<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 25, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-23027
Compass Plastics & Technologies, Inc.
-------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-4611994
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
15730 South Figueroa Street
Gardena, CA 90248
-----------------
(Address of principal executive offices)
(Zip Code)
(323) 770-8771
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or 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 No X
As of June 1, 1999, the Registrant had 4,883,750 shares of common stock, par
value $.0001 per share, outstanding.
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COMPASS PLASTICS & TECHNOLOGIES, INC.
FORM 10-Q
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
April 25,1999 and October 25,1998................................. 3
Condensed Consolidated Statements of Income for
the Thirteen weeks and Twenty-six weeks ended
April 25,1999 and April 26,1998................................... 4
Condensed Consolidated Statements of Cash
Flows for the Twenty-six weeks ended
April 25,1999 and April 26,1998................................... 5
Notes to Condensed Consolidated
Financial Statements.............................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 9
PART II - OTHER INFORMATION..............................................
Legal Proceedings................................................. 16
Changes in Securities............................................. 16
Defaults upon Senior Securities................................... 16
Submissions of matters to a vote of securities holders............ 16
Other Information................................................. 16
Exhibits and Reports on Form 8-K.................................. 16
SIGNATURES................................................................. 17
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Part I - Financial Information
Item 1 - Financial Statements
Compass Plastics & Technologies, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
April 25, 1999 October 25, 1998
-------------- ----------------
<S> <C> <C>
Cash and cash equivalents $ 1,141,827 $ 371,846
Accounts receivable, net 6,012,265 6,472,917
Inventories 5,140,116 6,839,171
Other current assets, net 342,474 1,420,623
------------ ------------
Total current assets 12,636,682 15,104,557
Property, plant & equipment, net 17,298,490 18,542,201
Goodwill 17,927,767 18,928,908
Other assets, net 1,227,646 1,760,724
------------ ------------
Total other assets 19,155,413 20,689,632
============ ============
Total assets $ 49,090,585 $ 54,336,390
============ ============
Accounts payable and accrued expenses 7,990,947 8,513,866
Accrued payroll and related expenses 1,308,261 1,506,082
Other current liabilities 1,711,383 922,835
Current portion of capitalized lease obligations 365,585 441,948
Current portion of long-term debt 14,838,690 4,325,726
------------ ------------
Total current liabilities 26,214,866 15,710,457
Capitalized lease obligations, net of current portion 577,897 568,935
Long-term debt, net of current portion 14,331,035 25,329,429
Deferred income taxes -- 949,085
------------ ------------
Total other liabilities 14,908,932 26,847,449
------------ ------------
Total liabilities 41,123,798 42,557,906
------------ ------------
Common stock, par value $.0001; 20,000,000 shares
authorized, 4,883,750 shares issued and outstanding 488 488
Additional paid-in capital 12,578,134 12,578,134
Notes receivable from issuance of stock (706,448) (706,448)
Retained earnings/(deficit) (3,905,387) (93,690)
------------ ------------
Total stockholder's equity 7,966,787 11,778,484
============ ============
Total liabilities and stockholder's equity 49,090,585 54,336,390
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these consolidated balance sheets.
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Compass Plastics & Technologies, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended 26 Weeks Ended 26 Weeks Ended
April 25, 1999 April 26, 1998 April 25, 1999 April 26, 1998
-------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Sales $ 11,668,118 $13,119,280 25,224,009 23,907,004
Cost of goods sold 11,119,139 11,771,708 23,863,026 21,206,162
-------------- --------------- ---------------- ----------------
Gross profit 548,979 1,347,572 1,360,983 2,700,842
Selling expenses 186,079 219,970 371,943 390,057
Amortization of goodwill 232,904 153,858 456,443 179,907
General administrative 1,047,760 1,053,724 2,128,475 1,645,704
-------------- --------------- ---------------- ----------------
Total 1,466,743 1,427,552 2,956,861 2,215,668
Operating income (917,764) (79,980) (1,595,878) 485,174
Interest expense 1,062,865 624,634 2,230,983 828,132
Other expense / (income) 1,042,804 -- 1,075,591 --
-------------- --------------- ---------------- ----------------
Income before income taxes (3,023,433) (704,614) (4,902,452) (342,958)
Income tax expense / (benefit) (339,149) (282,343) (1,090,756) (137,182)
-------------- --------------- ---------------- ----------------
Income (loss) before extraordinary item ($2,684,284) (422,271) (3,811,696) (205,776)
Extraordinary loss from extinguishment
of indebtedness, net of tax (58,277) (58,277)
-------------- --------------- ---------------- ----------------
Net income / (loss) ($2,684,284) (480,548) (3,811,696) (264,053)
============== =============== ================ ================
Net income (loss) per common share:
Basic -$0.55 -$0.10 -$0.78 -$0.05
Diluted -$0.55 -$0.10 -$0.78 -$0.05
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these consolidated statements.
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Compass Plastics & Technologies, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
April 25, 1999 April 25, 1999
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income (Loss) $ (3,811,696) $ (264,053)
Adjustments to reconcile Income ( Loss) to
cash provided by operating activities:
Depreciation and Amortization 1,814,701 1,194,862
Changes in assets and liabilities:
Accounts Receivable 460,652 (259,457)
Inventory 1,699,054 (11,879)
Accounts Payable and accruals (477,499) (2,565,163)
Accrued Interest Payable 918,020 0
Income taxes 973,780 (613,046)
Other 942,513 (870,390)
------------ ------------
CASH PROVIDED BY OPERATING ACTIVITIES 2,519,525 (3,389,126)
INVESTING ACTIVITIES:
Capital Expenditures (12,806) (3,813,329)
Acquisition of MOS, net of cash acquired 0 (17,598,419)
Aborted acquisition of Gumsung (1,014,027) 0
Other 0 26,776
------------ ------------
CASH USED IN INVESTING ACTIVITIES (1,026,833) (21,384,972)
FINANCING ACTIVITIES:
Proceeds from Long Term Debt 0 26,101,341
Net Proceeds from Revolving Line of Credit (96,084) (408,964)
Repayment of Capitalized Lease Obligations (288,287) (131,548)
Repayments of Long Term Debt (338,340) (458,621)
------------ ------------
CASH USED IN FINANCING ACTIVITIES (722,711) 25,102,208
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 769,981 $ 328,110
------------ ------------
</TABLE>
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Compass Plastics & Technologies, Inc.
Notes to Condensed Financial Statements
1. Basis of Presentation
Compass Plastics & Technologies, Inc. together with its wholly owned
subsidiaries, AB Plastics Corporation, based in Gardena, California, AB Plastics
de Mexico, S.A . de C.V., based in Tijuana, Mexico, and M.O.S. Plastics, Inc.
located in San Jose, California, is referred to as "Compass" or the "Company".
The accompanying consolidated financial statements are unaudited and
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. The Company's Annual Report on Form 10-K for the fiscal
year ended October 25, 1998 has not been filed within the prescribed time period
because the Company is experiencing delays in the collection and compilation of
certain financial information required to be included in the Form 10-K. The
Company's Annual Report on Form 10-K will be filed as soon as practicable. All
financial data, including the balance sheet data as of October 25, 1998,
included in this quarterly report is unaudited. Certain information and footnote
disclosures normally required in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate for a fair presentation.
These condensed consolidated financial statements reflect all
adjustments which, in the opinion of management, are necessary to fairly present
the results of operations for the interim periods. All of the adjustments which
have been made are of a normal and recurring nature. The results of interim
reporting are not necessarily an indication of the results to be expected for
the full year.
For information concerning the Company's significant accounting
policies, reference is made to the Company's filing with the Securities and
Exchange Commission on Form 10-K.
2. Inventories
As of As of
April 25, 1999 April 26, 1998
-------------- --------------
Raw Materials $ 2,394,407 $ 3,584,749
Finished Goods & WIP 2,745,709 3,317,971
------------------------------------
Total $ 5,140,116 $ 6,902,720
------------------------------------
3. Net Earnings per Share
The Company has adopted the provision of statement of accounting
standards No. 128 earnings per share ("SFAS 128"). SFAS 128 eliminates the
presentation of primary and fully diluted earnings per share ("EPS") and
requires presentation of basic and diluted EPS. All prior period EPS data has
been restated to conform to the new pronouncement. The impact of adopting SFAS
128 was not material. The following table sets forth the computation of basic
and diluted earnings per share.
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<PAGE>
<TABLE>
<CAPTION>
13 weeks ended 13 weeks ended 26 weeks ended 26 weeks ended
April 25, 1999 April 25, 1998 April 25, 1999 April 25, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Numerator
- ---------
Net Earnings for Basic EPS ($2,684,284) ($480,548) ($3,811,696) ($264,053)
Net Earnings for Diluted EPS ($2,684,284) ($480,548) ($3,811,696) ($264,053)
Denominator
- -----------
Shares for Basic EPS -
Avg. Shares Outstanding 4,883,750 4,883,750 4,883,750 4,883,750
Stock Options (1) N/A N/A N/A N/A
Shares for Diluted EPS 4,883,750 4,883,750 4,883,750 4,883,750
Basic EPS ($0.55) ($0.10) ($0.78) ($0.05)
Diluted EPS ($0.55) ($0.10) ($0.78) ($0.05)
</TABLE>
(1) Stock options and warrants to purchase 1,657,222 shares of common stock at
prices ranging from $1.00 to $12.40 per share are excluded from the diluted
earnings per share calculations because they are anti-dilutive.
4. Acquisition of M.O.S. Plastics, Inc.
On February 27, 1998, Compass Plastics & Technologies, Inc. (the
"Company") completed the acquisition from Werner H. Schulz and Carolyn Schulz,
co-trustees of the Schulz Family Living Trust, of all of the outstanding shares
of capital stock of M.O.S. Plastics, Inc. ("M.O.S."), a San Jose,
California-based injection-molding company that specializes in producing
turn-key plastics parts and subassemblies. The purchase price of the acquisition
was approximately $17.4 million in cash, subject to adjustment based on a
percentage of any step-up in basis of any of the tangible assets of M.O.S. The
Company also issued to Werner H. Schulz and Carolyn Schulz, co-trustees of the
Schulz Family Living Trust, five-year warrants to purchase 50,000 shares of the
Company's common stock at an exercise price of $10.80 per share, and entered
into a one-year employment agreement with Mr. Schulz, followed by a one-year
consulting agreement, for him to continue in the areas of sales, engineering and
tooling for M.O.S.
In connection with the acquisition, the Company, its wholly-owned
subsidiary AB Plastics Corporation ("AB"), and M.O.S. entered into a Commercial
Loan Agreement with The Sumitomo Bank of California ("Sumitomo") and
Manufacturers Bank (collectively, the "Senior Lenders"), pursuant to which the
Company and such subsidiaries (collectively, the "Borrowers") obtained a
$6,000,000 revolving credit commitment (with borrowings thereunder limited to
specified percentages of the Borrowers' eligible accounts receivable and
eligible inventory) maturing on April 2, 2003, and an amortizing $14,000,000
term loan with final maturity on April 2, 2003. The proceeds of the term loan
and initial revolving credit borrowings were utilized to retire the outstanding
revolving credit borrowings under the Company's and AB's previous loan facility
with Sumitomo, to pay a portion of the purchase price for the shares of capital
stock of M.O.S., to retire certain secured indebtedness of M.O.S., and to pay
transaction expenses relating to the acquisition.
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<PAGE>
Also in connection with the acquisition, the Company and AB issued a
$7,000,000 debenture to Sirrom Capital Corporation d/b/a Tandem Capital
("Sirrom") and a $2,000,000 debenture to Pinecreek Capital Partners, L.P.
("Pinecreek"), each of which debentures bears interest at 12.25% per annum
payable quarterly in arrears, and matures as to all principal on February 27,
2003. The Company's and AB's obligations under such debentures are secured by
second liens on substantially all of the Company's and AB's non-real estate
assets, and such obligations and liens are subordinated to the liens securing
the obligations under the Commercial Loan Agreement described above. The net
proceeds of such debentures were used to pay a portion of the purchase price for
the shares of capital stock of M.O.S.
In conjunction with the issuance of such debentures, the Company issued
to Sirrom and Pinecreek five-year warrants to purchase 420,000 shares and
120,000 shares of common stock of the Company, respectively, at an exercise
price of $6.75 per share. In addition, in the event that any portion of their
respective debentures remain outstanding on February 27, 2000 and/or each
anniversary thereof, the Company has agreed to issue, on each such date, to
Sirrom an additional warrant for 140,000 shares of common stock of the Company,
and/or to Pinecreek an additional warrant for 40,000 shares of common stock of
the Company, in each case at an exercise price equal to the greater of $7.00 per
share or 75% of the average closing bid price of the Company's common stock for
the 20 trading days preceding the required date of issuance of such additional
warrant. The Company has granted to Sirrom and Pinecreek demand and piggyback
registration rights in respect of the shares underlying such warrants, and has
granted, so long as the debentures remain outstanding, observer rights for a
representative of each of Sirrom and Pinecreek to attend all meetings of the
Company's Board of Directors.
On May 7, 1999, the Company sold 100% of the common stock of M.O.S. to
Timothy E. Howard and Daniel P. Flamen (collectively the "Buyers") for $7.75
million adjusted for approximately $1.53 million in assumed liabilities. The
Buyers also paid the Company $500,000 concurrently with the sale for consulting
services to be provided by the Company for one year after the sale. Consulting
services to Buyers shall involve, but not be limited by, advice with respect to
strategic planning, sales and marketing, personnel, systems development and
implementation, and new products and technology. Concurrently with the sale,
M.O.S. has engaged the Company to provide consulting services until May 6, 2002.
M.O.S. will pay for services as to the first year $130,000, $170,000 for the
second year and $200,000 for the final year. Payments under the agreement are to
be paid on the first day of each month. The Company shall consult with and
advise M.O.S. with respect to matters relating to the Business. Consulting
services to M.O.S. shall involve, but not be limited by, advice with respect to
strategic planning, sales and marketing, personnel, systems development and
implementation, analyzing potential acquisitions, assisting in due diligence,
and new products and technology. Initially, The Company will assist in the
transition to a new Chief Executive Officer and recruiting a new sales director.
During the contract period, the Company shall provide Michael Gibbs to render
services on behalf of the Company hereunder, as may be reasonably requested by
the officers of M.O.S. During the consulting period, the Company shall cause
Michael Gibbs to devote approximately 25% of his business and professional time
to providing the consulting services; provided, that Mr. Gibbs shall have no
specified hours and MOS shall provide the Company with reasonable advance notice
as to when consulting services are to be provided. Net proceeds from the sale,
plus the $500,000 for consulting services to Buyers, were used to repay
approximately $6.3 million of debt owing to the Senior Lenders.
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<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
The Company is a manufacturer and assembler of custom injection molded
plastic components for leading computer, medical and consumer electronics OEM's
located in California and Mexico. The Company supplies its customer requirements
from its manufacturing facilities in Gardena, California and Tijuana, Mexico.
The Company typically charges its customers a fixed price for each
component it manufactures with each component consisting of single or multiple
parts. Prices are quoted based on (i) the type of product, (ii) the type of
services provided, which include design, prototype, molding, painting and
coloring, and other value-added services, (iii) the complexity of manufacturing
processes involved, and (iv) the Company's estimates of part weight, resin
costs, machine requirements and parts produced per hour (cycle time). In many
cases, the Company purchases its raw materials from its customers or directly
from vendors under its customer's supply agreements. In such instances, the
Company's arrangements with its customers provide that price changes in such raw
materials are passed through to the customer by changes in the component prices
charged by the Company. As customers generally seek price reductions during the
product life cycle, the Company's ability to improve operating performance is
generally dependent on increasing manufacturing efficiency through improved
process control, increased automation, engineering changes to molds and reduced
operating and labor expenses.
During the product life cycle, components are ordered by the Company's
customers to meet their just-in-time production requirements. Typical lead times
range from one to thirty days. Traditionally, once a mold is awarded to a
supplier and is in production, it is rarely moved to a competitor due to the
costs associated with the move and the in-depth understanding of the mold and
the manufacturing process gained by the supplier during the design and tooling
phases. As of October 25, 1998, the Company maintained approximately 3,400
active molds for its customers. All molds are owned by the customer, although
the Company is responsible for the general maintenance and safe storage of the
mold during its lifetime, a period ranging from two to twenty years. Costs for
the maintenance of the mold are expensed as incurred. Major tool modifications
and renovations are charged to the customer.
Because sales from the Company's Mexican facilities and all raw
material purchases for use at these facilities will be U.S. dollar-denominated,
the Company does not believe that it will be significantly affected by exchange
rate fluctuations in the Mexican peso relative to the U.S. dollar. Compass
believes that the effects of such fluctuations will be limited to wages for
Mexican laborers and costs for operating supplies, and those fluctuations are
not expected to be material to the Company's results of operations.
Recent Significant Adverse Developments
The Company's business, financial condition and prospects has
materially and adversely suffered as a result of a combination of adverse
factors and events which occurred in fiscal 1998. These included:
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o In April 1998, Sony cancelled a significant portion of a program previously
granted to the Company to private manufacture a computer line for a third
party, and in April 1998 discontinued another branded Sony line. These
developments, along with Samsung's temporary transfer to Asia of its
monitor molding and assembly business, resulted in the decrease of
approximately $16.0 million of projected 1998 revenue from these customers.
o The adverse impact on the Company's fiscal 1998 financial results from the
costs of operating facilities at less than optimal capacity utilization
rates in both Gardena, California and Tijuana were exacerbated by the loss
of anticipated OEM business from Sony and Samsung.
o The operating results of M.O.S. Plastics during the fiscal year ended
October 25, 1998 were significantly less than those projected by the
Company.
o On September 22, 1998, the Company entered into an agreement to acquire the
assets and business of Gumsung Plastics U.S.A., Inc. ("Gumsung") for a
purchase price of approximately $15.2 million, including refinancing of
existing Gumsung indebtedness. Gumsung, a contract manufacturer and
assembler of custom injection-molded plastic components located in
Mexicali, Mexico, primarily services the same or complimentary Asian based
computer and consumer electronics OEMs that are serviced by the Company.
The Company sought to finance the Gumsung acquisition and refinance its
existing bank debt with the Senior Lenders through an offering of senior
high-yield debt and equity. However, the Company was unable to complete the
financing or the Gumsung acquisition, but incurred approximately $1 million
in costs in connection with its acquisition and financing efforts.
o For its fiscal year ended October 25, 1998, the Company incurred a net loss
of approximately ($2.4 million) on consolidated net sales of $50.1 million,
as compared to net income of $2.1 million on consolidated net sales of
$44.0 million in the fiscal year ended October 26, 1997.
As a result of these adverse developments, the Company defaulted in a
number of its obligations to the Senior Lenders under the February 27, 1998
credit agreement, including (i) defaults in maintenance of certain financial
ratios, including minimum tangible net worth, minimum senior funded debt to
EBITDA and minimum fixed charge coverage ratio, and (ii) failure to make a total
$2.75 million of installment payments due under the term loan in December 1998
and April 1999. Accordingly, on February 2, 1999, the Senior Lenders accelerated
all indebtedness under the credit agreement, aggregating approximately $16.0
million.
Since February 1999, the Senior Lenders provisionally agreed to
forebear from foreclosing on the Company's assets and properties, subject to
completion of an agreement between the Company and the Senior Lenders to
restructure the Company in a manner designed to repay the indebtedness to the
Senior Lenders. Pending resolution of such restructuring plan, all payments to
the Subordinated Lenders have been suspended. A key element of the restructuring
plan included the sale of M.O.S. and on May 7, 1999, the Company sold 100% of
the common stock of M.O.S. to Timothy E. Howard and Daniel P. Flamen
(collectively the "Buyers") for $7.75 million adjusted for approximately $1.53
million in assumed liabilities. The Buyers also paid the Company $500,000
concurrently with the sale for consulting services to be provided by the Company
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<PAGE>
for one year after the sale. Consulting services to Buyers shall involve, but
not be limited by, advice with respect to strategic planning, sales and
marketing, personnel, systems development and implementation, and new products
and technology. Concurrently with the sale, M.O.S. engaged the Company to
provide consulting services until May 6, 2002. M.O.S. will pay for such services
as to the first year $130,000, $170,000 for the second year and $200,000 for the
final year. Installment payments under the agreement are to be paid on the first
day of each month. The Company shall consult with and advise M.O.S. with respect
to matters relating to the business. Consulting services to M.O.S. shall
involve, but not be limited by, advice with respect to strategic planning, sales
and marketing, personnel, systems development and implementation, analyzing
potential acquisitions, assisting in due diligence, and new products and
technology. Initially, The Company will assist in the transition to a new Chief
Executive Officer and recruiting a new sales director. During the contract
period, the Company shall provide Michael Gibbs to render services on behalf of
the Company hereunder, as may be reasonably requested by the officers of M.O.S.
During the consulting period, the Company shall cause Michael Gibbs to devote
approximately 25% of his business and professional time to providing the
consulting services; provided, that Mr. Gibbs shall have no specified hours and
MOS shall provide the Company with reasonable advance notice as to when
consulting services are to be provided. Net proceeds from the sale of M.O.S. and
the fees related to the consulting agreement with the Buyers, were used to repay
approximately $6.3 million of debt owed to the Senior Lenders.
Concurrent with the sale of M.O.S. Plastics, the Company completed an
Amended and Restated Commercial Loan Agreement ("Amended Loan Agreement") with
the Senior Lenders. The Amended Loan Agreement waives all prior defaults, limits
advances under the Company's revolving line of credit to $2.1 million, increases
the interest rate to 3.5% in excess of the Senior Lenders' base rate, and fixes
the maturity date of the entire facility to April 30, 2000. The maximum
availability under the revolving line is subject to a borrowing base amount
equal to 85% of eligible accounts receivable, 50% of eligible inventory, plus
$500,000. The Amended Loan Agreement also refinanced approximately $7.7 million
of term loans owed to the Senior Lenders. Additionally, on or before June 30,
1999, the Company and AB Plastics shall have consummated the sale of certain
assets, including specified accounts receivable, inventory and equipment
currently used at AB's facility located at 15730 South Figueroa Street, Gardena,
CA 90248 (the "Gardena Facility"), all pursuant to the terms of an asset
purchase agreement between AB, as seller, and AB Sunshine, Inc. ("AB Sunshine"),
as purchaser (the "AB Sunshine Agreement"), all on terms and conditions
satisfactory to the Senior Lenders, in their sole and absolute discretion ("AB
Sunshine Transaction"). In the event the AB Sunshine Transaction does not
consummate on or before June 30,1999 an Event of Default shall be deemed to have
occurred. Certain aspects of the AB Sunshine Transaction failed to materialize,
including a satisfactory long term real estate lease for the Gardena Facility.
Hence, the AB Sunshine Transaction will not be consummated and the Company will
default on its Amended Loan Agreement. The discussion of the sale of M.O.S. and
the Amended Loan Agreement are qualified in their entirety by their respective
agreements included as exhibits to this Quarterly Report.
Even though the Company was successful in selling M.O.S. Plastics and
restructuring its senior banking facility, it remains in default to the
Subordinated Lenders holding $9.0 million of the Company's Subordinated Debt.
Additionally, the Company is delinquent on approximately $4 million of equipment
loans and leases, and approximately $7 million of trade debt. The Company does
not have the credit availability to bring the amounts owing current. Many of the
Company's vendors have retained various collection agents to assist their
collection efforts. The Company has been served with 5 vendor lawsuits and one
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<PAGE>
arbitration proceeding. Given the termination of the AB Sunshine Transaction and
in an effort to conserve cash and reduce operating losses, the Company announced
it will close the Gardena Facility on June 4, 1999. Additionally, the Company
has commenced discussions with certain managers of the Company's Tijuana
facility who have expressed an interest in purchasing certain assets and
liabilities related to the Tijuana Business. The sale of the Tijuana Business is
subject to (a) the completion of a purchase and sale agreement still to be
negotiated and (b) the required consents of the Board of Directors, the Senior
Lenders and the Subordinated Lenders. The Senior Lenders are aware of each these
events and are working with the Company to realize the value of the Gardena
assets while continuing discussions to sell the Tijuana operations to
management.
Results of Operations
The following table sets forth, for the periods indicated, certain
information relating to the Company's operations expressed as a percentage of
the Company's net sales.
<TABLE>
<CAPTION>
13 weeks ended 13 weeks ended 26 weeks ended 26 weeks ended
April 25,1999 April 26,1998 April 25,1999 April 26,1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 95.3% 89.7% 94.6% 88.7%
-------------- -------------- -------------- --------------
Gross Profit 4.7% 10.3% 5.4% 11.3%
Selling Expenses 1.6% 1.7% 1.5% 1.6%
Amortization of goodwill 2.0% 1.2% 1.8% 0.8%
General Administrative 9.0% 8.0% 8.4% 6.9%
-------------- -------------- -------------- --------------
Total 12.6% 10.9% 11.7% 9.3%
Operating Income -7.9% -0.6% -6.3% 2.0%
Interest Expense 9.1% 4.8% 8.8% 3.5%
Other Expense / (Income) 8.9% 0.0% 4.3% 0.0%
-------------- -------------- -------------- --------------
Income before Income Taxes -25.9% -5.4% -19.4% -1.4%
Income Taxes -2.9% -2.2% -4.3% -0.6%
-------------- -------------- -------------- --------------
Net Income -23.0% -3.2% -15.1% -0.9%
Extraordinary loss from extinguishment
of indebtedness,net of tax -0.4% -0.2%
-------------- -------------- -------------- --------------
-23.0% -3.7% -15.1% -1.1%
-------------- -------------- -------------- --------------
</TABLE>
13 Weeks ended April 25, 1999 compared to 13 weeks ended April 26,1998
The Company's sales for the 13 weeks ended April 25, 1999 decreased
$1.4 million, or 11.1%, to $11.7 million, from $13.1 million for the comparable
1998 period. Computer monitor component sales were $5.4 million, or 46.1% of
sales, approximately the same as the comparable 1998 period. Television
component sales declined $2.4 million, or 55.8%, to $1.9 million, or 16.2% of
sales, from $4.3 million for the comparable 1998 period. The decrease was due
primarily to reduced sales to Sony. Precision plastic components increased $0.7
million , or 25.9%, to $3.4 million, or 29.1% of sales, from $2.7 million for
the comparable 1998 period. The increase was due primarily to the addition of
MOS for a full quarter in 1999 compared with only 2 months in the 1998 period.
Other sales increased $0.3 million, or 42.9%, to $1.0 million, or 8.5% of sales,
from $0.7 million for the comparable 1998 period.
The Company's gross profit decreased $798,000 to 548,979, or 4.7% of
sales, compared to $1.3 million, or 10.3% of sales for the 1998 period. The
decrease in gross margin was primarily due to the duplicative costs of operating
-12-
<PAGE>
both the Gardena and Tijuana facilities at less than optimal capacity
utilization, and lower prices on computer monitor components.
The Company's selling, general and administrative expenses for the 1999
period approximated the expenses for the comparable 1998 period. Decreases in
cash expenditures were offset by higher amortization of goodwill.
The Company's interest expense increased $438,000 to $1.1 million, or
9.1% of sales, compared to $625,000, or 4.8% of sales, for the comparable 1998
period. The increase is attributable to the approximately $17 million of
additional debt related to the MOS Plastics acquisition. The Company's average
interest rate has increased to approximately 13.5% from 9.5% as a result of the
defaults on its loan agreements.
The Company's other expense of approximately $1.0 million reflects the
write off of accumulated expenditures related to the aborted acquisition of
Gumsung Plastics and the unsuccessful refinancing of the Company's debt.
The Company's income tax benefit of $339,149 eliminates the remaining
deferred tax liability. The Company has received all income tax refunds
available to it. In the future, the Company will not record any income tax
provisions until it returns to profitability.
26 Weeks ended April 25, 1999 compared to 26 weeks ended April 26,1998
The Company's sales for the 26 weeks ended April 25, 1999 increased
$1.3 million, or 5.4%, to $25.2 million from $23.9 million for the comparable
1998 period. Computer monitor component sales increased $1.0 million, or 9.5%,
to 11.5 million, from $10.5 million, or 43.9% of sales, for the comparable 1998
period. Television component sales declined $3.9 million, or 43.3%, to $5.1
million, or 20.2% of sales, from $9.0 million for the comparable 1998 period.
The decrease was due primarily to reduced sales to Sony. Precision plastic
components increased $4.0 million to $6.7 million, or 26.6% of sales, from $2.7
million for the comparable 1998 period. The increase was due primarily to the
addition of MOS from the beginning of 1999 compared with only 2 months in the
1998 period. Other sales increased $0.2 million, or 11.8%, to $1.9 million, or
7.5% of sales, from $1.7 million for the comparable 1998 period.
The Company's gross profit decreased $1.3 million, or 49.6%, to $1.4
million, or 5.4% of sales, compared to $2.7 million, or 11.3% of sales for the
1998 period. The decrease in gross margin was primarily due to the duplicative
costs of operating both the Gardena and Tijuana facilities at less than optimal
capacity utilization, and lower prices on computer monitor components.
The Company's selling, general and administrative expenses increased
$0.7 million, or 33.4%, to $3.0 million from $2.2 million for the comparable
1998 period. The increase was due to the addition of administrative expenses of
MOS, acquired in February 1998, and the related amortization of goodwill.
The Company's interest expense increased $1.4 million to $2.2 million,
or 8.7% of sales, compared to $828,000, or 3.5% of sales, for the comparable
1998 period. The increase is attributable to the approximately $17 million of
additional debt related to the MOS Plastics acquisition. The Company's average
interest rate has increased to approximately 13.5% from 9.5% as a result of the
defaults on its loan agreements.
-13-
<PAGE>
The Company's other expense of approximately $1.0 million reflects the
write off of accumulated expenditures related to the aborted acquisition of
Gumsung Plastics and the unsuccessful refinancing of the Company's debt.
The Company's income tax benefit of $1.1 million eliminates the
remaining deferred tax liability. The Company has received all income tax
refunds available to it. In the future, the Company will not record any income
tax provisions until it returns to profitability.
Liquidity and Capital Resources
Even though the Company was successful in selling M.O.S. Plastics and
restructuring its senior banking facility, it remains in default to the
Subordinated Lenders holding $9.0 million of the Company's Subordinated Debt.
Additionally, the Company is delinquent on approximately $4 million of equipment
loans and leases, and approximately $7 million of trade debt. The Company does
not have the credit availability to bring the amounts owing current. Many of the
Company's vendors have retained various collection agents to assist their
collection efforts. The Company has been served with 5 vendor lawsuits and one
arbitration proceeding. Given the termination of the AB Sunshine Transaction and
in an effort to conserve cash and reduce operating losses, the Company announced
it will close the Gardena Facility on June 4, 1999. Additionally, the Company
has commenced discussions with certain managers of the Company's Tijuana
facility who have expressed an interest in purchasing certain assets and
liabilities related to the Tijuana Business. The sale of the Tijuana Business is
subject to (a) the completion of a purchase and sale agreement still to be
negotiated and (b) the required consents of the Board of Directors, the Senior
Lenders and the Subordinated Lenders. The Senior Lenders are aware of each these
events and are working with the Company to realize the value of the Gardena
assets while continuing discussions to sell the Tijuana operations to
management.
Net cash provided by operations for the 26 weeks ended April 25,1999
was $2.5 million compared to $3.4 million used for the comparable 1998 period.
The difference between the Company's net loss of $3.8 million and operating cash
flow of $2.5 million was approximately $1.8 million in depreciation and
amortization, a reduction in accounts receivable of $460,000, a reduction in
inventory of $1.7 million, a reduction in deferred income taxes of $974,000, an
increase in accrued interest of $918,000, and a net reduction of other assets of
$943,000 offset by a reduction in accrued payables of $477,000.
Net cash used for investing activities for the 26 weeks ended April
25,1999 was $1.0 million compared to $21.4 million for the comparable 1998
period. The 1999 amount reflects the Company's expenditures related to the
aborted acquisition of Gumsung Plastics.
Net cash used in financing activities for the 26 weeks ended April
25,1999 was $722,711 compared to $25.1 million provided for the comparable 1998
period. This amount represents payments of approximately $626,000 to various
loans and leases, and $96,000 of net payments to the Company's revolving line of
credit.
-14-
<PAGE>
Forward-Looking Statements
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements are based largely on the Company's expectations and are subject to a
number of risks and uncertainties, certain of which are beyond the Company's
control. Actual results could differ materially from these forward-looking
statements as a result of, among other factors, risks related to the Company's
dependence on the computer and consumer electronics industries, its
concentration of customers, fluctuations in operating results, potential
significant indebtedness and leverage, competition, variability of customer
requirements and nature of customer commitments on orders, the integration of
the Company's new Mexican manufacturing facility and other risks described in
the Company's Registration Statement on Form S-1. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained in this report will in fact occur.
-15-
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
As of the date of this filing, the Company has been served with 5
lawsuits and one arbitration proceeding, all related to delinquent trade debt.
The total value of the claims against the Company is approximately than $100,000
Item 2. Change in Securities
None
Item 3. Defaults upon Senior Securities
The Company is currently in default on its loan agreements with Sirrom
Capital and Pinecreek Capital Partners (collectively the "Subordinated Lenders")
due to failure to comply with certain financial covenants.
Item 4. Submission of Matters to a vote of Securities Holders
None
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.23 Amended and Restated Commercial Loan Agreement dated May 7, 1999
between California Bank & Trust and Manufacturers Bank, and the
Company.
10.24 Stock Purchase Agreement dated May 7, 1999 by and between Daniel P.
Flamen and Timothy E. Howard, and the Company.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPASS PLASTICS & TECHNOLOGIES, INC.
Date: June 9, 1999 By: /s/ Paul J. Iacono
----------------------------------
Paul J. Iacono, Vice President -
Finance and Chief Financial Officer
(as both a duly authorized officer
of the registrant and the principal
financial officer and chief
accounting officer of the
registrant)
-17-
<PAGE>
AMENDED AND RESTATED COMMERCIAL LOAN AGREEMENT
THIS AMENDED AND RESTATED COMMERCIAL LOAN AGREEMENT ("Agreement") is made
and entered into as of the 7th day of May, 1999, by, between and among
CALIFORNIA BANK & TRUST, a California banking corporation ("CBT"), MANUFACTURERS
BANK, a California banking corporation ("Manufacturers"), AB PLASTICS
CORPORATION, a California corporation ("AB"), COMPASS PLASTICS & TECHNOLOGIES,
INC., a Delaware corporation ("Guarantor"), and CBT in its capacity as agent for
CBT and Manufacturers ("Agent").
RECITALS
--------
This Agreement is made and entered into on the basis of the following facts
and understandings of the parties hereto:
A. On or about February 27, 1998, AB, M.O.S. PLASTICS, INC., a California
corporation ("MOS"), Guarantor, Manufacturers and The Sumitomo Bank of
California ("Sumitomo") executed that Commercial Loan Agreement dated as of
February 27, 1998 ("Original Loan Agreement").
B. CBT is the successor by merger to Sumitomo, and is the holder of all of
Sumitomo's rights, titles and interests in, to and under the Original Loan
Agreement.
C. Manufacturers and CBT are sometimes collectively referred to herein as
the "Banks."
D. In connection with the closing of the Original Loan Agreement, and
pursuant to Section 2.1(c) thereof, AB, MOS and Agent executed that letter
agreement dated February 26, 1998 ("February 26, 1998 Letter Agreement")
pursuant to which AB and MOS agreed to pay to Agent, on each anniversary of the
closing of the Loan, an agency fee in the amount of $10,000.
E. On or about February 27, 1998, MOS, AB and Bank executed that letter
agreement dated February 27, 1998, which modified certain of the terms of the
Original Loan Agreement ("February 27, 1998 Letter Agreement").
F. On or about June 11, 1998, MOS, AB, Banks and Agent executed that
Amendment to Commercial Loan Agreement (AB/MOS) dated as of June 11, 1998
("First Amendment").
G. Pursuant to the First Amendment, the interest rates under the Original
Loan Agreement were modified, such that the maximum "Applicable Spread" for
"Prime Rate" borrowings was increased to 2.25%.
H. The First Amendment also added as an additional Event of Default, the
failure of AB and MOS to raise an additional $2,000,000 in equity or
subordinated debt no later than October 31, 1998.
<PAGE>
I. By letter dated August 31, 1998 ("August 31, 1998 Letter") Banks notified
AB, MOS and Guarantor that due to defaults that were in existence under the
Original Loan Agreement, as modified, AB and MOS were no longer permitted any
new "Offshore Rate" borrowings or any conversions from "Prime Rate" borrowings
to "Offshore Rate" borrowings.
J. By letter agreement dated September 4, 1998 ("September 4, 1998 Letter
Agreement") among AB, MOS, Banks and Guarantor, AB, MOS and Guarantor
acknowledged that pursuant to Section 3.12 of the Original Loan Agreement, as
modified, effective September 8, 1998, the "Default Rate" pricing (Prime Rate
plus 4.25%) went into effect. In addition, AB and MOS again acknowledged that
they had no right to "Offshore Rate" pricing.
K. Pursuant to the September 4, 1998 Letter Agreement, AB, MOS and Guarantor
acknowledged that they were in default under the Original Loan Agreement, as
modified, and that Banks were free to exercise their creditor rights and
remedies thereunder.
L. By letter agreement dated October 1, 1998, between Banks, AB, MOS and
Guarantor ("October 1, 1998 Letter Agreement"), Banks agreed to modify the
$600,000 payment due under the "Term Loan" on October 1, 1998, pursuant to
Section 1.5 of the Original Loan Agreement, as modified, by agreeing to accept a
$300,000 payment on October 1, 1998 and a $300,000 payment on October 15, 1998.
M. Pursuant to that letter agreement dated November 6, 1998, between Banks,
AB, MOS and Guarantor ("November 6, 1998 Letter Agreement") the "Total Revolver
Commitment" under the Credit Agreement was reduced from $6,000,000 to
$4,750,000, effective November 6, 1998.
N. In addition, pursuant to the November 6, 1998 Letter Agreement, AB and
MOS agreed to make an additional principal payment under the "Term Loan" of
$2,000,000 by December 15, 1998.
O. In the November 6, 1998 Letter Agreement, AB and MOS again acknowledged
that they were in default under the Original Loan Agreement, as modified by the
February 26, 1998 Letter Agreement, the February 27, 1998 Letter Agreement, the
First Amendment, the September 4, 1998 Letter Agreement, the October 1, 1998
Letter Agreement, and the November 6, 1998 Letter Agreement (collectively,
"Prior Credit Agreement"), and that Banks were free to exercise their rights and
remedies in Banks' discretion.
P. By letter dated December 1, 1998, Banks advised AB, MOS and Guarantor of
additional Events of Default under the Prior Credit Agreement.
Q. By letter dated December 1, 1998, Banks advised Pinecreek Capital
Partners ("Pinecreek") and Sirrom Capital, dba Tandem Capital ("Tandem Capital")
that AB and MOS had to suspend payments to Pinecreek Capital and Tandem Capital
on the "Subordinated Debt", as that term is defined in that Subordination
Agreement dated February 27, 1998, among Tandem Capital Corporation, Pinecreek
Capital (collectively, "Subordinated Creditors") and Banks ("Subordination
Agreement").
<PAGE>
R. By letter agreement dated January 15, 1999 ("January 15, 1999 Letter
Agreement"), AB and MOS acknowledged that they were in default under the terms
of the Prior Credit Agreement, and Banks agreed, upon certain terms and
conditions to forbear from exercising Bank's rights and remedies through January
29, 1999.
S. In connection with the execution of the Original Credit Agreement, AB and
MOS executed the following promissory notes (collectively "Prior Notes"):
(i) Revolving Loan Note (Sumitomo) dated February 27, 1998, in the
original principal amount of $3,000,000 payable to the order of Sumitomo ("CBT
Revolving Note");
(ii) Revolving Loan Note (Manufacturers) dated February 27, 1998, in the
original principal amount of $3,000,000 payable to the order of Manufacturers
("Manufacturers Revolving Note");
(iii) Term Loan Note (Sumitomo) dated February 27, 1998, in the original
principal amount of $7,000,000 payable to the order of Sumitomo ("CBT Term
Note"); and
(iv) Term Loan Note (Manufacturers) dated February 27, 1998,
in the original principal amount of $7,000,000 payable to the order of
Manufacturers ("Manufacturers Term Note").
T. In connection with the execution of the Original Loan Agreement, AB
executed in favor of Agent, for itself and Manufacturers that Security Agreement
(AB Plastics) dated as of February 27, 1998 ("AB Security Agreement").
U. In connection with the execution of the Original Loan Agreement, MOS
executed
in favor of Agent, for itself and Manufacturers, that Security Agreement (M.O.S.
Plastics) dated as of February 27, 1998 ("MOS Security Agreement").
V. In connection with the execution of the Original Loan Agreement,
Guarantor executed in favor of Banks that Continuing Guaranty dated as of
February 27, 1998 ("Guaranty").
W. As security for its obligations under the Guaranty, Guarantor executed in
favor of Agent, on behalf of Banks, that Pledge Agreement ("Stock Pledge
Agreement") and that Security Agreement ("Guarantor Security Agreement") each
dated as of February 27, 1998.
X. Guarantor is the owner of 100% of the issued and outstanding stock of
both AB and MOS.
Y. Pursuant to the Stock Pledge Agreement, Guarantor pledged to Agent, on
behalf of Banks, all of Guarantor's stock in AB and MOS.
Z. Banks perfected their security interests in the assets of AB and MOS by
the filing of UCC-1 Financing Statements with the California Secretary of State
on March 2, 1998.
<PAGE>
AA. Banks perfected their security interests in the assets of Guarantor of
the filing of a UCC-1 Financing Statement with the California Secretary of State
on March 2, 1998.
BB. As of the date of this Agreement, the following defaults exist under the
Prior Credit Agreement (collectively "Existing Defaults"):
(i) Defaults under Sections 6.3, 6.4, 6.5 and 6.6 of the Prior Credit
Agreement for failure to maintain the appropriate Quick Ratio, Tangible Net
Worth, Maximum Senior Funded Debt to EBITDA and Minimum Fixed Charge Coverage
Ratio;
(ii) Failure to raise an additional $2,000,000 in equity or subordinated
debt by October 31, 1998;
(iii) Failure to make a $2,000,000 principal payment under the Term Loan
on December 15, 1998; and
(iv) Failure to make a principal payment under the Term Loan in the
amount of $750,000 on January 1, 1999.
CC. As of April 23, 1999, the following principal amounts were owing under
the Prior Notes.
Prior Note Principal
---------- ---------
CBT Revolving Note $1,810,294.16
Manufacturers Revolving Note $1,810,294.16
CBT Term Note $5,987,500
Manufacturers Term Note $5,987,500
DD. Guarantor has entered into that Stock Purchase Agreement dated as of May
7, 1999 ("Stock Purchase Agreement") with Daniel P. Flaman and Timothy Howard
(collectively "Buyers").
EE. Guarantor has also entered into that Retainer and Consulting Agreement
("Consulting Agreement") dated as of May 7, 1999, with CHF Equity Fund I
Acquisition, a California Limited Partnership ("CHF").
FF. Pursuant to the Stock Purchase Agreement, Guarantor has agreed to sell
all the stock of MOS to Buyers for a gross purchase price of seven million seven
hundred fifty thousand dollars ($7,750,000).
GG. Pursuant to the Consulting Agreement, Guarantor has agreed to provide
certain services to CHF in return for an up front cash payment of five hundred
thousand dollars ($500,000).
<PAGE>
HH. The gross purchase price under the Stock Purchase Agreement is to be
reduced by the following amounts (collectively "Stock Purchase Deductions"):
Employee Bonuses in the approximate amount of $365,000.00
State income tax in the approximate amount of $221,121.00
$939,062.00
Senior Equipment Debt in the approximate amount of
Closing Costs not to exceed $100,000.00
Reimbursement of Franchise Taxes Paid $31,075.00
Repayment of all Capital MOS Advance $25,000.00
-------------
Total: $1,681,258.00
=============
II. In addition to the Stock Purchase Deductions, two hundred fifty thousand
dollars ($250,000) of the gross sale price ("Hold Back") is going to be placed
in escrow, at counsel for Buyers, to be held as security for breaches by
Guarantor of any representations or warranties in the Stock Purchase Agreement.
JJ. Pursuant to a separate consulting agreement, following the sale of MOS
pursuant to the Stock Purchase Agreement, the Buyers have agreed to cause MOS to
pay consulting fees aggregating $500,000 over a period of three years to Michael
A. Gibbs and Paul Iacono, or their corporate affiliate (unrelated to Guarantor
and AB) for services to be provided to MOS or the Buyers. Such consulting fees,
as and when paid are not part of the Net Proceeds (as hereinafter defined) or
otherwise subject to the terms of this Agreement.
KK. Guarantor and AB has requested that Banks consent to the sale of MOS
pursuant to the Stock Purchase Agreement.
LL. Banks have agreed to consent to such sale and release their security
interests in the assets of MOS and in the stock of MOS in return for a payment
to Banks of (i) the five hundred thousand dollars to be paid under the
Consulting Agreement and (ii) the net proceeds to be received by Guarantor under
the Stock Purchase Agreement.
MM. Guarantor and AB has further requested that Banks waive the Existing
Defaults and amend and restate the Prior Credit Agreement as set forth herein,
in order to give AB and Guarantor an opportunity to engage in transactions which
will result in the remaining amounts owing to Banks being paid.
NN. Banks are willing to undertake the obligations expressly required of
them under this Agreement without incurring any other liabilities of any kind
whatsoever whether to AB, Guarantor or to any other person or entity.
<PAGE>
AGREEMENTS
----------
NOW THEREFORE, in consideration of their mutual promises and covenants
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. CONSENT TO sALE OF mos and APPLICATION OF PROCEEDS FROM THE SALE OF MOS.
1.1 Consent To Sale.
Banks hereby consent to Guarantor's sale of the stock of MOS pursuant to
the Stock Purchase Agreement, and Banks agree to release their security interest
in the assets of MOS, so long as Banks receive, in cash, or immediately
available funds, the $500,000 payable to Guarantor under the Consulting
Agreement and the net proceeds to be received by Guarantor under the Stock
Purchase Agreement, in no event to be less than SIX MILLION THREE HUNDRED
EIGHTEEN THOUSAND SEVEN HUNDRED FORTY-TWO DOLLARS ($6,318,742) ("Net Proceeds").
1.2 Application of Net Proceeds
Guarantor, AB and Banks agree that Banks shall apply the Net Proceeds
from the sale of MOS as follows:
(a) $4,276,785.27 shall be applied against the "Term Loan", as that
term is defined in the Prior Credit Agreement;
(b) $1,468,000, the principal amount outstanding for Advances to MOS
under the "Revolving Line of Credit", as that term is defined in the Prior
Credit Agreement, shall be paid in full;
(c) the $10,000 agency fee due February 27, 1998, under the Prior
Credit Agreement shall be paid;
(d) $25,000 shall be paid to Banks to reimburse Banks for Banks' out
of pocket costs and expenses incurred with respect to the Prior Credit Agreement
and the negotiation and documentation of this Agreement; and
(e) the remainder shall be applied against Advances made by Banks to
AB under the "Revolving Line of Credit", as that term is defined in the Prior
Credit Agreement.
Guarantor, AB and Banks agree that the foregoing application of funds
shall leave owing and outstanding under the Prior Credit Agreement the following
amounts:
(f) $7,698,214.73 under the "Term Loan", as that term is defined in
the Prior Credit Agreement; and
<PAGE>
(g) $1,613,631.59 owing under the "Revolving Line of Credit", as
that term is defined in the Prior Credit Agreement ("Initial Revolving Credit
Balance").
2. CREDIT FACILITIES, AMOUNT AND TERMS.
Banks agree to make available to AB the following line(s) of credit
and/or credit accommodations on the following terms, covenants and conditions:
2.1 Revolving Line of Credit
(a) Revolving Line of Credit. During the Availability Period, Banks
will provide a line of credit (the "Revolving Line of Credit") to AB. The
maximum amount of the Revolving Line of Credit is TWO MILLION ONE HUNDRED
THIRTEEN THOUSAND DOLLARS ($2,113,000) representing the Initial Revolving Credit
Balance plus $500,000 (the "Total Revolver Commitment").
Of the Total Revolver Commitment, CBT's Commitment is ONE MILLION FIFTY
SIX THOUSAND FIVE HUNDRED DOLLARS ($1,056,500) and Manufacturer's Commitment is
ONE MILLION FIFTY SIX THOUSAND FIVE HUNDRED DOLLARS ($1,056,500). Upon execution
of this Agreement, the respective Commitments of the Banks shall be as set forth
above. Under no circumstances shall any Bank be obligated to advance more than
its particular Commitment. Each advance will be credited to the Banks'
respective Commitments in proportion to their respective Pro Rata Shares. As
used in this Agreement "Pro Rata Share" means, as to any Bank at any time, the
percentage equivalent (expressed as a decimal, rounded to the ninth decimal
place) at such time of such Bank's Commitment divided by the Total Revolver
Commitment of all Banks. CBT's Pro Rata Share is 0.50 and Manufacturers' Pro
Rata Share is 0.50. AB's obligations to repay the Revolving Line of Credit are
evidenced by two promissory notes (one in favor of CBT and one in favor of
Manufacturers) substantially in the forms of Exhibits A-1 and A-2 attached
hereto (collectively, the "Revolving Line Notes"). Banks' obligations to make
advances under the Revolving Line of Credit are subject to the additional
borrowing base limitations set forth in subparagraph (b) below, as well as the
other applicable terms and conditions of this Agreement.
(b) Borrowing Base Limitations on Revolving Line of Credit. During
the Availability Period, the Banks will, on a revolving basis, make advances to
AB, which may not at any time exceed, in the aggregate outstanding, the lesser
of (1) the Total Revolver Commitment or (2) the Borrowing Base.
(i) "Borrowing Base" shall mean the sum of eighty-five percent
(85%) of the net face amount of Eligible Accounts generated and owned by AB,
after deduction of such reserves as Banks deem necessary and proper in their
reasonable judgment plus fifty percent (50%) of Eligible Inventory owned by,
after deduction of such reserves as Agent deems necessary and proper in its
reasonable judgment (provided, however, that the amount which may be borrowed
against such Eligible Inventory may never exceed the amount which may be
borrowed against such Eligible Accounts, based on the foregoing formulas), plus
$500,000.
<PAGE>
(ii) "Accounts Receivable" shall mean open accounts arising in
the ordinary course of AB's business from services performed or goods sold by
AB.
(iii) "Account Debtor" shall mean the obligor on any Accounts
Receivable.
(iv) "Eligible Accounts" shall mean Accounts Receivable,
excluding the following (which exclusions shall be calculated without
duplication, to the greatest extent possible):
(A) Accounts Receivable which remain uncollected more than
90 days from the date they are first invoiced.
(B) Accounts Receivable due from an Account Debtor which
suspends business, suffers a business failure or the termination of its
existence, or makes an assignment for the benefit of creditors, or as to which a
dissolution, insolvency or bankruptcy proceeding has been commenced, or as to
whose property a trustee, receiver or conservator has been appointed.
(C) Accounts Receivable due from an Account Debtor
affiliated with AB, such as a stockholder, owner, parent, subsidiary, officer,
director, agent or employee of AB, or due from Account Debtors having common
officers or directors with AB or Guarantor.
(D) Accounts Receivable with respect to which payment is or
may be contingent or conditional.
(E) Accounts Receivable due from an Account Debtor who is
not a resident or citizen of, located in, or subject to service of process in
the United States of America.
(F) Accounts Receivable against which is asserted a defense,
counterclaim, discount or setoff.
(G) Accounts Receivable due from an Account Debtor which is
any national, federal, state, county or municipal government, including, without
limitation, any instrumentality, division, agency, body or department thereof.
(H) Accounts Receivable commonly known as "bill and hold" or
subject to any repurchase or return agreement, or which relate to goods on
consignment or on approval or any similar arrangement.
(I) Accounts Receivable relating to an Account Debtor with
respect to which twenty-five percent (25%) or more of the total Accounts
Receivable owing by such Account Debtor are over 90 days delinquent.
<PAGE>
(J) Accounts Receivable due from an Account Debtor which, in
the aggregate, exceed twenty-five percent (25%) of the aggregate amount of all
Eligible Accounts for AB (with the exception of Accounts Receivable from Sony
Corporation, which may be Eligible Accounts to the extent that they do not
exceed sixty percent (60%), in the aggregate, of all Eligible Accounts for AB;
and with the exception of Accounts Receivable from Samsung, which may be
Eligible Accounts to the extent that they do not exceed thirty percent (30%), in
the aggregate, of all Eligible Accounts for AB).
(K) Accounts Receivable as to which AB is or may become
liable to an Account
Debtor for services rendered or sales made or for any other reason, except to
the extent that such Accounts Receivable exceed the amount of such liability.
(L) Accounts Receivable which are not owned by AB or are not
free of all liens, encumbrances, charges, rights or interests of any kind,
except in favor of Agent or as otherwise permitted under this Agreement.
(M) Accounts Receivable which are evidenced by chattel
paper or an instrument of any kind.
(N) Accounts Receivable which are not evidenced by an
invoice or other documentation in form acceptable to Agent.
(O) Accounts Receivables arising as a result of progress
billings.
(P) "COD" Accounts Receivable and accounts paid by
post-dated check.
(Q) Accounts Receivable relating to inventory not yet
shipped or services not yet rendered.
(R) Accounts Receivable which are otherwise unacceptable to
Agent in its reasonable judgment.
(v) "Eligible Inventory" shall mean those items of Inventory
located in the United States of America consisting of raw materials, and
finished goods which are in good condition and currently saleable in the
ordinary course of ABs' business and are not otherwise unacceptable to Agent in
its reasonable judgment. Such Inventory shall not be subject to any other lien
or claim (except as otherwise permitted under this Agreement), shall not have
been consigned or sold to any person (nor have been purchased by ABs) as part of
any bulk sale unless there was compliance with all applicable bulk sale or
transfer laws. Such Inventory shall be located at such locations as are
acceptable to Agent and shall, at all times, be subject to and covered by,
Agent's perfected security interest.
(vi) "Inventory" shall mean all inventory (as that term is
defined in the Commercial Code of the State of California) wherever located,
which is or may at any time be held for sale or lease, furnished under any
contract of service or held as raw materials, work in process, supplies or
<PAGE>
materials used or consumed in ABs' business or which are or might be used in
connection with the manufacturing, shipping, advertising or selling or finishing
of such goods, merchandise and other personal property and all documents of
title or documents representing the same, and all such property, the sale or
other disposition of which has given rise to Accounts Receivable and which has
been returned to or repossessed or stopped in transit by ABs.
(c) Initial Revolving Credit Balance. Guarantor and AB acknowledge
and agree that upon the Closing of this Agreement, there will be outstanding
under the Revolving Line of Credit the Initial Revolving Credit Balance, plus
accrued and unpaid interest through the Closing.
(d) Collection of Accounts Receivable. AB shall have the privilege,
subject to revocation at the sole discretion of Agent during the continuance of
an Event of Default, to collect, at AB's expense, the payments due on Accounts
Receivable upon the express condition that all such collections shall be
received by AB in trust for Banks. AB shall promptly, on a daily basis, deliver
to Agent, at the location specified in this Agreement, in kind, all remittances
received by AB on Accounts Receivable, or if sales are made for cash, the
identical checks, cash, or other form of payment. All amounts received by Agent
from AB shall be deposited into AB's account at Agent, Account No. 02450897870
("Cash Collateral Account"). The receipt of any check or other item of payment
by Agent shall not be considered a payment in reduction of the sums owing to
Banks until such check or other item of payment is honored and finally paid. At
any time during the continuance of an Event of Default Agent in its sole
discretion may, but is not obligated to, notify any Account Debtor to make
payment directly to Agent, and exercise any and all of AB's rights regarding the
Account Receivable or the Account Debtor.
AB acknowledges and agrees that AB shall not have any right to
obtain a disbursement of any funds in the Cash Collateral Account. Instead, all
amounts deposited into the Cash Collateral Account will be applied to repay
amounts outstanding under the Revolving Line of Credit. In the event that all
amounts outstanding under the Revolving Line of Credit have been paid in full,
and there are still funds in the Cash Collateral Account, so long as no Event of
Default has occurred, Banks shall deposit such excess funds into AB's Account at
Agent.
(e) Revolving Nature of Line of Credit. During the Availability
Period, AB may repay principal amounts and reborrow them under the Revolving
Line of Credit.
(f) Maximum Revolving Line Balance. AB agrees not to permit the
outstanding principal balance of the Revolving Line of Credit (such sum being
referred to herein as the "Revolving Line Balance"), to at any time exceed the
lesser of (1) prior to the consummation of the AB Sunshine Transaction"
described in Section 2.6 of this Agreement, the Initial Total Revolver
Commitment, (2) after consummation of the AB Sunshine Transaction" described in
Section 2.6 of this Agreement, the Total Revolver Commitment or (3) the
Borrowing Base. AB agrees to immediately pay down all amounts outstanding under
the Revolving Line of Credit which exceed any of the limitations specified
herein, or in any other applicable provisions of this Agreement.
<PAGE>
(g) Minimum Advance. Each advance must be for at least fifty
thousand dollars ($50,000.00), or for the amount of the remaining available
Revolving Line of Credit, if less.
(h) Availability Period. The period during which AB may draw on
the Revolving Line of Credit ("Availability Period") is between the date of this
Agreement and April 30, 2000 (the "Maturity Date"), unless there exists an Event
of Default, or event which with the giving of notice or passage of time would
constitute an Event of Default, in which event Banks need not make any advances.
2.2 Repayment Terms of Revolving Line of Credit.
(a) AB will pay in arrears on the first day of each calendar
month all interest accrued on amounts outstanding under the Revolving Line of
Credit (including, without limitation, all unreimbursed amounts drawn under
letters of credit).
(b) AB will repay in full all principal, interest and other
charges outstanding under the Revolving Line of Credit no later than the
Maturity Date.
(c) Subject to provisions contained elsewhere herein, AB may
prepay the Revolving Line of Credit in full or in part at any time. The
prepayment will be applied first to interest and charges and then to the
principal outstanding under the Revolving Line of Credit.
(d) All payments of principal, interest, fees or other amounts
to be made by AB under this Agreement shall be made to Agent at its office
located at 611 West Sixth Street, Los Angeles, California, or at such other
place as Agent may designate by written notice to AB and Banks (herein, the
"Agent's Office").
2.3 Term Loan Facility. Guarantor, AB and Banks agree that upon the
Closing there will be outstanding under the Term Loan the principal amount of
$7,698,214.73;plus accrued interest as of the Closing. Each Bank will be owed
its Pro-Rata Share ($3,849,107.37) the principal outstanding under the Term
Loan. AB's obligation to repay the Term Loan is evidenced by two Promissory
Notes (one in favor of CBT and one in favor of Manufacturers) substantially in
the forms of Exhibits A-3 and A-4 attached hereto (collectively, the "Term Loan
Notes"; and, together with the Revolving Line Notes, the "Notes"). Any portion
of the Term Loan that is repaid may not be reborrowed.
The proceeds from the Advances by Banks of the Term Loan shall be
used solely to repay in full all amounts owing under the "Term Loan" under the
Prior Credit Agreement.
2.4 Repayment Terms of Term Loan.
(a) AB will pay in arrears on the first day of each calendar
month all interest accrued on amounts outstanding under the Term Loan.
<PAGE>
(b) AB shall pay to the Agent, for application to the
outstanding principal amount of the Term Loan, all amounts of the Hold Back
received by AB or Guarantor.
(c) AB shall pay to Agent for application to the outstanding
principal of the Term Loan all amounts outstanding thereunder on or before the
Maturity Date.
2.5 Interest Rate.
(a) Interest Rate. The "Interest Rate" for sums outstanding
under both the Revolving Line of Credit and the Term Loan (collectively, the
"Loans") shall be CBT's Prime Rate in effect from time to time, plus the
Applicable Spread (defined below).
(b) Definition of Prime Rate. The "Prime Rate" equals the rate
of interest set from time to time by CBT at its head office in San Francisco,
California as its Prime Rate. The Prime Rate is determined by CBT as a means of
pricing credit extensions to some customers and is neither tied to any external
rate of interest or index nor is it necessarily the lowest rate of interest
charged by CBT at any given time for any particular class of customers or credit
extensions. Any changes in the interest rate resulting from a change in the
Prime Rate shall take effect without notice on the date specified at the time
the Prime Rate is set.
(c) Applicable Spread. As used herein, "Applicable Spread" means
the additional component of interest, expressed as a percentage per annum, to be
added to the Prime Rate in determining the applicable interest rate for amounts
outstanding under the Loans. The Applicable Spread shall be three and one half
percent (3.5%).
2.6 AB Sunshine Transaction.
(a) On or before June 30, 1999, the Guarantor and AB shall have:
(i) consummated the sale of certain assets, including
specified accounts receivable, inventory and equipment currently used at AB's
facility located at 15730 South Figueroa Street, Gardena, CA 90248 (the "Gardena
Facility"), all pursuant to the terms of an asset purchase agreement between AB,
as seller, and AB Sunshine, Inc. ("AB Sunshine"), as purchaser (the "AB Sunshine
Agreement"), all on terms and conditions satisfactory to Banks, in their sole
and absolute discretion ("AB Sunshine Transaction"); and
(ii) simultaneously with the consummation of the
transactions contemplated by the AB Sunshine Agreement, shall have either (i)
sold to AB Sunshine for $2,000,000 certain equipment located at the Gardena
Facility (the "Gardena Equipment"), with such amount payable by AB Sunshine in
eighty-four (84) consecutive monthly installments of $31,172.43 each, or (ii)
leased the Gardena Equipment to AB Sunshine under a "triple net" financing lease
with rental payable in eighty-four (84) consecutive monthly installments of
$31,172.43 each.
<PAGE>
(b) Upon consummation of the transactions contemplated by the AB
Sunshine Agreement and the related sale or lease of the Gardena Equipment, the
Banks shall reduce by two million ($2,000,000) dollars, the Term Loan; provided,
that in either event (A) the terms and conditions of such sale or lease of the
Gardena Equipment shall be satisfactory to the Banks in the exercise of their
sole and absolute discretion, (B) the Gardena Equipment shall, at all times
remain Collateral subject to the Banks' Security Documents, and (C) all
installments of rent or principal and interest payable by AB Sunshine to AB or
Guarantor in connection with the lease or sale of the Gardena Equipment shall
have been assigned to Banks in a manner satisfactory to them, in their sole and
absolute discretion.
(c) AB and Guarantor acknowledge and agree that Banks have not
approved any of the terms or provisions described in the preceding two
paragraphs of this Section 2.6, and that Banks have no obligation of any sort to
do so. AB and Guarantor further acknowledge and agree that if Banks, in their
sole and absolute discretion, choose not to agree to any or all of the terms or
provisions of the AB Sunshine Transaction, the AB Sunshine Transaction cannot
occur and an Event of Default shall occur under this Agreement.
(d) In the event that the transactions contemplated by the AB
Sunshine Agreement and related sale or lease of the Gardena Equipment shall not
have been consummated by June 30, 1999, an Event of Default shall be deemed to
have occurred, unless otherwise waived in writing by the Banks, in the exercise
of their sole and absolute discretion.
3. FEES, EXPENSES AND DEPOSITS.
3.1 Agency Fee. AB agrees to pay to Agent (for its own benefit and not
for the benefit of the Banks) an agency fee of $10,000 on February 27, 2000.
3.2 Expenses.
(a) AB agrees to repay Agent and Banks, immediately upon demand by
Agent, for Agent's and Banks' reasonable expenses incurred in connection with
this Agreement, which may include, without limitation, filing, recording and
search fees, documentation fees, appraisal fees and audit fees.
(b) AB agrees to reimburse Agent and Banks, immediately upon demand
by Agent, for any reasonable expenses incurred by Agent and Banks in the
negotiation and preparation of this Agreement and any agreement or instrument
required by this Agreement. Expenses include, but are not limited to, reasonable
attorneys' fees and disbursements, including the reasonable fees and
disbursements of outside counsel and any allocated costs of Agent's and Banks'
in-house counsel.
4. DISBURSEMENTS, PAYMENTS AND COSTS.
4.1 Requests for Credit. AB shall make each request for an extension of
credit under the Revolving Line of Credit by delivering to Agent a Borrowing
Base Certificate and an irrevocable written request in the form of Exhibit B,
appropriately completed (a "Request for Credit"), which specifies, among other
things:
(i) The principal amount of the requested extension of credit; and
<PAGE>
(ii) The date of the requested extension of credit, which shall be a
Banking Day.
(iii) Describe in detail the projected use of the funds from such
borrowing, and the amount of and the reasons for any difference between such
requested uses and the Budget.
If Agent is reasonably concerned or uncertain about AB's compliance with
this Agreement, or AB's entitlement to any requested Advance, Banks may suspend
the related Advance requested by AB, until AB has demonstrated to Agent's
satisfaction such compliance and entitlement.
The amount requested for each type of expense described by a Budget line
item cannot exceed, when added to the amounts requested for that Budget line
item in the current calendar month, the amount budgeted for that calendar month
for that line item, by more than ten percent (10%). AB shall be entitled to
request Advances under the Revolving Line of Credit no more than twice in any
one (1) calendar week. AB shall deliver to Agent, at the Agent's Office, a
properly completed Request for Credit at least one (1) Banking Day before the
date of the requested extension of credit. The Agent may, in its sole and
absolute discretion, permit any request for extension of credit to be made by
telephone, in which case AB shall confirm the same by mailing or faxing a
written Request for Credit to the Agent within 24 hours following the telephonic
request. If AB fails to deliver to the Agent a written Request for Credit, AB
hereby waives the right to dispute the amount, interest rate or term of any
extension of credit made pursuant to AB's telephonic request. Promptly following
receipt of a Request for Credit, the Agent shall notify each Bank by telephone,
telecopier or Telex of the date and amount of the requested credit, and that
Bank's Pro Rata Share of the requested credit. Not later than 1:00 p.m., Los
Angeles time, on the date specified for any extension of credit, each Bank shall
make its Pro Rata Share of the requested credit in immediately available funds
available to the Agent at the Agent's Office, and Agent shall make such funds
available to AB (subject to the terms and conditions hereof).
The term "Budget" means that Budget attached hereto as Exhibit "C".
4.2 Agent's Right to Assume Funds Available for Extensions if Credit.
Unless the Agent shall have been notified by any Bank at least two hours prior
to the funding by the Agent of any extension of credit that such Bank does not
intend to make available to the Agent such Bank's Pro Rata Share of the total
amount of such extension of credit, the Agent may assume that such Bank has made
such amount available to the Agent on the date of the extension of credit and
the Agent may, in reliance upon such assumption, make available to AB a
corresponding amount. If such corresponding amount is not in fact made available
to the Agent by such Bank, the Agent shall be entitled to recover such
corresponding amount on demand from such Bank, which demand shall be made in a
reasonably prompt manner. If such Bank does not pay such corresponding amount
immediately upon the Agent's demand therefor, the Agent promptly shall notify
AB, and AB shall pay such corresponding amount to the Agent within five (5)
Banking Days after demand. In the event no Event of Default has occurred and is
continuing and a Bank does not fund its Pro Rata Share of an extension of
<PAGE>
credit, the other Banks shall increase the amount of their funding to cover the
Request for Credit, provided that such increased finding does not cause any
Bank's Pro Rata Share of the Total Revolver Commitment to be exceeded. The Agent
also shall be entitled to recover from such Bank or AB, as the case may be (but
without duplication, in the case of AB, of the interest otherwise payable
hereunder), interest on such corresponding amount for each day from the date
such corresponding amount was made available by the Agent to AB to the date such
corresponding amount is recovered by the Agent, at a rate per annum to the Prime
Rate plus the Applicable Spread. Nothing herein shall be deemed to relieve any
Bank from its obligation to fulfill its Pro Rata Share of the Total Revolver
Commitment or to prejudice any rights which the Agent and/or AB may have against
any Bank as a result of any default by such Bank hereunder.
4.3 Payments by AB. Each payment by AB will be:
(a) made at Agent's Office (or such other location as may be
selected by Agent from time to time by written notice to AB),
(b) made for the account of Agent's Office or such other office as
may be selected by Agent from time to time,
(c) made in immediately available funds, or such other type of funds
reasonably selected by Agent, and
(d) evidenced by records kept by Agent.
4.4 Telephone Authorization.
(a) Subject to Section 4.1, as applicable, Agent may, in its sole
and absolute discretion, honor telephonic requests for extensions of credit made
by any officer of AB or by any person or persons so authorized by any authorized
officer of AB, promptly followed up with a completed Request for Credit as
provided in Section 4.1.
(b) Proceeds of extensions of credit will be deposited in, and
repayments will be withdrawn from, AB's account number 058-15113070 with Agent
("Account") or such other accounts with Agent as may be designated in writing by
AB.
(c) Agent will provide written confirmation to AB and Banks of
transactions made based on telephone instructions. AB agrees to notify Agent
promptly of any discrepancy between the written confirmation and telephone
instructions. If there is a discrepancy and Agent has already acted on the
telephone instructions, the telephone instructions will prevail over the written
confirmation.
(d) AB will indemnify and hold harmless Agent and Banks (including
their officers, employees, and agents) from all liability, loss, and costs in
connection with any act resulting from telephone instructions it reasonably
believes are made by an officer of AB or a person authorized by an officer of
AB. This indemnity and agreement to hold harmless will survive this Agreement's
termination.
<PAGE>
4.5 Direct Debit.
(a) AB agrees that interest and principal payments and any fees will
be deducted automatically on the due date from the Account. On the date any
payment of principal, interest or fees is due, Agent will debit from the Account
such payment.
(b) Agent will debit the Account on the dates the payments become
due. If a due date does not fall on a Banking Day (as hereafter defined), Agent
will debit the Account on the first Banking Day following the due date.
(c) AB will maintain sufficient funds in the Account on the dates
Agent enters debits authorized by this Agreement. If there are insufficient
funds in the Account on the date Agent enters any debit authorized by this
Agreement, AB shall immediately pay such shortfall to Agent.
4.6 Banking Days. Unless otherwise provided in this Agreement, a
"Banking Day" is a day other than a Saturday or a Sunday on which Agent is open
for business in California. All payments and disbursements which would be due on
a day which is not a Banking Day will be due on the next Banking Day. All
payments received on a day which is not a Banking Day will be applied on the
next Banking Day.
4.7 Taxes. AB will not deduct any taxes from any payments made to Agent
or Banks hereunder. If any government authority imposes any taxes or charges
(other than taxes based on Agent's or Banks' income) on any payments made by AB,
AB will pay such taxes or charges. Upon request by Agent, AB will confirm that
they have paid the taxes by giving Agent official tax receipts (or notarized
copies) within 30 days after the due date.
4.8 Additional Costs. AB will pay Agent, on demand by Agent, for Banks'
costs or losses relating to this Agreement arising from any statute or
regulation adopted or amended after the date hereof, or any request or
requirement of a regulatory agency which is hereafter adopted or amended and
applicable to Banks. The costs include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to any Bank's assets and
commitments for credit.
4.9 Interest Calculation. Except as otherwise stated in this Agreement,
all interest and fees, if any, will be computed on the basis of a 360-day year
and the actual number of days elapsed. This results in more interest or a higher
fee than if a 365-day year is used.
4.10 Interest on Late Payments. At Agent's sole option in each instance,
any amount not paid when due under this Agreement (including interest), other
than amounts which have become due solely by reason of acceleration hereunder,
shall bear interest from the due date at CBT's Prime Rate plus the Applicable
Spread plus four percent (4.0%). This may result in compounding of interest.
<PAGE>
4.11 Default Rate. Upon the occurrence and during the continuance of any
Event of Default, at Agent's sole option, AB shall pay interest on the
outstanding principal of the Loans at the rate of interest otherwise provided
under this Agreement plus four percent (4.0%) (the "Default Rate"). This will
not constitute a waiver of any Event of Default.
4.12 Overdrafts. Subject to the other terms and conditions of this
Agreement, Agent may, in its sole and absolute discretion, make advances under
the Revolving Line of Credit to prevent or cover an overdraft on any account of
AB with CBT. Each such advance will accrue interest from the date of the advance
or the date on which the account is overdrawn, whichever occurs first, in
accordance with this Agreement. Each Bank agrees to fund any such advance (and
AB agrees to repay any such advance) at the same times and in the same manner as
required for any other advances under the Revolving Line of Credit pursuant to
this Agreement.
5. CONDITIONS.
5.1 Initial Extension of Credit. Agent must have received the following
items, in form and content acceptable to Agent and Banks, before Banks are
required to extend any credit (with respect to either the Term Loan or the
Revolving Line of Credit) to AB under this Agreement:
(a) Authorizations. Evidence that the execution, delivery and
performance by AB, Guarantor and each subordinating creditor of, the Stock
Purchase Agreement, the Consulting Agreement, this Agreement and any instrument
or agreement required under this Agreement have been duly authorized.
(b) Notes. The fully executed Revolving Line Notes and Term Loan
Notes.
(c) Evidence of Priority. Evidence that security interests and liens
in favor of Agent are valid, enforceable and prior to all other rights and
interests, except those Agent consents to in writing.
(d) Insurance. Evidence of insurance coverage, as required in the
"Covenants" section of this Agreement.
(e) Subordination Agreement. A reaffirmation of the Subordination
Agreement signed by Pinecreek Capital and Finova Mezzanine, Inc., formerly known
as Sirrom Capital Corporation.
(f) This Agreement. This Agreement executed by AB and Guarantor.
(g) Budget. Banks shall have received and approved the Budget.
(h) Legal Opinion. A written opinion from Greenberg Traurig, AB's
legal counsel, covering such matters as Agent may reasonably require.
<PAGE>
(i) Good Standing. Certificates of good standing for AB and
Guarantor from their state of incorporation and from any other state in which AB
and Guarantor are required to qualify to conduct their business.
(j) Consummation of MOS Sale. The Stock Purchase Agreement shall
have closed, and Guarantor shall have received the gross purchase price of
$7,750,000, less the Hold Back and the Stock Purchase Deductions. There shall be
no other deductions or hold backs with respect to the Stock Purchase Agreement
of any sort whatsoever. The Consulting Agreement shall have closed and Guarantor
shall have received the sum of $500,000 with respect thereto. Guarantor shall
have paid to Banks both the $500,000 Guarantor receives pursuant to the
Consulting Agreement and the gross sale price under the Stock Purchase Agreement
less only the Hold Back and the Stock Purchase Deductions not to be less than
$6,318,742.
(k) Stock Purchase Deduction Certificate. Banks shall have received
and approved the actual calculations and exact amounts of each of the Stock
Purchase Deductions. Bank shall also have received written verification of the
professional fees owed to Greenberg Traurig in connection with the Stock
Purchase Agreement, the Consulting Agreement, and this Agreement, and Banks
shall have approved of the same.
(l) Business Consultant. AB shall have retained a business
consultant, acceptable to Banks, in Banks' sole and absolute discretion, who
will provide business advice and guidance to AB and will be a required second
signatory on all checks on all of AB's accounts, other than payroll checks to
employees who are not an officer or a director. Banks acknowledge that Michael
Maidy and Martin Pichinson is each an acceptable business consultant.
(m) Other Required Documentation. Such other documents, instruments
and agreements as Banks may reasonable require, including the UCC-1 and UCC-2
financing statements.
(n) Certificate. A Certificate signed on behalf of Guarantor and its
subsidiaries, by the Chief Executive Officer of Guarantor, stating that:
(i) the representations and warranties contained in Section 6
are true and correct in all material respects on and as of such date, and
(ii) no default or Event of Default exists or will result upon
the consummation of the transactions contemplated herein.
(o) Interest. Banks shall have received, in cash or immediately
available funds, all accrued and outstanding interest owing with respect to (i)
the MOS Advances being repaid from the proceeds of the sale of MOS and (ii) the
principal amount of the "Term Loan" under the Prior Credit Agreement being
repaid with the proceeds from the sale of MOS.
(p) Escrow Instructions. Guarantor and AB shall have delivered
irrevocable instructions to counsel for Buyer, in form and substance
satisfactory to Banks, to the effect that such counsel shall pay any and all of
the Hold Back to be paid to Guarantor under the Stock Purchase Agreement,
directly to Agent at the address set forth in this Agreement.
<PAGE>
The date on which all of the foregoing conditions have been satisfied or
waived by Agent in its sole discretion is the "Closing Date." As used in this
Agreement "Loan Documents" shall mean, collectively, this Agreement, the Notes,
AB Security Agreement, the Guaranty, the Stock Pledge Agreement, the Guarantor
Security Agreement, the Subordination Agreement and any other certificates,
documents or agreements of any type or nature heretofore or hereafter executed
or delivered by AB, Guarantor, and/or any other party to Banks in any way
relating to or in the furtherance of this Agreement, in each case either as
originally executed or as the same may from time to time be supplemented,
modified, amended, restated or extended.
5.2 Conditions to Each Advance. Before each extension of credit,
including the first:
(a) With respect to advances under the Revolving Line of Credit, a
current Borrowing Base Certificate signed by AB and delivered to Agent as
required under Section 7.2(c).
(b) Agent's most recent audit of AB's records must be satisfactory
to Agent in its reasonable discretion.
(c) The Representations and Warranties hereunder must be true and
correct in all material respects.
(d) No Event of Default, or event that with the giving of notice
and/or the passage of time would become an Event of Default, shall have occurred
and be continuing.
6. REPRESENTATIONS AND WARRANTIES.
When AB and Guarantor sign this Agreement, and until Banks are repaid all
obligations hereunder in full, AB and Guarantor make the following
representations and warranties. Each Request for Credit executed by AB shall
constitute a renewed representation and warranty by AB as to each of the
following:
6.1 Organization of AB and Guarantor. AB and Guarantor are corporations
duly formed and validly existing under the laws of their respective states of
incorporation.
6.2 Authorization. This Agreement, those Loan Documents to which AB or
the Guarantor is a party and any other instrument or agreement required to be
executed by AB or the Guarantor hereunder or thereunder, are within AB's and
Guarantor's powers, have been duly authorized, and do not conflict with any of
AB's or Guarantor's certificate or articles of incorporation or bylaws.
6.3 Enforceable Agreement. The Loan Documents are legal, valid and
binding agreements of AB and Guarantor, enforceable against AB and Guarantor in
accordance with their terms, and any instrument or agreement required hereunder
or thereunder, when executed and delivered, will be similarly legal, valid,
binding and enforceable.
<PAGE>
6.4 Good Standing. AB and Guarantor is properly licensed, in good
standing, and, where required, in compliance with fictitious name statutes in
each state in which AB and Guarantor does business, except where the failure to
comply would not have a material adverse effect on Guarantor and AB as a
consolidated whole.
6.5 No Conflicts. This Agreement does not conflict with any law,
material agreement, or material obligation by which AB or the Guarantor is
bound.
6.6 Financial Information. All financial statements, information and
other data which may have been or which may be hereafter submitted by AB or
Guarantor to Agent or any Bank have been or will be prepared in accordance with
generally accepted accounting principles consistently applied (subject, in the
case of unaudited statements, to non-material audit adjustments and absence of
footnote disclosures) and accurately represent in all material respects the
financial condition, or, as applicable, the other information disclosed therein.
6.7 Lawsuits. Except as set forth in Schedule 6.7 hereto, there are no
actions, suits, or proceedings pending or, to the knowledge of AB or Guarantor,
threatened against or affecting AB or Guarantor or AB's or Guarantor's
properties before any court or administrative agency which, if determined
adversely to AB or Guarantor, would have a material adverse effect on AB's or
the Guarantor's financial condition or operations.
6.8 Permits, Franchises. AB possess all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable them to
conduct the business in which they are now engaged and where Absence of which
would cause a material adverse effect on AB's financial condition or operations.
6.9 Other Obligations. Neither AB nor Guarantor are in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation, except as
disclosed in Schedule 6.9 hereto.
6.10 Income Tax Returns. AB and Guarantor have filed all required tax
returns and have no knowledge of any material pending assessments or adjustments
of its income tax for any year.
6.11 No Event of Default. Subject to Banks' waiving the Existing
Defaults, no event has occurred which is, or with notice or lapse of time or
both would be, an Event of Default under this Agreement or any of the Loan
Documents.
6.12 ERISA Plans.
(a) Each of AB and Guarantor has fulfilled its obligations, if any,
under the minimum funding standards of ERISA and the Code with respect to each
Plan and is in compliance in all material respects with the presently applicable
provisions of ERISA and the Code, and has not incurred any liability with
respect to any Plan under Title IV of ERISA.
<PAGE>
(b) No reportable event has occurred in respect of any Plan under
Section 4043(b) of ERISA for which the PBGC requires 30 day notice.
(c) As of the date of this Agreement, no action by AB or Guarantor
to terminate or withdraw from any Plan has been taken and no notice of intent to
terminate a Plan has been filed under Section 4041 of ERISA.
(d) No proceeding has been commenced with respect to a Plan under
Section 4042 of ERISA, and no event has occurred or condition exists which might
constitute grounds for the commencement of such a proceeding.
(e) The following terms have the meanings indicated for purposes of
this Agreement:
(i) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(ii) "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended from time to time.
(iii) "PBGC" means the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA.
(iv) "Plan" means any employee pension benefit plan maintained
or contributed to by AB and insured by the Pension Benefit Guaranty Corporation
under Title IV of ERISA.
6.13 Collateral. All collateral required in this Agreement is owned by
the grantor of the security interest, free of any title defects or any liens or
interests of others except as disclosed on Schedule 6.13 attached hereto
(collectively, the "Permitted Encumbrances").
6.14 Environmental Condition. None of AB's properties or assets have
been used by AB or, to the best of AB's knowledge, by previous owners or
operators in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance, in violation of
applicable law. To AB's knowledge, none of AB's properties or assets have been
designated or identified in any manner pursuant to any environmental protection
statute as a hazardous waste or hazardous substance disposal site, or a
candidate for closure pursuant to any air quality, water quality or other
environmental protection statue. No lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by AB. AB has not received a summons, citation, notice, or
directive from the Environmental Protection Agency or any other federal or state
governmental agency concerning any action or omission by AB resulting in the
release or discharge of hazardous waste or hazardous substances into the
environment.
<PAGE>
6.15 Location of Inventory. Schedule 6.15 hereto accurately sets forth
all places where all inventory and equipment currently owned by AB, Guarantor
and AB Mexico are located.
6.16 No Mistake. AB and Guarantor are voluntarily undertaking their
obligations under this Agreement with full awareness of their significance and
risks, and AB and Guarantor have each read and understand this Agreement and
have discussed this Agreement with legal counsel. AB and Guarantor are not
relying upon any representation, understanding or obligation of Banks which is
not expressly stated in this Agreement.
6.17 Banks Are not Partners. Neither Banks nor any of their present or
former employees, officers, directors or agents at any time have agreed or
consented to being an agent, principal, business associate or participant, joint
venturer, partner or alter ego of AB or Guarantor, and AB and Guarantor have not
at any time been authorized by Banks directly or indirectly to represent, speak
or act for or on behalf of Banks with respect to any matter whatsoever relating
to any aspect of the business of AB, Guarantor or this Agreement.
6.18 Banks Are Only Creditors. Neither Banks nor any of their present or
former employees, officers, directors or agents at any time have directed or
participated in any of the business dealings of AB in any capacity other than
that of a creditor and lender with respect to AB and Guarantor.
6.19 No Third Party Liability. Neither the execution nor the performance
of this Agreement directly or indirectly creates (or will create) any liability
or obligation by Banks to any person besides AB and Guarantor.
6.20 No Reliance. AB and Guarantor are not entering into this Agreement
in reliance upon any express or implied representation, agreement, or
understanding of any kind by Banks, or any person representing (or purporting to
represent) Banks, or any other person, except as expressly stated in this
Agreement. Banks shall not be directly or indirectly liable or responsible for
the truth, accuracy, or enforcement of any representations, agreements, or
understandings which may now or hereafter exist between AB, Guarantor and any
third person.
6.21 No Claims. After the execution and delivery of this Agreement, AB
and Guarantor shall not have (nor have in the future) any claims or causes of
action against Banks or any of Banks' Agents, except as a result of any wrongful
conduct after execution and delivery of this Agreement.
6.22 Recitals. The recitals to this Agreement are true and correct and
are incorporated herein by this reference.
6.23 Mexico. The sole shareholders of AB Mexico are Guarantor and AB.
6.24 Assets Located In Mexico. AB is the owner of all equipment and
inventory in the possession of AB Mexico. AB is also the sole owner of accounts
receivable generated by the sale of inventory processed (or manufactured) by AB
Mexico. AB Mexico owns none of the inventory or equipment at its site in Mexico.
<PAGE>
6.25 Budget. AB has prepared and delivered to Bank a detailed and
comprehensive statement of all expenses which AB expects to receive and incur
during the term of this Agreement. To best of AB's knowledge, the Budget,
attached hereto as Exhibit C, is realistic and conservative and is based upon
considered analyses and diligent investigation by AB of the matters stated
therein.
7. COVENANTS.
AB and Guarantor agree, so long as credit is available under this
Agreement and until Banks are repaid all obligations hereunder in full:
7.1 Use of Proceeds. To use the proceeds of the Loans only as specified
in Sections 2.1 and 2.3 above.
7.2 Financial Information. To provide the following financial
information and statements and such additional information as reasonably
requested by Agent from time to time, in form and detail reasonably satisfactory
to Agent:
(a) Within 100 days after Guarantor's fiscal year end, audited
consolidated and consolidating financial statements of Guarantor and its
subsidiaries. These financial statements must be audited (with an unqualified
opinion or an opinion acceptable to Agent) by a Certified Public Accountant
("CPA") reasonably acceptable to Agent.
(b) Within 45 days after the period's end, consolidated and
consolidating monthly financial statements (including a balance sheet, income
statement and statement of cash flows) for Guarantor, AB and AB Plastics de
Mexico S.A. de C.V. ("AB Mexico") and any other subsidiaries. These financial
statements may be internally prepared. The statements shall be prepared on a
consolidated and consolidating basis, and shall reflect the results for the
month just ended as well as the results from the beginning of the current fiscal
year through the month just ended, along with a comparison to budget.
(c) Within 15 days after period end, a monthly detailed aging of
AB's accounts receivable and accounts payable, a detailed analysis of AB's
inventory and a Borrowing Base Certificate (all of which shall be provided more
often than monthly at Agent's request).
(d) Within 15 days after period end, a monthly a report with respect
to the actual expenses incurred by AB during the immediately preceding calendar
month, on a line item basis, and following the same format as the Budget,
showing for each line item, the budgeted amount for that month set forth in the
Budget and the actual amount spent for that month.
(e) Within 15 days after the end of each fiscal quarter, a schedule
listing the book value of all fixed assets of AB or any subsidiaries in Mexico.
(f) Within 30 days after each fiscal year end, a 2-year operating
plan covering the current fiscal year and the next fiscal year. Such plan will
detail, on a monthly basis for the then current fiscal year and quarterly for
the subsequent fiscal year, AB's and Guarantor's best estimate of revenues,
expenses and balance sheet categories, and will be presented in the customary
form of balance sheets and income statements, prepared in a manner consistent
with the AB's historical financial statements.
<PAGE>
(g) On or before June 30, 1999, projections for the operations of AB
and AB Mexico through March 31, 2000, in form and substance satisfactory to
Agent.
(h) Within 100 days after each fiscal year end, annual CPA
management letters for AB.
(i) All SEC filings made by Guarantor or AB within 10 days after
filing.
(j) Any other information that Banks may reasonably require.
7.3 Other Debts. Not to have outstanding or incur any direct or
contingent debts or lease obligations (other than those to Banks), or become
liable for the debts of others (other than guarantees by Guarantor of AB)
without Banks' written consent. As to AB only, this does not prohibit:
(a) Acquiring goods, supplies, or merchandise, (or financing
insurance premiums) on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Debts in existence on the date of this Agreement disclosed in
writing to Banks prior to the date of this Agreement in AB's financial
statements dated October 25, 1998, and audited consolidated financial statements
of Guarantor and its subsidiaries dated October 25, 1998.
(d) Additional debts and lease obligations for the acquisition of
fixed or capital assets, to the extent permitted elsewhere in this Agreement.
(e) Subject to the terms of the Subordination Agreement, the
Subordinate Debt Obligations.
7.4 Other Liens. Not to create, assume, or allow any security interest
or lien (including judicial liens) on property AB, Guarantor or AB Mexico now or
later own, except:
(a) Liens or security interests in favor of Agent or Banks.
(b) Liens for taxes not yet due, or which are being contested in
good faith by appropriate proceedings (so long as AB and Guarantor have
established and maintain adequate reserves for the payment of the same and by
reason of which nonpayment and contest no material item or portion of AB's or
Guarantor's property is in jeopardy of being seized, levied upon or forfeited).
<PAGE>
(c) The Permitted Encumbrances outstanding on the date of this
Agreement.
(d) Additional purchase money security interests in fixed assets
acquired after the date of this Agreement.
(e) Liens or security interests granted to Subordinated Lenders to
secure the Subordinate Debt Obligations, which liens or security interests (and
the Subordinate Debt Obligations) shall be subordinate to the liens and security
interest in favor of Agent and/or Banks and to AB's obligations to Banks, all in
accordance with the terms of the Subordination Agreement.
7.5 Leases. Not enter into any new leases (including capital and
operating leases for real or personal property).
7.6 Dividends/Distributions. Not to purchase, redeem or otherwise
acquire for value any of its shares, or create any sinking fund in relation
thereto. Guarantor shall not pay any dividends or distributions on any of its
shares.
7.7 Loans to Officers. Not to make any loans, advances or other
extensions of credit to any of AB's, Guarantor's or AB Mexico's executives,
officers, directors, shareholders or employees (or any relatives of any of the
foregoing).
7.8 Change of Ownership. Not to cause, permit, or suffer any change,
direct or indirect, in AB's or AB Mexico's ownership.
7.9 Notices to Agent. To promptly notify Agent in writing of:
(a) any lawsuit over ten thousand dollars ($10,000) against AB,
Guarantor or AB Mexico;
(b) any substantial dispute between AB, Guarantor or AB Mexico and
any government authority;
(c) any failure to comply with this Agreement;
(d) any claim under the Stock Purchase Agreement by Buyers;
(e) any claim against the Hold Back asserted by Buyers;
(f) any material adverse change in AB's, Guarantor's or AB Mexico's
financial condition or operations;
(g) any change in AB's, Guarantor's or AB Mexico's name, address, or
legal structure; and
(h) the occurrence of any Event of Default.
<PAGE>
7.10 Books and Records. To maintain adequate books and records which
contain information that will be made available from time to time upon Agent's
request.
7.11 Audits. To allow Agent and its agents to inspect AB's, Guarantor's
and AB Mexico's properties and examine, audit and make copies of books and
records at any reasonable time upon reasonable prior notice. If any of AB's,
Guarantor's and AB Mexico's properties, books or records are in the possession
of a third party, AB and Guarantor (on behalf of itself and AB Mexico) authorize
that third party to permit Agent or its agents to have access to perform
inspections or audits and to respond to Agent's requests for information
concerning such properties, books and records.
7.12 Compliance with Laws. To comply in all material respects with the
laws, regulations, and orders of any government body with authority over AB's,
Guarantor's or AB Mexico's business (including any fictitious name statute and
all statutes regarding the processing, manufacture, storage, transportation,
sale or use of hazardous or toxic materials).
7.13 Preservation of Rights. To maintain and preserve all rights,
privileges, and franchises AB, Guarantor and AB Mexico now have which are
necessary to carry on their business.
7.14 Maintenance of Properties. To make any repairs, renewals, or
replacements to keep AB's, Guarantor's and AB Mexico's properties in good
working condition (reasonable wear and tear excepted).
7.15 Perfection of Liens. To help Agent and Banks perfect and protect
their security interests and liens, and reimburse the Agent and Banks for
related costs incurred to protect its security interests and liens.
7.16 Cooperation. To take any action reasonably requested by Agent and
Banks to carry out the intent of this Agreement.
7.17 Insurance.
(a) Insurance Covering Collateral. To maintain all risk property
damage insurance policies covering the tangible property comprising the
Collateral (as defined in Section 8 below) and all other insurable assets of AB,
Guarantor, and AB Mexico. Each insurance policy must be for the full replacement
cost of the Collateral and other assets and include a replacement cost
endorsement. The insurance must be issued by an insurance company reasonably
acceptable to Agent and must include a lender's loss payable endorsement in
favor of Agent in a form reasonably acceptable to Agent.
(b) General Business Insurance. To maintain insurance as is usual
for the business they are in.
(c) Evidence of Insurance. Upon the request of Agent, to deliver to
Banks a copy of each insurance policy, or, if permitted by Agent, a certificate
of insurance listing all insurance in force.
<PAGE>
7.18 Operating Business Accounts. Establish and maintain with Banks all
of AB's and Guarantor's operating and business accounts and all other banking
services associated with the operation of AB's and Guarantor's business,
including without limitation any demand deposit accounts.
7.19 Additional Negative Covenants. Not to, without Banks' prior written
consent:
(a) engage in any business activities substantially different from
AB's, Guarantor's, or AB Mexico's, respectively, present businesses.
(b) liquidate or dissolve AB's, Guarantor's, or AB Mexico's,
respectively, businesses.
(c) enter into any consolidation, merger, pool, joint venture,
syndicate or other combination, or make any loans or investments (other than
intercompany investments), or make any commitment with respect thereto.
(d) sell, lease or dispose of all or (in Banks' reasonable opinion)
a substantial part of AB's, Guarantor's, or AB Mexico's, respectively, business,
or AB, Guarantor's, or AB Mexico's, respectively, assets.
(e) acquire or purchase a business or its assets (provided that
Banks will not unreasonably withhold or delay their consents to any such
transaction).
(f) sell or otherwise dispose of any assets for less than fair
market value, or enter into any sale and leaseback agreement covering any of
their fixed or capital assets.
(g) voluntarily suspend any of their respective businesses for more
than five business days in any ten day period, other than a routine shutdown,
not to exceed fourteen (14) consecutive days, consistent with past practice.
(h) enter into any transaction with any affiliate of AB on terms
less favorable than those available to AB from other persons or entities in the
ordinary course of such persons' and entities' business.
(i) except for the relocation of the balance of the tooling and
equipment at the Gardena Facility not sold or leased to AB Sunshine to AB Mexico
in Tijuana, Mexico, in connection with an AB Sunshine Transaction described in
Section 2.6 hereof, which the Banks, in their sole and absolute discretion have
approved in writing, transfer any fixed assets or inventory, exceeding $10,000
in aggregate book value, in any twelve (12) month period, to outside the United
States of America, without the prior written approval of Agent.
(j) make or incur any capital expenditures, including capital
leases.
<PAGE>
(k) change the Chairman of the Board, Chief Executive Officer, or
Chief Financial Officer of either of AB, or Guarantor or AB Mexico, and fail to
secure the services of a successor satisfactory to the Banks within 90 days.
(l) subject to Section 7.19(i), move any inventory or equipment to,
or otherwise store, hold or possess any inventory or equipment at, any other
locations or premises other than those identified in Schedule 6.15 hereto,
except upon 30 days prior written notice to Agent and upon execution and
delivery of any financing statements required by Agent (and any other documents
needed to perfect the Banks' liens in such jurisdiction).
(m) change in any material respect of their existing policies or
practices with respect to returns and allowances on inventory sold.
(n) change the name of either of AB, Guarantor or AB Mexico, except
upon 30 days prior written notice to Agent and upon execution and delivery of
any financing statements required by Agent (and any other documents needed to
perfect the Banks' liens in such jurisdiction).
(o) prepay any indebtedness (other than trade payables in the
ordinary course of
business) owed to any third parties prior to the scheduled maturity date of such
indebtedness (except that repayment of the Subordinated Debt Obligations will be
subject to the provisions of the Subordination Agreement), provided that the
cashless exercise of options or warrants shall not be deemed a prohibited
prepayment hereunder.
(p) place any inventory on consignment.
7.20 No Consumer Purpose. Not to use any loans or advances hereunder for
personal, family or household purposes.
7.21 ERISA Plans. To give prompt written notice to Agent of:
(a) The occurrence of any reportable event in respect of any Plan
under Section 4043(b) of ERISA for which the PBGC requires 30 day notice.
(b) Any action by AB, Guarantor or AB Mexico to terminate or
withdraw from a Plan or the filing of any notice of intent to terminate a Plan
under Section 4041 of ERISA.
(c) Any notice of noncompliance made with respect to a Plan under
Section 4041(b) of ERISA.
(d) The commencement of any proceeding with respect to a Plan under
Section 4042 of ERISA.
7.22 Payment of Taxes. Pay all taxes owing by Guarantor, AB (and all
other subsidiaries) when due, other than those being contested in good faith by
appropriate proceedings.
<PAGE>
7.23 Appointment of Agent as Attorney in Fact. Until all the obligations
of AB to Banks have been paid in full, AB irrevocably appoint Agent as their
attorney in fact and authorize and empower it to:
(a) Endorse and affix AB's name to or upon any check, draft, note,
instrument or other writing relating to the collection of Accounts Receivable,
or relating to any other Collateral, or upon any check or other instrument given
in payment thereof, or upon any omitted assignment, notification of assignment,
demand or auditor's verification relating to Collateral and upon all other
instruments and writings required to assert and protect Banks' rights in the
Collateral.
(b) Upon the occurrence and during the continuance of an Event of
Default, receive, open and dispose of all mail addressed to AB and notify the
Post Office authorities to change the address for the delivery of mail addressed
to AB to such address as Banks may designate. These powers, being coupled with
an interest, are irrevocable while AB's obligations to Banks remain unpaid.
7.24 Budget Variances. For each calendar month, commencing with the
month of May, 1999, not allow the actual expenses incurred by AB during that
month on a line item basis to exceed by more than 10% the expenses shown on the
Budget for that line item for that calendar month.
7.25 Business Consultant. At all times AB shall have retained a business
consultant, acceptable to Banks, in Banks' sole and absolute discretion, who
will provide business advice and guidance to AB and will be a required signatory
on all checks on all of AB's accounts, other than payroll checks to employees
who are not an officer or a director. Banks acknowledge that Michael Maidy and
Martin Pichinson is each an acceptable business consultant.
8. SECURITY DOCUMENTS.
8.1 Security Documents Executed by AB. In order to secure the
obligations of AB under this Agreement, the Notes, and other Loan Documents, AB
has executed the AB Security Agreement.
8.2 Security Documents Executed by Guarantor. AB's obligations under the
Notes and other Loan Documents are guaranteed by Guarantor, pursuant to the
terms of the Guaranty. In order to secure the obligations of Guarantor under the
Guaranty, Guarantor has executed in favor of Agent for the benefit of the Banks
Stock Pledge Agreement and the Guarantor Security Agreement.
To the extent not already covered by the Guarantor Security Agreement,
Guarantor hereby grants a security interest in and to the Hold Back to secure
all of the Guarantor's obligations under the Guaranty.
<PAGE>
8.3 Definition of Security Documents and Collateral. As used in this
Agreement, ("Security Documents") means and includes (i) the various documents
referenced in Sections 8.1 and 8.2, above, (ii) any other security agreement
which may now or hereafter be executed by AB, Guarantor, any other entity in
favor of Agent, for the benefit of Banks, to secure performance of AB's or
Guarantor's obligations under the Loan Documents or Guaranty, and (iii) any
modifications or to any of the foregoing documents. AB and Guarantor intend that
each Security Document (as the same may be modified or amended from time to
time) shall grant to Agent, for the ratable benefit of Banks, a security
interest in the items of collateral referenced in such Security Document. As
used herein, the term "Collateral" means all Accounts Receivable, Inventory,
equipment, general intangibles, and all other property and collateral described
in or covered by each and all of the Security Documents.
9. DEFAULT.
9.1 Events of Default. The occurrence of any one or more of the
following events shall constitute an "Event of Default":
(a) Failure to Pay. AB fail to make any payment under this
Agreement, any Note, or any other Loan Document when due.
(b) AB Sunshine Transaction. AB or Guarantor shall fail to have
received Banks' written approval of and consummate the AB Sunshine Transaction
described in Section 2.6 hereof on or before June 30, 1999.
(c) Business Consultant. At anytime AB shall not be in compliance
with the requirements of Section 7.25 hereof.
(d) Budget Variances. During any calendar month, AB shall allow
expenses on a line item basis during that month to exceed by more than ten
percent (10%) the expenses shown on the Budget for each line item for that
month.
(e) Non-Compliance. AB, Guarantor, or any other party (other than
Banks) fails to meet the conditions of, or fails to perform any obligation
under:
(i) this Agreement;
(ii) any other Loan Document; or
(iii) any other agreement AB or Guarantor has with (x) CBT or
any affiliate of CBT, or (y) Manufacturers or any affiliate of Manufacturers,
which in any case is not cured within ten (10) days after the occurrence thereof
(or such longer grace period, if any, as may be provided as to such default in
any document or agreement referenced in subparagraph (ii) or (iii) above),
provided that if such failure cannot be cured within ten days but AB has
commenced within such 10-day period to cure such failure and are otherwise
diligently pursuing such cure, then AB shall have such additional time as is
reasonably necessary to effect such cure, but in no event more than twenty (20)
days beyond the initial 10-day cure period. The foregoing notwithstanding, in
the event any other Loan Document specifically sets forth events which
constitute a "Default" or "Event of Default" thereunder, then the occurrence of
any such "Default" or "Event of Default" shall constitute an Event of Default
hereunder and the foregoing cure period shall not apply thereto. The foregoing
cure period is also not applicable to monetary defaults, as to which there is no
cure period, as specified in subparagraph (a) immediately above.
<PAGE>
(f) Other Defaults. Any default occurs under the Subordinate Debt
Documents or any other agreement in connection with any credit either of AB or
Guarantor has obtained from any other creditor(s) or which either of AB or
Guarantor has guaranteed if the default consists of failing to make a payment
when due or gives the other creditor(s) the right to accelerate any obligations
in an aggregate amount in excess of fifty thousand dollars ($50,000).
(g) Lien Priority. Banks fail to have an enforceable first lien
(except for any liens to which Banks have consented in writing) on or security
interest in any Collateral (other than "Emission Rights," as defined in AB
Security Agreement).
(h) False Information. Any representation or warranty under this
Agreement or any agreement, instrument or certificate executed pursuant to this
Agreement or in connection with any transaction contemplated hereby shall prove
to have been false or misleading in any material respect when made or when
deemed to have been made.
(i) Bankruptcy. Either of AB or Guarantor files a bankruptcy
petition, a bankruptcy petition is filed against either of AB or Guarantor or
either of AB or Guarantor makes a general assignment for the benefit of
creditors. The default will be deemed cured if any bankruptcy petition filed
against AB or Guarantor is dismissed within a period of sixty (60) days after
the filing; provided, however, that Banks will not be obligated to extend any
additional credit to AB during any bankruptcy period.
(j) Receivers. Either of AB's or Guarantor's business is terminated,
or a receiver or similar official is appointed for either of AB's or Guarantor's
business and, in the event such appointment is the result of an involuntary
action or proceeding, such appointment is not terminated, dismissed or
discharged within sixty (60) days.
(k) Lawsuits. Any lawsuit or lawsuits are filed on behalf of one or
more trade creditors against AB or Guarantor in an aggregate amount of fifty
thousand dollars ($50,000) or more in excess of any insurance coverage, and such
lawsuit or lawsuits are not dismissed or fully bonded within thirty (30)
calendar days after service of process upon AB or Guarantor (as applicable).
(l) Judgments. Any judgments or arbitration awards in an aggregate
amount in excess of fifty thousand dollars ($50,000) are entered against AB or
Guarantor and, absent procurement of a stay of execution, such judgment or award
remains unbonded or unsatisfied for ten (10) calendar days after the date of
entry; or AB or Guarantor enters into any settlement agreement with respect to
any litigation or arbitration, in an aggregate amount of fifty thousand dollars
($50,000) or more in excess of any insurance coverage.
<PAGE>
(m) Government Action. Any government authority takes action that
Agent reasonably believes materially adversely affects either of AB's or
Guarantor's financial condition or ability to repay.
(n) Revocation. The Guaranty, the Stock Pledge Agreement, the
Guarantor Security Agreement, the Subordination Agreement, or any other Security
Document deed of trust or other document required by this Agreement is revoked
or no longer in effect.
(o) Material Adverse Change. A material adverse change occurs in
either of AB's or Guarantor's financial condition, properties or prospects, or
ability to repay the obligations hereunder.
(p) ERISA Plans. The occurrence of a reportable event with respect
to a Plan which is, in the reasonable judgment of Agent, likely to result in the
termination of such Plan for purposes of Title IV of ERISA, or could reasonably
be expected, in the reasonable judgment of Agent, to subject either of AB or
Guarantor to any tax, penalty or liability (or any combination of the foregoing)
which, in the aggregate, would exceed $50,000.
9.2 Remedies. Upon the occurrence and during the continuance of an Event
of Default, Banks, acting through Agent, shall have all of the following rights
and remedies:
(a) All obligations and indebtedness hereunder may, at the option of
Agent and without demand, notice, or legal process of any kind, be declared, and
immediately shall become, due and payable;
(b) The Loans shall bear interest at the Default Rate;
(c) All of the rights and remedies of a secured party under the
California Commercial Code or other applicable law, all of which rights and
remedies shall be cumulative, and not exclusive, to the extent permitted by law,
in addition to any other rights and remedies contained in this Agreement or in
any of the documents or agreements executed in connection herewith or which
Agent and Banks may otherwise have under any applicable law or in equity;
(d) The right to (i) peacefully enter upon the premises of AB or
Guarantor or any other place or places where the Collateral is located, without
any obligation to pay rent to AB, Guarantor or any other person, through
self-help and without judicial process or first obtaining a final judgment or
giving AB or Guarantor notice and opportunity for a hearing on the validity of
Agents' or Banks' claim, and remove the Collateral from such premises and places
to the premises of Agent or any agent of Agent, for such time as Agent, may
require to collect or liquidate the Collateral, and/or (ii) require AB and
Guarantor to assemble and deliver the Collateral to Agent at a place to be
designated by Agent;
(e) The right to (i) open AB's and Guarantor's mail and collect any
and all amounts due from Account Debtors or direct that AB's and Guarantor's
mail be diverted to a post office box or other location as determined by Agent
(ii) notify Account Debtors that the Accounts Receivable have been assigned to
Agent and that Agent has a security interest therein and (iii) direct such
Account Debtors to make all payments due from them upon the Accounts Receivable,
directly to Agent or to a lock box designated by Agent. Agent shall promptly
furnish AB with a copy of any such notice sent and AB hereby agree that any such
notice in Agent's sole discretion, may be sent on Agents stationery, in which
event AB shall, upon demand, co-sign such notice with Agent; and
<PAGE>
(f) In addition, as a matter of right and without notice to Farm or
anyone claiming under AB, and without regard to the then value of any of the
assets of AB in which Banks have a security interest, AB agrees that Banks and
Agent shall have the right to apply to any court having jurisdiction to appoint
a receiver or receivers for AB or any of AB's assets in which Banks have a
security interest, and AB hereby irrevocably consents to such appointment and
waives notice of any application therefor. Any such receiver or receivers shall
have all the usual powers and duties of receivers in like or similar cases and
all the powers and duties of Banks and Agent as provided in the AB Security
Agreement and this Agreement and shall continue as such and exercise all such
powers until the later of (i) the date of the last sale of all of AB's assets in
which Banks have a security interest, (ii) the disbursement of all proceeds of
the assets of AB in which Banks have a security interest collected by such
receiver and the payment of all expenses incurred in connection therewith, and
(iii) the termination of such receivership with the consent of Banks or Agent or
pursuant to an order by a court of competent jurisdiction.
(g) The right to sell, lease or to otherwise dispose of all or any
Collateral in its then condition, or after any further manufacturing or
processing thereof, at public or private sale or sales, in lots or in bulk, for
cash or on credit, all as Agent in its sole discretion, may deem advisable. At
any such sale or sales of the Collateral, the Collateral need not be in view of
those present and attending the sale, nor at the same location at which the sale
is being conducted. Agent shall have the right to conduct such sales on AB's or
Guarantor's premises or elsewhere and shall have the right to use AB's or
Guarantor's premises without charge for such sales for such time or times as
Agent may see fit. Agent is hereby granted a license or other right to use,
without charge, AB's and Guarantor's labels, patents, copyrights, rights of use
of any name, trade secrets, trade names, trademarks and advertising matter, or
any property of a similar nature, as it pertains to the Collateral, in
advertising for sale and selling any Collateral and AB's and Guarantor's rights
under all licenses and all franchise agreements shall inure to Agent's benefit
but Agent shall have no obligations thereunder. Agent may purchase all or any
part of the Collateral at public or, if permitted by law, private sale and, in
lieu of actual payment of such purchase price, may setoff the amount of such
price against amounts due under this Agreement. The proceeds realized from the
sale of any Collateral shall be applied first to the costs and expenses,
including reasonable attorneys' fees, incurred by Agent and Banks for collection
and for acquisition, completion, protection, removal, storage, sale and delivery
of the Collateral; second to interest due upon the Loans; and third to the
principal of the Loans. Agent shall account to AB for any surplus. If any
deficiency shall arise, AB and Guarantor shall remain liable to Agent and Banks
therefor.
9.3 Costs and Expenses. Agent and Banks shall be entitled to recover all
costs, expenses, and reasonable attorneys' fees (including any allocated costs
of in-house counsel) in connection with the administering or enforcing of this
Agreement following the occurrence and during the continuance of any Event of
Default whether or not an action is filed.
<PAGE>
10. PARTICIPATIONS; AGENCY; AMENDMENT, CONSENTS AND WAIVERS; OTHER
EXTENSIONS OF CREDIT.
10.1 Participations.
(a) As used herein, an "Institutional Lender" means any bank or
other financial institution having (or whose parent has) capital and surplus of
not less than $100,000,000 and which makes commercial loans on an ongoing basis
in the ordinary course of its business. Each Bank may, with the prior written
consent of Agent (which consent shall not be unreasonably withheld), at any time
sell to one or more banks or other entities ("Participants") participating
interests in all or any portion of its Commitments and advances or any other
interest of such Bank hereunder and under the Loan Documents (in respect of any
Bank, its "Credit Exposure"). If the proposed Participant is not an
Institutional Lender, Agent may withhold its consent in its sole discretion. In
the event of any such sale by a Bank of participating interests to a
Participant, such Bank's obligations under this Agreement shall remain
unchanged, such Bank shall remain solely responsible for the performance
thereof, such Bank's Credit Exposure shall not decrease, and AB and Agent shall
continue to deal solely and directly with such Bank in connection with such
Bank's rights and obligations under this Agreement. Each Bank shall from time to
time upon request of AB notify AB of the identity of any Participants with
respect to its Credit Exposure hereunder; provided, however, that failure to
provide such notice will not affect the validity of such participation. AB
agrees that if amounts outstanding under this Agreement are due or unpaid, or
shall have been declared or shall have become due and payable upon the
occurrence of an Event of Default, each Participant shall be deemed to have the
right of set-off in respect of its participating interest in amounts owing under
this Agreement to the same extent as if the amount of its participating interest
were owing directly to it as a Bank under this Agreement, provided that such
right of set-off shall be subject to the obligation of such Participant to share
with the Banks, and the Banks agree to share with such Participant, as provided
in Section 10.4. Each Bank agrees that any agreement between such Bank and any
Participant in respect of such participating interest shall not restrict such
Bank's right to approve or agree to any amendment, restatement, supplement or
other modification to, waiver of, or consent under, this Agreement except to
extend the Maturity Date, reduce the rate of interest or fees, extend the time
of payment of interest thereon, reduce the principal amount thereof, or release
all or substantially all of any Collateral. Notwithstanding the foregoing, or
anything else contained herein which may be construed to the contrary, CBT, so
long as it is Agent, and Manufacturers, if it should ever become agent, shall at
all times retain (and not participate out) the lesser of (i) 25% of the total
indebtedness owing under the Notes, or (ii) the amount retained by the other
Bank that is a party to this Agreement.
(b) Notwithstanding any other provision contained in this Agreement
or any of the Loan Documents to the contrary, any Bank may, upon written notice
to Agent, AB and the other Banks, pledge all or any portion of its Notes to any
Federal Reserve Bank or the United States Treasury as collateral security
pursuant to Regulation A of the Board of Governors of the Federal Reserve System
and any Operating Circular issued by such Federal Reserve Bank, provided that
any payment in respect of such pledged Notes made by AB to or for the account of
the pledging Bank in accordance with the terms of this Agreement shall satisfy
AB's obligations hereunder in respect to such pledged Notes to the extent of
such payment. No such pledge shall release the pledging Bank from its
obligations hereunder.
<PAGE>
(c) AB and Guarantor authorize each Bank to disclose to any
Participant any and all financial information in such Bank's possession
concerning AB and Guarantor and any subsidiary of AB and Guarantor which has
been delivered to such Bank by AB or Agent pursuant to this Agreement or which
has been delivered to such Bank by AB or Agent in connection with such Bank's
credit evaluation of AB prior to entering into this Agreement.
10.2 Agent.
(a) Appointment. Each Bank hereby designates and appoints CBT as its
agent under this Agreement and the Loan Documents, and each Bank hereby
irrevocably authorizes Agent to take such action or to refrain from taking such
action on its behalf under the provisions of this Agreement and the Loan
Documents and to exercise such powers as are set forth herein or therein,
together with such other powers as are reasonably incidental thereto. Agent
agrees to act as such on the express conditions contained in this Section 10.2.
The provisions of this Section 10.2 are solely for the benefit of Agent and
Banks, and neither AB nor Guarantor shall have any rights as a third party
beneficiary of any of the provisions hereof. In performing its functions and
duties under this Agreement, Agent shall act solely as agent of the Banks and
does not assume and shall not be deemed to have assumed any obligation toward or
relationship of agency or trust with or for AB or Guarantor. Agent may perform
any of its duties hereunder, or under the Loan Documents, by or through its
agents or employees.
(b) Nature of Duties as Agent. Agent shall have no duties or
responsibilities except those expressly set forth in this Agreement. The duties
of Agent shall be mechanical and administrative in nature. Agent shall not have
by reason of this Agreement a fiduciary relationship with any Bank. Nothing in
this Agreement, the Loan Documents or any other agreements, express or implied,
is intended to or shall be construed to impose upon Agent any obligations in
respect of this Agreement, the Loan Documents or any other agreement except as
expressly set forth herein or therein. Each Bank shall make its own independent
investigation of the financial condition and affairs of AB, Guarantor and their
subsidiaries in connection with the extensions of credit hereunder and shall
make its own appraisal of the creditworthiness of AB, Guarantor and their
subsidiaries, and Agent shall have no duty or responsibility, either initially
or on a continuing basis, to provide any Bank with any credit or other
information with respect thereto (other than financial information received by
it in accordance herewith), whether coming into its possession before the date
hereof or at any time or times hereafter. If Agent seeks the consent or approval
of any Bank to the taking or refraining from taking any action hereunder, then
Agent shall send notice thereof to each Bank. Notwithstanding the foregoing,
Agent shall notify the Banks with reasonable promptness of any Event of Default
of which Agent has actual knowledge.
<PAGE>
(c) Neither Agent nor any of its officers, directors, employees or
agents shall be liable to any Bank for any action taken or omitted by it
hereunder or under any other agreement, or in connection herewith or therewith,
except that Agent shall be liable with respect to its own gross negligence or
willful misconduct. Agent shall not be liable for any apportionment or
distribution of payments made by it in good faith and if any such apportionment
or distribution is subsequently determined to have been made in error the sole
recourse of any Bank to whom payment was due but not made shall be to recover
from the other Banks any payment in excess of the amount to which it is
determined to be entitled (and such other Banks hereby agree to return to such
Bank any such erroneous payments received by them). In performing its functions
and duties hereunder, Agent shall exercise the same care which it would in
dealing with loans for its own account, but Agent shall not be responsible to
any Bank for any recitals, statements, representations or warranties herein or
for the execution (other than by Agent), effectiveness, genuineness, validity,
enforceability, collectibility, or sufficiency of this Agreement or any other
Loan Documents or any other agreement, or the transactions contemplated hereby
or thereby, or for the financial condition of AB or Guarantor or any of their
subsidiaries or affiliates. Agent shall not be required to make any inquiry
concerning either the performance or observance of any of the terms, provisions
or conditions of this Agreement or any agreement or the financial condition of
AB, or Guarantor or any of their subsidiaries or affiliates, or the existence or
possible existence of any Event of Default or any event which, with the giving
of notice or the passage of time, or both, would constitute an Event of Default.
Agent may at any time request instructions from Banks with respect to any
actions or approvals which by the terms of this Agreement or of any agreement
Agent is permitted or required to take or to grant and if such instructions are
promptly requested, Agent shall be absolutely entitled to refrain from taking
any action or to withhold any approval and shall not be under any liability
whatsoever to any person or entity for refraining from any action or withholding
any approval under this Agreement or any other agreement until it shall have
received such instructions from all Banks. Without limiting the foregoing, no
Bank shall have any right of action whatsoever against Agent as a result of
Agent acting or refraining from acting under this Agreement, any of the Loan
Documents or any other agreement in accordance with the instructions of all
Banks.
(d) Agent shall be entitled to rely upon any written notices,
statements, certificates, orders or other documents or any telephone message or
other communication (including any writing, telex, telecopy or telegram)
believed by it in good faith to be genuine and correct and to have been signed,
sent or made by the proper person or entity, and with respect to all matters
pertaining to this Agreement the Loan Documents or any other agreement and its
duties hereunder or thereunder, upon advice of counsel selected by it. Agent
shall be entitled to rely upon the advice of legal counsel, independent
accountants and other experts selected by Agent in its sole discretion.
(e) Banks will reimburse and indemnify Agent for and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses, advances or disbursements of any kind or nature
whatsoever which may be imposed on, incurred by, or asserted against Agent in
any way relating to or arising out of this Agreement, the Loan Documents or any
other agreement or any action taken or omitted by Agent under this Agreement,
the Loan Documents or any other agreement, in proportion to each Bank's Pro Rata
Share; provided, however, that no Bank shall be liable for any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses, advances or disbursements resulting from Agent's gross
negligence or willful misconduct; and provided further, however, that Agent
shall distribute to each of the Banks in accordance with their Pro Rata Share
all net payments and recoveries (after deduction of expenses) received by Agent
from AB and Guarantor. The obligations of the Banks under this Section 10.2
shall survive the payment in full of all extensions of credit hereunder and the
termination of this Agreement.
<PAGE>
(f) With respect to the extensions of credit made by it Agent shall
have and may exercise the same rights and powers hereunder and is subject to the
same obligations and liabilities as and to the extent set forth herein for any
other Bank. The term "Banks" or any similar terms shall, unless the context
clearly otherwise indicates, include Agent in its individual capacity as a Bank.
Agent may lend money to, and generally engage in any kind of banking, trust or
other business with AB as if it were not acting as Agent pursuant hereto.
(g) Agent may resign from the performance of all its functions and
duties hereunder at any time by giving at least thirty (30) Banking Days' prior
written notice to AB and Banks. Such resignation shall take effect upon the
acceptance by a successor Agent of appointment pursuant to clause (h) below or
as otherwise provided below.
(h) Upon any such notice of resignation pursuant to clause (g)
above, the Banks shall appoint a successor Agent. If a successor Agent shall not
have been, so appointed within said thirty (30) Banking Day period, the retiring
Agent upon notice to AB, shall then appoint a successor Agent who shall serve as
Agent until such time, if any, as Banks appoint a successor Agent as provided
above.
(i) Upon the acceptance by a successor Agent of any appointment as
an Agent under this Agreement and the Loan Documents, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Agent, and the refiring Agent shall be discharged
from its duties and obligations under this Agreement. After any retiring Agent's
resignation as Agent under this Agreement, the provisions of this Section 10.2
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was Agent under this Agreement. Notwithstanding anything contained
herein which may be construed to the contrary, if CBT is acquired by or merged
into another financial institution which does not have at least $100,000,000 in
capitalization, Manufacturers may, at its option, within 45 days of such
acquisition or merger, elect to become Agent hereunder by sending written notice
to CBT's successor and to AB that Manufacturers has elected to become the Agent
hereunder pursuant to the provisions of this section, and Manufacturers will,
after the sending of such notice, be the Agent hereunder and shall have all the
rights and responsibilities of the Agent hereunder.
(j) Banks hereby irrevocably authorize Agent, at its option and in
its discretion, to release any lien granted to or held by Agent upon any
property covered by this Agreement or the Security Documents (A) upon
termination of Bank's obligations hereunder and payment and satisfaction of all
liabilities of AB under the Notes; or (B) constituting property being sold or
disposed of if AB certify to Agent that the sale or disposition is made in
compliance with the provisions of this Agreement (and Agent may rely in good
faith conclusively on any such certificate, without further inquiry); or (C)
constituting property leased to AB under a lease which has expired or been
terminated in a transaction permitted under this Agreement or is about to expire
and which has not been, and is not intended by AB to be, renewed or extended.
Upon request by Agent at any time, any Bank will confirm in writing the Agent's
authority to release particular types or items of property covered by this
Agreement or the Loan Documents pursuant to this Section 10.2(j) or Section
10.3.
<PAGE>
(k) Without in any manner limiting Agent's authority to act without
any specific or further authorization or consent by the Banks (as set forth in
Section 10.2(j), each Bank agrees to confirm in writing, upon request by AB, the
authority to release any property covered by this Agreement and the Security
Documents conferred upon Agent under clauses (A) through (C) of Section 10.2(i)
and under Section 10.3. So long as no Event of Default is then continuing, upon
receipt by Agent of confirmation from the Banks of their authority to release
any particular item or types of property covered by this Agreement or the Loan
Documents, and upon at least five (5) Banking Days' prior written request by AB,
Agent shall (and is hereby irrevocably authorized by the Banks to) execute such
documents as may be necessary to evidence the release of the liens granted to
Agent for the benefit of the Banks herein or pursuant hereto upon such
collateral; provided, however, that (A) Agent shall not be required to execute
any such document on terms which, in Agent's opinion, would expose Agent to
liability or create any obligation or entail any consequence other than the
release of such liens without recourse or warranty, and (B) such release shall
not in any manner discharge, affect or impair the obligations of AB hereunder.
(l) Agent shall have no obligation whatsoever to any Bank or any
other person or entity to assure that the property covered by this Agreement or
any of the Security Documents exists or is owned by AB, or is cared for,
protected or insured or has been encumbered or that the liens granted to Agent
pursuant to the Security Documents have been properly or sufficiently or
lawfully created, perfected, protected or enforced or are entitled to any
particular priority, or to exercise at all or in any particular manner or under
any duty of care, disclosure or fidelity, or to continue exercising, any of the
rights, authorities and powers granted or available to Agent in this Section
10.2 or elsewhere in this Agreement or in any of the Security Documents, it
being understood and agreed that in respect of the property covered by any of
the Security Documents or any act, omission or event related thereto, Agent may
act in any manner Agent deems appropriate, in its sole discretion, given Agent's
own interest in property covered by any of the Security Documents as one of the
Banks and that Agent shall have no duty or liability whatsoever to any of the
other Banks; provided, that Agent shall exercise the same care which it would
exercise in dealing with loans for its own account.
(m) Each Bank hereby appoints each other Bank as agent for the
purpose of perfecting security interests in assets which, in accordance with
Article 9 of the Uniform Commercial Code in any applicable jurisdiction, can be
perfected only by possession. Should any Bank (other than Agent) obtain
possession of any such collateral, such Bank shall notify Agent thereof and,
promptly upon Agent's request therefor, shall deliver such collateral to Agent
or in accordance with Agent's instructions. Each Bank agrees that it will not
have any right individually to enforce or seek to enforce any right or remedy
under this Agreement or any of the Security Documents or to realize upon any
collateral securing any extensions of credit hereunder, it being understood and
agreed that such rights and remedies may be exercised only by Agent.
<PAGE>
10.3 Amendments; Consents and Waivers for Certain Actions. No amendment,
modification, termination or waiver of any provision of this Agreement or
consent to any departure by AB therefrom, shall in any event be effective unless
the same shall be in writing and signed by AB and by the Banks holding at least
two-thirds (66 2/3%) of the outstanding amounts of the Loans; provided, that no
amendment modification, termination or waiver shall, unless in writing and
signed by all Banks or, in the case of subsection (a) below, the affected Bank,
do any of the following:
(a) increase the Commitment of any Bank;
(b) reduce the principal of, rate of interest on or fees payable
with respect to any extensions of credit hereunder;
(c) postpone the Maturity Date or any date fixed for any payment
with respect to any amount of principal, interest or fees with respect to any
extensions of credit hereunder;
(d) amend or waive any of the covenants contained in Article 7
hereof, or this Section 10.3;
(e) consent to the assignment or other transfer by AB of any of
their rights and obligations under this Agreement or any of the Loan Documents;
(f) except as specified in Section 10.2(j) above, release any
material portion of the Collateral; or
(g) waive any material condition precedent to any borrowing
hereunder.
Each amendment, modification, termination or waiver shall be effective only in
the specific instance and for the specific purpose for which it was given. No
amendment, modification, termination or waiver shall be required for Agent to
accept from AB additional collateral. No notice to or demand on AB not required
by the terms hereof in any case shall entitle AB to any other or further notice
or demand in similar or other circumstances.
10.4 Set Off and Sharing of Payments. In addition to any rights now or
hereafter granted under applicable law and not by way of limitation of any such
rights, upon the occurrence and during the continuance of any Event of Default,
each Bank is hereby authorized by AB at any time or from time to time, with
reasonably prompt subsequent notice to AB (any prior or contemporaneous notice
being hereby expressly waived) to set off and to appropriate and to apply any
and all (a) balances (including, without limitation, all account balances,
whether provisional or final and whether or not collected or available, but
expressly excluding any trust funds) held by such Bank at any of its offices for
the account of AB (regardless of whether such balances are then due to AB) and
(b) other property held or owing by such Bank to or for the credit or for the
account of AB, against and on account of any amounts owed by AB hereunder which
are not paid when due; provided, however, that at any time that there exists any
real property collateral for the Loans or any other obligations of AB or
Guarantor under the Loan Documents, no Bank shall exercise any right of setoff
without the prior written consent of each other Bank.
<PAGE>
11. Release.
AB and Guarantor, each for itself, and its successors, heirs, executors,
administrators and assigns, hereby waives, releases and discharges, and agrees
that neither AB nor Guarantor will institute, prosecute or pursue, any and all
complaints, claims, charges, claims for relief, demands, suits, actions and
causes of action, whether in law or in equity, which either AB or Guarantor
assert or could assert at common law or under any statute, rule, regulation,
order or law, whether federal, state or local, on any ground whatsoever, whether
or not known, suspected, liquidated, contingent or matured, with respect to any
event, matter, claim, occurrence, damages or injury arising out of or associated
with any of the Prior Credit Agreement, Prior Notes or Loan Documents or any
other documents, instruments, or agreements related thereto, against Agent,
either of the Banks or any of the Banks' current or former owners, officials,
directors, officers, shareholders, affiliates, agents, representatives,
servants, attorneys, subsidiaries, parents, divisions, branches, units,
successors, predecessors, assigns and employees ("Banks Releasees"). AB and
Guarantor each waive and release any and all rights under Section 1542 of the
California Civil Code or any analogous state, local or federal law, statute,
rule, order or regulation, that each Guarantor may have. California Civil Code
Section 1542 reads as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
This Agreement shall extend and apply to all unknown, unsuspected and
unanticipated injuries and damages, relating to acts, omissions or occurrences
to the date hereof, as well as those that are now disclosed. By entering into
this Agreement, Banks and Agent do not admit any liability whatsoever to AB or
Guarantor or to any other person or entity arising out of any claims heretofore
or hereafter asserted by AB or Guarantor or other person or entity, and Banks
expressly deny any and all such liability. This Agreement may not be used as
evidence to prove any alleged wrong in any action brought or proceeding
initiated by AB, Guarantor or other person or entity against any of the Banks
Releasees.
12. Reaffirmation by Guarantor.
Guarantor acknowledges and agrees that the Guaranty continues in full
force and effect with respect to AB's obligations under the Notes and this
Agreement. Guarantor hereby restates and reaffirms as of the date of this
Agreement each representation, warranty, and waiver of Guarantor set forth in
the Guaranty. The Guaranty shall apply to all indebtedness of AB to Banks under
the Notes and this Agreement, as if the Guaranty had been executed concurrently
with the execution of this Agreement.
<PAGE>
13. MISCELLANEOUS.
13.1 Waiver of Jury Trial.
AB, GUARANTOR, AGENT AND BANKS EACH WAIVES ITS RESPECTIVE RIGHTS TO A
TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR
RELATED TO THIS AGREEMENT, ANY OF THE LOAN DOCUMENTS, OR THE TRANSACTIONS
CONTEMPLATED HEREBY IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE
BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH
RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. AB, AGENT, GUARANTOR, AND
BANKS EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A
COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER
AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF
THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN
WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT,
ANY OF THE LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL
APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO
THIS AGREEMENT AND ANY OF THE LOAN DOCUMENTS.
13.2 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to Agent and all financial covenants will be made under
generally accepted accounting principles consistently applied.
13.3 California Law. This Agreement is governed by California law
without reference to its conflict of laws principles.
13.4 Successors and Assigns. This Agreement is binding on AB's,
Guarantor's, Agent's and Banks' successors and assignees. AB agrees that it may
not assign this Agreement without the prior written consent of Agent and Banks.
As used herein, including for purposes of obtaining interest rate quotes or
making interest rate determinations, the term "CBT", "Agent" or "Manufacturers"
shall mean and include CBT's, Agent's and Manufacturers', respectively,
successors, including without limitation successors by merger or acquisition.
13.5 Severability; Waivers; Interpretation. If any part of this
Agreement is not enforceable, the rest of the Agreement may be enforced. No
failure on the part of Agent to exercise, and no delay in exercising, any right,
power, or remedy under this Agreement shall operate as a waiver thereof, nor
shall any single or partial exercise of any right under this Agreement preclude
any other or further exercise thereof or the exercise of any other right. Any
consent or waiver under this Agreement must be in writing. If Agent waives a
default, it may enforce a later default. Wherever the context so requires, all
words used in the singular will be construed to have been used in the plural,
and vice versa. The word "include(s)" means "include(s), without limitation,"
and the word "including" means "including, but not limited to." No listing of
specific instances, items or matters in any way limits the scope or generality
of any language of this Agreement. Time is of the essence in the performance of
this Agreement by AB and Guarantor. The exhibits to this Agreement are hereby
incorporated in this Agreement. The language of this Agreement shall be
construed as a whole according to its fair meaning, and not strictly for or
against any party (and the parties hereto acknowledge that they participated in
the negotiation and drafting of this Agreement, and that any ambiguity shall not
be construed against any party).
<PAGE>
13.6 Costs and Expenses. In addition to the recovery of costs and
expenses upon an occurrence of an Event of Default, if Agent or Banks incur
expenses in connection with the preparation, administering or enforcing of this
Agreement, AB shall pay Agent and Banks all such costs and reasonable attorneys'
fees, including any allocated costs of in-house counsel.
13.7 Entire Agreement. This Agreement and the Loan Documents,
collectively:
(a) represent the sum of the understandings and agreements between
Agent, Banks and AB concerning this credit; and
(b) replace any prior oral or written agreements between Agent,
Banks and AB concerning this credit; including without limitation the Prior
Credit Agreement and the Prior Notes, which are amended and restated in full by
this Agreement and the Notes; and
(c) are intended by Agent, Banks and AB as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other
agreements required by this Agreement, this Agreement will prevail.
13.8 Notices. Except as otherwise expressly provided elsewhere in this
Agreement or in the Loan Documents: (a) all notices, requests, demands,
directions and other communications provided for hereunder or under any of the
Loan Documents must be in writing and must be mailed, telecopied or personally
delivered to the appropriate party at the address set forth on the signature
pages of this Agreement or, as to any party, at any other address as may be
designated by it in a written notice sent to all other parties in accordance
with this Section 13.8; and (b) any notice, request, demand, direction or other
communication given by telecopier, must be confirmed within 48 hours by letter
mailed or delivered to the appropriate party at its respective address. Except
as otherwise expressly provided elsewhere herein or in any Loan Document if any
notice, request, demand, direction or other communication required or permitted
hereunder or under any Loan Document is given by mail it will be effective on
the earlier of receipt or the third calendar day after deposit in the United
States mail with first class or airmail postage prepaid; if given by telecopier,
upon electronic confirmation of receipt, and if given after 4:00 p.m., Los
Angeles time, effective on the next Banking Day; or if given by personal
delivery, when delivered.
<PAGE>
13.9 Headings. Article and paragraph headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.
13.10 Counterparts. This Agreement may be executed in as many
counterparts as necessary or convenient, and by the different parties on
separate counterparts each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
agreement.
13.11 Further Assurances. AB shall, at their expense and without expense
to Agent, do, execute and deliver such further acts and documents as Agent from
time to time reasonably requires to assure Agent the rights created or intended
to be created by this Agreement, and for carrying out the intention or
facilitating the performance of the terms of this Agreement or any document
executed in connection with this Agreement.
13.12 Hazardous Waste Indemnification. AB will indemnify and hold
harmless Agent and Banks from any loss or liability directly or indirectly
arising out of the use, generation, manufacture, production, storage, release,
threatened release, discharge, disposal or presence of a hazardous substance by
AB or at AB's premises or on AB's behalf. This indemnity will apply whether the
hazardous substance is on, under or about AB's property or operations or
property leased to AB. The indemnity includes but is not limited to reasonable
attorneys' fees (including the reasonable estimate of the allocated cost of
in-house counsel and staff). The indemnity extends to Agent, each Bank, their
parents and subsidiaries and all of their directors, officers, employees,
agents, successors, attorneys and assigns. For these purposes, the term
"hazardous substances" means any substance which is or becomes designated as
"hazardous" or "toxic" under any federal, state or local law. This indemnity
will survive repayment of AB's obligations hereunder.
Upon demand by Agent, AB will defend any investigation, action or
proceeding alleging the presence of any hazardous substance in any such
location, which affects any of AB's property or operations or property leased to
AB or which is brought or commenced against Agent in respect of AB, whether
alone or together with AB or any other person, all at AB's own cost and by
counsel to be approved by Agent in the exercise of its reasonable judgment. If
AB fail to so defend the investigation, action, or proceeding, then Agent may
elect to conduct its own defense at the expense of AB.
13.13 Inter-Affiliate Indebtedness. AB and Guarantor agree that all
indebtedness and obligations owing between AB and/or between either of AB and
Guarantor, or owing by any subsidiaries to Guarantor, shall at all times be
subject and subordinate to all indebtedness and obligations owing by AB and
Guarantor to the Banks hereunder, and under the Notes and other Loan Documents.
13.14 Existing Defaults. Subject to the satisfaction reached condition
precedent set forth in Section 5 of this Agreement, Agent and Banks hereby waive
each and everyone of the Existing Defaults.
<PAGE>
This Agreement is executed as of the date stated at the top of the first
page.
"AB"
AB PLASTICS CORPORATION, a California
corporation
By: /s/ Michael A. Gibbs
----------------------------------------
Michael A. Gibbs
Its: Chief Executive Officer
By: /s/ Paul J. Iacono
----------------------------------------
Paul Iacono
Its: Chief Financial Officer
Address where notices to AB are to
be sent:
15730 South Figueroa Street
Gardena, California 90248
Attn: Paul J. Iacono
Telecopier: (310) 523-9859
Telephone:(213) 770-8771
"Guarantor"
COMPASS PLASTICS & TECHNOLOGIES,
INC., a Delaware corporation
By: /s/ Michael A. Gibbs
----------------------------------------
Michael A. Gibbs
Its: Chief Executive Officer
<PAGE>
By: /s/ Paul J. Iacono
----------------------------------------
Paul Iacono
Its: Chief Financial Officer
Address where notices to Guarantor are to be sent:
15730 South Figueroa Street
Gardena, California 90248
Attn: Paul J. Iacono
Telecopier: (310) 523-9859
Telephone: (213) 770-8771
"Banks"
CALIFORNIA BANK & TRUST,
a California banking corporation, in its individual
capacity
By: /s/ Robert K. Chaulk
----------------------------------------
Robert K. Chaulk, Vice President
Address where notices to CBT are to be sent:
California Bank & Trust
550 S. Hope Street, 3rd Fl.
Los Angeles, CA 90071
Attn: Robert Chaulk
Telecopier: (213) 687-8394
Telephone: (213) 593-2059
MANUFACTURERS BANK, a California banking
corporation
By: /s/ Karen J. Kearney
----------------------------------------
Karen J. Kearney
Its: Vice President
<PAGE>
Address where notices to Manufacturers are to be
sent:
Manufacturers Bank
515 South Figueroa Street, 5th Floor
Los Angeles, California 90071
Attn: Karen J. Kearney
Telecopier: (213) 489-6239
Telephone: (213) 489-8816
"Agent"
CALIFORNIA BANK & TRUST,
California banking corporation, as Agent for itself
and Manufacturers Bank
By: /s/ Robert K. Chaulk
----------------------------------------
Robert K. Chaulk, Vice President
Address where notices to Agent are to be sent:
California Bank & Trust
550 S. Hope Street, 3rd Fl.
Los Angeles, CA 90071
Attn: Robert Chaulk
Telecopier: (213) 687-8394
Telephone: (213) 593-2059
<PAGE>
STOCK PURCHASE AGREEMENT
------------------------
STOCK PURCHASE AGREEMENT (this "Agreement"), entered into as of the 7th
day of May, 1999, by and between COMPASS PLASTICS & TECHNOLOGIES, INC., a
Delaware corporation having offices at 15730 South Figueroa Street, Gardena,
California 90248 (the "Stockholder"), and DANIEL P. FLAMEN and TIMOTHY E.
HOWARD, having offices at 485 Ramona Street, Palo Alto, California 94301
("Purchasers").
W I T N E S S E T H:
--------------------
WHEREAS, the Stockholder is the record and beneficial owner of all of
the issued and outstanding shares of the capital stock of M.O.S. Plastics, Inc.,
a California corporation (the "Company"), which is engaged primarily in the
business of manufacturing, marketing, distributing and selling injection-molded
plastic products, tooling and related goods and services (the "Business"); and
WHEREAS, the Stockholder desires to sell to Purchasers all, and not
less than all, of the outstanding shares of capital stock of the Company and the
business of the Company as a going concern, and to consummate the other
transactions contemplated by this Agreement, all upon the terms and subject to
the conditions set forth in this Agreement; and
WHEREAS, Purchasers desire to purchase from the Stockholder all, and
not less than all, of the outstanding shares of capital stock of the Company,
and to consummate the other transactions contemplated by this Agreement, all
upon the terms and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein set forth, the parties hereby covenant and agree
as follows:
1. SALE AND PURCHASE OF THE STOCK.
----------------------------------
1.1 Sale and Purchase. Effective as of the date hereof (the
"Closing Date") and in accordance with the provisions of this Agreement,
Purchasers hereby purchase from the Stockholder all, and not less than all, of
the outstanding shares of the capital stock of the Company, consisting of an
aggregate of 250 shares of common stock of the Company (the "Stock"); and the
Stockholder hereby sells to Purchasers all, and not less than all, of the Stock,
against receipt by the Stockholder of the Consideration set forth in Section 2
below.
1.2 Stock Certificates. Concurrently herewith, the Stockholder
is delivering to Purchasers, against receipt of the Consideration described in
Section 2 below, the certificate(s) representing all of the shares of the Stock,
duly endorsed for transfer, or accompanied by duly executed stock powers, in a
form acceptable to Purchasers.
1
<PAGE>
2. CONSIDERATION FOR THE STOCK.
-------------------------------
2.1 Consideration. In consideration for the delivery and
transfer to Purchasers of all of the issued and outstanding shares of the Stock
of the Company, Purchasers shall pay the Stockholder the consideration of Seven
Million Seven Hundred Fifty Thousand Dollars ($7,750,000) (the "Consideration"),
payable and subject to adjustment as specified in Sections 2.2 and 2.3 below.
2.2 Closing Payment.
(a) Concurrently herewith, the Purchasers are paying
to the Stockholder in cash by wire transfer of immediately available funds to an
account designated by the Stockholder, an amount (the "Closing Consideration")
which shall be equal to Seven Million Five Hundred Thousand Dollars ($7,500,000)
minus the sum of (i) the Tax Liabilities (as hereinafter defined), (ii) the
Employee Bonus Payments (as hereinafter defined), (iii) the Lease Obligations
(as hereinafter defined).
(b) Attached hereto as Exhibit "A" is a calculation
mutually agreed by Purchasers and Stockholder as of a date no earlier than three
(3) business days prior to the Closing Date evidencing (i) the outstanding
amount of the tax liabilities of Company to the California Franchise Tax Board
as of the Closing Date in the amount of $221,121.06 (the "California Tax
Liabilities"), (ii) the aggregate amount as of the Closing Date of all bonus
payments owing to employees of Company listed on Schedule 3.18 hereto (the
"Employee Bonus Payments"), and (iii) the aggregate amount as of the Closing
Date of all Capitalized Lease/Note Payable Obligations set forth on Schedule
3.16(e) hereto (the "Lease Obligations"). Not later than thirty (30) days
following the Closing Date, the Purchasers shall cause the Company to pay in
full the California Tax Liabilities and the Employee Bonus Payments.
2.3 Escrow. As security for Stockholder's covenants and
obligations hereunder, including without limitation under Section 7 hereof but
without limitation of Stockholder's liability hereunder, Purchasers on behalf of
Stockholder are concurrently herewith depositing into an interest bearing
attorneys bank escrow account at Santa Monica Bank ("Escrow Bank Account")
pursuant to an Escrow Agreement in the form attached hereto as Exhibit "B" with
Stern, Neubauer, Greenwald & Pauly, A Professional Corporation ("Escrowholder"),
the sum of Two Hundred Fifty Thousand Dollars ($250,000) of the Consideration
payable under Section 2.1 ("Holdback Escrow"). In consideration of the
foregoing, Stockholder hereby grants Purchasers a security interest in the
Escrow Bank Account in order to secure Stockholder's covenants and obligation
hereunder, including without limitation under Section 7 hereof. The Holdback
Escrow shall terminate on December 31, 1999, except to the extent that all or
any portion of the monies held thereunder are subject to claims that have not
been resolved as of such date.
2
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER.
-----------------------------------------------------
The Stockholder hereby represents and warrants to Purchasers
as follows:
3.1 Title to the Stock. The Stockholder has good, valid and
marketable title to all of the Stock, which consists of 250 shares of common
stock of the Company, all of which has been duly authorized and validly issued
and is fully paid and non-assessable, and is owned beneficially and of record by
the Stockholder, free and clear of all pledges, liens, claims, charges, options,
calls, encumbrances, restrictions and assessments whatsoever, except for any
restrictions which may be created by operation of state or federal securities
laws. No person other than the Stockholder has any claim or interest in or to
any of the Stock.
3.2 Authorization of Agreement. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby by Stockholder have been duly and validly authorized by the
Board of Directors and, if required, shareholders of Stockholder; and
Stockholder has the full legal right, power and authority to execute and deliver
this Agreement, to perform its obligations hereunder, and to consummate the
transactions contemplated hereby. No further corporate authorization is
necessary on the part of Stockholder to consummate the transactions contemplated
hereby.
3.3 Valid and Binding Agreement. This Agreement constitutes
the legal, valid and binding obligation of the Stockholder, enforceable against
the Stockholder in accordance with its terms, except to the extent limited by
bankruptcy, insolvency, reorganization and other laws affecting creditors'
rights generally, and except that the remedy of specific performance or similar
equitable relief is available only at the discretion of the court before which
enforcement is sought.
3.4 Organization, Good Standing and Qualification. The
Company: (a) is a corporation duly organized, validly existing and in good
standing under the laws of the State of California; (b) has all necessary
corporate power and authority to carry on its business and to own, lease and
operate its properties; and (c) is qualified to do business as a foreign
corporation in each foreign jurisdiction listed on Schedule 3.4; being the only
jurisdictions where such qualification is required by law and where the failure
to be so qualified would have a material adverse effect on the assets, business
or financial condition of the Company. True and complete copies of the Articles
of Incorporation and By-Laws of the Company (including all amendments thereto),
and a correct and complete list of the officers and directors of the Company,
are annexed hereto as Schedule 3.4.
3.5 Capital Structure Stock Ownership.
(a) The authorized capital stock of the Company is as
set forth in its Articles of Incorporation contained in Schedule 3.4, and the
Stock constitutes all of the issued and outstanding capital stock of the
Company.
(b) There are no outstanding subscriptions, options,
rights, warrants, convertible securities or other agreements or calls, demands
or commitments obligating the Company to issue, transfer or purchase any shares
of its capital stock or any rights to any shares of capital stock, or obligating
the Stockholder to transfer any of the Stock. No shares of capital stock of the
Company are reserved for issuance pursuant to stock options, warrants,
agreements or other rights to purchase or acquire capital stock.
3
<PAGE>
3.6 Subsidiaries and Investments. The Company does not (a)
own, directly or indirectly, any stock or other equity securities of any
corporation or entity, or (b) have any direct or indirect equity or ownership
interest in any person, firm, partnership, corporation, venture or business
other than the business conducted by the Company.
3.7 Financial Statements and Financial Information; Working
Capital.
(a) Annexed hereto as Schedule 3.7(a) are true,
correct and complete copies of:
(i) The audited balance sheets of the
Company as of December 31, 1997, and the related statements of income,
shareholders' equity and cash flows of the Company for the year then ended and
the internal consolidating balance sheet of the Company as of October 25, 1998
and related statements of income, shareholders equity and cash flow for the
period then ended, prepared in connection with Stockholder's unaudited
consolidated financial statements for such period (collectively, the "Historical
Financial Statements"); and
(ii) The balance sheet of the Company as of
March 21, 1999 (the "Most Recent Balance Sheet") and the related statement of
income of the Company for the five (5) months then ended (the "Interim Financial
Statements").
(b) The Historical Financial Statements: (i) were
prepared in accordance with generally accepted accounting principles
consistently applied subject, in the case of the October 25, 1998 financial
statements, to the absence of certain footnote disclosures which would otherwise
be required by generally accepted accounting principles; (ii) fairly present in
all material respects the Company's financial condition as at the dates thereof,
and the results of its operations for the fiscal years (or portion thereof) then
ended; (iii) contain and reflect all necessary material adjustments and accruals
for a fair presentation of the financial condition and the results of operations
as of the dates of and for the fiscal years covered by such Historical Financial
Statements; and (iv) make full and adequate provision, subject to and in
accordance with generally accepted accounting principles, for the various assets
and liabilities of the Company, fixed or contingent, and the results of its
operations and transactions in its accounts, as of the dates and for the periods
referred to therein.
(c) Subject only to the absence of full footnote
disclosures and to year-end audit adjustments which would not, individually or
in the aggregate, be material, the Interim Financial Statements: (i) were
derived from the books and records of the Company, which accurately and
consistently reflect all transactions to which the Company was and is a party;
(ii) were prepared in accordance with generally accepted accounting principles,
policies and practices of the Company consistently applied; (iii) fairly present
in all material respects the Company's financial condition as at March 21, 1999
and the results of its operations for the five (5) months then ended; and (iv)
make full and adequate provision, subject to and in accordance with generally
accepted accounting principles, for the various assets and liabilities of the
Company, fixed or contingent, and the results of its operations and transactions
in its accounts, as of the dates and for the periods referred to therein. The
Company has no liabilities or obligations, contingent or otherwise (including,
without limitation, any tax liabilities or accruals), except as expressly set
forth in the Interim Financial Statements and/or otherwise in the Schedules to
this Agreement, or arising in the normal course of the Company's business since
March 21, 1999.
4
<PAGE>
(d) Schedule 3.7(d) annexed hereto contains a true
and complete list of the outstanding principal balance of, approximate accrued
interest on, and all collateral security for, all Debt of the Company as of the
Most Recent Balance Sheet, including but not limited to any such Debt owed by
the Company to the Stockholder and/or any of the Stockholder's "Affiliates" (as
such term is hereinafter defined). Wherever used in this Agreement, the term
"Affiliates" or "Affiliate" means, as respects any person or entity, any other
person or entity that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with the
first person or entity.
(e) Schedule 3.7(e) annexed hereto contains: (i) true
and complete aging schedules of the accounts receivable and accounts payable of
the Company as of May 5, 1999; (ii) a true and complete list of all obligations
(other than obligations disclosed in Schedule 3.7(d))of the Company to the
Stockholder and/or any of the Stockholder's Affiliates on the date hereof; (iii)
a true and complete list of all obligations of the Company guaranteed by the
Stockholder on the date hereof, and the terms of such guaranties; and (iv) a
true and complete list reflecting the nature and amount of all obligations owed
to the Company on the date hereof by the Stockholder and/or any of the
Stockholder's Affiliates.
(f) For purposes of the provisions of this Agreement,
the working capital of the Company shall be the excess of those specified assets
over those specified liabilities of Company which are set forth and described on
Exhibit "C" annexed hereto (the "Working Capital"). As of the Closing Date, the
Working Capital shall be not less than $2,350,000.
3.8 No Material Changes.
(a) Since October 25, 1998, the Company has not made
any payments or distributions of cash or other property of any kind, other than
(i) normal operating expenses, (ii) scheduled amortization payments on existing
Debt.
(b) Except as set forth on Schedule 3.8 or Schedule
3.7(e) annexed hereto, since October 25, 1998, the Business of the Company has
continued to be operated only in the ordinary course, and there has not been:
5
<PAGE>
(i) Any material adverse change in the
financial condition, operations or business of the Company, or any material
transaction or commitment effected or entered into outside of the normal course
of the Company's business;
(ii) Any damage, destruction or loss,
whether covered by insurance or not, materially and adversely affecting the
business, operations, assets, properties, financial condition or prospects of
the Company; or
(iii) Any declaration, setting aside or
payment of any dividend or other distribution with respect to the Stock, any
other payment of any kind by the Company to the Stockholder or any of the
Stockholder's Affiliates, any forgiveness of any debt or obligation owed to the
Company by the Stockholder or any of the Stockholder's Affiliates, or any direct
or indirect redemption, purchase or other acquisition by the Company of any
capital stock of the Company.
3.9 Tax Returns and Tax Audits.
(a) From January 1, 1995, through February 28, 1998,
the Company elected to be taxed as an electing small business (Subchapter S)
corporation under the provisions of Section 1371 et. seq. of the Internal
Revenue Code of 1986, as amended (the "Code"). Commencing on March 2, 1998,
Company became a member of the Stockholder consolidated group.
(b) Except for the California Tax Liabilities or as
otherwise set forth on Schedule 3.9 hereof, all federal, state and local tax
returns and tax reports required to be filed by the Company, or by Stockholder
with respect to the Company on or before the date hereof, have been timely filed
with the appropriate governmental agencies in all jurisdictions in which such
returns and reports are required to be filed; all such returns were complete and
correct in all material respects; all federal, state and local income,
franchise, sales, use, property, excise, payroll and other taxes (including
interest and penalties and including estimated tax installments where required
to be filed and paid) due from or with respect to the Company as of the date
hereof have been fully paid, and appropriate accruals have been made on the
Company's books for taxes not yet due and payable; all taxes and other
assessments and levies which the Company is required by law to withhold or to
collect have been duly withheld and collected, and have been paid over to the
proper governmental authorities to the extent due and payable; and there are no
outstanding pending claims, deficiencies or assessments for taxes, interest or
penalties with respect to any taxable period of the Company. Stockholders
consolidated federal and state tax returns for the year ended October 25, 1998,
as filed with the applicable governmental agencies are attached to Schedule 3.9
hereof.
(c) Neither the Company nor the Stockholder has
received notice of any pending audits with respect to any federal, state or
local tax returns of the Company, and no waivers of statutes of limitations have
been given or requested with respect to any tax years or tax filings of the
Company.
6
<PAGE>
3.10 Personal Property: Liens. The Company has and owns good
and marketable title to all of its personal property and assets, including
without limitation, all such property and assets reflected on the Most Recent
Balance Sheet (except for properties or assets sold or otherwise disposed of in
the ordinary course of business since the date of such balance sheet), free and
clear of all liens, pledges, claims, security interests and encumbrances
whatsoever, except for: (a) liens securing the Debt, pursuant to the security
agreements listed in Schedule 3.10 annexed hereto, which liens are being
released concurrently herewith; (b) liens for current taxes not yet due and
payable or which are being contested in good faith by appropriate proceedings;
and (c) other liens, pledges, claims, security interests, encumbrances,
mortgages, conditions or restrictions which are not, individually or in the
aggregate, material in character or amount and do not interfere with the use
made or presently proposed to be made of any such property (collectively,
"Permitted Liens"). All material items of machinery, equipment, vehicles and
other fixed assets owned or leased by the Company are listed in Schedule 3.10
annexed hereto (with specific indication of those assets which are owned and
those assets which are leased), and, except as and to the extent disclosed in
Schedule 3.10, all of such fixed assets are in good operating condition and
repair (reasonable wear and tear excepted) and are adequate and sufficient for
their use in the Company's business as presently conducted.
3.11 Real Property.
(a) The Company does not own or have any interest of
any kind (whether ownership, lease or otherwise) in any real property, except to
the extent of the Company's interest as lessee under the leases for the
Company's business premises located at 2308 Zanker Road, San Jose, California
and at 326 Charcot Avenue, San Jose, California (collectively, the "Company
Facilities"). True and complete copies of the lease agreements in respect of the
Company Facilities (including all amendments thereto) are annexed hereto as
Schedule 3.11 (collectively, the "Leases"). The Company is not a sublessor with
respect to any real property.
(b) The Company (and, to the best of the
Stockholder's knowledge, each landlord thereunder) is presently in compliance
with all of their respective obligations under the Leases, and the Company
Facilities are in good condition (reasonable wear and tear excepted), and are
adequate and sufficient for the operation of the Company's business as presently
conducted. No consent of the landlord under either Lease will be required in
order for the Leases to remain in effect in accordance with their current terms,
after giving effect to the sale and transfer of the Stock pursuant to this
Agreement.
(c) The Company's use of the Company Facilities does
not violate any applicable building, zoning or other law, ordinance or
regulation affecting such real property, and no covenants, easements, rights of
way or other such conditions of record impair the Company's use of the Company
Facilities.
(d) All of the buildings, fixtures and other
improvements located on or at the Company Facilities are accessible by public
roads, and during the two (2) year period prior to the date hereof, the Company
has not experienced any material interruption in the delivery of adequate
quantities of any utilities or other public services required by the Company in
the normal operation of the Business.
7
<PAGE>
3.12 Accounts Receivable.
(a) To the extent not already collected, all accounts
receivable shown on the Most Recent Balance Sheet, and all accounts receivable
thereafter created or acquired by the Company prior to the date hereof (the
"Accounts"), have arisen or will arise in the ordinary course of the Company's
business, and, to the extent not already collected, represent and will represent
amounts owed to the Company by unaffiliated third party account debtors in
respect of goods, products or services provided to such account debtors by the
Company, collectible in full within ninety (90) days (subject to any reserve for
uncollectible accounts set forth in the Most Recent Balance Sheet).
(b) There are no asserted counterclaims or set-offs
in respect of any of such Accounts, or any state of facts, events or occurrences
which would impair the collection of such Accounts in the ordinary course of
business.
3.13 Inventories. Except as otherwise disclosed on Schedule
3.13 annexed hereto, all items of raw materials, work-in-process and finished
goods inventories which are owned by the Company and reflected in the Most
Recent Balance Sheet have been valued at the lower of cost or market, based on
the first-in-first-out method of accounting, and all items of obsolete or
slow-moving inventory have been written down to net realizable or scrap value.
Except as otherwise disclosed in Schedule 3.13, all inventories of the Company,
in the aggregate, consist of items which are of a quality and quantity which are
useable in the ordinary course of the Company's business. The Stockholder is not
aware of any government or governmental agency approvals required to be obtained
in respect of such inventories, all of such inventories have been manufactured
in accordance with and comply in all material respects with all applicable laws
and regulations.
3.14 Insurance Policies. Schedule 3.14 annexed hereto contains
a true and correct schedule of all insurance coverage held by the Company
concerning its business and properties, including the names of insurers, policy
limits and deductibles. The types and levels of such insurance coverages are
reasonable and customary for businesses of comparable type, size and location.
3.15 Permits and Licenses. The Company possesses all required
permits, licenses and/or franchises, from whatever governmental authorities or
agencies (domestic and/or foreign) requiring the same and having jurisdiction
over the Company, necessary in order to operate its Business in the manner
presently conducted, except for such permits and licenses the failure to obtain
which would not have a material adverse affect on the business or financial
condition of the Company. All of the Company's permits, licenses and/or
franchises are valid, current and in full force and effect and none of such
permits, licenses or franchises will be voided, revoked or terminated, or
voidable, revocable or terminable, upon and by reason of the consummation of the
transactions contemplated by this Agreement.
8
<PAGE>
3.16 Contracts and Commitments.
(a) Schedule 3.16 (a) annexed hereto lists all real
property leases, personal property leases, commitments, loan agreements,
indentures, employment, consulting and shareholder agreements, insurance
policies and all other contracts and agreements to which the Company is a party
and which are material to its business, except that Schedule 3.16(a) need not
list any such contract or agreement that is listed on any other Schedule hereto,
or was entered into in the ordinary course of the business of the Company and
that, in any case: (i) is for the purchase of supplies or other inventory items
in the ordinary course of business; (ii) is related to the purchase or lease of
any capital asset involving aggregate payments of less than $10,000 per annum;
or (iii) may be terminated without penalty, premium or liability by the Company
on not more than thirty (30) days' prior written notice. The contracts listed on
Schedules 3.10, 3.11, 3.12, 3.16 and 3.18 are referred to herein as "Material
Contracts".
(b) (i) all Material Contracts are in full force and
effect; (ii) the Company has not received any notice that any Material Contract
is in material breach or default or is now subject to any condition or event
which has occurred and which, after notice or lapse of time or both, would
constitute a material default by any party under any such contract, lease,
agreement or commitment; and (iii) none of the Material Contracts will be
voided, revoked or terminated, or voidable, revocable or terminable, upon and by
reason of the consummation of the transactions contemplated by this Agreement.
(c) No purchase commitment by the Company is in
excess of the normal, ordinary and usual requirements of the Business of the
Company.
(d) Except for powers of attorney granted to customs
brokers in the ordinary course of business, there is no outstanding power of
attorney granted by the Company to any person, firm or corporation for any
purpose whatsoever.
(e) Schedule 3.16(e) lists each capital lease and
note payable of Company and the obligations under each such lease and note
payable as of the Closing Date for the remainder of the term of each such lease
(the "Capitalized Lease/Note Payable Obligations").
3.17 Customers and Suppliers. Schedule 3.17 annexed hereto
sets forth a list of the names and addresses of those customers and suppliers
who accounted for 5% or more of the Company's net sales and 5% or more of the
Company's net purchases of inventories and materials for the fiscal year ended
October 25, 1998, and the dollar amount of net sales and purchases applicable to
each such material customer and supplier. The Company has not received any
notice of any existing, announced or anticipated changes in the policies of any
material customer, supplier or referral source which will materially adversely
affect the Business presently being conducted by the Company.
3.18 Labor. Benefit and Employment Agreements. Except as set
forth in Schedule 3.18 annexed hereto:
(a) the Company is not a party to (i) any collective
bargaining agreement or other written agreement covering unionized employees,
(ii) any bonus, deferred compensation, stock option, stock purchase, consulting,
retirement, severance, welfare or incentive plan, pension plan, profit sharing
plan, retirement, or other such benefit plan constituting an "employee benefit
plan" within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended (collectively, an "Employee Plans"), or (iii)
any written agreement with respect to the employment or compensation of any
non-hourly and/or non-union employee(s) which is not terminable without penalty
by the Company on not more than thirty (30) days' prior written notice. Schedule
3.18 sets forth the amount of all compensation or remuneration (including any
discretionary bonuses), whether in cash, stock or otherwise, paid or to be paid
by the Company for the 1998 and 1999 calendar years to employees or consultants
who presently receive aggregate compensation or remuneration at an annual rate
in excess of $75,000 as well as all unpaid bonuses to employees as of the
Closing Date.
9
<PAGE>
(b) no union is now certified or has claimed in
writing the right to be certified as a collective bargaining agent to represent
any employees of the Company, and there are no organizational activities or
labor disputes existing or, to the best of the Stockholder's knowledge,
threatened, involving organizational activities, picketing, strikes, slowdowns,
work stoppages, job actions or lockouts of any employees of the Company.
(c) neither the Company nor the Stockholder has
received notice of any unfair labor practice charges or petitions for election
filed, pending or being litigated before the National Labor Relations Board or
any State labor relations board. The Company has not received any notice of any
actual or alleged violation of any law, regulation, order or contract term
affecting the collective bargaining rights of employees, equal opportunity in
employment, or employee health, safety, welfare, or wages and hours.
(d) the Company (i) is not a party to any
"multiemployer plan" (as defined in Section 3(37) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), and (ii) the Company has
not, at any time on or after April 29, 1980, suffered or caused any "complete
withdrawal" or "partial withdrawal" (as those terms are respectively defined in
Sections 4203 and 4205 of ERISA) therefrom on its part.
(e) with respect to any and all Employee Plans which
the Company may previously have maintained or sponsored, such Employee Plans
were administered in compliance in all material respects with all applicable
statutes, rules and regulations.
(f) except for the group medical insurance programs
and any other medical insurance listed in Schedule 3.18, the Company does not
maintain any medical, health, life or other employee benefit insurance programs
or any welfare plans (within the meaning of Section 3(1) of ERISA) for the
benefit of any current or former employees, and, except as required by statute
or governmental regulation, the Company does not have any liability, fixed or
contingent, for health or medical benefits to any former employee.
3.19 No Breach of Statute, Decree or Other Instrument. Neither
the execution and delivery of this Agreement by the Stockholder, nor the
performance of or compliance with the terms and provisions of this Agreement on
the part of the Company and/or the Stockholder (a) violates or conflicts with
any term of the Articles of Incorporation or By-Laws of the Company, or (b)
constitutes a breach or violation of any statute, law, rule or regulation of any
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governmental authority affecting the Company, results in a breach of, or
constitutes a default under, any of the terms, conditions or provisions of any
judgment, order, award, injunction, decree or Material Contract to which the
Company or the Stockholder is a party or by which the Company or the Stockholder
is bound. No consent, authorization or approval of or filing with any
governmental authority or agency, or any third party, is required on the part of
the Company or the Stockholder in connection with the consummation of the
transactions contemplated hereby. Except as set forth on Schedule 3.19, the
Company is not required, whether by law, regulation or administrative practice,
to reapply for or refile to obtain any of the material licenses, permits or
other authorizations presently held by the Company and required for the
operation of its Business as conducted on the date hereof.
3.20 Compliance with Laws. The representations and warranties
contained in this Section 3.20 relate to matters other than "Environmental
Laws," which are covered by Section 3.25 below.
(a) The Company is, and has been at all times during
the three (3) year period prior to the date hereof, in compliance, in all
respects, with all domestic, foreign, federal, state, local and municipal laws
and ordinances and governmental rules and regulations, and all requirements of
insurance carriers, applicable to its business, affairs, properties or assets.
(b) The Company has not received any notice of
default or violation, nor is the Company in default or violation, with respect
to any judgment, order, writ, injunction, decree, demand or assessment issued by
any court or any federal, state, local, municipal or other governmental agency,
board, commission, bureau, instrumentality or department, domestic or foreign,
relating to any aspect of the Company's business, affairs, properties or assets.
The Company has not received any written notice of or been charged with, and is
not, to the best of the Stockholder's knowledge, under investigation with
respect to, any violation of any provision of any federal, state, local,
municipal or other law or administrative rule or regulation, domestic or
foreign, relating to any aspect of the Company's business, affairs, properties
or assets.
3.21 Litigation. Except as set forth on Schedule 3.21, there
is no suit, action, arbitration, or legal, administrative or other proceeding,
or governmental investigation pending, or to the best knowledge of the
Stockholder, threatened, by or against the Company or any of its assets or
properties. The Stockholder is not aware of any state of facts, events,
conditions or occurrences which would constitute grounds for or the basis of any
meritorious suit, action, arbitration, proceeding or investigation against or
with respect to the Company.
3.22 Patents. Licenses and Trademarks. There are no (a)
patents, patent applications, copyright registrations and applications,
registered trade names, and trademark registrations and applications, either
domestic and foreign, which are presently owned, filed or held by the Company
and/or the Stockholder or any of the Company's directors, officers or employees
and which in any way relate to or are used in the business of the Company; (b)
licenses, either domestic and foreign, which are owned or controlled by the
Company or the Stockholder and/or any of the Company's directors, officers or
employees and which in any way relate to or are used in the business of the
Company; or (c) franchises, licenses and/or similar arrangements granted to the
Company by others and/or to others by the Company.
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3.23 Transactions with Affiliates. Except as set forth on
Schedule 3.23, neither the Stockholder nor any of its Affiliates has been
involved in any business relationship or arrangement with Company since December
31, 1997. No asset employed in the business of the Company is owned by, leased
from or leased to the Stockholder or any of the Stockholder's Affiliates, or any
officer or director of the Company, the Stockholder or any of the Stockholder's
Affiliates. Company has not made any loans to, or entered into any other
transaction with, any of its directors, officers, and employees outside of the
ordinary course of business.
3.24 Bank Accounts. Annexed hereto as Schedule 3.24 is a
correct and complete list of all bank accounts and safe deposit boxes maintained
by or on behalf of the Company, with indication of all persons having signatory,
access or other authority with respect thereto.
3.25 Environmental Matters.
(a) As used in this Section 3.25: (i) the term
"Environmental Laws" means all federal, state and local laws, statutes,
regulations, permits, orders, ordinances, codes, rules and other governmental
restrictions, requirements and duties, including common law, relating to the
treatment, storage, disposal or release of air pollutants, water pollutants or
processed waste water or otherwise relating to human health, the environment or
hazardous substances, including but not limited to the Federal Solid Waste
Disposal Act; the Federal Clean Air Act (including, without limitation, the
Clean Air Act Amendments of 1990); the Federal Water Pollution Control Act; the
Hazardous Materials Transportation Act; the Federal Toxic Substances Control
Act; the Federal Resource Conservation and Recovery Act of 1976; the National
Environmental Policy Act; the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA") and similar state laws, all
amendments to any of the foregoing statutes, and all regulations promulgated by
any federal or state agencies, including the Environmental Protection Agency,
regulations of the Nuclear Regulatory Agency, and regulations of any state
department of natural resources or state environmental protection agency now or
at any time hereinafter in effect; (ii) the terms "hazardous substances",
"release", "respond", "response", and all variations and derivatives thereof
shall mean and include, without limitation, all radioactive materials, asbestos
and asbestos-containing materials, PCB's, petroleum products and by-products,
all solid, semi-solid, liquid or gaseous substances which are toxic, ignitable,
corrosive, carcinogenic or otherwise dangerous to human, plant or animal health,
and all substances defined or listed as "hazardous substances", "toxic
substances", "hazardous waste", "toxic pollutants" in, or otherwise regulated
under any Environmental Law, including, without limitation, the meanings
ascribed to them in CERCLA.
(b) The Company has not received any notice which in
any instance (i) asserts or alleges any violation of applicable Environmental
Laws on the part of the Company, (ii) asserts or alleges that the Company is
required to clean up, remove or otherwise take remedial or other response action
due to the disposal, depositing, discharge, leaking or other release of any
hazardous substances or materials, or (iii) asserts or alleges that the Company
is required to pay all or any portion of the costs of any past, present or
future cleanup, removal or remedial or other response action which arises out of
or is related to the disposal, depositing, discharge, leaking or other release
of any hazardous substances or materials by the Company. The Company is not
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subject to any judgment, decree, order or citation related to or arising out of
any Environmental Laws. The Company has not been named or listed as a
potentially responsible party by any governmental body or agency in any matter
arising under any Environmental Laws. The Company is not a participant in, nor
does the Stockholder have actual knowledge of, any governmental investigation
involving the Company Facility or any other real estate now or heretofore owned
or leased by the Company.
(c) Neither the Company nor any other person, firm,
corporation or governmental entity has caused or permitted any hazardous
substances or other materials to be stored, deposited, treated, recycled or
disposed of on, under or at any real estate now or heretofore owned or leased by
the Company, which materials, if known to be present, may reasonably be expected
to require or authorize cleanup, removal or other remedial action under any
applicable Environmental Laws.
(d) There are not now nor have there ever been, any
tanks or other storage facilities on, under or at any real estate now or
heretofore owned or leased by the Company which contain or contained hazardous
substances or other materials which, if known to be present in soils or ground
water, may reasonably be expected to require or authorize cleanup, removal or
other remedial action under any Environmental Laws.
(e) The Company has in full force and effect all
material permits, licenses and approvals required to be maintained under any
Environmental Laws applicable to the Company or the Company Facility.
(f) The Stockholder is not aware of any monitoring
and testing equipment and records which are legally required to assess
environmental compliance in accordance with Environmental Laws, and there are no
conditions presently existing at any real estate currently occupied by the
Company which would subject the Company to any damages, penalties, cleanup costs
or other liability under Environmental Laws, or which may reasonably be expected
to require cleanup, removal, remedial action or other response under any
applicable Environmental Laws.
3.26 Schedules Incorporated by Reference. The making of any
recitation in any Schedule hereto shall be deemed to constitute a representation
and warranty that such recitation is an accurate statement and disclosure of the
information required by the corresponding Section(s) of this Agreement, as, to
the extent, and subject to the qualifications and limitations, set forth in such
corresponding Section(s).
3.27 Disclosure and Duty of Inquiry. Purchasers are not
required to undertake any independent investigation to determine the truth,
accuracy and completeness of the representations and warranties made by the
Stockholder in this Agreement. The Stockholder's representations and warranties
herein shall not be affected by any information which may come to the attention
of Purchasers during the course of any investigation heretofore or hereafter
made.
3.28 Disclosure. No representation or warranty by Stockholder
in this Agreement or in any certificate or document delivered or to be delivered
to Purchasers pursuant hereto or in connection herewith, contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact required to be stated therein or necessary to make the statements
contained therein not false or misleading.
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4. REPRESENTATIONS AND WARRANTIES OF PURCHASERS.
------------------------------------------------
Each Purchaser hereby represents and warrants to the Stockholder as
follows:
4.1 Authorization of Agreement. Such Purchaser has the full
legal right, power and authority to execute and deliver this Agreement, to
perform his obligations hereunder, and to consummate the transactions
contemplated hereby.
4.2 Valid and Binding Agreement. This Agreement constitutes
the legal, valid and binding obligations of such Purchaser, enforceable against
such Purchaser in accordance with its terms, except to the extent limited by
bankruptcy, insolvency, reorganization and other laws affecting creditors'
rights generally, and except that the remedy of specific performance or similar
equitable relief is available only at the discretion of the court before which
enforcement is sought.
4.3 No Breach of Statute or Contract. Neither the execution
and delivery of this Agreement by such Purchaser, nor compliance with the terms
and provisions of this Agreement on the part of such Purchaser: (a) requires the
issuance to such Purchaser of any authorization, license, consent or approval of
any federal or state governmental agency, or (b) conflicts with or results in a
breach of any of the terms, conditions or provisions of any judgment, order,
injunction, decree, note, indenture, loan agreement or other agreement or
instrument to which such Purchaser is a party, or by which such Purchaser is
bound, or constitutes a default thereunder.
4.4 Purchase of Stock for Investment. Such Purchaser is
acquiring ownership of the Stock for his own account, for investment purposes
only, and not with a view to the resale or distribution thereof in violation of
any applicable securities laws.
4.5 Disclosure and Duty of Inquiry. The Stockholder is not
required to undertake any independent investigation to determine the truth,
accuracy and completeness of the representations and warranties made by
Purchasers in this Agreement. Purchasers' representations and warranties herein
shall not be affected by any information which may come to the attention of the
Stockholder during the course of any investigation heretofore or hereafter made.
5. ADDITIONAL AGREEMENTS OF THE PARTIES.
----------------------------------------
5.1 Confidentiality. Notwithstanding anything to the contrary
contained in this Agreement, and subject only to any disclosure requirements
which may be imposed upon Purchasers or the Stockholder under applicable state
or federal securities or antitrust laws, it is expressly understood and agreed
by Purchasers, the Company and the Stockholder that (a) this Agreement, the
Schedules hereto, and the conversations, negotiations and transactions relating
hereto and/or contemplated hereby, and (b) all financial information, business
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records and other non-public information concerning the Company or Purchasers
which any of the Purchasers, the Company and the Stockholder or their respective
representatives has received or may hereafter receive, shall be maintained in
the strictest confidence by Purchasers, the Company and the Stockholder and
their respective representatives, and shall not be disclosed to any person that
is not associated or affiliated with any of Purchasers, the Company and the
Stockholder and involved in the transactions contemplated hereby, without the
prior written approval of the Stockholder or Purchasers, as applicable. The
parties hereto shall use their best efforts to avoid disclosure of any of the
foregoing or undue disruption of any of the business operations or personnel of
the Company or Purchasers.
6. DELIVERIES AT THE CLOSING.
-----------------------------
6.1 Deliveries by Stockholder. Concurrently herewith,
Stockholder is delivering to Purchasers the following:
(a) Certified resolutions of the Board of Directors
and, if required, the shareholders of Stockholder in form reasonably
satisfactory to counsel for Purchasers, authorizing Stockholder's execution,
delivery and performance of this Agreement and all other actions to be taken by
Stockholder hereunder;
(b) A certificate or telegram issued by the Secretary
of State of the State of California, evidencing the good standing of the Company
in such jurisdiction as of a date not more than ten (10) calendar days prior to
the Closing Date;
(c) Consents of (i) California Bank & Trust and
Manufacturers Bank, the senior secured lenders to the Company and the
Stockholder (collectively, the "Senior Lenders") and Sirrom Capital Corporation
and Pine Creek Capital Partners, L.P. (collectively, the "Subordinated
Lenders"), and (ii) to the extent required under such Material Contract, any
third party to a Material Contract binding upon the Company or the Stockholder,
or (iii) any governmental authorities or agencies, to the extent such consent
shall be required in connection with the consummation of the transactions
contemplated by this Agreement;
(d) A release of Company from all obligations to the
Senior Lenders and Subordinated Lenders, including a release by the Senior
Lenders of the pledge of the Stock and all liens on any of the assets of Company
(including UCC-3 termination statements in a form suitable for filing with the
California Secretary of State), including the termination of any lockbox
arrangements with respect to the collection of Company's accounts receivable;
(e) Evidence satisfactory to Purchasers that (i) the
amount of the Lease Payable Obligations does not exceed $1,000,000 as of the
Closing Date; and (ii) $25,000 advance to Stockholder in April, 1999 shall have
been repaid by Stockholder or deducted from the Purchase Price;
(f) An assignment to Purchasers of Stockholder's
rights, if any, under Section 12 of the Stock Purchase Agreement dated as of
January 28, 1998 between Stockholder and Werner Schulz and Carolyn Schulz,
trustees ("Sellers");
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(g) The written resignations, dated and effective on
the date hereof, of such of the officers and directors of the Company as may be
requested by Purchasers;
(h) The opinion of Greenberg Traurig, counsel to
Stockholder;
(i) Executed copies of the Escrow Agreement and a
Notice of Security Interest in Deposit Account;
(j) Copies of all books and records with respect to
tax matters relating to any taxable period of the Company beginning prior to the
Closing Date;
(k) Such certificates and documents as may be
necessary or appropriate to change the authorized signatories on all bank
accounts and/or safe deposit boxes maintained by or in the name of the Company;
(l) Evidence satisfactory to Purchasers that
Stockholder has amended its federal and state consolidated tax returns in a
manner satisfactory to Purchasers; and
(m) Minute books and stock records of Company.
6.2 Deliveries by Purchasers. Concurrently herewith,
Purchasers are delivering to Company the following:
(a) The Purchase Price;
(b) Executed copies of the Escrow Agreement and a
Notice of Security Interest in Deposit Account; and
(c) The opinion of Messrs. Stern, Neubauer, Greenwald
& Pauly, counsel to Purchasers.
6.3 Cancellation of Certain Obligations. On the Closing Date
(a) each of the Stockholder and AB Plastics Corporation (a wholly-owned
subsidiary of Stockholder) and all other Affiliates of the Stockholder or AB
Plastics Corporation (other than the Company) shall be deemed to have canceled
any and all debts, liabilities, intercompany receivables, and all other monetary
obligations owed to any of them by the Company for all periods through and
including the Closing Date, and (b) the Company shall be deemed to have canceled
any and all debts, liabilities, intercompany receivables, and all other monetary
obligations owed to the Company by the Stockholder, AB Plastics Corporation or
any other Affiliate of Stockholder or AB Plastics Corporation (other than the
Company).
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7. INDEMNIFICATION.
-------------------
7.1 General.
(a) The Stockholder shall defend, indemnify and hold
harmless the Company and each Purchaser from, against and in respect of any and
all claims, losses, costs, expenses, obligations, liabilities, damages,
recoveries and deficiencies, including costs of investigation, interest,
penalties and reasonable attorneys' fees, that the Company and/or Purchasers may
incur, sustain or suffer (collectively "Purchasers Losses") as a result of any
breach of, or failure by the Stockholder to perform, any of the representations,
warranties, covenants or agreements of the Stockholder contained in this
Agreement or in any Schedule(s) furnished by or on behalf of the Stockholder
under this Agreement.
(b) The Purchasers shall jointly and severally
defend, indemnify and hold harmless the Stockholder from, against and in respect
of any and all claims, losses, costs, expenses, obligations, liabilities,
damages, recoveries and deficiencies, including costs of investigation,
interest, penalties and reasonable attorneys' fees, that the Stockholder may
incur, sustain or suffer (collectively, the "Stockholder Losses") as a result of
any breach of, or failure by the Purchasers to perform, any of the
representations, warranties, covenants or agreements of the Purchasers contained
in this Agreement.
(c) Purchaser Losses or Stockholder Losses are
hereinafter referred to as "Losses", as they relate to the applicable party or
parties in Sections 7.3 and 7.4 below.
7.2 Limitations on Certain Indemnity; Right Offset.
(a) Except with respect to any Purchasers Losses
involving fraud by the Stockholder, the Stockholder shall not be liable to
Purchasers or the Company with respect to Purchaser Losses unless and until, and
then only to the extent that, the aggregate amount of all Purchaser Losses shall
exceed the sum of $75,000 (the "Basket"); provided that the Basket shall not be
applicable to a breach of Section 3.7(f). The Stockholder shall thereafter be
liable for all Purchaser Losses relating back to the first dollar, up to the
aggregate amount of the Consideration set forth in Section 2.1 hereof.
(b) Duration of Indemnity for Breach of Warranty. The
Company and Purchasers shall be entitled to indemnification by the Stockholder
for Purchaser Losses, and the Stockholder shall be entitled to indemnification
by Purchasers for Stockholder Losses, only in respect of claims for which notice
of claim shall have been given on or before the first anniversary of the Closing
Date; provided that:
(i) with respect to Purchaser Losses
relating to a breach of any warranties relating to tax matters covered by
Section 3.9 or environmental matters covered by Section 3.25 above, claims may
be asserted at any time in the future, subject to any applicable statute of
limitations; and
(ii) neither Purchasers, the Company nor the
Stockholder shall be entitled to indemnification in the event that the subject
claim for indemnification relates to a third-party claim and the prospective
indemnified party (as the case may be) delayed giving notice thereof to such an
extent as to cause material prejudice to the defense of such third-party claim.
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(c) Rights of Offset. In the event that the Company
or Purchasers shall suffer or incur any Purchaser Losses which are established
pursuant to a written settlement agreement, arbitrators' decision or judicial
determination, the Company and Purchasers shall have the right (in addition to
any and all other rights and remedies, all of which may be exercised separately
or concurrently) to recover the amount of such Purchaser Losses by means of
offset against any amounts in the Holdback Escrow.
7.3 Resolution of Disputes: Binding Arbitration.
(a) Whenever a claim shall arise for which any party
shall be entitled to indemnification hereunder, the indemnified party shall
notify the indemnifying party in writing within thirty (30) days of the
indemnified party's first receipt of notice of, or the indemnified party's
obtaining actual knowledge of, such claim and in any event within fifteen (15)
days of the date a response may be due with respect to such claim. Such notice
shall specify all facts known to the indemnified party giving rise to such
indemnity rights and shall estimate (to the extent reasonably possible) the
amount of potential liability arising therefrom. If the indemnifying party shall
be duly notified of such dispute, the parties shall attempt to settle and
compromise the same.
(b) In the event that any dispute relating to
indemnification hereunder or otherwise involving the interpretation or
application of this Agreement, any Schedule or Exhibit hereto or any other
document delivered in connection herewith cannot be settled or compromised, as
aforesaid, within twenty (20) days of receipt of the subject claim, either the
indemnified party or the indemnifying party shall promptly thereafter submit the
dispute to the American Arbitration Association in Santa Clara County,
California for final and binding arbitration before a panel of three arbitrators
(each of whom shall be reasonably experienced and qualified in commercial
transactions), one of whom shall be selected by the indemnified party, one of
whom shall be selected by the indemnifying party and the third of whom shall be
selected by the other two arbitrators; all of which panel of arbitrators shall
be selected within twenty (20) days of submission of such dispute to the
American Arbitration Association. The parties shall use their collective best
efforts to promptly schedule and conduct the hearings before such arbitrators,
with a view toward concluding such arbitration proceedings not later than thirty
(30) days from the first submission of the dispute to arbitration. In addition
to, and not in lieu of, arbitration as a means of dispute resolution hereunder,
any party hereto shall have the right to seek specific enforcement of this
Agreement, or other injunctive or equitable relief or remedy before any court of
competent jurisdiction.
(c) In connection with any arbitration pursuant to
this Section 7.3, the arbitrators shall, as part of their award, allocate the
fee of the American Arbitration Association, the cost of any transcripts, and
the parties' reasonable attorneys' fees, based upon and taking into account the
arbitrators' determination of the merits and good faith of the parties' claims
and defenses in the subject proceeding.
(d) The decision and award of the arbitrators shall
be final and binding upon the parties hereto and shall be enforceable in any
court of competent jurisdiction, including any federal or state court in
California.
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(e) Any rights of indemnification established by
reason of such settlement, compromise, arbitration or litigation shall promptly
thereafter be satisfied by the indemnifying party in such amount as shall be
necessary to satisfy all applicable Losses determined in accordance with such
settlement and compromise, or by final nonappealable order or judgment of the
applicable judicial or arbitration panel.
7.4 Defense and Settlement. In connection with the defense of
any third party claims for which claims for indemnification have been made
hereunder, each party will provide reasonable access to its and the Company's
books and records as and to the extent required for the proper defense of such
third party claim. Neither party shall consent to any settlement or purport to
bind any other party to any settlement without the written consent of the other
party.
7.5 Working Capital. Notwithstanding Sections 7.3 and 7.4
hereof, determination of Purchaser Losses with respect to Section 3.7(f) shall
be governed by this Section 7.5. Within ninety (90) days after the Closing Date,
if Purchasers determine that the Working Capital as of the Closing Date is less
than $2,350,000, Purchasers shall prepare and deliver to Stockholder supporting
calculations which shall be consistent with Exhibit "C" (the "Purchasers'
Proposed Calculations"). Within fifteen (15) days after receipt of Purchasers'
Proposed Calculations, the Stockholder shall notify Purchasers of the
Stockholder's agreement or disagreement with Purchasers' Proposed Calculations.
If the Stockholder does not so notify Purchasers within such fifteen (15) day
period, Purchasers' Proposed Calculations shall be deemed accepted by the
Stockholder. If, however, the Stockholder disagrees with Purchasers' Proposed
Calculations, and Purchasers do not accept the Stockholder's proposed
alternative calculations consistent with Exhibit "C" (the "Stockholder's
Proposed Calculations"), then the Stockholder and Purchasers shall negotiate in
good faith to resolve the remaining disputed items (the "Remaining Disputed
Items"). In the event that the Stockholder and Purchasers do not resolve the
Remaining Disputed Items within fifteen (15) days after the date of Purchasers'
rejection of the Stockholder's Proposed Calculations, the Stockholder and
Purchasers shall engage Ernst & Young (the "Independent Accounting Firm") to
resolve the Remaining Disputed Items within thirty (30) days after the date of
its engagement by conducting its own review of the Remaining Disputed Items and
thereafter selecting either Purchasers' Proposed Calculations of the Remaining
Disputed Items, or the Stockholder's Proposed Calculations of the Remaining
Disputed Items, or an amount in between the two. Each of Purchasers and
Stockholder agrees that it shall be bound by the determination of the Remaining
Disputed Items by the Independent Accounting Firm. The fees and expenses of the
Independent Accounting Firm shall be paid jointly, one-half by Purchasers and
one-half by the Stockholder. If the Working Capital as adjusted pursuant to this
Section is less than $2,350,000, the difference shall be a Purchaser Loss for
purposes of Section 7.1.
8. COSTS.
---------
8.1 Finder's or Broker's Fees. Each Purchaser (on the one
hand) and the Stockholder (on the other hand) represent and warrants that
neither it nor any of their respective Affiliates dealt with any broker or
finder in connection with any of the transactions contemplated by this
Agreement, and no broker or other person is entitled to any commission or
finder's fee in connection with any of the transactions contemplated hereby.
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8.2 Closing Expenses. Each Purchaser and the Stockholder shall
each pay all of their own respective professional fees and other costs and
expenses incurred or to be incurred by them, respectively, in negotiating and
preparing this Agreement and in closing and carrying out the transactions
contemplated by this Agreement; provided, that nothing herein contained shall be
deemed to prohibit the payment by the Company of professional fees and other
costs and expenses incurred or to be incurred by the Company in the continuing
course of its business.
9. POST-CLOSING COVENANTS.
--------------------------
9.1 Income Taxes.
(a) Post-Closing Audits. In the event of any
investigation or audit with respect to any tax report or tax return of the
Company for any period prior to the Closing Date, Purchasers shall cause the
Company to give prompt written notice thereof to the Stockholder. Similarly, in
the event that the Stockholder shall be apprised of any such investigation or
audit prior to the Company being apprised thereof, the Stockholder shall give
prompt written notice thereof to the Company, and shall permit the Company and
its representatives to participate therein and receive copies of all notices and
communications in connection therewith. The Stockholder shall not enter into any
settlement of any such investigation or audit unless such settlement shall be
approved in writing by the Purchasers and the Company. Neither the Purchasers
nor the Company shall enter into any settlement of any such investigation or
audit which could reasonably be expected to result in any reduction in net
operating loss carryforwards or carrybacks, tax, penalty, interest, cost or
other liability to Stockholder without, in each such instance, the prior
approval of the Stockholder. In connection with any such investigation or audit,
each party shall be responsible for its own costs and expenses, except to the
extent otherwise agreed to in any written agreement hereafter entered into and
signed by the party to be charged therewith.
(b) Retention of Records. Stockholder agrees (a) to
retain all original books and records with respect to any taxable period of the
Company beginning before the Closing Date until the expiration of the statute of
limitations (and any extensions thereof) and to abide by all record retention
agreements entered into with any taxing authority, and (b) to give the
Purchasers reasonable written notice prior to transferring, destroying or
discarding any such books and records and, if Purchasers so request, the
Stockholder shall allow Purchasers to take possession of such books and records.
(c) Tax Sharing Agreements. Any tax sharing agreement
between Stockholder and Company is terminated as of the Closing Date and will
have no further effect for any taxable year (whether the current year, a future
year, or a past year).
(d) Taxes of Other Persons. Stockholder agrees to
indemnify Purchasers from and against the entirety of any Losses the Purchasers
may suffer resulting from, arising out of, relating to, in the nature of, or
caused by any liability of the Company for taxes of any Person other than the
Company (i) under Reg. ss.1.1502-6 (or any similar provision of state, local or
foreign law), (ii) as a transferee or successor, (iii) by contract, or (iv)
otherwise.
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(e) Returns for Periods Through the Closing Date.
Stockholder will include the income of the Company on the Stockholder's
consolidated federal and state income tax returns for all periods through the
Closing Date for which consolidation is required and pay any federal and state
income taxes attributable to such income. The Company will furnish tax
information to Stockholder for inclusion in Stockholder's consolidated income
tax returns for the period which includes the Closing Date. Stockholder will
allow the Purchasers an opportunity to review and comment upon such tax returns
(including any amended returns) to the extent that they relate to the Company
that would adversely affect the Company after the Closing Date. Stockholder
agrees to provide Purchasers with a copy of Stockholder's consolidated federal
income tax return for the year ended October 31, 1999 in order to permit
Purchasers to calculate any losses allowable to the Company. The income of the
Company will be apportioned to the period up to and including the Closing Date
and the period after the Closing Date by closing the books of the Company as of
the close of business on the Closing Date.
(f) Amendment of Company Income Tax Returns. The
Company shall not, nor shall either the Stockholder nor the Purchasers permit
the Company to, amend its federal or state income tax returns for any tax period
during which the capital stock of the Company was owned by the Stockholder or
the Purchasers or (if within the applicable statute of limitations for imposing
a State of California income tax, interest or penalties on Stockholder) prior
thereto, without, in each such instance, the prior written approval of the other
party hereto, which approval shall not be unreasonably withheld or delayed.
9.2 Further Assurances. From time to time from and after the
Closing Date, the parties shall execute and deliver, or cause to be executed and
delivered, any and all such further agreements, instruments, certificates and
other documents, and shall take or cause to be taken any and all such further
action, as any of the parties may reasonably deem necessary or desirable in
order to carry out the intent and purposes of this Agreement.
10. FORM OF AGREEMENT.
----------------------
10.1 Effect of Headings. The Section headings used in this
Agreement and the titles of the Schedules hereto are included for purposes of
convenience only, and shall not affect the construction or interpretation of any
of the provisions hereof or of the information set forth in such Schedules.
10.2 Entire Agreement; Waivers. This Agreement (including the
Schedules and Exhibits hereto) constitutes the entire agreement between the
parties pertaining to the subject matter hereof and thereof, and supersede all
prior agreements or understandings as to such subject matter. No party hereto
has made any representation or warranty or given any covenant to the other
except as set forth in this Agreement and the Schedules and Exhibits hereto. No
waiver of any of the provisions of this Agreement shall be deemed, or shall
constitute, a waiver of any other provisions, whether or not similar, nor shall
any waiver constitute a continuing waiver. No waiver shall be binding unless
executed in writing by the party making the waiver.
21
<PAGE>
10.3 Counterparts. This Agreement may be executed
simultaneously in any number of counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
11. PARTIES.
11.1 Parties in Interest. Nothing in this Agreement, whether
expressed or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any persons other than the parties to it and their
respective heirs, executors, administrators, personal representatives,
successors and permitted assigns, nor is anything in this Agreement intended to
relieve or discharge the obligations or liability of any third persons to any
party to this Agreement, nor shall any provision give any third persons any
right of subrogation or action over or against any party to this Agreement.
11.2 Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given (a) on the date of service, if served personally on the
party to whom notice is to be given, (b) on the day after the date sent by
recognized overnight courier service with all charges prepaid or billed to the
account of the sender, (c) three (3) days after being deposited in the United
States mail if sent by first class mail, registered or certified, postage
prepaid, or (d) when sent by facsimile transmission, to the party being notified
at its address or facsimile number set forth below or such other address or
facsimile number as any party hereto shall subsequently notify all other parties
hereto in writing:
(i) If to Stockholder:
Compass Plastics & Technologies, Inc.
15730 South Figueroa Street
Gardena, California 90248
Attention: President
fax no. (310) 523-9859
with a copy to:
Greenberg Traurig
200 Park Avenue - 15th Floor
New York, New York 10166
Attention: Stephen A. Weiss, Esq.
fax no. (212) 801-6400
22
<PAGE>
(ii) If to the Purchasers:
Daniel P. Flamen
Timothy E. Howard
485 Ramona Street
Palo Alto, California 94301
fax no. (650) 328-8301
with a copy to:
Stern, Neubauer, Greenwald & Pauly
1299 Ocean Avenue, Tenth Floor
Santa Monica, California 90401
Attention: Donald E. Karl, Esq.
fax no. (310) 395-5961
or to such other address as either party shall have specified by notice in
writing given to the other party.
12. MISCELLANEOUS.
------------------
12.1 Amendments and Modifications. No amendment or
modification of this Agreement or any Exhibit or Schedule hereto shall be valid
unless made in writing and signed by the party to be charged therewith.
12.2 Binding Effect. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, personal representatives, successors and permitted
assigns.
12.3 Entire Agreement. This Agreement represents the entire
agreement between the parties with respect to the subject matter hereof, and
supersedes all other agreements, written or oral, between the parties with
respect thereto.
12.4 Governing Law: Jurisdiction. This Agreement shall be
construed and interpreted and the rights granted herein governed in accordance
with the laws of the State of California applicable to contracts made and to be
performed wholly within such State. Except as otherwise provided in Section 7.3
above, any claim, dispute or controversy arising under or in connection with
this Agreement or any actual or alleged breach hereof shall be settled
exclusively by arbitration to be held before a single arbitrator in Santa Clara
County, California, or in any other locale or venue as legal jurisdiction may
otherwise be had over the party against whom the proceeding is commenced, in
accordance with the commercial arbitration rules of the American Arbitration
Association then obtaining. As part of his or her award, the arbitrator shall
make a fair allocation of the fee of the American Arbitration Association, the
cost of any transcript, and the parties' reasonable attorneys' fees, taking into
account the merits and good faith of the parties, claims and defenses. Judgment
may be entered on the award so rendered in any court having jurisdiction. Any
process or other papers hereunder may be served by registered or certified mail,
return receipt requested, or by personal service, provided that a reasonable
time for appearance or response is allowed.
23
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on and as
of the date first set forth above.
Stockholder: COMPASS PLASTICS & TECHNOLOGIES, INC.
By: /s/ Michael A. Gibbs
----------------------------------
Michael A. Gibbs, President
Purchasers:
/s/ Daniel P Flamen
--------------------------------------
DANIEL P. FLAMEN
/s/ Timothy E. Howard
--------------------------------------
TIMOTHY E. HOWARD
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