-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IGIDWUlt92lfgN5p6JVZT06eq9fbQI2bpIpzqYgEJGRbYPmUKojf4L29Y5LXPr9e 1mUmcFyz8WkCCIGPBvh1DQ== 0000927016-02-001983.txt : 20020416 0000927016-02-001983.hdr.sgml : 20020416 ACCESSION NUMBER: 0000927016-02-001983 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020228 FILED AS OF DATE: 20020409 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL ELECTRONICS INC CENTRAL INDEX KEY: 0000717751 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 042654231 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-16305 FILM NUMBER: 02606026 BUSINESS ADDRESS: STREET 1: 427 TURNPIKE ST CITY: CANTON STATE: MA ZIP: 02072 BUSINESS PHONE: 6178215566 MAIL ADDRESS: STREET 1: 427 TURNPIKE STREET CITY: CANTON STATE: MA ZIP: 02021 10QSB 1 d10qsb.txt FORM 10QSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For Quarter Ended February 28, 2002 ------------------------------------------------------------ Commission File Number 0-16305 -------------------------------------------------------- International Electronics, Inc. - ------------------------------------------------------------------------------ (Exact name of small business issuer as specified in its charter) Massachusetts 04-2654231 - ------------------------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 427 Turnpike Street, Canton, Massachusetts 02021 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (781) 821-5566 - ------------------------------------------------------------------------------ (Issuer's telephone number, including area code) Not applicable - ------------------------------------------------------------------------------ (former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO _____ --- 1,570,647 common shares were outstanding at March 29, 2002. INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES ------------------------------------------------ Index ----- Part I. Financial Information: Page No. -------- Item 1: Financial Statements (unaudited) -------------------------------- Condensed Consolidated Balance Sheets, February 28, 2002 and August 31, 2001 2 Condensed Consolidated Statements of Income, three and six months ended February 28, 2002 and 2001 3 Condensed Consolidated Statement of Shareholders' Equity, six months ended February 28, 2002 4 Condensed Consolidated Statements of Cash Flows, six months ended February 28, 2002 and 2001 5 Notes to Condensed Consolidated Financial Statements 6-9 Item 2: Management's Discussion and Analysis of --------------------------------------- Financial Condition and Results of Operations 10-17 --------------------------------------------- Part II. Other Information: Item 4: Submission of Matters to a Vote of Security Holders 18 --------------------------------------------------- Item 6: Exhibits and Reports on Form 8-K 18 -------------------------------- Signature 19 ---------
-1- INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES ------------------------------------------------ CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (unaudited)
Feb. 28, 2002 August 31, 2001 ------------- --------------- ASSETS - ------ Current assets: Cash and equivalents $1,789,168 $1,549,954 Accounts receivable, net 1,457,482 1,211,884 Inventories 767,017 848,742 Deferred income taxes 337,000 330,000 Other current assets 274,949 239,486 ---------- ---------- Total current assets 4,625,616 4,180,066 Property and equipment, net 892,851 476,359 Other assets: Deferred income taxes 88,000 88,000 Other 29,211 36,711 -------------- ------------- 117,211 124,711 -------------- ------------- $5,635,678 $4,781,136 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 529,830 $ 330,627 Accrued expenses 1,199,866 987,306 Income taxes 29,000 31,000 Current portion of long-term obligations 273,162 218,066 -------------- ------------- Total current liabilities 2,031,858 1,566,999 Long-term obligations, less current portion 273,169 201,488 Commitments Shareholders' equity: Common stock, $0.01 par value; authorized 5,984,375 shares; issued 1,605,647 and 1,589,313 shares, respectively 16,056 15,893 Capital in excess of par value 4,882,628 4,868,791 Accumulated deficit (1,529,389) (1,833,391) Less treasury stock, at cost: 35,000 shares (38,644) (38,644) -------------- ------------- Total shareholders' equity 3,330,651 3,012,649 -------------- ------------- $5,635,678 $4,781,136 ============== =============
See notes to unaudited condensed consolidated financial statements. -2- INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES ------------------------------------------------ CONDENSED CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------- (unaudited)
Three months ended Six months ended -------------------------------------- ----------------------------------- Feb. 28, 2002 Feb. 28, 2001 Feb. 28, 2002 Feb. 28, 2001 ---------------- ---------------- ---------------- --------------- Net sales $3,214,792 $2,597,690 $5,860,551 $5,337,142 Cost of sales 1,739,373 1,464,439 3,167,288 2,936,232 -------------- -------------- -------------- -------------- Gross profit 1,475,419 1,133,251 2,693,263 2,400,910 Operating expenses: Research and development costs 250,314 249,759 510,387 537,852 Selling, general and administrative expenses 961,512 873,795 1,853,200 1,868,457 -------------- -------------- -------------- -------------- Total operating expenses 1,211,826 1,123,554 2,363,587 2,406,309 -------------- -------------- -------------- -------------- Income (loss) from operations 263,593 9,697 329,676 (5,399) Interest expense (4,981) (7,476) (10,868) (15,913) Other income 7,341 20,094 17,194 49,531 -------------- -------------- -------------- -------------- Income before income taxes 265,953 22,315 336,002 28,219 Provision (benefit) for income taxes: Current 29,000 2,300 39,000 11,000 Deferred (6,000) (27,000) (7,000) (16,000) -------------- --------------- -------------- -------------- 23,000 (24,700) 32,000 (5,000) -------------- --------------- -------------- -------------- Net income $ 242,953 $ 47,015 $ 304,002 $ 33,219 ============== ============== ============== ============== Net income per share: Basic $ 0.15 $ 0.03 $ $0.19 $ 0.02 ============== ============== ============== ============== Diluted $ 0.15 $ 0.03 $ $0.18 $ 0.02 ============== ============== ============== ============== Shares used in computing net income per share: Basic 1,569,817 1,539,980 1,567,198 1,538,217 ============== ============== ============== ============== Diluted 1,674,982 1,662,544 1,672,159 1,672,146 ============== ============== ============== ==============
See notes to unaudited condensed consolidated financial statements. -3- INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES ------------------------------------------------ CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY -------------------------------------------------------- (unaudited)
Common Stock Capital in Treasury Stock ------------ excess of Accumulated -------------- Shares Amount par value Deficit Shares Cost Total ------ ------ --------- ------- ------ ---- ----- Balances, September 1, 2001 1,589,313 $15,893 $4,868,791 ($1,833,391) 35,000 ($38,644) $3,012,649 Stock issued upon exercise of stock options 14,001 140 10,361 - - - 10,501 Stock issued upon exercise of stock warrants 2,333 23 3,476 - - - 3,499 Net income - - - 304,002 - - 304,002 --------- ------- ---------- ------------ ------ --------- ---------- Balances, February 28, 2002 1,605,647 $16,056 $4,882,628 ($1,529,389) 35,000 ($38,644) $3,330,651 ========= ======= ========== ============ ====== ========= ==========
See notes to unaudited condensed consolidated financial statements. -4- INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES ------------------------------------------------ CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (unaudited)
Six months ended ----------------------------- Feb. 28, 2002 Feb. 28, 2001 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 304,002 $ 33,219 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 170,229 154,577 Deferred income taxes (7,000) (16,000) Changes in operating assets and liabilities: Accounts receivable (245,598) (426,484) Inventories 81,725 (351,493) Other current assets (35,463) 21,412 Income taxes (2,000) 11,000 Accounts payable and accrued expenses 411,763 396,221 ---------- ---------- Net cash provided by (used in) operating activities 677,658 (177,548) CASH FLOWS FROM INVESTING ACTIVITIES: Net purchase of property and equipment (579,221) (199,702) ---------- ---------- Net cash used in investing activities (579,221) (199,702) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 14,000 4,176 Proceeds from long-term obligations 248,659 42,268 Payments of long-term obligations (121,882) (92,468) ---------- ---------- Net cash provided by (used in) financing activities 140,777 (46,024) CASH AND EQUIVALENTS: Net increase (decrease) during period 239,214 (423,274) Balances, beginning of period 1,549,954 1,642,359 ---------- ---------- Balances, end of period $1,789,168 $1,219,085 ========== ==========
See notes to unaudited condensed consolidated financial statements. -5- INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES ------------------------------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (unaudited) A. Financial Statements: --------------------- In the opinion of International Electronics, Inc. ("IEI"), the unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of February 28, 2002 and the results of operations for the three and six months ended February 28, 2002 and 2001. Certain disclosures normally included have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although IEI believes the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in IEI's Annual Report on Form 10-KSB for the year ended August 31, 2001. B. Principles of Consolidation: ---------------------------- The accompanying condensed consolidated financial statements include the accounts of IEI, its majority owned subsidiary, Ecco Industries, Inc. and its wholly owned subsidiary, International Electronics Europe Limited. All material intercompany transactions, balances and profits have been eliminated. C. Income Taxes: ------------- IEI provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year. Cumulative adjustments to the tax provision are recorded in the interim period in which a change in the estimated annual effective rate is determined. D. Significant Estimates and Assumptions: -------------------------------------- The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. -6- INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES ------------------------------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (continued) (unaudited) E. Net Income per Share: --------------------- Basic net income per share is computed by dividing net income by the weighted-average common shares outstanding during the periods. Diluted net income per share is computed by dividing net income by the weighted average number of common and dilutive option and warrant shares outstanding based on the average market price of IEI's common stock (under the treasury stock method). The following table sets forth the computation of the weighted-average number of shares used in calculating basic and diluted net income per share:
Three months ended Six months ended --------------------------------- -------------------------------- Feb. 28, 2002 Feb. 28, 2001 Feb. 28, 2002 Feb. 28, 2001 ------------- ------------- ------------- ------------- Shares used in computation: Weighted-average shares outstanding for basic net income per share 1,569,817 1,539,980 1,567,198 1,538,217 Effect of dilutive option and warrant shares 105,165 122,564 104,961 133,929 ------------ ------------ ------------ ------------ Total shares for diluted net income per share 1,674,982 1,662,544 1,672,159 1,672,146 ============ ============ ============ ============
The calculations for diluted net income per share do not include an aggregate out of the money options and warrants of 95,000 and 60,500 for the three months ended February 28, 2002 and 2001, respectively. -7- INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES ------------------------------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (continued) (unaudited) F. Recent Accounting Pronouncements: -------------------------------- In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method of accounting and prohibits the use of the pooling-of-interests method. SFAS No. 142 eliminates the amortization of goodwill and certain other intangibles and instead subjects these assets to periodic impairment assessments. SFAS No. 142 is effective immediately for all goodwill and certain other intangible assets acquired after June 30, 2001. IEI does not expect that the implementation of SFAS No's. 141 and 142 will have any impact on its consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Bulletin Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS No. 144 specifies accounting for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions than were included under the previous standards. IEI is required to implement SFAS No. 144 on September 1, 2002, and it has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations. G. Commitments: ----------- Leases - IEI leases an administrative and production facility under an operating lease, which expires in 2004 at an annual rate of approximately $145,000. IEI is responsible for certain real estate taxes, utilities and maintenance costs. Total rental expense for operating leases for the six months ended February 28, 2002 and 2001 amounted to approximately $85,000 and $78,000, respectively. Employment Agreement - IEI has a continuous three-year employment agreement with its President and Chief Executive Officer providing minimum annual aggregate compensation of approximately $167,000. This employment agreement contains certain termination benefits including the payment of three years compensation upon a termination without cause. -8- INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES ------------------------------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (continued) (unaudited) H. Long-term Obligations: ---------------------- Long-term obligations are summarized as follows:
Feb. 28, 2002 Aug. 31, 2001 ------------- ------------- Equipment line of credit, 4.75%-6.5% (Note I) $546,331 $417,948 Collateralized 8% equipment loan - 1,606 ----------- ----------- 546,331 419,554 Less current portion (273,162) (218,066) ----------- ----------- $273,169 $201,488 =========== ===========
The future principal payments on long-term obligations are $273,162 (2003), $176,566 (2004) and $96,603 (2005). I. Bank Arrangements: ------------------ As of February 28, 2002, IEI has an available $380,000 equipment line of credit expiring February 28, 2003 and a bank demand line of credit that provides for borrowings of up to $1,000,000. Both lines of credit are at the bank's prime rate of interest, and all of IEI's assets are collateralized under these arrangements. The credit agreements contain certain restrictive covenants including covenants limiting the payment of dividends, a minimum debt to tangible net worth ratio, and bi-annual or annual net income. As of February 28, 2002, no borrowings have been made under the demand line of credit, and IEI has an aggregate of $546,331 outstanding as equipment debt, which is payable in monthly installments through February 2005 (Note H). -9- Management's Discussion and Analysis of --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes to those statements. The following discussion contains forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a number of factors, including the matters discussed in "Risk Factors" and elsewhere in this report. Critical Accounting Policies The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the consolidated financial statements in our Annual Report on Form 10-KSB for the year ended August 31, 2001 describes the significant accounting policies used in the preparation of our consolidated financial statements. Estimates are used for, but not limited to, the accounting for allowance for doubtful accounts and sales returns, inventory reserves, warranty reserves, contingencies and taxes. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements. The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and the aging of our accounts receivable. If there is a deterioration of a major customer's credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of the amounts due us could be adversely affected. A reserve for sales returns is established based on trends in product returns. If the actual future returns do not reflect these trends, our sales could be affected. Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and requirements, we may be required to increase our inventory reserve and our gross profit margin could be adversely affected. We accrue for warranty costs based on the historical rate of claims and costs to provide warranty services. If we experience an increase in warranty claims that are higher than our historical experience or our costs to provide warranty services increase, our gross profit margin could be adversely affected. We are subject to the possibility of various loss contingencies arising in the ordinary course of business. An estimated loss contingency is accrued -10- when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted. Results of Operations Net Sales. Net sales for the second quarter of fiscal 2002 increased 24% as compared to the second quarter of fiscal 2001. Net sales for the first six months of fiscal 2002 increased 10% as compared to the first six months of fiscal 2001. These increases are primarily the result of increased demand for our keypad and access control products. For the six months ended February 28, 2002 and 2001, one and two customers each contributed more than 10% of our net sales, representing an aggregate of 35% and 45% of total net sales, respectively. Cost of Sales. Our cost of sales consists primarily of purchased materials, manufacturing salaries and related personnel expenses, facility overhead and amounts paid to third-party manufacturers. Gross Profit. The ratios of gross profit to sales were 46% for both the second quarter and six months ended February 28, 2002, compared to 44% and 45% for the comparable periods of fiscal 2001. These increases are primarily the result of improved manufacturing efficiencies due to increased sales volume, a favorable product mix and a reduction in material costs, partially offset by start-up costs incurred in the implementation of the recently purchased production equipment. We expect future gross profit as a percentage of net sales to remain consistent at its current level. Research and Development. Research and development expenses consist primarily of salaries and related personnel expenses, consulting fees and prototype costs related to the design, development, testing and enhancement of our products. Research and development expenses were $250,314 and $510,387 for the second quarter and six months ended February 28, 2002, respectively, compared to $249,759 and $537,852 for the comparable periods of fiscal 2001. The decrease in these discretionary costs for the first half of fiscal 2002 compared to the first half of fiscal 2001 primarily relates to a reduction in consulting fees and, to a lesser extent, a decrease in prototype costs. We believe that research and development is critical to our strategic product development objectives and we intend to continue to enhance our products. Accordingly, we expect future research and development expenses to increase in absolute dollars from its current level. Selling, General and Administrative. Selling, general and administrative expenses consist primarily of salaries and related personnel expenses, commissions, travel and entertainment expenses, trade shows, advertising, bad debts and professional fees. As a percentage of net sales, selling, general and administrative expenses were 30% and 32% for the second quarter and six months ended February 28, 2002, respectively, as compared to 34% and 35% for the comparable periods of fiscal 2001. These decreases in costs as a percentage of net sales are primarily due to an increase in sales volume. The -11- increases in expenses for the second quarter of fiscal 2002 compared to the second quarter of fiscal 2001 primarily relate to increased commissions and incentive compensation and, to a lesser extent, additional advertising and professional fees expense. We expect future selling, general and administrative expenses to increase in absolute dollars from its current level as we introduce new products to the market and expand our sales organization. Interest Expense. Interest expense consists of interest incurred on equipment financing. Interest expense was $4,981 and $10,868 for the three and six months ended February 28, 2002, respectively, compared to $7,476 and $15,913 for the comparable periods of fiscal 2001. These decreases are the result of lower interest rates on equipment borrowings, partially offset by an increase in borrowings. Other Income. Other income primarily consists of interest earned on our cash balances and, to a lesser extent, sundry other non-operating items. Other income was $7,341 and $17,194 for the three and six months ended February 28, 2002, respectively, as compared to $20,094 and $49,531 for the comparable periods of fiscal 2001. These decreases are the result of a reduction in interest rates earned on our excess cash balances. Income Taxes. Our effective income tax rate, which includes current and deferred taxes, is 10% for the first half of fiscal 2002. The difference between the effective tax rate and the federal statutory rate is primarily the result of utilization of available federal net operating loss carryforwards and a corresponding reduction in the valuation allowance. Liquidity and Capital Resources As of February 28, 2002, IEI had working capital of $2,593,758 compared to $2,613,067 at August 31, 2001. The ratio of current assets to current liabilities was 2.3 at February 28, 2002 and 2.7 at August 31, 2001. The debt to equity ratio was 0.7 at February 28, 2002 and 0.6 at August 31, 2001. The decrease in current ratio and increase in debt to equity ratio are primarily due to an increase in accounts payable and accrued expenses, partially offset by operating income for the first half of fiscal 2002. Net cash flows from operating activities were $677,658 for the six months ended February 28, 2002 compared to net cash flows used in operating activities of ($177,548) for the six months ended February 28, 2001. The cash flows from operating activities in the first half of fiscal 2002 compared to the comparable period of the prior year primarily reflect significantly higher net income and decreases in inventories and accounts receivable. Net capital expenditures were $579,221 and $199,702 for the six months ended February 28, 2002 and 2001, respectively. The increase in expenditures is primarily due to the purchase of additional manufacturing equipment and related facility improvements. IEI has no current commitments for any material capital expenditures, but we anticipate up to $250,000 in additional capital expenditures for the purchase of office and manufacturing equipment, regulatory testing and tooling costs over the next twelve months. As of February 28, 2002, IEI has available a $380,000 equipment line of credit expiring February 28, 2003 and a bank demand line of credit available of up to $1,000,000. See Notes H and I to the unaudited condensed consolidated financial statements. As of -12- February 28, 2002, IEI had no outstanding borrowings under the demand line of credit and had approximately $546,000 in outstanding borrowings as equipment debt. Net cash flows provided by financing activities were $140,777 for the six months ended February 28, 2002 compared to net cash flows used in financing activities of ($46,024) for the six months ended February 28, 2001. The net cash flows provided by financing activities in the first half of fiscal 2002 primarily resulted from additions to long-term debt obligations for equipment financing, partially offset by payments on long-term obligations. The net cash flows used in financing activities in the first half of fiscal 2001 primarily resulted from the payment of long-term obligations, partially offset by new borrowings for equipment purchases. The following table summarizes our future contractual cash obligations as of February 28, 2002:
2003 2004 2005 Total ---- ---- ---- ----- Long-term obligations $ 273,162 $ 176,566 $ 96,603 $ 546,331 Employment agreement 167,056 167,056 167,057 501,169 Operating lease obligations 145,180 145,180 24,197 314,557 ---------- ---------- ---------- ---------- $ 585,398 $ 488,802 $ 287,857 $1,362,057 ========== ========== ========== ==========
Management believes that its current cash position, together with internally generated funds at present sales levels and its available bank financing, will provide adequate liquidity to satisfy its cash requirements for the next twelve months. Depending upon whether or not sufficient sales and working capital is generated from profitable operations, IEI may require additional external funding. There is no assurance that profits will be generated, or that additional external funding will be obtainable, if such a need should arise. If we are unable to obtain required financing, we may be required to reduce the scope of our planned product development, which could harm our business, financial condition and operating results. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method of accounting and prohibits the use of the pooling-of-interests method. SFAS No. 142 eliminates the amortization of goodwill and certain other intangibles and instead subjects these assets to periodic impairment assessments. SFAS No. 142 is effective immediately for all goodwill and certain other intangible assets acquired after June 30, 2001. IEI does not expect that the implementation of SFAS No's. 141 and 142 will have any impact on its consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Bulletin Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a -13- Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS No. 144 specifies accounting for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions than were included under the previous standards. IEI is required to implement SFAS No. 144 on September 1, 2002, and it has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations. Risk Factors Information provided by IEI in writing and orally, from time to time may contain certain "forward-looking" information as this term is defined by: (1) the Private Securities Litigation Reform Act of 1995 (the "Act") and (2) in releases made by the Securities and Exchange Commission. These Cautionary Statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act. IEI cautions investors that any forward-looking statements made by IEI involve risks and uncertainties, which could cause actual results to differ materially from those projected. IEI has identified certain risks and uncertainties as factors, which may impact on its operating results that are detailed below. All of these factors are difficult for IEI to forecast, and these or other factors can materially adversely affect IEI's business and operating results for one quarter or a series of quarters. Concentration of Customers. IEI has a substantial number of customers but sells a majority of its products to a small number of large customers. This concentration of customers may cause net sales and operating results to fluctuate from quarter to quarter based on major customers' requirements and the timing of their orders and shipments. Sales to IEI's two largest customers accounted for approximately 46% of IEI's total net sales for the fiscal year ended August 31, 2001. IEI's industry has recently experienced significant consolidation, which may further increase IEI's concentration among its major customers. There can be no assurance that IEI's major customers will place additional orders, or that IEI will obtain orders of similar magnitude from other customers. IEI's operating results could be materially and adversely affected upon the loss of any significant customer or if any present or future significant customer were to choose to reduce its level of orders, were to experience financial, operational or other difficulties that resulted in such a reduction in orders to IEI or were to delay paying or fail to pay IEI's receivables from such customer. General Economic Conditions. IEI's business is subject to the effects of general economic conditions in the United States and globally. If the economic conditions in the United States and globally do not improve, or if there is a worsening in the global economic slowdown, IEI could experience adverse impacts on its business, operating results and financial condition. Limited Financial Resources. IEI has limited financial resources. It is therefore subject to all the risks generally associated with a small business having limited financial resources. For the six months ended February 28, 2002 and the years ended August 31, 2001, 2000 and 1999, IEI had net income of approximately $304,000, $136,000, -14- $355,000, and $555,000, respectively. There can be no assurance that IEI will remain profitable. Continued operations after the expenditure of IEI's existing cash reserves may require additional working capital to be generated by profitable operations or use of the bank lines of credit and/or additional financing. There can be no assurance that profits will continue or that additional external funding will be obtainable, if such a need should arise. If we are unable to obtain required financing, we may be required to reduce the scope of our planned product development, which could harm our business, financial condition and operating results. Dependence on Key Employees. The business of IEI is dependent upon the efforts of John Waldstein, President and Chief Executive and Financial Officer, and certain other key management and technical employees. The loss or prolonged disability of such personnel could have a significant adverse effect on the business of IEI. IEI presently maintains a key man life insurance policy of $1,000,000 on John Waldstein. Lack of New Product Development. IEI is engaged in an industry, which, as a result of extensive research and development, introduces new products on a regular basis. Current competitors or new market entrants may develop new products with features that could adversely affect the competitive position of IEI's products. There can be no assurance that IEI will be successful in selecting, developing, manufacturing and marketing new products or enhancing its existing products or that IEI will be able to respond effectively to technological changes or product announcements by competitors. Any failure or delay in these goals could have a material adverse effect on IEI. Fluctuations in Sales and Operating Results. The annual growth rates experienced by IEI are not necessarily indicative of future annual growth rates. Operating results may also fluctuate due to factors such as the timing of new product announcements and introductions by IEI, its major customers and its competitors, market acceptance of new or enhanced versions of IEI's products, changes in the product mix of sales, changes in the relative proportions of sales among distribution channels or among customers within each distribution channel, changes in manufacturing costs, competitive pricing pressures, the gain or loss of significant customers, increased research and development expenses associated with new product introductions and general economic conditions. A limited number of customers have accounted for a significant portion of sales in any particular quarter. In addition, IEI typically operates with a relatively small backlog. As a result, quarterly sales and operating results generally depend on the volume, timing of, and ability to fulfill orders received within the quarter which are difficult to forecast. In this regard, IEI may recognize a substantial portion of its sales in a given quarter from sales booked and shipped in the last weeks of that quarter. A delay in customer orders, resulting in a shift of product shipment from one quarter to another, could have a significant effect on IEI's operating results. In addition, competitive pressure on pricing in a given quarter could adversely affect IEI's operating results, or such price pressure over an extended period could adversely affect IEI's long-term profitability. IEI establishes its expenditure levels for sales and marketing and other expenses based, in large part, on its expected future results. As a result, if sales fall below expectations, there would likely be a material adverse effect on operating results because only a small portion of IEI's expenses vary with its sales in the short-term. -15- Competition. Other companies in the industry offer products in competition with those of IEI. Many of the companies with which IEI competes are substantially larger, have greater resources and market a larger line of products. IEI expects competition to increase significantly in the future from existing competitors and new companies that may enter IEI's existing or future markets. Increased competition could adversely affect IEI's sales and profitability. There can be no assurance that IEI will be able to continue to compete successfully with its existing competitors or with new competitors. Investments or Acquisitions. Although we have no current agreements to do so, we intend to consider investing in or acquiring products, technologies or businesses. In the event of future investments or acquisitions, we could: . issue stock that would dilute our current shareholders' percentage ownership; incur debt or assume liabilities; . incur significant impairment charges related to the write-off of goodwill and purchased intangible assets; . incur significant amortization expenses related to purchased intangible assets; or . incur large and immediate write-offs for in-process research and development and stock-based compensation. Our integration of any acquired products, technologies or businesses may also involve numerous risks including: . problems and unanticipated costs associated with combining the purchased products, technologies or businesses; . diversion of management's attention from our core business; . adverse effects on existing business relationships with suppliers and customers; . risks associated with entering markets in which we have limited or no prior experience; and . potential loss of key employees, particularly those of the acquired organizations. We may be unable to successfully integrate any products, technologies, businesses or personnel that we might acquire in the future. Lack of Patent Protection. Although IEI has obtained some patent and copyright protection for certain of its products and software, management believes that competitors may be able to market products similar to those sold by IEI. -16- Offshore Production. IEI is currently having some of its finished products manufactured in Taiwan and Thailand. IEI presently maintains certain manufacturing molds in Taiwan and Thailand and has a significant amount of components for some products manufactured in South Korea, Taiwan and China. There can be no assurance that the political or economic environment in these countries will remain sufficiently stable to allow reliable and consistent delivery of product. Dependence on Single Source of Supply. IEI is dependent upon sole source suppliers for a number of key components and parts used in IEI's products. There can be no assurance that these suppliers will be able to meet IEI's future requirements for such components or that the components will be available to IEI at favorable prices, or at all. Any extended interruption in the supply or significant increase in price of any such components could have a material adverse effect on IEI's operating results in any given period. Foreign Sales. During the year ended August 31, 2001, IEI's foreign sales represented approximately 10% of total net sales. There may be a reduction in IEI's foreign sales from the 2001 level in the event of significant changes in foreign exchange rates or political and economic instability in foreign countries. Limited Market for Common Stock. There is a limited market for IEI's common stock and there can be no assurance that even this limited market will be sustained. Holders of IEI's common stock may have difficulty selling their shares or may have difficulty selling them at a favorable price. Maintain Listing on NASDAQ. There can be no assurance that IEI will continue to meet the NASDAQ SmallCap standards to maintain its listing on NASDAQ. If IEI is unable to maintain its listing on NASDAQ, holders of IEI's common stock may have difficulty selling their shares or may have difficulty selling them at a favorable price. Volatility of Stock Price. IEI's stock price is subject to significant volatility. If sales or earnings in any quarter fail to meet the investment community's expectations, announcements of new products by IEI or its competitors and other events or factors could have an immediate impact on IEI's stock price. The stock price may also be affected by broader market trends unrelated to IEI's performance. Change in Control. Our executive officers, directors and entities affiliated with them beneficially own, in the aggregate, a significant portion of our outstanding common stock. Although there are no current agreements among the parties, these shareholders, if acting together, would be able to influence significantly all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions. -17- Part II. Other Information - --------------------------- Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- On March 26, 2002, International Electronics held its Special Meeting in Lieu of the Annual Meeting of Shareholders. Of the 1,570,647 shares outstanding as of February 8, 2002, the record date, 1,115,971 shares (71%) were present or represented by proxy at the meeting. The table below presents the results of the election to International Electronics' board of directors: Votes for Against Abstentions --------- ------- ----------- Diane Balcom 1,094,723 21,248 0 Kenneth Moyes 1,094,729 21,242 0 Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits -------- (10) (a) Demand Loan and Security Agreement Accounts Receivable and Inventory dated as of February 28, 1997 between Eastern Bank and the Registrant. (10) (b) Demand Loan and Security Letter Agreement dated as of December 27, 2000 between Eastern Bank and the Registrant. (10) (c) Demand Loan and Security Letter Agreement dated May 20, 1999 between Eastern Bank and the Registrant. (10) (d) Line of Credit Agreement for the Acquisition of Equipment dated as of December 11, 2001 between Eastern Bank and the Registrant. (b) Reports on Form 8-K ------------------- There were no reports on Form 8-K filed for the three months ended February 28, 2002. -18- SIGNATURE --------- Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, who is duly authorized to sign and is the Chief Financial and Accounting Officer. International Electronics, Inc. Date: 4/09/02 /s/ John Waldstein ------- ------------------------------------ John Waldstein, President, Chief Executive Officer, Treasurer and Chief Financial and Accounting Officer and duly authorized to sign. -19- International Electronics, Inc. Exhibits to Form 10-QSB Quarter Ended February 28, 2002 (10) (a) Demand Loan and Security Agreement Accounts Receivable and Inventory dated as of February 28, 1997 between Eastern Bank and the Registrant. (10) (b) Demand Loan and Security Letter Agreement dated as of December 27, 2000 between Eastern Bank and the Registrant. (10) (c) Demand Loan and Security Letter Agreement dated May 20, 1999 between Eastern Bank and the Registrant. (10) (d) Line of Credit Agreement for the Acquisition of Equipment dated as of December 11, 2001 between Eastern Bank and the Registrant. -20- EX-10.A 3 dex10a.txt DEMAND LOAN AND SECURITY AGREEMENT EASTERN BANK DEMAND LOAN AND SECURITY AGREEMENT ACCOUNTS RECEIVABLE AND INVENTORY February 28, 1997 1. SECURITY INTEREST. INTERNATIONAL ELECTRONICS, INC. (hereinafter called the "Borrower") for valuable consideration, receipt whereof is hereby acknowledged, hereby grants to the EASTERN BANK, the secured party hereunder (hereinafter called the "Bank"), a continuing security interest in Borrower's inventory, including all goods, merchandise, raw materials, goods 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 contracts of service or used or consumed in Borrower's business (all hereinafter called the "Inventory"), and in all accounts (as defined in the Uniform Commercial Code, hereinafter "Accounts"), contracts, contract rights, notes, bills, drafts, acceptances, general intangibles (including without limitation tradenames, customer lists, goodwill, computer programs, computer records, computer software, computer data, trade secrets, trademarks, patents, ledger sheets, files, records, data processing records relating to any Accounts and all tax refunds of every kind and nature to which Borrower is now or hereafter may become entitled to, no matter how arising), instruments, documents, chattel paper, choses 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 to replevy goods, and all rights of an unpaid seller of merchandise or services (which, with Inventory and Accounts, are all hereinafter called "Collateral") and in the products and proceeds thereof, including, without limitation, all proceeds of credit, fire or other insurance, and also including, without limitation, rents and profits resulting from the temporary use of the Collateral. 2. OBLIGATIONS SECURED. The security interest granted hereby is to secure payment and performance of all debts, liabilities and obligations of Borrower to the Bank hereunder and also any and all other debts, liabilities and obligations of Borrower to Bank of every kind and description, direct or indirect, absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising, whether or not such obligations are related to the transactions described in this Agreement, by class, or kind, or whether or not contemplated by the parties at the time of the granting of this security interest, regardless of how they arise or by what agreement or instrument they may be evidenced or whether evidenced by any agreement or instrument, and includes obligations to perform acts and refrain from taking action as well as obligations to pay money including, without limitation, all interest, fees, charges, expenses and overdrafts, and also including, without limitation, all obligations and liabilities which the Bank may incur or become liable for, on account of, or as a result of, any transactions between Bank and Borrower including any which may arise out of any letter of credit, acceptance or similar instrument or obligation incurred by Bank for the account of Borrower (all hereinafter called "Obligations"). 3. BORROWER'S PLACES OF BUSINESS, INVENTORY LOCATIONS AND RETURNS POLICY. Borrower warrants that Borrower has no places of business other than that shown at the end of this Agreement, unless other places of business are listed on Schedule "A", annexed hereto, in which event Borrower represents that it has additional places of business at those locations set forth on Schedule "A". Borrower's principal executive office and the office where Borrower keeps its records concerning its accounts, contract rights and other property, is that shown at the end of this Agreement. All Inventory presently owned by Borrower is stored at the locations set forth on Schedule "A". Borrower will promptly notify Bank in writing of any change in the location of any place of business or the location of any Inventory or the establishment of any new place of business or location of Inventory or office where its records are kept which would be shown in this Agreement if it were executed after such change. Borrower represents and warrants that it has described its returns policy in writing to Bank and that it does now, and will continue to, apply such policy consistently in the conduct of its business and agrees that it shall notify Bank in writing before changing its policy or the application thereof. 4. BORROWER'S ADDITIONAL REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants that: (a) Borrower is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts and shall hereafter remain in good standing as a corporation in that state, and is duly qualified and in good standing in every other state in which it is doing business, and shall hereafter remain duly qualified and in good standing in every other state in which by reason of the nature or location of the Borrower's assets or operations, such qualification may be necessary. (b) Borrower's exact legal name is as set forth in this Agreement and Borrower will not undertake or commit to undertake any act which will result in a change of Borrower's legal name, without giving Bank at least thirty (30) days' prior written notice of the same. (c) The execution, delivery and performance of this Agreement, and any other document executed in connection herewith, are within the Borrower's corporate powers, have been duly authorized, are not in contravention of law or the terms of the Borrower's charter, by-laws or other incorporation papers, or of any indenture, agreement or undertaking to which the Borrower is a party or by which it or any of its properties may be bound. (d) All Articles of Organization and all amendments thereto of Borrower have been duly filed and are in proper order. All capital stock issued by Borrower and outstanding was and is properly issued and all books and records of Borrower, including but not limited to its minute books, by-laws and books of account, are accurate and up to date and will be so maintained. -2- (e) Borrower owns all of the assets reflected in the most recent of Borrower's financial statements provided to Bank, except assets sold or otherwise disposed of in the ordinary course of business since the date thereof, and such assets together with any assets acquired since such date, including without limitation the Collateral, are free and clear of any lien, pledge, security interest, charge, mortgage or encumbrance of any nature whatsoever, except (i) the security interests and other encumbrances (if any) listed on Schedule "B" annexed hereto, (ii) those leases set forth on Schedule "C" annexed hereto, or (iii) liens and security interests in favor of Bank. (f) Borrower has made or filed all tax returns, reports and declarations relating to any material tax liability required by any jurisdiction to which it is subject (any tax liability which may result in a lien on any Collateral being hereby deemed material); has paid all taxes shown or determined to be due thereon except those being contested in good faith and which Borrower has, prior to the date of such contest, identified in writing to Bank as being contested; and has made adequate provision for the payment of all taxes so contested, so that no lien will encumber any Collateral, and in respect of subsequent periods. (g) Borrower (i) is subject to no charter, corporate or other legal restriction, or any judgment, award, decree, order, governmental rule or regulation or contractual restriction which could have a material adverse effect on its financial condition, business or prospects, and (ii) is in compliance with its charter documents and by-laws, all contractual requirements by which it or any of its properties may be bound and all applicable laws, rules and regulations (including without limitation those relating to environmental protection) other than laws, rules or regulations the validity or applicability of which it is contesting in good faith or provisions of any of the foregoing the failure to comply with which cannot reasonably be expected to materially adversely affect its financial condition, business or prospects or the value of any Collateral. (h) There is no action, suit, proceeding or investigation pending or, to Borrower's knowledge, threatened against or affecting it or any of its assets before or by any court or other governmental authority which, if determined adversely to it, would have a material adverse effect on its financial condition, business or prospects or the value of any Collateral. (i) Borrower is in compliance with ERISA; no Reportable Event has occurred and is continuing with respect to any Plan; and it has no unfunded vested liability under any Plan. The word "Plan" as used in this Agreement means any employee plan subject to Title IV of the Employee Retirement Income Security Act of 1974 ("ERISA") maintained for employees of Borrower, any subsidiary of Borrower or any other trade or business under common control with Borrower within the meaning of Section 414(c) of the Internal Revenue Code of 1986 or any regulations thereunder. 5. LOANS. A. Subject to the terms and provisions of this Agreement, the Bank hereby establishes a discretionary revolving line of credit in Borrower's favor in the amount set forth below, as determined by Bank from time to time hereafter. Bank may make such loans to Borrower, based upon such facts and circumstances existing at the time of the request, as from time to time Bank elects to make which are secured by Borrower's Inventory, Accounts and all other Collateral and the proceeds thereof. Without limiting the discretionary nature of Bank's obligation to make loans hereunder, or the demand feature of any loans that Bank does make hereunder, Borrower agrees that -3- the aggregate unpaid principal of all loans outstanding at any one time shall not exceed the Borrowing Base. The term "Borrowing Base" as used herein shall mean the sum of the following: (a) seventy-five (75%) percent of the unpaid face amount of Qualified Accounts (as defined below), PLUS (b) the lesser of (i) $250,000.00, or (ii) twenty-five (25%) percent of the cost or market value, whichever is lower, of all Eligible Inventory (as defined below) consisting of raw materials, plus twenty-five (25%) percent of all Eligible Inventory consisting of finished goods, MINUS (c) one hundred (100%) percent of the aggregate amount then undrawn on all letters of credit and acceptances issued by the Bank for the account of the Borrower; but in no event shall the sum of all direct loans plus the sum of the aggregate amount undrawn on all letters of credit and acceptances be in excess of One Million ($1,000,000.00) Dollars. All such loans shall bear interest and at the option of Bank shall be evidenced by demand notes in form satisfactory to Bank, but in the absence of notes shall be conclusively evidenced by the Bank's record of disbursements and repayments and shall be payable ON DEMAND. Interest will be charged to Borrower at a fluctuating rate which is the daily equivalent to the Base Rate in effect from time to time, or at such other rate agreed on from time to time by the parties, upon any balance owing to Bank at the close of each day and shall be payable monthly in arrears, on the first day of each month, until the Bank makes demand. The rate of interest payable by Borrower shall be changed effective as of that date in which a change in the Base Rate becomes effective. Interest shall be computed on the basis of the actual number of days elapsed over a year of three hundred sixty (360) days. The term "Base Rate" as used herein and in any supplement and amendment hereto shall mean the rate of interest announced from time to time by Bank, at its head office, as its Base Rate, it being understood that such rate is a reference rate and not necessarily the lowest rate of interest charged by the Bank. The Base Rate on the date hereof is agreed to be eight and one-quarter (8 1/4%) percent. B. The Borrowing Base formula set forth above is intended solely for monitoring purposes. The making of loans, advances, and credits by the Bank to the Borrower in excess of the above described Borrowing Base formula is for the benefit of the Borrower and does not affect the obligations of Borrower hereunder; all such loans constitute Obligations and must be repaid by Borrower in accordance with the terms of this Agreement. C. Borrower hereby authorizes and directs Bank, in Bank's sole discretion (provided, however, Bank shall have no obligation to do so), (i) to pay accrued interest as the same becomes due and payable pursuant to this Agreement or pursuant to any note or other agreement between Borrower and Bank, and to treat the same as a loan to Borrower which shall be added to Borrower's loan balance pursuant to this Agreement; or (ii) to apply the proceeds of Collateral, including without limitation, payments on Accounts, and other payments from sales or lease of Inventory and any other funds to the payment of such items or the payment of any other amounts then due to Bank from Borrower. -4- 6. DEFINITION OF QUALIFIED ACCOUNT. The term "Qualified Account", as used herein, means an Account owing to Borrower which met the following specifications at the time it came into existence and continues to meet the same until it is collected in full: (a) The Account is unpaid for more than ninety (90) days from the date of the invoice thereof. (b) The Account arose from the performance of services or an outright sale of goods by Borrower, such goods have been shipped to the account debtor, and Borrower has possession of, or has delivered to Bank, shipping and delivery receipts evidencing such shipment. (c) The Account is not subject to any prior assignment, claim, lien, or security interest, and Borrower will not make any further assignment thereof or create any further security interest therein, nor permit Borrower's rights therein to be reached by attachment, levy, garnishment or other judicial process. (d) The Account is not subject to set-off, credit, allowance or adjustment by the account debtor, except discount allowed for prompt payment and the account debtor has not complained as to his liability thereon and has not returned any of the goods from the sale of which the Account arose. (e) The Account arose in the ordinary course of Borrower's business and did not arise from the performance of services or a sale of goods to a supplier or employee of the Borrower. (f) No notice of bankruptcy or insolvency of the account debtor has been received by or is known to the Borrower. (g) The Account is not owed by an account debtor whose principal place of business is outside the United States of America, unless the Account (i) is supported by a letter of credit in a form satisfactory to Bank which names Bank as a co-beneficiary and is issued or confirmed by a bank whose principal place of business is located in the United States of America, or (ii) is insured by credit insurance satisfactory to Bank which names Bank as an additional insured, provided, however, that certain so-called house accounts may be considered for inclusion as a Qualified Account depending on the dollar exposure and payment history of the account debtor. (h) The Account is not owed by an entity which is a parent, brother/sister, subsidiary or affiliate of Borrower. (i) The account debtor is not located in the State of New Jersey or in the State of Minnesota, unless Borrower has filed and shall file all legally required Notice of Business Activities Reports with the New Jersey Division of Taxation or the Minnesota Department of Revenue, as the case may be. (j) That portion of the Accounts of an account debtor which, when aggregated with all of the Accounts of an account debtor which, of that account debtor, does not exceed thirty (30%) percent of the then aggregate of Qualified Accounts unless specifically approved by Bank, -5- in which event, that portion of the approved Accounts, when aggregated with all of the Accounts of that account debtor, does not exceed thirty-five (35%) percent of the then aggregate of Qualified Accounts. (k) The Account is not evidenced by a promissory note. (l) The Account did not arise out of any sale made on a bill and hold, dating or delayed shipment basis. (m) The Bank, in accordance with its normal customary business practices, does not deem the Account to be unacceptable for any reason. PROVIDED THAT if at any time twenty (20%) percent or more of the aggregate amount of the Accounts due from any account debtor are unpaid in whole or in part more than one hundred twenty (120) days from the respective dates of invoice, from and after such time none of the Accounts (then existing or thereafter arising) due from such account debtor shall be deemed to be Qualified Accounts until such time as all Accounts due from such account debtor are (as a result of actual payments received thereon) no more than one hundred twenty (120) days from the date of invoice; Accounts payable by Borrower to an account debtor shall be netted against Accounts due from such account debtor and the difference (if positive) shall constitute Qualified Accounts from such account debtor for purposes of determining the Borrowing Base (notwithstanding paragraph (d) above); characterization of any Account due from an account debtor as a Qualified Account shall not be deemed a determination by Bank as to its actual value nor in any way obligate Bank to accept any Account subsequently arising from such account debtor to be, or to continue to deem such Account to be, a Qualified Account; it is Borrower's responsibility to determine the creditworthiness of account debtors and all risks concerning the same and collection of Accounts are with Borrower; and all Accounts whether or not Qualified Accounts constitute Collateral. 7. DEFINITION OF ELIGIBLE INVENTORY. The term "Eligible Inventory", as used herein, means Borrower's raw materials, work in process and finished goods which are initially and at all times until sold: new and unused (except, with Bank's written approval, used equipment held for sale or lease), in first-class condition, merchantable and saleable through normal trade channels; at a location which has been identified in writing to Bank; subject to a perfected security interest in favor of Bank; owned by Borrower free and clear of any lien except in favor of Bank; not obsolete; not scrap, waste, defective goods and the like; have been produced by Borrower in accordance with the Federal Fair Labor Standards Act of 1938, as amended, and all rules, regulations and orders promulgated thereunder; not stored with a bailee, warehouseman or similar party unless Bank has given its prior written consent thereto and Borrower has caused each such bailee, warehouseman or similar party to issue and deliver to Bank warehouse receipts in Bank's name for such Inventory; and have not been designated by Bank, in accordance with its normal customary business practices, as unacceptable for any reason by notice to Borrower. 8. BANK'S REPORTS. After the end of each month, Bank will render to Borrower a statement of Borrower's loan account with Bank hereunder, showing all applicable credits and debits. Each statement shall be considered correct and to have been accepted by Borrower in respect of all charges, debits and credits of whatsoever nature contained therein under or pursuant to this -6- Agreement, and the closing balance shown therein, unless Borrower notifies Bank in writing of any discrepancy within forty-five (45) days from the mailing by Bank to Borrower of any such monthly statement. 9. CAPITAL ADEQUACY. This section has been intentionally reserved. 10. COLLECTIONS; SET OFF; NOTICE OF ASSIGNMENT; EXPENSES; POWER OF ATTORNEY. (a) Immediately upon written notification to Borrower by Bank (the "Notice") which may be given at any time whether or not an Event of Default has occurred hereunder, and continuing thereafter for so long as any Obligation remains outstanding, Borrower will immediately upon receipt of all checks, drafts, cash and other remittances in payment of any Inventory sold or in payment or on account of Borrower's accounts, contracts, contract rights, notes, bills, drafts, acceptances, general intangibles, choses in action and all other forms of obligations, deliver the same to the Bank accompanied by a remittance report in form specified by Bank. Said proceeds shall be delivered to Bank in the same form received except for the endorsement of Borrower where necessary to permit collection of items, which endorsement Borrower agrees to make. The Bank will credit (conditional upon final collection) all such payments against the principal or interest of any loans secured hereby; provided, however, for the purpose of computing interest, any items requiring clearance or payment shall not be considered to have been credited against any loans secured hereby until three (3) business days after receipt by Bank of any such items. The order and method of such application shall be in the sole discretion of Bank and any portion of such funds which the Bank elects not to so apply shall be paid over from time to time by Bank to Borrower. Prior to receipt of the Notice, Borrower may, upon receipt of all remittances and payments of any Inventory sold or in payment or on account of Borrower's Accounts, use such proceeds to pay its ordinary and necessary business expenses in the ordinary course of Borrower's business and the requirement that Borrower furnish remittance reports to Bank shall be suspended. (b) Any and all deposits (whether demand or time deposits) or other sums at any time credited by or due from Bank to Borrower shall at all times constitute additional security for the Obligations and may be set-off against any Obligations at any time whether or not they are then due or other security held by Bank is considered by Bank to be adequate. Any and all instruments, documents, policies and certificates of insurance, securities, goods, accounts, choses in action, general intangibles, chattel papers, cash, property and the proceeds thereof (whether or not the same are Collateral or proceeds thereof hereunder) owned by Borrower or in which Borrower has an interest, which now or hereafter are at any time in possession or control of Bank or in transit by mail or carrier to or from Bank or in the possession of any third party acting in Bank's behalf, without regard to whether Bank received the same in pledge, for safekeeping, as agent for collection or transmission or otherwise or whether Bank had conditionally released the same, shall constitute additional security for the Obligations and may be applied at any time to any Obligations which are then owing, whether due or not due. Bank shall be entitled to presume, in the absence of clear and specific written notice to the contrary hereinafter provided by Borrower to Bank, that any and all deposits maintained by Borrower with Bank are general accounts as to which no person or entity other than Borrower has any legal or equitable interest whatsoever. -7- (c) The Bank may at any time, after the occurrence of an Event of Default, notify account debtors that Collateral has been assigned to Bank and that payments shall be made directly to Bank. Upon request of Bank at any time after the occurrence of an Event of Default, Borrower will so notify such account debtors and will indicate on all billings to such account debtors that their Accounts must be paid to Bank. The Bank shall have full power to collect, compromise, endorse, sell or otherwise deal with the Collateral or proceeds thereof in its own name or in the name of Borrower. (d) Borrower shall pay to Bank on demand any and all reasonable counsel fees and other expenses incurred by the Bank in connection with the preparation, interpretation, enforcement, administration or amendment of this Agreement, or of any documents relating thereto, and any and all expenses, including, but not limited to, a collection charge on all Accounts collected, all attorneys' fees and expenses, and all other expenses of like or unlike nature which may be expended by the Bank to obtain or enforce payment of any Account either as against the account debtor, Borrower, or any guarantor or surety of Borrower or in the prosecution or defense of any action or concerning any matter growing out of or connected with the subject matter of this Agreement, the Obligations or the Collateral or any of Bank's rights or interests therein or thereto, including, without limiting the generality of the foregoing, any counsel fees or expenses incurred in any bankruptcy or insolvency proceedings and all costs and expenses incurred or paid by Bank in connection with the administration, supervision, protection or realization on any security held by Bank for the debt secured hereby, whether such security was granted by Borrower or by any other person primarily or secondarily liable (with or without recourse) with respect to such debt, and all costs and expenses incurred by Bank in connection with the defense, settlement or satisfaction of any action, claim or demand asserted against Bank in connection with the debt secured hereby, all of which amounts shall be considered advances to protect Bank's security, and shall be secured hereby. At its option, and without limiting any other rights or remedies, Bank may at any time pay or discharge any taxes, liens, security interests or other encumbrances at any time levied against or placed on any of the Collateral, and may procure and pay any premiums on any insurance required to be carried by Borrower, and provide for the maintenance and preservation of any of the Collateral, and otherwise take any action reasonably deemed necessary to Bank to protect its security, and all amounts expended by Bank in connection with any of the foregoing matters, including reasonable attorneys' fees, shall be considered obligations of Borrower and shall be secured hereby. (e) Borrower does hereby make, constitute and appoint any officer or agent of Bank as Borrower's true and lawful attorney-in-fact, with power to endorse the name of Borrower or any of Borrower's officers or agents upon any notes, checks, drafts, money orders, or other instruments of payment (including payments payable under any policy of insurance on the Collateral) or Collateral that may come into possession of the Bank in full or part payment of any amounts owing to Bank; to sign and endorse the name of Borrower or any of Borrower's officers or agents upon any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with Accounts, and any instrument or documents relating thereto or to Borrower's rights therein; after the occurrence of an Event of Default, to give written notice to such office and officials of the United States Post Office to effect such change or changes of address so that all mail addressed to Borrower may be delivered directly to Bank; granting upon Borrower's said attorney full power to do any and all things necessary to be done in and about the premises as fully and effectually as Borrower might or -8- could do, and hereby ratifying all that said attorney shall lawfully do or cause to be done by virtue hereof. Neither the Bank nor the attorney shall be liable for any acts or omissions nor for any error of judgment or mistake, except for their gross negligence or willful misconduct. This power of attorney shall be irrevocable for the term of this Agreement and all transactions hereunder and thereafter as long as Borrower may be indebted to Bank. 11. FINANCING STATEMENTS. At the request of Bank, Borrower will join with Bank in executing one or more Financing Statements pursuant to the Uniform Commercial Code or other notices appropriate under applicable law in form satisfactory to Bank and will pay the cost of filing the same in all public offices wherever filing is deemed by Bank to be necessary or desirable. A legible carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement. 12. BORROWER'S REPORTS. (a) Borrower shall, following receipt of the Notice, deliver to Bank, daily, a schedule in form and content satisfactory to Bank describing the invoices issued by Borrower since the last schedule submitted to Bank. The schedules to be provided under this subsection are solely for the convenience of Bank in administering this Agreement and maintaining records of the Collateral. Borrower's failure to provide Bank with any such schedule shall not affect the security interest of Bank in such Accounts. (b) Borrower shall cause all of its invoices, including the copies thereof, to be printed and to bear consecutive numbers and shall prepare and issue its invoices in such consecutive numerical order. If requested by Bank, all copies of invoices not previously delivered to Bank shall be delivered to Bank with each schedule of Accounts. Copies of all invoices which are voided or cancelled or which for any other reason do not evidence an Account shall be included in such delivery. If any invoice or copy thereof is lost, destroyed or otherwise unavailable, Borrower shall account in writing, in form satisfactory to Bank, for such missing invoice. (c) Within fifteen (15) calendar days after the end of each month or on such other more frequent basis as may be required by Bank from time to time after the occurrence of an Event of Default, Borrower shall submit to Bank an aging report in form satisfactory to Bank showing the amounts due and owing on all Accounts according to Borrower's records as of the close of such month or such shorter period as may be required by Bank from time to time after the occurrence of an Event of Default, together with such other information as Bank may require. If Borrower's monthly aging reports are prepared by an accounting service or other agent, Borrower hereby authorizes such service or agent to deliver such aging reports and any other related documents to Bank. (d) Within fifteen (15) calendar days after the end of each month or on such other basis as may be required by Bank from time to time after the occurrence of an Event of Default, Borrower shall submit to Bank an accounts payable aging report in form satisfactory to Bank showing the amounts due and owing on all accounts payable according to Borrower's records as of the close of such month or such shorter period as may be required by Bank from time to time after the occurrence of an Event of Default, together with such other information as Bank may require. -9- If Borrower's monthly accounts payable aging reports are prepared by an accounting service or other agent, Borrower hereby authorizes such service or agent to deliver such accounts payable aging reports and any other related documents to Bank. (e) Within fifteen (15) calendar days after the end of each month or on such other more frequent basis as may be required by Bank from time to time after the occurrence of an Event of Default, Borrower shall furnish to Bank a certificate describing all of Borrower's Inventory by value based on the lower of cost or market value, listing all Inventory by nature, quantity and location, together with such other information as Bank may require. (f) In addition, Borrower shall, from time to time, deliver to Bank a Supplemental Assignment of Accounts on a form supplied by Bank containing a summary of Accounts created since the last Supplemental Assignment and a certificate concerning Borrower's inventory values, with copies of invoices relating to said Accounts attached thereto. (g) Borrower shall deliver to Bank all documents, as frequently as indicated below, or on such other more frequent basis as may be required by Bank from time to time after the occurrence of an Event of Default, and all other documents and information requested by Bank:
- -------------------------------------------------------------------------------------------------------------------- DOCUMENT FREQUENCY DUE - -------------------------------------------------------------------------------------------------------------------- - ----------- ------------------------------------------------- ------------------------------------------------------ (i) Credit Memos Daily, following receipt of the Notice - ----------- ------------------------------------------------- ------------------------------------------------------ (ii) List of names and addresses of account debtors Annually, within sixty (60) days after the end of to whom Borrower has made sales during the each fiscal year of Borrower previous year - ----------- ------------------------------------------------- ------------------------------------------------------ (iii) Reconciliation report, in form satisfactory to Monthly Bank, showing all accounts, collections, payments, credits, and extensions since the preceding report - ----------- ------------------------------------------------- ------------------------------------------------------ (iv) Projections of Borrower's balance sheet, Annually, concurrently with the submission of statement of profit and loss and cash flow for financial statements described in Section 12(i) of the next succeeding fiscal year broken down on this Agreement a month to month basis - ----------- ------------------------------------------------- ------------------------------------------------------ (v) A listing of the names and addresses of all Annually, within sixty (60) days after the end of suppliers and vendors from whom Borrower has each fiscal year of Borrower made purchases during the previous fiscal year, together with a listing of any other suppliers or vendors from whom Borrower expects to make purchases during the succeeding fiscal year - ----------- ------------------------------------------------- ------------------------------------------------------
-10- - ----------- ------------------------------------------------- ------------------------------------------------------ (vi) An accounts payable aging report showing the Upon request by Bank amounts due and owing on the ten largest payables of Borrower according to Borrower's records - ----------- ------------------------------------------------- ------------------------------------------------------ (vii) Notice of noncompliance with the provisions of Immediately upon learning of such noncompliance, or this Agreement if any representation or warranty contained herein is no longer true or accurate - ----------- ------------------------------------------------- ------------------------------------------------------ (viii) Borrowing Base Certificate containing a summary Within fifteen (15) days after the close of each of Accounts created since the last certificate, monthly period prior to receipt of the Notice together with a schedule of credit memorandums and such other documentation relating to such Accounts, as may be requested by Bank, and a certificate setting forth inventory values - ----------- ------------------------------------------------- ------------------------------------------------------
(h) Borrower will furnish Bank as soon as available, and in any event within forty-five (45) days after the close of each quarterly period of its fiscal year, an unaudited balance sheet as of the end of such quarter, and an unaudited statement of income and retained earnings for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, and an unaudited statement of cash flows of the Borrower for the portion of the fiscal year ended with the last day of such quarter, all in reasonable detail and stating in comparative form the respective figures for the corresponding date and period in the previous fiscal year, and all prepared in accordance with generally accepted accounting principles consistently applied, and certified by the chief financial officer of the Borrower (subject to year end adjustment). (i) Borrower will furnish Bank, annually, as soon as available, and in any event within one hundred twenty (120) days after the end of each fiscal year of Borrower, a balance sheet as of the end of such fiscal year, and a statement of income and retained earnings for such fiscal year, and a statement of cash flows for such fiscal year, all in reasonable detail and stating in comparative form the respective figures for the corresponding date and period in the prior fiscal year, and all prepared in accordance with generally accepted accounting principles consistently applied, accompanied by an opinion thereon acceptable to Bank by Deloitte Touche, LLP or such other independent public accountants selected by the Borrower and reasonably acceptable to Bank. (j) Borrower will furnish Bank, upon becoming available, a copy of each financial statement, report, notice or proxy statement sent by Borrower to shareholders generally and of each regular or periodic report, registration statement or prospectus filed by Borrower with any securities exchange or the Securities and Exchange Commission or any successor agency (including without limitation Form 10-KSB and Form 10-QSB) and of any order issued by any governmental authority in any proceeding to which Borrower is a party. -11- (k) In addition to the foregoing, the Borrower promptly shall provide the Bank with such other and additional information concerning the Borrower, the Collateral, the operation of the Borrower's business, and the Borrower's financial condition, including financial reports and statements, as the Bank may from time to time reasonably request from the Borrower. All financial information provided the Bank by the Borrower shall be prepared in accordance with generally accepted accounting or auditing principles (as applicable) applied consistently in the preparation thereof and with prior periods to fairly reflect the financial conditions of the Borrower at the close of, and its results of operations for, the periods in question. 13. GENERAL AGREEMENTS OF BORROWER. (a) Borrower agrees to keep all the Inventory insured with coverage and in amounts not less than that usually carried by one engaged in a like business and in any event not less than that required by Bank with loss payable to the Bank and Borrower, as their interests may appear, hereby appointing Bank as attorney for Borrower in obtaining, adjusting, settling and cancelling such insurance and endorsing any drafts. As further assurance for the payment and performance of the Obligations, Borrower hereby assigns to Bank all sums, including returns of 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. (b) The Bank or its agents have the right to inspect the Inventory and all records pertaining thereto at intervals to be determined by Bank and without hindrance or delay. (c) Although, as above set forth, Bank has a continuing security interest in all of Borrower's Inventory and existing and future Accounts and other Collateral and in the proceeds thereof, Borrower will at all times maintain as the minimum security hereunder a Borrowing Base not less than the aggregate unpaid principal of all loans made hereunder and if Borrower fails to do so, Borrower will immediately make the necessary reduction in the unpaid principal amount of said loans so that the loans outstanding hereunder do not in the aggregate exceed the Borrowing Base. (d) Borrower will at all times keep accurate and complete records of Borrower's Inventory, Accounts and other Collateral, and Bank, or any of its agents, shall have the right to call at Borrower's place or places of business at intervals to be determined by Bank, and without hindrance or delay, to inspect, audit, check, and make extracts from any copies of the books, records, journals, orders, receipts, correspondence which relate to Borrower's Accounts, and other Collateral or other transactions, between the parties thereto and the general financial condition of Borrower and Bank may remove any of such records temporarily for the purpose of having copies made thereof. Borrower shall pay to Bank an audit fee of Three Hundred Fifty ($350.00) Dollars per audit, not to exceed the sum of Seven Hundred ($700.00) Dollars in any calendar year, plus expenses. Notwithstanding the foregoing, Borrower shall not be obligated to pay to Bank an audit fee in any year in which Borrower has a positive net income, determined in accordance with generally accepted accounting principles. (e) Borrower will maintain its corporate existence in good standing and comply with all laws and regulations of the United States or of any state or states thereof or of any political -12- subdivision thereof, or of any governmental authority which may be applicable to it or to its business. (f) Borrower will pay all real and personal property taxes, assessments and charges and all franchises, income, unemployment, old age benefits, withholding, sales and other taxes assessed against it, or payable by it at such times and in such manner as to prevent any penalty from accruing or any lien or charge from attaching to its property. (g) The Bank may in its own name or in the name of others communicate with account debtors in order to verify with them to Bank's satisfaction the existence, amount and terms of any Accounts. (h) This Agreement may but need not be supplemented by separate assignments of Accounts and if such assignments are given the rights and security interests given thereby shall be in addition to and not in limitation of the rights and security interests given by this Agreement. (i) If any of Borrower's Accounts arise out of contracts with the United States or any department, agency, or instrumentality thereof, Borrower will immediately notify Bank thereof in writing and execute any instruments and take any steps required by Bank in order that all monies due and to become due under such contracts shall be assigned to Bank and notice thereof given to the Government under the Federal Assignment of Claims Act. (j) If any of Borrower's Accounts should be evidenced by promissory notes, trade acceptances, or other instruments for the payment of money, Borrower will immediately deliver same to Bank, appropriately endorsed to Bank's order and, regardless of the form of such endorsement, Borrower hereby waives presentment, demand, notice of dishonor, protest and notice of protest and all other notices with respect thereto. (k) Borrower will promptly pay when due all taxes and assessments upon the Collateral or for its use or operation or upon this Agreement, or upon any note or notes evidencing the Obligations, and will, at the request of Bank, promptly furnish Bank the receipted bills therefor. At its option, Bank may discharge taxes, liens or security interests or other encumbrances at any time levied or placed on the Collateral, if Borrower fails to maintain adequate insurance, Bank may pay for insurance on the Collateral and may pay for the maintenance and preservation of the Collateral. Borrower agrees to reimburse Bank on demand for any payments made, or any expenses incurred by Bank pursuant to the foregoing authorization, and upon failure of the Borrower so to reimburse Bank, any such sums paid or advanced by Bank shall be deemed secured by the Collateral and constitute part of the Obligations. (l) Borrower will immediately notify Bank upon receipt of notification of any potential or known release or threat of release of hazardous materials, hazardous waste, hazardous or toxic substance or oil from any site operated by Borrower or of the incurrence of any expense or loss in connection therewith or with the Borrower's obtaining knowledge of any investigation, action or the incurrence of any expense or loss by any governmental authority in connection with the assessment, containment or removal of any hazardous material or oil for which expense or loss the Borrower may be liable. As used herein, the terms "hazardous waste," "hazardous or toxic -13- substance," "hazardous material" or "oil" shall have the same meanings as defined and used in any of the following (the "Acts"): the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq.; the Federal Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Sections 1801 et seq.; the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; M.G.L.A. c. 21E (Massachusetts Oil and Hazardous Material Release Prevention Act); M.G.L.A. c. 21C (Massachusetts Hazardous Waste Management Act); and/or the regulations adopted and publications promulgated pursuant to any of the Acts, as the same may be amended from time to time. (m) Except for the Bank's gross negligence or willful misconduct, Borrower will indemnify and save Bank harmless from all loss, costs, damage, liability or expenses (including, without limitation, court costs and reasonable attorneys' fees) that Bank may sustain or incur by reason of defending or protecting this security interest or the priority thereof or enforcing the Obligations, or in the prosecution or defense of any action or proceeding concerning any matter growing out of or in connection with this Agreement and/or any other documents now or hereafter executed in connection with this Agreement and/or the Obligations and/or the Collateral. This indemnity shall survive the repayment of the Obligations and the termination of Bank's agreement to make loans available to Borrower and the termination of this Agreement. (n) At the option of the Bank, Borrower will furnish to Bank, from time to time, within five (5) days after the accrual in accordance with applicable law of Borrower's obligation to make deposits for F.I.C.A. and withholding taxes and/or sales taxes, proof satisfactory to Bank that such deposits have been made as required. (o) Should Borrower fail to make any of such deposits or furnish such proof then Bank may, in its sole and absolute discretion, (a) make any of such deposits or any part thereof, (b) pay such taxes, or any part thereof, or (c) set-up such reserves as Bank, in its judgment, shall deem necessary to satisfy the liability for such taxes. Each amount so deposited or paid shall constitute an advance under the terms hereof, repayable on demand with interest, as provided herein, and secured by all Collateral and any other property at any time pledged by Borrower with Bank. Nothing herein shall be deemed to obligate Bank to make any such deposit or payment or set-up such reserve and the making of one or more of such deposits or payments or the setting-up of such reserve shall not constitute (i) an agreement on Bank's part to take any further or similar action, or (ii) a waiver of any default by Borrower under the terms hereof. (p) All advances by Bank to Borrower under this Agreement and under any other agreement constitute one general revolving fluctuating loan, and all indebtedness of Borrower to Bank under this and under any other agreement constitute one general Obligation. Each advance to Borrower hereunder or otherwise shall be made upon the security of all of the Collateral held and to be held by Bank. It is distinctly understood and agreed that all of the rights of Bank contained in this Agreement shall likewise apply, insofar as applicable, to any modification of or supplement to this Agreement and to any other agreements between Bank and Borrower. Any default of this Agreement by Borrower shall constitute, likewise, a default by Borrower of any other existing agreement with Bank, and any default by Borrower of any other agreement with Bank shall constitute a default of this Agreement, except as otherwise provided in the Line of Credit Agreement -14- for the Acquisition of Equipment of even date herewith. The entire Obligation of Borrower to Bank shall become due and payable when payments become due and payable hereunder upon termination of this Agreement. (q) Borrower hereby grants to Bank for a term to commence on the date of this Agreement and continuing thereafter until all debts and Obligations of any kind or character owing from Borrower to Bank are fully paid and discharged, the right to use all premises or places of business which Borrower presently has or may hereafter have and where any of the Collateral may be located, at a total rental for the entire period of $1.00. Bank agrees not to exercise the rights granted in this paragraph unless and until Bank determines to exercise its rights against the Collateral. (r) Borrower will, at its expense, upon request of Bank promptly and duly execute and deliver such documents and assurances and take such actions as may be necessary or desirable or as Bank may request in order to correct any defect, error or omission which may at any time be discovered or to more effectively carry out the intent and purpose of this Agreement and to establish, perfect and protect Bank's security interest, rights and remedies created or intended to be created hereunder. Without limiting the generality of the above, Borrower will join with Bank in executing financing and continuation statements pursuant to the Uniform Commercial Code or other notices appropriate under applicable Federal or state law in form satisfactory to Bank and filing the same in all public offices and jurisdictions wherever and whenever requested by Bank. (s) Borrower shall perform any and all further steps requested by Bank to perfect Bank's security interest in Inventory, such as leasing warehouses to Bank or its designee, placing and maintaining signs, appointing custodians, maintaining stock records and transferring Inventory to warehouses. A physical listing of all Inventory, wherever located, shall be taken by Borrower at least annually and whenever requested by Bank if one or more of the Events of Default exist. (t) Borrower hereby grants to Bank for a term to commence on the date of this Agreement and continuing thereafter until all debts and Obligations of any kind or character owed to Bank are fully paid and discharged, a non-exclusive irrevocable royalty-free license in connection with the Bank's exercise of its rights hereunder, to use, apply or affix any trademark, trade name logo or the like and to use any patents, in which the Borrower now or hereafter has rights, which license may be used by Bank upon and after the occurrence of any one or more of the Events of Default, provided, however, that such use by Bank shall be suspended if such Events of Default are cured. This license shall be in addition to, and not in lieu of, the inclusion of all of Borrower's trademarks, servicemarks, tradenames, logos, goodwill, patents, franchises and licenses in the Collateral; in addition to the right to use said Collateral as provided in this paragraph, Bank shall have full right to exercise any and all of its other rights regarding Collateral with respect to such trademarks, servicemarks, tradenames, logos, goodwill, patents, franchises and licenses. 14. BORROWER'S NEGATIVE COVENANTS. Borrower will not at any time: (a) (Debt to Worth) permit the aggregate amount of its indebtedness to be more than two and one-half (2 1/2) times the amount of its tangible net worth on the last day of any fiscal year beginning with the fiscal year ending August 31, 1997; -15- (b) (Current Ratio) permit its ratio of current assets to current liabilities to be less than 1 to 1 on the last day of any fiscal year of Borrower; (c) (Subchapter S Corporation) if Borrower is a Subchapter S corporation, make distributions to its shareholders during any fiscal year of Borrower in an aggregate amount greater than the amount necessary to pay federal and state income taxes upon Borrower's undistributed income for such year; (d) (Disposition of Collateral) sell, assign, exchange or otherwise dispose of any of the Collateral (other than Inventory consisting of (i) scrap, waste, defective goods and the like; (ii) obsolete goods; and (iii) finished goods sold in the ordinary course of business) or any interest therein to any individual, partnership, trust or other corporation; (e) (Liens) create, permit to be created or suffer to exist any lien, encumbrance or security interest of any kind ("Lien") upon any of the Collateral or any other property of Borrower, now owned or hereafter acquired, except: (i) landlords', carriers', warehousemen's, mechanics' and other similar liens arising by operation of law in the ordinary course of Borrower's business; (ii) arising out of pledge or deposits under worker's compensation, unemployment insurance, old age pension, social security, retirement benefits or other similar legislation; (iii) purchase money Liens arising in the ordinary course of business (so long as the indebtedness secured thereby does not exceed the lesser of the cost or fair market value of the property subject thereto, and such Lien extends to no other property); (iv) those liens and encumbrances set forth on Schedule "B" annexed hereto; and (v) in favor of Bank; (f) (Dividends) pay any dividends on or make any distribution on account of (except, if Borrower is a Subchapter S corporation, consistent with paragraph (c) above) any class of Borrower's capital stock in cash or in property (other than additional shares of such stock), or redeem, purchase or otherwise acquire, directly or indirectly, any of such stock; notwithstanding the foregoing, if Borrower has a net income in excess of One Hundred Thousand ($100,000.00) Dollars, determined as of the last day of any fiscal year, determined in accordance with generally accepted accounting principles, the Borrower may, in the next succeeding fiscal year, redeem, purchase or otherwise acquire Borrower's capital stock, provided the purchase price for such stock does not exceed the sum of One Hundred Thousand ($100,000.00) Dollars and, immediately after giving effect to any such redemption or purchase, the Borrower is in compliance with the covenants set forth in Sections 14(a) and 14(b) above; (g) (Loans) make any loans or advances to any individual, partnership, trust or other corporation, including without limitation Borrower's directors, officers and employees, except (i) advances to officers or employees with respect to expenses incurred by them in the ordinary course of their duties which are properly reimbursable by Borrower, and (ii) loans to employees not exceeding Twenty-Five Thousand ($25,000.00) Dollars in the aggregate during any fiscal year of Borrower or exceeding Five Thousand ($5,000.00) Dollars to any individual employee; (h) (Guarantees) assume, guaranty, endorse or otherwise become directly or contingently liable in respect of (including without limitation by way of agreement, contingent or otherwise, to purchase, provide funds to or otherwise invest in a debtor or otherwise to assure a -16- creditor against loss), any indebtedness (except guarantees by endorsement of instruments for deposit or collection in the ordinary course of business and guarantees in favor of Bank) of any individual, partnership, trust or other corporation; (i) (Investments) (i) use any loan proceeds to purchase or carry any "margin stock" (as defined in Regulation U of the Board of Governors of the Federal Reserve System) or (ii) invest in or purchase any stock or securities of any individual, partnership, trust or other corporation except (x) readily marketable direct obligations of, or obligations guaranteed by, the United States of America or any agency thereof, (y) time deposits with or certificates of deposit issued by the Bank, or (z) any other investment reasonably acceptable to Bank such as investments graded AAA by Moody's or a comparable rating system; (j) (Subsidiaries) sell, transfer or otherwise dispose of any stock of any subsidiary of Borrower; (k) (Mergers, Consolidations or Sales) (i) merge or consolidate with or into any corporation; (ii) enter into any joint venture or partnership with any person, firm or corporation; (iii) convey, lease or sell all or any material portion of its property or assets or business to any other person, firm or corporation, except for the sale of Inventory in the ordinary course of its business; or (iv) convey, lease or sell any of its assets to any person, firm or corporation for less than the fair market value thereof; or (l) (Transactions with Affiliates) enter into any lease or other transaction with any shareholder, officer or affiliate on terms any less favorable than those which might be obtained at the time from persons who (or entities which) are not such a shareholder, officer or affiliate. For purposes of this Section: "tangible net worth" shall mean Borrower's stockholders' equity determined in accordance with generally accepted accounting principles, consistently applied, subtracting therefrom (i) intangibles (as determined in accordance with such principles so applied) and (ii) accounts and indebtedness owing to Borrower from any employee or parent, subsidiary or other affiliate of Borrower; "distributions" shall mean all payment or distributions to shareholders in cash or in property other than reasonable salaries, bonuses and expense reimbursements; "indebtedness" shall mean (i) all liabilities for borrowed money, for the deferred purchase price of property or services, and under leases which are or should be, under generally accepted accounting principles, recorded as capital leases, in respect of which a person or entity is directly or indirectly, absolutely or contingently liable as obligor, guarantor, endorser or otherwise, or in respect of which such person or entity otherwise assures a creditor against loss, (ii) all liabilities of the type described in (i) above which are secured by (or for which the holder has an existing right, contingent or otherwise, to be secured by) any lien upon property owned by such person or entity, whether or not such person or entity has assumed or become liable for the payment thereof, and (iii) all other liabilities or obligations which would, in accordance with generally accepted accounting principles, be classified as liabilities of such person or entity; "current assets" and "current liabilities" shall be determined in accordance with generally accepted accounting principles consistently applied; "affiliate" shall mean any person or entity (i) which directly or indirectly controls, or is controlled by or is under common control with the Borrower or a subsidiary, (ii) which directly or indirectly beneficially holds or owns five (5%) percent or more of any class of voting stock of the Borrower or any subsidiary, or (iii) five (5%) percent or more of the -17- voting stock of which is directly or indirectly beneficially owned or held by the Borrower or a subsidiary; and "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of any person or entity, whether through the ownership of voting securities, by contract or otherwise. 15. DEFAULT. Nothing contained in this section, or elsewhere in this Agreement, shall affect the demand nature of such of the Obligations as are by their terms, demand obligations, including, without limitation, loans and advances under this Agreement. The occurrence of an Event of Default, other than the Event of Default described in Section 15(a) below, shall not be a prerequisite for the Bank's making demand or requiring payment of such Obligations. Upon the occurrence of any one or more of the following events (herein, "Events of Default"), any and all Obligations of the Borrower to the Bank shall become immediately due and payable, at the option of the Bank and without notice or demand. The occurrence of any such Event of Default shall also constitute, without notice or demand, a default under all other agreements between the Bank and the Borrower and instruments and papers given the Bank by the Borrower, whether such agreements, instruments, or papers now exist or hereafter arise, namely: (a) The failure by the Borrower to pay upon demand any amount due under this Agreement. (b) The failure by the Borrower to pay upon demand (or when due, if not payable on demand) any other Obligations. (c) The failure by the Borrower to promptly, punctually and faithfully perform any of the covenants or agreements contained in Sections 10(a) or 14 of this Agreement. (d) The failure by the Borrower to promptly, punctually and faithfully perform, or observe any term, covenant or agreement on its part to be performed or observed pursuant to any of the provisions of this Agreement, other than those described in Sections 15(a), 15(b) and 15(c) above, which is not remedied within the earlier of forty-five (45) days after (i) notice thereof by Bank to Borrower, or (ii) the date the Borrower was required to give notice to the Bank pursuant to Section 12(g)(vii). (e) The determination by Bank that any material representation or warranty heretofore, now or hereafter made by the Borrower to Bank, in any documents, instrument, agreement, or paper was not true or accurate when given. (f) The occurrence of any event such that any indebtedness of the Borrower from any lender other than Bank could be accelerated, notwithstanding that such acceleration has not taken place. (g) The occurrence of any event which would cause a lien creditor, as that term is defined in Section 9-301 of the Code, to take priority over advances made by Bank. -18- (h) A filing against or relating to the Borrower of (i) a federal tax lien in favor of the United States of America or any political subdivision of the United States of America, or (ii) a state tax lien in favor of any state of the United States of America or any political subdivision of any such state. (i) The occurrence of any event of default under any agreement between Bank and the Borrower or instrument or paper given Bank by the Borrower, whether such agreement, instrument, or paper now exists or hereafter arises, providing the Bank shall have exercised its rights upon default under any such other agreement, instrument or paper. (j) Any act by, against, or relating to the Borrower, or its property or assets, which act constitutes the application for, consent to, or sufferance of the appointment of a receiver, trustee or other person, pursuant to court action or otherwise, over all, or any part of the Borrower's property. (k) The granting of any trust mortgage or execution of an assignment for the benefit of the creditors of the Borrower, or the occurrence of any other voluntary or involuntary liquidation or extension of debt agreement for the Borrower; the failure by the Borrower to generally pay the debts of the Borrower as they mature; adjudication of bankruptcy or insolvency relative to the Borrower; the entry of an order for relief or similar order with respect to the Borrower in any proceeding pursuant to Title 11 of the United States Code entitled "Bankruptcy" (the "Bankruptcy Code") or any other federal bankruptcy law; the filing of any complaint, application, or petition by or against the Borrower initiating any matter in which the Borrower is or may be granted any relief from the debts of the Borrower pursuant to the Bankruptcy Code or any other insolvency statute or procedure; the calling or sufferance of a meeting of creditors of the Borrower; the meeting by the Borrower of a formal or informal creditor's committee; the offering by or entering into by the Borrower of any composition, extension or any other arrangement seeking relief or extension for the debts of the Borrower, or the initiation of any other judicial or non-judicial proceeding or agreement by, against or including the Borrower which seeks or intends to accomplish a reorganization or arrangement with creditors. (l) The entry of any judgment against Borrower, which judgment is not satisfied or appealed from (with execution or similar process stayed) within fifteen (15) days of its entry. (m) The occurrence of any event or circumstance with respect to the Borrower such that Bank shall believe in good faith that the prospect of payment of all or any part of the Obligations or the performance by the Borrower under this Agreement or any other agreement between the Bank and the Borrower is impaired or there shall occur any material adverse change in the business or financial condition of the Borrower. (n) The entry of any court order which enjoins, restrains or in any way prevents the Borrower from conducting all or any part of its business affairs in the ordinary course of business. (o) The service of any process upon Bank seeking to attach by trustee process any funds of the Borrower on deposit with Bank. -19- (p) Any change in the identity, authority or responsibilities of any person having management or policy authority with respect to the Borrower. (q) The occurrence of any uninsured loss, theft, damage or destruction to any material asset(s) of the Borrower. (r) Any act by or against, or relating to the Borrower or its assets pursuant to which any creditor of the Borrower seeks to reclaim or repossess or reclaims or repossesses all or a portion of the Borrower's assets. (s) The death, termination of existence, dissolution, or liquidation of the Borrower or the ceasing to carry on actively any substantial part of the Borrower's current business. (t) This Agreement shall, at any time after its execution and delivery and for any reason, cease (i) to create a valid and perfected first priority security interest in and to the property purported to be subject to this Agreement; or (ii) to be in full force and effect or shall be declared null and void, or the validity or enforceability hereof shall be contested by the Borrower or any guarantor of the Borrower denies it has any further liability or obligation hereunder. (u) Any of the following events occur or exist with respect to the Borrower or any ERISA affiliate: (i) any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Internal Revenue Code) involving any Plan; (ii) any "reportable event" (as defined in Section 4043 of ERISA and the regulations issued under such Section) shall occur with respect to any Plan; (iii) The filing under Section 4041 of ERISA of a notice of intent to terminate any Plan or the termination of any Plan; (iv) any event or circumstance exists which might constitute grounds entitling the Pension Benefit Guaranty Corporation (PBGC) to institute proceedings under Section 4042 of ERISA for the termination of, or for the appointment of a trustee to administer, any Plan, or the institution by the PBGC of any such proceedings; (v) or partial withdrawal under Section 4201 or 4204 of ERISA from a Multiemployer Plan or the reorganization, insolvency, or termination of any Multiemployer Plan; and in each case above, such event or condition, together with all other events or conditions, if any, could in the opinion of the Bank subject the Borrower to any tax, penalty, or other liability to a Plan, a Multiemployer Plan, the PBGC, or otherwise. (v) The occurrence of any of the foregoing Events of Default with respect to any guarantor, endorser, or surety to Bank of the Obligations, as if such guarantor, endorser or surety, were the "Borrower" described therein. (w) The termination of any guaranty by any guarantor of the Obligations. Upon the occurrence of an Event of Default, Bank may declare any obligation Bank may have hereunder to be cancelled, declare all Obligations of Borrower to be due and payable and proceed to enforce payment of the Obligations and to exercise any and all of the rights and remedies afforded to Bank by the Uniform Commercial Code or under the terms of this Agreement or otherwise. In addition, upon the occurrence of an Event of Default, if Bank proceeds to enforce payment of the Obligations, Borrower shall be obligated to deliver to Bank cash collateral in an amount equal to the aggregate amounts then undrawn on all outstanding letters of credit or -20- acceptances issued or guaranteed by Bank for the account of Borrower, and Bank may proceed to enforce payment of the same and to exercise all rights and remedies afforded to Bank by the Uniform Commercial Code or under the terms of this Agreement or otherwise. Upon the occurrence of an Event of Default, the Borrower, as additional compensation to the Bank for its increased credit risk, promises to pay interest on all Obligations (including, without limitation, principal, whether or not past due, past due interest and any other amounts past due under this Agreement) at a per annum rate of three (3%) percent greater than the rate of interest then specified in Section 5 of this Agreement. 16. PROCESSING AND SALES OF INVENTORY. So long as Borrower is not in default hereunder, Borrower shall have the right, in the regular course of business, to process and sell Borrower's Inventory. A sale in the ordinary course of business shall not include a transfer in total or partial satisfaction of a debt. 17. WAIVER OF JURY TRIAL. BORROWER AND BANK EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT IT MAY HAVE OR HEREAFTER HAVE TO A TRIAL BY JURY IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. Borrower hereby certifies that neither Bank nor any of its representatives, agents or counsel has represented, expressly or otherwise, that Bank would not, in the event of any such suit, action or proceeding, seek to enforce this waiver of right to trial by jury. Borrower acknowledges that Bank has been induced to enter into this Agreement by, among other things, this waiver. Borrower acknowledges that it has read the provisions of this Agreement and in particular, this Section; has consulted legal counsel; understands the right it is granting in this Agreement and is waiving in this Section in particular; and makes the above waiver knowingly, voluntarily and intentionally. 18. CONSENT TO JURISDICTION. Borrower and Bank agree that any action or proceeding to enforce or arising out of this Agreement may be commenced in any court of the Commonwealth of Massachusetts sitting in the counties of Suffolk, Norfolk or Middlesex, or in the District Court of the United States for the District of Massachusetts, and Borrower waives personal service of process and agrees that a summons and complaint commencing an action or proceeding in any such court shall be properly served and confer personal jurisdiction if served by next day Federal Express or comparable overnight delivery service providing proof of delivery to Borrower, or as otherwise provided by the laws of the Commonwealth of Massachusetts or the United States of America. 19. TERMINATION. This Agreement may be terminated at any time by either party giving written notice of termination to the other party; provided, however, that unless and until all loans made by the Bank to the Borrower hereunder and all other Obligations or commitments of the Bank under which an Obligation could arise, outstanding as of the time of giving or receipt as the case may be, of such notice by the Bank have been paid in full, such termination shall in no way affect the security interest or other rights and powers herein granted to the Bank, and until such payment in full the security interest of the Bank in all Inventory, Accounts and other Collateral of the Borrower, whether existing as of the time of such termination or thereafter arising, and all rights and powers herein granted to the Bank in respect thereof shall remain in full force and effect. Until all of the Obligations of Borrower to Bank have been fully paid and satisfied and all commitments of the Bank under which an Obligation could arise have expired, Borrower shall continue to assign -21- Accounts to Bank, turn over all collections to the Bank in kind and otherwise fully comply with the terms and conditions of this Agreement as herein provided. Prior to such payment in full of all of the Obligations of Borrower to Bank, this Agreement shall be a continuing agreement in every respect. 20. MISCELLANEOUS. (a) No delay or omission on the part of Bank in exercising any rights shall operate as a waiver of such right or any other right. Waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. All Bank's rights and remedies, whether evidenced hereby or by any other agreement, instrument or paper, shall be cumulative and may be exercised singularly or concurrently. (b) Bank is authorized to make loans under the terms of this Agreement upon the request, either written or oral, in the name of Borrower or any authorized person whose name appears at the end of this Agreement or of any of the following named person, or persons, from time to time, holding the following offices of Borrower, President, Treasurer and such other officers and authorized signatories as may from time to time be set forth in separate banking and borrowing resolutions. (c) If at any time or times by assignment or otherwise, the Bank assigns this Agreement, such assignment shall carry with it the Bank's powers and rights under this Agreement, and the transferee shall become vested with said powers and rights whether or not they are specifically referred to in the transfer. Bank shall notify Borrower of any assignment, partial assignment or transfer by the Bank of this Agreement or of the Obligations of Borrower. (d) Borrower agrees that any and all loans made by Bank to Borrower or for its account under this Agreement shall be conclusively deemed to have been authorized by Borrower and to have been made pursuant to duly authorized requests therefor on its behalf. (e) Unless otherwise defined in this Agreement, capitalized words shall have the meanings set forth in the Uniform Commercial Code as in effect in the Commonwealth of Massachusetts as of the date of this Agreement. (f) Paragraph and section headings used in this Agreement are for convenience only, and shall not affect the construction of this Agreement. If one or more provisions of this Agreement (or the application thereof) shall be invalid, illegal or unenforceable in any respect in any jurisdiction, the same shall not, invalidate or render illegal or unenforceable such provision (or its application) in any other jurisdiction or any other provision of this Agreement (or its application). This Agreement is the entire agreement of the parties with respect to the subject matter hereof and supersedes any prior written or verbal communications or instruments relating thereto. (g) All notices and other communications hereunder shall be made by telegram, electronic transmitter, or certified or registered mail, return receipt requested, or next day Federal Express or comparable overnight delivery service providing proof of delivery and shall be deemed to be received by the party to whom sent one business day after sending, if sent by telegram, -22- electronic transmitter, or next day Federal Express or comparable overnight delivery service providing proof of delivery and three days after mailing if sent by certified or registered mail, return receipt requested. All such notices and other communications to a party hereto shall be addressed to such party at the address set forth at the end of this Agreement or to such other address as such party may designate for itself in a notice to the other party given in accordance with this section. (h) The laws of Massachusetts shall govern the construction of this Agreement and the rights and duties of the parties hereto. This Agreement shall take effect as a sealed instrument. Witnessed by: INTERNATIONAL ELECTRONICS, INC. /s/ Joel B. Rosenthal By: /s/ John Waldstein - --------------------------- -------------------------------------------- John Waldstein, President and Treasurer Address: 427 Turnpike Street Canton, Massachusetts 02021 Telecopier: (617) EASTERN BANK By: /s/ Alan Roberts -------------------------------------------- Alan Roberts, Vice President Address: 605 Broadway Saugus, Massachusetts 01906 Telecopier: (617) 231-4839 -23- SCHEDULES The following Schedules to the within Demand Loan and Security Agreement Accounts Receivable and Inventory are respectively described in the section indicated. Those Schedules in which no information has been inserted shall be deemed to read "None". SCHEDULE "A" Borrower's Places of Business (ss.3) Property Located Address At Such Address ------- ---------------- Corporate Headquarters 427 Turnpike Street Inventory Canton, MA 02021 Fixed Assets Sales Offices California Office 2731 Simi Hill Lane Simi Valley, CA 93063 Delaware Office Office Equipment 4571 Kirkwood Hwy, Suite 107 Wilmington, DE 19808 Florida Office Same as Georgia Office Georgia Office Office Equipment 209 Cabin Creek Court Woodstock, GA 30189 Illinois Office 1424 Timber Lane South Elgin, IL 60177 New York Office Currently Vacant European Office 11 Clamp Green, Colden Common Office Equipment Winchester, Hampshire England Office Inventory Locations Stephen Gould Inc. Raw Material 35 South Jefferson Road Whippany, NJ Noonan Press Raw Material 30 Reservoir Park Drive Rockland, MA Warwick Industrial Corporation Work In Process 50 Pennsylvania Avenue Warwick, RI Consolidated Coating Company Work In Process 5 William Way Bellingham, MA M & P Machine Work In Process 1438 Washington Street Stoughton, MA SCHEDULE "B" Other Encumbrances and Liens (ss.4(e)(i) Secured Party Description of Payment Terms and or Mortgagee of Collateral Dates of Maturity - ------------- ---------------- ----------------- None, excluding capital leases detailed in Schedule C below SCHEDULE "C" Leases (ss.4(e)(ii)
Description Date of Lease Rental Lessor of Property and Term Payable - ------ ----------- ------------- ------- People's Heritage Computers and printers 8/22/96 36 months $33,042.90 Leasing Corporation 11 Computers, 2 printers 10% buyout Master Lease Telephone System 4/23/96 60 months 31,417.88 10% buyout People's Heritage Wave Solder Machine 5/23/94 36 months 2,051.58 Leasing Corporation 10% buyout People's Heritage 12 Computers, 1 IBM printer, 11/94 36 months 10,724.48 Leasing Corporation 9 Notebook printers 10% buyout Enterprise Leasing PC's and Prod. Tester 3/95 30 months 4,328.34 10% buyout Enterprise Leasing Embedded Control Dev. System 12/13/95 24 months 4,838.00 Fax Machine, Printer, Computer 10% buyout Counting Scale and Chairs
-24- EX-10.B 4 dex10b.txt DEMAND LOAN AND SECURITY LETTER AGREEMENT Eastern Bank December 27, 2000 International Electronics, Inc. 427 Turnpike Street Canton, Massachusetts 02021 Attn: John Waldstein, President and Treasurer Gentlemen: Reference is made to our Demand Loan and Security Agreement Accounts Receivable and Inventory dated February 28, 1997, together with all amendments and additions thereto (hereinafter called the "Agreement"). Notwithstanding the provisions of the Agreement, it is agreed, effective immediately, that the Agreement shall be amended as follows: Section 5.A. of the Agreement is hereby stricken in its entirety and the following new Section 5.A. substituted therefor: "A. Subject to the terms and provisions of this Agreement, the Bank hereby establishes a discretionary revolving line of credit in Borrower's favor in the amount set forth below, as determined by Bank from time to time hereafter. Bank may make such loans to Borrower, based upon such facts and circumstances existing at the time of the request, as from time to time Bank elects to make which are secured by Borrower's Inventory, Accounts and all other Collateral and the proceeds thereof. Without limiting the discretionary nature of Bank's obligation to make loans hereunder, or the demand feature of any loans that Bank does make hereunder, Borrower agrees that the aggregate unpaid principal of all direct loans plus the sum of the aggregate amount undrawn on all letters of credit and acceptances shall not exceed the sum of One Million ($1,000,000.00) Dollars. All such loans shall bear interest and at the option of Bank shall be evidenced by demand notes in form satisfactory to Bank, but in the absence of notes shall be conclusively evidenced by the Bank's record of disbursements and repayments and shall be payable ON DEMAND. Interest will be charged to Borrower at a fluctuating rate which is the daily equivalent to the Base Rate in effect from time to time, less one-half of one (.50%) percent, or at such other rate agreed on from time to time by the parties, upon any balance owing to Bank at the close of each day and shall be payable monthly in arrears, on the first day of each month, until the Bank makes demand. The rate of interest payable by Borrower shall be changed effective as of that date in which a change in the Base Rate becomes effective. Interest shall be computed on the basis of the actual number of days elapsed over a year of three hundred sixty (360) days. The term "Base Rate" as used herein and in any supplement and amendment hereto shall mean the rate of interest announced from time to time by Bank, at its head office, as its Base Rate, it being understood that such rate is a reference rate and not necessarily the lowest rate of interest charged by the Bank." Kindly note that the alterations contained herein do not in any way alter, release or change any other sections contained in the Agreement. Please acknowledge your agreement to the foregoing by signing the enclosed copy of this letter and returning the same to the undersigned. Very truly yours, EASTERN BANK By: /s/ Alan Roberts -------------------------------- Alan Roberts, Vice President UNDERSTOOD AND AGREED TO: INTERNATIONAL ELECTRONICS, INC. By: /s/ John Waldstein ---------------------------------------- John Waldstein, President and Treasurer -2- EX-10.C 5 dex10c.txt SECURITY LETTER AGREEMENT DTD MAY 20,1999 Eastern Bank May 20, 1999 International Electronics, Inc. 427 Turnpike Street Canton, Massachusetts 02021 Attn: John Waldstein, President and Treasurer Gentlemen: Reference is made to our Demand Loan and Security Agreement Accounts Receivable and Inventory dated February 28, 1997, together with all amendments and additions thereto (hereinafter called the "Agreement"). Notwithstanding the provisions of the Agreement, it is agreed, effective immediately, that the Agreement shall be amended as follows: 1. Section 5.A. of the Agreement is hereby stricken in its entirety and the following new Section 5.A. substituted therefor: "A. Subject to the terms and provisions of this Agreement, the Bank hereby establishes a discretionary revolving line of credit in Borrower's favor in the amount set forth below, as determined by Bank from time to time hereafter. Bank may make such loans to Borrower, based upon such facts and circumstances existing at the time of the request, as from time to time Bank elects to make which are secured by Borrower's Inventory, Accounts and all other Collateral and the proceeds thereof. Without limiting the discretionary nature of Bank's obligation to make loans hereunder, or the demand feature of any loans that Bank does make hereunder, Borrower agrees that the aggregate unpaid principal of all direct loans plus the sum of the aggregate amount undrawn on all letters of credit and acceptances shall not exceed the sum of One Million ($1,000,000.00) Dollars. All such loans shall bear interest and at the option of Bank shall be evidenced by demand notes in form satisfactory to Bank, but in the absence of notes shall be conclusively evidenced by the Bank's record of disbursements and repayments and shall be payable ON DEMAND. Interest will be charged to Borrower at a fluctuating rate which is the daily equivalent to the Base Rate in effect from time to time, or at such other rate agreed on from time to time by the parties, upon any balance owing to Bank at the close of each day and shall be payable monthly in arrears, on the first day of each month, until the Bank makes demand. The rate of interest payable by Borrower shall be changed effective as of that date in which a change in the Base Rate becomes effective. Interest shall be computed on the basis of the actual number of days elapsed over a year of three hundred sixty (360) days. The term "Base Rate" as used herein and in any supplement and amendment hereto shall mean the rate of interest announced from time to time by Bank, at its head office, as its Base Rate, it being understood that such rate is a reference rate and not necessarily the lowest rate of interest charged by the Bank. The Base Rate on the date hereof is agreed to be seven and three-quarters (7 3/4%) percent." 2. Section 6 of the Agreement is hereby stricken in its entirety and the following new Section 6 substituted therefor: "6. DEFINITION OF QUALIFIED ACCOUNT. This section has been intentionally reserved." 3. Section 7 of the Agreement is hereby stricken in its entirety and the following new Section 7 substituted therefor: "7. DEFINITION OF ELIGIBLE INVENTORY. This section has been intentionally reserved." 4. Section 13(d) of the Agreement is hereby stricken in its entirety and the following new Section 13(d) substituted therefor: "(d) Borrower will at all times keep accurate and complete records of Borrower's Inventory, Accounts and other Collateral, and Bank, or any of its agents, shall have the right to call at Borrower's place or places of business at intervals to be determined by Bank, and without hindrance or delay, to inspect, audit, check, and make extracts from any copies of the books, records, journals, orders, receipts, correspondence which relate to Borrower's Accounts, and other Collateral or other transactions, between the parties thereto and the general financial condition of Borrower and Bank may remove any of such records temporarily for the purpose of having copies made thereof. Absent the occurrence of an Event of Default which is continuing, Borrower shall not be obligated to pay to Bank an audit fee in connection with any such audit or inspection." 5. Section 14(a) of the Agreement is hereby stricken in its entirety and the following new Section 14(a) substituted therefor: "(a) (Debt to Worth) permit the aggregate amount of its indebtedness to be more than one and one-half (1 1/2) times the amount of its tangible net worth on the last day of any fiscal year beginning with the fiscal year ending August 31, 1998, or the last day of the month of February, 1999, commencing February 28, 1999;" 6. The Agreement is hereby amended by adding the following new Section 14(m) thereto: -2- "(m) (Minimum Net Earnings) permit the net after tax earnings of Borrower for the six (6) month period ending on the last day of February of each year or the twelve (12) month period ending on the last day of August of each year to be less than One ($1.00) Dollar." Kindly note that the alterations contained herein do not in any way alter, release or change any other sections contained in the Agreement. Please acknowledge your agreement to the foregoing by signing the enclosed copy of this letter and returning the same to the undersigned. Very truly yours, EASTERN BANK By: /s/ Alan Roberts ---------------------------- Alan Roberts, Vice President UNDERSTOOD AND AGREED TO: INTERNATIONAL ELECTRONICS, INC. By: /s/ John Waldstein ------------------------------------------------------ John Waldstein, President and Treasurer -3- EX-10.D 6 dex10d.txt LINE OF CREDIT AGREEMENT LINE OF CREDIT AGREEMENT FOR THE ACQUISITION OF EQUIPMENT December 11, 2001 International Electronics, Inc. 427 Turnpike Street Canton, Massachusetts 02021 Attn: John Waldstein, President and Treasurer Gentlemen: We (hereinafter "Bank") are pleased to advise you (hereinafter referred to as the "Borrower") that Bank has established a line of credit of up to Five Hundred Thousand ($500,000.00) Dollars (hereinafter the "Credit Limit") for Borrower to be used exclusively for the purchase of new or used equipment; subject to Bank's periodic review. This line of credit will be subject to the following terms and conditions: 1. Any advances, extensions of credit, or loan of funds pursuant to this line of credit (hereinafter collectively and separately referred to as the "Loan") will be made only if in the opinion of Bank there has been no material adverse change of circumstances and if there exists no Event(s) of Default (as hereinafter defined). No advances, extensions of credit or loan of funds will be made on or after February 28, 2003. Any sums repaid hereunder shall not be readvanced. 2. Borrower may draw upon this line of credit from time to time by presenting to Bank for each Loan: (i) an invoice from the vendor of such equipment in a form reasonably acceptable to Bank, which includes, without limitation, the purchase price of such equipment, including all accessions thereto, net of all discounts, rebates, and other dealer or manufacturer incentives; (ii) a certificate of origin, bill of sale, or other documentation reasonably satisfactory to Bank indicating whether the equipment being purchased is new or used (hereinafter referred to as the "Equipment Documentation"); and (iii) an Equipment Documentation Certification in the form of Exhibit A annexed hereto. Except for the last draw which may be in the amount of the unused portion of the Credit Limit, all draws will be in amounts equal to or greater than Fifty Thousand ($50,000.00) Dollars. 3. The aggregate principal amount of any Loan made against any Equipment Documentation shall not exceed the lesser of (i) the Credit Limit, less any previous Loan, or (ii) one hundred (100%) percent of the net purchase price (exclusive of any soft costs, transportation or installation charges) of the new equipment referred to therein, or (iii) seventy (70%) percent of the net purchase price (exclusive of any soft costs, transportation or installation charges) of the used equipment referred to therein, provided, however, that the above limit may be exceeded if the Bank's appraisal (conducted on an auction value basis) of Borrower's equipment would exceed the limit for the purpose of purchasing used equipment. 1 4. The aggregate principal amount of any Loan made hereunder shall be payable in thirty-six (36) successive equal monthly installments over a term that begins on the first day of themonth which begins not less than thirty (30) days after the date of such Loan with the proviso that all Loans shall become due and payable upon (a) the occurrence of an Event of Default (other than the Event of Default described in Section 15(a) of the Demand Loan and Security Agreement Accounts Receivable and Inventory between Bank and Borrower dated February 28, 1997 (the "Loan Agreement"), or (b) one (1) year after the occurrence of the Event of Default described in Section 15(a) of the Loan Agreement. All such loans, at the option of Bank, shall be evidenced by promissory notes in form satisfactory to Bank, but in the absence of notes, shall be conclusively evidenced by Bank's records of disbursements and repayments. 5. Interest, net of those loans (if any) which bear interest at a fixed rate of interest (as defined in the following paragraph), will be charged to Borrower at a rate which is the daily equivalent to the Base Rate in effect from time to time plus one (1%) percent per annum, or such other rate as Bank and Borrower may from time to time agree to, upon any balance owing to Bank at the close of each day. The rate of interest payable by Borrower shall be changed effective as of that date in which a change in the Base Rate becomes effective. Interest shall be computed on the basis of the actual number of days elapsed over a year of three hundred sixty (360) days. Such interest shall be payable monthly in arrears on the first (1st) day of each month, commencing on the first of such dates next succeeding the date hereof. At Borrower's option, interest, net of those loans (if any) which bear interest calculated by reference to the Base Rate, will be charged to Borrower at a fixed rate which is equivalent to the then Cost of Funds Rate, but in no event shall such interest rate be less than seven (7%) percent per annum, such election by Borrower to be made on the date of the making of the applicable loan by Bank to Borrower. The term "Base Rate" as used herein and in any supplement and amendment hereto shall mean the per annum rate of interest announced from time to time by Bank, at its head office, as its Base Rate, it being understood that such rate is a reference rate and not necessarily the lowest rate of interest charged by the Bank. The Base Rate on the date hereof is agreed to be five (5%) percent. The term "Cost of Funds Rate" as used herein means the sum of (a) the fixed per annum rate of interest as of the date of the applicable Loan determined by Bank in good faith in accordance with Bank's customary practices for loans in United States currency and based on Bank's cost of obtaining funds with a maturity approximately equal to the period between the date the Cost of Funds Rate Loan is to be made and the maturity of the applicable Loan from sources as may be selected by Bank in its sole and absolute discretion, plus (b) two and three-quarters of one (2.75%) percent per annum (i.e., two hundred seventy-five (275) basis points). Upon the occurrence of an Event of Default hereunder, interest on unpaid balances shall thereafter be payable at an interest rate per annum equal to three (3%) percent greater than the rate of interest specified herein. 6. Borrower will pay or reimburse Bank for all reasonable expenses, including attorneys' fees, which Bank may in any way incur in connection with this agreement or any other agreement between Borrower and Bank or with any Loan or which result from any claim or action by any third person against Bank which would not have been asserted were it not for Bank's relationship with Borrower hereunder or otherwise. 2 7. Upon the occurrence of any one or more of the following events (hereinafter "Events of Default"), any and all obligations of Borrower to Bank shall become immediately due and payable, at the option of Bank and without notice or demand: (a) The failure by Borrower to pay when due any amount due under this Line of Credit Agreement or any secured term note issued pursuant to this Line of Credit Agreement. (b) The termination of the Loan Agreement (other than pursuant to Section 15(a) thereof) or the occurrence of an Event of Default as described in the Loan Agreement (other than pursuant to Section 15(a) thereof). (c) The occurrence of one or more of the events of default in any secured term note referred to in Paragraph 4 above. (d) The occurrence of any such Event of Default shall also constitute, without notice or demand, a default under all other agreements between Bank and Borrower and instruments and papers given Bank by Borrower, whether such agreements, instruments, or papers now exist or hereafter arise. 8. Borrower agrees that notwithstanding anything contained herein, the Loan Agreement or otherwise, if the Borrower shall terminate the Loan Agreement or any successor agreement, Bank shall have the right to terminate this line of credit and demand the immediate payment of the balance due under this Line of Credit Agreement. 9. The execution, delivery and performance of this Line of Credit Agreement, any note or any other instrument or document at any time required in respect hereof or of the Loan are within the corporate powers of Borrower, and not in contravention of law, the Articles of Organization or By-Laws of Borrower or any amendment thereof, or of any indenture, agreement or undertaking to which Borrower is a party or may otherwise be bound, and each such instrument and document represents a valid and binding obligation of Borrower and is fully enforceable according to its terms. Borrower will, if requested by Bank, furnish Bank with the opinion of counsel for Borrower with respect to any or all of the foregoing or other matters, such opinion to be in substance and form satisfactory to Bank. 10. This Line of Credit Agreement is supplementary to each and every other agreement between Borrower and Bank and shall not be so construed as to limit or otherwise derogate from any of the rights or remedies of Bank or any of the liabilities, obligations or undertakings of Borrower under any such agreement, nor shall any contemporaneous or subsequent agreement between Borrower and Bank be construed to limit or otherwise derogate from any of the rights or remedies of Bank or any of the liabilities, obligations or undertakings of Borrower hereunder unless such other agreement specifically refers to this Line of Credit Agreement and expressly so provides. 11. This Line of Credit Agreement and the covenants and agreements herein contained shall continue in full force and effect and shall be applicable not only in respect of the Loan, but also to all other obligations, liabilities and undertakings of Borrower to Bank whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising or acquired, until all 3 such obligations, liabilities and undertakings have been paid or otherwise satisfied in full. No delay or omission on the part of Bank in exercising any right hereunder shall operate as a waiver of such right or any other right and waiver on any one or more occasions shall not be construed as a bar to or waiver of any right or remedy of Bank on any future occasion. This Line of Credit Agreement isintended to take effect as a sealed instrument, shall be governed by and construed according to the laws of the Commonwealth of Massachusetts, shall be binding upon Borrower's successors and assigns and shall inure to the benefit of Bank's successors and assigns. 12. THE BORROWER AND BANK EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT THEY MAY HAVE OR HEREAFTER HAVE TO A TRIAL BY JURY IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS LINE OF CREDIT AGREEMENT. The Borrower hereby certifies that neither Bank nor any of its representatives, agents or counsel has represented, expressly or otherwise, that Bank would not, in the event of any such suit, action or proceeding, seek to enforce this waiver of right to trial by jury. The Borrower acknowledges that it has read the provisions of this Line of Credit Agreement and in particular, this Section; has consulted legal counsel; understands the right it is granting in this Line of Credit Agreement and is waiving in this section in particular; and makes the above waiver knowingly, voluntarily and intentionally. 13. The Borrower and Bank agree that any action or proceeding to enforce or arising out of this Line of Credit Agreement may be commenced in any court of the Commonwealth of Massachusetts sitting in the counties of Suffolk or Middlesex, or in the District Court of the United States for the District of Massachusetts, and the Borrower waives personal service of process and agrees that a summons and complaint commencing an action or proceeding in any such court shall be properly served and confer personal jurisdiction if served by next day Federal Express or comparable overnight delivery service providing proof of delivery to the Borrower, or as otherwise provided by the laws of the Commonwealth of Massachusetts or the United States of America. 14. Borrower's obligations pursuant to this Line of Credit Agreement are secured pursuant to the Loan Agreement. Very truly yours, EASTERN BANK By: /s/ Alan Roberts ---------------------------------- Alan Roberts, Vice President ACCEPTED: INTERNATIONAL ELECTRONICS, INC. By: /s/ John Waldstein ------------------------------------------ John Waldstein, President and Treasurer 4 EXHIBIT A EQUIPMENT DOCUMENTATION CERTIFICATION The undersigned, the __________________ of International Electronics, Inc. (the "Borrower"), hereby certifies to Eastern Bank that: 1. The attached copy of the Equipment Documentation (as defined in Paragraph 2 of the Borrower's Line of Credit Agreement for the Acquisition of Equipment dated December 11, 2001) is a true, correct and complete copy of the Equipment Documentation; 2. The net purchase price (exclusive of soft cost, transportation and installation charges) of the new equipment referred to in the attached Equipment Documentation is in the amount of $________________; 3. The net purchase price (exclusive of soft cost, transportation and installation charges) of the used equipment referred to in the attached Equipment Documentation is in the amount of $________________; 4. The soft cost, transportation and installation charges of the equipment referred to in the attached Equipment Documentation is in the amount of $______________; 5. The total purchase price of the equipment referred to in the attached Equipment Documentation (the net purchase price, plus the soft cost, transportation and installation charges) is in the amount of $________________; 6. The aggregate principal amount of the Loan requested in connection with the attached Equipment Documentation does not exceed the lesser of (i) the Credit Limit, less any previous Loan, or (ii) the sum of (a) one hundred (100%) percent of the net purchase price of the new equipment set forth in Item 2 above, and (b) seventy (70%) percent of the net purchase price of the used equipment set forth in Item 3 above (except as may be permitted under Paragraph 3 of the Borrower's Line of Credit Agreement for the Acquisition of Equipment dated December 11, 2001). ----------------------------------------- Name: Title: Date: ______________, _____ 5 -----END PRIVACY-ENHANCED MESSAGE-----