UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-26020
APPLIED CELLULAR TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
MISSOURI
(State or other jurisdiction of incorporation or organization
43-1641533
(IRS Employer Identification number)
400 Royal Palm Way
Suite 410
Palm Beach, Florida 33480
(Address of principal executive offices)
Issuer's telephone number: (561) 366-4800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ]
The number of shares outstanding of each of the issuer's classes of
common stock as of the close of business on November 6, 1998:
Class Number of Shares
Common Stock; $.001 Par Value 33,771,952
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC.
TABLE OF CONTENTS
Item Description Page
- ----- ----------- ----
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Balance Sheets - 3
September 30, 1998 (unaudited) and December 31, 1997
Consolidated Statements of Operations - 4
Three and Nine Months ended September 30, 1998 and 1997
(unaudited)
Consolidated Statements of Stockholders' Equity - 5
Nine Months ended September 30, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows - 6
Nine Months ended September 30, 1998 and 1997 (unaudited)
Notes to Consolidated Financial Statements 7
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
1. Legal Proceedings 20
2. Changes In Securities and Use Of Proceeds 20
3. Defaults Upon Senior Securities 22
4. Submission of Matters to a Vote of Security Holders 22
5. Other Information 22
6. Exhibits and Reports on Form 8-K 22
SIGNATURE 24
EXHIBITS 25
<PAGE>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except for number of shares and share value data)
<CAPTION>
Assets
September 30, December 31,
1998 1997
(unaudited) (audited)
------------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents .................................................. $ 5,407 $ 7,657
Accounts receivable (net of allowance for
doubtful accounts of $913 in 1998 and $675 in 1997)...................... 38,954 19,389
Inventories ................................................................ 19,842 10,872
Notes receivable ........................................................... 1,164 390
Prepaid expenses and other current assets .................................. 4,927 1,267
-------- --------
Total Current Assets.................................................. 70,294 39,575
Property, Plant And Equipment ................................................. 16,001 5,339
Notes Receivable .............................................................. 1,139 575
Goodwill ...................................................................... 25,634 12,263
Other Assets .................................................................. 9,148 3,530
-------- --------
$122,216 $ 61,282
======== ========
Liabilities And Stockholders' Equity
Current Liabilities
Notes payable............................................................... $ 20,492 $ 4,783
Current maturities of long-term debt........................................ 1,274 843
Accounts payable and accrued expenses ...................................... 25,791 14,487
-------- --------
Total Current Liabilities ............................................ 47,557 20,113
Long-Term Liabilities ......................................................... 2,925 2,200
-------- --------
Total Liabilities..................................................... 50,482 22,313
-------- --------
Minority Interest.............................................................. 3,527 1,785
-------- --------
Redeemable Preferred Shares ....... ................................... -- 900
-------- --------
Stockholders' Equity
Preferred shares:
Special voting, $10 par value, issued and outstanding 1 share in 1998.... -- --
Class B voting, $10 par value, issued and outstanding 1 share in 1998 ... -- --
Common shares:
Authorized 80,000,000 and 40,000,000 shares in 1998 and 1997 of $.001
par value; issued and outstanding 33,660,425 and 20,672,423 in 1998 and
1997, respectively....................................................... 34 21
Additional paid-in capital ................................................. 60,791 33,680
Retained earnings........................................................... 7,188 2,586
Unrealized gain on marketable securities ................................... 6 --
Foreign currency translation adjustment .................................... 188 (3)
------- --------
Total Stockholder' Equity ............................................... 68,207 36,284
------- --------
$122,216 $ 61,282
======== ========
</TABLE>
See the accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, except per share amounts)
<CAPTION>
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net Operating Revenue ........................ $ 59,044 $ 29,195 $ 151,508 $ 72,065
Cost of Goods Sold ........................... 40,095 18,826 104,617 47,339
- ---------------------------------------------- -------- -------- --------- --------
Gross Profit.................................. 18,949 10,369 46,891 24,726
Selling, General and Administrative Expenses . 15,637 7,704 38,041 20,246
- ---------------------------------------------- -------- -------- --------- --------
Operating Income ............................. 3,312 2,665 8,850 4,480
Interest Income .............................. 94 46 313 134
Interest Expense ............................. (461) (295) (1,127) (739)
- ---------------------------------------------- -------- -------- --------- --------
Income Before Provision For Income Taxes
And Minority Interest ..................... 2,945 2,416 8,036 3,875
Provision For Income Taxes ................... 1,021 980 2,763 1,395
- ---------------------------------------------- -------- -------- --------- --------
Income Before Minority Interest .............. 1,924 1,436 5,273 2,480
Minority Interest............................. 258 244 627 454
- ---------------------------------------------- -------- -------- --------- --------
Net Income.................................... 1,666 1,192 4,646 2,026
Preferred Stock Dividends .................... 12 18 44 54
- ---------------------------------------------- -------- -------- --------- --------
Net Income Applicable to Common
Stockholders .............................. $ 1,654 $ 1,174 $ 4,602 $ 1,972
============================================== ======== ======== ========= ========
Net Income Per Common Share - Basic .......... $ 0.05 $ 0.09 $ 0.15 $ 0.21
============================================== ======== ======== ========= ========
Net Income Per Common Share - Diluted ....... $ 0.05 $ 0.08 $ 0.15 $ 0.17
============================================== ======== ======== ========= ========
Weighted Average Number Of
Common Shares Outstanding - Basic ......... 36,369 12,896 30,721 9,619
============================================== ======== ======== ========= ========
Weighted Average Number Of Common
Shares Outstanding - Diluted .............. 36,863 14,929 32,041 12,226
============================================== ======== ======== ========= ========
</TABLE>
See the accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Nine Month Periods Ended September 30, 1998 And 1997
(Unaudited)
(In Thousands, except for number of shares)
<CAPTION>
Common Stock Preferred Stock Additional Total
-------------------- ----------------- Paid-In Retained Stockholders'
Number Amount Number Amount Capital Earnings Other Equity
--------- ------- ------ ------ --------- --------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1997 ............. 5,798,701 $ 6 $ -- $ -- $ 7,928 $ 318 $ -- $ 8,252
Net income.......................... -- -- -- -- -- 2,026 -- 2,026
Issuance of common stock............ 7,128,981 7 -- -- 9,039 -- -- 9,046
Issuance of common stock to
redeem preferred stock.......... 1,354,167 1 -- -- 2,499 -- -- 2,500
Warrants redeemed .................. 2,000,000 2 -- -- 7,109 -- -- 7,111
Foreign currency translation
adjustment...................... -- -- -- -- -- -- (9) (9)
Preferred stock dividends paid...... -- -- -- -- -- (54) -- (54)
---------- ---- ------ ----- -------- ------- ----- --------
Balance - September 30, 1997........... 16,281,849 $ 16 -- $ -- $26,575 $ 2,290 $ (9) $ 28,872
========== ==== ====== ===== ======== ======= ===== ========
Balance - January 1, 1998.............. 20,672,423 $ 21 $ -- $ -- $33,680 $ 2,586 $ (3) $ 36,284
Net income -- -- -- -- -- 4,646 -- 4,646
Issuance of common stock............ 12,138,002 12 -- -- 18,265 -- -- 18,277
Issuance of preferred stock......... -- -- -- -- 6,897 -- -- 6,897
Warrants redeemed................... 850,000 1 2 -- 1,949 -- -- 1,950
Foreign currency translation
adjustment...................... -- -- -- -- -- -- 191 191
Unrealized gain on marketable
securities...................... -- -- -- -- -- -- 6 6
Preferred stock dividends paid...... -- -- -- -- -- (44) -- (44)
---------- ---- ------ ----- -------- ------- ----- --------
Balance - September 30, 1998........... 33,660,425 $ 34 2 -- $60,791 $ 7,188 $ 194 $ 68,207
========== ==== ====== ===== ======== ======= ===== ========
</TABLE>
See the accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<CAPTION>
For The Nine Months
Ended September 30,
---------------------------
1998 1997
<S> <C> <C>
Cash Flows From Operating Activities
Net income ............................................... $ 4,646 $ 2,026
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization........................ 3,087 1,286
Minority interest ................................... 627 454
Gain on sale of property, plant and equipment ....... (76) (1,235)
Change in assets and liabilities:
Increase in accounts receivable ................... (4,557) (3,082)
Increase in inventories............................ (2,522) (1,391)
Increase in prepaid expenses....................... (2,711) (323)
Increase in deferred tax asset .................... (107) (72)
Decrease in accounts payable and accrued expenses.. (1,597) (1,381)
------------------------------------------------------------ -------- -------
Net Cash Used In Operating Activities ...................... (3,210) (3,718)
------------------------------------------------------------ -------- -------
Cash Flows From Investing Activities
(Increase) decrease in notes receivable........... ....... (1,086) 346
Increase in other assets.................................. (2,615) (589)
Proceeds from sale of property, plant, and equipment ..... 191 1,437
Payments for property, plant and equipment ............... (1,640) (1,049)
Proceeds from costs of asset and business acquisitions
(net of cash balances acquired) ....................... 29 193
------------------------------------------------------------ -------- -------
Net Cash Provided By (Used In) Investing Activities ........ (5,121) 338
------------------------------------------------------------ -------- -------
Cash Flows From Financing Activities
Net amounts borrowed (paid) on notes payable ............ 8,173 (59)
Proceeds from long-term debt............................. 891 --
Payments for long-term debt ............................. (4,389) --
Redemption of preferred shares........................... (900) --
Preferred stock dividends paid .......................... (44) (72)
Issuance of common shares ............................... 2,350 8,028
------------------------------------------------------------ -------- -------
Net Cash Provided By Financing Activities .................. 6,081 7,897
------------------------------------------------------------ -------- -------
Net Increase (Decrease) In Cash And Cash Equivalents ....... (2,250) 4,517
Cash And Cash Equivalents - Beginning Of Period ............ 7,657 810
------------------------------------------------------------ -------- -------
Cash And Cash Equivalents - End Of Period .................. $ 5,407 $ 5,327
============================================================ ======== ========
Supplemental Disclosure Of Cash Flow Information
Income taxes paid ....................................... $ 2,052 $ 778
Interest paid ........................................... 1,046 444
Noncash investing and financing activities:
Property acquired for long-term debt .................. 1,775 496
Property acquired through issuance of stock............ -- 163
------------------------------------------------------------------------------------------------------
</TABLE>
See the accompanying notes to consolidated financial statements.
6
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Applied
Cellular Technology, Inc. (the "Company") have been prepared by the Company in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, all adjustments (consisting of only normal recurring adjustments)
considered necessary to present fairly the consolidated financial statements
have been made.
The consolidated balance sheet at December 31, 1997 has been derived from
the audited consolidated financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The consolidated statements of
operations for the three and nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the entire year.
These statements should be read in conjunction with the consolidated financial
statements and related notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
2. Principles of Consolidation
The financial statements include the accounts of Applied Cellular
Technology, Inc. and its wholly owned and majority owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. During the nine-month periods ended September 30, 1998 and 1997,
the Company acquired interests in fourteen and seven companies, respectively.
The financial position and results of operations of these acquisitions are
included in the Company's consolidated financial statements as of their
effective date of acquisition.
3. Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income", and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information". These statements, which are
effective for fiscal years beginning after December 31, 1997, expand or modify
disclosures and will have no impact on the Company's consolidated financial
position, results of operations or cash flows. The only component of
comprehensive income is foreign currency translation which, for the nine months
ended September 30, 1998, amounted to $191.
4. Inventory
<TABLE>
September 30, December 31,
1998 1997
-------------------- ------------------
<S> <C> <C>
Raw materials $ 5,405 $ 1,962
Work in process 2,750 1,085
Finished goods 11,687 7,825
==================== ==================
$ 19,842 $ 10,872
==================== ==================
</TABLE>
7
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
5. Notes Payable
During the third quarter of 1998, the Company entered into a twenty million
dollar line of credit with a trust company secured by all assets of the Company
(the "Credit Agreement") at the prime lending rate or at the London Interbank
Offered Rate, as elected by the Company. The Credit Agreement expires on July
31, 1999 and contains standard debt covenants relating to financial position and
performance as well as restrictions on the declarations and payment of
dividends. As of September 30, 1998, the outstanding balance was $16,130 and the
availability was $3,870. The Company is currently in compliance with all
covenants under the Credit Agreement.
6. Stockholders' Equity
The Company has authorized 5,000 shares of preferred stock, $10.00 par
value, to be issued from time to time on such terms as is specified by the Board
of Directors.
In May 1998, in connection with the Company's acquisition of Commstar
Limited, an Ontario corporation ("Commstar"), the Board of Directors authorized
the issuance of one share of the Company's Preferred Stock ($10.00 par value)
designated as the Company's Special Voting Preferred Stock (the "Special
Preferred Share"). The Special Preferred Share is entitled to a number of votes
equal to the number of outstanding Exchangeable Shares not owned by the Company.
The holder of the Special Preferred Share is not entitled to receive any
dividends or participate in any distribution of assets to the stockholders of
the Company. When all Exchangeable Shares have been exchanged or redeemed for
shares of the Company's Common Stock, the Special Preferred Share will be
cancelled. The Company initially reserved 3,418 shares of its Common Stock to be
exchanged for Exchangeable Shares held by the Commstar selling shareholders, 652
of which have been exchanged into shares of Common Stock and 2,765 are reserved
at September 30, 1998. On July 30, 1998, Commstar acquired certain assets from
Western Inbound Network, Inc., an Ontario corporation, in consideration for 432
Exchangeable Shares. The Company initially reserved 432 shares of its Common
Stock, 288 of which have been exchanged into shares of Common Stock and 144 are
reserved at September 30, 1998.
In June 1998, in connection with the Company's acquisition of Ground
Effects Limited, an Ontario corporation ("Ground Effects"), the Board of
Directors authorized the issuance of one share of the Company's Preferred Stock
($10.00 par value) designated as the Company's Class B Voting Preferred Stock
(the "Class B Special Preferred Share"). The Class B Special Preferred Share is
entitled to a number of votes equal to the number of outstanding Exchangeable
Shares not owned by the Company. The holder of the Class B Special Preferred
Share is not entitled to receive any dividends or participate in any
distribution of assets to the stockholders of the Company. When all Exchangeable
Shares have been exchanged or redeemed for shares of the Company's Common Stock,
the Special Preferred Share will be cancelled. The Company has reserved 1,106
shares of its Common Stock to be exchanged for Exchangeable Shares held by the
Ground Effects selling shareholders, none of which had been exchanged at
September 30, 1998.
8
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
<TABLE>
7. Earnings Per Share
The following is a reconciliation of the numerator and denominator of
basic and diluted earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
-------------------------------------------------
NUMERATOR:
Net income $ 1,666 $ 1,192 $ 4,646 $2,026
Preferred stock dividends 12 18 44 54
------------------------------------------------
Numerator for basic earnings per share -
Net income available to common stockholders 1,654 1,174 4,602 1,972
Effect of dilutive securities:
Preferred stock dividends 12 18 44 54
------------------------------------------------
Numerator for diluted earnings per share -
Net income available to common stockholders $ 1,666 $ 1,192 $ 4,646 $2,026
================================================
DEMONINATOR:
Denominator for basic earnings per share -
Weighted-average shares (1) 36,369 12,896 30,721 9,619
------------------------------------------------
Effect of dilutive securities -
Redeemable preferred stock 74 868 114 1,869
Warrants 208 654 621 626
Employee stock options -- 511 275 111
Contingent stock - acquisitions 211 -- 310 --
------------------------------------------------
Dilutive potential common shares 493 2,033 1,320 2,606
------------------------------------------------
Denominator for diluted earnings per share - Adjusted
Weighted-average shares and assumed conversions
36,862 14,929 32,041 12,225
================================================
Basic earnings per share $ 0.05 $ 0.09 $ 0.15 $ 0.21
================================================
Diluted earnings per share $ 0.05 $ 0.08 $ 0.15 $ 0.17
================================================
- -----------------------
<FN>
1. Includes, for the three and nine month periods ended September 30,
1998, 2,909 shares of common stock reserved for issuance to the holders
of Commstar's Exchangeable Shares and 1,106 shares of common stock
reserved for issuance to the holder's of Ground Effects' Exchangeable
Shares.
</FN>
</TABLE>
9
<PAGE>
8. Pro-Forma Information
The following pro-forma condensed consolidated statement of operations
of the Company for the nine months ended September 30, 1998 gives effect to the
acquisitions of the following companies as if they were effective at January 1,
1998:
Effective Date
Acquired Company of Acquisition
-------------------------------------------- -------------------
The Americom Group, Inc. April 1, 1998
Aurora Electric, Inc. April 1, 1998
Blue Star Electronics, Inc. April 1, 1998
Commstar Limited May 1, 1998
Consolidated Micro Components, Inc. April 1, 1998
Data Path Technologies, Inc. April 1, 1998
The Fromehill Company dba Winward Electric January 1, 1998
GDB Software Services, Inc April 1, 1998
Ground Effects Limited April 1, 1998
Information Products Center, Inc. January 1, 1998
Innovative Vacuum Solutions, Inc. April 1, 1998
Service Transportation Company April 1, 1998
Signature Industries Limited June 1, 1998
Teledata Concepts, Inc. April 1, 1998
The pro-forma condensed consolidated statement of operations gives
effect to the acquisitions under the purchase method of accounting, and is not
indicative of the results that would have occurred had the acquisitions been
effective on the dates indicated or of the results that may be obtained in the
future.
--------------------------------------------------------
Applied Cellular Technology, Inc.
Pro-Forma Condensed Consolidated Statement Of Operations
For The Nine Months Ended September 30, 1998
(Unaudited)
(In Thousands, except per share amounts)
--------------------------------------------------------
Net operating revenue $174,852
Cost of goods sold 119,407
--------
Gross profit 55,445
Selling, general and administrative expenses 49,387
--------
Operating income 6,058
Interest income 328
Interest expense (1,339)
Minority interest ( 548)
Provision for income taxes (1,741)
--------
Net income 2,758
Dividends ( 44)
--------
Net income available to common stockholders $ 2,714
Net income per common share ========
- basic $0.08
- diluted $0.08
Weighted average number of common shares outstanding
- basic 34,883
- diluted 36,203
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion should be read in conjunction with the accompanying
consolidated financial statements and related notes in Item 1 of this report as
well as the Company's Annual Report on Form 10-K for the year ended December 31,
1997. Certain statements made in this report may contain forward-looking
statements. For a description of risks and uncertainties relating to such
forward-looking statements, see Exhibit 99.1 attached hereto. All amounts are
in thousands, except per share data.
Results of Operations
The Company's results of operations improved significantly from the third
quarter of 1997 to the third quarter of 1998. The significant increases are all
attributable to the Company's growth of existing businesses and to its growth
through acquisition. Net operating revenue for the third quarter of 1998 was
$59,044, an increase of $29,849, or 102.2 percent, from $29,195 the third
quarter of 1997. Net income applicable to common stockholders was $1,654, an
increase of $480, or 40.9 percent, from $1,174 a year earlier. Basic earnings
per share were $0.05 per share in 1998 compared to $0.09 per share in 1997.
Diluted earnings per share were $0.05 per share in 1998, compared to $0.08 per
share in 1997. The weighted-average number of diluted shares outstanding
increased by 146.9 percent from 1997 to 1998.
Net operating revenue for the nine months ended September 30, 1998 was
$151,508, an increase of $79,443, or 110.2%, from $72,065 for the nine months
ended September 30, 1997. Net income applicable to common stockholders for the
nine months ended September 30, 1998 was $4,602, an increase of $2,630, or 133.4
percent, from $1,972 for the same period of 1997. Basic earnings per share for
the nine months ended September 30, 1998 were $0.15 per share compared to $0.21
per share for the same period in 1997. Diluted earnings per share for the nine
months ended September 30, 1998 were $0.15 per share, compared to $0.17 per
share for the same period in 1997. The weighted-average number of diluted shares
outstanding increased by 162.1 percent from 1997 to 1998.
11
<PAGE>
The following table summarizes the Company's results of operations as a
percentage of net operating revenue for the three and nine-month periods ended
September 30, 1998 and 1997, and is derived from the unaudited consolidated
statements of operations in Part I, Item 1 of this report.
<TABLE>
Relationship to Net Operating Revenue
--------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
------ ----- ----- -----
% % % %
Net Operating Revenue 100.0 100.0 100.0 100.0
Cost of Goods Sold 67.9 64.5 69.1 65.7
-------------------------------------
Gross Profit 32.1 35.5 30.9 34.3
Selling, General and Administrative 26.5 26.4 25.1 28.1
Expenses
-------------------------------------
Operating Income 5.6 9.1 5.8 6.2
Interest Income 0.2 0.2 0.2 0.2
Interest Expense (0.8) (1.0) (0.7) (1.0)
-------------------------------------
Income Before Provision for Income
Taxes 5.0 8.3 5.3 5.4
And Minority Interest
Provision For Income Taxes 1.7 3.4 1.8 2.0
-------------------------------------
Income Before Minority Interest 3.3 4.9 3.5 3.4
Minority Interest 0.5 0.8 0.4 0.6
-------------------------------------
Net Income 2.8 4.1 3.1 2.8
Preferred Stock Dividends 0.0 0.1 0.1 0.1
=====================================
Net Income Applicable to Common
Stockholders 2.8 4.0 3.0 2.7
=====================================
</TABLE>
Net Operating Revenue
The Company operates in four business groups or segments. A fifth business
group, ACT Financial Group, is being developed to provide financial services for
end users and each ACT business unit:
ACT Communications Group
This group contains companies that provide products and services including
telephone systems, voice mail, computer telephony, interactive voice response
systems, telephone services, calling cards, paging services, cellular services,
digital satellite services, call centers, networking systems, fiber optic
cabling, power distribution services and communication towers.
ACT Software and Services Group
This group contains companies that develop and market software products and
services for wireless-enabled applications, data acquisition, field service,
decision support, corporate enterprise access and multi-function peripheral
devices.
ACT Computer Group
This group contains companies that provide computer systems, peripherals,
components, specialty systems, cabling, consulting, rental services, system
integration, transportation, and de-installation services.
ACT Specialty Manufacturing Group
This group contains companies that manufacture and market electrical
12
<PAGE>
components, control panels, global positioning systems, satellite modems,
transceivers, controllers, communication devices, orbit modeling applications,
as well as provide design and manufacturing engineering services.
<TABLE>
The following table summarizes the net operating revenue by business group:
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------
<S> <C> <C> <C> <C>
Business Group 1998 % 1997 %
---------------------------- ---------- ------- --------- -------
ACT Communications Group $ 73,812 48.7 $29,488 40.9
ACT Software and Services
Group 6,336 4.2 3,080 4.3
ACT Computer Group 43,043 28.4 27,029 37.5
ACT Specialty Manufacturing
Group 28,317 18.7 12,468 17.3
======== ===== ======= =====
$151,508 100.0 $72,065 100.0
======== ===== ======= =====
<CAPTION>
Three Months Ended September 30,
--------------------------------------------
Business Group 1998 % 1997 %
----------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
ACT Communications Group $ 27,348 46.3 $13,647 46.7
ACT Software and Services
Group 2,844 4.8 944 3.2
ACT Computer Group 14,814 25.1 9,314 31.9
ACT Specialty Manufacturing
Group 14,038 23.8 5,290 18.2
======== ===== ======= =====
$ 59,044 100.0 $29,195 100.0
======== ===== ======= =====
</TABLE>
The Company did not make any acquisitions in the third quarter of 1998.
In the first quarter of 1998, the Company acquired interests in the following
two companies:
-- Information Products Center, Inc. is a provider of services and
products designed to build and manage personal computer network
infrastructures.
-- The Fromehill Company, dba Winward Electric is a full service
electrical and communications systems contractor for residential,
commercial, institutional and industrial markets.
During the second quarter of 1998, the Company acquired interests
in the following twelve companies:
-- The Americom Group, Inc. provides communications infrastructure
construction, maintenance, installation and training services for the
telecommunications industry.
-- Aurora Electric, Inc. is a full service electrical and communications
system contractor for residential, commercial, institutional and
industrial markets.
13
<PAGE>
-- Blue Star Electronics, Inc. is a cable assembly manufacturer
specializing in custom voice and data cabling applications
-- Commstar Limited provides call centers, voice messaging and one
number dialing services throughout Canada.
-- Consolidated Micro Components, Inc. specializes in buying new and
surplus memory, processors and mass storage devices from auctions and
liquidation events and reselling the products to end users in the
commercial, institutional and government market sectors.
-- Data Path Technologies, Inc. specializes in marketing and servicing
computer systems, peripherals, components and business software
applications.
-- GDB Software Services, Inc. provides data processing consulting
services for mainframe, midrange and personal computer networks for
financial institutions.
-- Ground Effects Limited specializes in aluminum and steel tubular
manufacturing primarily for the automotive industry.
-- Innovative Vacuum Solutions, Inc. re-manufactures and services
high-end vacuum pumps used in the semiconductor, optical, electronics
and general manufacturing industry.
-- Service Transportation Company is a shipping company specializing in
the packaging and transportation of computer systems and electronics.
-- Signature Industries Limited is a manufacturer of high-grade
communication and safety devices.
-- Teledata Concepts, Inc. is a full service telecommunications provider
of PBX, computer telephony integration and call center technology.
Gross Profit
Gross profit for the third quarter of 1998 was $18,949, an increase of
$8,580, or 82.8 percent, from $10,369 for the third quarter of 1997. As a
percentage of revenue, gross profit was 32.1 percent and 35.5 percent for the
quarters ended September 30, 1998 and 1997, respectively. Gross profit for the
nine months ended September 30, 1998 was $46,891, an increase of $22,165, or
89.6 percent, from $24,726 for the same period of 1997. As a percentage of
revenue, gross profit was 30.9 percent and 34.3 percent for the nine months
ended September 30, 1998 and 1997, respectively. The decline in the gross profit
percentage from 1997 to 1998 is attributable to the different business mix and
to newly acquired businesses with lower overall margin contributions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the third quarter of 1998
were $15,637, an increase of $7,933, or 103.0 percent, from $7,704 for the third
quarter of 1997. As a percentage of revenue, selling, general and administrative
expenses were 26.5 percent and 26.4 percent for the quarters ended September 30,
1998 and 1997, respectively. Selling, general and administrative expenses for
the nine months ended September 30, 1998 were $38,041, an increase of $17,795,
or 87.9 percent, from $20,246 for the same period of 1997. As a percentage of
revenue, selling, general and administrative expenses were 25.1 percent and 28.1
percent for the nine months ended September 30, 1998 and 1997, respectively. The
changes in selling, general and administrative expenses from the prior year are
due to continued internal growth and growth through acquisition, offset by
economies of scale achieved with higher operating revenues.
Operating Income
Operating income for the third quarter of 1998 was $3,312, an increase of
$647, or 24.3 percent, from $2,665 for the third quarter of 1997. As a
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<PAGE>
percentage of revenue, operating income was 5.6 percent and 9.1 percent for the
quarters ended September 30, 1998 and 1997, respectively. Operating income for
the nine months ended September 30, 1998 was $8,850, an increase of $4,370, or
97.5 percent, from $4,480 for the same period of 1997. As a percentage of
revenue, operating income was 5.8 percent and 6.2 percent for the nine months
ended September 30, 1998 and 1997, respectively. The increase in operating
income is attributable to the growth of the Company's existing businesses and to
the growth contributed by the acquisitions the Company made during 1998.
Interest Income and Expense
Interest income for the third quarter of 1998 was $94, an increase of $48,
or 104.4 percent, from $46 for the third quarter of 1997. As a percentage of
revenue, interest income was 0.2 percent for the quarters ended September 30,
1998 and 1997. Interest income for the nine months ended September 30, 1998 was
$313, an increase of $179, or 133.6 percent, from $134 for the same period of
1997. As a percentage of revenue, interest income was 0.2 percent for the nine
months ended September 30, 1998 and 1997.
Interest expense for the third quarter of 1998 was $461, an increase of
$166, or 56.3 percent, from $295 for the third quarter of 1997. As a percentage
of revenue, interest expense was 0.8 percent and 1.0 percent for the quarters
ended September 30, 1998 and 1997, respectively. Interest expense for the nine
months ended September 30, 1998 was $1,127, an increase of $388, or 52.5
percent, from $739 for the same period of 1997. As a percentage of revenue,
interest expense was 0.7 percent and 1.0 percent for the nine months ended
September 30, 1998 and 1997, respectively.
The changes in interest income and interest expense are a factor of the
amount of cash invested or borrowed during a stated period.
Income Taxes
The Company's effective income tax rate was 34.7 percent and 40.6 percent
in the third quarter of 1998 and 1997, respectively. For the nine months ended
September 30, 1998 and 1997, the Company's effective income tax rate was 34.4
percent and 36.0 percent, respectively. The decrease in the effective rate for
the third quarter of 1998 was primarily a result of reducing the valuation
allowance for certain net operating loss carryforwards.
Financial Condition
As of September 30, 1998, cash and cash equivalents totaled $5,407, down
$2,250, or 29.4 percent, from $7,657 at December 31, 1997.
Operating activities used cash of $3,210 and $3,718 during the nine months
ended September 30, 1998 and 1997, respectively. As of September 30, 1998,
accounts receivable totaled $38,954, an increase of $19,565, or 100.9 percent,
from $19,389 at December 31, 1997. As of September 30, 1998, inventory totaled
$19,842, an increase of $8,970, or 82.5 percent, from $10,872 at December 31,
1997. As of September 30, 1998, accounts payable and accrued expenses totaled
$25,791, an increase of $11,304, or 78.0 percent, from $14,487 at December 31,
1997. These increases were primarily attributable to growth through acquisitions
and to the resulting increased level of business.
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Investing activities used cash of $5,121 during the nine months ended
September 30, 1998 and provided cash of $338 during the nine months ended
September 30, 1997. During these periods, investing activities consisted
principally of changes in notes receivable from officers; purchases of property,
plant and equipment; and increases in other assets, all of which were partially
offset by cash acquired in acquisitions.
Financing activities provided cash of $6,081 and $7,897 during the nine
months ended September 30, 1998 and 1997, respectively. The major financing
sources of cash in 1998 were proceeds from bank borrowings and the sale of
common stock. The major financing uses of cash were the repayment of long-term
debt, the redemption of preferred shares and the payment of preferred stock
dividends. In 1997, the major financing source of cash was the sale of common
stock, offset by the payment of preferred stock dividends.
During the third quarter of 1998, the Company entered into a twenty million
dollar line of credit with a trust company secured by all assets of the Company
(the "Credit Agreement") at the prime lending rate or at the London Interbank
Offered Rate, as elected by the Company. The Credit Agreement expires on July
31, 1999 and contains standard debt covenants relating to financial position and
performance as well as restrictions on the declarations and payment of
dividends. As of November 6, 1998, the outstanding balance was $15,094 and the
availability was $4,906. The Company is currently in compliance with all
covenants under the Credit Agreement.
One of the Company's objectives is to maximize its cash flow, as management
believes it offers evidence of financial strength. However, as the Company
experiences substantial growth, its investment needs are more substantial than
those of more mature companies with modest investment needs. Consequently, the
Company will continue to use cash from operations for the foreseeable future.
The Company's sources of liquidity include, but are not limited to, funds
available under the Credit Agreement, its ability to obtain additional bank
borrowings, the sale of common and preferred shares, the exercise of warrants,
and the raising of other forms of debt or equity through private placement.
There can be no assurance however, that these options will be available, or if
available, on terms favorable to the Company. The Company believes that its
current cash position, augmented by financing activities, will provide it with
sufficient resources to finance its working capital requirements for the
foreseeable future. The Company's capital requirements depend on a variety of
factors, including but not limited to, the rate of increase or decrease in its
existing business base; the success, timing, and amount of investment required
to bring new products on-line; revenue growth or decline; and potential
acquisitions. The Company believes that it has the financial resources to meet
its future business requirements.
Outlook
The Company's objective is to continue to grow internally through its
existing business groups and through acquisitions, both domestically and abroad.
The Company's strategy has been, and continues to be, to invest in, and acquire,
businesses that complement and add to its existing business base. The Company
has expanded significantly through acquisitions in the last twelve months and
continues to do so. The Company's financial results are substantially dependent
on not only its ability to sustain and grow existing businesses, but to continue
to grow through acquisition. The Company expects to continue to pursue its
acquisition strategy in 1998 and future years, but there can be no assurance
that management will be able to continue to find, acquire, finance and integrate
high quality companies at attractive prices.
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<PAGE>
While the Company has been profitable for the last three fiscal years,
future financial results are uncertain. There can be no assurance that the
Company will continue to be operated in a profitable manner. Profitability
depends upon many factors, including the success of the Company's various
marketing programs, the maintenance or reduction of expense levels and the
ability of the Company to successfully coordinate the efforts of the different
segments of its business.
The Company has engaged in a continuing program of acquisitions of other
businesses which are considered to be complementary to the lines of business
carried on by the Company, and it is anticipated that such acquisitions will
continue to occur. As of September 30, 1998, the total assets of the Company
were $122,216. Total assets were $61,282, $33,208 and $4,131 as of December 31,
1997, 1996 and 1995, respectively. Net operating revenue for the nine months
ended September 30, 1998 was $151,508. Net operating revenue was $103,159,
$19,883 and $2,336 for the years ended December 31, 1997, 1996 and 1995,
respectively. Managing these dramatic changes in the scope of the business of
the Company will present ongoing challenges to management, and there can be no
assurance that the Company's operations as currently structured, or as affected
by future acquisitions, will be successful. The businesses acquired by the
Company may require substantial additional capital, and there can be no
assurance as to the availability of such capital when needed, nor as to the
terms on which such capital might be made available to the Company. It is the
Company's policy to retain existing management of acquired companies and to
allow the new subsidiary to continue to operate in the manner which has resulted
in its success in the past, under the overall supervision of senior management
of the Company. Accordingly, the success of the operations of these subsidiaries
will depend, to a great extent, on the continued efforts of the management of
the acquired companies.
The Company is constantly looking for ways to maximize stockholder value.
As such, it is continually seeking operational efficiencies and synergies within
existing business segments as well as evaluating acquisitions of businesses and
customer bases which complement the operations of the Company. The Company has
retained the services of an investment banking firm to help evaluate strategic
initiatives and maximize stockholder value. These strategic initiatives may
include acquisitions, raising additional funds through debt or equity offerings,
or the divestiture of non-core business units that are not critical to the
Company's long term strategy. The Company will review all alternatives to ensure
maximum appreciation of its shareholders' investments. There can be no assurance
however, that any initiatives will be found, or if found, on terms favorable to
the Company.
Competition
Each segment of the Company's business is highly competitive, and it is
expected that competitive pressures will continue. Many of the Company's
competitors have far greater financial and other resources than the Company. The
areas which the Company has identified for continued growth and expansion are
also target market segments for some of the largest and most strongly
capitalized companies in the United States, Canada and Europe. There can be no
assurance that the Company will have the financial, technical, marketing and
other resources required to compete successfully in this environment in the
future.
Dependence on Key Individuals
The future success of the Company is highly dependent upon the Company's
ability to attract and retain qualified key employees. The Company is organized
with a small senior management team, with each of its separate operations under
the day-to-day control of local managers. If the Company were to lose the
services of any members of its central management team, the overall operations
of the Company could be adversely affected, and the operations of any of the
individual facilities of the Company could be adversely affected if the services
of the local managers should be unavailable.
17
<PAGE>
Year 2000 Compliance
Background. Some computers, software, and other equipment include programming
code in which calendar year data is abbreviated to only two digits. As a result
of this design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
These problems are widely expected to increase in frequency and severity as the
year 2000 approaches, and are commonly referred to as the "Millenium Bug" or
"Year 2000 Problem".
Assessment. The Year 2000 Problem could affect computers, software, and
other equipment used, operated, or maintained by the Company. Accordingly, the
Company is reviewing its internal computer programs and systems to ensure that
the programs and systems will be Year 2000 compliant. The Company presently
believes that its computer systems will be Year 2000 compliant in a timely
manner. However, while the estimated cost of these efforts are not expected to
be material to the Company's financial position or any year's results of
operations, there can be no assurance to this effect.
Software Sold to Consumers. The Company is in the process of identifying
and resolving all potential Year 2000 Problems with any of the software products
which it develops and markets. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting the Company's software products will be identified or corrected due to
the complexity of these products and the fact that these products interact with
other third party vendor products and operate on computer systems which are not
under the Company's control.
Internal Infrastructure. The Company believes that its major computers,
software applications, and related equipment used in connection with its
internal operations are not subject to significant Year 2000 problems, because
the computer programs used by the Company are primarily off-the-shelf, recently
developed programs from third-party vendors. The Company is in the process of
obtaining assurances from such vendors as to the Year 2000 compliance of their
products. Although some vendors make verbal assurances of Year 2000 compliance,
there can be no certainty that the systems utilized by the Company will not be
affected. The Company intends to continue confirming with vendors, testing,
replacing or enhancing its internal applications to ensure that risks related to
such software are minimized. This process is expected to be completed in early
1999.
Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, photocopiers, telephone switches, security systems, elevators, and
other common devices may be affected by the Year 2000 Problem. The Company is
currently assessing the potential effect of, and costs of remediating, the Year
2000 Problem on its office and facilities equipment.
The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems will
not have a material adverse effect on the Company's business or results of
operations. This estimate is being monitored and will be revised as additional
information becomes available.
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<PAGE>
Suppliers. The Company has initiated communications with third party
suppliers of the major computers, software, and other equipment used, operated,
or maintained by the Company to identify and, to the extent possible, to resolve
issues involving the Year 2000 Problem. However, the Company has limited or no
control over the actions of these third party suppliers. Thus, while the Company
expects that it will be able to resolve any significant Year 2000 Problems with
these systems, there can be no assurance that these suppliers will resolve any
or all Year 2000 Problems with these systems before the occurrence of a material
disruption to the business of the Company or any of its customers. Any failure
of these third parties to resolve Year 2000 problems with their systems in a
timely manner could have a material adverse effect on the Company's business,
financial condition, and results of operation.
Most Likely Consequences of Year 2000 Problems. The Company expects to
identify and resolve all Year 2000 Problems that could materially adversely
affect its business operations. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting the Company have been identified or corrected. The number of devices
that could be affected and the interactions among these devices are simply too
numerous. In addition, one cannot accurately predict how many Year 2000
Problem-related failures will occur or the severity, duration, or financial
consequences of these perhaps inevitable failures. As a result, management
expects that the Company could likely suffer the following consequences:
1. a significant number of operational inconveniences and inefficiencies
for the Company and its clients that may divert management's time and attention
and financial and human resources from its ordinary business activities; and
2. a lesser number of serious system failures that may require significant
efforts by the Company or its customers to prevent or alleviate material
business disruptions.
Contingency Plans. The Company is currently developing contingency plans to
be implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. The Company expects to complete its contingency
plans by the end of the first quarter of 1999. Depending on the systems
affected, these plans could include accelerated replacement of affected
equipment or software, short to medium-term use of backup equipment and
software, increased work hours for Company personnel or use of contract
personnel to correct on an accelerated schedule any Year 2000 Problems that
arise or to provide manual workarounds for information systems, and similar
approaches. If the Company is required to implement any of these contingency
plans, it could have a material adverse effect on the Company's financial
condition and results of operations.
Based on the activities described above, the Company does not believe that
the Year 2000 Problem will have a material adverse effect on the Company's
business or results of operations.
Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
With its Canadian and UK subsidiaries, the Company has operations and sales
in various regions of the world. Additionally, the Company may export and import
to and from other countries. The Company's operations may therefore be subject
to volatility because of currency fluctuations, inflation and changes in
political and economic conditions in these countries. Sales and expenses may be
denominated in local currencies and may be affected as currency fluctuations
affect the Company's product prices and operating costs or those of its
competitors. The financial position and results of operations of the Company's
foreign subsidiaries are measured using the local currency as the functional
currency, although United States dollars would be used if any of these countries
were deemed hyperinflationary.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None pursuant to Item 103 of regulation S-K.
Item 2. Changes in Securitie and Use of Proceeds
On September 29, 1998, the Company filed a Registration Statement on Form
S-3 under the Securities Act of 1933, (Registration No. 333-64605), to register
1,105,708 Common Shares to be issued from time to time upon exchange or
redemption of Class A exchangeable shares and Class B exchangeable shares
(together, the "Exchangeable Shares") of ACT-GFX Canada, Inc., an Ontario
corporation ("ACT-GFX"), a wholly owned subsidiary of the Company. The
Exchangeable Shares have been issued by ACT-GFX in exchange for eighty percent
of the issued and outstanding shares in the capital of Ground Effects Ltd. The
Company has issued a single share of Special Voting Preferred Stock (the
"Special Preferred Share") to the Montreal Trust Company of Canada, (the "Voting
Trustee"). Except as otherwise required by law or the Company's Articles of
Incorporation, the Special Preferred Share will be entitled to a number of votes
equal to the number of outstanding Exchangeable Shares not owned by the Company,
and may be voted in the election of directors and on all other matters submitted
to a vote of the Company's stockholders. When all Exchangeable Shares have been
exchanged or redeemed for shares of the Company's Common Stock, the Special
Preferred Share will be cancelled. This registration statement is subject to
completion and is not yet effective.
On September 30, 1998, the Company filed a Registration Statement on Form
S-3 under the Securities Act of 1933, (Registration No. 333-64755), to register
7,796,119 outstanding Common Shares on behalf of selling shareholders. This
registration statement is subject to completion and is not yet effective.
Recent Sales of Unregistered Securities
The following table lists all unregistered securities sold by the Company
from January 1, 1998 through September 30, 1998. These shares were issued
without registration in reliance upon the exemption provided by Section 4(2) of
the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.
Number of
Issued Common
Name/Entity/Nature Note For Shares
Alacrity Systems, Inc. 1 Acquisition 321,768
The Americom Group, Inc. 2 Acquisition 169,167
Amherst Systems 3 Assets 66,667
Advanced Telecommunications, Inc. 4 Acquisition 775,822
ATI Communications, Inc. 5 Acquisition 200,000
Aurora Electric, Inc. 6 Acquisition 1,116,923
Blue Star Electronics, Inc. 7 Acquisition 222,643
Canadian Network Services, Inc. 8 Acquisition 322,512
Commstar Limited 9 Acquisition 3,849,590
Consolidated Micro Components, Inc. 10 Acquisition 429,805
20
<PAGE>
CT Specialists, Inc. 11 Acquisition 7,328
Cybertech Station, Inc. 12 Acquisition 49,847
Data Path Technologies, Inc. 13 Acquisition 403,077
The Fromehill Company 14 Acquisition 1,816,400
GDB Software Services, Inc. 15 Acquisition 412,308
Ground Effects Limited 16 Acquisition 1,105,708
Innovative Vacuum Solutions, Inc. 17 Acquisition 270,769
Information Products Center, Inc. 18 Acquisition 576,410
Norcom Resources, Inc. 19 Acquisition 74,667
Pizarro Re-Marketing, Inc. 20 Acquisition 42,723
Service Transportation Company 20 Acquisition 37,181
Signature Industries Limited 21 Acquisition 2,362,785
Signal Processors Limited 22 Acquisition 928,293
Teledata Concepts, Inc. 23 Acquisition 144,828
The Bay Group 24 Acquisition Services 218,682
Warrants Exercised 25 Warrants Exercised 850,000
Services 26 Services 256,115
Employee Stock Sale 27 Stock Purchase 100,000
===========
Total 17,132,018
===========
- --------------------------
1. Includes (a) 312,630 additional shares issued to the selling shareholders
and (b) 9,138 additional shares issued as finder's fees in connection with
the "price protection" provision of the Agreement of Sale.
2. Represents shares issued to the selling shareholder to acquire such
shareholder's 80 percent interest in the company.
3. Represents shares issued to Amherst Systems to acquire customer lists for
the Company's subsidiary, Atlantic Systems, Inc.
4. Represents shares issued in connection with the "price protection"
provision of the Agreement of Sale.
5. Represents the first and second installments of shares issued to a selling
shareholder in connection with the earnout provision under the Agreement
and Plan of Merger.
6. Includes (a) 1,076,923 shares issued to selling shareholders to acquire
such shareholders' 100 percent interest in the company, and (b) 40,000
shares issued as a finder's fee.
7. Includes (a) 202,667 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, (b) 19,394 shares
issued as a finder's fee, and (c) 582 shares issued for services in
connection with the acquisition.
8. Includes (a) 7,530 shares issued to the Stage I selling shareholders to
correct the initial issuance of shares, (b) 170,683 shares issued to the
Stage II selling shareholders upon acquisition of their minority interest
in 1998, (c) 109,774 shares issued to the Stage I and Stage II selling
shareholders in connection with the "price protection" provision of the
Agreement of Sale, and (d) 34,525 shares issued as a finder's fee.
9. Represents shares of stock reserved for issuance in exchange for
Exchangeable Shares of Commstar Limited, in connection with the Company's
acquisition of 100 percent of Commstar Limited, and Commstar's acquisition
of certain assets from Western Inbound Network, Inc. As of September 30,
1998, 1,201,826 shares had been Exchangeable Shares had been converted into
shares of the Company's common stock.
10. Includes (a) 392,157 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, and (b) 37,648
shares issued as a finder's fee.
11. Represents additional shares issued as finder's fees in connection with the
"price protection" provision of the Agreement of Sale.
12. Includes (a) 26,444 additional shares issued to the selling shareholder and
805 additional shares issued as finder's fees in connection with the "price
protection" provision of the Agreement of Sale, and (b) 22,598 shares
issued to the selling shareholder as part of the earnout provision in the
Agreement of Sale.
13. Represents (a) 384,616 shares issued to selling shareholders to acquire
such shareholders' 100 percent interest in the company, and (b) 18,461
shares issued as a finder's fee.
14. Includes (a) 1,778,543 shares issued to the selling shareholder to acquire
such shareholder's 100 percent interest in the company, and (b) 37,857
shares issued as a finder's fee.
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<PAGE>
15. Includes (a) 384,616 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, and (b) 27,692
shares issued as a finder's fee.
16. Represents shares of stock reserved for issuance in exchange for
Exchangeable Shares of ACT-GFX Canada, Inc., in connection with the
Company's acquisition of 80 percent of Ground Effects Limited. As of
September 30, 1998, no shares had been exchanged into shares of the
Company's common stock.
17. Represents shares issued to selling shareholders to acquire such
shareholders' 80 percent interest in the company.
18. Represents shares issued to the selling shareholder to acquire such
shareholder's 100 percent interest in the company.
19. Represents earnout payments under the Agreements of Sale of these
companies.
20. Includes (a) 35,000 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, (b) 2,181 shares
issued for acquisition services.
21. Includes (a) 2,339,703 shares issued to selling shareholders to acquire
such shareholders' 85 percent interest in the company, and (b) 23,082
shares issued as a finder's fee.
22. Includes (a) 915,167 shares issued to the selling, and (b) 13,126 shares
issued as finder's fees in connection with the "price protection" provision
of the Agreement of Sale.
23. Includes (a) 140,138 shares issued to the selling shareholder to acquire
such shareholder's 100 percent interest in the company, and (b) 4,690
shares issued as a finder's fee.
24. Represents shares issued for investment banking services in connection with
acquisitions made by the Company in 1998.
25. Represents shares issued upon the exercise of Warrants by the warrant
holders.
26. Represents shares issued for professional services or under employment or
other such agreements.
27. Represents shares sold to an officer of the Company.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Effective as of August 25, 1998, the Company entered into a Credit
Agreement with State Street Bank and Trust Company (the "Bank"). The Credit
Agreement provides that the Company may borrow from the Bank from time to time
up to twenty million dollars at either the Bank's then prime lending rate or at
a rate calculated on the basis of the London Interbank Offered Rate, as elected
by the Company. All unpaid principal and accrued interest is due and payable on
July 31, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Amended and Restated Articles of Incorporation of the Company
(incorporated herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (File No. 333-37713) filed with the
Commission on November 19, 1997)
4.2 Amendment of Restated Articles of Incorporation of the Company
(incorporated herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3 (File No. 333-59523) filed with the
Commission on July 21, 1998)
4.3 Amended and Restated Bylaws of the Company dated March 31, 1998
(incorporated herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (File No. 333-51067) filed with the
Commission on April 27, 1998)
10.1 Credit Agreement between Applied Cellular Technology, Inc. and State
Street Bank and Trust Company dated as of August 25, 1998*
27.1 Financial Data Schedule
99.1 Cautionary Statements
-----------
* The registrant agrees to provide the exhibits and schedules to this
Agreement on request of the Staff
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<PAGE>
(b) Reports on Form 8-K
1. The Company's Current Report on Form 8-K/A filed with the Commission
on September 23, 1998 reporting the Company's acquisition of Signature
Industries Limited.
2. The Company's Current Report on Form 8-K/A filed with the Commission
on September 23, 1998 reporting the Company's acquisition of Commstar
Limited.
3. The Company's Current Report on Form 8-K filed with the Commission on
November 4, 1998 reporting the engagement of PricewaterhouseCoopers
LLP as the company's independent accountants.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLIED CELLULAR TECHNOLOGY, INC.
(Registrant)
Date: November 13, 1998 By: /s/ David A. Loppert
-------------------------------------
David A. Loppert, Vice President,
Treasurer and Chief Financial Officer
24
<PAGE>
Exhibit Index
Number Description of Exhibits
4.1 Amended and Restated Articles of Incorporation of the Company
(incorporated herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (File No. 333-37713) filed with the
Commission on November 19, 1997)
4.2 Amendment of Restated Articles of Incorporation of the Company
(incorporated herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3 (File No. 333-59523) filed with the
Commission on July 21, 1998)
4.3 Amended and Restated Bylaws of the Company dated March 31, 1998
(incorporated herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (File No. 333-51067) filed with the
Commission on April 27, 1998)
10.1 Credit Agreement between Applied Cellular Technology, Inc. and State
Street Bank and Trust Company dated as of August 25, 1998*
27.1 Financial Data Schedule
99.1 Cautionary Statements
-----------
* The registrant agrees to provide the exhibits and schedules to this
Agreement on request of the Staff
25
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CREDIT AGREEMENT
Dated as of August 25, 1998
by and between
APPLIED CELLULAR TECHNOLOGY, INC.
and
STATE STREET BANK AND TRUST COMPANY
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TABLE OF CONTENTS
ARTICLE I. DEFINITIONS.......................................................1
Section 1.01. Definitions........................................1
Section 1.02. Accounting Terms...................................8
ARTICLE II. AMOUNT AND TERMS OF THE CREDIT...................................8
Section 2.01. The Revolving Credit...............................8
Section 2.02. The Credit.........................................8
(a) General Terms......................................8
(b) The Credit Note....................................9
(c) Interest...........................................9
(d) Requests for Advances..............................9
(e) Payment Upon Maturity Date.........................9
(f) Credit Advances...................................10
Section 2.03. Interest on the Credit............................10
Section 2.04. Special Provisions Governing LIBOR Rate Loans.....10
(a) LIBOR Rate Loan Interest Periods..................10
(b) LIBOR Conversion..................................11
(c) Determination of Interest Rate....................12
(d) Substituted Rate of Borrowing.....................12
(e) Required Termination and Prepayment...............13
(f) Compensation......................................13
(g) Quotation of LIBOR Rate...........................13
(h) LIBOR Rate Taxes..................................14
(i) Booking of LIBOR Rate Loans.......................14
(j) Increased Costs...................................14
(k) Assumptions Concerning Funding of LIBOR
Rate Loans........................................15
(l) LIBOR Rate Loans After Default....................15
Section 2.05. Special Provisions Governing Alternative
Currencies........................................15
(a) General...........................................15
(b) Availability......................................16
(c) Judgment Currency.................................16
Section 2.06. Method of Payment.................................16
Section 2.07. Voluntary Prepayments on the Credit...............17
Section 2.08. Payment and Interest Cutoff.......................17
Section 2.09. Prepayment of Credit..............................17
Section 2.10. Expenses..........................................18
Section 2.11. [Intentionally Omitted]...........................18
Section 2.12. Commitment Fee....................................18
Section 2.13. Use of Credit Proceeds............................18
Section 2.14. Letters of Credit.................................18
(a) Issuance Procedures...............................18
(b) L/Cs - Foreign Subsidiaries.......................19
(c) Reimbursement.....................................19
(d) Commission........................................19
(e) Method of Payment.................................19
(f) Amount............................................19
ARTICLE III. REPRESENTATIONS AND WARRANTIES.................................20
Section 3.01. Corporate Existence and Power;
Organizational Structure..........................20
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Section 3.02. Subsidiaries......................................20
Section 3.03. Power and Authority Relative to Borrowing;
Legal and Binding Nature, Compliance
with Other Instruments............................20
Section 3.04. Financial Condition...............................21
Section 3.05 No Material Adverse Change........................21
Section 3.06. Litigation; Employment and Labor..................21
Section 3.07. Title.............................................22
Section 3.08. Tax Returns and Payments..........................22
Section 3.09. Compliance with Law...............................22
Section 3.10. Pension Matters...................................22
Section 3.11. Compliance with Regulation U......................23
Section 3.12. Credit Agreements.................................23
Section 3.13. Leases and Options to Purchase....................23
Section 3.14. Insolvency........................................23
Section 3.15. Real Estate Owned.................................23
Section 3.16. Hazardous Waste...................................23
Section 3.17. Permits...........................................23
Section 3.18. SEC Filings; No Omissions.........................24
Section 3.19 Intellectual Property.............................24
Section 3.20. Operation of Business on Consolidated Basis.......24
ARTICLE IV. CONDITIONS......................................................24
Section 4.01. Conditions to the Credit and the First
Advance...........................................24
(a) Credit Documents..................................25
(b) Actions to Perfect Liens..........................25
(c) Lien Searches.....................................25
(d) Pledged Stock; Stock Powers.......................25
(e) UCC-3 Termination Statements......................25
(f) Secretary's Certificate...........................25
(g) Officer's Certificate.............................26
(h) Legal Existence, Good Standing, Tax Good
Standing and Foreign Qualification Certificates...26
(i) Certificates of Insurance.........................26
(j) Legal Opinions from Counsel for the Borrower
and Guarantors....................................26
(k) No Default........................................26
(l) Material Adverse Change...........................26
(m) Miscellaneous Requirements........................26
Section 4.02. Conditions to Subsequent Advances.................27
ARTICLE V. COVENANTS OF THE BORROWER........................................27
Section 5.01. Payment of Amounts Due, Etc.......................27
Section 5.02. Corporate Existence...............................27
Section 5.03. Maintenance of Properties.........................27
Section 5.04. Payment of Taxes, Compliance with Laws............27
Section 5.05. Insurance.........................................27
Section 5.06. Accounts and Reports..............................28
(a) Annual Reports....................................28
(b) Quarterly Reports.................................28
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(c) Compliance Certificates...........................29
(d) Projections.......................................29
(e) Auditor's Management Letter.......................29
(f) Public Information................................29
(g) Accounting Principles.............................30
Section 5.07. Information and Inspection........................30
Section 5.08. Additional Advice.................................30
Section 5.09. Payment of Expenses...............................30
Section 5.10. Limitation on Indebtedness........................31
Section 5.11. Limitation on Liability for Obligations of
Others............................................32
Section 5.12. Limitation on Liens...............................32
Section 5.13. Sale of Assets....................................33
Section 5.14. Loans and Investments in Securities...............33
Section 5.15. Transactions With Affiliated Persons..............34
Section 5.16. Consolidation, Merger or Disposition/Acquisition
of Assets.........................................34
Section 5.17. Changes in Corporate Business.....................35
Section 5.18. New Subsidiaries..................................35
Section 5.19. Minority Stockholders.............................36
Section 5.20. Restricted Payments...............................36
Section 5.21. Restriction on Use of Proceeds....................36
Section 5.22. Bank Accounts.....................................37
Section 5.23. Continued Management and Ownership of Borrower
and Each Subsidiary...............................37
Section 5.24. Material Agreements...............................37
Section 5.25. Maximum Capital Expenditures......................37
Section 5.26. Ratio of Total Liabilities to Tangible
Net Worth.........................................37
Section 5.27. Ratio of Current Assets to Current Liabilities....38
Section 5.28. Ratio of Cash Flow to Debt Service ...............38
Section 5.29. Ratio of Net Profit Before Taxes to Revenue.......38
Section 5.30. Year 2000.........................................39
ARTICLE VI. EVENTS OF DEFAULT...............................................39
ARTICLE VII. MISCELLANEOUS..................................................41
Section 7.01. Term of Agreement.................................41
Section 7.02. Notices...........................................41
Section 7.03. No Waiver.........................................42
Section 7.04. Construction......................................42
Section 7.05. Amendments, Waivers and Consents; No Assignment...42
Section 7.06. Closing...........................................43
Section 7.07. Consent to Jurisdiction...........................43
Section 7.08. Waiver of Jury Trial..............................43
Section 7.09. Indemnity.........................................43
Section 7.10. Setoff............................................43
Section 7.11. Reliance on Representations and Actions
of the Borrower...................................44
Section 7.12. Participation.....................................44
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LIST OF EXHIBITS AND SCHEDULES
Exhibit A Form of Credit Note
Exhibit B Form of Borrower Security Agreement.
Exhibit C Form of Borrower Stock Pledge Agreement.
Exhibit D Form of Guaranty Agreement.
Exhibit E Form of Subsidiary Security Agreement.
Exhibit F Form of Subsidiary Stock Pledge Agreement.
Exhibit G Form of Notice of Conversion/Continuation
Exhibit H Form of Secretary's Certificate
Exhibit I Form of Officer's Certificate
Exhibit J Form of Compliance Certificate
Schedule 3.02 Schedule of Subsidiaries and Ownership Structure
Schedule 3.04 Schedule of Financial Condition
Schedule 3.05 Schedule of Material Adverse Changes
Schedule 3.06 Schedule of Litigation; Employment and Labor
Schedule 3.07 Schedule of Properties and Assets
Schedule 3.08 Schedule of Payment of Taxes
Schedule 3.09 Schedule of Compliance with Law, etc.
Schedule 3.10 Schedule of Pension Matters
Schedule 3.12 Schedule of Existing Loan Agreements
Schedule 3.13 Schedule of Leases
Schedule 3.15 Schedule of Real Estate
Schedule 3.16 Schedule of Hazardous Waste
Schedule 3.17 Schedule of Licenses and Permits
Schedule 4.01(c) Schedule of Lien Search Results
Schedule 5.06 Form of Consolidating and Comparative
Balance Sheet and Income Statement
Schedule 5.10(d) Schedule of Existing
Purchase Money Indebtedness and Capitalized Lease Obligations
Schedule 5.10(e) Schedule of Other Existing Indebtedness
Schedule 5.11 Schedule of Existing Guaranties
Schedule 5.15 Schedule of Warrants and Options
Schedule 5.20 Schedule of Permitted Payments
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CREDIT AGREEMENT
This CREDIT AGREEMENT (the "Agreement") is made as of August 25, 1998, by
and (a) between APPLIED CELLULAR TECHNOLOGY, INC., a Missouri corporation (the
"Borrower") and (b) STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust
company (the "Bank").
Preliminary Statements:
WHEREAS, the Borrower wishes to establish a credit facility with the Bank
under which the Borrower may borrow funds from the Bank to refinance existing
indebtedness and for general working capital purposes; and
WHEREAS, the Bank has agreed to establish a credit facility for the
Borrower under the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS
Section 1.01. Definitions. As used herein and in the other Credit
Documents, the following terms shall have the following meanings:
"Adjustment Date" means the first Business Day following receipt by
the Bank of both (i) the financial statements required to be delivered
pursuant to Section 5.06(a) or (b), as the case may be, for the most
recently completed fiscal period specified therein and (ii) the certificate
required to be delivered pursuant to subsection 5.06(c) with respect to
such fiscal period.
"Alternative Currency" shall mean, subject to the provisions set forth
in Section 2.05 below, any currency (a) which is freely transferable and
convertible into Dollars, (b) in which deposits are customarily offered to
banks in the London interbank market, (c) which the Borrower requests the
Bank to include as an alternative currency hereunder, and (d) which is
acceptable to the Bank.
"Applicable LIBOR Rate" shall mean an annual rate of interest for an
Interest Period equal to the LIBOR Rate in effect on the first day of such
Interest Period plus the Applicable Margin.
"Applicable Margin" means, for each LIBOR Rate Loan, 2.00% provided,
however, that after the date hereof, the Applicable Margin for all LIBOR
Rate Loans will be adjusted on each Adjustment Date (based upon the ratio
of Total Liabilities to Tangible Net Worth as of the last day of the fiscal
quarter ended on the date of the financial statements relating to such
Adjustment Date) to the Applicable Margin set below opposite the level for
which the ratio of Total Liabilities to Tangible Net Worth as so determined
satisfies the corresponding criteria set forth under the heading "Ratio of
Total Liabilities to Tangible Net Worth:"
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===========================================================================
Ratio of Applicable
Level Total Liabilities Margin
to
Tangible Net Worth
------- ------------------------------------- ----------
I Greater than or equal to 1.75 to 1.00 2.25%
II Less than 1.75 to 1.00 2.00%
==========================================================================
Notwithstanding the foregoing, in the event that the financial
statements required to be delivered pursuant to Section 5.06(a) or
(b), as applicable, and the related certificate required pursuant to
Section 5.06(c), are not delivered when due, then for the period
commencing on the next Adjustment Date to occur subsequent to such
failure through the date immediately following on the date on which
such financial statements and such related certificate is delivered,
the Applicable Margin shall be 2.25%.
"Borrower Security Agreement" means the Borrower Security
Agreement - All Assets to be executed and delivered by the Borrower in
favor of the Bank, substantially in the form attached hereto as
Exhibit B, as the same may be amended, modified, substituted, extended
or restated, from time to time.
"Borrower Stock Pledge Agreement" means the Borrower Stock Pledge
Agreement to be executed and delivered by the Borrower in favor of the
Bank, substantially in the form attached hereto as Exhibit C, as the
same may be amended, modified, substituted, extended or restated, from
time to time.
"Business Day" means (i) with respect to any borrowing, payment
or rate selection of LIBOR Rate Loans and any conversion of another
Type of Credit Advance into a LIBOR Rate Loans, any day other than
Saturday or Sunday on which commercial banks are open for business in
Boston, Massachusetts, on which dealings in Dollars are carried on in
the London interbank market and, where funds are to be paid or made
available in a currency other than Dollars, on which commercial banks
are open for domestic and international business (including dealings
in deposits in such currency) in both London and the place where such
funds are to be paid or made available, and (ii) for all other
purposes, a day other than Saturday or Sunday on which banks are open
for business in Boston, Massachusetts.
"Canadian Debt" shall mean all Indebtedness of the Canadian
Subsidiaries to (a) First Chicago NBD Bank, Canada, (b) The
Toronto-Dominion Bank or (c) any substitute or replacement banks
thereof; provided, however, that the aggregate principal amount of all
such Indebtedness shall not, at any time, exceed $9,000,000.
"Canadian Subsidiary" shall mean any Subsidiary organized under
the laws of Canada.
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"Capital Stock" means, with respect to the Borrower and any
Subsidiary, any and all shares, interests, participations or other
equity equivalents (however designated, whether voting or non-voting)
of capital of the Borrower or such Subsidiary, whichever is
applicable, whether now or hereafter outstanding or issued.
"Capitalized Lease Obligations" means, for any period, all
obligations of the Borrower and its Subsidiaries under any lease of
property (real, personal or mixed) or other periodic payment
arrangement which have been or should be capitalized on the
consolidated balance sheet of the Borrower and its Subsidiaries, in
accordance with GAAP, in each case taken at the amount thereof
accounted for as Indebtedness, net of interest expense related
thereto, determined in accordance with GAAP, the stated maturity of
which shall be the date of the last payment of any amount thereunder
prior to the first date upon which such arrangement may be terminated
by the Borrower or its Subsidiary, whichever is applicable, without
payment of any penalty.
"Credit Documents" shall mean this Agreement, the Note, the
Guaranty Agreement, the Security Documents and all other documents,
instruments, certificates and agreements now or hereafter executed in
connection with any of them.
"Dollar Amount" of any currency at any date shall mean (i) the
amount of such currency if such currency is Dollars, or (ii) the
equivalent amount of Dollars if such currency is any currency other
than Dollars, calculated on the basis of arithmetical mean of the buy
and sell spot rates of exchange of the Bank for such currency on the
London market at 11:00 a.m., London time, two Business Days prior to
the date on which such amount is to be determined.
"Dollars" and "$" shall mean in lawful currency of the United
States of America.
"Foreign Subsidiary" shall mean any Subsidiary organized under
the laws of any jurisdiction outside of the United States of America.
"GAAP" means generally accepted accounting principles in the
United States of America as in effect from time to time.
"Guarantor" shall mean any Subsidiary (other than any Foreign
Subsidiary) which is, or is required to become, a guarantor of the
Obligations, as provided in Section 5.18 of this Agreement.
"Guaranty Agreement" means the Guaranty Agreement to be executed
and delivered by each of the Subsidiaries (other than the Foreign
Subsidiaries) in favor of the Bank, substantially in the form attached
hereto as Exhibit D, as the same may be amended, modified,
substituted, extended, restated, supplemented or reaffirmed, from time
to time.
"Interest Rate Determination Date" shall mean each date for
calculating the LIBOR Rate for purposes of determining the interest
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rate in respect of an Interest Period. The Interest Rate Determination
Date shall be the second Business Day prior to the first day of the
related Interest Period for a LIBOR Rate Loan.
"LIBOR Rate" shall mean, for any given date, the London Interbank
Offered Rate for the applicable Interest Period selected by the
Borrower in accordance with Section 2.05(a) hereof as quoted by
Barclays Bank PLC, London, England or by Lloyds Bank, London, England
(and if such rate shall differ, the Bank shall have the option of
which rate applies for purposes of this Agreement) at 11:00 a.m.,
London time as adjusted by dividing (i) the LIBOR Rate for that
Interest Period by (ii) a percentage equal to 100% minus the stated
maximum percentage rate of all reserves (including, without
limitation, any basic, supplemental, emergency or marginal reserve
requirement) required to be maintained against "Eurocurrency
liabilities" as specified in Regulation D (or against any other
category of liabilities that includes deposits by reference to which
the interest rate on LIBOR Rate Loans is determined or any category of
extensions of credit or other assets that includes loans by a non-U.S.
office of the Bank to U.S. residents).
"LIBOR Rate Loans" shall mean all or a portion of the outstanding
Credit Advances which accrue and bear daily interest during the
Interest Period so selected at a per annum rate equal to the
Applicable LIBOR Rate for such Interest Period pursuant to Section
2.05 hereof.
"Liens" means any and all: mortgages, pledges, security
interests, encumbrances, liens, or charges of any kind, including
agreements to give any of the foregoing; conditional sales or other
title retention agreements or devices, or any leases in the nature
thereof; and filing of, giving or agreement to give, any financing
statement under the Uniform Commercial Code of any jurisdiction.
"Loans" means, collectively, the LIBOR Rate Loans and the Prime
Rate Loans.
"Note" shall mean the Credit Note, all substitutions and
replacements thereof, and any other note(s) issued by the Borrower to
the Bank pursuant to this Agreement.
"Obligations" shall mean any and all Indebtedness, liabilities,
duties, warranties, covenants and agreements of the Borrower or any of
its Subsidiaries (other than the Foreign Subsidiaries) to the Bank,
whether of payment or of performance; now existing or hereafter
arising; due or not due, absolute or contingent, liquidated or
unliquidated, and arising pursuant to or in connection with this
Agreement and the other Credit Documents (including without
limitation, the Guaranty Agreement).
"Permitted Acquisition" shall mean an acquisition by the Borrower
or a Subsidiary which meets all of the following criteria: (i) is an
acquisition of not less than eighty percent (80%) of the capital stock
or assets of an entity engaged in a substantially similar or
complementary business as that in which the Borrower or such
Subsidiary is engaged as of the date hereof; (ii) the properties and
assets acquired by the Borrower or such Subsidiary in connection with
such acquisition are free from all Liens whatsoever, except Liens
permitted under Section 5.12; (iii) no Indebtedness is assumed by the
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Borrower in connection with such acquisition, except Indebtedness
permitted under Section 5.10; (iv) immediately prior to, and after
giving effect to such acquisition, no Event of Default shall exist;
and (v) not less than two (2) Business Days prior to such acquisition,
the Bank shall have received computations from the Borrower (based
upon a compliance certificate in the form of Exhibit J hereto) showing
pro forma compliance with the financial covenants set forth in
Sections 5.25 through 5.29, inclusive, of this Agreement, as of the
date of, and after giving effect to, such acquisition.
"Person" or "person" means any individual, corporation, limited
liability company, partnership, limited liability partnership, trust,
trade, business and governmental agency and instrumentality.
"Prime Rate" shall mean the annual rate of interest announced by
the Bank from time to time, at the principal office of the Bank, 225
Franklin Street, Boston, Massachusetts 02110, as its prime rate.
"Purchase Money Indebtedness" means any Indebtedness incurred by
the Borrower or any of its Subsidiaries, whichever is applicable, in
connection with financing the purchase by the Borrower or such
Subsidiary, whichever is applicable, of property or assets from any
other Person.
"Regulation D" shall mean Regulation D of the Board of Governors
of the Federal Reserve System from time to time in effect, and shall
include any successor or other regulation or official interpretation
of said Board of Governors relating to reserve requirements applicable
to member banks of the Federal Reserve System.
"Restricted Payments" means (i) any cash or property dividend,
distribution, or other payment, direct or indirect, to any Person who
now or in the future may hold an equity interest in a Borrower or a
Subsidiary made with respect to or on account of such equity interest,
other than those from a Subsidiary to the Borrower, whether evidenced
by a security or not; and (ii) any payment on account of the purchase,
redemption, retirement or other acquisition of any capital stock of a
Borrower or a Subsidiary, or any other payment or distribution made in
respect thereof, either directly or indirectly (excluding any
Permitted Payments and, for purposes of both clauses (i) and (ii),
stock options and warrants granted to officers, employees or directors
in the ordinary course).
"Security Documents" shall mean the Borrower Security Agreement,
the Borrower Stock Pledge Agreement, the Subsidiary Security
Agreements, the Subsidiary Stock Pledge Agreements and any other
security documents, financing statements and instruments hereafter
delivered to the Bank granting a Lien on any asset or assets of any
Person to secure the Obligations or to secure any guarantee of any
such Obligations.
"Subsidiary" shall mean, with respect to any Person, any
corporation, limited liability company, partnership or other entity of
which more than 50% of the outstanding securities (or other ownership
interest) having ordinary voting power to elect the board of
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directors, managers or other voting members of the governing body of
such corporation, limited liability company, partnership or other
entity (irrespective of whether at the time securities (or other
ownership interest) of any other class or classes of such corporation,
limited liability company, partnership or other entity shall or might
have voting power upon the occurrence of any contingency) is at the
time directly or indirectly owned or controlled by such Person, by
such Person and one or more other Subsidiaries of such Person, or by
one or more other Subsidiaries of such Person. Unless the context
otherwise specifically requires, the term "Subsidiary" shall be a
reference to a Subsidiary of the Borrower.
"Subsidiary Security Agreement" means the Subsidiary Security
Agreement - All Assets to be executed and delivered by each of the
Subsidiaries (other than the Foreign Subsidiaries) in favor of the
Bank, substantially in the form attached hereto as Exhibit E, as the
same may be amended, modified, substituted, extended or restated, from
time to time.
"Subsidiary Stock Pledge Agreement" means the Subsidiary Stock
Pledge Agreement to be executed and delivered by each of the
Subsidiaries (including any Foreign Subsidiaries) in favor of the
Bank, substantially in the form attached hereto as Exhibit F, as the
same may be amended, modified, substituted, extended or restated, from
time to time.
"Type" means as to any Loan, its nature as a Prime Rate Loan or a
LIBOR Rate Loan.
"UK Debt" shall mean all Indebtedness of the UK Subsidiaries to
National Westminster Bank PLC or any substitute or replacement bank
thereof; provided, however, that the aggregate principal amount of all
such Indebtedness shall not, at any time, exceed $2,500,000.
"UK Subsidiary" shall mean any Subsidiary organized under the
laws of the United Kingdom.
The following terms are defined in the following sections:
Affected Interest Period Section 2.04(d)
Affiliate Section 5.15
Bank Preamble
Base Financial Statements Section 3.04
Borrower Preamble
Capital Expenditures Section 5.25
Cashflow Section 5.28
Closing Date Section 7.06
Code Section 3.10
Commitment Fee Section 2.12
Compliance Certificate Section 5.06(c)
Corporate Parent Section 5.18
CPA Section 5.06(a)
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Credit Sections 2.01 and 2.02
Credit Advance(s) Section 2.02(a)
Credit Note Section 2.02(b)
Cumulative Amount Section 5.28
Current Assets Section 5.27
Current Liabilities Section 5.27
Debt Service Section 5.28
Default Rate of Interest Section 2.03
ERISA Section 3.10
Event(s) of Default Article VI
Exchange Act Section 5.23
First Chicago NBD Guaranty Section 5.11(c)
Indebtedness Section 5.10
Interest Period Section 2.03
L/C Sections 2.14(a) - (e)
LIBOR Rate Taxes Sections 2.04(h) - (i)
Maximum Credit Section 2.02(b)
Maturity Date Section 2.02(a)
National Westminster Bank Guaranty Section 5.11(d).
Net Profit Before Taxes Section 5.29
Notice of Conversion/Continuation Section 2.04(b)
Participant Section 7.12
Permitted Payments Section 5.20
Prime Rate Loan(s) Section 2.03
Revenue Section 5.29
Special Counsel Section 4.01(j)
specified currency Section 2.05(b)
Securities Law Section 3.19
Tangible Net Worth Section 5.26
Total Liabilities Section 5.26
Section 1.02. Accounting Terms. Unless otherwise specified herein, all
accounting terms used herein shall be construed in accordance with GAAP
consistently applied.
ARTICLE II. AMOUNT AND TERMS OF THE CREDIT
Section 2.01. The Revolving Credit. Subject to the terms and conditions
hereof, and in reliance on the representations and warranties contained herein,
the Bank hereby establishes a revolving credit facility in favor of the Borrower
in the maximum aggregate principal amount of $20,000,000 as set forth below (the
"Credit").
Section 2.02. The Credit.
(a) General Terms. Subject to the terms and conditions hereof and
provided that no Event of Default, or event which with the passage of time,
the giving of notice, or both, would constitute an Event of Default, has
occurred or is continuing, the Borrower may, from time to time from the
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date hereof up to July 31, 1999 (the "Maturity Date") borrow and reborrow
from the Bank, and the Bank shall advance funds to the Borrower as
requested pursuant to Section 2.02(d) (each a "Credit Advance" and
collectively, the "Credit Advances"); provided, however, that the aggregate
of all Credit Advances outstanding at any time shall not exceed $20,000,000
less the maximum aggregate liability of the Borrower under any outstanding
letters of credit issued pursuant to Section 2.14 of this Agreement
(the"Maximum Credit"). To the extent any Credit Advance exceeds the Maximum
Credit, the Borrower shall immediately, without notice or demand, repay
such overadvance to the Bank.
Each Credit Advance shall be made in either Dollars or in such
Alternative Currency as shall be designated by the Borrower in writing with
respect to such Credit Advance; provided that (a) the Dollar Amount of all
Credit Advances outstanding in Alternative Currencies shall not, at any
time, exceed the aggregate sum of $4,000,000; (b) each Credit Advance to be
made in an Alternative Currency shall be in the minimum amount of 100,000
units of such Alternative Currency and increments of 50,000 units of such
Alternative Currency thereafter; and (c) each Credit Advance to be made in
Dollars shall be in the minimum amount of $100,000 and increments of
$50,000 thereafter. If, with respect to any Credit Advance, the Borrower
does not so designate the currency in which such Credit Advance is to be
made, such Credit Advance shall be made in Dollars.
(b) The Credit Note. All amounts owed by the Borrower with respect to
Credit Advances shall be evidenced by a revolving credit note in the
principal amount of the Maximum Credit, dated the date hereof in the form
attached hereto as Exhibit A (the "Credit Note").
(c) Interest. The Credit Note shall bear interest as provided in
Section 2.03.
(d) Requests for Advances. Each Credit Advance shall be made on the
day on which the Bank receives notice from the Borrower or, if such day is
not a Business Day, on the next succeeding Business Day, provided the Bank
receives notice from the Borrower prior to 1:00 p.m. Boston time on such
Business Day. Each request for a Credit Advance shall be made to the Bank
in writing (including by telecopy) or by telephone by a duly authorized
representative of the Borrower, and the Bank may rely upon any telephone
request which it reasonably believes is made by such a representative. The
Borrower agrees to indemnify and hold the Bank harmless for any action,
including the making of Credit Advances hereunder, or loss or expense,
taken or incurred by the Bank in good faith reliance upon such telephone
request. At the time of the initial request for a Credit Advance made under
this Section 2.02(d), the Borrower shall have provided the Bank with a
Compliance Certificate in the form required by Section 5.06(c) hereof. The
Borrower hereby agrees (i) that the Bank shall be entitled to rely upon the
most recent Compliance Certificate in its possession until it is superseded
by another Compliance Certificate, and (ii) that each request for a Credit
Advance, whether by telephone or in writing or otherwise, shall constitute
a confirmation of the representations and warranties contained in the most
recent Compliance Certificate then in the Bank's possession.
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(e) Payment Upon Maturity Date. The Credit shall expire on the
Maturity Date and all Credit Advances then outstanding shall be due and
payable without notice on such date together with all accrued and unpaid
interest thereon and any other amounts then due. In the event the Bank
continues Credit Advances after the Maturity Date without a written
extension of the Maturity Date, (i) all such Credit Advances shall be made
within the sole discretion of the Bank; (ii) the entire Credit shall be due
on demand; and (iii) the entire Credit will earn interest at the rate
specified to be earned after the Maturity Date in Section 2.03.
(f) Credit Advances. The Bank may from time to time in its sole
discretion permit Credit Advances to exceed the limitations set forth in
this Agreement, including, without limitation, (i) Credit Advances in
excess of the Maximum Credit, and (ii) advances after the Maturity Date or
the occurrence of an Event of Default. All such Credit Advances will be
deemed part of the Credit advanced hereby. The making of such Credit
Advance on one or more occasions will not operate to limit, waive or
otherwise modify any rights of the Bank hereunder on any future occasion
unless otherwise agreed in writing.
Section 2.03. Interest on the Credit. Unless otherwise elected by the
Borrower in its sole discretion pursuant to the terms of Section 2.04 relating
to LIBOR pricing options, all Credit Advances shall bear interest prior to the
occurrence of an Event of Default or the Maturity Date (computed on the basis of
the actual days elapsed over a 360-day year) at a fluctuating rate per annum
equal to the Prime Rate (the "Prime Rate Loans") in effect from time to time,
with interest thereon being payable monthly in arrears on the last Business Day
of each month. Any change in the Prime Rate shall result in a change on the same
day in the rate of interest to accrue from and after such day on the unpaid
balance of principal of the Prime Rate Loans bearing interest with reference to
the Prime Rate. In the manner and subject to the provisions set forth in Section
2.04, so long as no Event of Default, and no event which, with the giving of
notice or the passage of time, or both, would constitute an Event of Default has
occurred and is then continuing, the Borrower may elect from time to time prior
to the Maturity Date to have all or a portion of the unpaid principal amount of
any Credit Advance bear interest during any particular Interest Period
applicable to LIBOR Rate Loans at the LIBOR Rate and be treated as a LIBOR Rate
Loan, with interest, in all cases, being due and payable on the last day of the
applicable Interest Period relating to such LIBOR Rate Loan, provided, that any
such portion of such loan, shall be in an amount not less than $1,000,000 or
increments of $500,000 thereof. From and after the occurrence of an Event of
Default or upon maturity (whether by demand, acceleration, at the Maturity Date
or otherwise) the unpaid principal balance of the Credit Advances shall bear
interest at a fluctuating rate per annum equal to two percent (2%) above the
rate of interest then payable with respect thereto (the "Default Rate of
Interest").
Section 2.04 Special Provisions Governing LIBOR Rate Loans. Notwithstanding
any other provisions of this Agreement to the contrary, the following provisions
shall govern with respect to LIBOR Rate Loans as to the matters covered:
(a) LIBOR Rate Loan Interest Periods. In connection with each LIBOR
Rate Loan, the Borrower shall elect an interest period (the "Interest
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Period") to be applicable to such LIBOR Rate Loan, which Interest Period
shall be, at the option of the Borrower, a one, two, three or six month
period; provided that:
(i) the Interest Period for any LIBOR Rate Loan shall commence on
the date of such LIBOR Rate Loan;
(ii) if an Interest Period would otherwise expire on a day that
is not a Business Day, such Interest Period shall expire on the next
succeeding Business Day; provided, further that if any Interest Period
in respect to a LIBOR Rate Loan would otherwise expire on a day that
is not a Business Day but is a day of the month after which no further
Business Day occurs in such month, such Interest Period shall expire
on the next preceding Business Day;
(iii) any Interest Period in respect of a LIBOR Rate Loan that
begins on the last Business Day of a calendar month (or on a day for
which there is not numerically corresponding day in the calendar month
at the end of such Interest Period) shall, subject to clause (iv)
below, end on the last Business Day of a calendar month;
(iv) no Interest Period with respect to any LIBOR Rate Loan shall
extend beyond the Maturity Date; and
(v) no Interest Period shall be selected if at the time thereof
an Event of Default is in existence.
(b) LIBOR Conversion. Subject to the provisions hereof (including,
without limitation Section 2.04(a)) and as long as there exists no Event of
Default, the Borrower shall have the option (A) to elect to convert
outstanding Prime Rate Loans in the minimum amount of $1,000,000 or
increments of $500,000 thereof to LIBOR Rate Loans and (B) effective on and
as of the expiration date of the Interest Period of a LIBOR Rate Loan, to
continue such LIBOR Rate Loan; provided, however, that a LIBOR Rate Loan
may only be continued pursuant to clause (B) above if the outstanding
principal amount of such LIBOR Rate Loan equals or exceeds $1,000,000 or
increments of $500,000 thereof. The Borrower shall deliver a notice (the
"Notice of Conversion/Continuation") to the Bank no later than 1:00 P.M.
(Boston time) at least two (2) Business Days in advance of the proposed
conversion/continuation date. A Notice of Conversion/Continuation shall, in
the case of a conversion to, or continuation of, a LIBOR Rate Loan, be
irrevocable and shall be given by the Borrower in the form of Exhibit G,
appropriately completed to specify (i) the proposed conversion/continuation
date (which shall be a Business Day), (ii) the amount of the Credit Advance
to be converted/continued, (iii) whether the Credit Advance to be
converted/continued is a Prime Rate Loan or a LIBOR Rate Loan, and (iv) the
requested Interest Period. In lieu of delivering the above-described Notice
of Conversion/Continuation, the Borrower may give the Bank telephonic
notice by the required time of any proposed conversion/continuation under
this Section 2.04. If the Borrower has failed to deliver timely a Notice of
Conversion/Continuation or to give such a telephonic notice with respect
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to, a LIBOR Rate Loan, the Borrower shall be deemed to have delivered to
the Bank a Notice of Conversion/Continuation electing to convert such LIBOR
Rate Loan into a Prime Rate Loan. Any notice pursuant to this Section 2.04
(including any telephonic notice) shall be irrevocable on and after the
date of delivery thereof to the Bank, and the Borrower shall be bound to
convert or continue in accordance therewith.
(c) Determination of Interest Rate. As soon as practicable after 10:00
A.M. (Boston time) on an Interest Rate Determination Date, the Bank shall
determine (which determination shall, absent manifest error, be final,
conclusive and binding) the Applicable LIBOR Rate, which rate shall apply
to the LIBOR Rate Loans for which an interest rate is then being determined
for the applicable Interest Period, and the Bank shall promptly give notice
thereof to the Borrower.
(d) Substituted Rate of Borrowing. In the event that on any Interest
Rate Determination Date the Bank shall have reasonably determined (which
determination shall, absent manifest error, be final, conclusive and
binding) that:
(i) by reason of any changes affecting the LIBOR market, or
affecting the position of the Bank in such market, adequate and fair
means do not exist for ascertaining the applicable interest rate by
reference to the LIBOR Rate with respect to the LIBOR Rate Loans as to
which an interest rate determination is then being made; or
(ii) by reason of (A) any change in any applicable law or
governmental rule, regulation or order (or any interpretation thereof
and including the introduction of any new law or governmental rule,
regulation or order) or (B) other circumstances affecting the Bank,
the LIBOR market or the position of the Bank in such market (such as,
for example, but not limited to, official reserve requirements
required by Regulation D to the extent not given effect in the LIBOR
Rate), the LIBOR Rate shall not represent the effective pricing to the
Bank for dollar deposits of comparable amounts for the relevant
period;
then, and in any such event, the Bank shall promptly (and in any event as
soon as possible after being notified of a borrowing, conversion or
continuation) give notice to the Borrower of such determination.
Thereafter, the Borrower shall pay to the Bank with respect to the LIBOR
Rate Loans of the Borrower, upon written demand therefor, such additional
amounts (in the form of an increased rate of, or a different method of
calculating, interest or otherwise as the Bank in its sole discretion shall
reasonably determine) as shall be required to cause the Bank to receive
interest with respect to such LIBOR Rate Loans for the Interest Period
following that Interest Rate Determination Date (the "Affected Interest
Period") at a rate equal to 2.0% per annum in excess of the effective
pricing to the Bank for dollar deposits to make or maintain such LIBOR Rate
Loans. A certificate as to additional amounts owed the Bank, showing in
reasonable detail the basis for the calculation thereof, submitted in good
faith to the Borrower by the Bank, shall, absent manifest error, be final,
conclusive and binding.
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(e) Required Termination and Prepayment. In the event that on any date
the Bank shall have reasonably determined (which determination shall,
absent manifest error, be final, conclusive and binding) that the making or
continuation of LIBOR Rate Loans has become unlawful by compliance by the
Bank in good faith with any law, governmental rule, regulation or order
(whether or not having the force of law and whether or not failure to
comply therewith would be unlawful), then, and in any such event, the Bank
shall promptly give notice to the Borrower of that determination. The
obligation of the Bank to make or maintain such LIBOR Rate Loans during any
such period shall be determined at the earlier of the termination of the
Interest Period then in effect or when required by law, and the Borrower
shall, no later than the termination of the Interest Period in effect at
the time any such determination pursuant to this Section 2.04(e) is made,
or earlier when required by law, repay such LIBOR Rate Loans, together with
all interest accrued thereon or automatically convert the LIBOR Rate Loans
to a Prime Rate Loan subject to payment of amounts payable under Section
2.09.
(f) Compensation. The Borrower shall compensate the Bank, upon written
request from the Bank (which request shall set forth in reasonable detail
the basis for requesting such amounts), for all losses, expenses and
liabilities (including, without limitation, any interest paid by the Bank
to lenders of funds borrowed by Bank to make or carry the LIBOR Rate Loans
and any loss sustained by the Bank in connection with the reemployment of
such funds) that the Bank may sustain with respect to the Borrower' LIBOR
Rate Loans: (i) if for any reason (other than a default or manifest error
by the Bank) a borrowing of any LIBOR Rate Loan does not occur on a date
specified therefor in a notice of borrowing or a telephone request for
borrowing or conversion/continuation, or a successive Interest Period does
not commence after notice thereof is given; (ii) if, for any reason, any
prepayment of any LIBOR Rate Loan occurs on a date that is not the last day
of the Interest Period applicable to such LIBOR Rate Loan; (iii) if, for
any reason, any prepayment of the LIBOR Rate Loans is not made on the date
specified in a notice of prepayment given by the Borrower with respect to
such LIBOR Rate Loan; or (iv) as a consequence of any other default by the
Borrower to repay such LIBOR Rate Loans when, and on the terms, required by
the terms of this Agreement.
(g) Quotation of LIBOR Rate. Notwithstanding anything contained herein
to the contrary, if on any Interest Rate Determination Date the LIBOR Rate
is unavailable by reason of the failure of the referenced lenders to
provide offered quotations to the Bank in accordance with the definition of
"LIBOR Rate", the Bank shall give the Borrower prompt notice thereof and
any LIBOR Rate Loans requested shall be made as Prime Rate Loans.
(h) LIBOR Rate Taxes. The Borrower agrees that:
(i) Promptly upon notice from the Bank to the Borrower, the
Borrower will pay, prior to the date on which penalties attach
thereto, all present and future income, stamp and other taxes, levies,
or costs and charges whatsoever imposed, assessed, levied or collected
on or in respect of a Credit Advance solely as a result of the
interest rate being determined by reference to the LIBOR Rate and/or
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the provisions of this Agreement relating to the LIBOR Rate and/or the
recording, registration, notarization or other formalization of any
thereof and/or any payments of principal, interest or other amounts
made on or in respect of a Credit Advance when the interest rate is
determined by reference to the LIBOR Rate (all such taxes, levies,
cost and charges being herein collectively called "LIBOR Rate Taxes");
provided that LIBOR Rate Taxes shall not include taxes imposed on or
measured by the net income of the Bank by the country under the laws
of which the Bank is organized or any political subdivision or taxing
authority thereof or therein, or taxes imposed on or measured by the
net income of any branch or subsidiary of the Bank (whether gross or
net income) by any jurisdiction or subdivision thereof in which that
branch or subsidiary is doing business. The Borrower shall also pay
such additional amounts equal to increases in taxes payable by the
Bank, which increases are attributable to payments made by the
Borrower described in the immediately preceding sentence or this
sentence. Notwithstanding anything contained in this Section 2.04(h)
to the contrary, in the event that the Bank shall recover any amounts
in respect of LIBOR Rate Taxes as to which the Borrower have
previously rendered payment to Bank, then Bank shall reimburse the
Borrower in full for such amounts. Promptly after the date on which
payment of any such LIBOR Rate Tax is due pursuant to applicable law,
the Borrower will at the request of the Bank, furnish to Bank
evidence, in form and substance satisfactory to Bank, that the
Borrower have met its obligation under this Section 2.05(h); and
(ii) The Borrower will indemnify the Bank against, and reimburse
the Bank on demand for, any LIBOR Rate Taxes as determined by the Bank
in its good faith discretion. The Bank shall provide the Borrower with
appropriate receipts for any payments or reimbursements made by the
Borrower pursuant to this clause (ii).
(i) Booking of LIBOR Rate Loans. The Bank may make, carry or transfer
LIBOR Loans at, to, or for the account of, any of its branch offices or the
office of an affiliate of the Bank.
(j) Increased Costs. If, by reason of (i) the introduction of or any
change in (including, without limitation, any change by way of imposition
or increase of reserve requirements), or in the interpretation of, any law
or regulation or (ii) the compliance with any guideline or request from any
central bank or other governmental authority or quasigovernmental authority
exercising control over banks or financial institutions generally (whether
or not having the force of law), any reserve (including, without
limitation, any imposed by the Federal Reserve Board), special deposit or
similar requirement against assets of, deposits with or for the account of,
or credit extended by, the Bank or its applicable lending office shall be
imposed or deemed applicable or other condition affecting any of its LIBOR
Rate Loans or its obligation to make such LIBOR Rate Loans shall be imposed
on the Bank or its applicable lending office or the London interbank
market, and as a result thereof there shall be any increase in the cost to
the Bank of agreeing to make or making, funding or maintaining such LIBOR
Rate Loans, or there shall be a reduction in the amount received or
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receivable by the Bank, then, upon written notice from and demand by the
Bank, the Borrower shall pay to the Bank for the account of the Bank,
within five Business Days after the date specified in such notice and
demand, additional amounts sufficient to indemnify the Bank against such
increased cost. A certificate in reasonable detail as to the amount of such
increased cost, submitted to the Borrower by the Bank, shall, except for
manifest error, be final, conclusive and binding for all purposes.
(k) Assumptions Concerning Funding of LIBOR Rate Loans. The
calculation of all amounts payable to the Bank under this Section 2.04
shall be made as though the Bank had actually funded the LIBOR Rate Loans
through the purchase of a LIBOR deposit bearing interest at the LIBOR Rate
applicable to such LIBOR Rate Loan, in the case of a LIBOR Rate Loan,
through the transfer of such LIBOR deposit from an offshore office of the
Bank to a domestic office of such Bank in the United States of America; it
being understood that the Bank may fund LIBOR Rate Loans in any manner it
sees fit and the foregoing assumption shall be utilized only for the
calculation of amounts payable under this Section 2.04.
(l) LIBOR Rate Loans After Default. After the occurrence of and during
the continuance of an Event of Default, the Borrower may not elect to have
a Credit Advance be continued as, or converted to, a LIBOR Rate Loan after
the expiration of any Interest Period then in effect for such Credit
Advance.
Section 2.05. Special Provisions Governing Alternative Currencies.
Notwithstanding any other provisions of this Agreement to the contrary, the
following provisions shall govern with respect to any Credit Advance to be made
in an Alternative Currency:
(a) General. Subject to the terms and conditions contained in this
Agreement, the Borrower and the Bank shall separately agree as to the
procedures, documentation, lending office and other matters relating to any
Loan to be made in an Alternative Currency, all of which shall be
consistent, and in accordance, with the customary practices and procedures
of the Bank. When making requests for any Loan in an Alternative Currency,
the Borrower shall specify to the Bank (i) the type of Alternative Currency
for such Loan, (ii) the principal amount of such Loan and (iii) the term of
such Loan. Subject to the customary practices and procedures of the Bank.,
the term for any Loan in an Alternative Currency shall be not less than one
(1) week and not more than six (6) months. No Loan in an Alternative
Currency may mature after the Maturity Date.
(b) Availability. If the Bank determines that maintenance of any Loan
denominated an any Alternative Currency would violate any applicable law,
rule, regulation or directive, whether or not having the force of law, and
notifies the Borrower of such determination, then the affected currency
shall cease to be an Alternative Currency and the Bank shall suspend the
availability of the affected currency of Credit Advance and, if the Bank
determines that it is necessary, require that any Credit Advances of the
affected currency be immediately repaid.
(c) Judgment Currency. If for the purpose of obtaining judgment in any
court, it is necessary to convert a sum due from the Borrower hereunder or
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under the Credit Note in the currency expressed to be payable herein or
under the Credit Note (the "specified currency") into another currency, the
parties hereto agree to the fullest extent that they may effectively do so,
that the rate of exchange used shall be that at which, in accordance with
normal banking procedures, the Bank could purchase the specified currency
with such other currency at the Bank's main Boston office on the Business
Day preceding that on which final non-appealable judgment is given. The
obligations of the Borrower in respect of any sum due to the Bank hereunder
or under the Credit Note shall, notwithstanding any judgment in a currency
other than the specified currency, be discharged only to the extent that on
the Business Day following receipt by the Bank of any sum adjudged to be so
due in such other currency to the Bank may, in accordance with normal,
reasonable banking procedures, purchase the specified currency with such
other currency. If the amount of the specified currency so purchased is
less than the sum originally due to the Bank, in the specified currency,
the Borrower agrees, to the fullest extent that it may effectively do so,
as a separate obligation and notwithstanding any such judgment, to
indemnify the Bank against such loss, and if the amount of the specified
currency so purchased exceeds the sum originally due to the Bank in the
specified currency, the Bank agrees to remit such excess to the Borrower.
Section 2.06. Method of Payment. All payments (including prepayments) to be
made by the Borrower hereunder and under the Credit Note, whether on account of
principal, interest, fees or otherwise, shall be made without set-off or
counterclaim and shall be made prior to 1:00 P.M., Boston, Massachusetts time,
on the due date thereof, at the office of the Bank located at 225 Franklin
Street, Boston, Massachusetts 02110 (or such other place as the Bank may specify
in writing from time to time), (a) in the case of each Loan made in Dollars, in
Dollars, and (b) in the case of each Loan made in an Alternative Currency, in
such Alterative Currency. All such payments (including prepayments) in
immediately available funds. If any payment hereunder becomes due and payable on
a day other than a Business Day, such payment shall be extended to the next
succeeding Business Day, and, with respect to payments of principal, interest
thereon shall be payable at the then applicable rate during such extension. All
payments of principal, interest or fees to be made to the Bank may be effected
by the Bank debiting accounts of the Borrower with the Bank and sending an
advice thereof to the Borrower.
Section 2.07. Voluntary Prepayments on the Credit.
(a) Subject to Section 2.08, the Borrower may make prepayments to the
Bank of any outstanding principal amount of any portion of any Credit
Advance which is a Prime Rate Loan in accordance with this Section 2.07 at
any time prior to 1:00 p.m. (Boston time) on any Business Day.
(b) The Borrower may make prepayments to the Bank on any portion of
any Credit Advance which is a LIBOR Rate Loan subject to the terms and
conditions of Sections 2.08 and 2.09.
Section 2.08. Payment and Interest Cutoff. Notice of each prepayment
pursuant to Section 2.07 shall be given to the Bank in the case of prepayment of
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Prime Rate Loans, not later than 1:00 p.m. (Boston time) on the date of payment,
and shall specify the total principal amount of the Credit to be paid on such
date. Notice of prepayment having been given in compliance with this Section
2.07, the amount specified to be prepaid shall become due and payable on the
date specified for prepayment and from and after said date (unless the Borrower
shall default in the payment thereof) interest thereon shall cease to accrue.
Unpaid interest on the principal amount of any Credit Advances so prepaid
accrued to the date of prepayment shall be due on the date of prepayment.
Section 2.09. Prepayment of Credit. In the event of any prepayment of the
Borrower's obligations to the Bank in respect of LIBOR Rate Loans, either at the
Borrower's initiative or upon the exercise by the Bank of its rights in the case
of an Event of Default, the Borrower agrees to pay to the Bank the Bank's lost
net interest income resulting from the prepayment. Therefore, the Borrower's
payment to the Bank shall consist of all principal amounts outstanding, all
interest owing up to the date of such prepayment or demand by the Bank, together
with the Bank's lost net interest income, if any, computed as described below.
As of the date of prepayment, or as of the date of demand after an Event of
Default, the Bank will determine the interest rate differential between the rate
stated in the Note to the Bank and the yield on a United States Government
Treasury Note with the maturity closest to the Note as the same is reported in
the Wall Street Journal (or if not so reported, as the same is reported in its
successor or another national publication similar thereto) of that day
(reporting the previous day's activity). In the event that the rate differential
so determined is such that the Treasury Note yield is greater than the Note
yield, no lost net interest income shall be paid to the Bank, nor shall any sum
be owed to the Bank by the Borrower solely for any lost net income.
In the event that the rate differential so determined is such that the Note
yield is greater than the Treasury Note yield, the difference shall be
multiplied by the outstanding principal balance of the Note, computed monthly
for the remaining term of the LIBOR Rate Loans; the present value of such
monthly computation shall be calculated and paid to the Bank as its lost net
interest income. For the purpose of computing present value, the interest rate
used for discounting shall be the bond equivalent yield of the six month United
States Treasury Bill rate as reported in the Wall Street Journal (or if not so
reported, as the same is reported in its successor or another national
publication similar thereto) of that day (reporting the previous day's
activity).
Section 2.10. Expenses. The Borrower shall pay the Bank on demand all
reasonable out-of-pocket fees and expenses incurred by the Bank in connection
with examinations of the books and records of the Borrower, appraisals of the
assets of the Borrower and visits to the Borrower by officers, employees and
agents of the Bank. The Borrower shall cooperate fully with the Bank's officers,
employees and agents in connection with each audit or appraisal performed.
Section 2.11. [Intentionally Omitted].
Section 2.12. Commitment Fee. The Borrower shall pay the Bank a commitment
fee (the "Commitment Fee") quarterly in arrears on the last day of each fiscal
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quarter commencing September 30, 1998, in an amount equal to the quotient of (i)
the product of (A) the total unused portion of the Credit for each day within
the fiscal quarter then ended, multiplied by (B) a rate equal to one half of one
percent (.50%), divided by (ii) the actual number of days in such quarter.
Section 2.13. Use of Credit Proceeds; No Credit Proceeds to Foreign
Subsidiaries.
(a) Use of Credit Proceeds. The proceeds of the Credit shall be used
by the Borrower to refinance existing Indebtedness of the Borrower and its
Subsidiaries (other than its Foreign Subsidiaries) of approximately
$9,500,000 and for general working capital purposes of the Borrower and its
Subsidiaries (other than its Foreign Subsidiaries).
(b) No Credit Proceeds to Foreign Subsidiaries. Notwithstanding any
provision contained in any of the Credit Documents (including this
Agreement) to the contrary, the Borrower will not, and will cause its
Subsidiaries not to, transfer or otherwise make available any proceeds from
any Credit Advance to any Foreign Subsidiary for any purpose.
Section 2.14 Letters of Credit.
(a) Issuance Procedures. The Borrower may request and the Bank will
issue commercial and standby letters of credit (such letters of credit,
together with any renewals, collectively, the "L/Cs") for the account of
the Borrower. With each request, the Borrower shall deliver to the Bank an
L/C application and L/C agreement, together with the proposed form of such
L/C (which, together with all schedules and exhibits thereto), shall be in
form and substance satisfactory to the Bank and it Special Counsel and such
other certificates, documents and other papers and information as the Bank
may reasonably request. Any foreign beneficiary must be satisfactory to the
Bank. All L/Cs shall be for a period not to exceed (i) one hundred and
eighty (180) days (for commercial L/Cs), or (ii) three hundred and sixty
(360) days (for standby L/Cs), and must expire at least one day prior to
the Maturity Date. Within five Business Days following receipt of the
above-described documents in satisfactory form, the Bank shall, provided
that no (i) Event of Default exists or would exist upon issuance of such
L/C and (ii) no event exists which, with the giving of notice or passage of
time, or both, would constitute an Event of Default, issue such L/C.
(b) L/Cs - Foreign Subsidiaries. Notwithstanding any provision
contained in any of the Credit Documents (including this Agreement) to the
contrary, the Borrower will not request, and the Bank will not issue, any
L/C for the benefit of any Foreign Subsidiary or any creditor or equity
holder thereof.
(c) Reimbursement. The Borrower agrees to pay the Bank on each date
that any amount is drawn under an L/C, a sum equal to the amount so drawn.
The Borrower agrees to pay on demand any and all reasonable expenses
incurred by the Bank in enforcing any rights under this Section 2.14. In
the event any L/C is payable in foreign currency, the Borrower shall
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reimburse the Bank at the Bank's selling rate of exchange on the date such
reimbursement is made.
(d) Commission. The Borrower agrees to pay the Bank in advance a fee
equal to the face amount of any L/C after the date hereof multiplied by the
Applicable Margin (prorated based upon the number of days from the issue
date to the expiration date), together with any transactional fees, at the
Bank's customary rates.
(e) Method of Payment. The Bank is authorized to obtain reimbursement
for any L/C by making advances under the Credit. The Bank may make such
advance even if it causes the outstanding balance to exceed the limits set
forth in Section 2.01(a) and the making of such advance shall be an Event
of Default under Article VI.
(f) Amount. The aggregate amount of L/Cs outstanding at any time shall
not exceed $2,500,000.
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ARTICLE III. REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants that:
Section 3.01. Corporate Existence and Power, Organizational Structure. The
Borrower and each Subsidiary is a corporation duly incorporated, validly
existing and in good standing under the laws of the jurisdiction in which it is
organized, and has full corporate and other power and authority to conduct its
business and own its assets as now conducted and owned and as proposed to be
conducted and owned. The Borrower and each Subsidiary is licensed or qualified
as a foreign corporation in each jurisdiction where the conduct of its business
or the ownership of its assets require such licensing or qualification, except
where the failure to be so licensed or qualified would not have a material
adverse effect upon the business, assets, operations or financial condition of
the Borrower or such Subsidiary, as the case may be. All issued and outstanding
shares of capital stock of the Borrower and any Subsidiary have been duly
authorized, validly issued, fully paid and are non-assessable.
Section 3.02. Subsidiaries. The ownership structure and jurisdiction of
incorporation of each Subsidiary is as set forth in Schedule 3.02 attached
hereto. Except as set forth in Schedule 3.02, the Borrower currently has no
Subsidiaries or any equity investments in any other entity.
Section 3.03. Power and Authority Relative to Borrowing; Legal and Binding
Nature, Compliance with Other Instruments. The Borrower and each Subsidiary has
full power and authority and has taken all required corporate and other action
necessary to permit it to execute and deliver and perform all of its obligations
contained in the Credit Documents to which it is a party, and to borrow
hereunder, and none of such actions will violate any provision of law applicable
to it, or of its charter or by-laws, or result in the breach of or constitute a
default under any agreement or instrument to which it is a party or by which it
is bound. Each of the Credit Documents to which the Borrower and each Subsidiary
is a party has been (or will upon execution be) duly authorized and validly
executed and are (or will upon execution be) the valid and binding obligations
of the Borrower and each Subsidiary enforceable in accordance with their
respective terms. Neither the execution or delivery by each of the Borrower and
its Subsidiaries of any of the Credit Documents to which it is a party nor the
performance of its obligations thereunder, requires the consent, approval or
authorization of any person or governmental authority.
Neither the Borrower nor any Subsidiary is in violation of any term of its
charter or by-laws or of any agreement, instrument, mortgage, indenture,
contract, judgment, decree, order, statute, rule or governmental regulation
applicable to it. The execution, delivery and performance of the Credit
Documents will not result in the creation of any Lien (other than Liens in favor
of the Bank) upon any of the properties or assets of the Borrower or any
Subsidiary.
Section 3.04. Financial Condition. The audited consolidated financial
statements of the Borrower dated as of December 31, 1997 and the unaudited
consolidated financial statements of the Borrower and its Subsidiaries dated as
of March 31, 1998 (the "Base Financial Statements") have been delivered to the
Bank. The Base Financial Statements are complete and correct and present fairly
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and accurately the financial position of the Borrower and its Subsidiaries, on a
consolidated and consolidating basis, as of the date of the Base Financial
Statements are in conformity with GAAP consistently applied. Except as set forth
on Schedule 3.04 attached hereto, neither the Borrower nor any Subsidiary has
any contingent liability or liability for taxes, or any unusual or burdensome
agreement or commitment which would have a materially adverse effect on its
business assets, operations or financial condition, except as disclosed in the
Base Financial Statements and in this Agreement.
After giving effect to the financing provided for in this Agreement,
neither the Borrower nor any Guarantor will: (a) have liabilities (contingent or
otherwise) which exceed the fair and salable value of its assets; (b) be left
with unreasonably small capital with which to engage in its business; (c) have
incurred, or anticipate or reasonably should anticipate incurring, debts beyond
its ability to pay such debts as they mature.
Section 3.05. No Material Adverse Change. Except as set forth in Schedule
3.05 attached hereto, since the date of the Base Financial Statements there has
been no material adverse change in the business, assets, operation or condition
(financial or otherwise) of the Borrower or any Subsidiary, and neither the
Borrower nor any Subsidiary has paid any dividends or made any distributions on
or purchased or otherwise acquired any shares of the Borrower's capital stock or
the stock of any Subsidiary.
Section 3.06. Litigation; Employment and Labor. Except as set forth in
Schedule 3.06 attached hereto, there are no suits or proceedings pending or, to
the best knowledge of the Borrower, threatened against or affecting the Borrower
or any Subsidiary which would have a material adverse effect on the business,
assets or financial condition of the Borrower or any Subsidiary.
There are no controversies pending or, to the best of the knowledge of the
Borrower after due inquiry, threatened, between the Borrower and any of its
employees or any Subsidiary and its employees, other than employee grievances
arising in the ordinary course of business which are not, in the aggregate,
material to the financial condition, results of operation or business of the
Borrower or any Subsidiary. The Borrower is in compliance with all federal and
state laws respecting employment and employment terms, conditions and practices.
Neither the Borrower nor any Subsidiary has union representation questions,
grievances, discrimination or unfair labor practice complaints pending or
threatened against it before any state or federal board or agency respecting
employment and employment terms, conditions and practices, the failure to comply
with which could have a material adverse effect on its business or operations
or, to the best of their knowledge, after due inquiry, any basis therefor.
Section 3.07. Title. Except as set forth in Schedule 3.07 attached hereto,
the Borrower and each Subsidiary has good and marketable title to, or valid
leasehold interests in, all of the properties and assets and leasehold interests
reflected in the Base Financial Statements, or acquired since such date (except
for materials used, inventory sold, accounts receivable collected and other
items disposed of, all in the ordinary course of business since the date of the
Base Financial Statements), free and clear of all Liens except Liens permitted
by Section 5.12, and easements, restrictions and minor defects in title which do
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not, either individually or in the aggregate materially detract from the value
or materially limit the use of any real property.
Section 3.08. Tax Returns and Payments. Except as set forth in Schedule
3.08 attached hereto, all of the tax returns and tax reports of the Borrower and
its Subsidiaries required by law to be filed have been duly filed, or extensions
of the time for filing have been duly obtained, and the Borrower and its
Subsidiaries have paid all taxes shown due thereon. Except as set forth in
Schedule 3.08, the federal income tax returns of the Borrower and its
Subsidiaries have never been audited (or, in the case of a Subsidiary, have not
been audited since the date of its acquisition by the Borrower) by the Internal
Revenue Service. There are in effect no waivers of the applicable statutes of
limitations for federal taxes for any period. Except as set forth in Schedule
3.08, no deficiency assessment or proposed adjustment of the federal income
taxes of the Borrower or any Subsidiary is pending, and to the best of
Borrower's knowledge, there is no proposed liability of a substantial nature for
any tax to be imposed upon any of its assets for which there is not an adequate
reserve reflected in the Base Financial Statements.
Section 3.09. Compliance with Law. Except as set forth in Schedule 3.09
attached hereto, the Borrower and each Subsidiary has all necessary franchises,
permits, licenses and other rights to allow it to conduct its business as
presently conducted and as proposed to be conducted, and neither the Borrower
nor any Subsidiary is in default with respect to any order or decree of any
court, or under any law, order or regulation of any governmental authority, or
under the provisions of any contract or agreement to which it is a party or by
which it may be bound, which default would have a material adverse effect on its
business, assets, operations or financial condition.
Section 3.10. Pension Matters. Except as set forth in Schedule 3.10
attached hereto, neither the Borrower nor any Subsidiary has incurred (a) any
material accumulated funding deficiency within the meaning of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or (b) any
material liability to the Pension Benefit Guaranty Corporation established under
ERISA (or any successor thereto under ERISA) in connection with any employee
benefit plan established or maintained by it; neither the Borrower nor any
Subsidiary has had any tax assessed against it by the Internal Revenue Service
for any alleged violation under Section 4975 of the Internal Revenue Code of
1986, as amended (the "Code"). Neither the Borrower nor any Subsidiary has any
material unfunded liability under a pension plan or a contingent liability for
withdrawal from a multi-employer pension plan except as disclosed in the Base
Financial Statements.
Section 3.11. Compliance with Regulation U. None of the proceeds of the
Credit will be used to purchase, carry or refinance any borrowing the proceeds
of which were used to purchase or carry any "margin securities" within the
meaning of Regulation U of the Board of Governors of the Federal Reserve System.
Section 3.12. Credit Agreements. Set forth in Schedule 3.12 attached hereto
is a complete and correct list of all existing loan agreements, indentures, note
purchase agreements, guarantees or other instruments relating to extensions of
credit or money borrowed for an amount in excess of $100,000 under which the
Borrower or any Subsidiary is or may become directly or indirectly obligated.
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Section 3.13. Leases and Options to Purchase. Set forth on Schedule 3.13
attached hereto is a complete and correct list of all existing leases with
respect to, or options to purchase any, real estate or any equipment involving a
commitment, potential commitment, or series of commitments in any twelve month
period, in excess of $100,000 under which the Borrower or any Subsidiary is or
may become directly or indirectly obligated as lessee or purchaser.
Section 3.14. Insolvency. Neither the Borrower nor any Subsidiary has (a)
made a general assignment for the benefit of creditors, (b) filed any voluntary
petition in bankruptcy or suffered the filing of an involuntary petition by its
creditors, (c) suffered the appointment of a receiver to take possession of all
or substantially all of its assets, (c) suffered the attachment or other
judicial seizure of all, or substantially all of its assets, (d) admitted in
writing its inability to pay its debts as they come due, or (e) made an offer of
settlement, extension or composition to its creditors generally.
Section 3.15. Real Estate Owned. Except as set forth in Schedule 3.15
attached hereto, neither the Borrower nor any Subsidiary owns any real property.
Section 3.16. Hazardous Waste. Except as set forth in Schedule 3.16
attached hereto, neither the Borrower nor any Subsidiary has generated, stored
or disposed of any oil, hazardous substance or hazardous material as defined in
the Comprehensive Environmental Response Compensation and Liability Act, as
amended, 42 U.S.C. '9601, et seq., applicable state or federal laws, or
regulations adopted pursuant thereto, in violation of applicable law; and,
except as set forth in Schedule 3.16 attached hereto, to the best of the
Borrower's knowledge, there has been no generation, storage, or disposal of any
such materials by anyone else on the property owned or leased by the Borrower or
any Subsidiary, nor have any such materials been present on such property.
Section 3.17. Permits. All necessary licenses and permits for the use
and occupancy of the real property owned or leased by the Borrower and each
Subsidiary have been issued and are in full force and effect, except as set
forth in Schedule 3.17 attached hereto and except for any such licenses or
permits, the absence of which would not have a material adverse effect upon the
business, assets, operations or financial condition of the Borrower or such
Subsidiary.
Section 3.18. SEC Filings; No Omissions. None of the registration
statements or reports (including, without limitation, reports on Form 10-K, Form
10-Q and Form 8-K) filed by the Borrower with the SEC, as amended, modified or
supplemented from time to time, contains as of the date hereof any untrue
statement of a material fact or omitted to state any material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
The making of Credit Advances hereunder, the application of proceeds and
the repayment by the Borrower and the consummation of the transactions
contemplated by this Agreement have not and will not violate any provision of
any federal or state securities loans, rules or regulations, or any order issued
by the SEC (collectively, "Securities Laws"). Neither the Borrower nor any
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Subsidiary has issued any security in violation of any Securities Laws. The
Borrower agrees to indemnify and hold the Bank harmless from and against any
claim in connection with the violation or alleged violation by the Borrower of
any Securities Laws.
None of the representations or warranties in this Agreement nor any
document, agreement, statement, certificate, exhibit, schedule or other
information furnished or to be furnished by or on behalf of the Borrower to the
Bank pursuant to this Agreement contains any untrue statement of a material fact
or omits to state a material fact necessary to make the statements of facts
contained therein not misleading.
Section 3.19. Intellectual Property. The Borrower possesses all franchises,
patents, copyrights, trademarks, trade names, licenses and permits, and rights
in respect of the foregoing, adequate for the conduct of its business
substantially as now conducted without known conflict with any rights of others.
Section 3.20. Operation of Business on Consolidated Basis. The Borrower and
its Subsidiaries conduct a portion of their business on a consolidated basis,
including, but not limited to, shared management, accounting, marketing and
operations. Any Credit provided to the Borrower under the Credit Documents
benefits the Borrower and all Subsidiaries on a consolidated as well as an
individual basis.
ARTICLE IV. CONDITIONS
Section 4.01. Conditions to the Credit and the First Advance. The
obligation of the Bank to make the initial advance under the Credit is subject
to the fulfillment of the following conditions:
(a) Credit Documents. The Bank shall have received (i) this Agreement,
executed and delivered by a duly authorized officer of the Borrower, with a
counterpart for the Bank, (ii) the Credit Note executed and delivered by a
duly authorized officer of the Borrower, (iii) the Borrower Security
Agreement and the Borrower Stock Pledge Agreement, each executed and
delivered by a duly authorized officer of the Borrower, (iv) the Guaranty
Agreement, executed and delivered by a duly authorized officer of each of
the Subsidiaries (other than the Foreign Subsidiaries) and (v) the
Subsidiary Security Agreements and the Subsidiary Stock Pledge Agreements,
each executed and delivered by a duly authorized officer of each Subsidiary
which is a party thereto.
(b) Actions to Perfect Liens. The Bank shall have received evidence in
form and substance reasonably satisfactory to it that all filings,
recordings, registrations and other actions, including, without limitation,
the filing of duly executed financing statements on form UCC-1, necessary
or, in the opinion of the Bank, desirable to perfect the Liens created by
the Security Documents shall have been completed (or, to the extent that
any such filings, recordings, registrations and other actions shall not
have been completed, arrangements satisfactory to the Bank for the
completion thereof shall have been made).
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(c) Lien Searches. The Bank shall have received the results of a
recent search by a Person satisfactory to the Bank, of the UCC, judgment
and tax lien filings which may have been filed with respect to personal
property of the Borrower and each of its Subsidiaries in the jurisdictions
set forth in Schedule 4.01(c), and the results of such search shall be
satisfactory to the Bank.
(d) Pledged Stock; Stock Powers. The Bank shall have received the original
certificates representing the shares pledged pursuant to the Borrower Stock
Pledge Agreement and each of the Subsidiary Stock Pledge Agreements,
together with an undated stock power for each such certificate executed in
blank by a duly authorized officer of the Borrower or the applicable
Subsidiary, whichever is applicable.
(e) UCC-3 Termination Statements. The Bank shall have received UCC-3
termination statements and any other instrument necessary to terminate the
Liens granted by the Borrower or any of its Subsidiaries (other than its
Foreign Subsidiaries) to any Person (other than the Bank)(or, to the extent
that any such UCC-3 termination statements or any other instrument shall
not have been obtained and filed, arrangements satisfactory to the Bank for
the obtaining and filing thereof shall have been made).
(f) Secretary's Certificate. The Borrower and each of the Subsidiaries
(including the Foreign Subsidiaries) shall have delivered to the Bank, a
certificate of the Secretary or Assistant Secretary (or Clerk or Assistant
Clerk) of the Borrower and each such Subsidiary (in substantially the form
of Exhibit H attached hereto and dated as of the date of the Closing Date),
certifying (i) in the case of the Borrower and each of its Subsidiaries
(other than its Foreign Subsidiaries), the charter documents, by-laws,
consent votes of directors and incumbency of officers of the Borrower and
each such Subsidiary; and (ii) in the case of each of the Foreign
Subsidiaries, the charter documents and by-law of each such Foreign
Subsidiary.
(g) Officer's Certificate. The Borrower shall have delivered to the
Bank a certificate of a duly authorized officer of the Borrower certifying
that all conditions precedent on the part of the Borrower to the execution
and delivery hereof and the making of the initial Revolving Credit Advance
have been satisfied, in substantially the form of Exhibit I attached hereto
and dated as of the date of the Closing Date.
(h) Legal Existence, Good Standing, Tax Good Standing and Foreign
Qualification Certificates. The Bank shall have received (i) certificates
of legal existence, good standing, tax good standing and foreign
qualification for the Borrower, and (ii) certificates of legal existence,
good standing and foreign qualification from each of the Subsidiaries, all
of recent date issued by the appropriate governmental authorities.
(i) Certificates of Insurance. The Bank shall have received evidence
in form and substance satisfactory to it that all of the requirements of
this Agreement and those sections of the Security Documents requiring the
maintenance of insurance shall have been satisfied.
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(j) Legal Opinions from Counsel for the Borrower and Guarantors. The
Bank shall have received the written opinion of Bryan Cave LLP, counsel to
the Borrower and the Guarantors, in form satisfactory to Peabody & Arnold
LLP, special counsel to.the Bank (said special counsel and any successor
counsel shall be hereinafter referred to as "Special Counsel") covering
such matters as the Bank or its Special Counsel may request.
(k) No Default. No Event of Default specified in Article VI and no
event which, under Article VI with the giving of notice or the lapse of
time, or both, would constitute an Event of Default, shall have occurred
and be continuing.
(l) Material Adverse Change. There shall not have occurred any
material adverse change in the condition (financial or otherwise),
operation, properties, assets, liabilities, earnings or prospects of the
Borrower or its Subsidiaries since the date the most recent financial
statements were delivered to the Bank.
(m) Miscellaneous Requirements. The Borrower shall have delivered to
the Bank such other documents as the Bank or its Special Counsel shall
reasonably require.
Section 4.02. Conditions to Subsequent Advances. Each request for a
subsequent Credit Advance shall be deemed to be a representation by the Borrower
to the Bank that all representations and warranties contained in Article III
hereof or in any Exhibit, Schedule or Certificate attached hereto or delivered
to the Bank in connection herewith were true and correct when made and continue
to be true and correct as of the date of such advance, and that no Event of
Default specified in Article VI hereof, and no event which, under said Article
VI with the giving of notice or the lapse of time, or both, would constitute an
Event of Default, has occurred and is then continuing.
ARTICLE V. COVENANTS OF THE BORROWER
The Borrower hereby covenants as follows:
Section 5.01. Payment of Amounts Due. The Borrower will make all payments
of principal, interest and other amounts in connection with the Credit Note and
this Agreement in accordance with the terms hereof and thereof, and will
observe, perform and comply with all covenants, terms and conditions contained
herein, in the Credit Note or in any other Credit Document to be observed,
performed or complied with by it, and it will cause each of the Subsidiaries
(other than the Foreign Subsidiaries) to comply with all the covenants, terms
and conditions in any Credit Document to which it is a party, or which by the
terms hereof is applicable to such Subsidiary.
Section 5.02. Corporate Existence. The Borrower will maintain and preserve
in full force and effect its corporate existence and the corporate existence of
each Subsidiary and will maintain and preserve in full force and effect, and
will cause each Subsidiary to maintain and preserve in full force and effect,
all material rights, licenses, patents, trademarks and franchises, and comply
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with all applicable regulations in all jurisdictions necessary for the conduct
of their respective businesses.
Section 5.03. Maintenance of Properties. The Borrower will maintain,
preserve, protect and keep, and will cause each Subsidiary to maintain,
preserve, protect and keep, all properties used or useful in the conduct of
their respective businesses in good repair, working order and condition,
ordinary wear and tear excepted, and from time to time shall make, and will
cause each Subsidiary to make, such repairs, renewals, replacements, betterments
and improvements thereto as in the judgment of the Borrower's management are
necessary to permit such businesses to be properly and advantageously conducted
at all times.
Section 5.04. Payment of Taxes, Compliance with Laws. The Borrower will pay
and discharge, and will cause each Subsidiary to pay and discharge, all taxes,
assessments and governmental charges or levies imposed upon them or upon their
income or profits, or upon any property belonging to them before the same shall
become in default, as well as all lawful claims for labor, materials and
supplies, which, if not paid when due, might become a Lien or charge upon such
property or any part thereof; provided, however, that neither the Borrower nor
any Subsidiary shall be required to pay and discharge any such tax, assessment,
charge, levy or claim so long as the validity thereof shall be contested in good
faith by appropriate proceedings, an adequate reserve for the payment thereof is
established on the books of the Borrower or such Subsidiary in accordance with
GAAP, and the Borrower or each Subsidiary shall pay such tax, assessment,
charge, levy or claim before any taxing authority files any Lien with respect
thereto.
The Borrower will at all times and in all material respects comply with,
and will cause each Subsidiary to comply with, all applicable provisions of
laws, rules, regulations, licenses, permits, approvals and orders and observe
all requirements of federal, state, local and other governmental authorities.
The Borrower will satisfy, or cause to be satisfied, for the Borrower and
each Subsidiary, the minimum annual funding standard, within the meaning of
ERISA, for any employee benefit plan established or maintained by the Borrower
or such Subsidiary which is subject to ERISA and neither the Borrower nor any
Subsidiary will permit any tax or penalty to be incurred by it as a result of
any failure to satisfy any such minimum funding requirement or as a result of
any violation of the provisions of Section 4975 of the Code or any regulation
issued thereunder.
Section 5.05. Insurance. The Borrower will at all times maintain, and will
cause each Subsidiary to maintain, casualty, liability and business interruption
insurance with financially sound and reputable insurers satisfactory to the Bank
in such amounts and to the extent customary for entities of like size in similar
businesses, all in accordance with the provisions of this Agreement, the
Borrower Security Agreement and the Subsidiary Security Agreements. Each such
insurance policy shall contain a provision requiring at least thirty (30) days'
written notice to the Bank prior to the cancellation or modification of each
such policy. Certificates relating to such insurance shall be delivered to the
Bank on the Closing Date and thereafter upon demand by the Bank, it being
understood by the parties hereto that no such certificates for the Foreign
Subsidiaries shall be delivered to the Bank unless and until requested by the
Bank.
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Section 5.06. Accounts and Reports. The Borrower will furnish or cause to
be furnished to the Bank, the following reports:
(a) Annual Reports. As soon as available and in any event within
ninety (90) days after the end of each fiscal year, (i) consolidated and
comparative audited financial statements of the Borrower, together with all
notes thereto, prepared in reasonable detail and in accordance with GAAP
consistently applied, such consolidated statements to be duly certified by
a certified, independent public accounting firm selected by the Borrower
and acceptable to the Bank ("CPA"), which statements shall be accompanied
by (A) an unqualified opinion thereon by the CPA, and (B) a statement
executed by the Borrower's president or treasurer that to the best of his
or her knowledge, following diligent inquiry, he or she does not know of
any condition or event which constitutes an Event of Default under this
Agreement or which, after notice, or lapse of time or both, would
constitute such an Event of Default, or a statement specifying the nature
and period of existence of any such condition or event, all in form and
substance acceptable to the Bank; and (ii) unaudited consolidating and
comparative balance sheet and income statement prepared on a year-to-date
basis in reasonable detail and in accordance with GAAP consistently
applied, and in form similar to Schedule 5.06 attached hereto.
(b) Quarterly Reports. As soon as available, and in any event within
forty-five (45) days after the end of each quarterly accounting period in
each fiscal year during the term of this Agreement, (i) consolidated and
comparative unaudited financial statements of the Borrower prepared in
reasonable detail and in accordance with GAAP consistently applied,
certified by the president or treasurer of the Borrower, which statements
shall contain balance sheets as of the end of such accounting period,
statements of income and cash flow for such accounting period, all in form
and substance satisfactory to the Bank; and (ii) unaudited consolidating
and comparative balance sheet and income statement prepared on a
year-to-date basis in reasonable detail and in accordance with GAAP
consistently applied, and in form similar to Schedule 5.06 attached hereto.
(c) Compliance Certificates. With the annual and quarterly financial
statements furnished pursuant to subsections (a) and (b) hereof, an
officer's certificate substantially in the form of Exhibit J hereto (the
"Compliance Certificate"), and such other reports as the Bank may
reasonably request.
(d) Projections. At least thirty (30) days prior to each fiscal year
end, financial projections for the Borrower for the next fiscal year
prepared by month in the form previously provided to the Bank.
(e) Auditor's Management Letter. Promptly after receipt by the
Borrower, copies of the management letter provided by the CPA.
(f) Public Information. As soon as they become available, but in any
event, within fifteen (15) days after the issuance thereof, the Borrower
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shall furnish to the Bank copies of such other financial statements, proxy
material and reports as it shall send or make available to its
stockholders, and promptly upon the filing thereof, copies of all reports
and materials which the Borrower or any Subsidiary files with any
governmental commission (including, without limitation, the SEC),
department or agency or with any domestic or foreign stock exchange or with
the NASDAQ, including without limitation, copies of (i) any registration
statements, prospectuses and any amendments and supplements thereto, and
any regular and periodic reports (including, without limitation, reports on
Form 10-K, Form 10-Q and Form 8-K) filed by Borrower with the SEC or any
domestic or foreign stock exchange or with the NASDAQ, and (ii) any letters
of comment or correspondence with respect to filings or
compliance matters sent to the Borrower by any such governmental commission
(including without limitation, the SEC), department or agency or any such
domestic or foreign stock exchange or the NASDAQ.
(g) Accounting Principles. Reports furnished to the Bank under this
Agreement shall be prepared in accordance with GAAP consistently applied,
except that unaudited statements need not contain notes thereto and shall
be subject to normal year end adjustments. Compliance with the covenants
set forth in this Agreement will be determined in accordance with GAAP
consistently applied. In the event that any subsequent report shall have
been prepared in accordance with accounting principles different than those
used in the Base Financial Statements, the Borrower shall so inform the
Bank of such change in accounting principles and shall provide to the Bank
such subsequent reports and such supplemental reconciling financial
information as may be required to ascertain performance by the Borrower
with the covenants contained in this Agreement.
Section 5.07. Information and Inspection. The Borrower will furnish, and
will cause each Subsidiary to furnish, the Bank from time to time promptly upon
the Bank's request, full information pertinent to any covenant, provision or
condition hereof or to any matter in connection with the business of the
Borrower or such Subsidiary and, at all reasonable times during normal business
hours and as often as the Bank shall reasonably request, permit any authorized
representative designated by the Bank to visit and inspect any of properties of
the Borrower and its Subsidiaries, including their books and records (and to
make extracts therefrom), and to discuss their affairs, finances and accounts
with its officers. The Borrower will, in addition, promptly furnish to the Bank
such financial information as the Bank shall reasonably request. Without
limiting the generality of the foregoing, the Bank shall be entitled to conduct
as many examinations of the books and records of the Borrower or any Subsidiary
as the Bank in its sole discretion deems necessary and the Borrower shall pay on
demand the Bank's out-of-pocket expenses and field audits and appraisal fees.
Section 5.08. Additional Advice. The Borrower will promptly advise the Bank
of any change which constitutes or, after notice or lapse of time or both, would
constitute an Event of Default as defined in Article VI of this Agreement, or a
default in the performance by the Borrower or any Subsidiary under any covenant
or agreement contained in any other agreement to which it is a party or by which
it is bound which has not been cured within the applicable grace period, if any.
The Borrower will also promptly give notice to the Bank of (a) each waiver,
consent or amendment granted or made with respect to borrowed money in excess of
$25,000, and (b) any dispute or default under or change in a material term of
any collection agreement during the prior fiscal year.
Section 5.09. Payment of Expenses. The Borrower will bear all reasonable
out-of-pocket fees and expenses of the Bank in connection with the negotiation,
preparation, execution, amendment, administration or enforcement of this
Agreement, the other Credit Documents and the transactions contemplated hereby
(whether or not the Credit hereunder is consummated) and the making and
collection of the Credit hereunder, including without limitation, the fees and
disbursements of Special Counsel for the Bank, costs of appraisals, recording
fees, and filing fees. Such fees and disbursements of Special Counsel for the
Bank payable by the Borrower in connection with the initial negotiation,
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preparation and execution of this Agreement and the other Credit Documents shall
not exceed $50,000.
Section 5.10. Limitation on Indebtedness. Except as otherwise provided in
Section 5.11 below, the Borrower will not, and will not permit any Subsidiary to
create, incur, assume, or become, be or remain liable in any manner in respect
of, or allow to exist, any indebtedness (which term shall include: all
indebtedness, obligations and liabilities, which in accordance with GAAP would
be reflected on the balance sheet of the Borrower or such Subsidiary as a
liability; all indebtedness, obligations and liabilities (including any letters
of credit issued by any bank), whether or not assumed by the Borrower or such
Subsidiary, secured by any Lien existing on property owned by the Borrower or
such Subsidiary; all indebtedness in respect of operating leases; and all
amounts representing rental payments which, in accordance with GAAP, would be
classified as a liability on its balance sheet)(collectively, "Indebtedness"),
except for:
(a) the Obligations;
(b) the Canadian Debt;
(c) the UK Debt;
(d) Purchase Money Indebtedness and Capitalized Lease Obligations
(including the approximately $1,400,000 of Purchase Money Indebtedness and
Capitalized Lease Obligations which is in existence as of the date hereof
and which is specifically disclosed in Schedule 5.10(d) attached hereto)
which collectively shall not exceed the aggregate sum of $2,500,000 at any
one time;
(e) Indebtedness of the Borrower and the Subsidiaries which is in
existence as of the date hereof and which is specifically disclosed in
Schedule 5.10(e) attached hereto), and which shall not exceed the aggregate
principal amount of $533,345 at any time on or after the date hereof;
(f) Indebtedness of the Borrower and the Subsidiaries for taxes,
assessments, governmental charges, Liens or claims described in Section
5.04 hereof to the extent that payment thereof is not required by such
Section 5.04;
(g) Indebtedness of the Borrower and the Subsidiaries comprising of
trade debt, wages, employee benefits, advance payments on sales contracts
and other Indebtedness incurred in the ordinary course of business; and
(h) Indebtedness in respect of final judgments for the payment of
money not in excess of $50,000 in the aggregate at any time outstanding
(excluding sums covered by insurance) remaining unsatisfied and in effect
for any period of less than sixty (60) days or in respect of which a stay
of execution shall have, been obtained pending an appeal or proceeding for
review.
Section 5.11. Limitation on Liability for Obligations of Others. Except as
otherwise provided in Section 5.10 above, the Borrower will not, and will not
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allow any Subsidiary to, assume, guarantee, endorse or otherwise be or become
liable, contingently or otherwise, for the obligations of any other corporation,
firm or entity or other person, except for:
(a) the Guaranty Agreement;
(b) the endorsement of negotiable instruments for deposit or
collection in the normal course of business;
(c) the Guarantee dated ___________, 1998 (the "First Chicago NBD
Guaranty"), from the Borrower in favor of First Chicago NBD Bank, Canada,
as amended as of August __, 1998, pursuant to which, among other things,
the Borrower has guaranteed up to $2,000,000 of all of the obligations and
liabilities of its subsidiary, Ground Effects, Ltd., to First Chicago NBD
Bank, Canada; provided, however, that (i) the Borrower shall not further
amend, restate or otherwise alter the First Chicago NBD Guaranty in any
manner; and (ii) the Borrower will not, directly or indirectly, make any
payment pursuant to or with respect to the First Chicago NBD Guaranty;
(d) the Deed of Guarantee dated January 16, 1998 (the "National
Westminster Bank Guaranty"), from the Borrower in favor of National
Westminster Bank PLC, pursuant to which, among other things, the Borrower
has guaranteed up to ,391,780 (British Pounds) of all of the obligations
and liabilities of its subsidiary, Signal Processors Limited, to National
Westminster Bank PLC, provided, however, that (i) the Borrower shall not
amend, restate or otherwise alter the National Westminster Bank Guaranty in
any manner; and (ii) the Borrower will not, directly or indirectly, make
any payment pursuant to or with respect to the National Westminster Bank
Guaranty; and
(e) those guarantees of the Borrower, which are described in Schedule
5.11 attached hereto, and which relate solely to certain equipment leases
or bonds of the Subsidiaries described therein. . Section 5.12. Limitation
on Liens. The Borrower will not, and will not allow any Subsidiary to, (i)
create, incur, assume or allow to be created, incurred or assumed, or to
exist, any pledge of, or any Lien of any kind on, any of their respective
properties, assets or capital stock, (ii) subject any of such assets to
prior payments of any other Indebtedness whether by subordination
agreement, transfer of assets or otherwise, or (iii) own or acquire or
agree to acquire any property of any character subject to or upon any
mortgage, conditional sale agreement or other title retention agreement,
provided, however, that the foregoing restrictions shall not prohibit the
Borrower or a Subsidiary from:
(a) creating or allowing to exist any Liens which secure Indebtedness
permitted under
Section 5.10;
(b) creating or allowing to exist any Liens in favor of the Bank or
otherwise permitted under the Security Documents;
(c) allowing to exist Liens for taxes, assessments, governmental
charges and levies for claims described in Section 5.04 hereof to the
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extent that payment thereof is not then required by such Section;
(d) allowing to exist Liens in respect of judgments or awards which
have been in force for less than the applicable appeal period or less than
sixty (60) days, whichever is sooner, so long as execution is not levied
thereunder, or in respect of which the Borrower or such Subsidiary at the
time shall in good faith be prosecuting an appeal, or proceedings for
review are pending and in respect of which a stay of execution shall have
been obtained pending such appeal or review; and
(e) creating or all owing to exist deposits or pledges made in
connection with, or to secure payment of, workmen's compensation,
unemployment insurance or similar programs; Liens, charges or encumbrances
imposed by law, such as carriers', warehousemen's and mechanics' Liens and
other Liens arising in the ordinary course of business which do not,
individually or in the aggregate, materially detract from the value or
limit the use of any property subject thereto; landlords' Liens in respect
of rent not in default or Liens securing the performance of bids, tenders,
contracts (other than for the repayment of borrowed money), statutory
obligations and surety bonds.
Section 5.13. Sale of Assets. The Borrower will not, and will not allow any
of its Subsidiaries to, sell or transfer to any third party any of its assets
(including, without limitation, accounts receivable whether with or without
recourse); provided, however, (a) the Borrower or any of its Subsidiaries may
make such sales or transfers to the Borrower or any of its Subsidiaries (other
than its Foreign Subsidiaries); and (b) the Borrower or any of its Subsidiaries
may make sales or transfers which are (i) permitted by Section 5.16 hereof or
(ii) in the ordinary course of business.
Section 5.14. Loans and Investments in Securities. The Borrower will not,
and will not permit any Subsidiary to, without the prior written consent of the
Bank, purchase or otherwise acquire or retain any stock, assets or obligations
of, or make any loans or advances to, or investments in any corporation,
partnership or other entity or person, other than:
(a) obligations of the United States of America, or any agency
thereof, maturing not more than one (1) year from the date of issue
thereof; or
(b) certificates of deposit or other obligations maturing not more
than one (1) year from the date of issue thereof issued by the Bank; or
(c) Permitted Acquisitions or Permitted Payments; or
(d) loans by the Borrower to the Subsidiaries;
provided, however, notwithstanding any provision contained herein or in any of
the other Credit Documents to the contrary, the Borrower will not, and will
cause its Subsidiaries not to, make any loans or advances to, or additional
investments in, any Foreign Subsidiary for any purpose.
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Section 5.15. Transactions With Affiliated Persons. The Borrower will not,
and will not permit any Subsidiary to, enter into any transaction with any
Affiliate, except on terms no less favorable to the Borrower or such Subsidiary
than would be available in a bona fide arm's length transaction with a
non-affiliated person or entity; provided that (i) the Borrower shall have
obtained the Bank's prior written consent to any such transaction or series of
related transactions involving an amount of in excess of $25,000 in the
aggregate and (ii) the Borrower may issue stock options and warrants (and stock
upon the exercise thereof) at less than fair market value to its officers,
employees, directors and shareholders. All such existing stock options and
warrants as of the date hereof are as set forth in Schedule 5.15 attached
hereto. "Affiliate" means: any officer, director or shareholder who owns five
percent (5%) or more of any class of securities of the Borrower; any entity
where the Borrower owns directly or indirectly five percent (5%) or more of any
class of securities or interest issued by such entity; or any entity that
controls, is controlled by or under common control with, any Borrower.
Section 5.16. Consolidation, Merger or Disposition/Acquisition of Assets.
The Borrower will not, and will not allow any Subsidiary to, without the prior
written consent of the Bank, consolidate with or merge into or with another
firm, person or corporation, directly or indirectly, issue, sell, assign, pledge
or otherwise encumber or dispose of any shares of its capital stock or sell,
lease or otherwise dispose of (other than in the ordinary course of its
business) all or any material portion of their respective properties or assets
to any firm, person or corporation, or acquire any material portion of the
properties or assets of any other firm, person or corporation, whether in one or
a series of related transactions, except that:
(a) any Subsidiary may merge into or consolidate with the Borrower or
another Subsidiary (provided that the Borrower or a Subsidiary shall be the
surviving corporation); and
(b) the Borrower and its Subsidiaries may sell or otherwise dispose of
any property which has become uneconomic, obsolete or worn out if disposed
of in the ordinary course of business; and
(c) so long as no Event of Default (or event which with notice, the
passage of time or both would become an Event of Default) has occurred and
is continuing, the Borrower and its Subsidiaries may make Permitted
Acquisitions and Permitted Payments.
Section 5.17. Changes in Corporate Business. The Borrower will not, and
will not permit any Subsidiary to, materially alter the nature of its business.
Section 5.18. New Subsidiaries. The Borrower shall, at the expense of the
Borrower and its Subsidiaries, cause each new Subsidiary (other than new Foreign
Subsidiaries) of the Borrower created or acquired after the date hereof, to
execute and deliver to the Bank, within thirty (30) days after the creation or
acquisition of such new Subsidiary, the following agreements and documents, all
in form and substance reasonably satisfactory to the Bank:
(a) a Supplement to Guaranty Agreement in the form attached as Exhibit
A to the Guaranty Agreement, pursuant to which, such new Subsidiary shall
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become a party to the Guaranty Agreement;
(b) a Subsidiary Security Agreement, pursuant to which, such new
Subsidiary shall grant to the Bank a first priority security interest in
all of its assets;
(c) any and all UCC financing statements which the Bank deems
necessary and appropriate in order to perfect its first priority security
interests in all of the assets of such new Subsidiary; and
(d) such other agreements, documents, financing statements,
instruments, opinions and certificates and completion of such other
matters, as the Bank may reasonably deem necessary or appropriate.
The Borrower, or the Subsidiary, whichever is applicable (hereinafter
referred as the "Corporate Parent"), which owns or otherwise acquires Capital
Stock in any new Subsidiary (including any new Foreign Subsidiary) created or
acquired after the date hereof, will execute and deliver to the Bank, within
thirty (30) days after the creation or acquisition of such new Subsidiary, (i) a
pledge agreement (in form and substance reasonably acceptable to the Bank),
pursuant to which, such Corporate Parent shall grant in favor of the Bank a
first priority security interest with respect to all Capital Stock owned or
otherwise acquired by the Corporate Parent in such new Subsidiary; and (ii) such
financing statements, documents, instruments and certificates, as the Bank may
reasonably request in order to perfect its security interest in such Capital
Stock.
Except as otherwise provided in Sections 5.10 and 5.11 above, the Borrower
will not, and will not permit any Subsidiary to incur any Indebtedness in
connection with the creation or acquisition of any such new Subsidiary.
Section 5.19 Minority Stockholders. To the extent that the Borrower does
not directly or indirectly own all of the outstanding Capital Stock in any
Subsidiary, the Borrower shall use its best efforts to cause all Persons who own
any Capital Stock in such Subsidiary promptly to execute and deliver to the Bank
(a) a pledge agreement (in form and substance reasonably acceptable to the
Bank), providing for a first priority security interest in favor of the Bank
with respect to all Capital Stock owned by such Person in such Subsidiary; and
(b) such financing statements, documents, instruments and certificates, as the
Bank may reasonably request in order to perfect its security interest in such
Capital Stock.
Section 5.20. Restricted Payments. The Borrower will not, and will not
permit any Subsidiary to, directly or indirectly, declare, order, pay or make
any Restricted Payments, provided, however, that so long as no Event of Default
has occurred and is continuing,
(a) the Borrower may redeem for cash up to $700,000 (plus accrued
dividends) of the Borrower's redeemable preferred stock as set forth in
Schedule 5.20 attached hereto;
(b) the Borrower may acquire, in exchange for its Capital Stock, the
remaining equity interests in Subsidiaries which are not wholly-owned by
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the Borrower, by issuance to the Persons and pay certain "earn outs", in
the amounts, at the times, and, where so indicated, upon the satisfaction
of the earnings targets set forth in Schedule 5.20 attached hereto;
(c) the Borrower may declare and pay cash dividends to its
shareholders in the aggregate amount of up to $150,000 per any fiscal year;
and
(d) any Subsidiary may declare and pay cash dividends, to the extent
permitted under the provisions of the Borrower Stock Pledge Agreement and
the Subsidiary Stock Pledge Agreement.
The transactions permitted in clauses (a), (b), (c) and (d) of this Section 5.20
are hereinafter referred to collectively as the "Permitted Payments."
Section 5.21. Restriction on Use of Proceeds. None of the proceeds of the
Credit shall be used by the Borrower to purchase commodities except for use in
the ordinary course of the Borrower's business, or for the purpose of purchasing
or carrying, or refinancing any borrowing the proceeds of which were used to
purchase or carry, any "margin securities" within the meaning of Regulation U of
the Board of Governors of the Federal Reserve System.
Section 5.22. Bank Accounts. The Borrower shall maintain at all times all
of its primary operating and disbursement accounts with the Bank; provided that
the Bank's services meet the reasonable cash management needs of the Borrower.
Section 5.23. Continued Management and Ownership of Borrower and Each
Subsidiary. Richard J. Sullivan shall continue to serve actively as chief
executive officer of the Borrower and shall actively participate in the
management of the Borrower. At no time after the date hereof will the Borrower
permit (i) more than 50% of the outstanding shares of Capital Stock of the
Borrower to be beneficially owned (as defined in Rule 13d-3 promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) by any
"person" or any "group" (as defined in Section 13(d)(3) of the Exchange Act); or
(ii) any change in the ownership structure of any Subsidiary as set forth in
Schedule 3.02 (other than as a result of Permitted Acquisitions and Permitted
Payments).
Section 5.24. Material Agreements. The Borrower will observe and perform,
and will cause each Subsidiary to observe and perform, all of its obligations
under each material agreement to which it is a party, except where the failure
so to observe would not have a material adverse affect upon the business,
assets, operations, financial or other condition, or prospects of the Borrower
or such Subsidiary, as the case may be.
Section 5.25. Maximum Capital Expenditures. The Borrower will not permit,
and will cause its Subsidiaries not to permit, Capital Expenditures to exceed
$1,500,000 during any fiscal year (excluding from this calculation, Purchase
Money Indebtedness and Capitalized Lease Obligations permitted pursuant to
Section 5.10(c)) above).
As used herein, "Capital Expenditures" means, for any given period, all
internally financed expenditures of the Borrower and its Subsidiaries for fixed
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or capital assets made or incurred during such period which are properly
chargeable to capital account in accordance with GAAP consistently applied.
Section 5.26. Ratio of Total Liabilities to Tangible Net Worth. The
Borrower will not permit, and will cause its Subsidiaries not to permit, the
ratio of Total Liabilities to Tangible Net Worth at the end of any fiscal
quarter ending after the date hereof to be greater than 2.0 to 1.0.
As used herein, "Total Liabilities" means, as of any given date, the sum of
all liabilities of the Borrower and its Subsidiaries, as determined on a
consolidated basis, in accordance with GAAP consistently applied; "Tangible Net
Worth" means, as of any given date, the sum of all tangible assets of the
Borrower and its Subsidiaries minus the Total Liabilities, all as determined on
a consolidated basis in accordance with GAAP consistently applied.
Section 5.27. Ratio of Current Assets to Current Liabilities. The Borrower
will not permit, and will cause its Subsidiaries not to permit, the ratio of
Current Assets to Current Liabilities at the end of any fiscal quarter ending
after the date hereof to be less than 1.25 to 1.00.
As used herein, "Current Assets" means, as of any given date, the sum of
all cash and cash equivalents plus inventory, prepaid expenses and accounts
receivables of the Borrower and its Subsidiaries, all as determined on a
consolidated basis in accordance with GAAP consistently applied; "Current
Liabilities" means, as of any given date, all current liabilities (including
current maturities on long-term debt and all amounts outstanding under the
Credit) of the Borrower and its Subsidiaries, as determined on a consolidated
basis in accordance with GAAP consistently applied.
Section 5.28. Ratio of Cash Flow to Debt Service. The Borrower will not
permit, and will cause its Subsidiaries not to permit, the ratio of Cashflow to
Debt Service at the end of any fiscal quarter ending after the date hereof to be
less than 2.5 to 1.0; provided, however, that for the fiscal quarter June 30,
1998, such ratio will not be less than 2.0 to 1.0.
As used herein, "Cashflow" means, for any given period, the Cumulative
Amount of (a) the net income of the Borrower and its Subsidiaries for such
period (excluding all extraordinary income or losses), plus (b) the depreciation
and amortization expenses of the Borrower and its Subsidiaries for such period,
all as determined on a consolidated basis in accordance with GAAP consistently
applied; "Cumulative Amount" means, for any item, the total aggregate amount
thereof for the last four quarters on a rolling basis through the last day of
the fiscal quarter in question; "Debt Service" means, for any given period, the
Cumulative Amount of (a) current maturities of long term debt of the Borrower
and its Subsidiaries (including Capital Lease Obligations), plus (b) all capital
expenditures (both internally and externally financed) of the Borrower and its
Subsidiaries, all as determined on a consolidated basis in accordance with GAAP
consistently applied.
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Section 5.29. Ratio of Net Profit Before Taxes to Revenue. The Borrower
will not permit, and will cause its Subsidiaries not to permit, the ratio of Net
Profit Before Taxes to Revenue at the end of any fiscal quarter ending after the
date hereof, and expressed as a percentage, to be less than 3.0%; provided,
however, that for the fiscal quarters ending June 30, 1998 and September 30,
1998, respectively, such percentage will not be less than 2.7%.
As used herein, "Net Profit Before Taxes" means, for any given period, the
pre-tax income of the Borrower and its Subsidiaries for such period as
determined in accordance with GAAP, consistently applied (excluding any
extraordinary income or losses); "Revenue" means, for any given period, the net
sales of the Borrower and its Subsidiaries for such period as determined in
accordance with GAAP, consistently applied.
Section 5.30. Year 2000. The Borrower will take all action necessary to
assure that its and each Subsidiary's computer based systems are able
effectively to process data, including dates, on and after January 1, 2000. The
Borrower will promptly notify the Bank in writing of any Year 2000 problem
arising in any such system and, at the request of the Bank, will provide the
Bank with assurance reasonably acceptable to the Bank of the Borrower's and each
Subsidiary's Year 2000 capability.
ARTICLE VI. EVENTS OF DEFAULT.
If, while any part of the principal of or interest on the Notes remains
unpaid or while any part of the Credit shall be in effect, any one of the
following "Events of Default" shall occur:
(a) the failure of the Borrower or any Subsidiary to pay any amount of
principal, interest or other sum when due to the Bank under any of the
Credit Documents;
(b) the Borrower or any Subsidiary shall (i) apply for or consent to
the appointment of a receiver, trustee or liquidator of it or of all or a
substantial part of its assets; (ii) admit in writing of its inability to
pay its debts as they mature; (iii) make a general assignment for the
benefit of creditors; (iv) be adjudicated a bankrupt or insolvent; (v) file
a voluntary petition in bankruptcy or a petition or an answer seeking
reorganization or an arrangement with creditors to take advantage of any
insolvency law; (vi) file any answer admitting the material allegations of
a petition filed against it in any bankruptcy, reorganization or insolvency
proceeding or fail to dismiss such petition within thirty (30) days after
the filing thereof; or (vii) take any corporate action for the purpose of
effecting any of the foregoing;
(c) an order, judgment or decree shall be entered, without the
application, approval or consent of the Borrower or any Subsidiary by any
court of competent jurisdiction, approving a petition seeking
reorganization or liquidation of the Borrower or a Subsidiary or appointing
a receiver, trustee or liquidator of the Borrower or a Subsidiary or of all
or a substantial part of its assets;
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(d) any representation or warranty made by the Borrower or the
Subsidiaries hereunder or under any other Credit Document or in any
certificate, document or instrument furnished pursuant hereto or thereto
shall prove to have been false or incorrect in any material respect when
made;
(e) the failure of the Borrower or any Subsidiary to punctually
perform, observe, comply with or satisfy any covenant, agreement or
condition contained in this Agreement or any of the other Credit Documents
(other than those covenants, agreements or conditions referred to elsewhere
in this Article VI) and such failure continues for a period of ten (10) or
more days;
(f) the occurrence of any of the following: (i) any failure of the
Borrower punctually to perform, observe, comply with or satisfy the
provisions of Section 5.05 through 5.07 (inclusive), 5.10 through 5.20
(inclusive), and 5.23 through 5.29 (inclusive) of this Agreement; or (ii)
any failure with respect to any requirement of the Borrower or any
Subsidiary to give notice to the Bank as provided in any of the Credit
Documents;
(g) any failure of the Borrower or any of its Subsidiaries to perform
any covenant or agreement contained in any other agreement to which the
Borrower or such Subsidiary, whichever is applicable, is a party, or by
which the Borrower or such Subsidiary, whichever is applicable, is bound
involving a liability or obligation of the Borrower or such Subsidiary,
whichever is applicable, in excess of $100,000, which shall not be remedied
within the period of time (if any) within which such other agreement
permits such default to be remedied without the consent or waiver of the
other party thereto, unless such default is waived or excused as a matter
of law;
(h) the termination, revocation or curtailment by any of the
Subsidiaries of the Guaranty Agreement (or any provision contained
therein);
(i) any of the Security Documents shall, at any time after their
execution and delivery for any reason, cease: (i) to create a valid and
perfected first priority security interest in and to all of the collateral
pledged or granted thereunder; or (ii) to be in full force and effect or be
declared null and void;
(j) a material portion of the property of the Borrower or any of its
Subsidiaries is damaged by fire or other casualty, or otherwise lost or
stolen, the restoration or replacement cost of which property exceeds, in
the aggregate, the amount of insurance proceeds readily available for such
restoration or replacement, and such loss would have a material adverse
effect upon the Borrower and its Subsidiaries;
(k) the loss, suspension or revocation of any material governmental
license required or necessary in connection with the operation of the
business of the Borrower or any of its Subsidiaries;
(l) a judgment or judgments for the payment of money in excess of the
sum of $50,000 in the aggregate (not covered by insurance) shall be
rendered against the Borrower or any Subsidiary and such judgment or
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judgments shall remain unsatisfied and in effect for any period of sixty
(60) days without a stay of execution;
(m) there shall occur any material adverse change in the (i)
consolidated financial condition of the Borrower; or (ii) the financial
condition of any Subsidiary; or
(n) Any default shall exist and remains unwaived or uncured with
respect to any of the Canadian Debt or the UK Debt if, as a result of such
default, any holder of all or any portion of the Canadian Debt or the UK
Debt, is entitled to cause all or any portion of the Canadian Debt or the
UK Debt to become due prior to its stated date of maturity;
then and in every such event, while such event shall be continuing, the Bank may
(i) terminate the Credit with respect to further advances, whereupon no advances
may be made or L/Cs issued hereunder, and/or (ii) declare the Note to be
forthwith due and payable, whereupon the Notes shall forthwith become due and
payable without presentment, demand, protest or further notice of any kind, all
of which are expressly waived by the Borrower, and the right to borrow or
request the issuance of L/Cs hereunder shall terminate.
ARTICLE VII. MISCELLANEOUS
Section 7.01. Term of Agreement. This Agreement shall terminate whenever
both of the following conditions shall have been met: (i) all principal of and
interest on the Notes and all other amounts due and payable under this Agreement
have been paid and discharged in full and (ii) the Borrower shall have no
further right to borrow under this Agreement.
Section 7.02. Notices. Except as otherwise specifically provided in this
Agreement, all notices and other communications hereunder shall be in writing
and shall be delivered in person, mailed by United States registered or
certified first class mail, postage prepaid, sent by overnight courier, or
telexed, telegraphed, telecopied or telefaxed to the parties hereto addressed as
follows:
To the Bank: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
Attention: R. Scott Haskell, Vice President
Telecopier Number: (617) 664-6527
With copies to: Peabody & Arnold LLP
50 Rowes Wharf
Boston, Massachusetts 02110
Attention: Anil Khosla, Esq.
Telecopier Number: (617) 951-2125
To the Borrower: Applied Cellular Technology, Inc.
400 Royal Palm Way, Suite 410
Palm Beach, Florida 33480
Attention: Richard J. Sullivan, Chief Executive Officer
Telecopier Number: (561) 366-0002
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Jerome C. Artigliere
President, ACT Financial Corporation
10 Kady Lane
Kensington, NH 03833
Telecopier Number: (603) 778-8981
With copies to: Bryan Cave LLP
One Metropolitan Square
211 N. Broadway
St. Louis, Missouri 63102
Attention: Llewellyn Sale, Esq.
Telecopier Number: (314) 259-2020
Any such notice or demand shall be deemed to have been duly given or made
and to have become effective (a) if delivered by hand or overnight courier, or
sent by telegraph, telecopy, facsimile or telex, at the time of the receipt
thereof or the sending of such telegraph, telecopy, facsimile or telex, if
during normal business hours on a Business Day, and (b) if sent by registered or
certified first-class mail, postage prepaid, on the third Business Day following
the mailing thereof.
Section 7.03. No Waiver. No failure to exercise, and no delay in
exercising, on the part of the Bank, any right, power or privilege hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided are cumulative and not exclusive of any rights or
remedies provided by law.
Section 7.04. Construction. This Agreement and the Note shall each be
deemed to be a contract made under the laws of The Commonwealth of
Massachusetts, and shall be construed in accordance with the laws of The
Commonwealth of Massachusetts (excluding conflicts of law provisions). The
descriptive headings of the several Sections hereof are for convenience only and
shall not control or affect the meaning or construction of any of the provisions
hereof. This Agreement, together with the Exhibits, Schedules hereto and all
documents, certificates instruments and agreements executed pursuant hereto,
constitutes the entire agreement and understanding between the parties hereto
with respect to the subject matter hereof, supersedes all prior agreements,
understandings or representations pertaining to the subject matter hereof,
whether oral or written, and may not be contradicted by evidence of any alleged
oral agreement.
Section 7.05. Amendments, Waivers and Consents; No Assignment. Compliance
by the Borrower with any term, covenant or condition of this Agreement may be
omitted or waived (either generally or in a particular instance and either
retroactively or prospectively) only by a consent or consents in writing signed
by the Bank.
This Agreement shall be binding upon and inure to the benefit of the
Borrower and the Bank and their respective successors and permitted assigns. The
Bank may sell, assign or otherwise transfer all or any portion of its right,
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title and interest in, and its obligations under, this Agreement and the Credit,
or grant participation interests in its right, title and interest herein and
therein. The Borrower may not assign or transfer its rights or obligations
hereunder.
Section 7.06. Closing. The closing of the Credit shall take place at 9:00
a.m. on the date hereof (the "Closing Date"), at the offices of Peabody & Arnold
LLP, 50 Rowes Wharf, Boston, Massachusetts 02110, or such place as the parties
hereto may agree.
Section 7.07. Consent to Jurisdiction. The Borrower and any Guarantor of
the Borrower's obligations under this Agreement irrevocably consents and submits
to the non-exclusive jurisdiction of the Superior Court in The Commonwealth of
Massachusetts and the United States District Court for the Eastern District of
Massachusetts in connection with any action, proceeding or claim arising out of
or relating to this Agreement or other document executed in connection with this
Agreement. In any such litigation, the Borrower and all guarantors waive
personal service and agree that service may be made by certified mail directed,
in the case of the Borrower, to the location specified for notices under this
Agreement and, in the case of any guarantor, to its last known address.
Section 7.08. Waiver of Jury Trial. THE BORROWER AND THE BANK HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF ANY OF THE CREDIT DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.
Section 7.09 Indemnity. The Borrower hereby indemnifies and agrees to hold
harmless the Bank (exclusive of the Bank's cost of funds and allocation of
overhead and salaries), any other financing institutions that participate in the
Credit, and each of their directors, officers, agents, employees and counsel,
from and against any and all losses, claims, damages, liabilities or expenses
imposed on or incurred by any of them in connection with the lending
relationship reflected in this Agreement except as a result of any indemnified
party's gross negligence or willful misconduct. This indemnity shall survive
termination of the Agreement.
Section 7.10. Setoff. Any sums due from the Bank to the Borrower and any
property of the Borrower in the possession of the Bank may be held and treated
as collateral security for the payment of the obligations of the Borrower to the
Bank and upon the occurrence of any Event of Default and while such Event of
Default is continuing, may be applied to the payment of such obligations
regardless of the adequacy of other collateral. Any sums due from any financing
institution that may participate in the Credit or property of the Borrower in
the possession of such institution may be held as collateral security for the
payment of the obligations of the Borrower to the Bank as if such institution
had extended the Credit directly to the Borrower and, upon the occurrence of an
Event of Default and while such Event of Default is continuing, may be applied
to the payment of such obligations regardless of the adequacy of other
collateral.
Section 7.11. Reliance on Representations and Actions of the Borrower. The
Borrower hereby agrees that the Bank may rely upon any representation, warranty,
40
<PAGE>
certificate, notice, document or telephone request which purports to be executed
or made or which the Bank in good faith believes to have been executed or made
by the Borrower or any of its executive officers, and the Borrower hereby
further agrees to indemnify and hold harmless the Bank for any action, including
the making of Revolving Credit Advances hereunder, and any loss or expense taken
or incurred by the Bank as a result of its good faith reliance upon any such
representation, warranty, certificate, notice, document or telephone request.
Section 7.12. Participation. The Bank may grant participation in the Credit
to other financial institutions. The Borrower invites any financial institution
which may consider investing or participating in the Credit (each such financing
institution being referred to in this Section as a "Participant") to rely upon
all of the representations, warranties, covenants and other provisions of this
Agreement, the Note and the other Credit Document and agreements, instruments
and documents referred to herein or contemplated hereby in making such
investment or participation and agrees that its becoming a Participant in the
Credit shall constitute an acceptance of such offer and shall make the
Participant a creditor of the Borrower. Any Participant may exercise the rights
of set-off given to the Bank in this Agreement with respect to any outstanding
Indebtedness of the Borrower to such Participant hereunder.
[THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK]
41
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal as of the date first above written.
WITNESS: APPLIED CELLULAR TECHNOLOGY, INC.
/s/ Scott R. Silverman
- -------------------------------- By: /s/ Richard J. Sullivan
Name: ------------------------------------
Richard J. Sullivan
Chairman and Chief Executive Officer
WITNESS: STATE STREET BANK AND TRUST COMPANY
/s/ Susan Neel Morrison
- --------------------------------- By: /s/ R. Scott Haskell
Name: ------------------------------------
R. Scott Haskell, Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's interim unaudited condensed consolidated financial statements as of
and for the nine months ended September 30, 1998, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000924642
<NAME> Applied Cellular Technology, Inc.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 5,407,000
<RECEIVABLES> 39,867,000
<SECURITIES> 0
<ALLOWANCES> 913,000
<INVENTORY> 19,842,000
<CURRENT-ASSETS> 70,294,000
<PP&E> 30,077,000
<DEPRECIATION> 14,076,000
<TOTAL-ASSETS> 122,216,000
<CURRENT-LIABILITIES> 47,557,000
<BONDS> 0
0
0
<COMMON> 34,000
<OTHER-SE> 68,173,000
<TOTAL-LIABILITY-AND-EQUITY> 122,216,000
<SALES> 150,470,000
<TOTAL-REVENUES> 151,508,000
<CGS> 91,779,000
<TOTAL-COSTS> 104,617,000
<OTHER-EXPENSES> 38,041,000
<LOSS-PROVISION> 168,000
<INTEREST-EXPENSE> 1,127,000
<INCOME-PRETAX> 8,036,000
<INCOME-TAX> 2,763,000
<INCOME-CONTINUING> 5,273,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,646,000
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
Exhibit 99.1
CAUTIONARY STATEMENTS
Certain statements in this quarterly report on Form 10-Q of Applied
Cellular Technology, Inc. (the "Company"), and the documents incorporated by
reference herein, constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995,
and the Company intends that such forward-looking statements be subject to the
safe harbors created thereby. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: the continued ability of the Company to sustain its growth through
product development and business acquisitions; the successful completion and
integration of future acquisitions; the ability to hire and retain key
personnel; the continued development of the Company's technical, manufacturing,
sales, marketing and management capabilities; relationships with and dependence
on third-party suppliers; anticipated competition; uncertainties relating to
economic conditions where the Company operates; uncertainties relating to
government and regulatory policies; uncertainties relating to customer plans and
commitments; rapid technological developments and obsolescence in the industries
in which the Company operates and competes; potential performance issues with
suppliers and customers; governmental export and import policies; global trade
policies; worldwide political stability and economic growth; the highly
competitive environment in which the Company operates; potential entry of new,
well-capitalized competitors into the Company's markets; changes in the
Company's capital structure and cost of capital; and uncertainties inherent in
international operations and foreign currency fluctuations. The words "believe",
"expect", "anticipate", "intend" and "plan" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date the statement
was made.
RISK FACTORS
In addition to the other information contained herein, the following
factors should be considered carefully in evaluating the Company and its
business.
Uncertainty of Future Financial Results
While the Company has been profitable for the last three fiscal years,
future financial results are uncertain. There can be no assurance that the
Company will continue to be operated in a profitable manner. Profitability
depends upon many factors, including the success of the Company's various
marketing programs, the maintenance or reduction of expense levels and the
ability of the Company to successfully coordinate the efforts of the different
segments of its business.
Future Sales of and Market for the Shares
As of November 6, 1998, the Company had 33,771,952 shares of Common Stock
outstanding. In addition, 3,753,472 shares are reserved for issuance in exchange
99-1
<PAGE>
for the exchangeable shares of Commstar Limited and in exchange for certain
exchangeable shares to be issued by ACT-GFX Canada, Inc., a wholly-owned
subsidiary of the Company. Since January 1, 1998, the Company has issued or
reserved an aggregate of 17,132,018 shares of Common Stock, of which 11,953,749
shares of Common Stock were issued in acquisitions, 3,753,472 shares of Common
Stock are reserved for issuance upon exchange or redemption of exchangeable
shares issued in acquisitions, 850,000 shares of Common Stock were issued upon
the exercise of warrants, 100,000 shares of Common Stock were sold to an officer
of the Company, and 474,797 shares were issued for services rendered, including
services under employment agreements and employee bonuses.
Management of the Company anticipates that the Company will continue to
effect acquisitions and contract for certain services primarily through the
issuance of Common Stock or other equity securities of the Company. Such
issuance's of additional securities may be viewed as being dilutive of the value
of the Common Stock in certain circumstances and may have an adverse impact on
the market price of the Common Stock.
Lack of Dividends on Common Stock; Issuance of Preferred Stock
The Company does not have a history of paying dividends on its Common
Stock, and there can be no assurance that such dividends will be paid in the
foreseeable future. The Company intends to use any earnings which may be
generated to finance the growth of the Company's businesses. The Board of
Directors has the right to authorize the issuance of preferred stock, without
further shareholder approval, the holders of which may have preferences as to
payment of dividends.
Potential Conflicts of Interests
Mr. Richard Sullivan, the Chairman and Chief Executive Officer of the
Company, is also Chairman of Great Bay Technology, Inc. and Managing General
Partner of the Bay Group. Both these companies have, in the past, conducted
business with the Company, and received compensation from the Company for
various services, including assistance in identifying potential acquisition
candidates and in negotiating acquisition transactions. The relationships among
such companies, Mr. Sullivan and the Company may involve conflicts of interest.
Since July 1, 1998, the Company has ceased doing business with Great Bay
Technology, Inc. and the Bay Group.
Possible Volatility of Stock Price
The Common Stock is quoted on the Nasdaq National Market, which stock
market has experienced and is likely to experience in the future significant
price and volume fluctuations which could adversely affect the market price of
the Common Stock without regard to the operating performance of the Company. In
addition, the Company believes that factors such as the significant changes to
the business of the Company resulting from continued acquisitions and
expansions, quarterly fluctuations in the financial results of the Company,
shortfalls in earnings or sales below analyst expectations, changes in the
performance of other companies in the same market sectors as the Company and the
performance of the overall economy and the financial markets could cause the
price of the Common Stock to fluctuate substantially.
99-2
