable is contingent in any respect or for any reason;
(l) the applicable Borrower has made any agreement with any
Customer for any deduction therefrom, except for discounts or allowances made in
the ordinary course of business for prompt payment, all of which discounts or
allowances are reflected in the calculation of the face value of each respective
invoice related thereto;
(m) shipment of the merchandise or the rendition of services
has not been completed;
(n) any return, rejection or repossession of the merchandise
has occurred;
(o) such Receivable is not payable to a Borrower;
(p) such Receivable is not subject to Agent's first priority
perfected security interest or is subject to any other Lien (other than
Permitted Encumbrances), or is evidenced by an invoice or other documentary
evidence not reasonably satisfactory to Agent; or
(q) such Receivable is not otherwise satisfactory to Agent as
determined in good faith by Agent in the exercise of its discretion in a
reasonable manner.
"Environmental Complaint" shall have the meaning set forth in
Section 4.19(d) hereof.
"Environmental Laws" shall mean all federal, state and local
environmental, land use, zoning, health, chemical use, safety and sanitation
laws, statutes, ordinances
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and codes relating to the protection of the environment and/or governing the
use, storage, treatment, generation, transportation, processing, handling,
production or disposal of Hazardous Substances and the rules, regulations,
policies, guidelines, interpretations, decisions, orders and directives of
federal, state and local governmental agencies and authorities with respect
thereto.
"Equipment" shall mean and include as to each Borrower all of
such Borrower's goods (other than Inventory) whether now owned or hereafter
acquired and wherever located including, without limitation, all equipment,
machinery, apparatus, motor vehicles, fittings, furniture, furnishings,
fixtures, parts, accessories and all replacements and substitutions therefor or
accessions thereto.
"Equipment Advance" shall mean a Revolving Advance
specifically requested by the Borrowing Agent and approved by Agent to finance a
portion of the acquisition cost of the equipment purchased by one or more of the
Borrowers in accordance with the terms and conditions set forth in Section
2.2(a).
"Equipment Advance Rate" shall have the meaning set forth in
Section 2.1(a)(y)(iii) hereof.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time and the rules and regulations promulgated
thereunder.
"Eurodollar Rate Loan" shall mean an Advance at any time that
bears interest based on the Eurodollar Rate.
"Eurodollar Rate" shall mean for any Eurodollar Rate Loan for
the then current Interest Period relating thereto the interest rate per annum
determined by PNC by dividing (the resulting quotient rounded upwards, if
necessary, to the nearest 1/100th of 1% per annum) (i) the rate of interest
determined by PNC in accordance with its usual procedures (which determination
shall be conclusive absent manifest error) to be the eurodollar rate two (2)
Business Days prior to the first day of such Interest Period for an amount
comparable to such Eurodollar Rate Loan and having a borrowing date and a
maturity comparable to such Interest Period by (ii) a number equal to 1.00 minus
the Reserve Percentage.
"Event of Default" shall mean the occurrence of any of the
events set forth in Article X hereof.
"Federal Funds Rate" shall mean, for any day, 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
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<PAGE> 15
New York, or if such rate is not so published for any day which is a Business
Day, the average of quotations for such day on such transactions received by PNC
from three Federal funds brokers of recognized standing selected by PNC.
"Fixed Charge Coverage" shall mean and include, with respect
to any fiscal period, the ratio of (a) EBITDA less the amount of capital
expenditures (of the type referred to in Section 7.6) of Borrowers not paid from
borrowed money to (b) all Senior Debt Payments, in each case during such period.
"Formula Amount" shall have the meaning set forth in Section
2.1(a).
"GAAP" shall mean generally accepted accounting principles in
the United States of America in effect from time to time.
"General Intangibles" shall mean and include as to each
Borrower all of such Borrower's general intangibles, whether now owned or
hereafter acquired including, without limitation, all choses in action, causes
of action, corporate or other business records, inventions, designs, patents,
patent applications, equipment formulations, manufacturing procedures, quality
control procedures, trademarks, service marks, trade secrets, goodwill,
copyrights, design rights, registrations, licenses, franchises, customer lists,
tax refunds, tax refund claims, computer programs, all claims under guaranties,
security interests or other security held by or granted to such Borrower to
secure payment of any of the Receivables by a Customer all rights of
indemnification and all other intangible property of every kind and nature
(other than Receivables).
"Governmental Body" shall mean any nation or government, any
state or other political subdivision thereof or any entity exercising the
legislative, judicial, regulatory or administrative functions of or pertaining
to a government.
"Hazardous Discharge" shall have the meaning set forth in
Section 4.19(d) hereof.
"Hazardous Substance" shall mean, without limitation, any
flammable explosives, radon, radioactive materials, asbestos, urea formaldehyde
foam insulation, polychlorinated biphenyls, petroleum and petroleum products,
methane, hazardous materials, Hazardous Wastes, hazardous or Toxic Substances or
related materials as defined in CERCLA, the Clean Air Act, 42 U.S.C. Sections
7402 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. Sections 1251
et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Sections 1801, et
seq.; the Federal Insecticide, Fungicide, Rodenticide Act, 7 U.S.C. Section 136;
the Resource Conservation and Recovery Act of 1976, 42 U.S.C. ss. 6901 et seq.
(including the Hazardous and Solid Waste Amendments of 1984); the Toxic
Substances Control Act, 15 U.S.C. ss. 2601 et seq.; the Federal Occupational
Safety and Health Act of 1970, 29 U.S.C. ss. 3101 of the Omnibus
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Reconciliation Act of 1990); the Oil Pollution Act of 1990, Pub. L. No. 101-380,
104 Stat. 484 (1990); and the state analogues to any of the foregoing; all as
amended from time to time and the regulations promulgated pursuant thereto; any
requirements of the common law which may impose obligations or liabilities as a
result of the presence of or exposure to hazardous substances; or any other
applicable Environmental Law and in the regulations adopted pursuant thereto.
"Hazardous Wastes" shall mean all waste materials subject to
regulation under CERCLA, RCRA or applicable state law, and any other applicable
Federal and state laws now in force or hereafter enacted relating to hazardous
waste disposal.
"Indebtedness" of a Person at a particular date shall mean all
obligations of such Person which in accordance with GAAP would be classified
upon a balance sheet as liabilities (except capital stock and surplus earned or
otherwise) and in any event, without limitation by reason of enumeration, shall
include all indebtedness, debt and other similar monetary obligations of such
Person whether direct or guaranteed, and all premiums, if any, due at the
required prepayment dates of such indebtedness, and all indebtedness secured by
a Lien on assets owned by such Person, whether or not such indebtedness actually
shall have been created, assumed or incurred by such Person (provided that,
unless such obligations shall have been assumed, for purposes of this definition
the amount of such indebtedness at any time shall be deemed to equal the fair
market value of such property or asset at such time). Any indebtedness of such
Person resulting from the acquisition by such Person of any assets subject to
any Lien shall be deemed, for the purposes hereof, to be the equivalent of the
creation, assumption and incurring of the indebtedness secured thereby, whether
or not actually so created, assumed or incurred.
"Interest Period" shall mean the period provided for any
Eurodollar Rate Loan pursuant to Section 2.2(b).
"Inventory" shall mean and include as to each Borrower all of
such Borrower's now owned or hereafter acquired goods, merchandise and other
personal property, wherever located, to be furnished under any contract of
service or held for sale or lease, all raw materials, work in process, finished
goods and materials and supplies of any kind, nature or description which are or
might be used or consumed in such Borrower's business or used in selling or
furnishing such goods, merchandise and other personal property, and all
documents of title or other documents representing them.
"Inventory Advance Rate" shall have the meaning set forth in
Section 2.1(a)(y)(ii) hereof.
"Issuer" shall mean any Person who issues a Letter of Credit
and/or accepts a draft pursuant to the terms hereof.
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"Lender" and "Lenders" shall have the meaning ascribed to such
term in the preamble to this Agreement and shall include each Person which
becomes a transferee, successor or assign of any Lender.
"Letters of Credit" shall have the meaning set forth in
Section 2.8.
"Lien" shall mean any mortgage, deed of trust, pledge,
hypothecation, assignment, security interest, lien (whether statutory or
otherwise), Charge, claim or encumbrance, or preference, priority or other
security agreement or preferential arrangement held or asserted in respect of
any asset of any kind or nature whatsoever including, without limitation, any
conditional sale or other title retention agreement, any lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement under the Uniform Commercial
Code or comparable law of any jurisdiction.
"Material Adverse Effect" shall mean a material adverse effect
on (a) the condition, operations, assets, business or prospects of the
applicable Person or Persons, (b) any Borrower's ability to pay the Obligations
in accordance with the terms thereof, (c) the value of the Collateral, or
Agent's Liens on the Collateral or the priority of any such Lien or (d) the
practical realization of the benefits of Agent's and each Lender's rights and
remedies under this Agreement and the Other Documents.
"Maximum Revolving Advance Amount" shall mean $25,000,000.
"Monthly Advances" shall have the meaning set forth in Section
3.1 hereof.
"Multiemployer Plan" shall mean a "multiemployer plan" as
defined in Sections 3(37) and 4001(a)(3) of ERISA.
"Note" shall mean the Revolving Credit Note.
"Obligations" shall mean and include any and all of each
Borrower's Indebtedness and/or liabilities to Agent or Lenders or any
corporation that directly or indirectly controls or is controlled by or is under
common control with Agent or any Lender of every kind, nature and description,
direct or indirect, secured or unsecured, joint, several, joint and several,
absolute or contingent, due or to become due, now existing or hereafter arising,
contractual or tortious, liquidated or unliquidated, regardless of how such
indebtedness or liabilities arise or by what agreement or instrument they may be
evidenced or whether evidenced by any agreement or instrument, including, but
not limited to, any and all of any Borrower's Indebtedness and/or liabilities
under this Agreement, the Other Documents or under any other agreement between
Agent or Lenders and any Borrower and all obligations of any Borrower to Agent
or Lenders to perform acts or refrain from taking any action.
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"Original Owner" shall mean Avery More or any other Person
controlled by Avery More or any family member of Avery More or any trust for the
benefit of any of the foregoing.
"Other Documents" shall mean the Note, the Perfection
Certificate and any and all other agreements, instruments and documents,
including, without limitation, guaranties, pledges, powers of attorney,
consents, and all other writings heretofore, now or hereafter executed by any
Borrower and/or delivered to Agent or any Lender in respect of the transactions
contemplated by this Agreement.
"Parent" of any Person shall mean a corporation or other
entity owning, directly or indirectly at least 50% of the shares of stock or
other ownership interests having ordinary voting power to elect a majority of
the directors of the Person, or other Persons performing similar functions for
any such Person.
"Participant" shall mean each Person who shall be granted the
right by any Lender to participate in any of the Advances and who shall have
entered into a participation agreement in form and substance satisfactory to
such Lender.
"Payment Office" shall mean initially 1600 Market Street,
Philadelphia, Pennsylvania 19103; thereafter, such other office of Agent, if
any, which it may designate by notice to Borrowing Agent and to each Lender to
be the Payment Office.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Perfection Certificate" shall mean the Perfection Certificate
and the responses thereto provided by Borrowers and delivered to Agent.
"Permitted Encumbrances" shall mean (a) Liens in favor of
Agent for the benefit of Agent and Lenders; (b) Liens for taxes, assessments or
other governmental charges not delinquent or being contested in good faith and
by appropriate proceedings and with respect to which proper reserves have been
taken by Borrowers; provided, that, the Lien shall have no effect on the
priority of the Liens in favor of Agent or the value of the assets in which
Agent has such a Lien and a stay of enforcement of any such Lien shall be in
effect; (c) Liens disclosed in the financial statements referred to in Section
5.5, the existence of which Agent has consented to in writing; (d) deposits or
pledges to secure obligations under worker's compensation, social security or
similar laws, or under unemployment insurance; (e) deposits or pledges to secure
bids, tenders, contracts (other than contracts for the payment of money),
leases, statutory obligations, surety and appeal bonds and other obligations of
like nature arising in the ordinary course of any Borrower's business; (f)
judgment Liens that have been stayed or bonded and mechanics', workers',
materialmen's or other like Liens arising in the ordinary course of any
Borrower's business with respect to obligations which are not due or which are
being contested in good faith by
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the applicable Borrower; (g) Liens placed upon fixed assets hereafter acquired
to secure a portion of the purchase price thereof, provided that (x) any such
lien shall not encumber any other property of the Borrowers and (y) the
aggregate amount of Indebtedness secured by such Liens incurred as a result of
such purchases during any fiscal year shall not exceed the amount provided for
in Section 7.6; (h) other Liens incidental to the conduct of Borrowers' business
or the ownership of its property and assets which were not incurred in
connection with the borrowing of money or the obtaining of advances or credit,
and which do not in the aggregate materially detract from Agent's or Lenders'
rights in and to the Collateral or the value of Borrowers' property or assets or
which do not materially impair the use thereof in the operation of Borrowers'
business; and (i) Liens disclosed on Schedule 1.2.
"Person" shall mean any individual, sole proprietorship,
partnership, corporation, business trust, joint stock company, trust,
unincorporated organization, association, limited liability company,
institution, public benefit corporation, joint venture, entity or government
(whether Federal, state, county, city, municipal or otherwise, including any
instrumentality, division, agency, body or department thereof).
"Plan" shall mean any employee benefit plan within the meaning
of Section 3(3) of ERISA, maintained for employees of Borrowers or any member of
the Controlled Group or any such Plan to which any Borrower or any member of the
Controlled Group is required to contribute on behalf of any of its employees.
"Purchasing Lender" shall have the meaning set forth in
Section 16.3 hereof.
"RCRA" shall mean the Resource Conservation and Recovery Act,
42 U.S.C. ss. 6901 et seq., as same may be amended from time to time.
"Real Property" shall mean all of each Borrower's right, title
and interest in and to the owned and leased premises identified on Schedule 4.19
hereto.
"Receivables" shall mean and include, as to each Borrower, all
of such Borrower's accounts, contract rights, instruments (including those
evidencing indebtedness owed to Borrowers by their Affiliates), documents,
chattel paper, general intangibles relating to accounts, drafts and acceptances,
and all other forms of obligations owing to such Borrower arising out of or in
connection with the sale or lease of Inventory or the rendition of services, all
guarantees and other security therefor, whether secured or unsecured, now
existing or hereafter created, and whether or not specifically sold or assigned
to Agent hereunder.
"Receivables Advance Rate" shall have the meaning set forth in
Section 2.1(a)(y)(i) hereof.
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"Release" shall have the meaning set forth in Section
5.7(c)(i) hereof.
"Reportable Event" shall mean a reportable event described in
Section 4043(b) of ERISA or the regulations promulgated thereunder.
"Required Lenders" shall mean Lenders holding at least
fifty-one percent (51%) of the Advances and, if no Advances are outstanding,
shall mean Lenders holding fifty-one percent (51%) of the Commitment
Percentages.
"Reserve Percentage" shall mean the maximum effective
percentage in effect on any day as prescribed by the Board of Governors of the
Federal Reserve System (or any successor) for determining the reserve
requirements (including, without limitation, supplemental, marginal and
emergency reserve requirements) with respect to euroccurency funding.
"Revolving Advances" shall mean Advances made other than
Letters of Credit.
"Revolving Credit Note" shall mean collectively the promissory
notes referred to in Section 2.1(a) hereof.
"Revolving Interest Rate" shall mean an interest rate per
annum equal to (a) the Base Rate with respect to Base Rate Loans or (b) the sum
of the Eurodollar Rate plus two and one-half (2 1/2%) percent with respect to
Eurodollar Rate Loans.
"Senior Debt Payments" shall mean and include all cash
actually expended by Borrowers to make (a) interest payments on any Advances
hereunder, plus, (b) payments for all fees, commissions and charges set forth
herein and with respect to any Advances, plus (c) capitalized lease payments,
plus (d) payments with respect to any other Indebtedness but only for borrowed
money.
"Settlement Date" shall mean the Closing Date and thereafter
Wednesday of each week unless such day is not a Business Day in which case it
shall be the next succeeding Business Day.
"Subsidiary" shall mean a corporation or other entity of whose
shares of stock or other ownership interests having ordinary voting power (other
than stock or other ownership interests having such power only by reason of the
happening of a contingency) to elect a majority of the directors of such
corporation, or other Persons performing similar functions for such entity, are
owned, directly or indirectly, by such Person.
"Term" shall have the meaning set forth in Section 13.1
hereof.
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"Termination Event" shall mean (i) a Reportable Event with
respect to any Plan or Multiemployer Plan; (ii) the withdrawal of any Borrower
or any member of the Controlled Group from a Plan or Multiemployer Plan during a
plan year in which such entity was a "substantial employer" as defined in
Section 4001(a)(2) of ERISA; (iii) the providing of notice of intent to
terminate a Plan in a distress termination described in Section 4041(c) of
ERISA; (iv) the institution by the PBGC of proceedings to terminate a Plan or
Multiemployer Plan; (v) any event or condition (a) which might constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Plan or Multiemployer Plan, or (b) that may
result in termination of a Multiemployer Plan pursuant to Section 4041A of
ERISA; or (vi) the partial or complete withdrawal within the meaning of Sections
4203 and 4205 of ERISA, of any Borrower or any member of the Controlled Group
from a Multiemployer Plan.
"Toxic Substance" shall mean and include any material present
on the Real Property which has been shown to have significant adverse effect on
human health or which is subject to regulation under the Toxic Substances
Control Act (TSCA), 15 U.S.C. ss. 2601 et seq., applicable state law, or any
other applicable Federal or state laws now in force or hereafter enacted
relating to toxic substances. "Toxic Substance" includes but is not limited to
asbestos, polychlorinated biphenyls (PCBs) and lead-based paints.
"Transferee" shall have the meaning set forth in Section
16.3(b) hereof.
"Undrawn Availability" at a particular date shall mean an
amount equal to (a) the lesser of (i) the Formula Amount or (ii) the Maximum
Revolving Advance Amount, minus (b) the sum of (i) the outstanding amount of
Advances plus (ii) all amounts due and owing to Borrowers' trade creditors which
are outstanding beyond normal trade terms, plus (iii) fees and expenses for
which Borrowers are liable but which have not been paid or charged to Borrowers'
Account.
"Week" shall mean the time period commencing with the opening
of business on a Wednesday and ending on the end of business the following
Tuesday.
1.3. Uniform Commercial Code Terms. All terms used herein and defined
in the Uniform Commercial Code as adopted in the Commonwealth of Pennsylvania
shall have the meaning given therein unless otherwise defined herein.
1.4. Certain Matters of Construction. The terms "herein", "hereof" and
"hereunder" and other words of similar import refer to this Agreement as a whole
and not to any particular section, paragraph or subdivision. Any pronoun used
shall be deemed to cover all genders. Wherever appropriate in the context, terms
used herein in the singular also include the plural and vice versa. All
references to statutes and related regulations shall include any amendments of
same and any successor statutes and regulations. Unless otherwise provided, all
references to any instruments or agreements
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to which Agent is a party, including, without limitation, references to any of
the Other Documents, shall include any and all modifications or amendments
thereto and any and all extensions or renewals thereof.
II. ADVANCES, PAYMENTS.
2.1. (a) Revolving Advances. Subject to the terms and conditions set
forth in this Agreement, each Lender, severally and not jointly, will make
Revolving Advances to Borrowers in aggregate amounts outstanding at any time
equal to such Lender's Commitment Percentage of the lesser of (x) the Maximum
Revolving Advance Amount less the aggregate amount of outstanding Letters of
Credit or (y) an amount equal to the sum of the following as of the date of
determination:
(i) up to 80%, subject to the provisions of
Section 2.1(b) hereof ("Receivables Advance Rate"), of
Eligible Receivables, plus
(ii) up to the lesser of (A) 40%, subject to
the provisions of Section 2.1(b) hereof ("Inventory Advance
Rate"), of the value of the Eligible Inventory (which in no
event shall exceed 85% of the appraised net recovery value of
the Eligible Inventory) or (B) $10,000,000 in the aggregate at
any one time, plus
(iii) up to the lesser of (A) 80%, subject
to the provisions of Section 2.1(b) hereof ("Equipment Advance
Rate"; the Receivables Advance Rate, the Inventory Advance
Rate and the Equipment Advance Rate shall be referred to
collectively, as the "Advance Rates"), of the acquisition cost
of equipment to be purchased by one or more Borrowers with the
proceeds of an Equipment Advance approved by the Agent or (B)
$3,500,000 in the aggregate, provided, however, that the
availability under both (A) and (B) above shall be reduced
quarterly beginning on September 30, 1999 and on each December
31, March 31, June 30 and September 30 thereafter by an amount
equal to 1/20th of the aggregate principal amount of all
Equipment Advances made prior to such date, minus
(iv) the aggregate amount of outstanding
Letters of Credit, minus
(v) such reserves as Agent may reasonably
deem proper and necessary from time to time.
The amount derived from the sum of (x) Sections 2.1(a)(y)(i), (ii) and
(iii) minus (y) Section 2.1 (a)(y)(v) at any time and from time to time shall be
referred to as the "Formula
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Amount". The Revolving Advances of each Lender shall be evidenced by a secured
promissory note ("Revolving Credit Note") substantially in the form attached
hereto as Exhibit 2.1(a).
(b) Discretionary Rights. The Advance Rates may be increased
or decreased by Agent at any time and from time to time in the exercise of its
reasonable discretion based upon such credit and collateral considerations
related to the Eligible Receivables or Eligible Inventory, as the case may be,
as Agent reasonably deems appropriate. Each Borrower consents to any such
increases or decreases and acknowledges that decreasing the Advance Rates or
increasing the reserves may limit or restrict Advances requested by Borrowing
Agent. Agent shall give Borrowing Agent five (5) days prior written notice of
its intention to decrease the Advance Rates with an explanation of the basis for
such reductions.
2.2. Procedure for Revolving Advances Borrowing.
(a) Borrowing Agent on behalf of any Borrower may notify Agent
prior to 11:00 a.m. on a Business Day of a Borrower's request to incur, on that
day, a Revolving Advance hereunder. If such Revolving Advance is to be an
Equipment Advance, such designation shall be made on the request and such
request shall be accompanied by sales invoices for (or other evidence of the
purchase of) the equipment in respect of which the requested Equipment Advance
is to be made, provided, however, that each Equipment Advance shall be in a
minimum amount of $500,000 and shall not exceed 80% of the acquisition cost of
the equipment being purchased from the proceeds of such Equipment Advance as
approved by the Agent, and, provided, further, that the aggregate principal
amount of all Equipment Advances made hereunder shall not exceed $3,500,000.
Should any amount required to be paid as interest hereunder, or as fees or other
charges under this Agreement or any other agreement with Agent or Lenders, or
with respect to any other Obligation, become due, same shall be deemed a request
for a Revolving Advance as of the date such payment is due, in the amount
required to pay in full such interest, fee, charge or Obligation under this
Agreement or any other agreement with Agent or Lenders, and such request shall
be irrevocable.
(b) Notwithstanding the provisions of (a) above, in the event
any Borrower desires to obtain a Eurodollar Rate Loan, Borrowing Agent shall
give Agent at least three (3) Business Days' prior written notice, specifying
(i) the date of the proposed borrowing (which shall be a Business Day), (ii) the
type of borrowing and the amount on the date of such Advance to be borrowed,
which amount shall be an integral multiple of $1,000,000, and (iii) the duration
of the first Interest Period therefor. Interest Periods for Eurodollar Rate
Loans shall be for one, two, or three months; provided, if an Interest Period
would end on a day that is not a Business Day, it shall end on the next
succeeding Business Day unless such day falls in the next succeeding calendar
month in which case the Interest Period shall end on the next preceding Business
Day. No Eurodollar Rate Loan shall be
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made available to any Borrower during the continuance of a Default or an Event
of Default.
(c) Each Interest Period of a Eurodollar Rate Loan shall
commence on the date such Eurodollar Rate Loan is made and shall end on such
date as Borrowing Agent may elect as set forth in (b)(iii) above provided that
the exact length of each Interest Period shall be determined in accordance with
the practice of the interbank market for offshore Dollar deposits and no
Interest Period shall end after the last day of the Term.
Borrowing Agent shall elect the initial Interest Period applicable to a
Eurodollar Rate Loan by its notice of borrowing given to Agent pursuant to
Section 2.2(b) or by its notice of conversion given to Agent pursuant to Section
2.2(d), as the case may be. Borrowing Agent shall elect the duration of each
succeeding Interest Period by giving irrevocable written notice to Agent of such
duration not less than three (3) Business Days prior to the last day of the then
current Interest Period applicable to such Eurodollar Rate Loan. If Agent does
not receive timely notice of the Interest Period elected by Borrowing Agent,
Borrowers shall be deemed to have elected to convert to a Base Rate Loan subject
to Section 2.2(d) hereinbelow.
(d) Provided that no Event of Default shall have occurred and
be continuing, any Borrower may, on the last Business Day of the then current
Interest Period applicable to any outstanding Eurodollar Rate Loan, or on any
Business Day with respect to Base Rate Loans, convert any such loan into a loan
of another type in the same aggregate principal amount provided that any
conversion of a Eurodollar Rate Loan shall be made only on the last Business Day
of the then current Interest Period applicable to such Eurodollar Rate Loan. If
a Borrower desires to convert a loan, Borrowing Agent shall give Agent not less
than three (3) Business Days' prior written notice to convert from a Base Rate
Loan to a Eurodollar Rate Loan or one (1) Business Day's prior written notice to
convert from a Eurodollar Rate Loan to a Base Rate Loan, specifying the date of
such conversion, the loans to be converted and if the conversion is from a Base
Rate Loan to any other type of loan, the duration of the first Interest Period
therefor. After giving effect to each such conversion, there shall not be
outstanding more than six (6) Eurodollar Rate Loans, in the aggregate.
(e) At its option and upon three (3) Business Days' prior
written notice, any Borrower may prepay the Eurodollar Rate Loans in whole at
any time or in part from time to time, without premium or penalty, but with
accrued interest on the principal being prepaid to the date of such repayment.
Such Borrower shall specify the date of prepayment of Advances which are
Eurodollar Rate Loans and the amount of such prepayment. In the event that any
prepayment of a Eurodollar Rate Loan is required or permitted on a date other
than the last Business Day of the then current Interest Period with respect
thereto, such Borrower shall indemnify Agent and Lenders therefor in accordance
with Section 2.2(f) hereof.
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(f) Each Borrower shall indemnify Agent and Lenders and hold
Agent and Lenders harmless from and against any and all losses or expenses that
Agent and Lenders may sustain or incur as a consequence of any prepayment,
conversion of or any default by any Borrower in the payment of the principal of
or interest on any Eurodollar Rate Loan or failure by any Borrower to complete a
borrowing of, a prepayment of or conversion of or to a Eurodollar Rate Loan
after notice thereof has been given, including, but not limited to, any interest
payable by Agent or Lenders to lenders of funds obtained by it in order to make
or maintain its Eurodollar Rate Loans hereunder. A certificate as to any
additional amounts payable pursuant to the foregoing sentence submitted by Agent
or any Lender to Borrowing Agent shall be conclusive absent manifest error.
(g) Notwithstanding any other provision hereof, if any
applicable law, treaty, regulation or directive, or any change therein or in the
interpretation or application thereof, shall make it unlawful for any Lender
(for purposes of this subsection (g), the term "Lender" shall include any Lender
and the office or branch where any Lender or any corporation or bank controlling
such Lender makes or maintains any Eurodollar Rate Loans to make or maintain its
Eurodollar Rate Loans, the obligation of Lenders to make Eurodollar Rate Loans
hereunder shall forthwith be cancelled and Borrowers shall, if any affected
Eurodollar Rate Loans are then outstanding, promptly upon request from Agent,
either pay all such affected Eurodollar Rate Loans or convert such affected
Eurodollar Rate Loans into loans of another type. If any such payment or
conversion of any Eurodollar Rate Loan is made on a day that is not the last day
of the Interest Period applicable to such Eurodollar Rate Loan, Borrowers shall
pay Agent, upon Agent's request, such amount or amounts as may be necessary to
compensate Lenders for any loss or expense sustained or incurred by Lenders in
respect of such Eurodollar Rate Loan as a result of such payment or conversion,
including (but not limited to) any interest or other amounts payable by Lenders
to lenders of funds obtained by Lenders in order to make or maintain such
Eurodollar Rate Loan. A certificate as to any additional amounts payable
pursuant to the foregoing sentence submitted by Lenders to Borrowing Agent shall
be conclusive absent manifest error.
2.3. Disbursement of Advance Proceeds. All Advances shall be disbursed
from whichever office or other place Agent may designate from time to time and,
together with any and all other Obligations of Borrowers to Agent or Lenders,
shall be charged to Borrowers' Account on Agent's books. During the Term,
Borrowers may use the Revolving Advances by borrowing, prepaying and
reborrowing, all in accordance with the terms and conditions hereof. The
proceeds of each Revolving Advance requested by Borrowers or deemed to have been
requested by Borrowers under Section 2.2(a) hereof shall, with respect to
requested Revolving Advances to the extent Lenders make such Revolving Advances,
be made available to the applicable Borrower on the day so requested by way of
credit to such Borrower's operating account at PNC, or such other bank as
Borrowing Agent may designate following notification to Agent, in immediately
available federal funds or other immediately available funds or, with respect to
Revolving Advances deemed to
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have been requested by any Borrower, be disbursed to Agent to be applied to the
outstanding Obligations giving rise to such deemed request.
2.4. Maximum Advances. The aggregate balance of Revolving Advances and
Letters of Credit outstanding at any time shall not exceed the lesser of (a)
Maximum Revolving Advance Amount or (b) the Formula Amount.
2.5. Repayment of Advances.
(a) The Revolving Advances shall be due and payable in full on
the last day of the Term subject to earlier prepayment as herein provided.
(b) Each Borrower recognizes that the amounts evidenced by
checks, notes, drafts or any other items of payment relating to and/or proceeds
of Collateral may not be collectible by Agent on the date received. In
consideration of Agent's agreement to conditionally credit Borrowers' Account as
of the Business Day on which Agent receives those items of payment, each
Borrower agrees that, in computing the charges under this Agreement, all items
of payment shall be deemed applied by Agent on account of the Obligations one
(1) Business Day after the Business Day Agent receives such payments via wire
transfer or electronic depository check. Agent is not, however, required to
credit Borrowers' Account for the amount of any item of payment which is
unsatisfactory to Agent in its reasonable discretion and Agent may charge
Borrowers' Account for the amount of any item of payment which is returned to
Agent unpaid.
(c) All payments of principal, interest and other amounts
payable hereunder, or under any of the related agreements shall be made to Agent
at the Payment Office not later than 1:00 P.M. (New York Time) on the due date
therefor in lawful money of the United States of America in federal funds or
other funds immediately available to Agent. Agent shall have the right to
effectuate payment on any and all Obligations due and owing hereunder by
charging Borrowers' Account or by making Advances as provided in Section 2.2
hereof.
(d) Borrowers shall pay principal, interest, and all other
amounts payable hereunder, or under any related agreement, without any deduction
whatsoever, including, but not limited to, any deduction for any setoff or
counterclaim.
2.6. Repayment of Excess Advances. The aggregate balance of Advances
outstanding at any time in excess of the maximum amount of Advances permitted
hereunder shall be immediately due and payable without the necessity of any
demand, at the Payment Office, whether or not a Default or Event of Default has
occurred.
2.7. Statement of Account. Agent shall maintain, in accordance with its
customary procedures, a loan account ("Borrowers' Account") in the name of
Borrowers
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in which shall be recorded the date and amount of each Advance made by Agent and
the date and amount of each payment in respect thereof; provided, however, the
failure by Agent to record the date and amount of any Advance shall not
adversely affect Agent or any Lender. Each month, Agent shall send to Borrowing
Agent a statement showing the accounting for the Advances made, payments made or
credited in respect thereof, and other transactions between Agent and Borrowers,
during such month. The monthly statements shall be deemed correct and binding
upon Borrowers in the absence of manifest error and shall constitute an account
stated between Lenders and Borrowers unless Agent receives a written statement
of Borrowers' specific exceptions thereto within thirty (30) days after such
statement is received by Borrowing Agent. The records of Agent with respect to
the loan account shall be conclusive evidence absent manifest error of the
amounts of Advances and other charges thereto and of payments applicable
thereto.
2.8. Letters of Credit. Subject to the terms and conditions hereof,
Agent shall issue or cause the issuance of Letters of Credit ("Letters of
Credit") on behalf of any Borrower; provided, however, that Agent will not be
required to issue or cause to be issued any Letters of Credit to the extent that
the face amount of such Letters of Credit would then cause the sum of (i) the
outstanding Revolving Advances plus (ii) outstanding Letters of Credit to exceed
the lesser of (x) the Maximum Revolving Advance Amount or (y) the Formula
Amount. The maximum amount of outstanding Letters of Credit shall not exceed
$3,000,000 in the aggregate at any time. All disbursements or payments related
to Letters of Credit shall be deemed to be Revolving Advances and shall bear
interest at the Revolving Interest Rate for Base Rate Loans; Letters of Credit
that have not been drawn upon shall not bear interest.
2.9. Issuance of Letters of Credit
(a) Borrowing Agent, on behalf of Borrowers, may request Agent
to issue or cause the issuance of a Letter of Credit by delivering to Agent at
the Payment Office, Agent's form of Letter of Credit Application (the "Letter of
Credit Application") completed to the satisfaction of Agent; and, such other
certificates, documents and other papers and information as Agent may reasonably
request. Borrowing Agent, on behalf of Borrowers, also has the right to give
instructions and make agreements with respect to any application, any applicable
letter of credit and security agreement, any applicable letter of credit
reimbursement agreement and/or any other applicable agreement, any letter of
credit and the disposition of documents, disposition of any unutilized funds,
and to agree with Agent upon any amendment, extension or renewal of any Letter
of Credit.
(b) Each Letter of Credit shall, among other things, (i)
provide for the payment of sight drafts or acceptances of usance drafts when
presented for honor thereunder in accordance with the terms thereof and when
accompanied by the documents described therein and (ii) have an expiry date not
later than six (6) months after such Letter of Credit's date of issuance and in
no event later than the last day of the Term. Each Letter
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of Credit shall be subject to the International Standby Practices 1998 (ISP98)
published by the Institute of International Banking Law & Practice Inc. and any
amendments or revision thereof adhered to by the Issuer and, to the extent not
inconsistent therewith, the laws of the Commonwealth of Pennsylvania.
(c) Agent shall use its reasonable efforts to notify Lenders
of the request by Borrowing Agent for a Letter of Credit hereunder.
2.10. Requirements For Issuance of Letters of Credit
(a) In connection with the issuance of any Letter of Credit,
Borrowers shall indemnify, save and hold Agent, each Lender and each Issuer
harmless from any loss, cost, expense or liability, including, without
limitation, payments made by Agent, any Lender or any Issuer and expenses and
reasonable attorneys' fees incurred by Agent, any Lender or Issuer arising out
of, or in connection with, any Letter of Credit to be issued or created for any
Borrower. Borrowers shall be bound by Agent's or any Issuer's regulations and
good faith interpretations of any Letter of Credit issued or created for
Borrowers' Account, although this interpretation may be different from its own;
and, neither Agent, nor any Lender, nor any Issuer nor any of their
correspondents shall be liable for any error, negligence, or mistakes, whether
of omission or commission, in following Borrowing Agent's or any Borrower's
instructions or those contained in any Letter of Credit or of any modifications,
amendments or supplements thereto or in issuing or paying any Letter of Credit,
except for Agent's, any Lender's, any Issuer's or such correspondents' gross
negligence or willful misconduct.
(b) Borrowing Agent shall authorize and direct any Issuer to
name the applicable Borrower as the "Applicant" or "Account Party" of each
Letter of Credit. If Agent is not the Issuer of any Letter of Credit, Borrower
shall authorize and direct the Issuer to deliver to Agent all instruments,
documents, and other writings and property received by the Issuer pursuant to
the Letter of Credit and to accept and rely upon Agent's instructions and
agreements with respect to all matters arising in connection with the Letter of
Credit, or the application therefor.
(c) In connection with all Letters of Credit issued or caused
to be issued by Agent under this Agreement, each Borrower hereby appoints Agent,
or its designee, as its attorney, with full power and authority (i) to sign
and/or endorse such Borrower's name upon any warehouse or other receipts, letter
of credit applications and acceptances; (ii) to sign such Borrower's name on
bills of lading; (iii) to clear Inventory through the United States of America
Customs Department ("Customs") in the name of such Borrower or Agent or Agent's
designee, and to sign and deliver to Customs officials powers of attorney in the
name of such Borrower for such purpose; and (iv) to complete in such Borrower's
name or Agent's, or in the name of Agent's designee, any order, sale or
transaction, obtain
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the necessary documents in connection therewith, and collect the proceeds
thereof. Neither Agent nor its attorneys will be liable for any acts or
omissions nor for any error of judgment or mistakes of fact or law, except for
Agent's or its attorney's gross negligence or willful misconduct. This power,
being coupled with an interest, is irrevocable as long as any Letters of Credit
remain outstanding.
(d) Each Lender shall to the extent of the percentage amount
equal to the product of such Lender's Commitment Percentage times the aggregate
amount of all unreimbursed reimbursement obligations arising from disbursements
made or obligations incurred with respect to the Letters of Credit be deemed to
have irrevocably purchased an undivided participation in each such unreimbursed
reimbursement obligation. In the event that at the time a disbursement is made
the unpaid balance of Revolving Advances exceeds or would exceed, with the
making of such disbursement, the lesser of the Maximum Revolving Advance Amount
or the Formula Amount, and such disbursement is not reimbursed by Borrowers
within two (2) Business Days, Agent shall promptly notify each Lender and upon
Agent's demand each Lender shall pay to Agent such Lender's proportionate share
of such unreimbursed disbursement together with such Lender's proportionate
share of Agent's unreimbursed costs and expenses relating to such unreimbursed
disbursement. Upon receipt by Agent of a repayment from any Borrower of any
amount disbursed by Agent for which Agent had already been reimbursed by
Lenders, Agent shall deliver to each Lender that Lender's pro rata share of such
repayment. Each Lender's participation commitment shall continue until the last
to occur of any of the following events: (A) Agent ceases to be obligated to
issue or cause to be issued Letters of Credit hereunder; (B) no Letter of Credit
issued hereunder remains outstanding and uncancelled or (C) all Persons (other
than the applicable Borrower) have been fully reimbursed for all payments made
under or relating to Letters of Credit.
2.11. Additional Payments. Any sums expended by Agent or any Lender due
to any Borrower's failure to perform or comply with its obligations under this
Agreement or any Other Document including, without limitation, any Borrower's
obligations under Sections 4.2, 4.4, 4.12, 4.13, 4.14 and 6.1 hereof, may be
charged to Borrowers' Account as a Revolving Advance and added to the
Obligations.
2.12. Manner of Borrowing and Payment.
(a) Each borrowing of Revolving Advances shall be advanced
according to the applicable Commitment Percentages of Lenders.
(b) Each payment (including each prepayment) by Borrowers on
account of the principal of and interest on the Revolving Advances, shall be
applied to the Revolving Advances pro rata according to the applicable
Commitment Percentages of Lenders. Except as expressly provided herein, all
payments (including prepayments) to be made by any Borrower on account of
principal, interest and fees shall be made without
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set off or counterclaim and shall be made to Agent on behalf of the Lenders to
the Payment Office, in each case on or prior to 1:00 P.M., New York time, in
Dollars and in immediately available funds.
(c) (i) Notwithstanding anything to the contrary contained in
Sections 2.12(a) and (b) hereof, commencing with the first Business Day
following the Closing Date, each borrowing of Revolving Advances shall be
advanced by Agent and each payment by any Borrower on account of Revolving
Advances shall be applied first to those Revolving Advances advanced by Agent.
On or before 1:00 P.M., New York time, on each Settlement Date commencing with
the first Settlement Date following the Closing Date, Agent and Lenders shall
make certain payments as follows: (I) if the aggregate amount of new Revolving
Advances made by Agent during the preceding Week (if any) exceeds the aggregate
amount of repayments applied to outstanding Revolving Advances during such
preceding Week, then each Lender shall provide Agent with funds in an amount
equal to its applicable Commitment Percentage of the difference between (w) such
Revolving Advances and (x) such repayments and (II) if the aggregate amount of
repayments applied to outstanding Revolving Advances during such Week exceeds
the aggregate amount of new Revolving Advances made during such Week, then Agent
shall provide each Lender with funds in an amount equal to its applicable
Commitment Percentage of the difference between (y) such repayments and (z) such
Revolving Advances.
(ii) Each Lender shall be entitled to earn interest
at the applicable Revolving Interest Rate on outstanding Advances which it has
funded.
(iii) Promptly following each Settlement Date, Agent
shall submit to each Lender a certificate with respect to payments received and
Advances made during the Week immediately preceding such Settlement Date. Such
certificate of Agent shall be conclusive in the absence of manifest error.
(d) If any Lender or Participant (a "benefitted Lender") shall
at any time receive any payment of all or part of its Advances, or interest
thereon, or receive any Collateral in respect thereof (whether voluntarily or
involuntarily or by set-off) in a greater proportion than any such payment to
and Collateral received by any other Lender, if any, in respect of such other
Lender's Advances, or interest thereon, and such greater proportionate payment
or receipt of Collateral is not expressly permitted hereunder, such benefitted
Lender shall purchase for cash from the other Lenders a participation in such
portion of each such other Lender's Advances, or shall provide such other Lender
with the benefits of any such Collateral, or the proceeds thereof, as shall be
necessary to cause such benefitted Lender to share the excess payment or
benefits of such Collateral or proceeds ratably with each of Lenders; provided,
however, that if all or any portion of such excess payment or benefits is
thereafter recovered from such benefitted Lender, such purchase shall be
rescinded, and the purchase price and benefits returned, to the extent of such
recovery, but without interest. Each Lender so purchasing a portion of another
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Lender's Advances may exercise all rights of payment (including, without
limitation, rights of set-off) with respect to such portion as fully as if such
Lender were the direct holder of such portion.
(e) Unless Agent shall have been notified by telephone,
confirmed in writing, by any Lender that such Lender will not make the amount
which would constitute its applicable Commitment Percentage of the Advances
available to Agent, Agent may (but shall not be obligated to) assume that such
Lender shall make such amount available to Agent on the next Settlement Date
and, in reliance upon such assumption, make available to Borrowers a
corresponding amount. Agent will promptly notify Borrowers of its receipt of any
such notice from a Lender. If such amount is made available to Agent on a date
after such next Settlement Date, such Lender shall pay to Agent on demand an
amount equal to the product of (i) the daily average Federal Funds Rate
(computed on the basis of a year of 360 days) during such period as quoted by
Agent, times (ii) such amount, times (iii) the number of days from and including
such Settlement Date to the date on which such amount becomes immediately
available to Agent. A certificate of Agent submitted to any Lender with respect
to any amounts owing under this paragraph (e) shall be conclusive, in the
absence of manifest error. If such amount is not in fact made available to Agent
by such Lender within three (3) Business Days after such Settlement Date, Agent
shall be entitled to recover such an amount, with interest thereon at the rate
per annum then applicable to such Revolving Advances hereunder, on demand from
Borrowers; provided, however, that Agent's right to such recovery shall not
prejudice or otherwise adversely affect Borrowers' rights (if any) against such
Lender.
2.13. Use of Proceeds. Borrowers shall apply the proceeds of Advances
to (i) repay existing indebtedness owed to NationsBank, N.A., (ii) pay fees and
expenses relating to this transaction, and (iii) to provide for their working
capital needs.
2.14. Defaulting Lender.
(a) Notwithstanding anything to the contrary contained herein,
in the event any Lender (x) has refused (which refusal constitutes a breach by
such Lender of its obligations under this Agreement) to make available its
portion of any Advance or (y) notifies either Agent or Borrowing Agent that it
does not intend to make available its portion of any Advance (if the actual
refusal would constitute a breach by such Lender of its obligations under this
Agreement) (each, a "Lender Default"), all rights and obligations hereunder of
such Lender (a "Defaulting Lender") as to which a Lender Default is in effect
and of the other parties hereto shall be modified to the extent of the express
provisions of this Section 2.14 while such Lender Default remains in effect.
(b) Advances shall be incurred pro rata from Lenders (the
"Non-Defaulting Lenders") which are not Defaulting Lenders based on their
respective Commitment Percentages, and no Commitment Percentage of any Lender or
any pro rata share of any
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Advances required to be advanced by any Lender shall be increased as a result of
such Lender Default. Amounts received in respect of principal of any type of
Advances shall be applied to reduce the applicable Advances of each Lender pro
rata based on the aggregate of the outstanding Advances of that type of all
Lenders at the time of such application; provided, that, such amount shall not
be applied to any Advances of a Defaulting Lender at any time when, and to the
extent that, the aggregate amount of Advances of any Non-Defaulting Lender
exceeds such Non-Defaulting Lender's Commitment Percentage of all Advances then
outstanding.
(c) A Defaulting Lender shall not be entitled to give
instructions to Agent or to approve, disapprove, consent to or vote on any
matters relating to this Agreement and the Other Documents. All amendments,
waivers and other modifications of this Agreement and the Other Documents may be
made without regard to a Defaulting Lender and, for purposes of the definition
of "Required Lenders", a Defaulting Lender shall be deemed not to be a Lender
and not to have Advances outstanding.
(d) Other than as expressly set forth in this Section 2.14,
the rights and obligations of a Defaulting Lender (including the obligation to
indemnify Agent) and the other parties hereto shall remain unchanged. Nothing in
this Section 2.14 shall be deemed to release any Defaulting Lender from its
obligations under this Agreement and the Other Documents, shall alter such
obligations, shall operate as a waiver of any default by such Defaulting Lender
hereunder, or shall prejudice any rights which any Borrower, Agent or any Lender
may have against any Defaulting Lender as a result of any default by such
Defaulting Lender hereunder.
(e) In the event a Defaulting Lender retroactively cures to
the satisfaction of Agent the breach which caused a Lender to become a
Defaulting Lender, such Defaulting Lender shall no longer be a Defaulting Lender
and shall be treated as a Lender under this Agreement.
III. INTEREST AND FEES.
3.1. Interest. Interest on Advances shall be payable in arrears on the
last day of each month with respect to Base Rate Loans and, with respect to
Eurodollar Rate Loans, at the end of each Interest Period or, for Eurodollar
Rate Loans with an Interest Period in excess of three months, at the earlier of
(a) each three months on the anniversary date of the commencement of such
Eurodollar Rate Loan or (b) the end of the Interest Period. Interest charges
shall be computed on the actual principal amount of Advances outstanding during
the month (the "Monthly Advances") at a rate per annum equal to the applicable
Revolving Interest Rate. Whenever, subsequent to the date of this Agreement, the
Base Rate is increased or decreased, the Revolving Interest Rate for Base Rate
Loans shall be similarly changed without notice or demand of any kind by an
amount equal to the
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amount of such change in the Base Rate during the time such change or changes
remain in effect. The Eurodollar Rate shall be adjusted with respect to
Eurodollar Rate Loans without notice or demand of any kind on the effective date
of any change in the Reserve Percentage as of such effective date. Upon and
after the occurrence of an Event of Default, and during the continuation
thereof, (i) the Obligations other than Eurodollar Rate Loans shall bear
interest at the Revolving Interest Rate for Base Rate Loans plus two (2%)
percent per annum and (ii) Eurodollar Rate Loans shall bear interest at the
Revolving Interest Rate for Eurodollar Rate Loans plus two (2%) percent per
annum (as applicable, the "Default Rate").
3.2. Letter of Credit Fees.
(a) Borrowers shall pay (x) to Agent, for the benefit of
Lenders, fees for each Letter of Credit for the period from and excluding the
date of issuance of same to and including the date of expiration or termination,
equal to the average daily face amount of each outstanding Letter of Credit
multiplied by one and one-half percent (1 1/2%) per annum, such fees to be
calculated on the basis of a 360-day year for the actual number of days elapsed
and to be payable monthly in arrears on the first day of each month and on the
last day of the Term and (y) to the Issuer, any and all fees and expenses as
agreed upon by the Issuer and the Borrowing Agent in connection with any Letter
of Credit, including, without limitation, in connection with the opening,
amendment or renewal of any such Letter of Credit and any acceptances created
thereunder and shall reimburse Agent for any and all fees and expenses, if any,
paid by Agent to the Issuer (all of the foregoing fees, the "Letter of Credit
and Acceptance Fees"). All such charges shall be deemed earned in full on the
date when the same are due and payable hereunder and shall not be subject to
rebate or proration upon the termination of this Agreement for any reason. Any
such charge in effect at the time of a particular transaction shall be the
charge for that transaction, notwithstanding any subsequent change in the
Issuer's prevailing charges for that type of transaction. All Letter of Credit
Fees and Acceptance Fees payable hereunder shall be deemed earned in full on the
date when the same are due and payable hereunder and shall not be subject to
rebate or proration upon the termination of this Agreement for any reason.
On demand, Borrowers will cause cash to be deposited and
maintained in an account with Agent, as cash collateral, in an amount equal to
one hundred and five percent (105%) of the outstanding Letters of Credit, and
each Borrower hereby irrevocably authorizes Agent, in its discretion, on such
Borrower's behalf and in such Borrower's name, to open such an account and to
make and maintain deposits therein, or in an account opened by such Borrower, in
the amounts required to be made by such Borrower, out of the proceeds of
Receivables or other Collateral or out of any other funds of such Borrower
coming into any Lender's possession at any time. Agent will invest such cash
collateral (less applicable reserves) in such short-term money-market items as
to which Agent and such Borrower mutually agree and the net return on such
investments shall be credited to
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such account and constitute additional cash collateral. No Borrower may withdraw
amounts credited to any such account except upon payment and performance in full
of all Obligations and termination of this Agreement.
3.3. (a) Closing Fee. Upon the execution of this Agreement, Borrowers
shall pay to Agent for the ratable benefit of Lenders a closing fee of $135,000
less that portion of the commitment fee of $90,000 heretofore paid by Borrowers
to Agent remaining after application of such fee to out of pocket expenses.
(b) Facility Fee. If, for any quarter during the Term, the
average daily unpaid balance of the Advances for each day of such quarter does
not equal the Maximum Revolving Advance Amount, then Borrowers shall pay to
Agent for the ratable benefit of Lenders a fee at a rate equal to one-quarter of
one percent (.25%) per annum on the amount by which the Maximum Revolving
Advance Amount exceeds such average daily unpaid balance. Such fee shall be
payable to Agent in arrears on the last day of each quarter.
3.4. (a) Collateral Management Fee. Borrowers shall pay Agent a
collateral management fee equal to $1,000 per month commencing on the first day
of the month following the Closing Date and on the first day of each month
thereafter during the Term. The collateral management fee shall be deemed earned
in full on the date when same is due and payable hereunder and shall not be
subject to rebate or proration upon termination of this Agreement for any
reason.
(b) Collateral Monitoring Fee. Borrowers shall pay to Agent on
the first day of each month following any month in which Agent performs any
collateral monitoring - namely any field examination, collateral analysis or
other business analysis, the need for which is to be reasonably determined by
Agent and which monitoring is undertaken by Agent or for Agent's benefit - a
collateral monitoring fee in an amount equal to $675 per day for each person
employed to perform such monitoring plus all costs and disbursements incurred by
Agent in the performance of such examination or analysis. Prior to the
occurrence of a Default or Event of Default, Borrowers shall not be liable to
pay the cost of more than four such collateral audits in any twelve month
period.
3.5. Computation of Interest and Fees. Interest and fees hereunder
shall be computed on the basis of a year of 360 days and for the actual number
of days elapsed. If any payment to be made hereunder becomes due and payable on
a day other than a Business Day, the due date thereof shall be extended to the
next succeeding Business Day and interest thereon shall be payable at the
Revolving Interest Rate for Base Rate Loans during such extension.
3.6. Maximum Charges. In no event whatsoever shall interest and other
charges charged hereunder exceed the highest rate permissible under law. In the
event interest
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and other charges as computed hereunder would otherwise exceed the highest rate
permitted under law, such excess amount shall be first applied to any unpaid
principal balance owed by Borrowers, and if the then remaining excess amount is
greater than the previously unpaid principal balance, Lenders shall promptly
refund such excess amount to Borrowers and the provisions hereof shall be deemed
amended to provide for such permissible rate.
3.7. Increased Costs. In the event that any applicable law, treaty or
governmental regulation, or any change therein or in the interpretation or
application thereof, or compliance by any Lender (for purposes of this Section
3.7, the term "Lender" shall include Agent or any Lender and any corporation or
bank controlling Agent or any Lender) and the office or branch where Agent or
any Lender (as so defined) makes or maintains any Eurodollar Rate Loans with any
request or directive (whether or not having the force of law) from any central
bank or other financial, monetary or other authority, shall:
(a) subject Agent or any Lender to any tax of any kind
whatsoever with respect to this Agreement or any Other Document or change the
basis of taxation of payments to Agent or any Lender of principal, fees,
interest or any other amount payable hereunder or under any Other Documents
(except for changes in the rate of tax on the overall net income of Agent or any
Lender by the jurisdiction in which it maintains its principal office);
(b) impose, modify or hold applicable any reserve, special
deposit, assessment or similar requirement against assets held by, or deposits
in or for the account of, advances or loans by, or other credit extended by, any
office of Agent or any Lender, including (without limitation) pursuant to
Regulation D of the Board of Governors of the Federal Reserve System; or
(c) impose on Agent or any Lender or the London interbank
Eurodollar market any other condition with respect to this Agreement or any
Other Document;
and the result of any of the foregoing is to increase the cost to Agent or any
Lender of making, renewing or maintaining its Advances hereunder by an amount
that Agent or such Lender deems to be material or to reduce the amount of any
payment (whether of principal, interest or otherwise) in respect of any of the
Advances by an amount that Agent or such Lender deems to be material, then, in
any case Borrowers shall promptly pay Agent or such Lender, upon its demand,
such additional amount as will compensate Agent or such Lender for such
additional cost or such reduction, as the case may be, provided that the
foregoing shall not apply to increased costs which are reflected in the
Eurodollar Rate, as the case may be. Agent or such Lender shall certify the
amount of such additional cost or reduced amount to Borrowers, and such
certification shall be conclusive absent manifest error. Each Lender agrees
that, as promptly as practicable after it becomes aware of any circumstances
referred to in this Section 3.7 which would result in any increased cost to
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such Lender, such Lender shall (i) to the extent not inconsistent with such
Lender's internal policies of general application, use reasonable commercial
efforts to minimize costs and expenses incurred by it and payable to it by
Borrowers pursuant to this Section 3.7, and (ii) notify Agent and Borrowing
Agent thereof; provided that the failure to give such prompt notice shall not
result in any liability to such Lender and shall not affect the rights of such
Lender, or the obligations of Borrower hereunder; provided further that Borrower
shall not be obligated to pay any such additional amounts to such Lender for any
periods which are more than one (1) year prior to the date of such notice unless
and to the extent any such additional amounts arise as a result of the
retroactive application of such change in law, treaty or regulation.
3.8. Basis For Determining Interest Rate Inadequate or Unfair. In the
event that Agent or any Lender shall have determined that:
(a) reasonable means do not exist for ascertaining the
Eurodollar Rate applicable pursuant to Section 2.2 hereof for any Interest
Period; or
(b) Dollar deposits in the relevant amount and for the
relevant maturity are not available in the London interbank Eurodollar market,
with respect to an outstanding Eurodollar Rate Loan, a proposed Eurodollar Rate
Loan, or a proposed conversion of a Base Rate Loan into a Eurodollar Rate Loan,
then Agent shall give Borrowing Agent prompt written, telephonic or telegraphic
notice of such determination. If such notice is given, (i) any such requested
Eurodollar Rate Loan shall be made as a Base Rate Loan, unless Borrowing Agent
shall notify Agent no later than 10:00 a.m. (New York City time) two (2)
Business Days prior to the date of such proposed borrowing, that its request for
such borrowing shall be cancelled or made as an unaffected type of Eurodollar
Rate Loan, (ii) any Base Rate Loan or Eurodollar Rate Loan which was to have
been converted to an affected type of Eurodollar Rate Loan shall be continued as
or converted into a Base Rate Loan, or, if Borrowing Agent shall notify Agent,
no later than 10:00 a.m. (New York City time) two (2) Business Days prior to the
proposed conversion, shall be maintained as an unaffected type of Eurodollar
Rate Loan, and (iii) any outstanding affected Eurodollar Rate Loans shall be
converted into a Base Rate Loan, or, if Borrowing Agent shall notify Agent, no
later than 10:00 a.m. (New York City time) two (2) Business Days prior to the
last Business Day of the then current Interest Period applicable to such
affected Eurodollar Rate Loan, shall be converted into an unaffected type of
Eurodollar Rate Loan, on the last Business Day of the then current Interest
Period for such affected Eurodollar Rate Loans. Until such notice has been
withdrawn, Lenders shall have no obligation to make an affected type of
Eurodollar Rate Loan or maintain outstanding affected Eurodollar Rate Loans and
no Borrower shall have the right to convert a Base Rate Loan or an unaffected
type of Eurodollar Rate Loan into an affected type of Eurodollar Rate Loan.
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3.9. Capital Adequacy.
(a) In the event that Agent or any Lender shall have
determined that any applicable law, rule, regulation or guideline regarding
capital adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by Agent or any Lender (for purposes of this Section 3.9, the term "Lender"
shall include Agent or any Lender and any corporation or bank controlling Agent
or any Lender) and the office or branch where Agent or any Lender (as so
defined) makes or maintains any Eurodollar Rate Loans 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 Agent or any Lender's capital as a
consequence of its obligations hereunder to a level below that which Agent or
such Lender could have achieved but for such adoption, change or compliance
(taking into consideration Agent's and each Lender's policies with respect to
capital adequacy) by an amount deemed by Agent or any Lender to be material,
then, from time to time, Borrowers shall pay upon demand to Agent or such Lender
such additional amount or amounts as will compensate Agent or such Lender for
such reduction. In determining such amount or amounts, Agent or such Lender may
use any reasonable averaging or attribution methods. The protection of this
Section 3.9 shall be available to Agent and each Lender regardless of any
possible contention of invalidity or inapplicability with respect to the
applicable law, regulation or condition.
(b) A certificate of Agent or such Lender setting forth such
amount or amounts as shall be necessary to compensate Agent or such Lender with
respect to Section 3.9(a) hereof when delivered to Borrowers shall be conclusive
absent manifest error.
IV. COLLATERAL; GENERAL TERMS.
4.1. Security Interest in the Collateral. To secure the prompt payment
and performance to Agent and each Lender of the Obligations, each Borrower
hereby assigns, pledges and grants to Agent for the ratable benefit of each
Lender a continuing security interest in and to all of its Collateral, whether
now owned or existing or hereafter acquired or arising and wheresoever located.
Each Borrower shall mark its books and records as may be necessary or
appropriate to evidence, protect and perfect Agent's security interest and shall
cause its financial statements to reflect such security interest.
4.2. Perfection of Security Interest. Each Borrower shall take all
action that may be necessary or desirable, or that Agent may reasonably request,
so as at all times to maintain the validity, perfection, enforceability and
priority of Agent's security interest in the Collateral or to enable Agent to
protect, exercise or enforce its rights hereunder and in the
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Collateral, including, but not limited to, (i) immediately discharging all Liens
other than Permitted Encumbrances, (ii) obtaining landlords' or mortgagees' lien
waivers, (iii) delivering to Agent, endorsed or accompanied by such instruments
of assignment as Agent may specify, and stamping or marking, in such manner as
Agent may specify, any and all chattel paper, instruments, letters of credits
and advices thereof and documents evidencing or forming a part of the
Collateral, (iv) entering into warehousing, lockbox and other custodial
arrangements reasonably satisfactory to Agent, and (v) executing and delivering
financing statements, instruments of pledge, mortgages, notices and assignments,
in each case in form and substance satisfactory to Agent, relating to the
creation, validity, perfection, maintenance or continuation of Agent's security
interest under the Uniform Commercial Code or other applicable law. Agent is
hereby authorized to file financing statements signed by Agent instead of
Borrower in accordance with Section 9-402(2) of Uniform Commercial Code as
adopted in the Commonwealth of Pennsylvania. All charges, expenses and fees
Agent may incur in doing any of the foregoing, and any local taxes relating
thereto, shall be charged to Borrowers' Account as a Revolving Advance of a Base
Rate Loan and added to the Obligations, or, at Agent's option, shall be paid to
Agent for the ratable benefit of Lenders immediately upon demand.
4.3. Disposition of Collateral. Each Borrower will use its best efforts
to safeguard and protect all Collateral for Agent's general account and make no
disposition thereof whether by sale, lease or otherwise except (a) the sale of
Inventory in the ordinary course of business and (b) the disposition or transfer
of obsolete and worn-out Equipment in the ordinary course of business during any
fiscal year having an aggregate fair market value of not more than $250,000.
Notwithstanding the foregoing, nothing in this Section 4.3 shall prohibit any
Borrower from selling any of its assets as permitted by Section 7.1 hereof.
4.4. Preservation of Collateral. Following the occurrence of an Event
of Default in addition to the rights and remedies set forth in Section 11.1
hereof, Agent: (a) may at any time take such steps as Agent deems necessary to
protect Agent's interest in and to preserve the Collateral, including the hiring
of such security guards or the placing of other security protection measures as
Agent may deem appropriate; (b) may employ and maintain at any of any Borrower's
premises a custodian who shall have full authority to do all acts necessary to
protect Agent's interests in the Collateral; (c) may lease warehouse facilities
to which Agent may move all or part of the Collateral; (d) may use any
Borrower's owned or leased lifts, hoists, trucks and other facilities or
equipment for handling or removing the Collateral; and (e) shall have, and is
hereby granted, a right of ingress and egress to the places where the Collateral
is located, and may proceed over and through any of Borrower's owned or leased
property. Each Borrower shall cooperate fully with all of Agent's efforts to
preserve the Collateral and will take such actions to preserve the Collateral as
Agent may reasonably direct. All of Agent's expenses of preserving the
Collateral, including any expenses relating to the bonding of a custodian, shall
be charged to Borrowers' Account as a Revolving Advance of a Base Rate Loan and
added to the Obligations.
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4.5. Ownership of Collateral. With respect to the Collateral, at the
time the Collateral becomes subject to Agent's security interest: (a) each
Borrower shall be the sole owner of and fully authorized and able to sell,
transfer, pledge and/or grant a first priority security interest in each and
every item of the its respective Collateral to Agent; and, except for Permitted
Encumbrances the Collateral shall be free and clear of all Liens and
encumbrances whatsoever; (b) each document and agreement executed by each
Borrower or delivered to Agent or any Lender in connection with this Agreement
shall be true and correct in all respects; (c) all signatures and endorsements
of each Borrower that appear on such documents and agreements shall be genuine
and each Borrower shall have full capacity to execute same; and (d) each
Borrower's Equipment and Inventory shall be located as set forth on Schedule 4.5
and shall not be removed from such location(s) without the prior written consent
of Agent except with respect to the sale of Inventory in the ordinary course of
business and Equipment to the extent permitted in Sections 4.3 and 7.1 hereof.
4.6. Defense of Agent's and Lenders' Interests. Until (a) payment and
performance in full of all of the Obligations and (b) termination of this
Agreement, Agent's interests in the Collateral shall continue in full force and
effect. During such period no Borrower shall, without Agent's prior written
consent, pledge, sell (except Inventory in the ordinary course of business and
Equipment to the extent permitted in Sections 4.3 and 7.1 hereof), assign,
transfer, create or suffer to exist a Lien upon or encumber or allow or suffer
to be encumbered in any way except for Permitted Encumbrances, any part of the
Collateral. Each Borrower shall defend Agent's interests in the Collateral
against any and all Persons whatsoever. At any time following demand by Agent
for payment of all Obligations, Agent shall have the right to take possession of
the indicia of the Collateral and the Collateral in whatever physical form
contained, including without limitation: labels, stationery, documents,
instruments and advertising materials. If Agent exercises this right to take
possession of the Collateral, Borrowers shall, upon demand, assemble it in the
best manner possible and make it available to Agent at a place reasonably
convenient to Agent. In addition, with respect to all Collateral, Agent and
Lenders shall be entitled to all of the rights and remedies set forth herein and
further provided by the Uniform Commercial Code or other applicable law.
Following the occurrence of a Default or Event of Default, each Borrower shall,
and Agent may, at its option, instruct all suppliers, carriers, forwarders,
warehouses or others receiving or holding cash, checks, Inventory, documents or
instruments in which Agent holds a security interest to deliver same to Agent
and/or subject to Agent's order and if they shall come into any Borrower's
possession, they, and each of them, shall be held by such Borrower in trust as
Agent's trustee, and such Borrower will immediately deliver them to Agent in
their original form together with any necessary endorsement.
4.7. Books and Records. Each Borrower shall (a) keep proper books of
record and account in which full, true and correct entries will be made of all
dealings or transactions of or in relation to its business and affairs; (b) set
up on its books accruals with
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respect to all taxes, assessments, charges, levies and claims; and (c) on a
reasonably current basis set up on its books, from its earnings, allowances
against doubtful Receivables, advances and investments and all other proper
accruals (including without limitation by reason of enumeration, accruals for
premiums, if any, due on required payments and accruals for depreciation,
obsolescence, or amortization of properties), which should be set aside from
such earnings in connection with its business. All determinations pursuant to
this subsection shall be made in accordance with, or as required by, GAAP
consistently applied in the opinion of such independent public accountant as
shall then be regularly engaged by Borrowers.
4.8. Financial Disclosure. Each Borrower hereby irrevocably authorizes
and directs all accountants and auditors employed by such Borrower at any time
during the Term to exhibit and deliver to Agent and each Lender copies of any of
any Borrower's financial statements, trial balances or other accounting records
of any sort in the accountant's or auditor's possession, and to disclose to
Agent and each Lender any information such accountants may have concerning such
Borrower's financial status and business operations.
4.9. Compliance with Laws. Each Borrower shall comply with all acts,
rules, regulations and orders of any legislative, administrative or judicial
body or official applicable to its respective Collateral or any part thereof or
to the operation of such Borrower's business the non-compliance with which could
reasonably be expected to have a Material Adverse Effect on such Borrower. Each
Borrower may, however, contest or dispute any acts, rules, regulations, orders
and directions of those bodies or officials in any reasonable manner, provided
that any related Lien is inchoate or stayed and sufficient reserves are
established to the reasonable satisfaction of Agent to protect Agent's Lien on
or security interest in the Collateral. The Collateral of Borrowers at all times
shall be maintained in accordance with the requirements of all insurance
carriers which provide insurance with respect to the Collateral so that such
insurance shall remain in full force and effect.
4.10. Collateral Inspection and Monitoring. At all reasonable times
and, prior to the occurrence of a Default or Event of Default, upon prior notice
to Borrowers, Agent and each Lender shall have full access to and the right to
monitor, examine, audit, check and inspect the Collateral and each Borrower's
books, records, audits, correspondence and all other papers relating to the
Collateral and the operation of each Borrower's business and to make abstracts
and copies of any thereof. Agent, any Lender and their agents may enter upon any
of Borrower's premises at any time during business hours and at any other
reasonable time, and from time to time, and, prior to the occurrence of a
Default or Event of Default, upon prior notice to Borrowers for the purpose of
inspecting and monitoring the Collateral and any and all records pertaining
thereto and the operation of such Borrower's business.
4.11. Insurance. Each Borrower shall bear the full risk of any loss of
any nature
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whatsoever with respect to the Collateral. At each Borrower's own cost and
expense in amounts and with carriers acceptable to Agent, each Borrower shall
(a) keep all its insurable properties and properties in which each Borrower has
an interest insured against the hazards of fire, flood, sprinkler leakage, those
hazards covered by extended coverage insurance and such other hazards, and for
such amounts, as is customary in the case of companies engaged in businesses
similar to such Borrower's including, without limitation, business interruption
insurance; (b) maintain a bond in such amounts as is customary in the case of
companies engaged in businesses similar to such Borrower insuring against
larceny, embezzlement or other criminal misappropriation of insured's officers
and employees who may either singly or jointly with others at any time have
access to the assets or funds of such Borrower either directly or through
authority to draw upon such funds or to direct generally the disposition of such
assets; (c) maintain public and product liability insurance against claims for
personal injury, death or property damage suffered by others; (d) maintain all
such worker's compensation or similar insurance as may be required under the
laws of any state or jurisdiction in which such Borrower is engaged in business;
(e) furnish Agent with (i) copies of all policies and evidence of the
maintenance of such policies by the renewal thereof at least thirty (30) days
before any expiration date, and (ii) appropriate loss payable endorsements in
form and substance satisfactory to Agent, naming Agent as a co-insured and loss
payee as its interests may appear with respect to all insurance coverage
referred to in clauses (a), and (c) above, and providing (A) that all proceeds
thereunder shall be payable to Agent, (B) no such insurance shall be affected by
any act or neglect of the insured or owner of the property described in such
policy, and (C) that such policy and loss payable clauses may not be cancelled,
amended or terminated unless at least thirty (30) days' prior written notice is
given to Agent. In the event of any loss thereunder, the carriers named therein
hereby are directed by Agent and the applicable Borrower to make payment for
such loss to Agent and not to such Borrower and Agent jointly. If any insurance
losses are paid by check, draft or other instrument payable to any Borrower and
Agent jointly, Agent may endorse such Borrower's name thereon and do such other
things as Agent may deem advisable to reduce the same to cash. Agent is hereby
authorized to adjust and compromise claims under insurance coverage referred to
in clauses (a) and (b) above. All loss recoveries received by Agent upon any
such insurance may be applied to the Obligations, in such order as Agent in its
sole discretion shall determine, provided that prior to the occurrence of a
Default or Event of Default any such recoveries in respect of Equipment of up to
an aggregate of $500,000 shall be paid by Agent to Borrowers and applied by
Borrowers to the replacement of any Equipment purchased with the proceeds of an
Equipment Advance. Any surplus shall be paid by Agent to Borrowers or applied as
may be otherwise required by law. Any deficiency thereon shall be paid by
Borrowers to Agent, on demand.
4.12. Failure to Pay Insurance. If any Borrower fails to obtain
insurance as hereinabove provided, or to keep the same in force, Agent, if Agent
so elects, may obtain such insurance and pay the premium therefor on behalf of
Borrower, and charge Borrowers' Account therefor as a Revolving Advance of a
Base Rate Loan and such
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expenses so paid shall be part of the Obligations.
4.13. Payment of Taxes. Each Borrower will pay, when due, all taxes,
assessments and other Charges lawfully levied or assessed upon such Borrower or
any of the Collateral including, without limitation, real and personal property
taxes, assessments and charges and all franchise, income, employment, social
security benefits, withholding, and sales taxes. If any tax by any governmental
authority is or may be imposed on or as a result of any transaction between any
Borrower and Agent or any Lender which Agent or any Lender may be required to
withhold or pay or if any taxes, assessments, or other Charges remain unpaid
after the date fixed for their payment, or if any claim shall be made which, in
Agent's or any Lender's opinion, may possibly create a valid Lien on the
Collateral, Agent may without notice to Borrowers pay the taxes, assessments or
other Charges and each Borrower hereby indemnifies and holds Agent and each
Lender harmless in respect thereof. Agent will not pay any taxes, assessments or
Charges to the extent that any Borrower has contested or disputed those taxes,
assessments or Charges in good faith, by expeditious protest, administrative or
judicial appeal or similar proceeding provided that any related tax lien is
stayed and sufficient reserves are established to the reasonable satisfaction of
Agent to protect Agent's security interest in or Lien on the Collateral. The
amount of any payment by Agent under this Section 4.13 shall be charged to
Borrowers' Account as a Revolving Advance and added to the Obligations and,
until Borrowers shall furnish Agent with an indemnity therefor (or supply Agent
with evidence satisfactory to Agent that due provision for the payment thereof
has been made), Agent may hold without interest any balance standing to
Borrowers' credit and Agent shall retain its security interest in any and all
Collateral held by Agent.
4.14. Payment of Leasehold Obligations. Each Borrower shall at all
times pay, when and as due, its rental obligations under all leases under which
it is a tenant, and shall otherwise comply, in all material respects, with all
other terms of such leases and keep them in full force and effect and, at
Agent's request will provide evidence of having done so.
4.15. Receivables.
(a) Nature of Receivables. Each of the Receivables shall be a
bona fide and valid account representing a bona fide indebtedness incurred by
the Customer therein named, for a fixed sum as set forth in the invoice relating
thereto (provided immaterial or unintentional invoice errors shall not be deemed
to be a breach hereof) with respect to an absolute sale or lease and delivery of
goods upon stated terms of a Borrower, or work, labor or services theretofore
rendered by a Borrower as of the date each Receivable is created. Same shall be
due and owing in accordance with the applicable Borrower's standard terms of
sale without dispute, setoff or counterclaim except as may be stated on the
accounts receivable schedules delivered by Borrowers to Agent.
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(b) Solvency of Customers. Each Customer, to the best of each
Borrower's knowledge, as of the date each Receivable is created, is and will be
solvent and able to pay all Receivables on which the Customer is obligated in
full when due or with respect to such Customers of any Borrower who are not
solvent such Borrower has set up on its books and in its financial records bad
debt reserves adequate to cover such Receivables.
(c) Locations of Borrower. Each Borrower's chief executive
office is located at the addresses set forth on Schedule 4.15(c) hereto. Until
written notice is given to Agent by Borrowing Agent of any other office at which
any Borrower keeps its records pertaining to Receivables, all such records shall
be kept at such executive office.
(d) Collection of Receivables. Until any Borrower's authority
to do so is terminated by Agent (which notice Agent may give at any time
following the occurrence of an Event of Default or when Agent in its sole but
reasonable discretion deems it to be in Lenders' best interest to do so), each
Borrower will, at such Borrower's sole cost and expense, but on Agent's behalf
and for Agent's account, collect as Agent's property and in trust for Agent all
amounts received on Receivables, and shall not commingle such collections with
any Borrower's funds or use the same except to pay Obligations. Each Borrower
shall, upon request, deliver to Agent, or deposit in the Blocked Account, in
original form and on the date of receipt thereof, all checks, drafts, notes,
money orders, acceptances, cash and other evidences of Indebtedness of any
account debtor.
(e) Notification of Assignment of Receivables. At any time
after the occurrence of an Event of Default, Agent shall have the right to send
notice of the assignment of, and Agent's security interest in, the Receivables
to any and all Customers or any third party holding or otherwise concerned with
any of the Collateral. Thereafter, Agent shall have the sole right to collect
the Receivables, take possession of the Collateral, or both. Agent's actual
collection expenses, including, but not limited to, stationery and postage,
telephone and telegraph, secretarial and clerical expenses and the salaries of
any collection personnel used for collection, may be charged to Borrowers'
Account and added to the Obligations.
(f) Power of Agent to Act on Borrowers' Behalf. Agent shall
have the right to receive, endorse, assign and/or deliver in the name of Agent
or any Borrower any and all checks, drafts and other instruments for the payment
of money relating to the Receivables, and each Borrower hereby waives notice of
presentment, protest and non-payment of any instrument so endorsed. Each
Borrower hereby constitutes Agent or Agent's designee as such Borrower's
attorney with power (i) to endorse such Borrower's name upon any notes,
acceptances, checks, drafts, money orders or other evidences of payment or
Collateral; (ii) to sign such Borrower's name on any invoice or bill of lading
relating to any of the Receivables, drafts against Customers, assignments and
verifications of Receivables; (iii) to send verifications of Receivables to any
Customer; (iv) to sign such
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Borrower's name on all financing statements or any other documents or
instruments deemed necessary or appropriate by Agent to preserve, protect, or
perfect Agent's interest in the Collateral and to file same; (v) to demand
payment of the Receivables after an Event of Default; (vi) to enforce payment of
the Receivables by legal proceedings or otherwise; (vii) to exercise all of
Borrowers' rights and remedies with respect to the collection of the Receivables
and any other Collateral after an Event of Default; (viii) to settle, adjust,
compromise, extend or renew the Receivables; (ix) to settle, adjust or
compromise any legal proceedings brought to collect Receivables after an Event
of Default; (x) to prepare, file and sign such Borrower's name on a proof of
claim in bankruptcy or similar document against any Customer; (xi) to prepare,
file and sign such Borrower's name on any notice of Lien, assignment or
satisfaction of Lien or similar document in connection with the Receivables; and
(xii) to do all other acts and things reasonably necessary to carry out this
Agreement. All acts of said attorney or designee are hereby ratified and
approved, and said attorney or designee shall not be liable for any acts of
omission or commission nor for any error of judgment or mistake of fact or of
law, unless done maliciously or with gross (not mere) negligence; this power
being coupled with an interest is irrevocable while any of the Obligations
remain unpaid. Agent shall have the right at any time after the occurrence of an
Event of Default, to change the address for delivery of mail addressed to any
Borrower to such address as Agent may designate and to receive, open and dispose
of all mail addressed to any Borrower.
(g) No Liability. Neither Agent nor any Lender shall, under
any circumstances or in any event whatsoever, have any liability for any error
or omission or delay of any kind occurring in the settlement, collection or
payment of any of the Receivables or any instrument received in payment thereof,
or for any damage resulting therefrom unless done maliciously or with gross (not
mere) negligence. After the occurrence of an Event of Default or Default Agent
may, without notice or consent from any Borrower, sue upon or otherwise collect,
extend the time of payment of, compromise or settle for cash, credit or upon any
terms any of the Receivables or any other securities, instruments or insurance
applicable thereto and/or release any obligor thereof. Agent is authorized and
empowered to accept after the occurrence of an Event of Default or Default the
return of the goods represented by any of the Receivables, without notice to or
consent by any Borrower, all without discharging or in any way affecting any
Borrower's liability hereunder.
(h) Establishment of a Lockbox Account, Dominion Account. All
proceeds of Collateral shall, at the direction of Agent, be deposited by
Borrowers into a lockbox account, dominion account or such other "blocked
account" ("Blocked Accounts") as Agent may require pursuant to an arrangement
with such bank as may be selected by Borrowers and be acceptable to Agent.
Borrowers shall issue to any such bank, an irrevocable letter of instruction
directing said bank to transfer such funds so deposited to Agent, either to any
account maintained by Agent at said bank or by wire transfer to appropriate
account(s) of Agent. All funds deposited in such "blocked account" shall
immediately become the
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property of Agent and Borrowers shall obtain the agreement by such bank to waive
any offset rights against the funds so deposited. Neither Agent nor any Lender
assumes any responsibility for such "blocked account" arrangement, including
without limitation, any claim of accord and satisfaction or release with respect
to deposits accepted by any bank thereunder. Alternatively, Agent may establish
depository accounts ("Depository Accounts") in the name of Agent at a bank or
banks for the deposit of such funds and Borrowers shall deposit all proceeds of
Collateral or cause same to be deposited, in kind, in such Depository Accounts
of Agent in lieu of depositing same to the Blocked Accounts.
(i) Adjustments. No Borrower will, without Agent's consent,
compromise or adjust any Receivables (or extend the time for payment thereof) or
accept any returns of merchandise or grant any additional discounts, allowances
or credits thereon except for those compromises, adjustments, returns,
discounts, credits and allowances as have been heretofore customary in the
business of such Borrower.
4.16. Inventory. To the extent Inventory held for sale or lease has
been produced by any Borrower, it has been and will be produced by such Borrower
in accordance with the Federal Fair Labor Standards Act of 1938, as amended, and
all rules, regulations and orders thereunder.
4.17. Maintenance of Equipment. The Equipment shall be maintained in
good operating condition and repair (reasonable wear and tear excepted) and all
necessary replacements of and repairs thereto shall be made so that the value
and operating efficiency of the Equipment shall be maintained and preserved. No
Borrower shall use or operate the Equipment in violation of any law, statute,
ordinance, code, rule or regulation. Each Borrower shall have the right to sell
Equipment to the extent set forth in Sections 4.3 and 7.1 hereof.
4.18. Exculpation of Liability. Nothing herein contained shall be
construed to constitute Agent or any Lender as any Borrower's agent for any
purpose whatsoever, nor shall Agent or any Lender be responsible or liable for
any shortage, discrepancy, damage, loss or destruction of any part of the
Collateral wherever the same may be located and regardless of the cause thereof.
Neither Agent nor any Lender, whether by anything herein or in any assignment or
otherwise, assume any of any Borrower's obligations under any contract or
agreement assigned to Agent or such Lender, and neither Agent nor any Lender
shall be responsible in any way for the performance by any Borrower of any of
the terms and conditions thereof.
4.19. Environmental Matters. (a) Borrowers shall use their best efforts
to ensure that the Real Property remains in compliance with all Environmental
Laws and Borrowers shall not place or permit to be placed any Hazardous
Substances on any Real Property except as not prohibited by applicable law or
appropriate governmental authorities.
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(b) Borrowers shall establish and maintain a system to assure
and monitor continued compliance with all applicable Environmental Laws which
system shall include periodic reviews of such compliance.
(c) Borrowers shall (i) employ in connection with the use of
the Real Property appropriate technology necessary to maintain compliance with
any applicable Environmental Laws and (ii) dispose of any and all Hazardous
Waste generated at the Real Property only at facilities and with carriers that
maintain valid permits under RCRA and any other applicable Environmental Laws.
Borrowers shall use their best efforts to obtain certificates of disposal, such
as hazardous waste manifest receipts, from all treatment, transport, storage or
disposal facilities or operators employed by Borrowers in connection with the
transport or disposal of any Hazardous Waste generated at the Real Property.
(d) In the event any Borrower obtains, gives or receives
notice of any Release or threat of Release of a reportable quantity of any
Hazardous Substances at the Real Property (any such event being hereinafter
referred to as a "Hazardous Discharge") or receives any notice of violation,
request for information or notification that it is potentially responsible for
investigation or cleanup of environmental conditions at the Real Property,
demand letter or complaint, order, citation, or other written notice with regard
to any Hazardous Discharge or violation of Environmental Laws affecting the Real
Property or any Borrower's interest therein (any of the foregoing is referred to
herein as an "Environmental Complaint") from any Person, including any state
agency responsible in whole or in part for environmental matters in the state in
which the Real Property is located or the United States Environmental Protection
Agency (any such person or entity hereinafter the "Authority"), then Borrowing
Agent shall, within five (5) Business Days, give written notice of same to Agent
detailing facts and circumstances of which any Borrower is aware giving rise to
the Hazardous Discharge or Environmental Complaint. Such information is to be
provided to allow Agent to protect its security interest in the Real Property
and is not intended to create nor shall it create any obligation upon Agent or
any Lender with respect thereto.
(e) Borrowers shall promptly forward to Agent copies of any
request for information, notification of potential liability, demand letter
relating to potential responsibility with respect to the investigation or
cleanup of Hazardous Substances at any other site owned, operated or used by any
Borrower to dispose of Hazardous Substances and shall continue to forward copies
of correspondence between any Borrower and the Authority regarding such claims
to Agent until the claim is settled. Borrowers shall promptly forward to Agent
copies of all documents and reports concerning a Hazardous Discharge at the Real
Property that any Borrower is required to file under any Environmental Laws.
Such information is to be provided solely to allow Agent to protect Agent's
security interest in the Real Property and the Collateral.
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(f) Borrowers shall respond promptly to any Hazardous
Discharge or Environmental Complaint and take all necessary action in order to
safeguard the health of any Person and to avoid subjecting the Collateral or
Real Property to any Lien. If any Borrower shall fail to respond promptly to any
Hazardous Discharge or Environmental Complaint or any Borrower shall fail to
comply with any of the requirements of any Environmental Laws, Agent on behalf
of Lenders may, but without the obligation to do so, for the sole purpose of
protecting Agent's interest in Collateral: (A) give such notices or (B) enter
onto the Real Property (or authorize third parties to enter onto the Real
Property) and take such actions as Agent (or such third parties as directed by
Agent) deem reasonably necessary or advisable, to clean up, remove, mitigate or
otherwise deal with any such Hazardous Discharge or Environmental Complaint. All
reasonable costs and expenses incurred by Agent and Lenders (or such third
parties) in the exercise of any such rights, including any sums paid in
connection with any judicial or administrative investigation or proceedings,
fines and penalties, together with interest thereon from the date expended at
the Default Rate for Base Rate Loans constituting Revolving Advances shall be
paid upon demand by Borrowers, and until paid shall be added to and become a
part of the Obligations secured by the Liens created by the terms of this
Agreement or any other agreement between Agent, any Lender and any Borrower.
(g) Promptly upon the written request of Agent from time to
time if Agent reasonably believes that any Borrower may have violated any
Environmental Law, Borrowers shall provide Agent, at Borrowers' expense, with an
environmental site assessment or environmental audit report prepared by an
environmental engineering firm acceptable in the reasonable opinion of Agent, to
assess with a reasonable degree of certainty the existence of a Hazardous
Discharge and the potential costs in connection with abatement, cleanup and
removal of any Hazardous Substances found on, under, at or within the Real
Property. Any report or investigation of such Hazardous Discharge proposed and
acceptable to an appropriate Authority that is charged to oversee the clean-up
of such Hazardous Discharge shall be acceptable to Agent. If such estimates,
individually or in the aggregate, exceed $100,000, Agent shall have the right to
require Borrowers to post a bond, letter of credit or other security reasonably
satisfactory to Agent to secure payment of these costs and expenses.
(h) Borrowers shall defend and indemnify Agent and Lenders and
hold Agent, Lenders and their respective employees, agents, directors and
officers harmless from and against all loss, liability, damage and expense,
claims, costs, fines and penalties, including attorney's fees, suffered or
incurred by Agent or Lenders under or on account of any Environmental Laws,
including, without limitation, the assertion of any Lien thereunder, with
respect to any Hazardous Discharge, the presence of any Hazardous Substances
affecting the Real Property, whether or not the same originates or emerges from
the Real Property or any contiguous real estate, including any loss of value of
the Real Property as a result of the foregoing except to the extent such loss,
liability, damage and expense is attributable to any Hazardous Discharge
resulting from actions on the part of Agent or any
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Lender. Borrowers' obligations under this Section 4.19 shall arise upon the
discovery of the presence of any Hazardous Substances at the Real Property,
whether or not any federal, state, or local environmental agency has taken or
threatened any action in connection with the presence of any Hazardous
Substances. Borrowers' obligation and the indemnifications hereunder shall
survive the termination of this Agreement.
(i) For purposes of Section 4.19 and 5.7, all references to
Real Property shall be deemed to include all of Borrowers' right, title and
interest in and to its owned and leased premises.
4.20. Financing Statements. Except as respects the financing statements
filed by Agent and the financing statements described on Schedule 1.2, no
financing statement covering any of the Collateral or any proceeds thereof is on
file in any public office.
V. REPRESENTATIONS AND WARRANTIES.
Each Borrower represents and warrants as follows:
5.1. Authority. Each Borrower has full power, authority and legal right
to enter into this Agreement and the Other Documents and to perform all its
respective Obligations hereunder and thereunder. The execution, delivery and
performance of this Agreement and of the Other Documents (a) are within such
Borrower's corporate powers, have been duly authorized, are not in contravention
of law or the terms of such Borrower's by-laws, certificate of incorporation or
other applicable documents relating to such Borrower's formation or to the
conduct of such Borrower's business or of any material agreement or undertaking
to which such Borrower is a party or by which such Borrower is bound, and (b)
will not conflict with nor result in any breach in any of the provisions of or
constitute a default under or result in the creation of any Lien except
Permitted Encumbrances upon any asset of such Borrower under the provisions of
any agreement, charter document, instrument, by-law, or other instrument to
which such Borrower or its property is a party or by which it may be bound.
5.2. Formation and Qualification. (a) Each Borrower is duly
incorporated and in good standing under the laws of the state listed on Schedule
5.2(a) and is qualified to do business and is in good standing in the states
listed on Schedule 5.2(a) which constitute all states in which qualification and
good standing are necessary for such Borrower to conduct its business and own
its property and where the failure to so qualify could reasonably be expected to
have a Material Adverse Effect on such Borrower. Each Borrower has delivered to
Agent true and complete copies of its certificate of incorporation and by-laws
and will promptly notify Agent of any amendment or changes thereto.
(b) The only Subsidiaries of each Borrower are listed on
Schedule 5.2(b).
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5.3. Survival of Representations and Warranties. All representations
and warranties of such Borrower contained in this Agreement and the Other
Documents shall be true at the time of such Borrower's execution of this
Agreement and the Other Documents, and shall survive the execution, delivery and
acceptance thereof by the parties thereto and the closing of the transactions
described therein or related thereto.
5.4. Tax Returns. Each Borrower's federal tax identification number is
set forth on Schedule 5.4. Each Borrower has filed all federal, state and local
tax returns and other reports each is required by law to file and has paid all
taxes, assessments, fees and other governmental charges that are due and
payable. Federal, state and local income tax returns of each Borrower have been
examined and reported upon by the appropriate taxing authority or closed by
applicable statute and satisfied for all fiscal years prior to and including the
fiscal year ending December 31, 1994. The provision for taxes on the books of
each Borrower are adequate for all years not closed by applicable statutes, and
for its current fiscal year, and no Borrower has any knowledge of any deficiency
or additional assessment in connection therewith not provided for on its books.
5.5. Financial Statements. The consolidated and consolidating balance
sheets of the Borrowers and such other Persons described therein as of December
31, 1997, and the related statements of income, changes in stockholder's equity,
and changes in cash flow for the period ended on such date, all accompanied by
reports thereon containing opinions without qualification by independent
certified public accountants, copies of which have been delivered to Agent, have
been prepared in accordance with GAAP, consistently applied (except for changes
in application in which such accountants concur and present fairly the financial
position of the Borrowers at such date and the results of their operations for
such period. Other than as set forth in the press release of PC Service dated
January 28, 1999, a copy of which has previously been delivered to Lenders,
since December 31, 1997 there has been no change in the condition, financial or
otherwise, of Borrowers as shown on the consolidated balance sheet as of such
date and no change in the aggregate value of machinery, equipment and Real
Property owned by Borrowers, except changes in the ordinary course of business,
none of which individually or in the aggregate has been materially adverse.
5.6. Corporate Name. No Borrower has been known by any other corporate
name in the past five years and does not sell Inventory under any other name
except as set forth on Schedule 5.6, nor has any Borrower been the surviving
corporation of a merger or consolidation or acquired all or substantially all of
the assets of any Person during the preceding five (5) years.
5.7. O.S.H.A. and Environmental Compliance.
(a) Each Borrower has duly complied with, and its facilities,
business, assets, property, leaseholds and Equipment are in compliance in all
material respects with,
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the provisions of the Federal Occupational Safety and Health Act, the
Environmental Protection Act, RCRA and all other Environmental Laws; there have
been no outstanding citations, notices or orders of non-compliance issued to any
Borrower or relating to its business, assets, property, leaseholds or Equipment
under any such laws, rules or regulations.
(b) Each Borrower has been issued all required federal, state
and local licenses, certificates or permits relating to all applicable
Environmental Laws.
(c) (i) There are no visible signs of releases, spills,
discharges, leaks or disposal (collectively referred to as "Releases") of
Hazardous Substances at, upon, under or within any Real Property or any premises
leased by any Borrower; (ii) to the best of any Borrower's knowledge, there are
no underground storage tanks or polychlorinated biphenyls on the Real Property
or any premises leased by any Borrower; (iii) to the best of any Borrower's
knowledge, neither the Real Property nor any premises leased by any Borrower has
ever been used as a treatment, storage or disposal facility of Hazardous Waste;
and (iv) to the best of any Borrower's knowledge, no Hazardous Substances are
present on the Real Property or any premises leased by Borrower, excepting such
quantities as are handled in accordance with all applicable manufacturer's
instructions and governmental regulations and in proper storage containers and
as are necessary for the operation of the commercial business of any Borrower or
of its tenants.
5.8. Solvency; No Litigation, Violation, Indebtedness or Default.
(a) On the Closing Date, Borrowers will be solvent, able to
pay their debts as they mature, will have capital sufficient to carry on their
business and all businesses in which they are about to engage, and (i) as of the
Closing Date, the fair present saleable value of their assets, calculated on a
going concern basis, is in excess of the amount of their liabilities and (ii)
subsequent to the Closing Date, the fair saleable value of their assets
(calculated on a going concern basis) will be in excess of the amount of their
liabilities.
(b) Except as disclosed in Schedule 5.8(b), no Borrower has
(i) any pending or threatened litigation, arbitration, actions or proceedings
which involve the possibility of having a Material Adverse Effect on such
Borrower, and (ii) any liabilities nor indebtedness for borrowed money other
than the Obligations.
(c) No Borrower is in violation of any applicable statute,
regulation or ordinance in any respect which could reasonably be expected to
have a Material Adverse Effect on such Borrower, nor is any Borrower in
violation of any order of any court, governmental authority or arbitration board
or tribunal.
(d) No Borrower nor any member of the Controlled Group
maintains or contributes to any Plan other than those listed on Schedule 5.8(d)
hereto. Except as set
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forth in Schedule 5.8(d), (i) no Plan has incurred any "accumulated funding
deficiency," as defined in Section 302(a)(2) of ERISA and Section 412(a) of the
Code, whether or not waived, and each Borrower and each member of the Controlled
Group has met all applicable minimum funding requirements under Section 302 of
ERISA in respect of each Plan, (ii) each Plan which is intended to be a
qualified plan under Section 401(a) of the Code as currently in effect has been
determined by the Internal Revenue Service to be qualified under Section 401(a)
of the Code and the trust related thereto is exempt from federal income tax
under Section 501(a) of the Code, (iii) no Borrower nor any member of the
Controlled Group has incurred any liability to the PBGC other than for the
payment of premiums, and there are no premium payments which have become due
which are unpaid, (iv) no Plan has been terminated by the plan administrator
thereof nor by the PBGC, and there is no occurrence which would cause the PBGC
to institute proceedings under Title IV of ERISA to terminate any Plan, (v) at
this time, the current value of the assets of each Plan exceeds the present
value of the accrued benefits and other liabilities of such Plan and no Borrower
nor any member of the Controlled Group knows of any facts or circumstances which
would materially change the value of such assets and accrued benefits and other
liabilities, (vi) no Borrower nor any member of the Controlled Group has
breached any of the responsibilities, obligations or duties imposed on it by
ERISA with respect to any Plan, (vii) no Borrower nor any member of a Controlled
Group has incurred any liability for any excise tax arising under Section 4972
or 4980B of the Code, and no fact exists which could give rise to any such
liability, (viii) no Borrower nor any member of the Controlled Group nor any
fiduciary of, nor any trustee to, any Plan, has engaged in a "prohibited
transaction" described in Section 406 of the ERISA or Section 4975 of the Code
nor taken any action which would constitute or result in a Termination Event
with respect to any such Plan which is subject to ERISA, (ix) each Borrower and
each member of the Controlled Group has made all contributions due and payable
with respect to each Plan, (x) there exists no event described in Section
4043(b) of ERISA, for which the thirty (30) day notice period contained in 29
CFR '2615.3 has not been waived, (xi) no Borrower nor any member of the
Controlled Group has any fiduciary responsibility for investments with respect
to any plan existing for the benefit of persons other than employees or former
employees of any Borrower and any member of the Controlled Group, and (xii) no
Borrower nor any member of the Controlled Group has withdrawn, completely or
partially, from any Multiemployer Plan so as to incur liability under the
Multiemployer Pension Plan Amendments Act of 1980.
5.9. Patents, Trademarks, Copyrights and Licenses. All patents, patent
applications, trademarks, trademark applications, service marks, service mark
applications, copyrights, copyright applications, design rights, tradenames,
assumed names, trade secrets and licenses owned or utilized by any Borrower are
set forth on Schedule 5.9, are valid and have been duly registered or filed with
all appropriate governmental authorities and constitute all of the intellectual
property rights which are necessary for the operation of its business; there is
no objection to or pending challenge to the validity of any such material
patent, trademark, copyright, design right, tradename, trade secret or license
and
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no Borrower is aware of any grounds for any challenge, except as set forth on
Schedule 5.9 hereto. Each patent, patent application, patent license, trademark,
trademark application, trademark license, service mark, service mark
application, service mark license, copyright, copyright application and
copyright license owned or held by any Borrower and all trade secrets used by
any Borrower consist of original material or property developed by such Borrower
or was lawfully acquired by such Borrower from the proper and lawful owner
thereof. Each of such items has been maintained so as to preserve the value
thereof from the date of creation or acquisition thereof. Except as set forth on
Schedule 5.9, with respect to all material software used by any Borrower, such
Borrower is in possession of all source and object codes related to each piece
of software or is the beneficiary of a source code escrow agreement, each such
source code escrow agreement being listed on Schedule 5.9 hereto.
5.10. Licenses and Permits. Except as set forth in Schedule 5.10, each
Borrower (a) is in compliance with and (b) has procured and is now in possession
of, all material licenses or permits required by any applicable federal, state
or local law or regulation for the operation of its business in each
jurisdiction wherein it is now conducting or proposes to conduct business and
where the failure to procure such licenses or permits could have a Material
Adverse Effect on such Borrower.
5.11. Default of Indebtedness. No Borrower is in default in the payment
of the principal of or interest on any Indebtedness or under any instrument or
agreement under or subject to which any Indebtedness has been issued and no
event has occurred under the provisions of any such instrument or agreement
which with or without the lapse of time or the giving of notice, or both,
constitutes or would constitute an event of default thereunder.
5.12. No Default. No Borrower is in default in the payment or
performance of any of its contractual obligations and no Default has occurred.
5.13. No Burdensome Restrictions. No Borrower is party to any contract
or agreement the performance of which could have a Material Adverse Effect on
such Borrower. No Borrower has agreed or consented to cause or permit in the
future (upon the happening of a contingency or otherwise) any of its property,
whether now owned or hereafter acquired, to be subject to a Lien which is not a
Permitted Encumbrance.
5.14. No Labor Disputes. No Borrower is involved in any labor dispute;
there are no strikes or walkouts or union organization of any Borrower's
employees threatened or in existence and no labor contract is scheduled to
expire during the Term other than as set forth on Schedule 5.14 hereto.
5.15. Margin Regulations. No Borrower is engaged, nor will it engage,
principally or as one of its important activities, in the business of extending
credit for the purpose of
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"purchasing" or "carrying" any "margin stock" within the respective meanings of
each of the quoted terms under Regulation U or Regulation G of the Board of
Governors of the Federal Reserve System as now and from time to time hereafter
in effect. No part of the proceeds of any Advance will be used for "purchasing"
or "carrying" "margin stock" as defined in Regulation U of such Board of
Governors.
5.16. Investment Company Act. No Borrower is an "investment company"
registered or required to be registered under the Investment Company Act of
1940, as amended, nor is it controlled by such a company.
5.17. Disclosure. No representation or warranty made by any Borrower in
this Agreement or in any financial statement, report, certificate or any other
document furnished in connection herewith contains any untrue statement of a
material fact or omits to state any material fact necessary to make the
statements herein or therein not misleading. There is no fact known to Borrowers
or which reasonably should be known to Borrowers which Borrowers have not
disclosed to Agent in writing with respect to the transactions contemplated by
this Agreement which could reasonably be expected to have a Material Adverse
Effect on any Borrower.
5.18. Swaps. No Borrower is a party to, nor will it be a party to, any
swap agreement whereby such Borrower has agreed or will agree to swap interest
rates or currencies unless same provides that damages upon termination following
an event of default thereunder are payable on an unlimited "two-way basis"
without regard to fault on the part of either party.
5.19. Conflicting Agreements. No provision of any mortgage, indenture,
contract, agreement, judgment, decree or order binding on any Borrower or
affecting the Collateral conflicts with, or requires any Consent which has not
already been obtained to, or would in any way prevent the execution, delivery or
performance of, the terms of this Agreement or the Other Documents.
5.20. Application of Certain Laws and Regulations. No Borrower nor any
Affiliate of any Borrower is subject to any statute, rule or regulation which
regulates the incurrence of any Indebtedness, including without limitation,
statutes or regulations relative to common or interstate carriers or to the sale
of electricity, gas, steam, water, telephone, telegraph or other public utility
services.
5.21. Business and Property of Borrower. Upon and after the Closing
Date, Borrowers do not propose to engage in any business other than providing
parts and logistics services to the personal computer hardware repair industry
and activities necessary to conduct the foregoing. On the Closing Date, each
Borrower will own all the property and possess all of the rights and Consents
necessary for the conduct of the business of such Borrower.
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5.22 Year 2000. Borrowers have reviewed the areas within their business
and operation which could be adversely affected by, and have developed or are
developing a program to address, not later than March 1, 1999, the risk that
certain computer applications used by Borrowers (or any of their material
suppliers, customers or vendors) may be unable to recognize and perform properly
date-sensitive functions involving dates prior to and after December 31, 1999
(the "Year 2000 Problem"). The Year 2000 Problem will not result in any Material
Adverse Effect.
VI. AFFIRMATIVE COVENANTS.
Each Borrower shall, until payment in full of the Obligations and
termination of this Agreement:
6.1. Payment of Fees. Pay to Agent on demand all usual and customary
fees and expenses which Agent incurs in connection with (a) the forwarding of
Advance proceeds and (b) the establishment and maintenance of any Blocked
Accounts or Depository Accounts as provided for in Section 4.15(h). Agent may,
without making demand, charge Borrowers' Account for all such fees and expenses.
6.2. Conduct of Business and Maintenance of Existence and Assets. (a)
Conduct continuously and operate actively its business according to good
business practices and maintain all of its properties useful or necessary in its
business in good working order and condition (reasonable wear and tear excepted
and except as may be disposed of in accordance with the terms of this
Agreement), including, without limitation, all licenses, patents, copyrights,
design rights, tradenames, trade secrets and trademarks and take all actions
necessary to enforce and protect the validity of any intellectual property right
or other right included in the Collateral; (b) keep in full force and effect its
existence and comply in all material respects with the laws and regulations
governing the conduct of its business where the failure to do so could
reasonably be expected to have a Material Adverse Effect on such Borrower; and
(c) make all such reports and pay all such franchise and other taxes and license
fees and do all such other acts and things as may be lawfully required to
maintain its rights, licenses, leases, powers and franchises under the laws of
the United States or any political subdivision thereof.
6.3. Violations. Promptly notify Agent in writing of any violation of
any law, statute, regulation or ordinance of any Governmental Body, or of any
agency thereof, applicable to any Borrower which could reasonably be expected to
have a Material Adverse Effect on any Borrower.
6.4. Government Receivables. Take all steps necessary to protect
Agent's interest in the Collateral under the Federal Assignment of Claims Act or
other applicable state or local statutes or ordinances and deliver to Agent
appropriately endorsed, any
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instrument or chattel paper connected with any Receivable arising out of
contracts between any Borrower and the United States, any state or any
department, agency or instrumentality of any of them.
6.5 Fixed Charge Coverage. Maintain as of the end of each fiscal
quarter beginning with the quarter ending June 30, 1999 for the four consecutive
fiscal quarters then ended, a Fixed Charge Coverage of not less than 1.2 to 1.0,
provided that for purposes of determining compliance with this Section as of the
end of each of the second and third quarters of 1999, Fixed Charge Coverage
shall be calculated for the less than four-quarter periods elapsed during such
year and then annualized.
6.6. Execution of Supplemental Instruments. Execute and deliver to
Agent from time to time, upon demand, such supplemental agreements, statements,
assignments and transfers, or instructions or documents relating to the
Collateral, and such other instruments as Agent may request, in order that the
full intent of this Agreement may be carried into effect.
6.7. Payment of Indebtedness. Pay, discharge or otherwise satisfy at or
before maturity (subject, where applicable, to specified grace periods and, in
the case of the trade payables, to normal payment practices) all its obligations
and liabilities of whatever nature, except when the failure to do so could not
reasonably be expected to have a Material Adverse Effect or when the amount or
validity thereof is currently being contested in good faith by appropriate
proceedings and each Borrower shall have provided for such reserves as Agent may
reasonably deem proper and necessary, subject at all times to any applicable
subordination arrangement in favor of Lenders.
6.8. Standards of Financial Statements. Cause all financial statements
and other reports referred to in Sections 9.7, 9.8, 9.9, 9.10, 9.11, 9.12, 9.13
and 9.14 as to which GAAP is applicable to be complete and correct in all
material respects (subject, in the case of interim financial statements, to
normal year-end audit adjustments) and to be prepared in reasonable detail and
in accordance with GAAP applied consistently throughout the periods reflected
therein (except as concurred in by such reporting accountants or officer, as the
case may be, and disclosed therein).
VII. NEGATIVE COVENANTS.
No Borrower shall, until satisfaction in full of the Obligations and
termination of this Agreement:
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7.1. Merger, Consolidation, Acquisition and Sale of Assets.
(a) Enter into any merger, consolidation or other
reorganization with or into any other Person or acquire all or a substantial
portion of the assets or stock of any other Person or permit any other Person to
consolidate with or merge with it, provided that any Borrower may merge with any
other Borrower, provided further that if PC Service is a party to any such
merger, it shall be the surviving entity.
(b) Sell, lease, transfer or otherwise dispose of any of its
properties or assets, except (i) in the ordinary course of its business (ii)
obsolete or worn-out assets, (iii) asset sales in which the net cash proceeds
from the disposition thereof are reinvested, within ninety (90) days before or
after such disposition, in productive tangible assets of a similar nature of any
Borrower, (iv) asset sales between Borrowers and (v) in connection with the
termination of the repair operations of Borrowers in California.
7.2. Creation of Liens. Create or suffer to exist any Lien or transfer
upon or against any of its property or assets now owned or hereafter acquired,
except Permitted Encumbrances.
7.3. Guarantees. Become liable upon the obligations of any Person by
assumption, endorsement or guaranty thereof or otherwise (other than to Lenders)
except (a) as disclosed on Schedule 7.3, (b) guarantees made in the ordinary
course of business up to an aggregate amount of $500,000 and (c) the endorsement
of checks in the ordinary course of business.
7.4. Investments. Purchase or acquire obligations or stock of, or any
other interest in, any Person, except (a) obligations issued or guaranteed by
the United States of America or any agency thereof, (b) commercial paper with
maturities of not more than 180 days and a published rating of not less than A-1
or P-1 (or the equivalent rating), (c) certificates of time deposit and bankers'
acceptances having maturities of not more than 180 days and repurchase
agreements backed by United States government securities of a commercial bank if
(i) such bank has a combined capital and surplus of at least $500,000,000, or
(ii) its debt obligations, or those of a holding company of which it is a
Subsidiary, are rated not less than A (or the equivalent rating) by a nationally
recognized investment rating agency, and (d) U.S. money market funds that invest
solely in obligations issued or guaranteed by the United States of America or an
agency thereof.
7.5. Loans. Make advances, loans or extensions of credit to any Person,
including without limitation, any Parent, Subsidiary or Affiliate except with
respect to (a) the extension of commercial trade credit in connection with the
sale of Inventory in the ordinary course of its business and (b) loans to its
employees in the ordinary course of business not to exceed the aggregate amount
of $100,000 at any time outstanding.
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7.6. Capital Expenditures. Contract for, purchase or make any
expenditure or commitments for fixed or capital assets (including capitalized
leases) in any fiscal year in an amount in excess of $4,000,000.
7.7. Dividends. Declare, pay or make any dividend or distribution on
any shares of the common stock or preferred stock of any Borrower (other than
dividends or distributions payable in its stock, or split-ups or
reclassifications of its stock) or apply any of its funds, property or assets to
the purchase, redemption or other retirement of any common or preferred stock,
or of any options to purchase or acquire any such shares of common or preferred
stock of any Borrower.
7.8. Indebtedness. Create, incur, assume or suffer to exist any
Indebtedness (exclusive of trade debt and other customary accruals) except in
respect of (i) Indebtedness to Lenders; (ii) existing Indebtedness described on
Schedule 7.8; and (iii) Indebtedness incurred for capital expenditures permitted
under Section 7.6 hereof; provided, however, that the maximum aggregate amount
outstanding at any time of such Indebtedness shall not exceed $750,000.
7.9. Nature of Business. Substantially change the nature of the
business in which it is presently engaged, nor except as specifically permitted
hereby purchase or invest, directly or indirectly, in any assets or property
other than in the ordinary course of business for assets or property which are
useful in, necessary for and are to be used in its business as presently
conducted.
7.10. Transactions with Affiliates. Directly or indirectly, purchase,
acquire or lease any property from, or sell, transfer or lease any property to,
or otherwise deal with, any Affiliate, except transactions disclosed in the
ordinary course of business, on an arm's-length basis on terms no less favorable
than terms which would have been obtainable from a Person other than an
Affiliate.
7.11. Leases. Enter as lessee into any lease arrangement for real or
personal property (unless capitalized and permitted under Section 7.6 hereof or
referred to on Schedule 7.8) if after giving effect thereto, aggregate annual
rental payments for all leased property would exceed $500,000 in any one fiscal
year.
7.12. Subsidiaries. Except with the consent of Lenders, which consent,
prior to the occurrence of a Default or Event of Default, shall not be
unreasonably withheld:
(a) Form any Subsidiary.
(b) Enter into any partnership, joint venture or similar
arrangement.
7.13. Fiscal Year and Accounting Changes. Change its fiscal year from
January
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1 to December 31 or make any change (i) in accounting treatment and reporting
practices except as required by GAAP or (ii) in tax reporting treatment except
with the approval of the Lenders, or as required by law.
7.14. Pledge of Credit. Now or hereafter pledge Agent's or any Lender's
credit on any purchases or for any purpose whatsoever or use any portion of any
Advance in or for any business other than such Borrower's business as conducted
on the date of this Agreement.
7.15. Amendment of Articles of Incorporation, By-Laws. Amend, modify or
waive any term or material provision of its Articles of Incorporation or By-Laws
unless required by law.
7.16. Compliance with ERISA. (i) (x) Maintain, or permit any member of
the Controlled Group to maintain, or (y) become obligated to contribute, or
permit any member of the Controlled Group to become obligated to contribute, to
any Plan, other than those Plans disclosed on Schedule 5.8(d), (ii) engage, or
permit any member of the Controlled Group to engage, in any non-exempt
"prohibited transaction", as that term is defined in section 406 of ERISA and
Section 4975 of the Code, (iii) incur, or permit any member of the Controlled
Group to incur, any "accumulated funding deficiency", as that term is defined in
Section 302 of ERISA or Section 412 of the Code, (iv) terminate, or permit any
member of the Controlled Group to terminate, any Plan where such event could
result in any liability of any Borrower or any member of the Controlled Group or
the imposition of a lien on the property of any Borrower or any member of the
Controlled Group pursuant to Section 4068 of ERISA, (v) assume, or permit any
member of the Controlled Group to assume, any obligation to contribute to any
Multiemployer Plan not disclosed on Schedule 5.8(d), (vi) incur, or permit any
member of the Controlled Group to incur, any withdrawal liability to any
Multiemployer Plan; (vii) fail promptly to notify Agent of the occurrence of any
Termination Event, (viii) fail to comply, or permit a member of the Controlled
Group to fail to comply, with the requirements of ERISA or the Code or other
applicable laws in respect of any Plan, (ix) fail to meet, or permit any member
of the Controlled Group to fail to meet, all minimum funding requirements under
ERISA or the Code or postpone or delay or allow any member of the Controlled
Group to postpone or delay any funding requirement with respect of any Plan.
7.17. Prepayment of Indebtedness. At any time, directly or indirectly,
prepay any Indebtedness for borrowed money (other than to Lenders), or
repurchase, redeem, retire or otherwise acquire any Indebtedness for borrowed
money of any Borrower.
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VIII. CONDITIONS PRECEDENT.
8.1. Conditions to Initial Advances. The agreement of Lenders to make
the initial Advances requested to be made on the Closing Date is subject to the
satisfaction, or waiver by Lenders, immediately prior to or concurrently with
the making of such Advances, of the following conditions precedent:
(a) Note. Agent shall have received the Note duly executed and
delivered by an authorized officer of each Borrower;
(b) Filings, Registrations and Recordings. Each document
(including, without limitation, any Uniform Commercial Code financing statement)
required by this Agreement, any related agreement or under law or reasonably
requested by the Agent to be filed, registered or recorded in order to create,
in favor of Agent, a perfected security interest in or lien upon the Collateral
shall have been properly filed, registered or recorded in each jurisdiction in
which the filing, registration or recordation thereof is so required or
requested, and Agent shall have received an acknowledgment copy, or other
evidence satisfactory to it, of each such filing, registration or recordation
and satisfactory evidence of the payment of any necessary fee, tax or expense
relating thereto;
(c) Corporate Proceedings of Borrowers. Agent shall have
received a copy of the resolutions in form and substance reasonably satisfactory
to Agent, of the Board of Directors of each Borrower authorizing (i) the
execution, delivery and performance of this Agreement, the Note and any related
agreements (collectively the "Documents") and (ii) the granting by each Borrower
of the security interests in and liens upon the Collateral in each case
certified by the Secretary or an Assistant Secretary of each Borrower as of the
Closing Date; and, such certificate shall state that the resolutions thereby
certified have not been amended, modified, revoked or rescinded as of the date
of such certificate;
(d) Incumbency Certificates of Borrowers. Agent shall have
received a certificate of the Secretary or an Assistant Secretary of each
Borrower, dated the Closing Date, as to the incumbency and signature of the
officers of each Borrower executing this Agreement, any certificate or other
documents to be delivered by it pursuant hereto, together with evidence of the
incumbency of such Secretary or Assistant Secretary;
(e) Certificates. Agent shall have received a copy of the
Articles or Certificate of Incorporation of each Borrower, and all amendments
thereto, certified by the Secretary of each Borrower together with copies of the
By-Laws of each Borrower and all agreements of each Borrower's shareholders
certified as accurate and complete by the Secretary of each Borrower;
(f) Good Standing Certificates. Agent shall have received good
standing certificates for each Borrower dated not more than 30 days prior to the
Closing Date,
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issued by the Secretary of State or other appropriate official of each
Borrower's jurisdiction of incorporation and each jurisdiction where the conduct
of each Borrower's business activities or the ownership of its properties
necessitates qualification;
(g) Legal Opinion. Agent shall have received the executed
legal opinion of Sayles & Lidji in form and substance satisfactory to Agent
which shall cover such matters incident to the transactions contemplated by this
Agreement, the Note and related agreements as Agent may reasonably require and
each Borrower hereby authorizes and directs such counsel to deliver such
opinions to Agent and Lenders;
(h) No Litigation. (i) No litigation, investigation or
proceeding before or by any arbitrator or Governmental Body shall be continuing
or threatened against any Borrower or against the officers or directors of any
Borrower (A) in connection with the Other Documents or any of the transactions
contemplated thereby and which, in the reasonable opinion of Agent, is deemed
material or (B) which could, in the reasonable opinion of Agent, have a Material
Adverse Effect; and (ii) no injunction, writ, restraining order or other order
of any nature materially adverse to any Borrower or the conduct of its business
shall have been issued by any Governmental Body;
(i) Collateral Examination. Agent shall have completed
Collateral examinations and received appraisals, the results of which shall be
satisfactory in form and substance to Lenders, of the Receivables, Inventory,
General Intangibles and Equipment of each Borrower and all books and records in
connection therewith;
(j) Fees. Agent shall have received all fees payable to Agent
and Lenders on or prior to the Closing Date pursuant to Article III hereof;
(k) Insurance. Agent shall have received in form and substance
satisfactory to Agent, certified copies of Borrowers' casualty insurance
policies, together with loss payable endorsements on Agent's standard form of
loss payee endorsement naming Agent as loss payee, and certified copies of
Borrowers' liability insurance policies, together with endorsements naming Agent
as a co-insured;
(l) Payment Instructions. Agent shall have received written
instructions from Borrowers directing the application of proceeds of the initial
Advances made pursuant to this Agreement;
(m) Blocked Accounts. Agent shall have received duly executed
agreements establishing the Blocked Accounts or Depository Accounts with
financial institutions acceptable to Agent for the collection or servicing of
the Receivables and proceeds of the Collateral;
(n) Consents. Agent shall have received any and all Consents
necessary
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to permit the effectuation of the transactions contemplated by this Agreement
and the Other Documents; and, Agent shall have received such Consents and
waivers of such third parties as might assert claims with respect to the
Collateral, as Agent and its counsel shall deem necessary;
(o) No Adverse Material Change. (i) Since September 30, 1998,
there shall not have occurred any event, condition or state of facts which could
reasonably be expected to have a Material Adverse Effect and (ii) no
representations made or information supplied to Agent shall have been proven to
be inaccurate or misleading in any material respect;
(p) Leasehold Agreements. Agent shall have received landlord,
mortgagee or warehouseman agreements satisfactory to Agent with respect to all
premises leased by Borrowers at which Inventory is located;
(q) Contract Review. Agent shall have reviewed all material
contracts of Borrowers including, without limitation, leases, union contracts,
labor contracts, vendor supply contracts, license agreements and distributorship
agreements and such contracts and agreements shall be satisfactory in all
respects to Agent;
(r) Closing Certificate. Agent shall have received a closing
certificate signed by the Chief Financial Officer of each Borrower dated as of
the date hereof, stating that (i) all representations and warranties set forth
in this Agreement and the Other Documents are true and correct on and as of such
date, (ii) Borrowers are on such date in compliance with all the terms and
provisions set forth in this Agreement and the Other Documents and (iii) on such
date no Default or Event of Default has occurred or is continuing;
(s) Borrowing Base. Agent shall have received evidence from
Borrowers that the aggregate amount of Eligible Receivables and Eligible
Inventory is sufficient in value and amount to support Advances in the amount
requested by Borrowers on the Closing Date;
(t) Undrawn Availability. After giving effect to the initial
Advances hereunder, Borrowers shall have Undrawn Availability of at least
$3,000,000; and
(u) Other. All corporate and other proceedings, and all
documents, instruments and other legal matters in connection with the
Transactions shall be satisfactory in form and substance to Agent and its
counsel.
8.2. Conditions to Each Advance. The agreement of Lenders to make any
Advance requested to be made on any date (including, without limitation, the
initial Advance), is subject to the satisfaction of the following conditions
precedent as of the date
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such Advance is made:
(a) Representations and Warranties. Each of the
representations and warranties made by any Borrower in or pursuant to this
Agreement and any related agreements to which it is a party, and each of the
representations and warranties contained in any certificate, document or
financial or other statement furnished at any time under or in connection with
this Agreement or any related agreement shall be true and correct in all
material respects on and as of such date as if made on and as of such date;
(b) No Default. No Event of Default or Default shall have
occurred and be continuing on such date, or would exist after giving effect to
the Advances requested to be made, on such date; provided, however that Lenders,
in their sole discretion, may continue to make Advances notwithstanding the
existence of an Event of Default or Default and that any Advances so made shall
not be deemed a waiver of any such Event of Default or Default; and
(c) Maximum Advances. In the case of any Advances requested to
be made, after giving effect thereto, the aggregate Advances shall not exceed
the maximum amount of Advances permitted under Section 2.1 hereof.
Each request for an Advance by any Borrower hereunder shall constitute a
representation and warranty by each Borrower as of the date of such Advance that
the conditions contained in this subsection shall have been satisfied.
IX. INFORMATION AS TO BORROWERS.
Each Borrower shall, until satisfaction in full of the Obligations and
the termination of this Agreement:
9.1. Disclosure of Material Matters. Immediately upon learning thereof,
report to Agent all matters materially affecting the value, enforceability or
collectibility of any portion of the Collateral including, without limitation,
any Borrower's reclamation or repossession of, or the return to any Borrower of,
a material amount of goods or claims or disputes asserted by any Customer or
other obligor.
9.2. Schedules. Deliver to Agent on or before the fifteenth (15th) day
of each month as and for the prior month (a) accounts receivable agings, (b)
accounts payable schedules and (c) Inventory reports. In addition, each Borrower
will deliver to Agent at such intervals as Agent may require: (i) confirmatory
assignment schedules, (ii) copies of Customer's invoices, (iii) evidence of
shipment or delivery, and (iv) such further schedules, documents and/or
information regarding the Collateral as Agent may require including, without
limitation, trial balances and test verifications. Agent shall have the right to
confirm
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and verify all Receivables by any manner and through any medium it considers
advisable and do whatever it may deem reasonably necessary to protect its
interests hereunder. The items to be provided under this Section are to be in
form satisfactory to Agent and executed by each Borrower and delivered to Agent
from time to time solely for Agent's convenience in maintaining records of the
Collateral, and any Borrower's failure to deliver any of such items to Agent
shall not affect, terminate, modify or otherwise limit Agent's Lien with respect
to the Collateral.
9.3. Environmental Reports. Furnish Agent, concurrently with the
delivery of the financial statements referred to in Sections 9.7 and 9.8, with a
certificate signed by the President of each Borrower stating, to the best of his
knowledge, that each Borrower is in compliance in all material respects with all
federal, state and local laws relating to environmental protection and control
and occupational safety and health. To the extent any Borrower is not in
compliance with the foregoing laws, the certificate shall set forth with
specificity all areas of non-compliance and the proposed action such Borrower
will implement in order to achieve full compliance.
9.4. Litigation. Promptly notify Agent in writing of any litigation,
suit or administrative proceeding affecting any Borrower, whether or not the
claim is covered by insurance, and of any suit or administrative proceeding,
which in any such case could reasonably be expected to have a Material Adverse
Effect on any Borrower.
9.5. Material Occurrences. Promptly notify Agent in writing upon the
occurrence of (a) any Event of Default or Default; (b) any event, development or
circumstance whereby any financial statements or other reports furnished to
Agent fail in any material respect to present fairly, in accordance with GAAP
consistently applied, the financial condition or operating results of any
Borrower as of the date of such statements; (c) any accumulated retirement plan
funding deficiency which, if such deficiency continued for two plan years and
was not corrected as provided in Section 4971 of the Code, could subject any
Borrower to a tax imposed by Section 4971 of the Code; (d) each and every
default by any Borrower which might result in the acceleration of the maturity
of any Indebtedness, including the names and addresses of the holders of such
Indebtedness with respect to which there is a default existing or with respect
to which the maturity has been or could be accelerated, and the amount of such
Indebtedness; and (e) any other development in the business or affairs of any
Borrower which could reasonably be expected to have a Material Adverse Effect;
in each case describing the nature thereof and the action Borrowers propose to
take with respect thereto.
9.6. Government Receivables. Notify Agent immediately if any of its
Receivables arise out of contracts between any Borrower and the United States,
any state, or any department, agency or instrumentality of any of them.
9.7. Annual Financial Statements. Furnish Agent within ninety (90) days
after the
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end of each fiscal year of Borrowers, financial statements of Borrowers on a
consolidating and consolidated basis including, but not limited to, statements
of income and stockholders' equity and cash flow from the beginning of the
current fiscal year to the end of such fiscal year and the balance sheet as at
the end of such fiscal year, all prepared in accordance with GAAP applied on a
basis consistent with prior practices, and in reasonable detail and reported
upon without qualification by Ernst & Young, LLP or such other independent
certified public accounting firm selected by Borrowers and satisfactory to Agent
(the "Accountants"). The report of the Accountants shall be accompanied by a
statement of the Accountants certifying that (i) they have caused the Loan
Agreement to be reviewed, (ii) in making the examination upon which such report
was based either no information came to their attention which to their knowledge
constituted an Event of Default or a Default under this Agreement or any related
agreement or, if such information came to their attention, specifying any such
Default or Event of Default, its nature, when it occurred and whether it is
continuing, and such report shall contain or have appended thereto calculations
which set forth Borrowers' compliance with the requirements or restrictions
imposed by Sections 6.5, 7.6 and 7.11 hereof. In addition, the reports shall be
accompanied by a certificate of each Borrower's Chief Financial Officer which
shall state that, based on an examination sufficient to permit him to make an
informed statement, no Default or Event of Default exists, or, if such is not
the case, specifying such Default or Event of Default, its nature, when it
occurred, whether it is continuing and the steps being taken by such Borrower
with respect to such event, and such certificate shall have appended thereto
calculations which set forth Borrowers' compliance with the requirements or
restrictions imposed by Sections 6.5, 7.6 and 7.11 hereof.
9.8. Quarterly Financial Statements. Furnish Agent within forty-five
(45) days after the end of each fiscal quarter, an unaudited balance sheet of
Borrowers on a consolidated and consolidating basis and unaudited statements of
income and stockholders' equity and cash flow of Borrowers on a consolidated and
consolidating basis reflecting results of operations from the beginning of the
fiscal year to the end of such quarter and for such quarter, prepared on a basis
consistent with prior practices and complete and correct in all material
respects, subject to normal year end adjustments. The reports shall be
accompanied by a certificate signed by the Chief Financial Officer of each
Borrower, which shall state that, based on an examination sufficient to permit
him to make an informed statement, no Default or Event of Default exists, or, if
such is not the case, specifying such Default or Event of Default, its nature,
when it occurred, whether it is continuing and the steps being taken by
Borrowers with respect to such default and, such certificate shall have appended
thereto calculations which set forth Borrowers' compliance with the requirements
or restrictions imposed by Sections 6.5, 7.6 and 7.11 hereof.
9.9. Monthly Financial Statements. Furnish Agent within thirty (30)
days after the end of each month, an unaudited balance sheet of Borrowers on a
consolidated and consolidating basis and unaudited statements of income of
Borrowers on a consolidated and consolidating basis reflecting results of
operations from the beginning of the fiscal year
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to the end of such month and for such month, prepared on a basis consistent with
prior practices and complete and correct in all material respects, subject to
normal year end adjustments. The reports shall be accompanied by a certificate
of each Borrower's Chief Financial Officer of each Borrower, which shall state
that, based on an examination sufficient to permit him to make an informed
statement, no Default or Event of Default exists, or, if such is not the case,
specifying such Default or Event of Default, its nature, when it occurred,
whether it is continuing and the steps being taken by Borrowers with respect to
such event and, such certificate shall have appended thereto calculations which
set forth Borrowers' compliance with the requirements or restrictions imposed by
Sections 6.5, 7.6 and 7.11 hereof.
9.10. Other Reports. Furnish Agent as soon as available, but in any
event within ten (10) days after the issuance thereof, with copies of such
financial statements, reports and returns as each Borrower shall send to its
stockholders.
9.11. Additional Information. Furnish Agent with such additional
information as Agent shall reasonably request in order to enable Agent to
determine whether the terms, covenants, provisions and conditions of this
Agreement and the Note have been complied with by Borrowers including, without
limitation and without the necessity of any request by Agent, (a) copies of all
environmental audits and reviews, (b) at least thirty (30) days prior thereto,
notice of any Borrower's opening of any new office or place of business or any
Borrower's closing of any existing office or place of business, and (c) promptly
upon any Borrower's learning thereof, notice of any labor dispute to which any
Borrower may become a party, any strikes or walkouts relating to any of its
plants or other facilities, and the expiration of any labor contract to which
any Borrower is a party or by which any Borrower is bound.
9.12. Projected Operating Budget. Furnish Agent, no later than thirty
(30) days prior to the beginning of each Borrower's fiscal years commencing with
fiscal year 1999, a month by month projected operating budget and cash flow of
Borrowers on a consolidated and consolidating basis for such fiscal year
(including an income statement for each month and a balance sheet as at the end
of the last month in each fiscal quarter), such projections to be accompanied by
a certificate signed by the President or Chief Financial Officer of each
Borrower to the effect that such projections have been prepared on the basis of
sound financial planning practice consistent with past budgets and financial
statements and that such officer has no reason to question the reasonableness of
any material assumptions on which such projections were prepared.
9.13. Notice of Suits, Adverse Events. Furnish Agent with prompt notice
of (i) any lapse or other termination of any Consent issued to any Borrower by
any Governmental Body or any other Person that is material to the operation of
any Borrower's business, (ii) any refusal by any Governmental Body or any other
Person to renew or extend any such Consent; and (iii) copies of any periodic or
special reports filed by any Borrower with any
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Governmental Body or Person, if such reports indicate any material change in the
business, operations, affairs or condition of any Borrower, or if copies thereof
are requested by Lender, and (iv) copies of any material notices and other
communications from any Governmental Body or Person which specifically relate to
any Borrower.
9.14. ERISA Notices and Requests. Furnish Agent with immediate written
notice in the event that (i) any Borrower or any member of the Controlled Group
knows or has reason to know that a Termination Event has occurred, together with
a written statement describing such Termination Event and the action, if any,
which such Borrower or member of the Controlled Group has taken, is taking, or
proposes to take with respect thereto and, when known, any action taken or
threatened by the Internal Revenue Service, Department of Labor or PBGC with
respect thereto, (ii) any Borrower or any member of the Controlled Group knows
or has reason to know that a prohibited transaction (as defined in Sections 406
of ERISA and 4975 of the Code) has occurred together with a written statement
describing such transaction and the action which such Borrower or any member of
the Controlled Group has taken, is taking or proposes to take with respect
thereto, (iii) a funding waiver request has been filed with respect to any Plan
together with all communications received by any Borrower or any member of the
Controlled Group with respect to such request, (iv) any increase in the benefits
of any existing Plan or the establishment of any new Plan or the commencement of
contributions to any Plan to which any Borrower or any member of the Controlled
Group was not previously contributing shall occur, (v) any Borrower or any
member of the Controlled Group shall receive from the PBGC a notice of intention
to terminate a Plan or to have a trustee appointed to administer a Plan,
together with copies of each such notice, (vi) any Borrower or any member of the
Controlled Group shall receive any favorable or unfavorable determination letter
from the Internal Revenue Service regarding the qualification of a Plan under
Section 401(a) of the Code, together with copies of each such letter; (vii) any
Borrower or any member of the Controlled Group shall receive a notice regarding
the imposition of withdrawal liability, together with copies of each such
notice; (viii) any Borrower or any member of the Controlled Group shall fail to
make a required installment or any other required payment under Section 412 of
the Code on or before the due date for such installment or payment; (ix) any
Borrower or any member of the Controlled Group knows that (a) a Multiemployer
Plan has been terminated, (b) the administrator or plan sponsor of a
Multiemployer Plan intends to terminate a Multiemployer Plan, or (c) the PBGC
has instituted or will institute proceedings under Section 4042 of ERISA to
terminate a Multiemployer Plan.
9.15. Additional Documents. Execute and deliver to Agent, upon request,
such documents and agreements as Agent may, from time to time, reasonably
request to carry out the purposes, terms or conditions of this Agreement.
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X. EVENTS OF DEFAULT.
The occurrence of any one or more of the following events shall
constitute an "Event of Default":
10.1. failure by any Borrower to pay any principal or interest on the
Obligations when due, whether at maturity or by reason of acceleration pursuant
to the terms of this Agreement, or by required prepayment or failure to pay any
other liabilities or make any other payment, fee or charge provided for herein
when due or in any Other Document, within two (2) Business Days after the due
date therefor;
10.2. any representation or warranty made or deemed made by any
Borrower in this Agreement or any related agreement or in any certificate,
document or financial or other statement furnished at any time in connection
herewith or therewith shall prove to have been misleading in any material
respect on the date when made or deemed to have been made;
10.3. failure by any Borrower to (i) furnish financial information when
due or when requested, or (ii) permit the inspection of its books or records,
and in either such case such failure is not cured within five (5) days of the
date when due or requested;
10.4. issuance of a notice of Lien, levy, assessment, injunction or
attachment against a material portion of any Borrower's property;
10.5. except as otherwise provided for in this Article 10, failure or
neglect of any Borrower to perform, keep or observe any term, provision,
condition, covenant contained in this Agreement, or contained in any other
agreement or arrangement, now or hereafter entered into between any Borrower and
Agent or any Lender which failure or neglect, if capable of being cured, is not
cured within fifteen (15) days after the earlier of notice from the Agent or any
Lender thereof or actual notice thereof by a Borrower.
10.6. any judgment or judgments are rendered or judgment liens filed
against any Borrower for an aggregate amount in excess of $350,000 which within
thirty (30) days of such rendering or filing is not either satisfied, stayed,
bonded, vacated or discharged of record;
10.7. any Borrower shall (i) apply for, consent to or suffer the
appointment of, or the taking of possession by, a receiver, custodian, trustee,
liquidator or similar fiduciary of itself or of all or a substantial part of its
property, (ii) make a general assignment for the benefit of creditors, (iii)
commence a voluntary case under any state or federal bankruptcy laws (as now or
hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a
petition seeking to take advantage of any other law providing for the relief of
debtors, (vi) acquiesce to, or fail to have dismissed, within thirty (30) days,
any petition filed against it
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in any involuntary case under such bankruptcy laws, or (vii) take any action for
the purpose of effecting any of the foregoing;
10.8. any Borrower shall admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of its
present business;
10.9. any Subsidiary of any Borrower, shall (i) apply for, consent to
or suffer the appointment of, or the taking of possession by, a receiver,
custodian, trustee, liquidator or similar fiduciary of itself or of all or a
substantial part of its property, (ii) admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of its
present business, (iii) make a general assignment for the benefit of creditors,
(iv) commence a voluntary case under any state or federal bankruptcy laws (as
now or hereafter in effect), (v) be adjudicated a bankrupt or insolvent, (vi)
file a petition seeking to take advantage of any other law providing for the
relief of debtors, (vii) acquiesce to, or fail to have dismissed, within thirty
(30) days, any petition filed against it in any involuntary case under such
bankruptcy laws, or (viii) take any action for the purpose of effecting any of
the foregoing;
10.10. any change in any Borrower's condition or affairs (financial or
otherwise) which in Agent's opinion has a Material Adverse Effect;
10.11. any Lien created hereunder or provided for hereby or under any
related agreement for any reason ceases to be or is not a valid and perfected
Lien having a first priority interest, with an aggregate value in excess of
$50,000;
10.12. a default of the obligations of any Borrower under any other
agreement to which it is a party shall occur which adversely affects its
condition, affairs or prospects (financial or otherwise) which default is not
cured within any applicable grace period;
10.13. any Change of Control shall occur;
10.14. any material provision of this Agreement shall, for any reason,
cease to be valid and binding on any Borrower, or any Borrower shall so claim in
writing to Agent;
10.15. (i) any Governmental Body shall (A) revoke, terminate, suspend
or adversely modify any license, permit, patent trademark or tradename of any
Borrower, the continuation of which is material to the continuation of any
Borrower's business, or (B) commence proceedings to suspend, revoke, terminate
or adversely modify any such license, permit, trademark, tradename or patent and
such proceedings shall not be dismissed or discharged within sixty (60) days, or
(c) schedule or conduct a hearing on the renewal of any license, permit,
trademark, tradename or patent necessary for the continuation of any Borrower's
business and the staff of such Governmental Body issues a report recommending
the termination, revocation, suspension or material, adverse
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modification of such license, permit, trademark, tradename or patent the
continuation of which is material to the continuation of any Borrower's
business; (ii) any agreement which is necessary or material to the operation of
any Borrower's business shall be revoked or terminated and not replaced by a
substitute acceptable to Agent within thirty (30) days after the date of such
revocation or termination, and such revocation or termination and
non-replacement would reasonably be expected to have a Material Adverse Effect
on any Borrower;
10.16. any portion of the Collateral with an aggregate value in excess
of $50,000 shall be seized or taken by a Governmental Body, or any Borrower or
the title and rights of any Borrower which is the owner of any portion of the
Collateral with an aggregate value in excess of $50,000 shall have become the
subject matter of litigation which might, in the reasonable opinion of Agent,
upon final determination, result in impairment or loss of the security provided
by this Agreement or the Other Documents;
10.17. the operations of any Borrower's manufacturing facility are
interrupted at any time for more than forty (40) hours during any period of
seven (7) consecutive days, unless such Borrower shall (i) be entitled to
receive for such period of interruption, proceeds of business interruption
insurance sufficient to assure that its per diem cash needs during such period
is at least equal to its average per diem cash needs for the consecutive three
month period immediately preceding the initial date of interruption and (ii)
receive such proceeds in the amount described in clause (i) preceding not later
than thirty (30) days following the initial date of any such interruption;
provided, however, that notwithstanding the provisions of clauses (i) and (ii)
of this section, an Event of Default shall be deemed to have occurred if such
Borrower shall be receiving the proceeds of business interruption insurance for
a period of thirty (30) consecutive days; or
10.18. an event or condition specified in Sections 7.16 or 9.15 hereof
shall occur or exist with respect to any Plan and, as a result of such event or
condition, together with all other such events or conditions, any Borrower or
any member of the Controlled Group shall incur, or in the opinion of Agent be
reasonably likely to incur, a liability to a Plan or the PBGC (or both) which,
in the reasonable judgment of Agent, would have a Material Adverse Effect on any
Borrower.
XI. LENDERS' RIGHTS AND REMEDIES AFTER DEFAULT.
11.1. Rights and Remedies. Upon the occurrence of (i) an Event of
Default pursuant to Section 10.7 all Obligations shall be immediately due and
payable and this Agreement and the obligation of Lenders to make Advances shall
be deemed terminated; and, (ii) any of the other Events of Default and at any
time thereafter (such default not having previously been cured), at the option
of Required Lenders all Obligations shall be immediately due and payable and
Lenders shall have the right to terminate this Agreement
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and to terminate the obligation of Lenders to make Advances and (iii) a filing
of a petition against any Borrower in any involuntary case under any state or
federal bankruptcy laws, the obligation of Lenders to make Advances hereunder
shall be terminated other than as may be required by an appropriate order of the
bankruptcy court having jurisdiction over any Borrower. Upon the occurrence of
any Event of Default, Agent shall have the right to exercise any and all other
rights and remedies provided for herein, under the Uniform Commercial Code and
at law or equity generally, including, without limitation, the right to
foreclose the security interests granted herein and to realize upon any
Collateral by any available judicial procedure and/or to take possession of and
sell any or all of the Collateral with or without judicial process. Agent may
enter any of Borrower's premises or other premises without legal process and
without incurring liability to any Borrower therefor, and Agent may thereupon,
or at any time thereafter, in its discretion without notice or demand, take the
Collateral and remove the same to such place as Agent may deem advisable and
Agent may require Borrowers to make the Collateral available to Agent at a
convenient place. With or without having the Collateral at the time or place of
sale, Agent may sell the Collateral, or any part thereof, at public or private
sale, at any time or place, in one or more sales, at such price or prices, and
upon such terms, either for cash, credit or future delivery, as Agent may elect.
Except as to that part of the Collateral which is perishable or threatens to
decline speedily in value or is of a type customarily sold on a recognized
market, Agent shall give Borrowers reasonable notification of such sale or
sales, it being agreed that in all events written notice mailed to Borrowers at
least five (5) days prior to such sale or sales is reasonable notification. At
any public sale Agent or any Lender may bid for and become the purchaser, and
Agent, any Lender or any other purchaser at any such sale thereafter shall hold
the Collateral sold absolutely free from any claim or right of whatsoever kind,
including any equity of redemption and such right and equity are hereby
expressly waived and released by each Borrower. In connection with the exercise
of the foregoing remedies, Agent is granted permission to use all of each
Borrower's trademarks, trade styles, trade names, patents, patent applications,
licenses, franchises and other proprietary rights which are used in connection
with (a) Inventory for the purpose of disposing of such Inventory and (b)
Equipment for the purpose of completing the manufacture of unfinished goods. The
proceeds realized from the sale of any Collateral shall be applied as follows:
first, to the reasonable costs, expenses and attorneys' fees and expenses
incurred by Agent for collection and for acquisition, completion, protection,
removal, storage, sale and delivery of the Collateral; second, to interest due
upon any of the Obligations and any fees payable under this Agreement; and,
third, to the principal of the Obligations. If any deficiency shall arise,
Borrowers shall remain liable to Agent and Lenders therefor.
11.2. Agent's Discretion. Agent shall have the right in its sole
discretion to determine which rights, Liens, security interests or remedies
Agent may at any time pursue, relinquish, subordinate, or modify or to take any
other action with respect thereto and such determination will not in any way
modify or affect any of Agent's or Lenders' rights hereunder.
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11.3. Setoff. In addition to any other rights which Agent or any Lender
may have under applicable law, upon the occurrence of an Event of Default
hereunder, Agent and such Lender shall have a right to apply any Borrower's
property held by Agent and such Lender to reduce the Obligations.
11.4. Rights and Remedies not Exclusive. The enumeration of the
foregoing rights and remedies is not intended to be exhaustive and the exercise
of any right or remedy shall not preclude the exercise of any other right or
remedies provided for herein or otherwise provided by law, all of which shall be
cumulative and not alternative.
XII. WAIVERS AND JUDICIAL PROCEEDINGS.
12.1. Waiver of Notice. Each Borrower hereby waives notice of
non-payment of any of the Receivables, demand, presentment, protest and notice
thereof with respect to any and all instruments, notice of acceptance hereof,
notice of loans or advances made, credit extended, Collateral received or
delivered, or any other action taken in reliance hereon, and all other demands
and notices of any description, except such as are expressly provided for
herein.
12.2. Delay. No delay or omission on Agent's or any Lender's part in
exercising any right, remedy or option shall operate as a waiver of such or any
other right, remedy or option or of any default.
12.3. Jury Waiver. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES
ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A)
ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT
EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH
OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM
WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT
EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO
OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE AND EACH PARTY HEREBY CONSENTS THAT
ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT
TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENTS OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
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XIII. EFFECTIVE DATE AND TERMINATION.
13.1. Term. This Agreement, which shall inure to the benefit of and
shall be binding upon the respective successors and permitted assigns of each
Borrower, Agent and each Lender, shall become effective on the date hereof and
shall continue in full force and effect until March __, 2002 (the "Term") unless
sooner terminated as herein provided. Borrowers may terminate this Agreement at
any time upon ninety (90) days' prior written notice upon payment in full of the
Obligations. In the event the Obligations are prepaid in full prior to the last
day of the Term (the date of such prepayment hereinafter referred to as the
"Early Termination Date"), Borrowers shall pay to Agent for the benefit of
Lenders an early termination fee in an amount equal to $250,000 if the Early
Termination Date occurs on or after the Closing Date to and including the date
immediately preceding the second anniversary of the Closing Date.
13.2. Termination. The termination of the Agreement shall not affect
any Borrower's, Agent's or any Lender's rights, or any of the Obligations having
their inception prior to the effective date of such termination, and the
provisions hereof shall continue to be fully operative until all transactions
entered into, rights or interests created or Obligations have been fully
disposed of, concluded or liquidated. The security interests, Liens and rights
granted to Agent and Lenders hereunder and the financing statements filed
hereunder shall continue in full force and effect, notwithstanding the
termination of this Agreement or the fact that Borrowers' Account may from time
to time be temporarily in a zero or credit position, until all of the
Obligations of each Borrower have been paid or performed in full after the
termination of this Agreement or each Borrower has furnished Agent and Lenders
with an indemnification satisfactory to Agent and Lenders with respect thereto.
Accordingly, each Borrower waives any rights which it may have under Section
9-404(1) of the Uniform Commercial Code to demand the filing of termination
statements with respect to the Collateral, and Agent shall not be required to
send such termination statements to each Borrower, or to file them with any
filing office, unless and until this Agreement shall have been terminated in
accordance with its terms and all Obligations paid in full in immediately
available funds. All representations, warranties, covenants, waivers and
agreements contained herein shall survive termination hereof until all
Obligations are paid or performed in full.
XIV. REGARDING AGENT.
14.1. Appointment. Each Lender hereby designates PNC to act as Agent
for such Lender under this Agreement and the Other Documents. Each Lender hereby
irrevocably authorizes Agent to take such action on its behalf under the
provisions of this Agreement and the Other Documents and to exercise such powers
and to perform such duties hereunder and thereunder as are specifically
delegated to or required of Agent by the terms hereof and thereof and such other
powers as are reasonably incidental thereto and
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Agent shall hold all Collateral, payments of principal and interest, fees
(except the fees set forth in Sections 3.3(a) and 3.4), charges and collections
(without giving effect to any collection days) received pursuant to this
Agreement, for the ratable benefit of Lenders. Agent may perform any of its
duties hereunder by or through its agents or employees. As to any matters not
expressly provided for by this Agreement (including without limitation,
collection of the Note) Agent shall not be required to exercise any discretion
or take any action, but shall be required to act or to refrain from acting (and
shall be fully protected in so acting or refraining from acting) upon the
instructions of the Required Lenders, and such instructions shall be binding;
provided, however, that Agent shall not be required to take any action which
exposes Agent to liability or which is contrary to this Agreement or the Other
Documents or applicable law unless Agent is furnished with an indemnification
reasonably satisfactory to Agent with respect thereto.
14.2. Nature of Duties. Agent shall have no duties or responsibilities
except those expressly set forth in this Agreement and the Other Documents.
Neither Agent nor any of its officers, directors, employees or agents shall be
(i) liable for any action taken or omitted by them as such hereunder or in
connection herewith, unless caused by their gross (not mere) negligence or
willful misconduct, or (ii) responsible in any manner for any recitals,
statements, representations or warranties made by any Borrower or any officer
thereof contained in this Agreement, or in any of the Other Documents or in any
certificate, report, statement or other document referred to or provided for in,
or received by Agent under or in connection with, this Agreement or any of the
Other Documents or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement, or any of the Other Documents
or for any failure of any Borrower to perform its obligations hereunder. Agent
shall not be under any obligation to any Lender to ascertain or to inquire as to
the observance or performance of any of the agreements contained in, or
conditions of, this Agreement or any of the Other Documents, or to inspect the
properties, books or records of any Borrower. The duties of Agent as respects
the Advances to Borrowers shall be mechanical and administrative in nature;
Agent shall not have by reason of this Agreement a fiduciary relationship in
respect of any Lender; and nothing in this Agreement, expressed or implied, is
intended to or shall be so construed as to impose upon Agent any obligations in
respect of this Agreement except as expressly set forth herein.
14.3. Lack of Reliance on Agent and Resignation. Independently and
without reliance upon Agent or any other Lender, each Lender has made and shall
continue to make (i) its own independent investigation of the financial
condition and affairs of each Borrower in connection with the making and the
continuance of the Advances hereunder and the taking or not taking of any action
in connection herewith, and (ii) its own appraisal of the creditworthiness of
each Borrower. Agent shall have no duty or responsibility, either initially or
on a continuing basis, to provide any Lender with any credit or other
information with respect thereto, whether coming into its possession before
making of the Advances or at any time or times thereafter except as shall be
provided by any Borrower pursuant to the terms hereof. Agent shall not be
responsible to any Lender for any recitals,
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statements, information, representations or warranties herein or in any
agreement, document, certificate or a statement delivered in connection with or
for the execution, effectiveness, genuineness, validity, enforceability,
collectibility or sufficiency of this Agreement or any Other Document, or of the
financial condition of any Borrower, or be required to make any inquiry
concerning either the performance or observance of any of the terms, provisions
or conditions of this Agreement, the Note, the Other Documents or the financial
condition of any Borrower, or the existence of any Event of Default or any
Default.
Agent may resign on sixty (60) days' written notice to each of Lenders
and Borrowing Agent and upon such resignation, the Required Lenders will
promptly designate a successor Agent reasonably satisfactory to Borrowers.
Any such successor Agent shall succeed to the rights, powers and duties
of Agent, and the term "Agent" shall mean such successor agent effective upon
its appointment, and the former Agent's rights, powers and duties as Agent shall
be terminated, without any other or further act or deed on the part of such
former Agent. After any Agent's resignation as Agent, the provisions of this
Article XIV shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Agent under this Agreement.
14.4. Certain Rights of Agent. If Agent shall request instructions from
Lenders with respect to any act or action (including failure to act) in
connection with this Agreement or any Other Document, Agent shall be entitled to
refrain from such act or taking such action unless and until Agent shall have
received instructions from the Required Lenders; and Agent shall not incur
liability to any Person by reason of so refraining. Without limiting the
foregoing, Lenders shall not have any right of action whatsoever against Agent
as a result of its acting or refraining from acting hereunder in accordance with
the instructions of the Required Lenders.
14.5. Reliance. Agent shall be entitled to rely, and shall be fully
protected in relying, upon any note, writing, resolution, notice, statement,
certificate, telex, teletype or telecopier message, cablegram, order or other
document or telephone message believed by it to be genuine and correct and to
have been signed, sent or made by the proper person or entity, and, with respect
to all legal matters pertaining to this Agreement and the Other Documents and
its duties hereunder, upon advice of counsel selected by it. Agent may employ
agents and attorneys-in-fact and shall not be liable for the default or
misconduct of any such agents or attorneys-in-fact selected by Agent with
reasonable care.
14.6. Notice of Default. Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default hereunder or under
the Other Documents, unless Agent has received notice from a Lender or a
Borrower referring to this Agreement or the Other Documents, describing such
Default or Event of Default and stating that such notice is a "notice of
default". In the event that Agent receives such a
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notice, Agent shall give notice thereof to Lenders. Agent shall take such action
with respect to such Default or Event of Default as shall be reasonably directed
by the Required Lenders; provided, that, unless and until Agent shall have
received such directions, Agent may (but shall not be obligated to) 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 interests of Lenders.
14.7. Indemnification. To the extent Agent is not reimbursed and
indemnified by Borrowers, each Lender will reimburse and indemnify Agent in
proportion to its respective portion of the Advances (or, if no Advances are
outstanding, according to its Commitment Percentage), from and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind or nature whatsoever which
may be imposed on, incurred by or asserted against Agent in performing its
duties hereunder, or in any way relating to or arising out of this Agreement or
any Other Document; provided that, Lenders shall not be liable for any portion
of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from Agent's gross
(not mere) negligence or willful misconduct.
14.8. Agent in its Individual Capacity. With respect to the obligation
of Agent to lend under this Agreement, the Advances made by it shall have the
same rights and powers hereunder as any other Lender and as if it were not
performing the duties as Agent specified herein; and the term "Lender" or any
similar term shall, unless the context clearly otherwise indicates, include
Agent in its individual capacity as a Lender. Agent may engage in business with
any Borrower as if it were not performing the duties specified herein, and may
accept fees and other consideration from any Borrower for services in connection
with this Agreement or otherwise without having to account for the same to
Lenders.
14.9. Delivery of Documents. To the extent Agent receives financial
statements required under Sections 9.7, 9.8, and 9.9 from any Borrower pursuant
to the terms of this Agreement, Agent will promptly furnish such documents and
information to Lenders.
14.10. Borrowers' Undertaking to Agent. Without prejudice to their
respective obligations to Lenders under the other provisions of this Agreement,
each Borrower hereby undertakes with Agent to pay to Agent from time to time on
demand all amounts from time to time due and payable by it for the account of
Agent or Lenders or any of them pursuant to this Agreement to the extent not
already paid. Any payment made pursuant to any such demand shall pro tanto
satisfy the relevant Borrower's obligations to make payments for the account of
Lenders or the relevant one or more of them pursuant to this Agreement.
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XV. BORROWING AGENCY.
15.1. Borrowing Agency Provisions.
(a) Each Borrower hereby irrevocably designates Borrowing
Agent to be its attorney and agent and in such capacity to borrow, sign and
endorse notes, and execute and deliver all instruments, documents, writings and
further assurances now or hereafter required hereunder, on behalf of such
Borrower or Borrowers, and hereby authorizes Agent to pay over or credit all
loan proceeds hereunder in accordance with the request of Borrowing Agent.
(b) The handling of this credit facility as a co-borrowing
facility with a borrowing agent in the manner set forth in this Agreement is
solely as an accommodation to Borrowers and at their request. Neither Agent nor
any Lender shall incur liability to Borrowers as a result thereof. To induce
Agent and Lenders to do so and in consideration thereof, each Borrower hereby
indemnifies Agent and each Lender and holds Agent and each Lender harmless from
and against any and all liabilities, expenses, losses, damages and claims of
damage or injury asserted against Agent or any Lender by any Person arising from
or incurred by reason of the handling of the financing arrangements of Borrowers
as provided herein, reliance by Agent or any Lender on any request or
instruction from Borrowing Agent or any other action taken by Agent or any
Lender with respect to this Section 15.1 except due to willful misconduct or
gross (not mere) negligence by the indemnified party.
(c) All Obligations shall be joint and several, and each
Borrower shall make payment upon the maturity of the Obligations by acceleration
or otherwise, and such obligation and liability on the part of each Borrower
shall in no way be affected by any extensions, renewals and forbearance granted
to Agent or any Lender to any Borrower, failure of Agent or any Lender to give
any Borrower notice of borrowing or any other notice, any failure of Agent or
any Lender to pursue or preserve its rights against any Borrower, the release by
Agent or any Lender of any Collateral now or thereafter acquired from any
Borrower, and such agreement by each Borrower to pay upon any notice issued
pursuant thereto is unconditional and unaffected by prior recourse by Agent or
any Lender to the other Borrowers or any Collateral for such Borrower's
Obligations or the lack thereof.
15.2. Waiver of Subrogation. Each Borrower expressly waives any and all
rights of subrogation, reimbursement, indemnity, exoneration, contribution of
any other claim which such Borrower may now or hereafter have against the other
Borrowers or other Person directly or contingently liable for the Obligations
hereunder, or against or with respect to the other Borrowers' property
(including, without limitation, any property which is Collateral for the
Obligations), arising from the existence or performance of this Agreement, until
termination of this Agreement and repayment in full of the Obligations.
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XVI. MISCELLANEOUS.
16.1. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Pennsylvania applied to
contracts to be performed wholly within the Commonwealth of Pennsylvania. Any
judicial proceeding brought by or against any Borrower with respect to any of
the Obligations, this Agreement or any related agreement may be brought in any
court of competent jurisdiction in the Commonwealth of Pennsylvania, United
States of America, and, by execution and delivery of this Agreement, each
Borrower accepts for itself and in connection with its properties, generally and
unconditionally, the non-exclusive jurisdiction of the aforesaid courts, and
irrevocably agrees to be bound by any judgment rendered thereby in connection
with this Agreement. Each Borrower hereby waives personal service of any and all
process upon it and consents that all such service of process may be made by
registered mail (return receipt requested) directed to Borrowing Agent at its
address set forth in Section 16.6 and service so made shall be deemed completed
five (5) days after the same shall have been so deposited in the mails of the
United States of America, or, at the Agent's and/or any Lender's option, by
service upon Borrowing Agent which each Borrower irrevocably appoints as such
Borrower's Agent for the purpose of accepting service within the Commonwealth of
Pennsylvania. Nothing herein shall affect the right to serve process in any
manner permitted by law or shall limit the right of Agent or any Lender to bring
proceedings against any Borrower in the courts of any other jurisdiction. Each
Borrower waives any objection to jurisdiction and venue of any action instituted
hereunder and shall not assert any defense based on lack of jurisdiction or
venue or based upon forum non conveniens. Any judicial proceeding by any
Borrower against Agent or any Lender involving, directly or indirectly, any
matter or claim in any way arising out of, related to or connected with this
Agreement or any related agreement, shall be brought only in a federal or state
court located in the County of Philadelphia, Commonwealth of Pennsylvania.
16.2. Entire Understanding. (a) This Agreement and the documents
executed concurrently herewith contain the entire understanding between each
Borrower, Agent and each Lender and supersedes all prior agreements and
understandings, if any, relating to the subject matter hereof. Any promises,
representations, warranties or guarantees not herein contained and hereinafter
made shall have no force and effect unless in writing, signed by each
Borrower's, Agent's and each Lender's respective officers. Neither this
Agreement nor any portion or provisions hereof may be changed, modified,
amended, waived, supplemented, discharged, cancelled or terminated orally or by
any course of dealing, or in any manner other than by an agreement in writing,
signed by the party to be charged. Each Borrower acknowledges that it has been
advised by counsel in connection with the execution of this Agreement and Other
Documents and is not relying upon oral representations or statements
inconsistent with the terms and provisions of this Agreement.
(b) The Required Lenders, Agent with the consent in writing of
the
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Required Lenders, and Borrowers may, subject to the provisions of this Section
16.2 (b), from time to time enter into written supplemental agreements to this
Agreement or the Other Documents executed by Borrowers, for the purpose of
adding or deleting any provisions or otherwise changing, varying or waiving in
any manner the rights of Lenders, Agent or Borrowers thereunder or the
conditions, provisions or terms thereof of waiving any Event of Default
thereunder, but only to the extent specified in such written agreements;
provided, however, that no such supplemental agreement shall, without the
consent of all Lenders:
(i) increase the Commitment Percentage of any Lender.
(ii) extend the maturity of any Note or the due date
for any amount payable hereunder, or decrease the rate of interest or reduce any
fee payable by Borrowers to Lenders pursuant to this Agreement.
(iii) alter the definition of the term Required
Lenders or alter, amend or modify this Section 16.2(b).
(iv) release any Collateral during any calendar year
(other than in accordance with the provisions of this Agreement) having an
aggregate value in excess of $500,000.
(v) change the rights and duties of Agent.
(vi) increase the Maximum Revolving Advance Amount or
permit any Advance to be made if after giving effect thereto the total of
Advances outstanding hereunder would exceed the Formula Amount for more than
sixty (60) consecutive Business Days or exceed one hundred and ten percent
(110%) of the Formula Amount.
(vii) increase the Advance Rates above the Advance
Rates in effect on the Closing Date.
Any such supplemental agreement shall apply equally to each Lender and shall be
binding upon Borrowers, Lenders and Agent and all future holders of the
Obligations. In the case of any waiver, Borrowers, Agent and Lenders shall be
restored to their former positions and rights, and any Event of Default waived
shall be deemed to be cured and not continuing, but no waiver of a specific
Event of Default shall extend to any subsequent Event of Default (whether or not
the subsequent Event of Default is the same as the Event of Default which was
waived), or impair any right consequent thereon.
In the event that Agent requests the consent of a Lender pursuant to
this Section 16.2 and such Lender shall not respond or reply to Agent in writing
within five (5) days of delivery of such request, such Lender shall be deemed to
have consented to matter that
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was the subject of the request. In the event that Agent requests the consent of
a Lender pursuant to this Section 16.2 and such consent is denied, then PNC may,
at its option, require such Lender to assign its interest in the Advances to PNC
or to another Lender or to any other Person designated by the Agent (the
"Designated Lender"), for a price equal to the then outstanding principal amount
thereof plus accrued and unpaid interest and fees due such Lender, which
interest and fees shall be paid when collected from Borrower. In the event PNC
elects to require any Lender to assign its interest to PNC or to the Designated
Lender, PNC will so notify such Lender in writing within forty five (45) days
following such Lender's denial, and such Lender will assign its interest to PNC
or the Designated Lender no later than five (5) days following receipt of such
notice pursuant to a Commitment Transfer Supplement executed by such Lender, PNC
or the Designated Lender, as appropriate, and Agent.
16.3. Successors and Assigns; Participations; New Lenders.
(a) This Agreement shall be binding upon and inure to the
benefit of Borrowers, Agent, each Lender, all future holders of the Obligations
and their respective successors and assigns, except that no Borrower may assign
or transfer any of its rights or obligations under this Agreement without the
prior written consent of Agent and each Lender.
(b) Each Borrower acknowledges that in the regular course of
commercial banking business one or more Lenders may at any time and from time to
time sell participating interests in the Advances to other financial
institutions (each such transferee or purchaser of a participating interest, a
"Transferee"). Each Transferee may exercise all rights of payment (including
without limitation rights of set-off) with respect to the portion of such
Advances held by it or other Obligations payable hereunder as fully as if such
Transferee were the direct holder thereof provided that Borrowers shall not be
required to pay to any Transferee more than the amount which it would have been
required to pay to Lender which granted an interest in its Advances or other
Obligations payable hereunder to such Transferee had such Lender retained such
interest in the Advances hereunder or other Obligations payable hereunder and in
no event shall Borrowers be required to pay any such amount arising from the
same circumstances and with respect to the same Advances or other Obligations
payable hereunder to both such Lender and such Transferee. Each Borrower hereby
grants to any Transferee a continuing security interest in any deposits, moneys
or other property actually or constructively held by such Transferee as security
for the Transferee's interest in the Advances.
(c) Any Lender may with the consent of Agent which shall not
be unreasonably withheld or delayed sell, assign or transfer all or any part of
its rights under this Agreement and the Other Documents to one or more
additional banks or financial institutions and one or more additional banks or
financial institutions may commit to make Advances hereunder (each a "Purchasing
Lender"), in minimum amounts of not less than
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$5,000,000, pursuant to a Commitment Transfer Supplement, executed by a
Purchasing Lender, the transferor Lender, and Agent and delivered to Agent for
recording. Upon such execution, delivery, acceptance and recording, from and
after the transfer effective date determined pursuant to such Commitment
Transfer Supplement, (i) Purchasing Lender thereunder shall be a party hereto
and, to the extent provided in such Commitment Transfer Supplement, have the
rights and obligations of a Lender thereunder with a Commitment Percentage as
set forth therein, and (ii) the transferor Lender thereunder shall, to the
extent provided in such Commitment Transfer Supplement, be released from its
obligations under this Agreement, the Commitment Transfer Supplement creating a
novation for that purpose. Such Commitment Transfer Supplement shall be deemed
to amend this Agreement to the extent, and only to the extent, necessary to
reflect the addition of such Purchasing Lender and the resulting adjustment of
the Commitment Percentages arising from the purchase by such Purchasing Lender
of all or a portion of the rights and obligations of such transferor Lender
under this Agreement and the Other Documents. Borrowers hereby consent to the
addition of such Purchasing Lender and the resulting adjustment of the
Commitment Percentages arising from the purchase by such Purchasing Lender of
all or a portion of the rights and obligations of such transferor Lender under
this Agreement and the Other Documents. Borrowers shall execute and deliver such
further documents and do such further acts and things in order to effectuate the
foregoing.
(d) Agent shall maintain at its address a copy of each
Commitment Transfer Supplement delivered to it and a register (the "Register")
for the recordation of the names and addresses of the Advances owing to each
Lender from time to time. The entries in the Register shall be conclusive, in
the absence of manifest error, and Borrowers, Agent and Lenders may treat each
Person whose name is recorded in the Register as the owner of the Advance
recorded therein for the purposes of this Agreement. The Register shall be
available for inspection by Borrowers or any Lender at any reasonable time and
from time to time upon reasonable prior notice. Agent shall receive a fee in the
amount of $2,500 payable by the applicable Purchasing Lender upon the effective
date of each transfer or assignment to such Purchasing Lender.
(e) Borrowers authorize each Lender to disclose to any
Transferee or Purchasing Lender and any prospective Transferee or Purchasing
Lender any and all financial information in such Lender's possession concerning
Borrowers which has been delivered to such Lender by or on behalf of Borrowers
pursuant to this Agreement or in connection with such Lender's credit evaluation
of Borrowers.
(f) Without otherwise limiting its rights under this Section
16.3, PNC acknowledges that it will retain at least 51% of the Advances and
Commitment Percentages.
16.4. Application of Payments. Agent shall have the continuing and
exclusive right to apply or reverse and re-apply any payment and any and all
proceeds of Collateral to any
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portion of the Obligations. To the extent that any Borrower makes a payment or
Agent or any Lender receives any payment or proceeds of the Collateral for any
Borrower's benefit, which are subsequently invalidated, declared to be
fraudulent or preferential, set aside or required to be repaid to a trustee,
debtor in possession, receiver, custodian or any other party under any
bankruptcy law, common law or equitable cause, then, to such extent, the
Obligations or part thereof intended to be satisfied shall be revived and
continue as if such payment or proceeds had not been received by Agent or such
Lender.
16.5. Indemnity. Each Borrower shall indemnify Agent, each Lender and
each of their respective officers, directors, Affiliates, employees and agents
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses and disbursements of any
kind or nature whatsoever (including, without limitation, fees and disbursements
of counsel) which may be imposed on, incurred by, or asserted against Agent or
any Lender in any litigation, proceeding or investigation instituted or
conducted by any governmental agency or instrumentality or any other Person with
respect to any aspect of, or any transaction contemplated by, or referred to in,
or any matter related to, this Agreement or the Other Documents, whether or not
Agent or any Lender is a party thereto, except to the extent that any of the
foregoing arises out of the willful gross negligence or misconduct of the party
being indemnified.
16.6. Notice. Any notice or request hereunder may be given to any
Borrower or to Agent or any Lender at their respective addresses set forth below
or at such other address as may hereafter be specified in a notice designated as
a notice of change of address under this Section. Any notice or request
hereunder shall be given by (a) hand delivery, (b) overnight courier, (c)
registered or certified mail, return receipt requested, (d) telex or telegram,
subsequently confirmed by registered or certified mail, or (e) telecopy to the
number set out below (or such other number as may hereafter be specified in a
notice designated as a notice of change of address) with electronic confirmation
of its receipt. Any notice or other communication required or permitted pursuant
to this Agreement shall be deemed given (a) when personally delivered to any
officer of the party to whom it is addressed, (b) on the earlier of actual
receipt thereof or three (3) days following posting thereof by certified or
registered mail, postage prepaid, or (c) upon actual receipt thereof when sent
by a recognized overnight delivery service or (d) upon actual receipt thereof
when sent by telecopier to the number set forth below with electronic
confirmation of its receipt, in each case addressed to each party at its address
set forth below or at such other address as has been furnished in writing by a
party to the other by like notice:
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(A) If to Agent or PNC at: PNC Bank, National Association
1600 Market Street
Philadelphia, PA 19103
Attention: Michael Wagner
Telephone: 215-585-5171
Telecopier: 215-585-4771
with a copy to: Ballard Spahr Andrews & Ingersoll, LLP
51st Floor
1735 Market Street
Philadelphia, PA 19103-7599
Attention: Carl H. Fridy, Esquire
Telephone: (215) 864-8726
Telecopier: (215) 864-8999
(B) If to a Lender other than Agent, as specified on the signature
pages hereof
(C) If to Borrowing Agent
or any Borrower, at: PC Service Source, Inc.
2350 Valley View Lane
Dallas, TX 75234
Attention: Robert Boutin
Telephone: 972-481-4949
Telecopier: 972-620-0562
with a copy to: Sayles & Lidji
4400 Renaissance Tower
1201 Elm Street
Dallas, TX 75270
Attention: Michael R. Dorey, Esquire
Telephone: 214-939-8707
Telecopier: 214-939-8787
16.7. Survival. The obligations of Borrowers under Sections 2.2(f),
3.7, 3.8, 3.9, 4.19(h), 14.7 and 16.5 shall survive termination of this
Agreement and the Other Documents and payment in full of the Obligations.
16.8. Severability. If any part of this Agreement is contrary to,
prohibited by, or deemed invalid under applicable laws or regulations, such
provision shall be inapplicable and deemed omitted to the extent so contrary,
prohibited or invalid, but the remainder hereof shall not be invalidated thereby
and shall be given effect so far as possible.
16.9. Expenses. All costs and expenses including, without limitation,
reasonable attorneys' fees (including the allocated costs of in house counsel)
and disbursements incurred by Agent, Agent on behalf of Lenders and Lenders (a)
in all efforts made to enforce payment of any Obligation or effect collection of
any Collateral, or (b) in connection with the entering into, modification,
amendment, administration and enforcement of this Agreement or any consents or
waivers hereunder and all related agreements, documents
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and instruments, or (c) in instituting, maintaining, preserving, enforcing and
foreclosing on Agent's security interest in or Lien on any of the Collateral,
whether through judicial proceedings or otherwise, or (d) in defending or
prosecuting any actions or proceedings arising out of or relating to Agent's or
any Lender's transactions with any Borrower, or (e) in connection with any
advice given to Agent or any Lender with respect to its rights and obligations
under this Agreement and all related agreements, may be charged to Borrowers'
Account and shall be part of the Obligations.
16.10. Injunctive Relief. Each Borrower recognizes that, in the event
any Borrower fails to perform, observe or discharge any of its obligations or
liabilities under this Agreement, any remedy at law may prove to be inadequate
relief to Lenders; therefore, Agent, if Agent so requests, shall be entitled to
temporary and permanent injunctive relief in any such case without the necessity
of proving that actual damages are not an adequate remedy.
16.11. Consequential Damages. Neither Agent nor any Lender, nor any
agent or attorney for any of them, shall be liable to any Borrower for
consequential damages arising from any breach of contract, tort or other wrong
relating to the establishment, administration or collection of the Obligations.
16.12. Captions. The captions at various places in this Agreement are
intended for convenience only and do not constitute and shall not be interpreted
as part of this Agreement.
16.13. Counterparts; Telecopied Signatures. This Agreement may be
executed in any number of and by different parties hereto on separate
counterparts, all of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute one and the same agreement. Any signature
delivered by a party by facsimile transmission shall be deemed to be an original
signature hereto.
16.14. Construction. The parties acknowledge that each party and its
counsel have reviewed this Agreement and that the normal rule of construction to
the effect that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Agreement or any amendments,
schedules or exhibits thereto.
16.15. Confidentiality; Sharing Information. (a) Agent, each Lender and
each Transferee shall hold all non-public information obtained by Agent, such
Lender or such Transferee pursuant to the requirements of this Agreement in
accordance with Agent's, such Lender's and such Transferee's customary
procedures for handling confidential information of this nature; provided,
however, Agent, each Lender and each Transferee may disclose such confidential
information (a) to its examiners, affiliates, outside auditors, counsel and
other professional advisors, (b) to Agent, any Lender or to any prospective
Transferees and Purchasing Lenders, and (c) as required or requested by any
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Governmental Body or representative thereof or pursuant to legal process;
provided, further that (i) unless specifically prohibited by applicable law or
court order, Agent, each Lender and each Transferee shall use its best efforts
prior to disclosure thereof, to notify the applicable Borrower of the applicable
request for disclosure of such non-public information (A) by a Governmental Body
or representative thereof (other than any such request in connection with an
examination of the financial condition of a Lender or a Transferee by such
Governmental Body) or (B) pursuant to legal process and (ii) in no event shall
Agent, any Lender or any Transferee be obligated to return any materials
furnished by any Borrower other than those documents and instruments in
possession of Agent or any Lender in order to perfect its Lien on the Collateral
once the Obligations have been paid in full and this Agreement has been
terminated.
(b) Borrower acknowledges that from time to time financial
advisory, investment banking and other services may be offered or provided to
such Borrower or one or more of its Affiliates (in connection with this
Agreement or otherwise) by any Lender or by one or more Subsidiaries or
Affiliates of such Lender and each Borrower hereby authorizes each Lender to
share any information delivered to such Lender by such Borrower and its
Subsidiaries pursuant to this Agreement, or in connection with the decision of
such Lender to enter into this Agreement, to any such Subsidiary or Affiliate of
such Lender, it being understood that any such Subsidiary or Affiliate of any
Lender receiving such information shall be bound by the provision of Section
16.15 as if it were a Lender hereunder. Such authorization shall survive the
repayment of the other Obligations and the termination of the Loan Agreement.
16.16. Publicity. Each Borrower and each Lender hereby authorizes Agent
to make appropriate announcements of the financial arrangement entered into
among Borrowers, Agent and Lenders, including, without limitation, announcements
which are commonly known as tombstones, in such publications and to such
selected parties as Agent shall in its sole and absolute discretion deem
appropriate.
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Each of the parties has signed this Agreement as of the day and year
first above written.
<TABLE>
<S> <C>
PC SERVICE SOURCE, INC.
ATTEST:
/s/ By: /s/
- - ---------------------------- ------------------------------------
Name:
----------------------------------
Title:
---------------------------------
2350 Valley View Lane
Dallas, TX 75234
CYCLIX ENGINEERING CORPORATION
ATTEST:
/s/ By: /s/
- - ---------------------------- ------------------------------------
Name:
----------------------------------
Title:
---------------------------------
2800 W. Story Road, Suite 200
Irving, TX 75038
HI-TEK SERVICES, INC.
ATTEST:
/s/ By: /s/
- - ---------------------------- ------------------------------------
Name:
----------------------------------
Title:
---------------------------------
1595 Crocker Avenue
Hayward, CA 94545
PNC BANK, NATIONAL ASSOCIATION,
as Lender and as Agent
By: /s/
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
1600 Market Street
Philadelphia, PA 19103-7599
Commitment Percentage: 100%
</TABLE>
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<PAGE> 86
Exhibits and Schedules
<TABLE>
<CAPTION>
Exhibits
<S> <C>
Exhibit 2.1(a) Revolving Credit Note
Exhibit 5.5(b) Financial Projections
Schedules
Schedule 1.2 Permitted Encumbrances
Schedule 4.5 Equipment and Inventory Locations
Schedule 4.15(c) Location of Executive Offices
Schedule 4.19 Real Property
Schedule 5.2(a) States of Qualification and Good Standing
Schedule 5.2(b) Subsidiaries
Schedule 5.4 Federal Tax Identification Number
Schedule 5.5(c) Material Adverse Change
Schedule 5.6 Prior Names
Schedule 5.7 Environmental
Schedule 5.8(b) Litigation
Schedule 5.8(d) Plans
Schedule 5.9 Intellectual Property, Source Code Escrow Agreements
Schedule 5.10 Licenses and Permits
Schedule 5.14 Labor Disputes
</TABLE>
<PAGE> 1
EXHIBIT 10.3
RIGHTS AGREEMENT
BETWEEN
PC SERVICE SOURCE, INC.
and
HARRIS TRUST AND SAVINGS BANK
Rights Agent
Dated as of December 7, 1998
--------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Certain Definitions.........................................................................1
Section 2. Appointment of Rights Agent.................................................................4
Section 3. Issue of Right Certificates.................................................................5
Section 4. Form of Right Certificates..................................................................6
Section 5. Countersignature and Registration...........................................................7
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.......................7
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights...............................8
Section 8. Cancellation and Destruction of Right Certificates..........................................9
Section 9. Status and Availability of Preferred Shares................................................10
Section 10. Preferred Shares Record Date...............................................................10
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights.........................11
Section 12. Certificate of Adjustment..................................................................19
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.......................19
Section 14. Fractional Rights and Fractional Shares....................................................20
Section 15. Rights of Action...........................................................................22
Section 16. Agreement of Right Holders.................................................................22
Section 17. Right Certificate Holder Not Deemed a Stockholder..........................................22
Section 18. Concerning the Rights Agent................................................................23
Section 19. Merger or Consolidation or Change of Name of Rights Agent..................................23
Section 20. Duties of Rights Agent.....................................................................24
Section 21. Change of Rights Agent.....................................................................27
Section 22. Issuance of New Right Certificates.........................................................28
Section 23. Redemption.................................................................................28
Section 24. Exchange...................................................................................29
Section 25. Notice of Certain Events...................................................................30
Section 26. Notices....................................................................................31
Section 27. Supplements and Amendments.................................................................32
Section 28. Successors.................................................................................32
Section 29. Benefits of this Agreement.................................................................32
Section 30. Severability...............................................................................32
Section 31. Governing Law..............................................................................33
Section 32. Counterparts...............................................................................33
Section 33. Descriptive Headings.......................................................................33
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
Section 34. Administration.............................................................................33
Exhibit A Form of Certificate of Designation of Series A Junior
Participating Preferred Stock.............................................................A-1
Exhibit B Form of Right Certificate.................................................................B-1
Exhibit C Summary of Rights to Purchase Preferred Shares............................................C-1
</TABLE>
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<PAGE> 4
RIGHTS AGREEMENT
Agreement, dated as of December 7, 1998, between PC Service Source,
Inc. , a Delaware corporation (the "Company"), and Harris Trust and Savings
Company (the "Rights Agent").
The Board of Directors of the Company has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each share of
Common Stock, par value $0.01 per share, of the Company (a "Common Share")
outstanding on the Close of Business on December 21, 1998 (the "Record Date")
and has authorized the issuance of one Right with respect to each additional
Common Share that shall become outstanding between the Record Date and the
earliest of Close of Business on the Distribution Date, the Redemption Date and
the Close of Business on the Final Expiration Date, each Right representing the
right to purchase one one-thousandth of a Preferred Share (as hereinafter
defined), or such different amount and/or kind of securities as shall be
hereinafter provided.
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
"Acquiring Person" shall mean any Person who or which, together with
all Affiliates and Associates of such Person, shall be the Beneficial Owner of
15%, or in the case of a Grandfathered Stockholder 30%, but shall not include
(i) the Company, (ii) any Subsidiary of the Company, (iii) any employee benefit
plan of the Company or any Subsidiary of the Company, or (iv) any entity holding
Common Shares for or pursuant to the terms of any such employee benefit plan.
Notwithstanding the foregoing, (1) no Person shall become an "Acquiring Person"
as the result of an acquisition of Common Shares by the Company which, by
reducing the number of shares outstanding, increases the proportionate number of
shares beneficially owned by such Person to 15% (or such other percentage as
would otherwise result in such person becoming an Acquiring Person) or more of
the Common Shares of the Company then outstanding; provided, however, that if a
Person shall so become the Beneficial Owner of 15% (or such other percentage) or
more of the Common Shares of the Company then outstanding by reason of an
acquisition of Common Shares by the Company and shall, after such share
purchases by the Company, become the Beneficial Owner of an additional 1% of the
outstanding Common Shares of the Company, then such Person shall be deemed to be
an "Acquiring Person"; and (2) if the Board of Directors of the Company
determines in good faith that a Person who would otherwise be an "Acquiring
Person," as defined pursuant to the foregoing provisions of this paragraph, has
become such
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<PAGE> 5
inadvertently, and such Person divests as promptly as practicable a sufficient
number of Common Shares so that such Person would no longer be an "Acquiring
Person," as defined pursuant to the foregoing provisions of this paragraph, then
such Person shall not be deemed to have become an "Acquiring Person" for any
purposes of this Agreement.
"Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect
on the date of this Agreement.
A Person shall be deemed the "Beneficial Owner" of and shall be deemed
to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities), written or otherwise, or upon the exercise of
conversion rights, exchange rights, rights (other than the Rights), warrants or
options, or otherwise; provided, however, that a Person shall not be deemed to
be the Beneficial Owner of, or to beneficially own, securities tendered pursuant
to a tender or exchange offer made pursuant to, and in accordance with, the
applicable rules and regulations promulgated under the Exchange Act by or on
behalf of such Person or any of such Person's Affiliates or Associates until
such tendered securities are accepted for purchase or exchange; or (B) the right
to vote pursuant to any agreement, arrangement or understanding; provided,
however, that a Person shall not be deemed the Beneficial Owner of, or to
beneficially own, any security if the agreement, arrangement or understanding to
vote such security (1) arises solely from a revocable proxy or consent given to
such Person in response to a public proxy or consent solicitation made pursuant
to, and in accordance with, the applicable rules and regulations promulgated
under the Exchange Act and (2) is not also then reportable on Schedule 13D under
the Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person with which such Person or any of such Person's Affiliates or
Associates has any agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group members with respect
to a bona fide public offering of securities), written or otherwise, for the
purpose of acquiring,
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<PAGE> 6
holding, voting (except to the extent contemplated by the proviso to section (B)
of the immediately preceding paragraph (ii)) or disposing of any securities of
the Company.
Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder.
"Business Day" shall mean any day other than a Saturday, Sunday, or a
day on which banking institutions in the State of Texas or the State of Illinois
are authorized or obligated by law or executive order to close.
"Close of Business" on any given date shall mean 5:00 P.M., Dallas,
Texas time, on such date; provided, however, that if such date is not a Business
Day it shall mean 5:00 P.M., Dallas, Texas time, on the next succeeding Business
Day.
"Common Shares" when used with reference to the Company shall mean the
shares of common stock, par value $0.01 per share, of the Company. "Common
Shares" when used with reference to any Person other than the Company shall mean
the capital stock (or equity interest) with the greatest voting power of such
other Person or, if such other Person is a Subsidiary of another Person, the
Person or Persons which ultimately control such first-mentioned Person.
"Common Stock Equivalents" shall have the meaning set forth in Section
11(a)(iii)(B)(3) hereof.
"Current Value" shall have the meaning set forth in Section
11(a)(iii)(A)(1) hereof.
"Distribution Date" shall have the meaning set forth in Section 3(a)
hereof.
"Equivalent Preferred Shares" shall have the meaning set forth in
Section 11(b) hereof.
"Exchange Ratio" shall have the meaning set forth in Section 24(a)
hereof.
"Final Expiration Date" shall mean December 7, 2008.
"Grandfathered Stockholder" shall mean Eureka Venture Partners I, Ltd.
("EVP") together with its general partner, Eureka Venture Management, Inc.
("EVM"), or their assigns, but only if such entities (including assigns) are
owned or controlled by either of the current owners of EVP and EVM, being Avery
More and Morti Tenenhaus, or each of their respective heirs in the event of
either of their deaths, and the Affiliates and Associates of such entities. Each
of such Grandfathered Stockholder is referred to as a "Eureka Venture Holder".
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<PAGE> 7
"Person" shall mean any individual, firm, corporation, partnership,
limited partnership, limited liability partnership, business trust, limited
liability company, unincorporated association or other entity, and shall include
any successor (by merger or otherwise) of such entity.
"Purchase Price" shall have the meaning set forth in Section 7(b)
hereof.
"Preferred Shares" shall mean shares of Series A Junior Participating
Preferred Stock, par value $0.0001 per share, of the Company having such rights
and preferences upon adoption as are set forth in the form of Certificate of
Designation set forth as Exhibit A hereto.
"Redemption Date" shall have the meaning set forth in Section 23
hereof.
"Right Certificate" shall mean a certificate evidencing a Right in
substantially the form of Exhibit B hereto.
"Section 11(a)(ii) Trigger Date" shall have the meaning set forth in
Section 11(a)(iii) hereof.
"Shares Acquisition Date" shall mean the earlier of the date of (i) the
public announcement by the Company or an Acquiring Person that an Acquiring
Person has become such or (ii) the public disclosure of facts by the Company or
an Acquiring Person indicating that an Acquiring Person has become such.
"Spread" shall have the meaning set forth in Section 11(a)(iii)(A)
hereof.
"Subsidiary" of any Person shall mean any Person of which a majority of
the voting power of the voting equity securities or equity interest is owned,
directly or indirectly, by such Person.
"Substitution Period" shall have the meaning set forth in Section
11(a)(iii) hereof.
"Summary of Rights" shall mean the Summary of Rights to Purchase
Preferred Shares in substantially the form of Exhibit C hereto.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such co-Rights Agents as it may deem necessary or
desirable.
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<PAGE> 8
Section 3. Issue of Right Certificates.
(a) Until the earlier of (i) the tenth day after the Shares Acquisition
Date or (ii) the tenth Business Day (or such later date as may be determined by
action of the Board of Directors prior to such time as any Person becomes an
Acquiring Person) after the date of the commencement by any Person (other than
the Company, any Subsidiary of the Company, any employee benefit plan of the
Company or of any Subsidiary of the Company or any entity holding Common Shares
for or pursuant to the terms of any such plan) of, or of the first public
announcement of the intention of any Person (other than any of the Persons
referred to in the preceding parenthetical) to commence, a tender or exchange
offer the consummation of which would result in any Person becoming the
Beneficial Owner of Common Shares aggregating 15% or, in the case of a
Grandfathered Stockholder 30% (such date being herein referred to as the
"Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of Section 3(b) hereof) by the certificates for Common Shares
registered in the names of the holders thereof (which certificates shall also be
deemed to be Right Certificates) and not by separate Right Certificates, and (y)
the right to receive Right Certificates will be transferable only in connection
with the transfer of Common Shares. As soon as practicable after the
Distribution Date, the Company will prepare and execute, the Rights Agent will
countersign, and the Company will send or cause to be sent (and the Rights Agent
will, if requested, at the expense of the Company, send) by first-class,
insured, postage-prepaid mail, to each record holder of Common Shares as of the
Close of Business on the Distribution Date, at the address of such holder shown
on the records of the Company, a Right Certificate evidencing one Right for each
Common Share so held. As of the Distribution Date, the Rights will be evidenced
solely by such Right Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the
Company will send a copy of the Summary of Rights by first-class,
postage-prepaid mail, to each record holder of Common Shares as of the Close of
Business on the Record Date, at the address of such holder shown on the records
of the Company. With respect to certificates for Common Shares outstanding as of
the Record Date, until the Close of Business on the Distribution Date, the
Rights will be evidenced by such certificates registered in the names of the
holders thereof together with a copy of the Summary of Rights attached thereto.
Until the Close of Business on the Distribution Date (or the earlier of the
Redemption Date or the Close of Business on the Final Expiration Date), the
surrender for transfer of any certificate for Common Shares outstanding on the
Record Date, with or without a copy of the Summary of Rights attached thereto,
shall also constitute the transfer of the Rights associated with the Common
Shares evidenced thereby.
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<PAGE> 9
(c) Certificates for Common Shares which become outstanding (including,
without limitation, reacquired Common Shares referred to in the last sentence of
this paragraph (c)) after the Record Date but prior to the earliest of the Close
of Business on the Distribution Date, the Redemption Date or the Close of
Business on the Final Expiration Date shall have impressed on, printed on,
written on or otherwise affixed to them the following legend:
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in a Rights Agreement between PC Service
Source , Inc. and Harris Trust and Savings Bank, as Rights Agent, dated
as of December 7, 1998 (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is on file
at the principal executive offices of PC Service Source , Inc.. Under
certain circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and will no longer be
evidenced by this certificate. PC Service Source , Inc. will mail to
the holder of this certificate a copy of the Rights Agreement without
charge after receipt of a written request therefor. Under certain
circumstances, Rights that are or were acquired or beneficially owned
by Acquiring Persons (as defined in the Rights Agreement) may become
null and void.
With respect to such certificates containing the foregoing legend, until the
Close of Business on the Distribution Date, the Rights associated with the
Common Shares represented by certificates shall be evidenced by such
certificates alone, and the surrender for transfer of any such certificate shall
also constitute the transfer of the Rights associated with the Common Shares
represented thereby. In the event that the Company purchases or acquires any
Common Shares after the Record Date but prior to the Close of Business on the
Distribution Date, any Rights associated with such Common Shares shall be deemed
canceled and retired so that the Company shall not be entitled to exercise any
Rights associated with the Common Shares which are no longer outstanding.
Section 4. Form of Right Certificates. The Right Certificates (and the
forms of election to purchase Preferred Shares and of assignment to be printed
on the reverse thereof) shall be substantially the same as Exhibit B hereto and
may have such marks of identification or designation and such legends, summaries
or endorsements printed thereon as the Company may deem appropriate and as are
not inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the Rights
may from time to time be listed, or to conform to usage. Subject to the other
provisions of
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<PAGE> 10
this Agreement, the Right Certificates shall entitle the holders thereof to
purchase such number of one one-thousandths of a Preferred Share as shall be set
forth therein at the Purchase Price, but the number of one one-thousandths of a
Preferred Share and the Purchase Price shall be subject to adjustment as
provided herein.
Section 5. Countersignature and Registration. The Right Certificates
shall be executed on behalf of the Company by its Chairman of the Board, its
Chief Executive Officer, its President, any of its Vice Presidents, or its
Treasurer, either manually or by facsimile signature, shall have affixed thereto
the Company's seal or a facsimile thereof, and shall be attested by the
Secretary or any Assistant Secretary of the Company, either manually or by
facsimile signature. The Right Certificates shall be countersigned by the Rights
Agent and shall not be valid for any purpose unless so countersigned, either
manually or by facsimile. In case any officer of the Company who shall have
signed any of the Right Certificates shall cease to be such officer of the
Company before countersignature by the Rights Agent and issuance and delivery by
the Company, such Right Certificates, nevertheless, may be countersigned by the
Rights Agent and issued and delivered by the Company with the same force and
effect as though the person who signed such Right Certificates had not ceased to
be such officer of the Company; and any Right Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Right Certificate, shall be a proper officer of the Company to sign such
Right Certificate, although at the date of the execution of this Rights
Agreement any such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its principal office, books for registration of the transfer of the
Right Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Right Certificates, the number of
Rights evidenced on its face by each of the Right Certificates and the date of
each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject
to the provisions of Section 14 hereof, at any time after the Close of Business
on the Distribution Date, and prior to the earlier of the Redemption Date or the
Close of Business on the Final Expiration Date, any Right Certificate or Right
Certificates (other than Right Certificates representing Rights that have become
void pursuant to Section 11(a)(ii) hereof or that have been exchanged pursuant
to Section 24 hereof) may be transferred, split up, combined or exchanged for
another Right Certificate or Right Certificates, entitling the registered holder
to purchase a like number of one one-thousandths of a Preferred Share as the
Right Certificate or Right Certificates surrendered then entitled such holder to
purchase. Any registered holder desiring to transfer, split up, combine or
exchange any Right Certificate or Right Certificates shall make such request in
writing delivered to the Rights Agent, and shall
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<PAGE> 11
surrender the Right Certificate or Right Certificates to be transferred, split
up, combined or exchanged at the principal office of the Rights Agent. Thereupon
the Rights Agent shall countersign and deliver to the person entitled thereto a
Right Certificate or Right Certificates, as the case may be, as so requested.
The Company may require payment of a sum sufficient for any tax or governmental
charge that may be imposed in connection with any transfer, split up,
combination or exchange of Right Certificates.
Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make and deliver a new
Right Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Right Certificate so lost, stolen, destroyed or
mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
(a) The registered holder of any Right Certificate (other than a holder
whose Rights have become void pursuant to Section 11(a)(ii) hereof or have been
exchanged pursuant to Section 24 hereof) may exercise the Rights evidenced
thereby in whole or in part at any time after the Distribution Date upon
surrender of the Right Certificate, with the form of election to purchase on the
reverse side thereof duly executed, to the Rights Agent at its principal office,
together with payment of the Purchase Price for each one one-thousandth of a
Preferred Share as to which the Rights are exercised, prior to the earliest of
(i) the Close of Business on the Final Expiration Date, (ii) the time at which
the right to exercise the Rights terminates pursuant to Section 23 hereof, or
(iii) the time at which the right to exercise the Rights terminates pursuant to
Section 24 hereof.
(b) The purchase price for each one one-thousandth of a Preferred Share
to be purchased upon the exercise of a Right shall initially be Fifteen and
No/100 Dollars ($15.00) (the "Purchase Price"), shall be subject to adjustment
from time to time as provided in Sections 11 and 13 hereof and shall be payable
in lawful money of the United States of America in accordance with paragraph (c)
below.
(c) Upon receipt of a Right Certificate representing exercisable
Rights, with the form of election to purchase and certificate duly executed,
accompanied by payment of the Purchase Price for the number of one
one-thousandths of a Preferred Share to be purchased and an amount equal to any
applicable transfer tax required to be paid by the holder of such Right
Certificate in accordance with Section 9 hereof by cash, certified check,
cashier's check or money order payable to the order of the Company, the Rights
Agent shall thereupon promptly (i) (A) requisition from any transfer agent of
the Preferred Shares certificates for the
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<PAGE> 12
number of one one-thousandths of a Preferred Share to be purchased and the
Company hereby irrevocably authorizes its transfer agent to comply with all such
requests, or (B) requisition from any depositary agent for the Preferred Shares
depositary receipts representing such number of one one-thousandths of a
Preferred Share as are to be purchased (in which case certificates for the
Preferred Shares represented by such receipts shall be deposited by the transfer
agent with the depositary agent) and the Company hereby directs the depositary
agent to comply with such request, (ii) when appropriate, requisition from the
Company the amount of cash to be paid in lieu of issuance of fractional
Preferred Shares in accordance with Section 14 hereof, (iii) after receipt of
such certificates or depositary receipts, cause the same to be delivered to or
upon the order of the registered holder of such Right Certificate, registered in
such name or names as may be designated by such holder and (iv) when
appropriate, after receipt, deliver such cash to or upon the order of the
registered holder of such Right Certificate.
(d) In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Right Certificate or to his
duly authorized assigns, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless such registered holder shall have (i)
completed and signed the certificate following the form of election to purchase
set forth on the reverse side of the Right Certificate surrendered for such
exercise and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Right Certificates. All
Right Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Rights Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
all canceled Right Certificates to the Company, or shall, at the written request
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<PAGE> 13
of the Company, destroy such canceled Right Certificates, and in such case shall
deliver a certificate of destruction thereof to the Company.
Section 9. Status and Availability of Preferred Shares.
(a) The Company covenants and agrees that it will take all such action
as may be necessary to ensure that all Preferred Shares delivered upon exercise
of Rights shall, at the time of delivery of the certificates for such Preferred
Shares (subject to payment of the Purchase Price), be duly and validly
authorized and issued and fully paid and non-assessable shares.
(b) The Company further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and charges which may
be payable in respect of the issuance or delivery of the Right Certificates or
of any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Right Certificates to a person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or to deliver
any certificates or depositary receipts for Preferred Shares upon the exercise
of any Rights until any such tax shall have been paid (any such tax being
payable by the holder of such Right Certificate at the time of surrender) or
until it has been established to the Company's reasonable satisfaction that no
such tax is due.
(c) The Company covenants and agrees that it will cause to be reserved
and kept available, out of its authorized and unissued Preferred Shares or any
Preferred Shares held in its treasury, the number of Preferred Shares that will
be sufficient to permit the exercise in full of all outstanding Rights in
accordance with Section 7 hereof.
Section 10. Preferred Shares Record Date. Each person in whose name any
certificate for Preferred Shares is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of the Preferred
Shares represented thereby on, and such certificate shall be dated, the date
upon which the Right Certificate evidencing such Rights was duly surrendered and
payment of the Purchase Price (and any applicable transfer taxes) was made.
Prior to the exercise of the Rights evidenced thereby, the holder of a Right
Certificate shall not be entitled to any rights of a holder of Preferred Shares
for which the Rights shall be exercisable, including, without limitation, the
right to vote, to receive dividends or other distributions or to exercise any
preemptive rights, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided herein.
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<PAGE> 14
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number of Preferred Shares covered by each Right
and the number of Rights outstanding are subject to adjustment from time to time
as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Shares
payable in Preferred Shares, (B) subdivide the outstanding
Preferred Shares, (C) combine the outstanding Preferred Shares
into a smaller number of Preferred Shares or (D) issue any shares
of its capital stock in a reclassification of the Preferred
Shares (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing or
surviving corporation), except as otherwise provided in this
Section 11(a), the Purchase Price in effect at the time of the
record date for such dividend or of the effective date of such
subdivision, combination or reclassification, and the number and
kind of shares of capital stock issuable on such date, shall be
proportionately adjusted so that the holder of any Right
exercised after such time shall be entitled to receive the
aggregate number and kind of shares of capital stock which, if
such Right had been exercised immediately prior to such date, he
would have owned upon such exercise and been entitled to receive
by virtue of such dividend, subdivision, combination or
reclassification; provided, however, that in no event shall the
consideration to be paid upon -------- ------- the exercise of
one Right be less than the aggregate par value of the shares of
capital stock of the Company issuable upon exercise of one Right.
(ii) Subject to the following paragraph of this subparagraph (ii)
and to Section 24 of this Agreement, in the event any Person
shall become an Acquiring Person, each holder of a Right shall
thereafter have a right to receive, upon exercise thereof at a
price equal to the then current Purchase Price multiplied by the
number of one one-thousandths of a Preferred Share for which a
Right is then exercisable, in accordance with the terms of this
Agreement and in lieu of Preferred Shares, such number of Common
Shares of the Company as shall equal the result obtained by (x)
multiplying the then current Purchase Price by the number of one
one-thousandths of a Preferred Share for which a Right is then
exercisable and dividing that product by (y) 50% of the then
current per share market price of the Company's Common Shares
(determined pursuant to Section 11(d) hereof) on the date such
Person became an Acquiring Person. In the event that any Person
shall become an Acquiring
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<PAGE> 15
Person and the Rights shall then be outstanding, the Company
shall not take any action that would eliminate or diminish the
benefits intended to be afforded by the Rights.
From and after the occurrence of such an event, any Rights that are or
were acquired or beneficially owned by such Acquiring Person (or any Associate
or Affiliate of such Acquiring Person) on or after the earlier of (x) the date
of such event and (y) the Distribution Date shall be void and any holder of such
Rights shall thereafter have no right to exercise such Rights under any
provision of this Agreement. No Right Certificate shall be issued pursuant to
Section 3 that represents Rights beneficially owned by an Acquiring Person whose
Rights would be void pursuant to the preceding sentence or any Associate or
Affiliate thereof; no Right Certificate shall be issued at any time upon the
transfer of any Rights to an Acquiring Person whose Rights would be void
pursuant to the preceding sentence or any Associate or Affiliate thereof or to
any nominee of such Acquiring Person, Associate or Affiliate; and any Right
Certificate delivered to the Rights Agent for transfer to an Acquiring Person
whose Rights would be void pursuant to the preceding sentence or any Associate
or Affiliate thereof shall be canceled.
(iii) In the event that the number of Common Shares which are
authorized by the Company's certificate of incorporation and not
outstanding or subscribed for, or reserved or otherwise committed
for issuance for purposes other than upon exercise of the Rights,
are not sufficient to permit the holder of each Right to purchase
the number of Common Shares to which he would be entitled upon
the exercise in full of the Rights in accordance with the
foregoing subparagraph (ii) of paragraph (a) of this Section 11,
or should the Board of Directors so elect, the Company shall: (A)
determine the excess of (1) the value of the Common Shares
issuable upon the exercise of a Right (calculated as provided in
the last sentence of this subparagraph (iii)) pursuant to Section
11(a)(ii) hereof (the "Current Value") over (2) the Purchase
Price (such excess, the "Spread"), and (B) with respect to each
Right, make adequate provision to substitute for such Common
Shares, upon payment of the applicable Purchase Price, any one or
more of the following having an aggregate value determined by the
Board of Directors to be equal to the Current Value: (1) cash,
(2) a reduction in the Purchase Price, (3) Common Shares or other
equity securities of the Company (including, without limitation,
shares, or units of shares, of preferred stock which the Board of
Directors of the Company has determined to have the same value as
shares of Common Stock (such shares of preferred stock, "common
stock equivalents")), (4) debt securities of the Company, or (5)
other assets; provided, however, if the Company shall not
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<PAGE> 16
have made adequate provision to deliver value pursuant to clause
(B) above within thirty (30) days following the first occurrence
of an event triggering the rights to purchase Common Shares
described in Section 11(a)(ii) (the "Section 11(a)(ii) Trigger
Date"), then the Company shall be obligated to deliver, upon the
surrender for exercise of a Right and without requiring payment
of the Purchase Price, shares of Common Stock (to the extent
available) and then, if necessary, cash, which shares and cash
have an aggregate value equal to the Spread. If the Board of
Directors of the Company shall determine in good faith that it is
likely that sufficient additional Common Shares could be
authorized for issuance upon exercise in full of the Rights, the
thirty (30) day period set forth above may be extended to the
extent necessary, but not more than ninety (90) days after the
Section 11(a)(ii) Trigger Date, in order that the Company may
seek stockholder approval for the authorization of such
additional shares (such period, as it may be extended, the
"Substitution Period"). To the extent that the Company determines
that some action need be taken pursuant to the first and/or
second sentences of this Section 11(a)(iii), the Company (x)
shall provide, subject to Section 7(e) hereof and the last
paragraph of Section 11(a)(ii) hereof, that such action shall
apply uniformly to all outstanding Rights, and (y) may suspend
the exercisability of the Rights until the expiration of the
Substitution Period in order to seek any authorization of
additional shares and/or to decide the appropriate form of
distribution to be made pursuant to such first sentence and to
determine the value thereof. In the event of any such suspension,
the Company shall make a public announcement, and shall deliver
to the Rights Agent a statement, stating that the exercisability
of the Rights has been temporarily suspended. At such time as the
suspension is no longer in effect, the Company shall make another
public announcement, and deliver to the Rights Agent a statement,
so stating. For purposes of this Section 11(a)(iii), the value of
the Common Shares shall be the current per share market price (as
determined pursuant to Section 11(d)(i) hereof) of the Common
Shares on the Section 11(a)(ii) Trigger Date and the value of any
common stock equivalent shall be deemed to have the same value as
the Common Shares on such date.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Shares (or shares having the same rights,
privileges and preferences as the Preferred Shares ("equivalent preferred
shares")) or securities convertible into Preferred
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<PAGE> 17
Shares or equivalent preferred shares at a price per Preferred Share or
equivalent preferred share (or having a conversion price per share, if a
security convertible into Preferred Shares or equivalent preferred shares) less
than the then current per share market price of the Preferred Shares (as defined
in Section 11(d)) on such record date, the Purchase Price to be in effect after
such record date shall be adjusted by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the number of Preferred Shares outstanding on such record date plus the
number of Preferred Shares which the aggregate offering price of the total
number of Preferred Shares and/or equivalent preferred shares so to be offered
(and/or the aggregate initial conversion price of the convertible securities so
to be offered) would purchase at such current market price and the denominator
of which shall be the number of Preferred Shares outstanding on such record date
plus the number of additional Preferred Shares and/or equivalent preferred
shares to be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible); provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right. In case such subscription price may be paid
in a consideration part or all of which shall be in a form other than cash, the
value of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent. Preferred Shares owned by or held for the account
of the Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a record
date is fixed; and in the event that such rights, options or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price of the Preferred Shares on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the assets or evidences
of indebtedness so to be distributed or of such subscription rights or
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<PAGE> 18
warrants applicable to one Preferred Share and the denominator of which shall be
such current per share market price of the Preferred Shares; provided, however,
that in no event shall the consideration to be paid upon the exercise of one
Right be less than the aggregate par value of the shares of capital stock of the
Company to be issued upon exercise of one Right. Such adjustments shall be made
successively whenever such a record date is fixed; and in the event that such
distribution is not so made, the Purchase Price shall again be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.
(d) (i) For the purpose of any computation hereunder, the "current
per share market price" of any security (a "Security" for the
purpose of this Section 11(d)(i)) on any date shall be deemed to
be the average of the daily closing prices per share of such
Security for the 30 consecutive Trading Days (as such term is
hereinafter defined) immediately prior to such date; provided,
however, that in the event that the current per share market
price of the Security is determined during a period following the
announcement by the issuer of such Security of (A) a dividend or
distribution on such Security payable in shares of such Security
or securities convertible into such shares, or (B) any
subdivision, combination or reclassification of such Security and
prior to the expiration of 30 Trading Days after the ex-dividend
date for such dividend or distribution, or the record date for
such subdivision, combination or reclassification, then, and in
each such case, the current per share market price shall be
appropriately adjusted to reflect the current market price per
share equivalent of such Security. The closing price for each day
shall be the last sale price, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock
Exchange or, if the Security is not listed or admitted to trading
on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange
on which the Security is listed or admitted to trading or, if the
Security is not listed or admitted to trading on any national
securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotations System
("NASDAQ") or such other system then in use, or, if on any such
date the Security is not quoted by any such
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<PAGE> 19
organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the
Security selected by the Board of Directors of the Company. The
term "Trading Day" shall mean a day on which the principal
national securities exchange on which the Security is listed or
admitted to trading is open for the transaction of business or,
if the Security is not listed or admitted to trading on any
national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the "current
per share market price" of the Preferred Shares shall be
determined in accordance with the method set forth in Section
11(d)(i). If the Preferred Shares are not publicly traded, the
"current per share market price" of the Preferred Shares shall be
conclusively deemed to be the current per share market price of
the Common Shares as determined pursuant to Section 11(d)(i)
(appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof),
multiplied by 1000. If neither the Common Shares nor the
Preferred Shares are publicly held or so listed or traded,
"current per share market price" shall mean the fair value per
share as determined in good faith by the Board of Directors of
the Company, whose determination shall be described in a
statement filed with the Rights Agent.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Purchase
Price; provided, however, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest one ten-millionth of a
Preferred Share or one ten-thousandth of any other share or security as the case
may be. Notwithstanding the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than three years from the
date of the transaction which requires such adjustment.
(f) If as a result of an adjustment made pursuant to Section 11(a)
hereof, the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock of the Company other than Preferred Shares,
the number of such other shares so receivable upon exercise of any Right shall
thereafter be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
Preferred Shares contained in Section 11(a) through (c), inclusive, and the
provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares
shall apply on like terms to any such other shares.
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<PAGE> 20
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-thousandths of
a Preferred Share (calculated to the nearest one ten-millionth of a Preferred
Share) obtained by (i) multiplying (x) the number of one one-thousandths of a
share covered by a Right immediately prior to this adjustment by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights in substitution for any adjustment
in the number of one one-thousandths of a Preferred Share purchasable upon the
exercise of a Right. Each of the Rights outstanding after such adjustment of the
number of Rights shall be exercisable for the number of one one-thousandths of a
Preferred Share for which a Right was exercisable immediately prior to such
adjustment. Each Right held of record prior to such adjustment of the number of
Rights shall become that number of Rights (calculated to the nearest one
hundred-thousandth) obtained by dividing the Purchase Price in effect
immediately prior to adjustment of the Purchase Price by the Purchase Price in
effect immediately after adjustment of the Purchase Price. The Company shall
make a public announcement of its election to adjust the number of Rights,
indicating the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. This record date may be the date on which
the Purchase Price is adjusted or any day thereafter, but, if the Right
Certificates have been distributed, shall be at least 10 days later than the
date of the public announcement. If Right Certificates have been distributed,
upon each adjustment of the number of Rights pursuant to this Section 11(i), the
Company shall, as promptly as practicable, cause to be distributed to holders of
record of Right Certificates on such record date Right Certificates evidencing,
subject to Section 14 hereof, the additional Rights to which such holders shall
be entitled as a result of such adjustment, or, at the option of the Company,
shall cause to be distributed to such holders of record in substitution and
replacement for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new Right
Certificates evidencing all the Rights to which such holders shall be entitled
after
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<PAGE> 21
such adjustment. Right Certificates to be so distributed shall be issued,
executed and countersigned in the manner provided for herein and shall be
registered in the names of the holders of record of Right Certificates on the
record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-thousandths of a Preferred Share issuable upon the
exercise of the Rights, the Right Certificates theretofore and thereafter issued
may continue to express the Purchase Price and the number of one one-thousandths
of a Preferred Share which were expressed in the initial Right Certificates
issued hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below one one-thousandth of the then par value of the
Preferred Shares issuable upon exercise of the Rights, the Company shall take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
non-assessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the Preferred Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any (i) combination or subdivision of the Preferred Shares, (ii)
issuance wholly for cash of any Preferred Shares at less than the current market
price, (iii) issuance wholly for cash of Preferred Shares or securities which by
their terms are convertible into or exchangeable for Preferred Shares, (iv)
dividends on Preferred Shares payable in Preferred Shares or (v) issuance of any
rights, options or warrants referred to hereinabove in Section 11(b), hereafter
made by the Company to holders of its Preferred Shares shall not be taxable to
such stockholders.
(n) In the event that at any time after the date of this Agreement and
prior to the Distribution Date, the Company shall (i) declare or pay any
dividend on the Common Shares payable in Common Shares
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<PAGE> 22
or (ii) effect a subdivision, combination or consolidation of the Common Shares
(by reclassification or otherwise other than by payment of dividends in Common
Shares) into a greater or lesser number of Common Shares, then in any such case
(i) the number of one one-thousandths of a Preferred Share purchasable after
such event upon proper exercise of each Right shall be determined by multiplying
the number of one one-thousandths of a Preferred Share so purchasable
immediately prior to such event by a fraction, the numerator of which is the
number of Common Shares outstanding immediately before such event and the
denominator of which is the number of Common Shares outstanding immediately
after such event, and (ii) each Common Share outstanding immediately after such
event shall have issued with respect to it that number of Rights which each
Common Share outstanding immediately prior to such event had issued with respect
to it. The adjustments provided for in this Section 11(n) shall be made
successively whenever such a dividend is declared or paid or such a subdivision,
combination or consolidation is effected.
Section 12. Certificate of Adjustment. Whenever an adjustment is made
as provided in Sections 11 and 13 hereof, the Company shall promptly (a) prepare
a certificate setting forth such adjustment, and a brief statement of the facts
accounting for such adjustment, (b) file with the Rights Agent and with each
transfer agent for the Common Shares or the Preferred Shares a copy of such
certificate and (c) mail a brief summary thereof to each holder of a Right
Certificate in accordance with Section 25 hereof. The Rights Agent shall be
fully protected in relying on any such certificate and on any adjustment therein
contained and shall not be obligated or responsible for calculating any
adjustment nor shall it be deemed to have knowledge of such an adjustment unless
and until it shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
In the event that, at any time after a Person becomes an Acquiring
Person, directly or indirectly, (i) the Company shall consolidate with, or merge
with and into, any other Person, (ii) any Person shall consolidate with the
Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in connection with such
merger, all or part of the Common Shares shall be changed into or exchanged for
stock or other securities of any other Person (or the Company) or cash or any
other property, or (iii) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person other than the Company or one or more of its wholly-owned
Subsidiaries, then, and in each such case, proper provision shall be made so
that (A) each holder of a Right (except as otherwise provided herein) shall
thereafter have the right to receive, upon the exercise thereof at a price equal
to the then current
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<PAGE> 23
Purchase Price multiplied by the number of one one-thousandths of a Preferred
Share for which a Right is then exercisable, in accordance with the terms of
this Agreement and in lieu of Preferred Shares, such number of Common Shares of
such other Person (including the Company as successor thereto or as the
surviving corporation) as shall equal the result obtained by (x) multiplying the
then current Purchase Price by the number of one one-thousandths of a Preferred
Share for which a Right is then exercisable and dividing that product by (y) 50%
of the then current per share market price of the Common Shares of such other
Person (determined pursuant to Section 11(d) hereof) on the date of consummation
of such consolidation, merger, sale or transfer; (B) the issuer of such Common
Shares shall thereafter be liable for, and shall assume, by virtue of such
consolidation, merger, sale or transfer, all the obligations and duties of the
Company pursuant to this Agreement; (C) the term "Company" shall thereafter be
deemed to refer to such issuer; and (D) such issuer shall take such steps
(including, but not limited to, the reservation of a sufficient number of its
Common Shares in accordance with Section 9 hereof) in connection with such
consummation as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to the
Common Shares thereafter deliverable upon the exercise of the Rights. The
Company covenants and agrees that it shall not consummate any such
consolidation, merger, sale or transfer unless prior thereto the Company and
such issuer shall have executed and delivered to the Rights Agent a supplemental
agreement so providing. The Company shall not enter into any transaction of the
kind referred to in this Section 13 if at the time of such transaction there are
any rights, warrants, instruments or securities outstanding or any agreements or
arrangements which, as a result of the consummation of such transaction, would
eliminate or substantially diminish the benefits intended to be afforded by the
Rights. The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers. For purposes hereof, the
"earning power" of the Company and its Subsidiaries shall be determined in good
faith by the Company's Board of Directors on the basis of the operating earnings
of each business operated by the Company and its Subsidiaries during the three
fiscal years preceding the date of such determination (or, in the case of any
business not operated by the Company or any Subsidiary during three full fiscal
years preceding such date, during the period such business was operated by the
Company or any Subsidiary).
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights or
to distribute Right Certificates which evidence fractional Rights. In lieu of
such fractional Rights, there shall be paid to the registered holders of the
Right Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the
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<PAGE> 24
purposes of this Section 14(a), the current market value of a whole Right shall
be the closing price of the Rights for the Trading Day immediately prior to the
date on which such fractional Rights would have been otherwise issuable. The
closing price for any day shall be the last sale price, regular way, or, in case
no such sale takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Rights are not listed or
admitted to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Rights are listed or
admitted to trading or, if the Rights are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by NASDAQ or such other system then in use or, if on any such date
the Rights are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Rights selected by the Board of Directors of the Company. If on any such
date no such market maker is making a market in the Rights, the fair value of
the Rights on such date as determined in good faith by the Board of Directors of
the Company shall be used.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions which are integral multiples of one one-thousandth
of a Preferred Share) upon exercise of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions which are
integral multiples of one one-thousandth of a Preferred Share). Fractions of
Preferred Shares in integral multiples of one one-thousandth of a Preferred
Share may, at the election of the Company, be evidenced by depositary receipts,
pursuant to an appropriate agreement between the Company and a depositary
selected by it; provided, that such agreement shall provide that the holders of
such depositary receipts shall have all the rights, privileges and preferences
to which they are entitled as beneficial owners of the Preferred Shares
represented by such depositary receipts. In lieu of fractional Preferred Shares
that are not integral multiples of one one-thousandth of a Preferred Share, the
Company shall pay to each registered holder of Right Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of one Preferred Share as the fraction of
one Preferred Share that such holder would otherwise receive upon the exercise
of the aggregate number of rights exercised by such holder. For the purposes of
this Section 14(b), the current market value of a Preferred Share shall be the
closing price of a Preferred Share (as determined pursuant to the second
sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to
the date of such exercise.
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<PAGE> 25
(c) The holder of a Right by the acceptance of the Right expressly
waives any right to receive fractional Rights or fractional shares upon exercise
of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares) may, without the consent of the
Rights Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), on his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Right Certificate in the manner provided
in such Right Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books maintained by the Rights Agent if
surrendered at the principal office of the Rights Agent, duly endorsed or
accompanied by a proper instrument of transfer with a completed form of
certification; and
(c) the Company and the Rights Agent may deem and treat the person in
whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Shares
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise
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<PAGE> 26
of the Rights represented thereby nor shall anything contained herein or in any
Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees to pay to
the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement, including the costs and expenses of
defending against any claim or liability in connection therewith. The
indemnification provided for hereunder shall survive the expiration of the
Rights and the termination of this Agreement. The costs and expenses of
enforcing this right of indemnification shall also be paid by the Company.
The Rights Agent may conclusively rely upon and shall be protected and
shall incur no liability for or in respect of any action taken, suffered or
omitted by it in connection with its administration of this Agreement in
reliance upon any Right Certificate or certificate for Preferred Shares or for
other securities of the Company, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged, by
the proper person or persons. Notwithstanding anything in this Agreement to the
contrary, in no event shall the Rights Agent be liable for special, indirect or
consequential loss or damage of any kind whatsoever (including but not limited
to lost profits), even if the Rights Agent has been advised of the likelihood of
such loss or damage and regardless of the form of the action.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
Any corporation into which the Rights Agent or any successor
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<PAGE> 27
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the corporate trust business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that such corporation would be eligible for appointment
as a successor Rights Agent under the provisions of Section 21 hereof. In case
at the time such successor Rights Agent shall succeed to the agency created by
this Agreement, any of the Right Certificates shall have been countersigned but
not delivered, any such successor Rights Agent may adopt the countersignature of
the predecessor Rights Agent and deliver such Right Certificates so
countersigned; and in case at that time any of the Right Certificates shall not
have been countersigned, any successor Rights Agent may countersign such Right
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent; and in all such cases such Right Certificates
shall have the full force provided in the Right Certificates and in this
Agreement.
In case at any time the name of the Rights Agent shall be changed and
at such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any of
the Right Certificates shall not have been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name; and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations expressly set forth in this Agreement and no implied
duties or obligations shall be read into this Agreement against the Rights
Agent. The Rights Agent shall perform those duties and obligations upon the
following terms and conditions, by all of which the Company and the holders of
Right Certificates, by their acceptance thereof, shall be bound:
(a) Before the Rights Agent acts or refrains from acting, it may
consult with legal counsel (who may be legal counsel for the Company), and the
opinion of such counsel shall be full and complete authorization and protection
to the Rights Agent as to any action taken or omitted by it in good faith and in
accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board, the
President, a Vice President, the Treasurer or the Secretary of the
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<PAGE> 28
Company and delivered to the Rights Agent; and such certificate shall be full
authorization to the Rights Agent for any action taken or suffered in good faith
by it under the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except as to its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any adjustment required under the provisions of Sections 11
or 13 hereof or responsible for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that would require any
such adjustment (except with respect to the exercise of Rights evidenced by
Right Certificates after actual notice of any such adjustment); nor shall it by
any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Preferred Shares to be issued
pursuant to this Agreement or any Right Certificate or as to whether any
Preferred Shares will, when so issued, be validly authorized and issued, fully
paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the President, a Vice President, the Secretary
or the Treasurer of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken or suffered to be taken by it in good faith in accordance with
instructions of any such officer. Any application by the Rights Agent for
written instructions from the Company may, at the option of the Rights Agent,
set forth in writing any
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<PAGE> 29
action proposed to be taken or omitted by the Rights Agent under this Agreement
and the date on or after which such action shall be taken or such omission shall
be effective. The Rights Agent shall not be liable for any action taken by, or
omission of, the Rights Agent in accordance with a proposal included in any such
application on or after the date specified in such application (which date shall
not be less than ten Business Days after the date any officer of the Company
actually receives such application, unless any such officer shall have consented
in writing to an earlier date) unless, prior to taking any such action (or the
effective date in the case of an omission), the Rights Agent shall have
received, in response to such application, written instructions with respect to
the proposed action or omission specifying a different action to be taken or
omitted.
(h) The Rights Agent and any stockholder, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) The Rights Agent shall not be required to take notice or be deemed
to have notice of any fact, event or determination (including, without
limitation, any dates or events defined in this Agreement or the designation of
any Person as an Acquiring Person, Affiliate or Associate) under this Agreement
unless and until the Rights Agent shall be specifically notified in writing by
the Company of such fact, event or determination.
(l) If with respect to any Rights Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may
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<PAGE> 30
be, has not been completed, the Rights Agent shall not take any further action
with respect to such requested exercise of transfer without first consulting
with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Shares and the Preferred Shares by registered or certified mail,
and, at the expense of the Company, to the holders of the Right Certificates by
first-class mail. The Company may remove the Rights Agent or any successor
Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or
successor Rights Agent, as the case may be, and to each transfer agent of the
Common Shares and the Preferred Shares by registered or certified mail, and, at
the expense of the Company, to the holders of the Right Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who shall,
with such notice, submit his Right Certificate for inspection by the Company),
then the registered holder of any Right Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business under the laws of the United States or
of any state of the United States, in good standing, having an office in the
State of Texas which is authorized under such laws to exercise corporate trust
powers and is subject to supervision or examination by federal or state
authority and which has at the time of its appointment as Rights Agent a
combined capital and surplus of at least $100 million. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Common Shares and the Preferred Shares, and mail
a notice thereof in writing to the registered holders of the Right Certificates.
Failure to give any notice provided for in this Section 21, however, or any
defect therein, shall not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights Agent, as
the case may be.
-27-
<PAGE> 31
Section 22. Issuance of New Right Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement.
Section 23. Redemption.
(a) The Board of Directors of the Company may, at its option, at any
time prior to such time as any Person becomes an Acquiring Person, redeem all
but not less than all of the then outstanding Rights at a redemption price of
$0.01 per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof (such redemption
price being hereinafter referred to as the "Redemption Price"). The redemption
of the Rights by the Board of Directors may be made effective at such time, on
such basis and subject to such conditions as the Board of Directors in its sole
discretion may establish.
(b) Immediately upon the time of the effectiveness of the redemption of
the Rights pursuant to paragraph (a) of this Section 23 or such earlier time as
may be determined by the Board of Directors of the Company in the action
ordering such redemption (although not earlier than the time of such action)
(such time the "Redemption Date"), and without any further action and without
any notice, the right to exercise the Rights shall terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price.
The Company shall promptly give public notice of any such redemption; provided,
however, that the failure to give, or any defect in, any such notice shall not
affect the validity of such redemption. Within 10 days after such action of the
Board of Directors ordering the redemption of the Rights pursuant to paragraph
(a), the Company shall mail a notice of redemption to all the holders of the
then outstanding Rights at their last addresses as they appear upon the registry
books of the Rights Agent or, prior to the Distribution Date, on the registry
books of the transfer agent for the Common Shares. Any notice which is mailed in
the manner herein provided shall be deemed given, whether or not the holder
receives the notice. If the payment of the Redemption Price is not included with
such notice, each such notice shall state the method by which the payment of the
Redemption Price will be made. Neither the Company nor any of its Affiliates or
Associates may redeem, acquire or purchase for value any Rights at any time in
any manner other than that specifically set forth in this Section 23 or in
Section 24 hereof, other than in connection with the purchase of Common Shares
prior to the Distribution Date.
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<PAGE> 32
Section 24. Exchange.
(a) The Board of Directors of the Company may, at its option, at any
time after any Person becomes an Acquiring Person, exchange all or part of the
then outstanding and exercisable Rights (which shall not include Rights that
have become void pursuant to the provisions of Section 11(a)(ii) hereof) for
Common Shares at an exchange ratio of one Common Share per Right, appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such exchange ratio being hereinafter referred
to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of
Directors shall not be empowered to effect such exchange at any time after any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any such Subsidiary, or any entity holding Common
Shares for or pursuant to the terms of any such plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of a
majority of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to subsection (a) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of Common Shares equal to the
number of such Rights held by such holder multiplied by the Exchange Ratio. The
Company shall promptly give public notice of any such exchange; provided,
however, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of exchange will state the
method by which the exchange of the Common Shares for Rights will be effected
and, in the event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based on the number
of Rights (other than Rights which have become void pursuant to the provisions
of Section 11(a)(ii) hereof) held by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company, at its
option, may substitute Preferred Shares or common stock equivalents for Common
Shares exchangeable for Rights, at the initial rate of one one-thousandth of a
Preferred Share (or an appropriate number of common stock equivalents) for each
Common Share, as appropriately adjusted to reflect adjustments in the voting
rights of the Preferred
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<PAGE> 33
Shares pursuant to the terms thereof, so that the fraction of a Preferred Share
delivered in lieu of each Common Share shall have the same voting rights as one
Common Share.
(d) In the event that there shall not be sufficient Common Shares,
Preferred Shares or common stock equivalents authorized by the Company's
certificate of incorporation and not outstanding or subscribed for, or reserved
or otherwise committed for issuance for purposes other than upon exercise of
Rights, to permit any exchange of Rights as contemplated in accordance with this
Section 24, the Company shall take all such action as may be necessary to
authorize additional Common Shares, Preferred Shares or common stock equivalents
for issuance upon exchange of the Rights.
(e) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares. In
lieu of such fractional Common Shares, the Company shall pay to the registered
holders of the Right Certificates with regard to which such fractional Common
Shares would otherwise be issuable an amount in cash equal to the same fraction
of the current per share market value of a whole Common Share. For the purposes
of this paragraph (e), the current per share market value of a whole Common
Share shall be the closing price of a Common Share (as determined pursuant to
the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24.
Section 25. Notice of Certain Events.
(a) In case the Company shall after the Distribution Date propose (i)
to pay any dividend payable in stock of any class to the holders of its
Preferred Shares or to make any other distribution to the holders of its
Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer
to the holders of its Preferred Shares rights or warrants to subscribe for or to
purchase any additional Preferred Shares or shares of stock of any class or any
other securities, rights or options, (iii) to effect any reclassification of its
Preferred Shares (other than a reclassification involving only the subdivision
of outstanding Preferred Shares), (iv) to effect any consolidation or merger
into or with, or to effect any sale or other transfer (or to permit one or more
of its Subsidiaries to effect any sale or other transfer), in one or more
transactions, of 50% or more of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the
liquidation, dissolution or winding up of the Company, or (vi) to declare or pay
any dividend on the Common Shares payable in Common Shares or to effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares),
then, in each such case, the Company shall give to each holder of a Right
Certificate, in accordance with Section 26 hereof, a notice of such proposed
action, which shall specify the record date for the purposes of such stock
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<PAGE> 34
dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Common Shares and/or Preferred Shares, if any such
date is to be fixed, and such notice shall be so given in the case of any action
covered by clause (i) or (ii) above at least 10 days prior to the record date
for determining holders of the Preferred Shares for purposes of such action, and
in the case of any such other action, at least 10 days prior to the date of the
taking of such proposed action or the date of participation therein by the
holders of the Common Shares and/or Preferred Shares, whichever shall be the
earlier.
(b) In case any event set forth in Section 11(a)(ii) hereof shall
occur, then the Company shall as soon as practicable thereafter give to each
holder of a Right Certificate, in accordance with Section 26 hereof, a notice of
the occurrence of such event, which notice shall describe such event and the
consequences of such event to holders of Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
PC Service Source, Inc.
Attn: President
2350 Valley View Lane
Dallas, Texas 75234
Copy to:
Sayles & Lidji
Attn: Brian M. Lidji
4400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by registered or certified mail and shall be deemed given upon receipt
and, addressed (until another address is filed in writing with the Company) as
follows:
Harris Trust and Savings Bank
1601 Elm Street, LB 39
Thanksgiving Tower, Suite 2320
Dallas, TX 75201
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<PAGE> 35
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. The Company may from time to time,
and the Rights Agent shall, if the Company so directs, supplement or amend this
Agreement without the approval of any holders of Right Certificates in order to
cure any ambiguity, to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provisions herein, or to
make any change to or delete any provision hereof or to adopt any other
provisions with respect to the Rights which the Company may deem necessary or
desirable; provided, however, that from and after such time as any Person
becomes an Acquiring Person, this Agreement shall not be amended or supplemented
in any manner which would adversely affect the interests of the holders of
Rights (other than an Acquiring Person and its Affiliates and Associates). Any
supplement or amendment authorized by this Section 27 will be evidenced by a
writing signed by the Company and the Rights Agent. Notwithstanding anything in
this Agreement to the contrary, no supplement or amendment that changes the
rights and duties of the Rights Agent under this Agreement will be effective
against the Rights Agent without the execution of such supplement or amendment
by the Rights Agent.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or entity other than the Company, the Rights
Agent and the registered holders of the Right Certificates (and, prior to the
Distribution Date, the Common Shares) any legal or equitable right, remedy or
claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Right Certificates (and, prior to the Distribution Date, the Common Shares).
Section 30. Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
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<PAGE> 36
Section 31. Governing Law. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of Delaware and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and
performed entirely within such State.
Section 32. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
Section 34. Administration. The Board of Directors of the Company shall
have the exclusive power and authority to administer and interpret the
provisions of this Agreement and to exercise all rights and powers specifically
granted to the Board of Directors or the Company or as may be necessary or
advisable in the administration of this Agreement. All such actions,
calculations, determinations and interpretations which are done or made by the
Board of Directors in good faith shall be final, conclusive and binding on the
Company, the Rights Agent, the holders of the Rights and all other parties and
shall not subject the Board of Directors to any liability to the holders of the
Rights.
IN WITNESS WHEREOF, the parties hereto have caused this Rights Agreement
to be duly executed and their respective corporate seals to be hereunder affixed
and attested, all as of the day and year first above written.
Attest: PC SERVICE SOURCE, INC.
/s/Brian M. Lidji By: /s/Robert J. Boutin
- - -------------------------- -------------------------------------------
Brian M. Lidji Robert J. Boutin, Chief Financial Officer
Attest: HARRIS TRUST AND SAVINGS BANK, as Rights Agent
/s/Rozlynn R. Orr By: /s/Mark Asbury
- - -------------------------- -------------------------------------------
Rozlynn R. Orr, T.O. Mark Asbury, V.P.
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<PAGE> 37
Exhibit A
FORM
of
CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
PC Service Source, Inc.
-----------------------------------------------
(Pursuant to Section 151 of the
Delaware General Corporation Law)
------------------------------------------------
PC Service Source, Inc. a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on December 7, 1998:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board
of Directors" or the "Board") in accordance with the provisions of the
Restated Certificate of Incorporation of the Corporation (the "Restated
Certificate of Incorporation"), the Board of Directors hereby creates a
series of Preferred Stock, par value $0.0001 per share (the "Preferred
Stock"), of
A-1
<PAGE> 38
the Corporation and hereby states the designation and number of shares,
and fixes the relative rights, preferences, and limitations thereof as
follows:
Section 1. Designation and Amount. The shares of this series shall be
designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be 10,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series A Preferred Stock to a number less than the
number of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Corporation
convertible into Series A Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any other stock) ranking prior and superior to the Series A
Preferred Stock with respect to dividends, the holders of shares of Series A
Preferred Stock shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the last day of March, June, September and December
in each year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series A Preferred
Stock, in an amount (if any) per share (rounded to the nearest cent), subject to
the provision for adjustment hereinafter set forth, equal to 1000 times the
aggregate per share amount of all cash dividends, and 1000 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock, par
value $0.01 per share (the "Common Stock"), of the Corporation or a subdivision
of the outstanding shares of Common Stock (by reclassification or otherwise),
declared on the Common Stock since the immediately preceding Quarterly Dividend
Payment Date or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of Series A
Preferred Stock. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under the preceding sentence
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
A-2
<PAGE> 39
(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).
(C) Dividends due pursuant to paragraph (A) of this Section shall begin
to accrue and be cumulative on outstanding shares of Series A Preferred Stock
from the Quarterly Dividend Payment Date next preceding the date of issue of
such shares, unless the date of issue of such shares is prior to the record date
for the first Quarterly Dividend Payment Date, in which case dividends on such
shares shall begin to accrue from the date of issue of such shares, or unless
the date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of Series
A Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 1000 votes
on all matters submitted to a vote of the stockholders of the Corporation. In
the event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the number of votes per share to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
A-3
<PAGE> 40
(B) Except as otherwise provided the Restated Certificate of
Incorporation, including any other Certificate of Designations creating a series
of Preferred Stock or any similar stock, or by law, the holders of shares of
Series A Preferred Stock and the holders of shares of Common Stock and any other
capital stock of the Corporation having general voting rights shall vote
together as one class on all matters submitted to a vote of stockholders of the
Corporation.
(C) Except as set forth herein, or as otherwise required by law,
holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then entitled; or
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such junior stock in exchange for shares of any stock of the Corporation ranking
junior (as to dividends and upon dissolution, liquidation or winding up) to the
Series A Preferred Stock.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
A-4
<PAGE> 41
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein or in
the Restated Certificate of Incorporation, including any Certificate of
Designations creating a series of Preferred Stock or any similar stock, or as
otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation the holders of shares
of Series A Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
1000 times the aggregate amount to be distributed per share to holders of shares
of Common Stock plus an amount equal to any accrued and unpaid dividends. In the
event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under the preceding sentence
shall be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately
A-5
<PAGE> 42
after such event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
Section 8. Amendment. The Restated Certificate of Incorporation shall
not be amended in any manner, including in a merger or consolidation, which
would alter, change, or repeal the powers, preferences or special rights of the
Series A Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of at least two-thirds of the outstanding shares of Series A
Preferred Stock, voting together as a single class.
Section 9. Rank. The Series A Preferred Stock shall rank, with respect
to the payment of dividends and upon liquidation, dissolution and winding up,
junior to all series of Preferred Stock.
IN WITNESS WHEREOF, this Certificate of Designation is executed on
behalf of the Corporation by its this ______ day of ____________, 1998.
PC SERVICE SOURCE, INC.
By:
---------------------------------------
[Name and Title]
A-6
<PAGE> 43
Exhibit B
Form of Right Certificate
Certificate No. R- _______ Rights
NOT EXERCISABLE AFTER DECEMBER 7, 2008 OR EARLIER IF REDEMPTION OR
EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $0.01 PER
RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
UNDER CERTAIN CIRCUMSTANCES, RIGHTS THAT ARE OR WERE ACQUIRED OR
BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR ANY ASSOCIATES OR
AFFILIATES THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT)
OR ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID.
Right Certificate
PC Service Source, Inc.
This certifies that _______________________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of December 7, 1998 (the "Rights Agreement"), between PC
Service Source, Inc., a Delaware corporation (the "Company"), and Harris Trust
and Savings Bank (the "Rights Agent"), to purchase from the Company at any time
after the Distribution Date (as such term is defined in the Rights Agreement)
and prior to 5:00 P.M., Dallas, Texas time, on December 7, 2008, at the
principal office of the Rights Agent, or at the office of its successor as
Rights Agent, one one-thousandth of a fully paid non-assessable share of Series
A Junior Participating Preferred Stock, par value $0.0001 per share (the
"Preferred Shares"), of the Company, at a purchase price of $15.00 per one
one-thousandth of a Preferred Share (the "Purchase Price"), upon presentation
and surrender of this Right Certificate with the certification and the Form of
Election to Purchase duly executed. The number of Rights evidenced by this Right
Certificate (and the number of one one-thousandths of a Preferred Share which
may be purchased upon exercise hereof) set forth above, and the Purchase Price
set forth above, are the number and Purchase Price as of December 7, 1998, based
on the Preferred Shares as constituted at such date. As provided in the Rights
Agreement, the Purchase Price and the number of one one-thousandths of a
Preferred Share which may be
B-1
<PAGE> 44
purchased upon the exercise of the Rights evidenced by this Right Certificate
are subject to modification and adjustment upon the happening of certain events.
From and after the occurrence of an event described in Section
11(a)(ii) of the Rights Agreement, if the Rights evidenced by this Right
Certificate are or were at any time on or after the earlier of (x) the date of
such event and (y) the Distribution Date (as such term is defined in the Rights
Agreement) acquired or beneficially owned by an Acquiring Person or an Associate
or Affiliate of an Acquiring Person (as such terms are defined in the Rights
Agreement), such Rights shall become void, and any holder of such Rights shall
thereafter have no right to exercise such Rights.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company and the offices of the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the principal office of the Rights Agent, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, at the Company's
option, the Rights evidenced by this Certificate (i) may be redeemed by the
Company at a redemption price of $0.01 per Right or (ii) may be exchanged in
whole or in part for shares of the Company's Common Stock, par value $0.01 per
share, or Preferred Shares.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth of a Preferred Share, which may, at the election
of the Company, be evidenced by depositary receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time
B-2
<PAGE> 45
be issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of _______________, ____.
Attest: PC SERVICE SOURCE, INC.
By:
- - ------------------------------------ ----------------------------------
Countersigned:
HARRIS TRUST AND SAVINGS BANK,
Rights Agent
By:
---------------------------------
Authorized Signature
B-3
<PAGE> 46
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED _________________________________ hereby sells,
assigns and transfers unto_____________________________________________________
(Please print name and address of transferee)
_______________________________________________________________________________
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint ____________________________,
Attorney, to transfer the within Right Certificate on the books of the
within-named Company, with full power of substitution.
Dated: _____________ ___, _____
___________________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
___________________________________
Signature
B-4
<PAGE> 47
Form of Reverse Side of Right Certificate -- continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise the Right Certificate.)
To PC SERVICE SOURCE, INC.:
The undersigned hereby irrevocably elects to exercise ________________
Rights represented by this Right Certificate to purchase the Preferred Shares
issuable upon the exercise of such Rights and requests that certificates for
such Preferred Shares be issued in the name of:
Please insert social security
or other identifying number
-----------------------------------------------------------------
(Please print name and address)
-----------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
-----------------------------------------------------------------
(Please print name and address)
-----------------------------------------------------------------
-----------------------------------------------------------------
Dated: _____________ ___, _____
___________________________________
Signature
B-5
<PAGE> 48
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
B-6
<PAGE> 49
Form of Reverse Side of Right Certificate -- continued
The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
___________________________________
Signature
NOTICE
The signature in the foregoing Forms of Assignment and Election must
conform to the name as written upon the face of this Right Certificate in every
particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the beneficial owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement) and such
Assignment or Election to Purchase will not be honored.
B-7
<PAGE> 50
Exhibit C
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On December 7, 1998, the Board of Directors of PC Service Source, Inc.
(the "Company") declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of common stock, par value $0.01 per share
(the "Common Shares") outstanding on December 21, 1998 (the "Record Date") to
the stockholders of record on that date. Each Right entitles the registered
holder to purchase from the Company one one-thousandth of a share of Series A
Junior Participating Preferred Stock, par value $0.0001 per share (the
"Preferred Shares"), of the Company, at a price of $15.00 per one one-thousandth
of a Preferred Share (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and Harris Trust and Savings Bank, as
Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired beneficial ownership of 15% or, in the case of
a Eureka Venture Holder, as defined in the Rights Agreement, 30%, or (ii) 10
business days (or such later date as may be determined by action of the Board of
Directors prior to such time as any Person becomes an Acquiring Person)
following the commencement of, or announcement of an intention to make, a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or, in the case of a Eureka Venture Holder
30% (the earlier of such dates being called the "Distribution Date"), the Rights
will be evidenced, with respect to any of the Common Share certificates
outstanding as of the Record Date, by such Common Share certificate with a copy
of this Summary of Rights attached thereto.
The Rights Agreement provides that, until the Distribution Date, the
Rights will be transferred with and only with the Common Shares. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
Common Share certificates issued after the Record Date or upon transfer or new
issuance of Common Shares will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the surrender for transfer of any certificates for
Common Shares outstanding as of the Record Date, even without such notation or a
copy of this Summary of Rights being attached thereto, will also constitute the
transfer of the Rights associated with the Common Shares represented by such
certificate. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the Common Shares as of the Close of Business on the
Distribution Date and such separate Right Certificates alone will evidence the
Rights.
C-1
<PAGE> 51
The Rights are not exercisable until the Distribution Date. The Rights
will expire on December 7, 2008 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed by the
Company, in each case, as described below.
The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then current market price of the Preferred Shares or (iii) upon the
distribution to holders of the Preferred Shares of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Shares) or of subscription
rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-thousandths
of a Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such case,
prior to the Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a quarterly dividend
payment of 1000 times the dividend declared per Common Share. In the event of
liquidation, the holders of the Preferred Shares will be entitled to an
aggregate payment of 1000 times the aggregate payment made per Common Share.
Each Preferred Share will have 1000 votes, voting together with the Common
Shares. In the event of any merger, consolidation or other transaction in which
Common Shares are exchanged, each Preferred Share will be entitled to receive
1000 times the amount received per Common Share.
These rights are protected by customary antidilution provisions.
Because of the nature of the Preferred Shares' dividend, liquidation
and voting rights, the value of the one one-thousandth interest in a Preferred
Share purchasable upon exercise of each Right should approximate the value of
one Common Share.
From and after the occurrence of an event described in Section
11(a)(ii) of the Rights Agreement, if the Rights evidenced by this Right
Certificate are or were at any time on or after the earlier of (x) the date of
such event and (y) the Distribution Date (as such term is defined in the Rights
Agreement) acquired or beneficially owned by an Acquiring Person or an Associate
or Affiliate of an Acquiring Person (as such terms are defined in the Rights
Agreement), such Rights shall become void, and any holder of such Rights shall
thereafter have no right to exercise such Rights.
C-2
<PAGE> 52
In the event that, at any time after a Person becomes an Acquiring
Person, the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold,
proper provision will be made so that each holder of a Right will thereafter
have the right to receive, upon the exercise thereof at the then current
exercise price of the Right, that number of shares of common stock of the
acquiring company which at the time of such transaction will have a market value
of two times the exercise price of the Right. In the event that any person
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights beneficially owned by the Acquiring Person and its
Affiliates and Associates (which will thereafter be void), will thereafter have
the right to receive upon exercise that number of Common Shares having a market
value of two times the exercise price of the Right. If the Company does not have
sufficient Common Shares to satisfy such obligation to issue Common Shares, or
if the Board of Directors so elects, the Company shall deliver upon payment of
the exercise price of a Right an amount of cash or securities equivalent in
value to the Common Shares issuable upon exercise of a Right; provided that, if
the Company fails to meet such obligation within 30 days following the later of
(x) the first occurrence of an event triggering the right to purchase Common
Shares and (y) the date on which the Company's right to redeem the Rights
expires, the Company must deliver, upon exercise of a Right but without
requiring payment of the exercise price then in effect, Common Shares (to the
extent available) and cash equal in value to the difference between the value of
the Common Shares otherwise issuable upon the exercise of a Right and the
exercise price then in effect. The Board of Directors may extend the 30-day
period described above for up to an additional 60 days to permit the taking of
action that may be necessary to authorize sufficient additional Common Shares to
permit the issuance of Common Shares upon the exercise in full of the Rights.
At any time after any Person becomes an Acquiring Person and prior to
the acquisition by any person or group of a majority of the outstanding Common
Shares, the Board of Directors of the Company may exchange the Rights (other
than Rights owned by such person or group which have become void), in whole or
in part, at an exchange ratio of one Common Share per Right (subject to
adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions which are integral multiples of one one-thousandth of a Preferred
Share, which may, at the election of the Company, be evidenced by depositary
receipts) and in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to the date
of exercise.
At any time prior to the time any Person becomes an Acquiring Person,
the Board of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $0.01 per Right (the "Redemption
C-3
<PAGE> 53
Price"). The redemption of the Rights may be made effective at such time, on
such basis and with such conditions as the Board of Directors in its sole
discretion may establish. Immediately upon any redemption of the Rights, the
right to exercise the Rights will terminate and the only right of the holders of
Rights will be to receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, except that from and
after such time as any person becomes an Acquiring Person no such amendment may
adversely affect the interests of the holders of the Rights (other than the
Acquiring Person and its Affiliates and Associates).
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
A copy of the Agreement is available free of charge from the Company.
This summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Agreement, which is hereby
incorporated herein by reference.
C-4
<PAGE> 1
EXHIBIT 10.4
PC SERVICE SOURCE, INC.
STOCK PRICE APPRECIATION PLAN
1. PURPOSE. The purpose of the Stock Price Appreciation Plan (the
"Plan") of PC Service Source, Inc. ("PCSS"), a Delaware corporation, is to (a)
provide an incentive to its employees to concentrate their efforts in a manner
that will provide for the long-term growth and profitability of PCSS; (b)
encourage stock ownership by the employees in order to promote an identity of
interests with PCSS' shareholders; and (c) provide a means of attracting and
retaining qualified employees.
2. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective on
such date as it is approved by the Board of Directors of PCSS (the "Board") and
the PCSS stockholders if such approval is necessary or advisable under relevant
securities, tax or other applicable laws, and shall remain in effect until March
1, 2002, unless terminated earlier by the Compensation Committee of the Board
(the "Termination Date").
3. STOCK SUBJECT TO THE PLAN. There are authorized for issuance and
delivery under the Plan an aggregate of 200,000 shares of common stock, $.01 par
value per share (the "Common Stock"), subject to adjustment as provided in
Section 7 hereof. Such shares may be, in whole or in part, authorized but
unissued shares, whether now or hereafter authorized, or issued shares that have
been reacquired by PCSS.
4. PLAN ADMINISTRATION. The Plan shall be administered by the
Compensation Committee of the Board. The Compensation Committee shall have full
and final authority to interpret the Plan, adopt, amend and rescind rules and
regulations relating to the Plan, and make all other determinations and take all
other actions necessary and advisable for the administration of the Plan.
Decisions and determinations of the Committee on all matters relating to the
Plan shall be in its sole discretion and shall be conclusive.
5. ELIGIBILITY. Only those employees of PCSS designated by the
Compensation Committee and who are employed by PCSS on the Stock Price
Appreciation Date (defined below) may participate in the Plan.
6. STOCK GRANTS. If at any time prior to the Termination Date, the
closing price of the Common Stock as reported on Nasdaq equals or exceeds $15.00
per share for twenty (20) consecutive trading days (the "Stock Price
Appreciation Date"), PCSS shall make the following grants of up to an aggregate
of 200,000 shares of Common Stock to the eligible PCSS employees. Each Employee
will be issued the Common Stock granted pursuant to this Plan within a
reasonable period of time following the Stock Price Appreciation Date unless the
Stock Price Appreciation Date occurs during a PCSS Blackout Period (defined
below), whereupon the Common Stock shall be issued at the end of such Blackout
Period. For purposes of this Plan, the term "Blackout Period" shall mean that
period during which the Board has prohibited PCSS employees and directors from
selling or acquiring Common Stock.
7. CHANGES IN CAPITALIZATION. If the outstanding shares of Common Stock
are increased, decreased or exchanged for a different number or kind of shares
or other securities, or if additional shares or other property (other than
ordinary dividends) are distributed with respect to such shares of Common Stock
<PAGE> 2
or other securities, through merger, consolidation, sale of all or substantially
all of the assets of PCSS, reorganization, recapitalization, reclassification,
dividend, stock split, spin-off, split-off or other distribution with respect to
such shares of Common Stock, or other securities, an appropriate and
proportionate adjustment may be made in the maximum number and kind of shares
reserved for issuance under the Plan.
8. NO RIGHT TO CONTINUE AS AN EMPLOYEE. Neither the Plan nor any action
taken pursuant to the Plan, shall constitute evidence of any agreement or
understanding, express or implied, that PCSS will retain a participant as an
employee of PCSS for any period of time or at any particular rate of
compensation.
9. AMENDMENT, MODIFICATION, AND TERMINATION. The Compensation Committee
may at any time terminate the Plan prior to the Termination Date and in any
respect amend or modify the Plan; provided, however, that the Compensation
Committee shall condition any amendments on the approval of stockholders if such
approval is necessary or advisable under relevant securities, tax or other
applicable law. No amendment, modification, or termination of the Plan shall in
any manner adversely affect the rights of any participant with respect to shares
of Common Stock to which he or she became entitled prior to such amendment,
modification or termination.
10. RESTRICTIONS ON DELIVERY AND SALE OF SHARES; LEGENDS. PCSS shall
use its best efforts to cause each share of Common Stock issued under the Plan
to be (a) listed on the Nasdaq or such other market or securities exchange as
PCSS shall be qualified to list its securities on and (b) registered under the
Securities Act of 1933 and any applicable state securities law. If for any
reason a registration statement is not in effect under the Securities Act of
1933 or any applicable state securities laws with respect to the shares of
Common Stock issued or otherwise deliverable hereunder, the Employee shall as a
condition to any delivery of Common Stock hereunder, represent, in writing, that
the shares received are being acquired for investment and not with a view to
distribution and agree that the shares will not be disposed of except pursuant
to an effective registration statement, unless PCSS shall have received an
opinion of counsel that such disposition is exempt from such requirement under
the Securities Act of 1993 any applicable state securities laws. PCSS shall
include on certificates representing shares delivered pursuant to the Plan such
legends referring to the foregoing representations or restrictions and any other
applicable restrictions on resale as the Compensation Committee, in its
discretion, shall deem appropriate.
<PAGE> 1
EXHIBIT 10.7
FIFTH AMENDMENT TO
PC SERVICE SOURCE, INC.
STOCK OPTION PLAN
PC Service Source, Inc., a Delaware corporation (the "Company"), adopted a
Stock Option Plan dated as of August 28, 1992 (the "Plan"), providing for shares
of the Company's common stock, $.01 par value per share (the "Common Stock"), to
be issued under the Plan pursuant to the terms and conditions stated in the
Plan. Subject to stockholder approval, at a meeting held on October 21, 1998,
the Board of Directors of the Company adopted resolutions amending the Plan to
increase the aggregate number of shares subject to issuance under the Plan from
1,000,000 to 1,750,000. On December 7, 1998, the Board of Directors amended the
resolution adopted by it at the October 21, 1998, meeting by adopting a
resolution to increase the aggregate number of shares subject to issuance under
the plan from 1,000,000 to 1,500,000. Also, at a Special Meeting of stockholders
of the Company held on December 18, 1998, the stockholders of the Company
approved the amendment to the Plan.
As a result of the approval by the Company's Board of Directors and the
stockholders, the Plan is hereby amended to increase the total number of shares
subject to issuance under the Plan from 1,000,000 to 1,500,000.
IN WITNESS WHEREOF, the Company, acting by and through its officers
hereunto duly authorized, has executed this instrument as of the 18th day of
December, 1998.
PC SERVICE SOURCE, INC.
By: /s/ Robert J. Boutin
----------------------------------------
Robert J. Boutin, Senior Vice President,
Chief Financial Officer and Secretary
<PAGE> 1
PC SERVICE SOURCE, INC.
EXHIBIT 21 - SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
NAMES OF SUBSIDIARIES STATE OF INCORPORATION
- - --------------------- ----------------------
<S> <C>
Cyclix Engineering Corporation d/b/a
PC Service Source Repair Services Texas
Hi-Tek Services, Inc. California
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration
statements (Form S-8 No. 333-09333, No. 333-09335, No. 33-81146 and No.
33-98176) of PC Service Source, Inc. of our report dated February 12, 1999,
except for the last paragraph of Note 1 and the first paragraph of Note 3 for
which the date is March 11, 1999, with respect to the consolidated financial
statements and schedule of PC Service Source, Inc. and subsidiaries included in
the Annual Report (Form 10-K) for the year ended December 31, 1998.
Ernst & Young LLP
Dallas, Texas
March 29, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
PC Service Source, Inc.:
We consent to the incorporation by reference in the registration statements
(nos. 333-09333, 333-09335, 33-81146 and 33-98176) on Form S-8 of PC Service
Source, Inc. of our report dated February 13, 1998 relating to the consolidated
balance sheet of PC Service Source, Inc. and subsidiaries as of December 31,
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows and the related financial statement schedule for the
years ended December 31, 1997 and 1996, which report appears in the December
31, 1998 annual report on Form 10-K of PC Service Source, Inc.
KPMG LLP
Dallas, Texas
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 940
<SECURITIES> 0
<RECEIVABLES> 20,186
<ALLOWANCES> (974)
<INVENTORY> 22,031
<CURRENT-ASSETS> 45,007
<PP&E> 26,369
<DEPRECIATION> (11,288)
<TOTAL-ASSETS> 62,734
<CURRENT-LIABILITIES> 38,815
<BONDS> 2,677
0
0
<COMMON> 59
<OTHER-SE> 20,081
<TOTAL-LIABILITY-AND-EQUITY> 62,734
<SALES> 148,615
<TOTAL-REVENUES> 160,773
<CGS> 103,762
<TOTAL-COSTS> 115,807
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,605
<INCOME-PRETAX> (12,212)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,212)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,212)
<EPS-PRIMARY> (2.12)
<EPS-DILUTED> (2.12)
</TABLE>
