UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1999
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-28260
EP MEDSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-3212190
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Stierli Court, Mount Arlington, New Jersey 07856
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 398-2800
Check whether the issuer (1) has filed all reports required to be filed
bySection 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. _X_Yes ___No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common Stock, no par value, 9,872,417
shares outstanding at May 8, 1999.
Transitional Small Business Disclosure Format: Yes___ No _X_
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PART I. -- Financial INFORMATION Page
-----------
Item 1. Financial Statements
Consolidated Balance Sheet at March 31, 1999
(unaudited) 3
Consolidated Statements of Operations for three months
ended March 31, 1999 and 1998(unaudited) 4
Consolidated Statements of Cash Flows for three months
ended March 31, 1999 and 1998 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6-7
Item 2. Management's Discussion and Analysis or Plan of
Operation 7-12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Secure 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit Index 14
2
PART I.-- FINANCIAL INFORMATION
Item 1. Financial Statements
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31,
ASSETS 1999
-------------
Current assets: (unaudited)
Cash and cash equivalents $ 1,691,504
Short-term investments 729,351
Accounts receivable, net of allowances for
Doubtful accounts of $99,275 2,362,435
Inventories 1,828,321
Prepaid expenses and other current assets 135,782
-------------
Total current assets 6,747,393
Property and equipment, net 1,289,519
Intangible assets, net 543,388
Other assets 9,423
-------------
Total assets $ 8,589,723
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 796,237
Payables due to related parties 445,744
Accrued expenses 432,939
Deferred revenue 82,500
Customer deposits 46,572
Current portion of long-term debt 47,514
------------
Total current liabilities 1,851,506
Long-term debt, less current portion 475,000
------------
Total liabilities $ 2,326,506
------------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, no par value, 5,000,000 shares
authorized, no shares issued and outstanding --
Common stock, $.001 stated value, 25,000,000
shares authorized, 9,872,417 shares issued
and outstanding 9,872
Additional paid-in capital 21,432,375
Accumulated deficit (15,179,030)
-------------
Total shareholders' equity 6,263,217
=============
Total liabilities and shareholders' equity $ 8,589,723
=============
The accompanying notes are an integral part of these statements.
3
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months Ended
March 31, March 31,
1999 1998
-------------- --------------
Sales $ 2,534,411 $ 1,454,609
Cost of products sold 1,193,166 886,806
-------------- --------------
Gross profit 1,341,245 567,803
Operating costs and expenses:
Sales and marketing expenses 1,070,547 699,786
General and administrative expenses 597,579 348,267
Research and development expenses 444,737 349,351
-------------- --------------
Loss from operations (771,618) (829,601)
Interest income, net 27,54 34,215
=============== ==============
Net loss $ (744,071) $ (795,386)
=============== ==============
Basic loss per share $ (0.08) $ (.10)
=============== ==============
Diluted loss per share $ (0.08) $ (.10)
=============== ==============
Weighted average shares outstanding
used to compute basic and diluted
loss per share 9,872,417 7,599,917
=============== ==============
The accompanying notes are an integral part of these statements.
4
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Three Months Ended
March 31, March 31,
1999 1998
-------------- --------------
Cash flows from operating activities:
Net loss $ (744,071) (795,386)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 57,974 67,028
Changes in assets and liabilities:
(Increase) in accounts receivable (56,937) (129,488)
(Increase) decrease in inventories (27,630) 98,962
Decrease (increase) in prepaid and other
current assets 16,113 (35,381)
Decrease in other assets 10,000 32,801
Increase in payables due to related parties 256,955 18,569
Increase in accounts payable 23,598 5,782
(Decrease) in accrued expenses, deferred
revenue and customer deposits (150,078) (253,769)
-------------- --------------
Net cash used in operating activities $ (614,076) (990,882)
-------------- --------------
Cash flows from investing activities:
Proceeds of held to maturity investments -- 759,937
Patent costs -- (20,541)
Capital expenditures (534,851) (58,866)
-------------- --------------
Net cash provided by investing
activities $ (534,851) 680,530
-------------- --------------
Cash flows from financing activities:
Net borrowings under note payable 507,500 --
-------------- --------------
Net cash provided by financing
activities $ 507,500 --
-------------- --------------
Net (decrease) in cash and cash
equivalents (641,427) (310,352)
Cash and cash equivalents, beginning of
period 2,332,931 752,068
-------------- --------------
Cash and cash equivalents, end of period $ 1,691,504 441,716
============== ==============
The accompanying notes are an integral part of these statements.
5
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-QSB.
Accordingly, they do not include all of the financial information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (including normal
recurring adjustments) considered necessary for a fair presentation have been
included.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The results of operations for the respective interim periods are not necessarily
indicative of the results to be expected for the full year. The accompanying
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and the notes thereto included in
the Company's Form 10-KSB for the year ended December 31, 1998 filed with the
Securities and Exchange Commission.
Note 2. Net Loss Per Common Share
Effective for the year ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). The
Company's basic and diluted earnings per share are equal, due to the exclusion
of common stock equivalents, which would make the earnings per share
calculations anti-dilutive.
Note 3. Inventories
Inventories consist of the following:
March 31, 1999
Raw materials $ 941,825
Work in process 46,621
Finished goods 839,875
--------------
$ 1,828,321
==============
Note 4. Long-Term Debt
Effective March 31, 1999, the Company entered into two debt agreements with a
bank: a $2,000,000 revolving line of credit ("revolver") and a $500,000 term
note.
6
The proceeds of the revolver, when drawn down are intended to fund future
working capital needs. Borrowings bear interest at either the bank's Prime Rate
plus 1/2% or LIBOR plus 3%. A facility fee is payable quarterly on the average
unused commitment at a rate of 3/4%.
The purpose of the term note is to fund the purchase of 7,500 square feet of
manufacturing and warehouse space at the Company's ProCath subsidiary and
building improvements. Interest is payable monthly in arrears at either Prime
plus 3/4% or LIBOR plus 3 1/4%. Principal is payable commencing January 2000 in
48 equal monthly installments under a 15 year amortization schedule with a
balloon payment due in December 2004.
The Company is required to maintain certain financial ratios, and meet certain
net worth and indebtedness tests. The debt is collateralized by a first priority
lien on all corporate assets. The agreement also prohibits the Company from
incurring certain additional indebtedness, limits investments, advances or loans
and restricts substantial asset sales, capital expenditures and cash dividends.
Item 2. Management's Discussion and Analysis or Plan of Operation
Overview
The Company was incorporated in New Jersey in January 1993 and operates in a
single industry segment. The Company develops, manufactures, markets and sells a
line of products for the cardiac electrophysiology ("EP") market used to
diagnose, monitor and treat irregular heartbeats known as arrhythmias. Since
inception, the Company has acquired technology, has developed new products and
has begun marketing various electrophysiology products, including the EP
WorkMate[REGISTERED] electrophysiology workstation, the EP-3[TRADEMARK]
Stimulator, diagnostic electrophysiology catheters, internal cardioversion
catheters and related disposable supplies.
The Company has developed a new product for internal cardioversion of atrial
fibrillation known as the ALERT[REGISTERED] System, which uses a patented
electrode catheter to deliver measured, variable, low energy electrical impulses
directly to the inside of the heart in order to convert atrial fibrillation to a
normal heart rhythm. The ALERT[REGISTERED] System is not approved for sale in
the United States, but is currently undergoing clinical trials. The Company
intends to market a full family of internal cardioversion catheters around the
ALERT[REGISTERED] platform.
The Company has also developed an intracardiac ultrasound product line including
the ViewMate[TRADEMARK] ultrasound imaging console and U-View[TRADEMARK]
deflectable intracardiac imaging catheter. These products are designed to
improve a physician's ability to visualize inside the chambers of the heart,
including the internal anatomy of the heart. The Company believes that the
ViewMate[TRADEMARK] and U-View[TRADEMARK] may play an important role as new and
effective treatment options are developed for the treatment of complex cardiac
arrhythmias, including ventricular tachyarrhythmia and atrial fibrillation. The
7
Company's ultrasound products are not approved for sale and the Company does not
anticipate receiving approval to sell the ViewMate[TRADEMARK] or
U-View[TRADEMARK] for at least several months, if approved at all.
Forward-Looking Statements
This report contains certain statements of a forward-looking nature relating to
such matters as anticipated financial and operational performance, business
prospects, technological developments, results of clinical trials, new products,
research and development activities and similar matters. Stockholders are
cautioned that such statements are only predictions and that actual events or
results may differ materially. In evaluating such statements, prospective
investors should specifically consider the various factors effecting the
industry and economy generally, as well as those identified in this report and
in the Company's other reports filed with the Securities and Exchange
Commission, which could cause actual results to differ materially from those
indicated by such forward-looking statements.
RESULTS OF OPERATIONS
Three months ended March 31, 1999 compared to three months ended March 31, 1998
Sales increased $1,080,000 (or 74%) in the three months ended March 31, 1999 as
compared to the prior period in 1998. The majority of the increase in revenue in
the quarter resulted from increased sales of the EP WorkMate[REGISTERED], which
represented a substantial percentage of sales during the three-month period in
1999. The Company also realized increased sales of certain of its catheter
products during the period.
The level of sales for the remaining nine months of 1999 will depend materially
on sales of the EP WorkMate[REGISTERED] and diagnostic catheters and the ability
of the Company's direct sales force and network of international independent
distributors to effectively market and sell the Company's existing products. The
ALERT[REGISTERED] System is currently undergoing clinical trials and is not
approved for sale in the United States. The ALERT[REGISTERED] System has been
introduced for sale in Europe. However, the Company cannot accurately determine
the sales level of the ALERT[REGISTERED] System for the remaining quarters in
1999 at this time or when it will be available at all in the United States. The
Company expects the ALERT[REGISTERED] System to contribute a greater proportion
of revenues in the second half of 1999 and beyond.
Cost of products sold increased $306,000 (or 35%) due to the 74% increase in
sales for the three months ended March 31, 1999 as compared to 1998. Gross
profit on sales for the three months ended March 31, 1999 was $1,341,000 (or 53%
as a percentage of sales), as compared with $568,000 (or 39% as a percentage of
product sales) for the comparable period in 1998. The Company realized an
increase in gross profit on sales of existing products during first quarter 1999
primarily due to increased sales of the EP WorkMate, which currently yields a
higher gross margin than certain of the Company's other products. The Company
8
hopes to improve its overall gross profit percentage as sales of the
ALERT[REGISTERED] System and other catheter products increase, which may offset
the fixed costs associated with maintaining a catheter manufacturing operation.
Sales and marketing expenses increased $371,000 (or 53%), but decreased as a
percentage of revenue from product sales from 48% to 42% in the three months
ended March 31, 1999 as compared to 1998. The dollar increase during first
quarter 1999 was primarily due to the impact of expanding the domestic sales
force from 6 employees as of March 31, 1998 to 9 employees as of March 31, 1999
and the increase in travel, trade show related expenses, product promotion and
physician educational materials in support of its sales efforts. The
international distribution network is currently supported by a team of direct
international sales and marketing professionals, international field clinical
engineers and administrative support personnel.
General and administrative expenses increased $249,000 (or 72%) and remained at
24% of sales revenue in the three months ended March 31, 1999 as compared to
1998. The increase during first quarter 1999 was due to increased personnel,
occupancy and other administrative costs necessary to support the increased
operations. It is anticipated that these expenses may decline as a percentage of
revenues as incremental sales are generated.
Research and development expenses increased $95,000 (or 27%)%), but decreased as
a percentage of revenue from product sales from 23% to 18% in the three months
ended March 31, 1999 as compared to 1998. in the three months ended March 31,
1999 as compared to 1998. During the three months ended March 31, 1999, the
Company incurred research and development expenses in connection with ongoing
development efforts on existing products, including the EP WorkMate[REGISTERED],
costs associated with the clinical trials for the ALERT[REGISTERED] System,
development costs and costs of preparing regulatory submissions for the new
ultrasound imaging product line, as well as costs associated with several new
products under development. The Company expects that research and development
expenses are likely to increase in future periods, in part due to ongoing
expenses related to the ALERT[REGISTERED] System clinical trials, new product
development activities and regulatory applications aimed at gaining approval to
sell other new products.
The net loss for the three months ended March 31, 1999 was $744,000 as compared
to a net loss of $795,000 during the comparable period in first quarter 1998.
The basic and diluted loss per share for the three months ended March 31, 1999
was $0.08 per share as compared to $.10 in first quarter 1998.
Liquidity and Capital Resources
Since inception, the Company's expenses have exceeded its sales, resulting in an
accumulated deficit of approximately $15,179,000 at March 31, 1999.
The Company entered into two financing arrangements in March of 1999 with a
bank: a $2,000,000 revolving line of credit and a $500,000 term loan. Management
believes that its current liquidity position will be sufficient to meet the
9
needs of the Company until at least March 31, 2000. In the event that it cannot
generate additional capital funds during 1999, the Company believes that it can
reduce non-core related expenditures, which will allow it to continue in its
operations for a significant period.
Net cash used in operating activities for the three months ended March 31, 1999
decreased $377,000 (or 38%) as compared to 1998. The net use of cash in
operations during first quarter 1999 was primarily due to the Company's loss
from operations. Payables to related parties increased $257,000 due to an
increase in purchases of components for the Alert[REGISTERED] System. Payments
to related parties are made on terms similar to those of other suppliers.
Accrued expenses payable decreased by $150,000.
Capital expenditures, were $535,000 during first quarter 1999 as compared to
$59,000 in first quarter 1998. During February 1999, the Company purchased an
additional 7,500 square feet of manufacturing and warehouse space at ProCath for
a purchase price of approximately $400,000. Costs to prepare the space for
intended use are estimated to be $100,000. This purchase was financed via a
$500,000 term loan executed subsequent to December 31, 1998. The purchase
provided for expansion of the existing manufacturing operations, additional
warehousing, shipping and quality assurance activities and relocation of
ProCath's administrative offices.
Net borrowings under note payable increased $508,000 as compared to first
quarter 1998 due to the proceeds the Company received from the $500,000 term
loan.
As of the date of this Report on Form 10-QSB, the Company does not have any
other material commitments for capital expenditures. However, the Company
expects to purchase capital equipment and to expand its manufacturing and
assembly capabilities as it continues to grow. The Company leases office and
manufacturing space and certain office equipment under operating leases.
During February 1997, the Company licensed the rights to several ultrasound
technologies from EchoCath, for use in the field of electrophysiology. The
agreement with EchoCath calls for the Company to make payments totaling up to a
maximum of $700,000, in four installments, as certain development milestones and
initial sales are achieved on the EchoMark and EchoEye technologies. One of the
milestones calls for a $400,000 payment payable upon the completion of a
development program for the EchoEye. This milestone was only payable in the
event that the development was completed by September 30, 1998. To the best of
the Company's knowledge, the milestone was not achieved and no milestone
payments are accrued or payable to EchoCath as of March 31, 1999.
The Company expects its operating losses to continue in the near future as it
will continue to expend substantial funds for research and development, clinical
trials in support of regulatory approvals, increased manufacturing capacity and
expansion of sales and marketing activities. The amount and timing of future
losses will be dependent upon, among other things, increased sales of the
Company's existing products, clinical approval and market acceptance of the
ALERT[REGISTERED] System and developmental, regulatory and market success of new
10
products under development. There can be no assurance that any of the Company's
development projects will be successful or that if development is successful,
that the products will generate any sales. Based upon its current plans and
projections, the Company believes that its existing capital resources will be
sufficient to meet its anticipated capital needs for at least the next twelve
months.
Year 2000 Readiness
The Year 2000 issue could affect computers, software and other equipment used,
operated or maintained by the Company. The Company has substantially completed a
review of its internal computer programs and systems to ensure that the programs
and systems will be Year 2000 compliant. The Company presently believes that,
based on current plans and efforts to date, its internal programs and systems
will be Year 2000 compliant in a timely manner.
The Year 2000 issue can also affect products sold by the Company, particularly
the EP WorkMate[REGISTERED] and ALERT[REGISTERED] Companion. The Company has
performed an assessment of its products and, as a result of this review,
believes that it has substantially identified and resolved the potential Year
2000 issues with these products. However, the Company also believes that it is
not possible to determine with complete certainty that all Year 2000 issues
affecting the Company's products have been identified or corrected due to the
complexity of these products and the fact that these products interact with
other third party products or operate on computer systems which are not under
the Company's control.
The Company believes that its greatest Year 2000 risk for disruption to its
business is the potential noncompliance of third parties. In this regard, the
Company has initiated communications with its vendors, major customers and
service providers in order to determine the extent to which the Company's
business is vulnerable to the third parties' failure to make their systems Year
2000 compliant. Since the Company has no control over the actions of these third
parties, there can be no assurance that these third parties will resolve any or
all Year 2000 issues. Any failure of these third parties to resolve Year 2000
issues in a timely manner could have a material adverse effect on the Company's
financial condition and results of operations.
The Company currently does not have a contingency plan in the event that
particular systems, including the systems of material third parties, are not
Year 2000 compliant. It is intended that such a plan will be developed if it
becomes clear that the Company is not going to achieve its scheduled compliance
objectives. Although no assurance can be given that there will be no
interruption of operations as a result of the Year 2000 issue, the Company
believes and assuming that third parties with whom the Company has material
business relationships successfully remediate their own Year 2000 issues) that
it has reasonably assessed its systems in order to ensure that the Company will
not suffer any material adverse effect from the Year 2000 issue. Though the
Company has used and will continue to use internal resources to resolve its Year
2000 issues, the Company may retain third party consultants to assist in this
regard.
11
Costs specifically associated with Year 2000 compliance are expensed as
incurred. To date, the Company has not spent a material amount on this project.
The Company does not expect the total costs relating to Year 2000 compliance to
have a material effect on the Company's results of operations or financial
condition. However, the total costs that the Company will incur in connection
with the Year 2000 issue will be influenced by (i) its ability to successfully
identify Year 2000 issues, (ii) the nature and amount of programming required to
remediate the issues, (iii) the related labor and/or consulting costs for such
remediation and (iv) the ability of third parties with whom the Company has
business relationships to successfully address their own Year 2000 concerns.
These and other unforeseen factors could have a material adverse effect on the
Company's results of operations or financial condition.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
During October 1997, the Company filed a lawsuit against EchoCath in the United
States District Court for the District of New Jersey alleging, among other
things, that EchoCath made fraudulent misrepresentations and omissions in
connection with the prior sale of $1,400,000 of its preferred stock to the
Company.
EchoCath filed an answer to the complaint, denying the allegations and asserting
a counterclaim against the Company seeking its costs and expenses in the action.
EchoCath also filed a motion to dismiss the complaint. During October 1998, the
complaint was dismissed by the District Court. The Company is appealing the
decision. The Company believes that EchoCath's counterclaim and request for
reimbursement of its costs and expenses is without merit. As a result, the
Company has not accrued for such costs and expenses at March 31, 1999. In the
opinion of management, the ultimate resolution of the counterclaim will not have
a material adverse impact of the Company's financial condition or results of
operations. The Company cannot determine the outcome of the EchoCath litigation
at this time.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
12
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits will be filed as part of this Form 10-QSB:
Exhibit 10.34 Loan and Security Letter Agreement dated
March 31, 1999 between Fleet National Bank
and the Company
Exhibit 27 Financial Data Schedule (SEC filing only)
(b) Reports on Form 8-K
None
13
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EP MEDSYSTEMS, INC.
(Registrant)
Date: May 11, 1999 By: /s/ David A. Jenkins
David A. Jenkins
President and Chief Executive Officer
Date: May 11, 1999 By: /s/ Joseph M. Turner
Joseph M. Turner
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------------- -------------------------------------------
Exhibit 10.34 Loan and Security Letter Agreement dated March 31, 1999
between Fleet National Bank and the Company
Exhibit 27 Financial Data Schedule
(SEC filing only)
14
EXHIBIT 10.34
EP MEDSYSTEMS, INC.
100 Stierli Court
Mount Arlington, New Jersey 07856
March 31, 1999
Fleet National Bank
One Federal Street, 7th Floor
Boston, MA 02110
Ladies and Gentlemen:
This Loan and Security Letter Agreement (the "Letter Agreement") will set
forth certain understandings between EP MedSystems, Inc., a New Jersey
corporation (the "Borrower") and Fleet National Bank (the "Bank") with respect
to Revolving Loans and Term Loans (each as hereinafter defined) which may be
made by the Bank to the Borrower and with respect to letters of credit which may
hereinafter be issued by the Bank for the account of the Borrower. In
consideration of the mutual promises contained herein and in the other documents
referred to below, and for other good and valuable consideration, receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as
follows:
I. AMOUNTS AND TERMS
1.1 Reference to Documents. Reference is made to: (i) that certain
$2,000,000 face principal amount revolving promissory note (the "Revolving
Note") of even date herewith made by the Borrower and payable to the order of
the Bank; (ii) that certain $500,000 face principal amount term promissory note
(the "Term Note") of even date herewith made by Borrower and payable to the
order of the Bank; (iii) the Disclosure Schedule to this Letter Agreement of
even date herewith; and (iv) the Closing Agenda, of even date herewith.
1.2 Revolving Loans; Revolving Note. Subject to the terms and conditions
hereinafter set forth, the Bank will make loans ("Revolving Loans") to the
Borrower, in such amounts as the Borrower may request, on any Business Day prior
to the first to occur of (i) the Expiration Date, or (ii) the earlier
termination of the within-described revolving financing arrangements pursuant to
[SECTION]5.2 or [SECTION]6.7; provided, however, that (1) the aggregate
principal amount of Revolving Loans outstanding shall at no time exceed the
Maximum Revolving Amount (hereinafter defined) and (2) the Aggregate Revolving
Bank Liabilities (hereinafter defined) shall at no time exceed the Borrowing
Base (hereinafter defined). Within such limits, and subject to the terms and
conditions hereof, the Borrower may obtain Revolving Loans, repay Revolving
Loans and obtain Revolving Loans again on one or more occasions. The Revolving
Loans shall be evidenced by the Revolving Note and interest thereon shall be
payable at the times and at the rate provided for in the Revolving Note. Overdue
principal of the Revolving Loans and, to the extent permitted by law, overdue
interest shall bear interest at a fluctuating rate per annum which at all times
shall be equal to the sum of (i) four (4%) percent per annum plus (ii) the per
annum rate otherwise payable under the Revolving Note (but in no event in excess
of the maximum rate from time to time permitted by then applicable law),
compounded monthly and payable on demand. The Borrower hereby irrevocably
authorizes the Bank to make or cause to be made, on a schedule attached to the
Revolving Note or on the books of the Bank, at or following the time of making
each Revolving Loan and of receiving any payment of principal, an appropriate
notation reflecting such transaction and the then aggregate unpaid principal
balance of the Revolving Loans. The amount so noted shall constitute presumptive
evidence as to the amount owed by the Borrower with respect to principal of the
Revolving Loans. Failure of the Bank to make any such notation shall not,
however, affect any obligation of the Borrower or any right of the Bank
hereunder or under the Revolving Note.
1.3 Repayment; Renewal of Revolving Loan Facility. The Borrower shall
repay in full all Revolving Loans and all interest thereon upon the first to
occur of: (i) the Expiration Date, or (ii) an acceleration under [SECTION]5.2(a)
following an Event of Default. The Borrower may repay at any time, without
penalty or premium, the whole or any portion of any Revolving Loan. In addition,
if at any time the Borrowing Base is in an amount which is less than the then
outstanding Aggregate Revolving Bank Liabilities, the Borrower will forthwith
prepay so much of the Revolving Loans as may be required (or arrange for
termination of such letters of credit as may be required) so that the Aggregate
Revolving Bank Liabilities will not exceed the Borrowing Base. The Bank may, at
its sole discretion, renew the revolving financing arrangements described in
this Letter Agreement by extending the Expiration Date in a writing signed by
the Bank and accepted by the Borrower. Neither the inclusion in this Letter
Agreement or elsewhere of covenants relating to periods of time after the
Expiration Date, nor any other provision hereof, nor any action (except a
written extension pursuant to the immediately preceding sentence), non-action or
course of dealing on the part of the Bank will be deemed an extension of, or
agreement on the part of the Bank to extend, the Expiration Date.
1.4 Term Loans: Term Note. In addition to the foregoing, the Bank may make
one or more loans (the "Term Loans") to the Borrower in an aggregate principal
amount up to $500,000. A Term Loan shall be made, no more than once per calendar
quarter (except that more than one Term Loan may be made in any calendar quarter
provided that any additional Term Loan in any one calendar quarter is in an
amount of at least $250,000), in order to finance costs of Qualifying Equipment
or Qualifying Real Property acquired by the Borrower within the 90 days
preceding the request for such Term Loan, each Term Loan to be in such amount as
may be requested by the Borrower; provided that (i) no Term Loan will be made
after the earlier of (A) December 31, 1999 or (b) the earlier termination of the
within-described term loan facility, pursuant to [SECTION]5.2 or [SECTION]7.7;
(ii) the aggregate original principal amounts of all Term Loans will not exceed
$500,000; and (iii) no Term Loan will be in an amount more than 80% of the Fair
Market Value of Qualifying Real Property (excluding appraisals, environmental
assessments and reports, insurance and other closing costs); or 80% of the
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invoiced actual costs of the tangible property of equipment and/or fixtures
constituting the items of Qualifying Equipment with respect to which such Term
Loan is made (excluding taxes, shipping, software, installation charges,
training fees and other "soft costs"); or 30% of the invoiced actual costs of
software. Prior to the making of each Term Loan, and as a precondition thereto,
the Borrower will provide the Bank with: (i) appraisals, environmental
assessments and reports, title reports and other information of the relevant
Qualifying Real Property or invoices supporting the costs of the relevant
Qualifying Equipment; or (ii) such evidence as the Bank may reasonably require
showing that the Qualifying Equipment has been delivered to and installed at the
Premises, has become fully operational, has been paid for by the Borrower and is
owned by the Borrower free of all liens and interests of any other Person (other
than the security interest of the Bank provided for herein); or (iii) Uniform
Commercial Code financing statements. If needed, reflecting the relevant
Qualifying Equipment or Qualifying Real Property with respect to which such Term
Loan is being made; and (iv) evidence Satisfactory to the Bank that the
Qualifying Equipment or Qualifying Real Property is fully insured against
casualty loss, with insurance naming the Bank as secured party and first loss
payee. The Term Loans will be evidenced by the Term Note. Interest on the Term
Loans shall be payable at the times and at the rate provided for in the Term
Note. Overdue principal of any Term Loan and, to the extent permitted by law,
overdue interest shall bear interest at a fluctuating rate per annum which at
all times shall be equal to the sum of (i) four (4%) percent per annum plus (ii)
the per annum rate otherwise payable under the Term Note (but in no event in
excess of the maximum rate from time to time permitted by then applicable law),
compounded monthly and payable on demand. The Borrower hereby irrevocably
authorizes the Bank to make or cause to be made, on a schedule attached to the
Term Note or on the books of the Bank, at or following the time of making each
Term Loan and of receiving any payment of principal, an appropriate notation
reflecting such transaction and the then aggregate unpaid principal balance of
the Term Loans. The amount so noted shall constitute presumptive evidence as to
the amount owed by the Borrower with respect to principal of the Term Loans.
Failure of the Bank to make any such notation shall not, however, affect any
obligation of the Bank hereunder or under the Term Note.
1.5 Principal Repayment of Term Loans. The Borrower shall repay principal
of each Term Loan in 47 equal consecutive monthly installments (each in an
amount equal to 1/180th of the aggregate principal amount of the Term Loans
outstanding at the close of business on December 31, 1999) commencing on January
31, 2000 and continuing on the last Business Day of each month through November
30, 2004 plus a 48th and final payment of all remaining principal and unpaid
interest due and payable on December 31, 2004. In any event, the then
outstanding principal balance of each Term Loan and all interest then accrued
but unpaid thereon shall be due and payable in full no later than December 31,
2004. The Borrower may prepay, at any time, or from time to time, without
premium or penalty, the whole or any portion of any Term Loan; provided that
each such principal prepayment shall be accompanied by payment of all interest
on the sum so prepaid accrued but unpaid to the date of payment. Any partial
prepayment of principal of the Term Loans will be applied to installments of
principal of the Term Loans thereafter coming due in inverse order of normal
maturity. Amounts repaid or prepaid with respect to the Term Loans are not
available for reborrowing.
1.6 Interest Rates and Payment. Interest on the Revolving Loans and on the
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Term Loans shall be calculated as follows:
(a) Except as otherwise provided below in this [SECTION]1.6, interest
on the Revolving Loans and on the Term Loans will be payable monthly in arrears
as provided in the Notes at a fluctuating rate per annum (the "Floating Rate")
which shall at all times be equal to the sum of (i) (A) for the Revolving Loans,
one half of one percent (0.50%); or (B) for the Term Loans, there quarters of
one percent (0.75%) plus (ii) the Prime Rate as defined in the Notes in effects
from time to time (but in no event in excess of the maximum rate permitted by
then applicable law), with a change in such rate of interest to become effective
on each day when a change in the Prime Rate becomes effective.
(b) Subject to the conditions set forth herein, the Borrower may elect
that all or a portion of any Revolving Loan to be made under [SECTION]1.2 or any
Term Loan to be made under [SECTION]1.4 be made as a London Interbank Offered
Rate ("LIBOR") Loan at the rate of (i) (A) for a Revolving Loan, three percent
(3%); or (B) for a Term Loan, three and one quarter percent (3.25%) plus (ii)
30, 60 or 90 day LIBOR (as the Borrower may select), as provided for in the
Notes; that all or any portion of any Floating Rate Loan will be converted to a
30, 60 or 90 day (as the Borrower may select) LIBOR Loan at such rates; and/or
that any LIBOR Loan will be continued at the expiration of the Interest Period,
as defined herein, as a 30, 60 or 90 day (as the Borrower may select) new LIBOR
Loan. As used herein, "Interest Period" shall mean , with respect to each such
advance conversion or continuation, the chosen 30,60 or 90 day period commencing
on and including the date on which such advance, conversion or continuation is
made and ending on and including the date preceding the next succeeding date,
when payment of interest is due, or, if such interest payment date should fall
within thirty (30) days of the date of such advance, conversion or continuation,
the net interest payment date thereafter.
(c) A LIBOR Loan election shall be made by the Borrower giving to the
Bank a written or telephonic notice received by the Bank within the time period
and containing the information described in the next following sentence (a
"LIBOR Borrowing Notice"). The LIBOR Borrowing Notice must be received by the
Bank no later than 10:00 a.m. (Boston time) on that day which is two Business
Days prior to the date of any such advance conversion or continuation, and must
specify: (i) the amount of the LIBOR Loan requested (which shall be $500,000 or
an integral multiple of $100,000 in excess of $500,000; (ii) the particular Term
Loan(s) or Revolving Loan(s) to be so advanced, converted or continued, as the
case may be; and (iii) the proposed commencement date of the relevant Interest
Period and its 30, 60 or 90 day duration. The Bank shall determine the LIBOR as
quoted to it by leading banks in the London Interbank Eurodollar Market, at or
about 5:00 p.m. (London time) on the date a LIBOR Borrowing Notice is received
(or, if such date is a banking holiday in London, of the last LIBOR quoted to
the Bank), which will be in effect on the date of the advance, conversion or
continuation as the case may be (which in any case must be a Business Day) with
respect to the Term Loan or Revolving Loan or LIBOR Loan in question, having a
maturity date of 30, 60 or 90 days from the date of the advance, conversion or
continuation, as the case may be. Each determination of LIBOR by the Bank shall
be conclusive evidence, in the absence of manifest error, or such LIBOR and
4
shall be promptly communicated to the Borrower. However, if the Borrower if the
Borrower has not delivered a notice to the Bank in a timely manner in accordance
with the provisions of this [SECTION]1.6 (c), the Borrower shall be deemed to
have chosen to have the interest on such Revolving Loan or Term Loan or LIBOR
Loan calculated on the applicable Floating Rate basis. Any LIBOR Borrowing
Notice shall, upon receipt by the Bank, become irrevocable and binding on the
Borrower, and the Borrower shall, upon demand and receipt of a Bank Certificate
with respect thereto, forthwith indemnify the Bank against any loss or expense
incurred by the Bank as a result of any failure by the Borrower to borrow any
requested LIBOR Loan, including, without limitation, any loss or expense
incurred by reason of the liquidation or redeployment of deposits or other funds
acquired by the Bank to fund or maintain such LIBOR Loan. Notwithstanding the
foregoing, the Bank need not make a LIBOR Loan, convert a Floating Rate Loan to
a LIBOR Loan or continue a LIBOR Loan at any time at which there exists an Event
of Default.
(d) Nothing contained herein shall be construed as authorizing the
Borrower, with respect to the determination of LIBOR (i) to choose a LIBOR
Interest Period in respect of which the Interest Period extends beyond the
Expiration Date in the case of Revolving Loans or beyond the due date of the
applicable installment in the case of Term Loans; or (ii) to choose an amount
for an advance, conversion or continuation amount greater than that permitted
under [SECTION]1.2 for Revolving Loans or [SECTION]1.4 for Term Loans.
(e) The actual annual rate of interest to which the rates
determined in accordance with [SECTION]1.6(b) are equivalent is the specified
rate multiplied by the actual number of days during the year, divided by 360:
(LIBOR + Margin) x 365*/360 = % per year
* (in a leap year, substitute 366 for 365). LIBOR Loan interest shall be payable
in arrears on each applicable Interest Period payment date.
(f) In the event that the Bank determines that (i) for any
reason, adequate and reasonable methods for determining the LIBOR applicable to
any Interest Period do not exist; or (ii) the making, conversion to or
continuation of LIBOR Loan has been made impracticable or unlawful by reason of
London Interbank market conditions or events or by compliance by the Bank with
any applicable law, regulation, guideline or other or change of, or change in
the interpretation of, any such law, regulation, guideline or order; or (iii)
LIBOR, in the Bank's reasonable determination, does not adequately and fairly
reflect the Bank's cost in funding such LIBOR Loans for such Interest Period,
then the Bank shall give Borrower notice of such determination, which shall be
conclusive and binding on Borrower, and the Bank's obligation to make LIBOR
Loans shall be suspended until the Bank determines that the conditions that gave
rise to its prior determination no longer exist.
(g) If, due to acceleration or prepayment (whether voluntary or
mandatory) or for any other reason, the Bank receives payment for any principal
of any LIBOR Loan on any date prior to the last day of such LIBOR Loan's
relevant Interest Period, the Borrower shall, upon receipt of a Bank Certificate
from the Bank with respect thereto, pay forthwith to the Bank a yield
5
maintenance fee in an amount computed as follows: the current rate for United
States Treasury securities (bills on a discounted basis shall be converted to a
bond equivalent) with a maturity date closest to the last day of the Interest
Period applicable to the affected LIBOR Loan shall be subtracted from the "cost
of funds" component (i.e., reserve-adjusted LIBOR) of the fixed rate in effect
at the date of such prepayment or conversion. If the result is zero or a
negative number, there shall be no yield maintenance fee. If the result is a
positive number, then the resulting percentage shall be multiplied by the amount
of the principal balance being prepaid. The resulting amount shall be divided by
360 and multiplied by the number of days remaining in the relevant Interest
Period. Such amount shall be reduced to present value calculated by using the
number of days remaining in the relevant Interest Period and by using the
above-referenced United States Treasury securities rate as the discount rate.
The resulting amount shall be the yield maintenance fee due the Bank upon
prepayment or conversion of the applicable LIBOR Loan. Any acceleration of a
LIBOR Loan due to an Event of Default will give rise to a yield maintenance fee
calculated with respect to such LIBOR Loan on the date of such acceleration in
the same manner as though the Borrower had exercised a right of prepayment at
that date, such yield maintenance fee being due and payable at that date.
1.7 Advances and Payments. The proceeds of all Loans shall be credited by
the Bank to a general deposit account maintained by the Borrower with the Bank.
The proceeds of each Revolving Loan will be used by the Borrower solely for
working capital purposes. The proceeds of each Term Loan will be used by the
Borrower solely to pay or reimburse acquisition costs of Qualifying Equipment or
Qualifying Real Property.
The Bank may charge any general deposit account of the Borrower at the Bank
with the amount of all payments of interest, principal and other sums when same
are due, from time to time, under this Letter Agreement and/or any Note and/or
with respect to any letter of credit; and will thereafter notify the Borrower of
the amount so charged. The failure of the Bank so to charge any account or to
give any such notice shall not affect the obligation of the Borrower to pay
interest, principal or overdue principal, overdue interest or default interest
as provided herein or in any Note or with respect to any letter of credit.
Whenever any payment to be made to the Bank hereunder or under any Note or
with respect to any letter of credit shall be stated to be due on a day which is
not a Business Day, such payment may be made on the next succeeding Business
Day, and interest payable on each such date shall include the amount thereof
which shall accrue during the period of such extension of time. All payments by
the Borrower hereunder and/or in respect of any Note and/or with respect to any
letter of credit shall be made net of any impositions or taxes and without
deduction, set-off or counterclaim, notwithstanding any claim which the Borrower
any now or at any time hereafter have against the Bank. All payments of
interest, principal and any other sum payable hereunder and/or under any Note
and/or with respect to any letterof credit shall be made to the Bank, in lawful
money of the United States in immediately available funds, at its office at One
Federal Street, 7th Floor, Boston, MA 02110 or at such other address as the Bank
may from time to time direct. All payments received by the Bank after 2:00 p.m.
on any day shall be deemed received as of the next succeeding Business Day. All
6
monies received by the Bank shall be applied first to fees, charges, costs and
expenses payable to the Bank under this Letter Agreement, any Note and/or
any of the other Loan Documents and/or with respect to any letter of credit,
next to interest then accrued on account of any Loans or letter of credit next
to interest then accrued on account of any Loans or letter of credit
reimbursement obligations and only thereafter to principal of the Loans or
letter of credit reimbursement obligations being applied against the Loans
and/or such obligations in such order as the Borrower may designate (and,
failing such designation, being applied first against the letter of credit
reimbursement obligations, next against the Revolving Loans and thereafter
against installments of the Term Loans in inverse order of normal maturity). All
interest and fees payable hereunder and/or under nay Note shall be calculated on
the basis of a 360-day year for the actual number of days elapsed.
1.8 Letters of Credit. At the Borrower's request, the Bank may, from time
to time, in its sole discretion issue one or more letters of credit for the
account of the Borrower; provided that at the time of such issuance and after
giving effect thereto the Aggregate Revolving Bank Liabilities will in no event
exceed the lesser of (i) Borrower or (ii) the then effective Borrowing Base. Any
such letter of credit will be issued for such fee and upon such terms and
conditions as may be agreed to by the Bank and the Borrower at the time of
issuance. The Borrower hereby authorizes the Bank, without further request from
the Borrower, to cause the Borrower's liability to the Bank for reimbursement of
funds drawn under any such letter of credit to be repaid from the proceeds of a
Revolving Loan to be made thereunder. The Borrower hereby irrevocably requests
that such Revolving Loans be made.
1.9 Conditions to Advance. Prior to the making of the initial Loan
hereunder or the issuance of any letter of credit hereunder, the Borrower shall
deliver to the Bank duly executed copies of this Letter Agreement, the Revolving
Note, the Term Note, all other Loan Documents and the documents and other items
listed on the Closing Agenda delivered herewith by the Bank to the Borrower, all
of which, as well as all legal matters incident to the transactions contemplated
hereby, shall be satisfactory in form and substance to the Bank and its counsel.
As a material condition precedent to the granting of any advance for the
purchase of Qualifying Real Property (including, without limitation, purchase of
the building or part of the building containing the Premises, Borrower agrees to
execute in the Bank's favor a senior first mortgage in a form supplied by the
Bank for the entirety of the Qualifying Real Property, and, in the case of
purchase of part of the building containing the Premises, a senior first
mortgage on the entire building and lot containing the Premises. As a further
material precondition t the making of an advance for the purchase of Qualifying
Real Property, Borrower agrees that such advance is to be paid by the Bank
directly to the Seller of such Qualifying Real Property at the closing and that
Borrower will, prior to such closing, furnish to the Bank appraisals,
environmental assessments and reports, title information and such other
documents and information as the Bank may require to ascertain the value, clear
title, freedom from liens and validity of the Bank's Security Interest in such
Qualifying Real Property, including those set forth in the definition of
"Qualifying Real Property" in [SECTION]8.1 herein.
Without limiting the foregoing, any Loan or letter of credit issuance
(including the initial Loan or letter of credit issuance) is subject to the
7
further conditions precedent that on the date on which such Loan is made or such
letter of credit is issued ( and after giving effect thereto):
(a) All statements. representations and warranties of the Borrower
made in this Letter Agreement shall continue to be correct in all material
respects as of the date of such Loan or issuance of such letter of credit, as
the case may be.
(b) All covenants and agreements of the Borrower contained herein
and/or in any of the other Loan Documents shall have been complied within all
material respects on and as of the date of such Loan or issuance of such letter
of credit, as the case may be.
(c) No event which constitutes, or which with notice or lapse of time
or both could constitute, an Event of Default shall have occurred and be
continuing.
(d) No material adverse change shall have occurred in the financial
condition of the Borrower from that disclosed in the financial statements then
most recently furnished to the Bank.
Each request by the Borrower for any Loan or for the issuance of a letter
of credit and each acceptance by the Borrower of the proceeds of any Loan or
delivery of a letter of credit, will be deemed a representation and warranty by
the Borrower that at the date of such Loan or letter of credit issuance, as the
case may be, and after giving effect thereto all of the conditions set forth in
the foregoing clauses (a)-(d) of this 1.9 will be satisfied. Each request for a
Revolving Loan or letter of credit issuance will be accompanied by a borrowing
base certificate on a form satisfactory to the Bank, executed by the chief
financial officer of the Borrower, unless such a certificate shall have been
previously furnished setting forth the Borrowing Base as at a date not more than
30 days prior to the date of the requested borrowing or the requested letter of
credit issuance as the case may be.
II. REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties. In order to induce the Bank to enter
into this Letter Agreement and to make Loans hereunder and/or issue letters of
credit hereunder, the Borrower warrants and represents to the Bank as follows:
(a) The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of New Jersey. The Borrower has full corporate
power to own its property and conduct its business as now conducted and as
contemplated to be conducted, to grant the security interests contemplated
herein and execute, deliver and perform this Letter Agreement and the other Loan
Documents. The Borrower is duly qualified to do business and in good standing in
each other jurisdiction in which the Borrower maintains any facility, sales
office or warehouse and in each other jurisdiction where the failure so to
qualify could (singly or in the aggregate with all other such failures) have a
material adverse effect on the financial condition, business or prospects of the
Borrower, all such jurisdictions, as at the date of this Letter Agreement, being
listed on item 2.1(a) of the attached Disclosure Schedule. At the date hereof,
the borrower has no Subsidiaries, except as shown on said item 2.1(a) of the
8
attached Disclosure Schedule. The Borrower is not a member of any such
partnership or joint venture.
(b) At the date of this Letter Agreement, all of the outstanding
capital stock of the Borrower is owned, of record and beneficially, as set forth
on item 2.1(b) of the attached Disclosure Schedule. The Borrower owns 100% of
the outstanding capital stock of each Subsidiary.
(c) The execution delivery and performance by the Borrower of this
Letter Agreement and each of the other Loan Documents have been duly authorized
by all necessary corporate and other action and do not and will not:
(i) violate any provision of, or require any filings (other than
filings under the UCC), registration, consent or approval under,
any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award presently in effect having
applicability to the Borrower;
(ii) violate any provision of the charter or by-laws of the Borrower,
or result in a breach of or constitute a default or require any
waiver or consent under nay indenture or loan credit agreement or
any other material agreement, lease or instrument to which the
Borrower is a party or by which the Borrower or any of its
properties may be bound or affected or require any other consent
of any Person; or
(iii)result in, or require, the creation or imposition of any Lien
(other than in favor of the Bank), upon or with respect to any of
the properties now owned or hereafter acquired by the Borrower.
(d) This Letter Agreement and each of the other Loan Documents has
been duly authorized, executed and delivered by the Borrower and each is a
legal, valid and binding obligation of the Borrower, enforceable against the
Borrower in accordance with its respective terms.
(e) Except as described on item 2.1(e) of the attached Disclosure
Schedule, there are no actions, suits, proceedings or investigations pending or,
to the knowledge of the Borrower, threatened by or against the Borrower or any
Subsidiary of the Borrower before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, which
could hinder or prevent the consummation of the transactions contemplated hereby
or call into question the validity of this Letter Agreement or any of the other
Loan Documents or any other instrument provided for or contemplated by this
Letter Agreement or any of the other Loan Documents or any action taken or to be
taken in connection with the transactions contemplated hereby or thereby or
which in any single case or in the aggregate might result in any material
adverse change in the business, prospects, condition, affairs or operations of
the Borrower or any such Subsidiary.
(f) The Borrower is not in material violation of any term of its
9
charter or by-laws as now in effect. As used herein, a material violation
includes any violation that invalidates, or impairs the legal effect of, the
execution, delivery or performance of this Letter Agreement or any other Loan
Document. Neither the Borrower nor any Subsidiary of the Borrower is in material
violation of any term of any mortgage, indenture or judgment, decree or order,
or any other instrument, contract or agreement to which it is a party or by
which any of its property is bound.
(g) The Borrower has filed (and has caused each Subsidiary of the
Borrower to file) all federal, foreign, state and local tax returns, reports and
estimates required to be filed by the Borrower or by any such Subsidiary. All
such filed returns, reports and estimates are proper and accurate and the
borrower (or the Subsidiary concerned, as the case may be) has paid all taxes,
assessments, impositions, fees and other governmental charges required to be
paid in respect of the periods covered by such returns, reports or estimates. No
deficiencies for any tax, assessment or governmental charge have been asserted
or assessed, and the Borrower knows of no material tax liability or basis
therefor.
(h) The Borrower is in compliance with (and each Subsidiary of the
Borrower is in compliance with) all requirements of law, federal, state and
local, and all requirements of all governmental bodies or agencies having
jurisdiction over it, the conduct of its business, the use of its properties and
assets, and all premises occupied by it, failure to comply with which could
(singly or in the aggregate with all other such failures) have a material
adverse effect upon the assets, business, financial condition or prospects of
the Borrower or any such Subsidiary. Without limiting the foregoing, the
Borrower has all the franchises, licenses, leases, permits, certificates and
authorizations needed for the conduct of its business and the use of its
properties and all premises occupied by it, as now conducted, owned and used and
as proposed to be conducted, owned and used.
(i) The audited financial statements of the Borrower as at
December 31, 1997 and the management-generated financial statements of the
Borrower as at September 30, 1998, each heretofore delivered to the Bank, are
complete and accurate and fairly present the financial condition of the Borrower
as at the date thereof and for the period covered thereby, except that the
management-generated statements do not have footnotes and thus do not present
the information which would normally be contained in footnotes to financial
statements. Neither the Borrower nor any of the Borrowers's Subsidiaries has any
liability, contingent or otherwise, not disclosed in the aforesaid December 31,
1997 and September 30, 1998 financial statements or in the notes thereto that
could materially affect the financial condition of the Borrower. Since September
30, 1998, there has been no material adverse development in the business or
condition of the Borrower, and the Borrower has not entered into any transaction
other than in the ordinary course.
(j) The principal place of business and chief executive offices of
the Borrower are located at 100 Stierli Court, Mount Arlington, New Jersey and
those of the Borrower's subsidiary, Procath Corporation ("Procath") at Cooper
Run Executive Park Condominium, 575 Route 73 North, West Berlin, New Jersey
(collectively, the "Premises"). All of the Collateral is located at the
Premises. Except as described on item 2.1(j) of the attached Disclosure
Schedule, no Collateral is located at any other address. Said item 2.1(j) of the
10
attached Disclosure Schedule sets forth the names and addresses of all record
owners of the Premises.
(c) The Borrower owns or has a valid and unencumbered right to use
all of the collateral free of all Liens except those in favor of the Bank.
(l) None of the executive officers or key employees of the Borrower
is subject to any agreement in favor of anyone other than the Borrower which
limits or restricts that person's right to engage in the type of business
activity conducted or proposed to be conducted by the Borrower or which grants
to anyone other than the Borrower any rights in any inventions or other ideas
susceptible to legal protection developed or conceived by any such officer or
key employee.
(m) The Borrower is not a party to any contract or agreement which
now has or, as far as can be foreseen by the Borrower at the date hereof, may
have a material adverse effect on the financial condition, business, prospects
or properties of the Borrower.
III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
Without limitation of any covenants and agreements contained herein or
elsewhere, the Borrower agrees that so long as the financing arrangements
contemplated hereby are in effect or any Revolving Loan or any Term Loan or any
of the other Obligation shall be outstanding or any letter of credit issued
hereunder shall be outstanding;
3.1 Legal Existence; Qualification: Compliance. The Borrower will maintain
(and will cause each Subsidiary of the Borrower to maintain) its corporate
existence and good standing in the jurisdiction of its incorporation. The
Borrower will remain qualified to do business and in good standing in New
Jersey. The Borrower will qualify to do business and remain qualified and in
good standing (and will cause each Subsidiary of the Borrower to qualify and
remain qualified and in good standing) in each other jurisdiction where the
Borrower or such Subsidiary, as the case may be, maintains any plant, sales
office, warehouse or other facility and in each other jurisdiction in which the
failure so to qualify could (singly or in the aggregate with all other such
failures) have a material adverse effect on the financial condition, business or
prospects of the Borrower or any such Subsidiary. The Borrower will comply (and
will cause each Subsidiary of the Borrower to comply) with its charter documents
and by-laws. The Borrower will comply with (and will cause each Subsidiary of
the Borrower to comply with) all applicable laws, rules and regulations
(including, without limitation, ERISA and those relating to environmental
protection other than (i) laws, rules or regulations the validity or
applicability of which the Borrower or such Subsidiary shall be contesting in
good faith by proceedings which serve as a matter of law to stay the enforcement
thereof and (ii) those laws, rules and regulations the failure to comply with
any of which could not (singly or in he aggregate) have a material adverse
effect on the financial condition, business or prospects of the Borrower or any
such Subsidiary.
3.2 Maintenance of Property; Insurance. The Borrower will maintain and
preserve (and will cause each Subsidiary of the Borrower to maintain and
11
preserve) all of its property in good working order and condition, making all
necessary repairs thereto and replacements thereof. The Borrower, in addition to
all such insurance as may be required under Section 6.5 herein, will also
maintain, with financially sound and reputable insurers, insurance with respect
to its property and business against such liabilities, casualties and
contingencies and of such type and in such amounts as shall be reasonably
satisfactory to the Bank from time to time and in any event all such insurance
as may from time to time be customary for companies conducting a business
similar to that of the Borrower in similar locales.
3.3 Payment of Taxes and Charges. The Borrower will pay and discharge (and
will cause each Subsidiary of the Borrower to pay and discharge) all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or property, including without limitation, taxes, assessments, charges or
levies relating to real and personal property, franchises, income, unemployment,
old age benefits, withholding, or sales or use, prior to the date on which
penalties would attach thereon and all lawful claims (whether for any of the
foregoing or otherwise) which, if unpaid, might give rise to a lien upon any
property of the Borrower or any such Subsidiary, except any of the foregoing
which is being contested in good faith and by appropriate proceedings which
serve as a matter of law to stay the enforcement thereof and for which the
Borrower has established and is maintaining adequate reserves. The Borrower will
pay, and will cause each of its Subsidiaries to pay, in a timely manner, all
lease obligations, all trade debt, purchase money obligations, equipment lease
obligations and all of its other material Indebtedness, except any of the
foregoing which is being contested in good faith and by appropriate proceedings
which serve as a matter of law to stay the enforcement thereof for which the
Borrower has established and is maintaining adequate reserves. The Borrower will
perform and fulfill all material covenants and agreements under any leases of
real estate, agreements relating to purchase money debt, equipment leases and
other material contracts. The Borrower will maintain in full force and effect,
and comply with the terms and conditions of, all permits, permissions and
licenses necessary or desirable for its business.
3.4 Accounts. The Borrower will maintain its principal operating accounts
with the Bank.
3.5 Conduct of Business. The Borrower will conduct, in the ordinary
course, the business in which it is presently engaged. The Borrower will not,
without the prior written consent of the Bank, directly or indirectly (itself or
through any Subsidiary), enter into any other lines of business, businesses or
ventures.
3.6 Reporting Requirements. The Borrower will furnish to the Bank:
(i) Within 120 days after the end of each fiscal year (commencing
with the fiscal year ending December 31, 1997 of the Borrower), a copy
of the annual audit report for such fiscal year for the Borrower,
including therein consolidated balance sheets of the Borrower and
Subsidiaries as at the end of such fiscal year and related
consolidated statements of income, stockholder's equity and cash flow
for the fiscal year then ended. The annual consolidated financial
statements shall be certified by
12
independent public accountants selected by the Borrower and reasonably
acceptable to the Bank, such certification to be in such form as is
generally recognized as "unqualified".
(ii) Within 45 days after the end of each fiscal quarter of the
Borrower, consolidated balance sheets of the Borrower and its
Subsidiaries and related consolidated statements of income and cash
flow, unaudited but complete and accurate and prepared in accordance
with generally accepted accounting principles fairly presenting the
financial condition of the Borrower as at the dates thereof and for
the periods covered thereby (except that such quarterly statements
need not contain footnotes) and certified as accurate (subject to
normal year-end audit adjustments, which shall not be material) by the
chief financial officer of the Borrower, such balance sheets to be as
at the end of each such fiscal quarter and for the fiscal year to
date, in each case together with a comparison to budget.
(iii)At the time of delivery of each annual or quarterly statement of
the Borrower, a certificate executed by the chief financial offer of
the Borrower stating that he or she has reviewed this Letter Agreement
and the other Loan Documents and has no knowledge of any default by
the Borrower in the performance or observance of any of the provisions
of this Letter Agreement or of any of the other Loan Documents or, if
he or she has such knowledge, specifying each default and the nature
thereof. Each such certificate given as at the end of any fiscal
quarter shall also set forth the calculations necessary to evidence
compliance with [SECTION SECTION]3.7-3.10.
(iv) Monthly, within 30 days after the end of each month, (A) an aging
report in form satisfactory to the Bank covering all Receivables of
the Borrower outstanding as at the end of such month and(B) a
certificate of the chief financial officer of the Borrower setting
forth the Borrowing Base as at the end of such month, all in form
reasonably satisfactory to the Bank.
(v) Promptly after receipt, a copy of all audits or reports submitted
to the Borrower by independent public accountants in connection with
any annual, special or interim audits of the books of the Borrower and
any "management letter" prepared by such accountants and a copy of the
current year income statement balance sheet and cash flow projections.
(vi) Borrower will furnish to the Bank, promptly upon same becoming
available, one copy of each financial statement, report, notice or
proxy statement sent by the Borrower to stockholders or the holders of
debt securities generally, and of each regular or periodic report and
any registration statement, prospectus or listing application
(including, without limitation, Forms 10-K and 10-Q) filed by the
Borrower with the National Association of Securities Dealers, any
securities exchange or the Securities and Exchange Commission or any
successor agency.
13
(vii)As soon as possible and in any event within five days of the
occurrence of any Event of Default or any event which, with the giving
of notice or passage of time or both, would constitute an Event of
Default, the statement of the Borrower setting forth details of such
Event of Default or event and the action which the Borrower proposes
to take with respect thereto.
(viii) Promptly after the commencement thereof, notice of all actions
and proceedings before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or
foreign, to which the Borrower or any Subsidiary of the Borrower is a
party, except for civil proceedings in which less than $50,000 is in
controversy.
(ix) Promptly upon applying for, or being granted, a federal or state
registration for any copyright, trademark or patent or purchasing any
registered copyright, trademark or patent, written notice to the Bank
describing same.
(x) Promptly after the Borrower has knowledge thereof, written notice
of any development or circumstance which may reasonably be expected to
have a material adverse effect on the Borrower or its business,
properties, assets, Subsidiaries or condition, financial or otherwise.
(xi) Promptly upon request, such other information respecting the
financial condition, operations, Receivables, inventory, machinery or
equipment of the Borrower or any Subsidiary as the Bank may from time
to time reasonably request.
3.7 Debt to Worth. The Borrower will maintain as at the end of each fiscal
quarter of the Borrower (commencing with its results as at December 31, 1998) on
a consolidated basis a Leverage Ration of not more than 1.00 to 1. As used
herein, "Leverage Ratio" means the ration of (x) Adjusted Senior Debt of the
Borrower and Subsidiaries to (y) Capital Base of the Borrower.
3.8 Capital Base. The Borrower will maintain as at the end of each
fiscal quarter of the Borrower (commencing with its results as at December 31,
1998) a consolidated Capital Base which shall not be less than the
then-effective Capital Base Requirement. As used herein, the "Capital Base
Requirement" will be deemed to have been $4,500,000 as at December 31, 1998.
3.9 Liquidity. The Borrower will maintain as at the end of each fiscal
quarter of the Borrower (commencing with its results as at December 31, 1998 a
ratio of Net Quick Assets to Adjusted Current Liabilities, which ratio shall be
not less than 1.5 to1.
3.10 Profitability. The Borrower will achieve quarterly Net Income of at
least $1.00 for its fiscal quarter ending December 31, 1999 and for each
subsequent fiscal quarter ending December 31, 2000 and for each subsequent
fiscal year.
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3.11 Books and Records. The Borrower will maintain (and cause each of its
Subsidiaries to maintain) complete and accurate books, records and accounts
which will at all times accurately and fairly reflect all of its transactions in
accordance with generally accepted accounting principles consistently applied.
The Borrower will, at any reasonable time and from time to time upon reasonable
notice and during normal business hours (and at any time and without any
necessity for notice following the occurrence of an Event of Default), permit
the Bank, and any agents or representatives thereof, to examine and make copies
of and take abstracts from the records and books of account of, and visit the
properties of the Borrower and any of its Subsidiaries, and to discuss its
affairs, finances and accounts with its managers, officers or directors and
independent accountants, all of whom are hereby authorized and directed to
cooperate with the Bank in carrying out the intent of this [SECTION]3.11. Each
financial statement of the Borrower hereafter delivered pursuant to this Letter
Agreement will be complete and accurate and will fairly present the financial
condition of the Borrower as at the date thereof and for the periods covered
thereby.
IV. NEGATIVE COVENANTS
Without limitation of any covenants and agreements contained in this Letter
Agreement or elsewhere the Borrower agrees that so long as the financing
arrangements contemplated hereby are in effect or any Revolving Loan or any Term
Loan or any of the other Obligation shall be outstanding or any letter of credit
issued hereunder shall be outstanding:
4.1 Indebtedness. The Borrower will not create, incur, assume or suffer to
exist any Indebtedness (nor allow any of its Subsidiaries to create, incur,
assume or suffer to exist any Indebtedness), except for:
(i) Indebtedness owed to the Bank, including, without limitation, the
Indebtedness represented by the Notes and any Indebtedness in
respect of letters of credit issued by the Bank;
(ii) Indebtedness of the Borrower or any Subsidiary for taxes,
assessments and governmental charges or levies not yet due and
payable;
(iii)unsecured current liabilities of the Borrower or any Subsidiary
(other than for money borrowed or for purchase money Indebtedness
with respect to fixed assets) incurred upon customary terms in
the ordinary course of business;
(iv) purchase money indebtedness (including, without limitation,
Indebtedness in respect of capitalized equipment leases) owed to
equipment vendors and/or lessors for equipment purchased or
leased by the Borrower for use in the Borrower's business,
provided that the total of Indebtedness permitted under this
clause (iv) plus presently-existing equipment financing permitted
under clause (v) of this [SECTION]4.1 will not exceed $1,000,000
in the aggregate outstanding at any one time.
15
(v) other Indebtedness existing at the date hereof, but only to the
extent set forth on item 4.1 of the attached Disclosure Schedule;
(vi) any guaranties or other contingent liabilities expressly
permitted pursuant to [SECTION]4.3.
4.2 Liens. The Borrower will not create, incur, assume or suffer to
exist (nor allow any of its Subsidiaries to create, incur, assume or suffer to
exist) any Lien upon or with respect to any of the Collateral, now owned or
hereafter acquired, except:
(i) Liens for taxes, assessments or governmental charges or levies on
property of the Borrower or any of its Subsidiaries if the same
shall not at the time be delinquent or thereafter can be paid
without interest or penalty;
(ii) Liens imposed by law, such as carrier's, warehousemen's and
mechanics' liens and other similar Liens arising in the ordinary
course of business for sums not yet due or which are being
contested in good faith and by appropriate proceedings which
serve as a matter of law to stay the enforcement thereof and as
to which adequate reserves have been made;
(iii)pledges or deposits under workmen's compensation laws,
unemployment insurance, social security, retirement benefits or
similar legislation;
(iv) Liens in favor of the Bank;
(v) Liens in favor of equipment vendors and/or lessors securing
purchase money Indebtedness to the extent permitted by clause
(iv) of [SECTION]4.1; provided that no such Lien will extend to
any property of the Borrower or any Subsidiary other than the
specific items of equipment financed;
(vi) Liens permitted under [SECTION]6.3 of this Letter Agreement; or
(vii)other Liens existing at the date hereof, but only to the extent
and with the relative priorities set forth on item 4.2 of the
attached Disclosure Schedule.
4.3 Guaranties. The Borrower will not, without the prior written consent
of the Bank, assume, guarantee, endorse or otherwise become directly or
contingently liable (including, without limitation, liable by way of agreement,
contingent or otherwise, to purchase, to provide funds for payment, to supply
funds to or otherwise invest in any debtor or otherwise to assure any creditor
against loss) (and will not permit any of its Subsidiaries so to assume,
guaranty or become directly or contingently liable) in connection with any
indebtedness of any other Person, except (i) guaranties by endorsement for
deposit or collection in the ordinary course of business; and (ii) currently
16
existing guaranties described in item 4.3 of the attached Disclosure Schedule.
4.4 Dividends. The Borrower will not, without the prior written consent of
the Bank, make any distributions to its shareholders, pay any dividends (other
than dividends payable solely in capital stock of the Borrower) or redeem,
purchase or otherwise acquire directly or indirectly any of its capital stock.
4.5 Loans and Advances. The Borrower will not make any loans or advances
(and will not permit any of its Subsidiaries to make any loans or advances) to
any Person, including, without limitation, the Borrower's directors, officers
and employees, except advances to directors, officers or employees with respect
to expenses incurred by them in the ordinary course of their duties and advances
against salary, all of which will not exceed in the aggregate $500,000
outstanding at any one time.
4.6 Investments. The Borrower will not, without the Bank's prior written
consent, invest in, hold or purchase any stock or securities of any Person (nor
will the Borrower permit any of its Subsidiaries to invest in, purchase or hold
any such stock or securities) except (i) readily marketable direct obligations
of, or obligations guaranteed by, the United States of America or any agency
thereof; (ii) other investment grade debt securities; (iii) mutual funds, the
assets of which are primarily invested in items of the kind described in the
foregoing clauses (i) and (ii) of this [SECTION]4.6; (iv) deposits with or
certificates of deposit issued by the Bank and any other obligations of the Bank
or the Bank's parent; (v) deposits with or certificates of deposit issued by any
United States commercial bank having more than $100,000,000 in capital, and (vi)
investments in any Subsidiaries now existing or hereafter created by the
Borrower pursuant to [SECTION]4.7 below; provided that in any event the Tangible
Net Worth of the Borrower alone (exclusive of its investment in Subsidiaries and
any debt owed by any Subsidiary to the Borrower) will not be less than 90% of
the consolidated Tangible Net Worth of the Borrower and Subsidiaries.
4.7 Subsidiaries; Acquisitions. The Borrower will not, without the prior
written consent of the Bank, form or acquire any Subsidiary or make any other
acquisition of the stock of any Person or of all or substantially all of the
assets of any other Person. The Borrower will not become a partner in any
partnership.
4.8 Merger. The Borrower will not, without the prior written consent of
the Bank, merge or consolidate with any Person or sell, lease, transfer or
otherwise dispose of any material portion of its assets (whether in one or more
transactions), other than sale of inventory in the ordinary course.
4.9 Affiliate Transactions. The Borrower will not, without the prior
written consent of the Bank, enter into any transaction, including, without
limitation, the purchase, sale or exchange of any property or the rendering of
any service, with any affiliate of the Borrower, except in the ordinary course
of and pursuant to the reasonable requirements of the Borrower's business and
17
upon fair and reasonable terms no less favorable to the Borrower than would be
obtained in a comparable arms'-length transaction with any Person not an
affiliate; provided that nothing in this [SECTION]4.9 shall be deemed to
prohibit the payment of salary or other similar payments to any officer or
director of the Borrower at a level consistent with the salary and other
payments being paid at the date of this Letter Agreement and heretofore
disclosed in writing to the Bank, nor to prevent the hiring of additional
officers at a salary level consistent with industry practice, nor to prevent
reasonable periodic increases in salary. For the purposes of this Letter
Agreement, "affiliate" means any Person which, directly or indirectly, controls
or is controlled by or is under common control with the Borrower; any officer or
director or former officer or director of the Borrower; any Person owning of
record or beneficially, directly or indirectly, 5% or more of any class of
capital stock of the Borrower or 5% or more of any class of capital stock or
other equity interest having voting power (under ordinary circumstances) of any
of the other Persons described above; and any member of the immediate family of
any of the foregoing. "Control" means possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of any
Person, whether through ownership of voting equity, by contract or otherwise.
4.10 Change of Address, etc. The Borrower will not change its name or legal
structure, nor will the Borrower move its chief executive offices or principal
place of business from the address described in the first sentence of
[SECTION]2.1(j) above, nor will the Borrower remove any books or records from
such address, nor will the Borrower keep any Collateral at any location other
than the Premises without, in each instance, giving the Bank at least 30 days'
prior written notice and providing all such financing statements, certificates
and other documentation as the Bank may request in order to maintain the
perfection and priority of the security interests granted or intended to be
granted herein. The Borrower will not change its fiscal year or methods of
financial reporting unless, in each instance, prior written notice of such
change is given to the Bank and prior to such change the Borrower enters into
amendments to this Letter Agreement in form and substance satisfactory to the
Bank in order to preserve unimpaired the rights of the Bank and the obligations
of the Borrower hereunder.
4.11 Hazardous Waste. Except as provided below, the Borrower will not
dispose of or suffer or permit to exist any hazardous material or oil on any
site or vessel owned, occupied or operated by the Borrower or any Subsidiary of
the Borrower, nor shall the Borrower store (or permit any Subsidiary to store)
on any site or vessel owned, occupied or operated by the Borrower or any such
Subsidiary, or transport or arrange the transport of, any hazardous material or
oil (the terms "hazardous material", "oil", "site" and "vessel", respectively,
being used herein with the meanings given those terms in Mass. Gen. Laws, Ch.
21E or any comparable terms in any comparable statute in effect in any other
relevant jurisdiction). The Borrower shall provide the Bank with written notice
of (i) the intended storage or transport of any hazardous material or oil by the
Borrower or any Subsidiary of the Borrower, (ii) any potential or known release
or threat of release of any hazardous material or oil at or from any site or
vessel owned, occupied or operated by the Borrower or any Subsidiary of the
Borrower, and (iii) any incurring of any expense or loss by any government or
governmental authority in connection with the assessment, containment or removal
of any hazardous material or oil for which expense or loss the Borrower or any
Subsidiary of the Borrower may be liable. Notwithstanding the foregoing, the
18
Borrower and its Subsidiaries may use, store and transport and need not notify
the Bank of the use, storage or transportation of (x) oil in reasonable
quantities, as fuel for heating of their respective facilities or for vehicles
or machinery used in the ordinary course of their respective businesses and (y)
hazardous materials that are solvents, cleaning agents or other materials used
in the ordinary course of the respective business operations of the Borrower and
its Subsidiaries, in reasonable quantities, as long as in any case the Borrower
or the Subsidiary concerned (as the case may be) has obtained and maintains in
effect any necessary governmental permits, licenses and approvals, complies with
all requirements of applicable federal, state and local law relating to such
use, storage or transportation, follows the protective and safety procedures
that a prudent businessperson conducting a business the same as or similar to
that of the Borrower or such Subsidiary (as the case may be) would follow, and
disposes of such materials (not consumed in the ordinary course) only through
licensed providers of hazardous waste removal services.
4.12 No Margin Stock. No proceeds of any Loan shall be used directly or
indirectly to purchase or carry any margin security.
4.13 Subordinated Debt. The Borrower will not directly or indirectly make
any optional or voluntary prepayment or purchase of Subordinated Debt or modify,
alter or add any provisions with respect to payment or terms of Subordinated
Debt. The Borrower will not make any payment of any principal of or interest on
any Subordinated Debt at any time when there exists, or if there would result
therefrom, any Event of Default hereunder.
4.14 Corporate Assets Including Intellectual Property. The Borrower will
not directly or indirectly sell, assign, license, lease, transfer, alienate,
encumber or otherwise dispose of any corporate assets, whether held by purchase,
assignment, license, lease or any other form of transfer or alienation,
including, without limitation, any register and patent license, copyright
trademark, trade name or franchise, without the written consent of the Bank,
except for commercially acceptable transactions made in the ordinary course of
the Borrower's business as defined in [SECTION]3.5 of this Letter Agreement, nor
will the Borrower make any covenant or agreement equivalent to that contained in
this [SECTION]4.14 with any third party.
V. DEFAULT AND REMEDIES
5.1 Events of Default. The occurrence of any one of the following events
shall constitute an Event of Default hereunder:
(a) The Borrower shall fail to make any payment of principal of or
interest on the Revolving Note or the Term Note on or before the date when due;
or the Borrower shall fail to pay when due any amount owed to the Bank with
respect to any letter of credit now or hereafter issued by the Bank; or
(b) Any representation or warranty of the Borrower contained herein
shall at any time prove to have been incorrect in any material respect when made
19
or any representation or warranty made by the Borrower in connection with any
Loan or letter of credit shall at any time prove to have been incorrect in any
material respect when made; or
(c) The Borrower shall default in the performance or observance of
any agreement or obligation under any of [SECTION SECTION]3.1, 3.3, 3.6, 3.7,
3.8, 3.9 or 3.10 or Article IV; or
(d) The Borrower shall default in the performance of any other term,
covenant or agreement contained in this Letter Agreement and such default shall
continue unremedied for 30 days after notice thereof shall have been given to
the Borrower; or
(e) Any default on the part of the Borrower or any Subsidiary of the
Borrower shall exist, and shall remain unwaived or uncured beyond the expiration
of any applicable notice and/or grace period, under any other contract,
agreement, or undertaking now existing or hereafter entered into with or for the
benefit of the Bank (or any affiliate of the Bank); or
(f) Any default shall exist and remain unwaived or uncured with
respect to any Subordinated Debt of the Borrower or with respect to any
instrument evidencing, guaranteeing, securing or otherwise relating to any such
Subordinated Debt, or any such Subordinated Debt shall not have been paid when
due, whether by acceleration or otherwise, or shall have been declared to be due
and payable prior to its stated maturity, or any event or circumstance shall
occur which permits, or with the lapse of time or the giving of notice or both
would permit, the acceleration of the maturity of any Subordinated Debt by the
holder or holders thereof; or
(g) Any default shall exist and remain unwaived or uncured with
respect to any Indebtedness of the Borrower or any Subsidiary of the Borrower in
excess of $250,000 in aggregate principal amount or with respect to any
instrument evidencing, guaranteeing, securing or otherwise relating to any such
Indebtedness, or any such Indebtedness in excess of $250,000 in aggregate
principal amount shall not have been paid when due, whether by acceleration or
otherwise, or shall have been declared to be due and payable prior to its stated
maturity, or any event or circumstance shall occur which permits, or with the
lapse of time or the giving of notice or both would permit, the acceleration of
the maturity of any such Indebtedness by the holder or holders thereof; or
(h) The Borrower shall be dissolved, or the Borrower or any
Subsidiary of the Borrower shall become insolvent or bankrupt or shall cease
paying its debts as they mature or shall make an assignment for the benefit of
creditors, or a trustee, receiver or liquidator shall be appointed for the
Borrower or any Subsidiary of the Borrower or for a substantial part of the
property of the Borrower or any such Subsidiary, or bankruptcy, reorganization,
arrangement, insolvency or similar proceedings shall be instituted by or against
the Borrower or any such Subsidiary under the laws of any jurisdiction (except
for an involuntary proceeding filed against the Borrower or any Subsidiary of
the Borrower which is dismissed within 60 days following the institution
thereof); or
(i) Any attachment, execution or similar process shall be issued or
levied against any of the Collateral of the Borrower or any Subsidiary and such
20
attachment, execution or similar process shall not be paid, stayed, released,
vacated or fully bonded within 10 days after its issue or levy; or
(j) Any final uninsured judgment in excess of $100,000 shall be
entered against the Borrower or any Subsidiary of the Borrower by any court of
competent jurisdiction; or
(k) The Borrower or any Subsidiary of the Borrower shall fail to meet
its minimum funding requirements under ERISA with respect to any employee
benefit plan (or other class of benefit which the PBGC has elected to insure) or
any such plan shall be the subject of termination proceedings (whether voluntary
or involuntary) and there shall result from such termination proceedings a
liability of the Borrower or any Subsidiary of the Borrower to the PBGC which in
the reasonable opinion of the Bank may have a material adverse effect upon the
financial condition of the Borrower or any such Subsidiary; or
(l) This Letter Agreement or any other Loan Document shall for any
reason (other than due to payment in full of all amounts secured or evidenced
thereby or due to discharge in writing by the Bank) not remain in full force and
effect; or
(m) The security interests and liens of the Bank in and on any of the
Collateral covered or intended to be covered by this Letter Agreement shall for
any reason (other than written release by the Bank) not be fully perfected liens
and security interests; or
(n) If, at any time, more than 50% of any class of voting stock of
the Borrower shall be held, of record and/or beneficially, by any Person or by
any "group" (as defined in the Securities Exchange Act of 1934, as amended, and
the regulations thereunder) other than by one or more of the Persons listed on
item 5.1(n) of the attached Disclosure Schedule; or
(o) David A. Jenkins, or a replacement that the Borrower has proposed
to the Bank prior to hiring or installing such person and that the Bank has
approved in writing within thirty (30) days of David A. Jenkins not being an
executive officer of Borrower, shall for any reason not be an executive officer
of the Borrower actively involved in the management of the Borrower; or
(p) There shall occur any other material adverse change in the
condition (financial or otherwise), operations, properties, assets, liabilities
or earnings of the Borrower.
(q) Borrower or any third party commences any action or proceeding to
contest the validity or enforceability of any, or any part of any, Loan
Document.
(r) If all, or a controlling interest of, the capital stock of
Borrower shall be sold, assigned or otherwise transferred or if a security
interest or other encumbrance shall be granted or otherwise acquired with
respect thereto.
5.2 Rights and Remedies on Default. Upon the occurrence of any Event of
21
Default, in addition to any other rights and remedies available to the Bank
hereunder or otherwise, the Bank may, at any time, at its sole option and
without notice or demand to the Borrower, exercise anyone or more of the
following rights and remedies alternatively, successively or concurrently (all
of which shall be cumulative):
(a) Declare the entire unpaid principal amounts of the Revolving Note
and the Term Note then outstanding, all interest accrued and unpaid thereon and
all other amounts payable under this Letter Agreement and all other Indebtedness
of the Borrower to the Bank to be forthwith due and payable, whereupon the same
shall become forthwith due and payable, without presentment, demand, protest or
notice of any kind, all of which are hereby expressly waived by the Borrower.
(b) Terminate the revolving financing arrangements and Term Loan
facility provided for by this Letter Agreement.
(c) Exercise any and all rights and remedies of a secured party
available under the UCC and all other applicable law and notify account debtors
that the Collateral has been assigned to the Bank and that payments by such
accounts debtors shall be made directly to the Bank. At any time after the
occurrence of an Event of Default, the Bank may collect the Borrower's
Receivables, or any of same, directly from account debtors and may charge the
collection costs and expenses to the Borrower. Upon the occurrence of any Event
of Default, the Borrower will assemble and make available to the Bank all books,
records and data, whether in written form or electronically recorded,
representing any of the Collateral (including, without limitation, all source
codes in Intellectual Property (whether modified by the Borrower or not) and
object codes for the Borrower's software).
(d) Exercise all rights and remedies hereunder, under the Revolving
Note, under the Term Note and under each and any other agreement with the Bank;
and exercise all other rights and remedies which the Bank may have under
applicable law.
5.3 Set-off. In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default, the Bank is hereby authorized at anytime or
from time to time, without presentment, demand protest or other notice of any
kind to the Borrower or to any other Person, all of which are hereby expressly
waived, to set off and to appropriate and apply any and all deposits and any
other Indebtedness at any time held or owing by the Bank or any affiliate
thereof to or for the credit or the account of the Borrower against and on
account of the obligations and liabilities of the Borrower to the Bank under
this Letter Agreement or otherwise, irrespective of whether or not the Bank
shall have made any demand hereunder and although said obligations, liabilities
or claims, or any of them, may then be contingent or unmatured and without
regard for the availability or adequacy of other collateral. As further security
for the Obligations, the Borrower also grants to the Bank a security interest
with respect to all its deposits and all securities or other property in the
possession of the Bank or any affiliate of the Bank from time to time, and, upon
the occurrence of any Event of Default, the Bank may exercise all rights and
remedies of a secured party under the UCC.
22
ANY AND ALL RIGHTS TO REQUIRE THE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH
RESPECT TO ANY OTHER COLLATERAL WHICH SECURES ANY OF THE OBLIGATIONS PRIOR TO
THE EXERCISE BY THE BANK OF ITS RIGHT OF SET-OFF UNDER THIS SECTION ARE HEREBY
KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
5.4 Letters of Credit. Without limitation of any other right or remedy of
the Bank, (i) if an Event of Default shall have occurred and the Bank shall have
accelerated the Revolving Loans or (ii) if this Letter Agreement and/or the
revolving financing arrangements described herein shall have expired or shall
have been earlier terminated by either the Bank or the Borrower for any reason,
the Borrower will forthwith deposit with the Bank in cash a sum equal to the
total of all then undrawn amounts of all outstanding letters of credit issued by
the Bank for the account of the Borrower.
VI. COLLATERAL AND INDEBTEDNESS SECURED
6.1 Security Interest. To secure the due payment and performance of all of
the Obligations of the Borrower to the Bank, the Borrower hereby grants to the
Bank a continuing security interest in, and a Lien on, the following property
and rights of Borrower wherever located and whether now owned or hereafter
acquired:
(a) All accounts, contracts, contract rights, notes, bills, drafts,
acceptances, general intangibles, chattel paper, chooses in action, and all
other debts, obligations and liabilities, in whatever form, owing to Borrower
from any person, firm or corporation, or any other legal entity, whether now
existing or hereafter arising, now or hereafter received by or belonging or
owing to Borrower, for goods sold by it or for services rendered by it or
however otherwise same may have been established or created, all guarantees and
securities therefor, all right, title and interest of Borrower in the
merchandise or services which gave rise thereto, including the rights of
reclamation and stoppage in transit, all rights of an unpaid seller of
merchandise or services, and in the proceeds thereof, including, without
limitation, all proceeds of credit, fire or other insurance, and any tax
refunds; and
(b) All goods, merchandise, raw materials, goods, work product and
work in process, finished goods and other tangible personal property, now owned
or hereafter acquired and held for sale or lease, or furnished or to be
furnished under contract of service, or used or consumed in Borrower's business
and in the products and proceeds thereof, including, without limitation, all
proceeds of fire or other insurance. This portion of the Collateral being
sometimes referred to as "Inventory;" and
(c) All machinery, equipment and other goods (as defined in Article 9
of the UCC) whether now owned or hereafter acquired by Borrower and wherever
located, goods (as defined in Article 9 of the UCC) whether now owned or
hereafter acquired by Borrower and wherever located, all replacements and
23
substitutions therefor or accessions thereto and all proceeds thereof, and
including, also without limitation, all proceeds of fire or other insurance: and
(d) All of the Borrower's files, books and records (including,
without limitation, all electronically recorded data) all whether now owned or
existing or hereafter acquired, created or arising; and
(e) Any and all real property and fixtures appurtenant to such real
property now owned by the Borrower or purchased by the Borrower with any Term
Loans hereunder.
All of the property and rights set forth in (a) through (e) above,
including, without limitation, all proceeds of fire and other insurance thereon,
are hereinafter referred to collectively as "Collateral."
6.2 Obligations Secured. The Collateral and all proceeds and products
thereof shall be security for all Obligations. Until all Obligations have been
fully satisfied. Bank's security interest in the Collateral, and all proceeds
and products thereof, shall continue in full force and effect and Bank will at
all times after the occurrence and during the continuance of an Event of Default
(as defined herein) have the right to take physical possession of the Inventory
and other Collateral and to maintain such possession on Borrower's premises or
to remove the Inventory and other Collateral or any part thereof to such other
places as Bank may desire. If Bank exercises Bank's right to take possession of
the Inventory and other Collateral, Borrower shall, upon Bank's demand, assemble
the Inventory and other Collateral and make it available to Bank at a place
reasonably convenient to Bank.
6.3 No Disposal of Collateral. Except for sales, licenses and leases made
in the ordinary course of business on a non-exclusive basis and the disposal of
obsolete or worn-out equipment made in the ordinary course of business, Borrower
shall not sell, license, assign, lease, grant a Lien on or dispose of or permit
the sale, license, lease, establishment of a Lien on or disposal of any
Collateral or remove any Inventory from the Premises without Bank's prior
written consent. A transfer of any interest of Borrower's in any Collateral in
total or partial satisfaction of a debt shall not be deemed to be made in the
ordinary course of business.
6.4 Perfection of Security Interest. Borrower shall sign and file, or
permit the filing, in form and substance satisfactory to the Bank, of the
financing statements and shall perform any and all steps requested by Bank to
perfect Bank's security interest in the Collateral, such as, without limitation,
leasing warehouses to Bank or its designee, placing and maintaining signs and
appointing custodians. This Letter Agreement, coupled with the filing of such
UCC Financing statements with the filing offices and public authorities set
forth in the Closing Agenda (which are the only locations for filing required by
the UCC), creates in the Bank's favor a valid and perfected first priority
security interest in the Collateral, which security interest secures the
Obligations. If any Inventory is in the possession or control of any of
Borrower's agents or processors, Borrower shall notify such agents or processors
of Bank's interest therein, and upon request instruct them to hold all such
Inventory for Bank's account and subject to Bank's instructions. A physical
24
listing of all Inventory, wherever located, shall be taken by Borrower whenever
requested by Bank, and a copy of each such physical listing shall be supplied to
Bank. Bank may examine and inspect the Inventory and other Collateral on or off
the Premises at any time on reasonable notice and during business hours or at
any time without any necessity for notice following the occurrence of an Event
of Default.
6.5 Insurance. Borrower agrees to keep all the Inventory and Collateral
insured with fire and extended coverage as insurance policies in amounts: (i)
not less than that usually carried by one engaged in a like business; (ii)
sufficient to provide for full replacement cost coverage; and (iii) in any event
not less than that required by Bank naming the Bank as secured party and first
loss payee. Borrower hereby appoints Bank as attorney for Borrower in obtaining,
adjusting, settling and canceling such insurance and endorsing any drafts. All
premiums on such insurance shall be paid by Borrower and the policies delivered
to the Bank. If Borrower fails to do so, the Bank may procure such insurance and
charge the cost to Borrower's loan account. As further assurance for the payment
and performance of the Obligations. Borrower hereby assigns to Bank all sums
including returned or unearned premiums, which may become payable under any
policy of insurance on the Collateral and Borrower hereby directs each insurance
company issuing any such policy to make payment of such sums directly to Bank.
6.6 Right to Discharge. Bank may, at its sole option, discharge any taxes,
liens, security interests or other encumbrances at any time levied or placed on
the Collateral and not permitted by this Letter Agreement and pay for the
maintenance and preservation of the Collaterals. Borrower will reimburse Bank on
demand for any payment made or any expense incurred with interest at the rate
provided in this Letter Agreement. Where practical and consistent with its
rights to take such actions to preserve or protect the Collateral, the Bank will
give Borrower reasonable notice of its intention to take such actions.
6.7 Deficiency. If in the event of the sale of the Collateral by the Bank
following an Event of Default, the proceeds thereof are insufficient to pay all
amounts to which Bank is legally entitled. Borrower will be liable for the
deficiency, together with interest thereon at the rate provided in this Letter
Agreement and the reasonable fees of any attorney employed by Bank to collect
such deficiency.
6.8 Defense of Collateral. The Borrower agrees to defend its title to the
Collateral and to take all steps reasonably necessary to preserve its title
and/or right to the Collateral and ability to use same, including, without
limitation, defense of any claim of infringement of Intellectual Property and
action against any infringers of Intellectual Property.
6.9 Bank's Duties with Respect to Collateral. The powers conferred on the
Bank herein are solely to protect its interest in the Collateral and shall not
impose any duty upon it to exercise any such powers. Except for the safe custody
of any Collateral actually in its possession and the accounting for monies
actually received by it hereunder, the Bank shall have no duty as to any
Collateral. The Bank shall not be liable for any acts, omissions, error of
judgment or mistakes of fact or law including, without limitation, acts,
25
omissions, error or mistakes with respect to the Collateral, except for those
arising out of or in connection with the Bank's gross negligence or willful
misconduct. The Bank shall be deemed to have exercised reasonable care in the
custody and preservation of the Collateral in its possession if the Collateral
is accorded treatment substantially equal to that which the Bank accords its own
like property or rights. The Bank shall be under no obligation to take any
necessary steps to collect any Collateral or preserve rights against prior
parties or any other rights pertaining to any Collateral, but may do so at its
sole option, and all expenses incurred in so doing shall be for the sole account
of the Borrower and shall be deemed part of the Obligations.
6.10 Other Collateral. This Letter Agreement shall not be construed to be
in limitation of or in substitution for any other grant of security interest
from Borrower to Bank made prior to or contemporaneously herewith and no other
such grant of a security interest made subsequent to or contemporaneously
herewith shall be construed to be in limitation of or in substitution for this
Letter Agreement unless expressly and specifically provided therein.
VII. MISCELLANEOUS
7.1 Costs and Expenses: Indemnity. The Borrower agrees to pay at closing
all costs and expenses (including, without limitation, reasonable legal fees
determined on the basis of the hourly rates charged by the Bank's law firm for
attorneys and staff, such legal fees estimated to be, and to be capped at,
$8,000 exclusive of costs and disbursement and pursuant to the Term Sheet dated
as of February 9, 1999 and the annexed letter of the Bank's counsel dated
February 5, 1999) in connection with the preparation, execution and delivery of
this Letter Agreement, the Revolving Note, the Term Note and all other
instruments and documents to be delivered in connection with any Loan or letter
of credit issued hereunder and any amendments or modifications of any of the
foregoing, as well as the costs and expenses (including, without limitation, the
reasonable fees and expenses of legal counsel) incurred by the Bank in
connection with preserving, enforcing or exercising, upon default, any rights or
remedies under this Letter Agreement, the Revolving Note, the Term Note and all
other instruments and documents delivered or to be delivered hereunder or in
connection herewith, all whether or not legal action is instituted. THE BORROWER
IS ON NOTICE THAT THE BANK'S AND THE BORROWERS' INTERESTS MAY BE DIFFERENT AND
MAY CONFLICT, AND THAT THE BANK'S ATTORNEY REPRESENTS ONLY THE BANK AND NOT THE
BORROWER. THE BORROWER IS THEREFORE ADVISED TO CONSULT A NEW JERSEY ATTORNEY OF
ITS OWN CHOOSING TO REPRESENT ITS INTERESTS. In addition, the Borrower shall be
obligated to pay any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of this Letter Agreement,
the Revolving Note, the Term Note and all other instruments and documents to be
delivered in connection with any Obligation. Borrower agrees to indemnify and
hold harmless the Bank from and against any and all liability, loss, damage, and
all costs or expense (including, without limitation, reasonable fees and
disbursements of counsel, experts and agents) imposed on, incurred by or
asserted against the Bank arising out of or in connection with: (i) preparation
of the Loan Documents, or amendments, modifications or waivers thereof: (ii)
taxes (excluding any corporate excise or income taxes payable by the Bank by
reason hereof or otherwise) and other governmental charges in connection with
this Letter Agreement and the Collateral; (iii) exercise of the Bank's rights
with respect
26
to the Collateral; (iv) any enforcement, collection or other resulting therefrom
or any negotiations or other measures to preserve the Bank's rights
hereunder:(v) the custody or preservation of, or the sale of or other
realization upon, any of the Collateral; (vi) any failure by the Borrower to
perform or observer any of the provisions of this Letter Agreement; (vii) any
investigative, administrative or judicial proceeding (whether or not the Bank is
a party thereto) relating to or arising out of this Letter Agreement; or (viii)
any bankruptcy, insolvency or other similar proceeding relating to the Borrower,
unless the Bank was at fault with respect to such liability, loss, damage, cost
or expense or acted in bad fait with respect thereto. The Borrower's obligations
under this Section constitute Obligations and shall survive the termination of
this Letter Agreement. Any fees, costs, expenses or other charges which the Bank
is entitled to receive from the Borrower under this Section shall bear interest
from the date of any demand therefor until the date when paid at a rate per
annum equal to the sum of (i) four (4%) percent plus (ii) the per annum rate
otherwise payable under the Notes (but in no event in excess of the maximum rate
permitted by then applicable law).
7.2 Capital Adequacy. If the Bank shall have determined that the adoption
or phase-in after the date hereof of any applicable law, rule or regulation
regarding capital requirements for banks or bank holding companies, or any
change therein after the date hereof, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by the Bank with any request or directive of such entity regarding capital
adequacy (whether or not having the force of the law) has or would have the
effect of reducing the return on the Bank's capital with respect to the
Revolving Loans, the Term Loans, LIBOR Loans and/or the within described
revolving and Term Loan facilities and/or letters of credit issued for the
account of the Borrower to a level below that which the Bank could have achieved
(taking, into consideration the Bank's policies with respect to capital adequacy
immediately before such adoption, phase-in, change or compliance and assuming
the Bank's capital was then fully utilized) but for such adoption, phase-in,
change of compliance by any amount deemed by the Bank to be material: (i) the
Bank shall promptly after its determination of such occurrence give notice
thereof to the Borrower; and (ii) the Borrower shall pay forthwith to the Bank
as an additional fee such amount as the Bank certifies to be the amount that
will compensate it for such reduction with respect to the Revolving Loans, the
Term Loans, the LIBOR loans (excluding, with respect to any LIBOR loan, any such
requirement already included in such LIBOR loan's reserve rate), the
within-described revolving and Term Loan facilities and/or such letters of
credit.
A certificate of the Bank claiming compensation on under this Section shall
be conclusive in the absence of manifest error. Such certificate shall set forth
the nature of the occurrence giving rise to such compensation, the additional
amount or amounts to be paid to it hereunder and the method by which such
amounts were determined. In determining such amounts, the Bank may use any
reasonable averaging and attribution methods. No failure on the part of the Bank
to demand compensation on any one occasion shall constitute a waiver of its
right to demand such compensation on any other occasion and no failure on the
part of the Bank to deliver any certificate in a timely manner shall reduce any
obligation of the Borrower to the Bank under this Section.
27
7.3 Facility Fees. With respect to the Term Loans, the Borrower is paying
to the Bank, at closing, a non-refundable facility fee in the amount of $3,750.
The Borrower will pay to the Bank with respect to the within arrangements for
Revolving Loans, on the last day of each calendar quarter (commencing on March
31, 1999 as long as the within-described revolving loan arrangements are in
effect and on the Expiration Date, non-refundable commitment fees, computed
quarterly in arrears on the daily average unused portion of the revolving credit
amount during the calendar quarter for which such commitment fees are to be
determined, appropriately prorate for any partial calendar quarter. As used
herein, the "unused portion of the revolving credit amount" as at any date means
that amount by which (x) $2,000,000 exceeds (y) the sum of the aggregate
principal amount of all Revolving Loans then outstanding plus the aggregate
undrawn amounts of all letters of credit then outstanding. Such commitment fees
will be payable, based on such daily average unused portion of the revolving
credit amount, at the rate of 0.75% per annum. In addition, if the
within-described revolving financing arrangements are terminated by the Borrower
for any reason or by the Bank as the result of the Borrower's default, the
Borrower shall forthwith upon such termination pay to the Bank a sum equal to
all of the commitment fees which would have become due pursuant to this Section
for the period from the date of such termination through the Expiration Date
assuming that no Revolving Loans and no letters of credit are outstanding during
such period. Fees described in this Section are in addition to any balances and
fees required by the Bank or any of its affiliates in connection with any other
services now or hereafter made available to the Borrower.
7.4 Other Agreements. The provisions of this Letter Agreement are not in
derogation or limitation of any obligations, liabilities or duties of the
Borrower under any of the other Loan Documents or any other agreement with or
for the benefit of the Bank. No inconsistency in default provisions between this
Letter Agreement and any of the other Loan Documents or any such other agreement
will be deemed to create any additional grace period or otherwise derogate from
the express terms of each such default provisions. No covenant, agreement or
obligation of the Borrower contained herein, nor any right or remedy of the Bank
contained herein, shall in any respect be limited by or be deemed in limitation
of any inconsistent or additional provisions contained in any of the other Loan
Documents or in any such other agreement.
7.5 Governing Law. This Letter Agreement and the Notes shall be governed
by and construed and enforced in accordance with, the laws of The Commonwealth
of Massachusetts, without giving effect to its provisions governing conflicts of
laws.
28
7.6 Addresses for Notices, etc. All notices, requests, demands and other
communications provided for hereunder shall be in writing and shall be mailed or
delivered to the applicable party at the address indicated below:
If to the Borrower:
EP MEDSYSTEMS, INC.
100 Stierli Court
Arlington, NJ 07856
Attention: Joseph Turner,
Chief Financial Officer
If to the Bank:
Fleet National Bank
High Technology Division
One Federal Street
Boston, MA 02110
Attention: Kimberly A. Martone,
Senior Vice President
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall be effective two (2) days after deposit in the United
States mails, if sent postage prepaid, certified or registered mail, return
receipt requested, addressed as aforesaid. If any such notice, request, demand
or other communication is hand delivered, same shall be effective upon receipted
delivery.
7.7 Binding Effect; Assignment; Termination. This Letter Agreement shall
be binding upon the Borrower, its successors and assigns and shall inure to the
benefit of the Borrower and the Bank and their respective permitted successors
and assigns. The Borrower may not assign this Letter Agreement or any rights
hereunder without the express written consent of the Bank. The Bank may, in
accordance with applicable law, from time to time assign or grant participations
in this Letter Agreement, the Loans, the Notes and/or any letters of credit
issued hereunder. Without limitation of the foregoing generality,
(i) The Bank may at any time pledge all or any portion of its rights
under the Loan Documents (including any portion of any Note) to
any of the twelve Federal Reserve Banks organized under Section 4
of the Federal Reserve Act, 12 U.S.C. Section 341. No such pledge
or the enforcement thereof shall release the Bank from its
obligations sunder any of the Loan Documents.
(ii) The Bank shall have the unrestricted right at any time and from
29
time to time, and without the consent of or notice to the
Borrower, to grant to one or more banks or other financial
institutions (each, a "Participant") participating interests in
the Bank's obligation to lend hereunder and/or any or all of the
Loans held by the Bank hereunder. In the event of any such grant
by the Bank of a participating interest to a Participant, whether
or not upon notice to the Borrower, the Bank shall remain
responsible for the performance of its obligations hereunder and
the Borrower shall continue to deal solely and directly with the
Bank in connection with the Bank's rights and obligations
hereunder. The Bank may furnish any information concerning the
Borrower in its possession from time to time to prospective
assignees and Participants; provided that the bank shall require
any such prospective assignee or Participant to agree in writing
to maintain the confidentiality of such information to the same
extent as the Bank would be required to maintain such
confidentiality.
The Borrower may terminate this Letter Agreement and the financing
arrangements made herein by giving written notice of such termination to the
Bank, together with the payment described in the fifth sentence of [SECTION]7.3;
provided that no such termination will release or waive any of the Bank's rights
or remedies or any of the Borrower's obligations under this Letter Agreement or
any of the other Loan Documents unless and until the Borrower has paid in full
all Loans and all interest thereon and all fees and charges payable in
connection therewith and all letters of credit issued hereunder have been
terminated.
7.8 Consent to Jurisdiction. The Borrower irrevocably submits to the
non-exclusive jurisdiction of any Massachusetts court or any federal court
sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this Letter Agreement and/or any Note.
The Borrower irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of venue of any such
suit, action or proceeding brought in such a court and any claim that any such
suit, action or proceeding has been brought in an inconvenient forum. The
Borrower agrees that final judgment in any such suit, action or proceeding
brought in such a court shall be enforced in any court of proper jurisdiction by
a suit upon such judgment, provided that service of process in such action, suit
or proceeding shall have been effected upon the Borrower in one of the manners
specified in the following paragraph of this [SECTION]6.8 or as otherwise
permitted by law.
The Borrower hereby consents to process being served in any suit, action or
proceeding of the nature referred to in the preceding paragraph of this
[SECTION]7.8 either (i) by mailing a copy thereof by registered or certified
mail, postage prepaid, return receipt requested, to it at its address set forth
in [SECTION]7.6 or (ii) by serving a copy thereof upon it at its address set
forth in [SECTION]7.6.
7.9 Severability. In the event that any provision of this Letter Agreement
or the application thereof to any Person, property or circumstances shall be
held to any extent to be invalid or unenforceable, the remainder of this Letter
30
Agreement, and the application of such provision to Persons, properties or
circumstances other than those as to which it has been held invalid and
unenforceable, shall not be affected thereby, and each provision of this Letter
Agreement shall be valid and enforced to the fullest extent permitted by law.
7.10 Replacement Note. Upon receipt of an affidavit of an officer of the
Bank as to the loss, theft, destruction or mutilation of any Note or of any
other Loan Document which is not of public record and, in the case of any such
mutilation, upon surrender and cancellation of such Note or other Loan Document,
the Borrower will issue, in lieu thereof, a replacement Note or other Loan
Document in the same principal amount (as to any Note) and in any event of like
tenor.
7.11 Usury. All agreements between the Borrower and the Bank are hereby
expressly limited so that in no contingency or event whatsoever, whether by
reason of acceleration of maturity of the Notes or otherwise, shall the amount
paid or agreed to be paid to the Bank for the use or the forbearance of the
Indebtedness represented by any Note exceed the maximum permissible under
applicable law. In this regard, it is expressly agreed that it is the intent of
the Borrower and the Bank, in the execution, delivery and acceptance of the
Notes, to contract in strict compliance with the laws of The Commonwealth of
Massachusetts. If, under any circumstances whatsoever, performance or
fulfillment of any provision of any of the Notes or any of the other Loan
Documents at the time such provision is to be performed or fulfilled shall
involve exceeding the limit of validity prescribed by applicable law, then the
obligation so to be performed or fulfilled shall be reduced automatically to the
limits of such validity, and if under any circumstances whatsoever the Bank
should ever receive as interest an amount which would exceed the highest lawful
rate, such amount which would be excessive interest shall be applied to the
reduction of the principal balance evidenced by the Notes and not to the payment
of interest. The provisions of this Section 7.11 shall control every other
provision of this Letter Agreement and of each Note.
7.12 Generally Accepted Accounting Principles or ("GAAP"). Any financial
calculation to be made, all financial statements and other financial information
to be provided, and all books and records to be kept in connection with the
provisions of this Letter Agreement shall be in accordance with generally
accepted accounting principles consistently applied during each interval and
from interval to interval; provided, however, that in the event changes in
generally accepted accounting principles shall be mandated by the Financial
Accounting Standards Board or any similar accounting body of comparable
standing, or should be recommended by Borrower's certified public accounts, to
the extent such changes would affect any financial calculations to be made in
connection herewith, such changes shall be implemented in making such
calculations only from and after such date as Borrower and Bank shall have
amended this Agreement to the extent necessary to reflect such changes in the
financial and other covenants to which such calculations relate.
7.13 WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY MUTUALLY WAIVE THE RIGHT TO A TRAIL BY JURY IN
RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS LETTER AGREEMENT, ANY NOTE OR ANY OTHER LOAN DOCUMENTS OR OUT OF ANY COURSE
31
OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS
OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE BANK TO
ENTER INTO THIS LETTER AGREEMENT AND TO MAKE LOANS AS CONTEMPLATED HEREIN.
VIII. DEFINED TERMS.
8.1 Definitions. In addition to the terms defined elsewhere in this Letter
Agreement as used in this Letter Agreement, the following terms have the
following respective meanings:
"Adjusted Current Liabilities" - All Current Liabilities, other than any
such Liabilities which consist of the current portion of Deferred Revenue, as
defined by GAAP.
"Adjusted Senior Debt" - All Indebtedness of the Borrower and/or any of its
Subsidiaries, other than (i) any such Indebtedness which constitutes
Subordinated Debt and (ii) any such Indebtedness which consists of Deferred
Revenue, as defined by GAAP.
"Aggregate Revolving Bank Liabilities" - At any time, the sum of (i) the
principal amount of all Revolving Loans then outstanding, plus (ii) all then
undrawn amounts of letters of credit issued by the Bank for the account of the
Borrower, plus (iii) all amounts then drawn on any such letter of credit which
at said date shall not have been reimbursed to the Bank by the Borrower.
"Borrowing Base" - At any time, 80% of the aggregate principal amount of
the Qualified Receivables of the Borrower then outstanding, plus 80% of Eligible
insured foreign accounts receivable (including accounts receivable secured by
irrevocable letters of credit), plus 50% of Eligible non-insured foreign
accounts receivable up to $250,000.
"Business Day" - Any day which is not a Saturday, nor a Sunday nor a public
holiday under the laws of the United States of America or The Commonwealth of
Massachusetts applicable to a national bank.
"Capital Base" - At any time, the sum of (i) the consolidated Tangible Net
Worth of the Borrower and Subsidiaries then existing plus (ii) the principal
amount of Subordinated Debt of the Borrower then outstanding (nothing contained
herein being deemed to authorize the incurring of any additional Subordinated
Debt).
"Collateral" - All property now or hereafter owned by the Borrower or in
which the Borrower now or hereafter has any interest which is described as
"Collateral" in [SECTION]6.1.
"Current Liabilities" - All liabilities of the Borrower and/or any of its
Subsidiaries which would properly be shown as current liabilities on a
consolidated balance sheet of the Borrower prepared in accordance with generally
accepted accounting principles applied consistently with the Borrower's audited
financial statements as at December 31, 1997, heretofore provided to the Bank.
32
"Deferred Revenue" - All liabilities of the Borrower which would properly
be shown as "deferred revenue" on a balance sheet of consistently with the
balance sheet included in the Borrower's audited annual financial statements as
of December 31, 1997 heretofore provided to the Bank.
"ERISA" - The Employee Retirement Income Security Act of 1974, as amended.
"Expiration Date" - March 31, 2001, unless extended by the Bank, which
extension may be given or withheld by sole discretion.
"Indebtedness" - The total of all obligations of a Person, whether current
or long-term, senior or subordinated, which in accordance with generally
accepted accounting principles would be included as liabilities upon such
Person's balance sheet at the date as of which Indebtedness is to be determined,
and shall also include guaranties, endorsements (other than for collection in
the ordinary course of business) or other arrangements whereby responsibility is
assumed for the obligations of others, whether by agreement to purchase or
otherwise acquire the obligations of others, including any agreement, contingent
or otherwise, to furnish funds through the purchase of goods, supplies or
services for the purpose of payment of the obligations of others.
"Lien" - Any mortgage, deed of trust, pledge, lien, security interest, or
other charge or encumbrance (including the lien or retained security title of a
conditional vendor) whether voluntary or involuntary.
"Loan" - Any Revolving Loan or any Term Loan.
"Loan Documents" - Each of this Letter Agreement, the Revolving Note, the
Term Note, and each other instrument, document or agreement evidencing,
securing, guaranteeing or relating in any way to any of the Loans or to any of
the letters of credit issued hereunder, all whether now existing or hereafter
arising or entered into.
"Maximum Revolving Amount" - At any date as of which same is to be
determined by which (x) $2,000,000 exceeds (y) the sum of (i) all then undrawn
amounts of letters of credit issued by the Bank for the account of the Borrower
plus (ii) all amounts then drawn on any such letter of credit which at said date
shall not have been reimbursed to the Bank by the Borrower.
"Net Income" (or "Net Loss") - The book net income (or book net loss, as
the case may be) of a Person for any period, after all taxes actually paid or
accrued and all expenses and other charges determined in accordance with
generally accepted accounting principles consistently applied.
"Net Quick Assets" - Such current assets of the Borrower as consist of
cash, cash- equivalents, readily marketable securities and Receivables (less an
allowance for bad debt consistent with the Borrower's prior experience).
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"Notes" - Collectively, the Revolving Note and the Term Note.
"Obligations" - All Indebtedness, covenants, agreements, liabilities and
obligations, now existing or hereafter arising, made by the Borrower with or for
the benefit of the Bank or owed by the Borrower to the Bank in any capacity of
every name and nature whatsoever, direct or indirect, absolute or contingent,
now existing or hereafter arising or acquired, including, without limitation,
the due payment and performance of all liabilities and obligations under the
Loan Documents and under any and all notes, including, but not limited to, the
Notes and obligations to perform or refrain from performing any acts.
"PBGC" - The Pension Benefit Guaranty Corporation or any successor thereto.
"Person" - An individual, corporation, company, partnership, joint venture,
trust or unincorporated organization, or a government or any agency or political
subdivision thereof.
"Premises" - As defined in Subsection 2.1(j) above.
"Qualified Receivables" - Only those Receivables of the Borrower which
arise out of bona fide sales made to customers of the Borrower (which customers
are located in the United States and are unrelated to the Borrower) in the
ordinary course of the Borrower's business and which remain unpaid no more than
90 days past the respective invoice dates of such Receivables, the payment of
which is not in dispute. Unless the Bank in its sole discretion otherwise
determines with respect to any Receivable, a Receivable which would otherwise be
a Qualified Receivable shall be deemed not to be a Qualified Receivable (i) if
the Bank does not have a fully perfected first priority security interest in
such Receivable; (ii) if such Receivable is not fee and clear of all adverse
interests in favor of any other Person; (iii) if such Receivable is subject to
any deduction, off-set, contra account, counterclaim or condition, (iv) if a
field examination made by the Bank fails to confirm that such Receivable exists
and satisfies all of the criteria set forth herein to be a Qualified Receivable;
(v) if such Receivable is not properly invoiced at the date of sale; (vi) if the
customer or account debtor has disputed liability or made any claim with respect
to the Receivable or the merchandise covered thereby or with respect to any
other Receivable due from said customer to the Borrower; (vii) if the customer
or account debtor has filed a petition for bankruptcy or any other application
for relief under the Bankruptcy Code or has effected an assignment for the
benefit of creditors, or if any petition or any other application for relief
under the Bankruptcy Code has been filed against said customer or account
debtor, or if the customer or account debtor has suspended business, become
insolvent, ceased to pay its debts as they become due, or had or suffered a
receiver or trustee to be appointed for any of its assets or affairs; (viii) if
the customer or account debtor has failed to pay other Receivables so that an
aggregate of 25% of the total Receivables owing to the Borrower by such customer
or account debtor has been outstanding for more than 90 days: (ix) if such
Receivable is owed by the United States Government or any agency or department
thereof (unless assigned to the Bank under the Federal Assignment of Claims
Act); or (x) if the Bank reasonably believes that collection of such Receivable
is insecure or that it may not be paid by reason of financial inability to pay
or otherwise, or that such Receivable is not for any reason suitable for use as
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a basis for borrowing hereunder.
"Qualifying Equipment" - Equipment (not including prepackaged software) and
fixtures purchased by the Borrower after September 30, 1998 for use in the
Borrower's business which meets all of the following criteria: (i) such item of
equipment and fixtures consists of one of the items shown on the Equipment List
heretofore delivered by the Borrower to the Bank or has otherwise been approved
by the Bank for use in supporting a Term Loan, (ii) each item of such equipment
and fixtures has been delivered to and installed at the Premises and has become
fully operational, (iii) the Borrower has paid in full for each item of such
equipment and holds title to same, free of all interests and claims of any other
Person (other than the security interest of the Bank), and (iv) the Bank has
fully perfected first security interest in such equipment.
"Qualifying Real Property" - shall mean (i) any part or all of the
buildings and lots containing the Premises and (ii) such other real property as
the Bank may agree, in writing and in its sole discretion, may constitute
Qualifying Real Property, subject in either case to the Bank's review of
appraisals, environmental assessments and reports and other documentation
reasonably required by the Bank to assess its Security Interest in respect of
such Qualifying Real Property. Such documents and information shall include,
without limitation, a "marked-up" title insurance commitment from a title
insurance company acceptable to the Bank agreeing to issue a mortgagee title
insurance policy insuring the mortgage as a valid first lien on the Qualifying
Real Property free and clear of all liens, encumbrances, exceptions and
restrictions, a current survey of the Qualifying Real Property certified to be
true and correct to the Bank which shall not disclose any boundary
encroachments, and a letter from the New Jersey Department of Environmental
Protection indicating that the Qualifying Real Property is not subject to the
New Jersey Industrial Site Recovery Act.
"Receivables" - All of the Borrower's resent and future accounts, accounts
receivable and notes, drafts, acceptances and other instruments representing or
evidencing a right to payment for goods sold or for services rendered.
"Security Interest" - shall mean the security interests granted to the Bank
by the Borrower in [SECTION]6.1.
"Subordinated Debt" - Any Indebtedness of the Borrower which is expressly
subordinated, pursuant to a subordination agreement in form and substance
satisfactory to the Bank, to all Indebtedness now or hereafter owed by the
Borrower to the Bank.
"Subsidiary" - Any corporation or other entity of which the Borrower and/or
any of its Subsidiaries, directly, or indirectly, owns, or has the right to
control or direct the voting of, fifty (50%) percent or more of the outstanding
capital stock or other ownership interest having general voting power (under
ordinary circumstances).
"Tangible Net Worth" - An amount equal to the total assets of any Person
(excluding (i) the total intangible assets of such Person and (ii) any assets
35
representing amounts due from any officer, employee or other affiliate of such
Person) minus the total liabilities of such Person. Total intangible assets
shall be deemed to include, but shall not be limited to, the excess of cost over
book value of acquired businesses accounted for by the purchase method,
formulae, trademarks, trade names, patents, patent rights and deferred expenses
(including, but not limited to, unamortized debt discount and expense,
organizational expense, capitalized software costs and experimental and
development expenses).
"UCC" - The Uniform Commercial Code as in effect from time to time in the
Commonwealth of Massachusetts, except that with respect to Collateral located or
deemed located in any other jurisdiction, such term shall refer to the Uniform
Commercial Code as in effect in each such other jurisdiction. Unless otherwise
defined in this Letter Agreement, capitalized words shall have the meanings set
forth in the UCC as in effect on the date of this Agreement in the Commonwealth
of Massachusetts.
Any defined term used in the plural preceded by the definite article shall
be taken to encompass all members of the relevant class. Any defined term used
in the singular preceded by "any" shall be taken to indicate any number of the
members of the relevant class.
This Letter Agreement is executed, as an instrument under seal, as of the
day and year first above written.
Very truly yours,
EP MEDSYSTEMS INC.
By:/s________________________________
Name:
Title:
Accepted and agreed:
FLEET NATIONAL BANK
By:/s____________________________
Its
By:/s____________________________
Its
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