GREEN MOUNTAIN COFFEE ROASTERS INC

Transcription

1 GREEN MOUNTAIN COFFEE ROASTERS INC FORM 10-Q (Quarterly Report) Filed 05/28/96 for the Period Ending 04/13/96 Address 33 COFFEE LANE WATERBURY, VT Telephone CIK Symbol GMCR SIC Code Miscellaneous Food Preparations And Kindred Industry Food Processing Sector Consumer/Non-Cyclical Fiscal Year 09/29 Copyright 2010, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

2 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C Form 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TWELVE WEEKS ENDED APRIL 13, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission file number GREEN MOUNTAIN COFFEE, INC. (Exact name of small business issuer as specified in its charter) Delaware (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 33 Coffee Lane, Waterbury, Vermont (Address of principal executive offices) (802) (Issuer's telephone number) (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of May 28, 1996, 3,399,795 shares of common stock of the registrant were outstanding. Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]

3 Part I. Financial Information Item I. Financial Statements GREEN MOUNTAIN COFFEE, INC. Consolidated Balance Sheet (Dollars in thousands except share data) April 13, 1996 Sept. 30, unaudited ASSETS Current assets: Cash and cash equivalents $ 516 $ 310 Receivables, less allowances of $62 at April 13, 1996 and $63 at September 30, ,286 2,660 Inventories 2,466 2,766 Other current assets Deferred income taxes, net Total current assets 5,737 6,228 Fixed assets, net 8,187 8,127 Other assets, net Deferred income taxes, net Total assets $ 15,125 $ 15, LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 840 $ 618 Current portion of obligation under capital lease Revolving line of credit 485 1,720 Accounts payable 1,867 2,751 Accrued payroll Accrued expenses Total current liabilities 3,745 5, Long-term debt 2,878 2, Obligation under capital lease Commitments Stockholders' equity: Common stock, $0.10 par value: Authorized - 10,000,000 shares; issued and outstanding - 3,399,795 shares at April 13, 1996 and September 30, Additional paid-in capital 12,421 12,421 Accumulated deficit (4,462) (5,239) Total stockholders' equity 8,299 7, Total stockholders' equity $ 15,125 $ 15, The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

4 GREEN MOUNTAIN COFFEE, INC. Consolidated Statement of Operations (Dollars in thousands except share data) Twelve weeks ended April 13, 1996 April 8, (unaudited) Net sales $ 8,119 $ 6,832 Cost of sales 4,874 4, Gross profit 3,245 2,400 Selling and operating expenses 2,341 2,222 General and administrative expenses Income (loss) from operations 231 (482) Other expense (10) (23) Interest expense (106) (92) Income (loss) before income taxes 115 (597) Income tax benefit (expense) (17) Net income (loss) $ 98 $ (494) Net income (loss) per share $.03 $ (.15) Weighted average shares outstanding 3,428,588 3,383,485 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

5 GREEN MOUNTAIN COFFEE, INC. Consolidated Statement of Operations (Dollars in thousands except share data) Twenty-eight weeks ended April 13, 1996 April 8, (unaudited) Net sales $ 20,263 $ 17,764 Cost of sales 12,108 11, Gross profit 8,155 6,199 Selling and operating expenses 5,385 5,052 General and administrative expenses 1,599 1, Income (loss) from operations 1,171 (201) Other income (expense) (11) 1 Interest expense (246) (191) Income (loss) before income taxes 914 (391) Income tax benefit (expense) (137) Net income (loss) $ 777 $ (319) Net income (loss) per share $.23 $ (.09) Weighted average shares outstanding 3,427,554 3,383, The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

6 GREEN MOUNTAIN COFFEE, INC. Consolidated Statement of Cash Flows (Dollars in thousands) Twenty-eight weeks ended April 13, 1996 April 8, (unaudited) Cash flows from operating activities: Net income (loss) $ 777 $ (319) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 1, Loss on disposals of fixed assets 31 - Provision for doubtful accounts Decrease (increase) in long-term deferred income taxes 133 (60) Increase in other assets (134) - Changes in working capital: Receivables 315 (344) Inventories 300 (238) Other current assets 20 (54) Deferred income taxes 3 (10) Accounts payable (884) (42) Accrued payroll 161 (7) Accrued expenses (40) (66) Net cash provided by (used for) operating activities 1,784 (228) Cash flows from investing activities: Expenditures for fixed assets (977) (910) Proceeds from disposals of fixed assets Net cash used for investing activities (944) (910) Cash flows from financing activities: Proceeds from issuance of long-term debt 1, Repayment of long-term debt (369) (324) Net change in revolving line of credit (1,235) 1,428 Repayment of note payable to stockholder - (416) Principal payments under capital lease obligation (39) Net cash provided by (used for) financing activities (634) Net increase (decrease) in cash and cash equivalents 206 (164) Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period $ 516 $ The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

7 GREEN MOUNTAIN COFFEE, INC. Notes to Consolidated Financial Statements 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair statement of the interim financial data have been included. Results from operations for the twelve and twenty-eight week periods ended April 13, 1996 are not necessarily indicative of the results that may be expected for the fiscal year ending September 28, For further information, refer to the consolidated financial statements and the footnotes included in the annual report on Form 10-KSB for Green Mountain Coffee, Inc. for the year ended September 30, Net income (loss) per share is computed based upon the weighted average number of common and dilutive common equivalent shares outstanding during the period. 2. Income Taxes The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, generally all expected future events other than enactments of changes in the tax law or rates are considered. Gross deferred tax assets were $1,929,000 and $2,315,000 at April 13, 1996 and September 30, 1995, respectively, and the Company has established deferred tax asset valuation allowances of $975,000 and $1,225,000, respectively, at the same dates. The net deferred tax assets were $954,000 and $1,090,000 at April 13, 1996 and September 30, 1995, respectively.

8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations General For the twenty-eight weeks ended April 13, 1996, Green Mountain Coffee, Inc. (the "Company" or "Green Mountain") derived approximately 76.9% of its net sales from its wholesale operation. Green Mountain's wholesale opera- tion sells coffee to supermarkets, restaurants, convenience stores, specialty stores, hotels, universities and business offices. The Company also operated twelve retail stores and a direct mail operation, which accounted for approx- imately 14.0% and 9.1% of net sales, respectively, during the same period. Cost of sales consists of the cost of raw materials including coffee beans, flavorings and packaging materials, a portion of the Company's rental expense, the salaries and related expenses of production and distribution personnel, depreciation on production equipment and freight and delivery expenses. Selling and operating expenses consist of expenses that directly support the sales of the Company's wholesale, retail or direct mail channels, including media and advertising expenses, a portion of the Company's rental expense, and the salaries and related expenses of employees directly supporting sales. General and administrative expenses consist of expenses incurred for corporate support and administration, including a portion of the Company's rental expense and the salaries and related expenses of personnel not elsewhere categorized. The Company's fiscal year ends on the last Saturday in September. The Company's fiscal year normally consists of 13 four-week periods with the first, second and third "quarters" ending 16 weeks, 28 weeks and 40 weeks, respectively, into the fiscal year. Fiscal 1995, which began on September 25, 1994 and ended on September 30, 1995, consisted of 53 weeks with the fiscal fourth quarter having 13 weeks instead of the normal 12 weeks. Twelve weeks ended April 13, 1996 versus twelve weeks ended April 8, 1995 Net sales increased by $1,287,000 or 18.8% from $6,832,000 for the twelve weeks ended April 8, 1995 (the "1995 period") to $8,119,000 for the twelve weeks ended April 13, 1996 (the "1996 period"). Coffee pounds sold, excluding those sold as beverages through the Company's retail stores, increased by approximately 28% from the 1995 period to the 1996 period. The difference between the net sales percentage increase and the coffee pounds sold percentage increase primarily reflects reductions in Green Mountain's sales prices during fiscal 1996 as a result of lower green coffee costs. The 1995 period to 1996 period increase in net sales is attributable to the wholesale area in which net sales increased by $1,365,000 or 27.1% from $5,042,000 for the 1995 period to $6,407,000 for the 1996 period. This increase resulted primarily from the growth in the number of wholesale customer accounts. Retail net sales increased by $6,000 or 0.6% from $1,039,000 for the 1995 period to $1,045,000 for the 1996 period despite the closing during the second quarter of fiscal 1995 of three espresso carts located at super- markets, and the closing on December 15, 1995 of an espresso cart located in Albany, New York. The three supermarket locations were converted to whole- sale supermarket accounts with pre-bagged, bulk and/or self-service coffee beverage displays. Net sales in the direct mail area decreased by $84,000, or 11.2%, from $751,000 for the 1995 period to $667,000 for the 1996 period. The decrease in direct mail sales resulted primarily from a shift in strategy whereby the Company focused its mail order solicitations on catalog customers who more regularly buy from the Company, and decreased the number of low- margin product promotions. Green Mountain's gross profit increased by $845,000 or 35.2% from $2,400,000 for the 1995 period to $3,245,000 for the 1996 period. This increase was due primarily to an increase in sales. Gross profit increased by 4.9 percentage points as a percentage of sales from 35.1% for the 1995 period to 40.0% for the 1996 period. This increase was due primarily to the mathematical impact of lower coffee sales prices charged to customers in the 1996 period, since the majority of the green coffee cost decreases have been passed on to them. Selling and operating expenses increased by $119,000 or 5.4% from $2,222,000 for the 1995 period to $2,341,000 for the 1996 period. However, selling and operating expenses decreased by 3.7 percentage points as a percentage of sales from 32.5% for the 1995 period to 28.8% for the 1996 period. General and administrative expenses increased by $13,000 or 2.0% from $660,000 for the 1995 period to $673,000 for the 1996 period and decreased by 1.4 percentage points as a percentage of sales from 9.7% for the 1995 period to 8.3% for the 1996 period. As a result of the foregoing, income from operations increased by $713,000 from a loss from operations of $(482,000) for the 1995 period to income from operations of $231,000 for the 1996 period. The income tax benefit recognized under SFAS 109 was $103,000 for the 1995 period compared to income tax expense of $17,000 for the 1996 period. Net income increased by $592,000 from a net loss of $(494,000) for the 1995 period to net income of $98,000 for the 1995 period. Twenty-eight weeks ended April 13, 1996 versus twenty-eight weeks ended April 8, 1995

9 Net sales increased by $2,499,000 or 14.1% from $17,764,000 for the twenty-eight weeks ended April 8, 1995 (the "1995 YTD period") to $20,263,000 for the twenty-eight weeks ended April 13, 1996 (the "1996 YTD period"). Coffee pounds sold, excluding those sold as beverages through the Company's retail stores, increased by approximately 20% from the 1995 YTD period to the 1996 YTD period. The difference between the net sales percentage increase and the coffee pounds sold percentage increase primarily reflects reductions in Green Mountain's coffee sales prices during fiscal 1996 as a result of lower green coffee costs. The 1995 YTD period to 1996 YTD period increase in net sales is attributable to the wholesale area in which net sales increased by $2,781,000 or 21.7% from $12,796,000 for the 1995 YTD period to $15,577,000 for the 1996 YTD period. The wholesale net sales increase resulted primarily from growth in the number of wholesale customer accounts. Retail net sales decreased by $64,000 or 2.2% from $2,903,000 for the 1995 YTD period to $2,839,000 for the 1996 YTD period principally due to the closing of the four espresso carts discussed above. Net sales in the direct mail area decreased by $218,000 or 10.6% from $2,065,000 for the 1995 YTD period to $1,847,000 for the 1996 YTD period primarily due to the shift in strategy during the 1996 YTD period discussed above. Green Mountain's gross profit increased by $1,956,000 or 31.6% from $6,199,000 for the 1995 YTD period to $8,155,000 for the 1996 YTD period. This increase was due primarily to an increase in sales. Gross profit increased by 5.3 percentage points as a percentage of sales from 34.9% for the 1995 YTD period to 40.2% for the 1996 YTD period. This increase was due primarily to the mathematical impact of lower coffee sales prices charged to customers in the 1996 YTD period since the majority of the green coffee cost decreases have been passed on to them. Selling and operating expenses increased by $333,000 or 6.6% from $5,052,000 for the 1995 YTD period to $5,385,000 for the 1996 YTD period. However, selling and operating expenses decreased by 1.8 percentage points as a percentage of sales from 28.4% for the 1995 YTD period to 26.6% for the 1996 YTD period. General and administrative expenses increased by $251,000 or 18.6% from $1,348,000 for the 1995 YTD period to $1,599,000 for the 1996 YTD period and increased by.3 percentage points as a percentage of sales from 7.6% for the 1995 YTD period to 7.9% for the 1996 YTD period. General and administrative expenses incurred by the Company during the first quarter of fiscal 1995 reflect the effect of certain cost containment measures in place at that time. Even with the 1995 YTD period to 1996 YTD period increase in general and administrative expenses as a percentage of sales, the Company does not currently anticipate that full-year general and administrative expenses as a percentage of sales will increase significantly, if at all, over the fiscal 1995 level of 7.6%. As a result of the foregoing, income from operations increased by $1,372,000 from a net loss of $(201,000) for the 1995 YTD period to income from operations of $1,171,000 for the 1996 YTD period. The income tax benefit recognized under SFAS 109 was $72,000 for the 1995 YTD period compared to income tax expense of $137,000 for the 1996 YTD period. Net income increased by $1,096,000 from a net loss of $(319,000) for the 1995 YTD period to $777,000 in the 1996 YTD period. Liquidity and Capital Resources The Company had working capital of $1,992,000 and $745,000 at April 13, 1996 and September 30, 1995, respectively. The Company had net cash provided by operating activities of $1,784,000 in the 1996 YTD period and net cash used for operating activities of $(228,000) in the 1995 YTD period, a $2,012,000 improvement. The net cash provided by operating activities in the 1996 YTD period resulted primarily from the Company's improved profitability during the period. The Company had net cash used for financing activities of $(634,000) in the 1996 YTD period, and net cash provided by financing activities of $974,000 in the 1995 period. The combined net cash provided by operating and financing activities was used primarily to fund expenditures for fixed assets. During the 1996 YTD period, Green Mountain had capital expenditures of $977,000 (net of $180,000 financed directly by a capital lease and long-term debt), including $396,000 for equipment on loan to wholesale customers. During the 1995 YTD period, Green Mountain had capital expenditures of $910,000, including $413,000 for equipment on loan to wholesale customers. On April 12, 1996, the Company amended its credit facility with Fleet Bank-NH (Fleet). Under the revised facility, Green Mountain can borrow up to $1,500,000 under a five-year term promissory note to be repaid in equal principal installments. The Company drew down $1,000,000 against such note on April 12, 1996 and expects to draw down the remaining $500,000 upon meeting certain financial covenants following the end of the Company's third fiscal quarter. The interest rate on all term debt under the credit facility was reduced to the lesser of the Fleet base rate (8.25% at April 13, 1996) plus 25 basis points or 275 basis points above the LIBOR rate for maturities of up to one year. The rate on the Company's revolving line of credit under the Fleet credit facility was also reduced to the lesser of the Fleet base rate or 250 basis points above the LIBOR rate for maturities of up to one year. The term of the revolving line of credit was also extended by one year to February 28, The outstanding balance on the revolving line of credit at April 13, 1996 was $485,000 with a total availability under the amended borrowing base formula of $2,656,000. The average cost of the high-quality arabica coffees the Company purchases decreased during the 1996 period when compared to the 1995

10 period and the Company's overall gross profit margin has improved. The Company has begun to pass such savings on to its customers through price reductions, and such price reductions are likely to negatively impact the Company's year-to- year percentage net sales growth rate. The Company believes that the cost of green coffee will continue to be volatile throughout the remainder of fiscal 1996, but expects that its average cost of green coffee in fiscal 1996 will be less than that experienced in fiscal 1995, although there can be no assurance that this will be the case. The Company believes that increases in the cost of green coffee can generally be passed on to customers or absorbed through more efficient operations, although there can be no assurance that the Company will be successful in doing so. Similarly, rapid sharp decreases in the cost of green coffee could also force the Company to lower sales prices before realizing cost reductions in its green coffee inventory. To date, Green Mountain has not encountered any problems with the availability of the green coffees the Company purchases. The Company believes that there are adequate sources of supply of top-quality green arabica coffee beans to meet its needs plans for the foreseeable future. Because Green Mountain roasts over 25 different types of green coffee beans to produce its more than 70 different varieties of coffee, if one type of green coffee bean were to become unavailable or prohibitively expensive, management believes Green Mountain could substitute another type of coffee, of equal or better quality, meeting a similar taste profile, in a blend or temporarily remove that particular coffee from its product line. The Company had net deferred tax assets of $954,000 at April 13, The Company had been profitable in each of the three fiscal years ended September 26, 1992, the fifteen month period ended September 30, 1989 and the fiscal year ended June 30, In fiscal 1993 and fiscal 1994, the Company made investments in production and distribution capacity and personnel and marketing expenditures in order to position itself for accelerated growth and the Company reported net losses for those years. More than half the net loss for fiscal 1993 was attributable to a one-time, non-cash charge to compensation expense of $1.3 million resulting from factors related to its initial public offering. The Company was profitable in the fourth quarter of fiscal 1994, the first and fourth quarters of fiscal 1995, and the first and second quarters of fiscal 1996, and reduced its full- year net loss by 90.8% from $2,358,000 in fiscal 1994 to $218,000 in fiscal Accordingly, management believes that the net deferred tax assets are realizable. The Company operated at approximately 50-60% of production capacity during the 1996 period. The Company added five sales people to the greater Boston and Florida geographic markets during the 1996 period, increasing the number of people in the Company's direct sales force from fifteen to twenty. This is the first increase in the size of the sales force since fiscal 1994, and management intends to continue building the Company's sales force during the balance of the fiscal year. Total currently planned capital expenditures in fiscal 1996 are approx- imately $2,400,000, primarily to fund equipment for loan to wholesale customers, production equipment and computer hardware and software. However, the Company is constantly reviewing its capital expenditure needs and the actual amount may increase or decrease. The Company expects that cash requirements for fiscal 1996 will be satisfied by net cash provided by operating activities and bank and other borrowings. The Company presently does not anticipate that it will seek additional funds from public or private convertible debt or equity sources in fiscal Seasonality Historically, the Company has experienced lower net sales levels in its second fiscal quarter following high holiday-related levels in its first fiscal quarter, especially in its retail and direct mail operations, resulting in less favorable operating results during the second fiscal quarter. In addition, quarterly results may be affected by a variety of other factors, including, but not limited to, general economic trends, the cost of green coffee, competition, marketing programs, weather and special or unusual events. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

11 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.2 (y) Seventh Amendment and First Restatement of Commercial Loan Agreement, dated April 12, 1996 among Green Mountain Coffee Roasters, Inc., as borrower, and Fleet Bank-NH, as lender (z) Term Promissory Note, dated April 12, 1996, from Green Mountain Coffee Roasters, Inc. to Fleet Bank-NH (aa) Note Modification Agreement, dated April 12, 1996, to modify Term Promissory Note dated August 11, 1993, from Green Mountain Coffee Roasters, Inc. to Fleet Bank-NH (g) First Restatement of Security Agreement, dated April 12, 1996, between Green Mountain Coffee Roasters, Inc. and Fleet Bank-NH. 11 Computation of net income (loss) per share of Common Stock. 27 Financial Data Schedule. (b) No reports on Form 8-K were filed during the twelve weeks ended April 13, 1996.

12 Excludes Exhibits Filed With This 10-QSB To obtain copies of exhibits, please contact: Green Mountain Coffee, Inc. Investor Relations Department 33 Coffee Lane Waterbury, VT (802)

13 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GREEN MOUNTAIN COFFEE, INC. Date: May 28, 1996 By: /s/ Robert P. Stiller Robert P. Stiller, President and Chief Executive Officer Date: May 28, 1996 By: /s/ Robert D. Britt Robert D. Britt, Treasurer, Secretary and Chief Financial Officer

14 FLEET BANK - NH SEVENTH AMENDMENT AND FIRST RESTATEMENT OF COMMERCIAL LOAN AGREEMENT THIS SEVENTH AMENDMENT AND FIRST RESTATEMENT OF COMMERCIAL LOAN AGREEMENT (the "Agreement"), is made as of 12th day of April, 1996, by and among GREEN MOUNTAIN COFFEE ROASTERS, INC. (f/k/a Green Mountain Coffee, Inc.), a Vermont corporation with a principal place of business at 33 Coffee Lane, Waterbury, Vermont (the "BORROWER"), and GREEN MOUNTAIN COFFEE ROASTERS FRANCHISING CORPORATION, a Delaware corporation(the "Subsidiary"), and FLEET BANK - NH, a BANK organized under the laws of the State of New Hampshire with an address of NH NA E02A, 1155 Elm Street, Manchester, New Hampshire (the "BANK"). RECITALS: The BANK, the BORROWER, and the Subsidiary are parties to a certain Commercial Loan Agreement dated October 22, 1992, said loan agreement having been a amended by a certain letter agreement dated November 13, 1992, by a certain Amendment to Commercial Loan Agreement and Loan Documents dated August 11, 1993, by a certain Third Amendment to Loan Agreement and Loan Documents dated August 31, 1993, by a certain Fourth Amendment to Commercial Loan Agreement and Loan Documents dated April 7, 1994, by a certain Fifth Amendment to Commercial Loan Agreement and Loan Documents dated August 15, 1994, and by a certain Sixth Amendment to Commercial Loan Agreement and Loan Documents dated March 31, 1995 (collectively, as amended to date, the "Old Loan Agreement") and certain Loan Documents (as defined in the Old Loan Agreement and as amended through the date hereof), including, but not limited to a certain Guaranty Agreement dated October 22, 1992, as amended to date, of the Subsidiary (the "Guaranty"), and certain Security Agreements dated October 22, 1992, as amended to date, of each of the BORROWER and the Subsidiary (collectively, the "Security Agreements"). Pursuant to the Old Loan Agreement, the BANK has extended to the BORROWER certain credit facilities. The BORROWER has requested, and the BANK has agreed, to extend a new term loan in the maximum principal of up to One Million Five Hundred Thousand Dollars ($1,500,000.00) and, in connection therewith, to make certain amendments affecting the other credit facilities extended by the BANK to the BORROWER under the Old Loan Agreement. The BANK, BORROWER, and the Subsidiary have agreed that it is necessary and appropriate in connection with such amendments to restate the Old Loan Agreement in its entirety. Each loan currently outstanding from the BANK to the BORROWER under the Old Loan Agreement, and each loan which BANK may, from time to time hereafter extend to BORROWER is individually referred to herein as a "Loan" and collectively as the "Loans"). All of the Loans are, together with all other debts, liabilities and obligations of BORROWER to the BANK, direct or indirect, absolute or contingent, now existing or hereafter arising, hereinafter sometimes collectively referred to as the "Obligations". Each Loan is or shall be evidenced by a promissory note (individually a "Note" and collectively the "Notes") and each Loan and all of the other Obligations are secured pursuant to the Security Agreements and the other Loan Documents. In connection with the Loans, the BORROWER has and may hereafter execute certain other documents, certificates and agreements, all of which are, together with this Agreement, the Notes, and the Security Agreement and as all of the same have been and may be hereafter amended, modified, revised, renewed, or extended, sometimes collectively referred to herein as the "Loan Documents". Each Loan, whether now existing or hereafter arising, is made upon and subject to the terms and conditions set forth in the Note evidencing such Loan, the Security Agreement, the other Loan Documents, and this Agreement. The terms, conditions, representations, warranties, and covenants set forth in this Agreement are in addition to, and not in limitation of, the terms, conditions, representations, warranties, and covenants set forth in the other Loan Documents. In the event of any conflict between the terms, conditions, representations, warranties, and covenants contained in the Loan Documents, the term, condition, representation, warranty, or covenant which confers the greatest benefit upon the BANK shall control. The determination as to which term, condition, representation, warranty, or covenant is more beneficial shall be made by the BANK in its sole discretion and shall be binding upon the BORROWER. Where there is more than one BORROWER or guarantor hereunder, all of the terms, conditions, representations, warranties, and covenants set forth herein and in the other Loan Documents shall apply to, be binding upon, and be deemed to be made by each BORROWER and guarantor, jointly, severally, separately, and individually. NOW, THEREFORE, in consideration of the BANK extending the Loans to the BORROWER as described hereinabove, the BANK, the BORROWER, and the Subsidiary hereby agree to amend and restate the Old Loan Agreement in its entirety as follows: I. REVOLVING LINE OF CREDIT. The BANK shall make available to the BORROWER a revolving line of credit loan in the maximum principal amount of up to Three Million Dollars ($3,000,000.00) (the "Revolving Line of Credit Loan"), as evidenced by the Revolving Line of Credit Promissory Note made by the BORROWER payable to the order of the BANK in the maximum principal amount of up to Three Million Dollars ($3,000,000.00) dated March 31, 1995 (the "Revolving Line of Credit Note"). The Revolving Line of Credit Loan shall be upon and subject to the terms and conditions set forth in the Revolving Line of Credit Note, the other Loan Documents, and this Agreement. A. Maximum Available Amount. The maximum amount available to the BORROWER from time to time under the Revolving Line of Credit Loan shall be the lesser of (1) Three Million Dollars ($3,000,000.00) or (2) an amount equal to the aggregate of (a) the applicable percentage of the sum of BORROWER's Acceptable Accounts and (b) the applicable percentage of the value of BORROWER's Acceptable Inventory, up to a maximum dollar amount, all as set forth and defined on Schedule A attached hereto. The maximum amount available to BORROWER under the Revolving Line of Credit Loan as determined from time to time under the formula set forth in clauses (2) (a) and (b) above is hereinafter referred to as the BORROWER'S "Borrowing Base". The BORROWER agrees that the BANK may, at any time or times, lower the applicable percentages of Acceptable Accounts and Acceptable Inventory for purposes of determining the Borrowing Base to such percentages as the BANK may determine in a commercially reasonable manner to be appropriate based upon any material deterioration of the BORROWER's condition, financial or otherwise, and/or of the value, condition or quality of the Collateral (as hereinafter defined).

15 B. Advances. The Revolving Line of Credit Loan shall be disbursed, advanced, readvanced, and repaid as provided in the Revolving Line of Credit Note and this Agreement. BORROWER may request advances orally or in writing from time to time in accordance with such procedures as the BANK may from time to time specify in an amount such that the aggregate amounts outstanding under the Revolving Line of Credit Loan do not exceed the maximum available amount as determined under Section I. A. above. The BANK is also authorized by BORROWER to automatically make advances under and repayments of the Revolving Line of Credit Loan pursuant to the Revolving Line of Credit Management provisions of Section I. E. below. The BANK shall be under no obligation to make any advance (automatic or otherwise) at any time or times during which an Event of Default has occurred or is existing under this Agreement or the Loan Documents, or if any condition exists which, if not cured, would with the passage of time or the giving of notice, or both, constitute such an Event of Default. At the time of each advance and readvance under the Revolving Line of Credit Loan, BORROWER shall immediately become indebted to the BANK for the amount thereof. Each such advance or readvance may be credited by the BANK to any deposit account of BORROWER with the BANK, be paid to BORROWER, or applied to any Obligation, as the BANK may in each instance elect. BORROWER authorizes the BANK to charge any account which BORROWER maintains with the BANK for any payments which BORROWER may or must make, or customarily makes, to the BANK from time to time. C. Review and Repayment. The Revolving Line of Credit Loan shall be subject to review and, at the sole option and discretion of the BANK, renewal on February 28, 1998, and, if renewed, thereafter on each subsequent anniversary of such date (February 28, 1998, and each anniversary thereof to which the Revolving Line of Credit Loan is renewed, being a "Review Date"). IF THE REVOLVING LINE OF CREDIT LOAN IS NOT RENEWED BY THE BANK AS AFORESAID ON ANY REVIEW DATE, THE ENTIRE AMOUNT OF OUTSTANDING PRINCIPAL, ACCRUED INTEREST AND OTHER CHARGES PAYABLE THEREUNDER SHALL BE DUE AND PAYABLE BY BORROWER ON SUCH REVIEW DATE. BORROWER ACKNOWLEDGES AND AGREES THAT THE BANK HAS NO OBLIGATION OR COMMITMENT TO RENEW THE REVOLVING LINE OF CREDIT LOAN ON ANY REVIEW DATE. NOTWITHSTANDING THE FOREGOING, OR ANY PROVISION OF THE REVOLVING LINE OF CREDIT NOTE, ANY OF LOAN DOCUMENTS OR HEREIN TO THE CONTRARY, THE REVOLVING LINE OF CREDIT LOAN SHALL BE A DEMAND OBLIGATION OF BORROWER TO THE EXTENT THAT THE AMOUNT OUTSTANDING THEREUNDER AT ANY TIME EXCEEDS THE MAXIMUM AVAILABLE AMOUNT UNDER SUCH REVOLVING LINE OF CREDIT LOAN AS DETERMINED UNDER SECTION I. A. ABOVE, BUT ONLY TO THE EXTENT OF THE AMOUNT OUTSTANDING IN EXCESS OF THE MAXIMUM AVAILABLE AMOUNT. D. Interest Rate. (i) Except as provided hereinbelow, the principal balance outstanding from time to time under the Revolving Line of Credit Loan, net of amounts subject to a LIBOR based rate of interest as provided hereinbelow, shall bear interest at a variable annual rate equal to the BANK's Base Rate. The "Base Rate" shall be the Base Rate of the BANK as established and changed by the BANK from time to time whether or not such rate shall be otherwise published or BORROWER receives notice thereof. The BORROWER acknowledges that the Base Rate is used for reference purposes only as an index and is not necessarily the lowest interest rate charged by the BANK on commercial loans. Each time the Base Rate changes the interest rate under the Revolving Line of Credit Loan shall change contemporaneously with such change in the Base Rate. Interest shall be calculated and charged daily on the basis of actual days elapsed over a three hundred sixty (360) day banking year. (ii) BORROWER may elect from time to time to have amounts outstanding under the Revolving Line of Credit Loan bear interest for one or more periods of thirty (30) days each (but in no event beyond the next Review Date) at a fixed rate (the "Revolving LIBOR-based Rate") equal to the LIBOR rate (as herein after defined) plus two and one-half percent (2.5%) per annum. BORROWER may only elect the Revolving LIBOR-based Rate with respect to an outstanding principal amount under the Revolving Line of Credit Loan of not less than Five Hundred Thousand Dollars ($500,000.00). BORROWER shall notify BANK in writing at least two (2) banking Days (as hereinafter defined) in advance of the date upon which the BORROWER desires an election to the Revolving LIBOR-based Rate to be effective. BORROWER's notice to BANK as aforesaid shall specify the outstanding amount under the Revolving Line of Credit Loan that BORROWER desires to bear interest at the Revolving LIBOR-based Rate and the date such election is to be effective (which must be a Banking Day). Any amounts outstanding under the Revolving Line of Credit Loan as to which BORROWER has elected the Revolving LIBOR-based Rate shall hereinafter be referred to as a "LIBOR Advance". All amounts outstanding under the Revolving Line of Credit Loan which are not subject to the Revolving LIBOR-based Rate shall bear interest at a variable annual rate equal to the BANK's Base Rate as provided hereinabove. The term "LIBOR rate" shall mean the rate as determined by the BANK on the basis of the offered rates for deposits in U.S. dollars for a thirty (30) day period which appear on the Telerate page 3750 or Reuter's LIBO page as of 11:00 a.m. London time on the date that is two (2) Banking Days preceding the effective date of BORROWER's election of the Revolving LIBOR-based Rate in respect of a LIBOR Advance. If such rate does not appear on the Telerate page 3750 or Reuter's LIBO page, the rate for that date will be determined on the basis of the offered rates for deposits in U.S. dollars for a thirty (30) day period which are offered by four major banks in the London interbank market at approximately 11:00 a.m. London time on the date that is two (2) Banking Days preceding the effective date of BORROWER's election of the Revolving LIBOR- based Rate in respect of a LIBOR Advance. The principal London office of each of the four major BANKS in the London interbank market will be requested to provide a quotation of its U.S. dollar deposit offered rate. If at least two such quotations are provided, the rate for that date will be the arithmetic mean of all such quotations. If fewer than two quotations are provided as requested, the rate for that date will be determined on the basis of the rates quoted for loans in U.S. dollars to leading European BANKS for a thirty (30) day period offered by major BANKS in New York City at approximately 11:00 a.m., New York City time, on the date that is two (2) Banking Days preceding the effective date of BORROWER's election of the Revolving LIBOR- based Rate in respect of a LIBOR Advance. In the event that the BANK is unable to obtain any such quotation as provided above, it will be deemed that the LIBOR rate cannot be determined and that the BORROWER's election for the applicable LIBOR Advance shall be void. In the event that the Board of Governors of the Federal Reserve System shall impose a Reserve Percentage on the BANK with respect to LIBOR deposits of the BANK, then for any period during which such Reserve Percentage shall apply, the LIBOR rate shall be equal to the amount determined above divided by an amount equal to 1 minus the Reserve Percentage actually maintained by the BANK. For purposes hereof, "Reserve Percentage" means the rate (expressed as a decimal) at which the BANK is required to maintain reserves under Regulation D of the Board of Governors of the Federal Reserve System against Eurodollar liabilities outstanding.

16 Notwithstanding the foregoing, if as a result of any change in any foreign or United States law or regulation (or change in the interpretation thereof) it is determined by BANK that it is unlawful to maintain a LIBOR Advance, or if any central BANK or governmental authority (foreign or domestic) shall assert that it is unlawful to maintain a LIBOR Advance, then such LIBOR Advance shall terminate and the BORROWER shall have no further right hereunder to elect the Revolving LIBOR- based Rate. If for any reason a LIBOR Advance is terminated or prepaid prior to the end of the applicable thirty (30) day period for which the Revolving Libor-based Rate is to be in effect, the BORROWER shall, upon demand by BANK, pay to BANK any amounts required to compensate BANK for any losses, costs, or expenses which it may reasonably incur as a result of such termination or prepayment, including, without limitation, any losses, costs, or expenses incurred by reason of the liquidation or redeployment of deposits or other funds acquired by the BANK to fund or maintain such LIBOR Advance. For purposes hereof, a "Banking Day" means a day upon which BANKS are open for business to the general public in Manchester, New Hampshire, and upon which dealings are carried on and BANKS are open for business in the London interbank market. E. Revolving Line of Credit Management. Set forth on Schedule A are additional terms and conditions relating to the management of the Revolving Line of Credit Loan. F. Purposes. Amounts advanced to BORROWER under the Revolving Line of Credit Loan shall be used solely for BORROWER's ordinary working capital requirements and general corporate purposes. II. EQUIPMENT LINE OF CREDIT. The BANK has heretofore extended to the BORROWER an Equipment Line of Credit Loan in the maximum principal amount of up to One Million Five Hundred Thousand Dollars ($1,500,000.00) (the "Equipment Line of Credit Loan"). Currently, outstanding principal under the Equipment Line of Credit Loan is and shall be evidenced by (a) the Replacement Term Promissory Note made by the BORROWER payable to the order of the BANK in the principal amount of One Million Five Hundred Thousand Dollars ($1,500,000.00) dated March 31, 1995 and (b) the Term Promissory Note Tied to Equipment Line of Credit made by the BORROWER payable to the order of the BANK in the principal amount of Two Hundred Eighty-five Thousand Seven Hundred Fourteen Dollars and Thirty-six Cents ($285,714.36) dated April 3, 1995 (individually and collectively, both of said notes being referred to as the "Equipment Line of Credit Note"). Effective as of the date hereof, no further advances of principal shall be made under the Equipment Line of Credit Loan. Outstanding principal under the Equipment Line of Credit Loan shall be repaid in accordance with the terms and conditions set forth in each Equipment Line of Credit Note, the other Loan Documents, and this Agreement. The interest rate applicable to principal outstanding from time to time under the Equipment Line of Credit Loan shall be as follows: (i) Except as provided hereinbelow, principal outstanding under the Equipment Line of Credit Loan, if not subject to a LIBOR based rate of interest as provided hereinbelow, shall bear interest at a variable rate equal to the BANK's Base Rate (as defined in hereinabove), plus one quarter of one percent (.25%) per annum. Each time the Base Rate changes, the interest rate applicable to outstanding principal under the Equipment Line of Credit Loan shall change contemporaneously with such change in the Base Rate. Interest shall be calculated and charged daily on the basis of actual days elapsed over a three hundred sixty (360) day Banking year. (ii) The BORROWER may elect to have the entire outstanding principal amount under the Equipment Line of Credit Loan bear interest for one or more periods of thirty (30) days each at a fixed rate (the "Equipment LIBOR-based Rate") equal to the LIBOR rate plus two and three quarters percent (2.75%) per annum. Outstanding principal under the Equipment Line of Credit Loan which is not subject to a current election to bear interest at the Equipment LIBOR-based Rate shall bear interest at the Base Rate plus one quarter of one percent (.25%) per annum. BORROWER shall make elections to have principal outstanding under the Equipment Line of Credit Loan subject to the Equipment LIBOR based Rate in accordance with the procedures set forth above for the Revolving Line of Credit Loan in Section I. D. (ii) above and, except as otherwise specifically set forth in this section, the terms and conditions of Section I. D. (ii) shall apply to all such elections, and outstanding principal under the Equipment Line of Credit which is subject to such an election shall constitute a LIBOR Advance for purposes of Section I. D. (ii) above. III. TERM LOANS. The BANK has and shall extend the term loans to the BORROWER described hereinbelow upon and subject to the terms and conditions set forth in the other Loan Documents and this Agreement. The term loans are as follow: A. Leasehold Improvements Term Loan. Pursuant to the Old Loan Agreement, the BANK has extended to the BORROWER a term loan in the original principal amount of up to Six Hundred Twenty-three Thousand Dollars ($623,000.00) (the "Improvements Term Loan"), which loan is evidenced by a certain Term Loan Promissory Note dated August 11, 1993 made by the BORROWER to the BANK in the principal amount of Six Hundred Twenty-three Thousand Dollars ($623,000.00) (the Improvements Note"). BORROWER shall continue to make payments of principal and interest as provided under said Term Loan Promissory Note and this Agreement; provided, however, that the interest rate applicable to outstanding principal under the Improvements Term Loan shall be and hereby is amended to the following: The interest rate applicable to principal outstanding from time to time under the Improvements Term Loan shall be as follows: (i) Except as provided hereinbelow, principal outstanding under the Improvements Term Loan, if not subject to a LIBOR based rate of interest as provided hereinbelow, shall bear interest at a variable rate equal to the BANK's Base Rate (as defined in hereinabove), plus one-quarter of one percent (.25%) per annum. Each time the Base Rate changes, the interest rate applicable to outstanding principal under the Improvements Term Loan shall change contemporaneously with such change in the Base Rate. Interest shall be calculated and charged daily on the basis of actual days elapsed over a three hundred sixty(360)day Banking year.

17 (ii) The BORROWER may elect to have the entire amount, or any portion thereof (in increments of not less than $50,000), of principal outstanding under the Improvements Term Loan bear interest for one or more periods of thirty (30) to three hundred sixty (360) days each (but in any event each such period must be in increments of thirty (30) days) at a fixed rate (the "Improvements Term LIBOR-based Rate") equal to the LIBOR rate plus two and three-quarters percent (2.75%) per annum. Outstanding principal under the Improvements Term Loan which is not subject to a current election to bear interest at the Improvements Term LIBOR-based Rate shall bear interest at the Base Rate plus onequarter of one percent (.25%) per annum. BORROWER shall make elections to have outstanding principal under the Improvements Term Loan subject to the Improvements Term LIBOR-based Rate in accordance with the procedures set forth above for the Revolving Line of Credit Loan in Section I. D. (ii) above and, except as otherwise specifically set forth in this section, the terms and conditions of Section I. D. (ii) shall apply to all such elections, and outstanding principal under the Improvements Term Loan which is subject to such an election shall constitute LIBOR Advances for purposes of Section I. D. (ii). To evidence the foregoing modification of the interest rate applicable to the Improvements Term Loan, the BORROWER shall execute and deliver to the BANK a Note Modification Agreement (Allonge) in form and substance satisfactory to the BANK with respect to the Improvements Note. B. New Term Loan. The BANK shall extend to the BORROWER a new term loan in the maximum principal amount of up to One Million Five Hundred Thousand Dollars ($1,500,000.00) (the "New Term Loan"), upon and subject to the terms and conditions set forth in the Term Promissory Note of even date evidencing the New Term Loan, the other Loan Documents and this Agreement. (1) Maximum Amount Advanced. The maximum amount available to the BORROWER to be advanced under the New Term Loan as of the date hereof shall be One Million Dollars ($1,000,000.00). Upon BORROWER certifying to BANK that the BORROWER has achieved cumulative Net Profits (as defined below) as at either the end of its third or fourth 1996 fiscal quarters of not less than ninety (90%) of the Net Profits projected for the 1996 fiscal year to date as set forth in the BORROWER's fiscal year 1996 budget dated November 2, 1995 a copy of which is attached hereto as Exhibit III. B. (1), then the remaining Five Hundred Thousand Dollars ($500,000.00) of principal shall be available to be advanced at the request of BORROWER under the New Term Loan. (2) Repayment. The New Term Loan shall be repaid as provided in the Term Promissory Note of even date evidencing the New Term Loan and in this Agreement. (3) Interest. The interest rate applicable to principal outstanding from time to time under the New Term Loan shall be as follows: (i) Except as provided hereinbelow, principal outstanding under the New Term Loan, if not subject to a LIBOR based rate of interest as provided hereinbelow, shall bear interest at a variable rate equal to the BANK's Base Rate (as defined in hereinabove), plus one-quarter of one percent (.25%) per annum. Each time the Base Rate changes, the interest rate applicable to outstanding principal under the New Term Loan shall change contemporaneously with such change in the Base Rate. Interest shall be calculated and charged daily on the basis of actual days elapsed over a three hundred sixty (360) day banking year. (ii) The BORROWER may elect to have the entire amount, or any portion thereof (in increments of not less than $50,000), of principal outstanding under the New Term Loan bear interest for one or more periods of thirty (30) to three hundred sixty (360) days each (but in any event each such period must be in increments of thirty (30) days) at a fixed rate (the "Term LIBOR-based Rate") equal to the LIBOR rate plus two and three quarters percent (2.75%) per annum. Outstanding principal under the New Term Loan which is not subject to a current election to bear interest at the Term LIBOR-based Rate shall bear interest at the Base Rate plus one-quarter of one percent (.25%) per annum. BORROWER shall make elections to have outstanding principal under the New Term Loan subject to the Term LIBORbased Rate in accordance with the procedures set forth above for the Revolving Line of Credit Loan in Section I. D. (ii) above and, except as otherwise specifically set forth in this section, the terms and conditions of Section I. D. (ii) shall apply to all such elections, and outstanding principal under the New Term Loan which is subject to such an election shall constitute LIBOR Advances for purposes of Section I. D. (ii). (4) Purposes. Amounts advanced to BORROWER under the New Term Loan shall be used solely for BORROWER's repayment of outstanding principal advanced for purposes of funding capital expenditures under the Revolving Line of Credit Loan and general corporate purposes. IV. FEES. In addition to such other fees as are provided in this Agreement and in the other Loan Documents, BORROWER agrees to pay the BANK the fees set forth on Schedule B attached hereto. V. PAYMENTS. All payments made by the BORROWER of principal and interest on the Loans, and other sums and charges payable under the Loan Documents, shall be made to the BANK in accordance with the terms of the respective Loan Documents in lawful United States of America currency at its office set forth above, or by the debiting by the BANK of the demand deposit account(s) in the name of the BORROWER at the BANK, or in such other reasonable manner as may be designated by the BANK in writing to the BORROWER. The BORROWER authorizes the BANK automatically to debit the BORROWER's demand deposit account as described above and in accordance with the Cash Management provisions set forth herein below. VI. SECURITY. Each of the Loans and all other Obligations of the BORROWER to the BANK, whether now existing or hereafter arising, shall at all times be secured by perfected security interests in and liens on the Collateral (as hereinafter defined), which security interests and liens shall continue until payment in full of all amounts outstanding under said Loans and the other Obligations. Additionally, the full and punctual payment and performance of the Loans and all other Obligations of BORROWER is guaranteed by the Subsidiary pursuant to the