<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 28, 1998
REGISTRATION STATEMENT NO. 333-58675
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
KEY COMPONENTS, LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3400 04-3425424
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION IDENTIFICATION NO.)
CODE IDENTIFICATION NO.)
</TABLE>
------------------------
KEY COMPONENTS FINANCE CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3400 14-1805946
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION IDENTIFICATION NO.)
CODE IDENTIFICATION NO.)
</TABLE>
------------------------
B. W. ELLIOTT MANUFACTURING CO., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEW YORK 3400 15-0585760
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION IDENTIFICATION NO.)
CODE IDENTIFICATION NO.)
</TABLE>
------------------------
HUDSON LOCK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3400 22-2973848
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION IDENTIFICATION NO.)
CODE IDENTIFICATION NO.)
</TABLE>
------------------------
ESP LOCK PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3400 04-3192780
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION IDENTIFICATION NO.)
CODE IDENTIFICATION NO.)
</TABLE>
------------------------
WING ROAD RR1,
BOX 167D
MILLBROOK, NEW YORK 12545
(516) 677-8383
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
------------------------
ALAN L. RIVERA
VICE-PRESIDENT
KEY COMPONENTS, INC.
C/O MILLBROOK CAPITAL MANAGEMENT, INC.
152 WEST 57TH STREET
NEW YORK, NEW YORK 10019
(212) 586-4333
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
PAUL A. GAJER, ESQ.
RUBIN BAUM LEVIN CONSTANT & FRIEDMAN
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
(212) 698-7700
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of the Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(d) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1) OFFERING PRICE(1)(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 1/2% Senior Notes Due 2008............ $80,000,000 100% $80,000,000 $23,600.00
- ---------------------------------------------------------------------------------------------------------------------------------
Subsidiary Guarantees of Senior Notes.... $80,000,000 100% $80,000,000 (3)
- ---------------------------------------------------------------------------------------------------------------------------------
Amount Previously Paid.................................................................................... $23,600.00
Amount Owed............................................................................................... $ 0
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee.
(2) Calculated pursuant to Rule 457(f) and (o).
(3) No separate registration fee is required pursuant to Rule 457(n).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 28, 1998
PROSPECTUS
KEY COMPONENTS, LLC
KEY COMPONENTS FINANCE CORP. [KCI LOGO]
OFFER TO EXCHANGE 10 1/2% SENIOR NOTES DUE 2008
FOR ANY AND ALL OUTSTANDING 10 1/2% SENIOR NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998 UNLESS EXTENDED.
------------------------
Key Components, LLC, a Delaware limited liability company ("KC LLC"), and
Key Components Finance Corp., a Delaware corporation and a wholly-owned
subsidiary of KC LLC ("Finance Corp." and, together with KC LLC, the "Issuers"),
are jointly offering, upon the terms and subject to the conditions set forth in
this Prospectus (the "Prospectus") and the accompanying related Letter of
Transmittal (the "Letter of Transmittal" which, together with the Prospectus
constitute the "Exchange Offer"), to exchange up to $80,000,000 aggregate
principal amount of 10 1/2% Senior Notes due 2008, (the "New Notes") of the
Issuers for a like principal amount of their issued and outstanding 10 1/2%
Senior Notes due 2008 (the "Old Notes" and, together with the New Notes, the
"Notes"). As of the date of this Prospectus there were outstanding $80,000,000
principal amount of Old Notes. The terms of the New Notes are identical in all
material respects to the Old Notes, except that the New Notes will have been
registered under the Securities Act of 1933 as amended (the "Securities Act")
and, therefore, the New Notes will not be subject to certain transfer
restrictions, registration rights and related provisions applicable to the Old
Notes.
Interest on each New Note issued pursuant to the Exchange Offer will accrue
from the last interest payment date on which interest was paid on the Old Notes
surrendered in exchange therefor or, if no interest has been paid, from the
original date of issuance of the Old Notes.
Interest on the Notes will be payable semi-annually on June 1 and December
1 of each year, commencing on December 1, 1998. The Notes will mature on June 1,
2008 unless previously redeemed. The Notes will be redeemable, in whole or in
part, at the option of the Issuers, at any time and from time to time on or
after June 1, 2003, at the redemption prices set forth herein, plus accrued and
unpaid interest, if any, thereon, to the date of redemption. In addition, at any
time and from time to time on or prior to June 1, 2001, the Issuers may redeem
up to 33 1/3% of the original aggregate principal amount of the Notes with the
Net Cash Proceeds (as defined) of one or more Equity Offerings (as defined) at
the redemption prices set forth herein, plus accrued and unpaid interest, if
any, thereon, to the date of redemption; provided, however, that at least
66 2/3% of the original aggregate principal amount of the Notes remains
outstanding following each such redemption; and provided, further, that such
redemption shall occur within 60 days of the closing of any such Equity
Offering. Upon the occurrence of a Change of Control (as defined) (i) the
Issuers will have the option, at any time prior to June 1, 2003, to redeem the
Notes, in whole, at a redemption price equal to 100% of the principal amount
thereof plus the Applicable Premium (as defined) together with accrued and
unpaid interest, if any, to the date of redemption and (ii) if the Issuers have
not redeemed the Notes, each holder of the Notes may require the Issuers to
repurchase such holder's Notes, in whole or in part, at a repurchase price of
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
thereon, to the date of repurchase. There can be no assurance, however, that
sufficient funds will be available to the Issuers when necessary to make any
required repurchases. See "Description of Notes."
The Notes will be unsecured, senior obligations of the Issuers, will rank
pari passu in right of payment with all other existing and future senior
indebtedness of the Issuers and will rank senior in right of payment to all
existing and future subordinated indebtedness of the Issuers. The Notes will be
fully and unconditionally guaranteed, jointly and severally, on an unsecured,
senior basis, by B.W. Elliott Manufacturing Co., Inc., Hudson Lock, Inc. and ESP
Lock Products, Inc. (the "Subsidiary Guarantors"). The Subsidiary Guarantees (as
defined) will be general, unsecured, senior obligations of the Subsidiary
Guarantors, ranking senior in right of payment to all existing and future
subordinated obligations of the Subsidiary Guarantors and pari passu in right of
payment to all existing and future senior indebtedness of the Subsidiary
Guarantors. As of June 30, 1998, the Issuers had no secured indebtedness and $80
million of senior indebtedness (representing the outstanding Old Notes). As of
the same date, the aggregate principal amount of senior indebtedness of the
Subsidiary Guarantors outstanding (other than the Subsidiary Guarantees) would
have been approximately $1.5 million, all of which is secured indebtedness. The
Indenture relating to the Notes (the "Indenture") permits the Issuers and the
Subsidiary Guarantors to incur additional indebtedness, including secured
indebtedness, subject to certain limitations. See "Description of Notes." As of
June 30, 1998, the Issuers and the Subsidiary Guarantors would have collectively
been able to borrow an additional $50 million, based on the limitations
contained in the Indenture.
(continued on next page)
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 3
(continued from cover)
The Old Notes were originally issued and sold in a transaction that was
exempt from registration under the Securities Act (the "Initial Offering") and
resold to qualified institutional buyers in reliance on, and subject to the
restrictions imposed pursuant to, Rule 144A under the Securities Act ("Rule
144A") and outside the United States in accordance with Regulation S of the
Securities Act ("Regulation S"). The New Notes are being offered hereunder in
order to satisfy certain obligations of the Issuers under the Exchange and
Registration Rights Agreement, dated May 20, 1998, among the Issuers and the
other signatories thereto (the "Exchange and Registration Rights Agreement"),
relating to the Old Notes. Based upon interpretations by the staff of the
Securities and Exchange Commission (the "Commission"), as set forth in no-action
letters to third parties in other transactions (including Exxon Capital Holdings
Corporation (available May 13, 1988), Morgan Stanley & Co. Incorporated
(available June 5, 1991), K-III Communications Corporation (available May 14,
1993) and Shearman & Sterling (available July 2, 1993)), the Issuers believe
that the New Notes issued pursuant to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by each holder
thereof (other than any such holder which is (i) an "affiliate" of the Issuers
within the meaning of Rule 405 under the Securities Act, (ii) a broker-dealer
who acquired Old Notes directly from Issuers or (iii) a broker-dealer who
acquired Old Notes as a result of market-making or other trading activities
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that (a) the New Notes are acquired in the ordinary
course of such holders' business (b) such holder has no arrangement or
understanding with any person to participate in the distribution of such New
Notes and (c) such holder is not engaged in, and does not intend to engage in a
distribution of the New Notes. Any holder who is an "affiliate" of the Issuers,
or any holders of Old Notes which, at the time of the commencement of the
Exchange Offer, are engaged in, intend to engage in, or have an arrangement to
engage in, a distribution of the New Notes may not rely on the applicable
interpretations of the staff of the Commission set forth in the above-mentioned
interpretive letters, will not be permitted or entitled to tender such Old
Notes, and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction unless such sale is made pursuant to any exemption from such
requirements. In addition, since the Commission has not considered the Exchange
Offer in the context of a no-action letter, there can be no assurance that the
staff of the Commission would make a similar determination with respect to the
Exchange Offer as in such other circumstances. Each holder of Old Notes that
desires to participate in the Exchange Offer will be required to make certain
representations described in "The Exchange Offer -- Terms of the Exchange
Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Issuers have agreed that, for a period of 90 days after the
Expiration Date (as defined), they will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
The New Notes will be represented by one or more Global Securities (as
defined) registered in the name of a nominee of The Depository Trust Company
("DTC"), as Depositary. Beneficial interest in the Global Securities will be
shown on, and transfers will be effected only through records maintained by the
Depositary and its participants. See "Description of New Notes--Book-Entry,
Delivery and Form."
THE EXCHANGE OFFER IS NOT BEING MADE, NOR WILL THE ISSUERS ACCEPT SURRENDER
FOR EXCHANGE FROM HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE
OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES
AND BLUE SKY LAWS OF SUCH JURISDICTION.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes tendered. The Exchange Offer will expire at 5:00 p.m., New York City
time, on , 1998, unless extended by the Issuers (such time and
date as it may be so extended, the "Expiration Date"). In no event, however,
shall the Expiration Date be later than November 9, 1998. The date of acceptance
for exchange of the Old Notes will be the first business day following the
Expiration Date, upon surrender of the Old Notes. Old Notes tendered pursuant to
the Exchange Offer may be withdrawn at any time prior to the Expiration Date;
otherwise such tenders are irrevocable. New Notes to be issued in exchange for
properly tendered Old Notes will be delivered through the facilities of DTC by
the Exchange Agent (as defined) promptly after the acceptance thereof. The
Issuers will not receive any proceeds from the Exchange Offer. The Issuers will
pay all the expenses incident to the Exchange Offer. Tenders of Old Notes
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date. In the event the Issuers terminate the Exchange Offer and do
not accept for exchange any Old Notes, the Issuers will promptly return all
previously tendered Old Notes to the holders thereof. See "The Exchange Offer."
Prior to the Exchange Offer, there has been no public market for the Notes.
The Issuers do not currently intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance that an active public market for the New Notes
will develop. To the extent Old Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Old Notes
may be adversely affected. See "Risk Factors -- Absence of Public Market;
Adverse Effect on Market for Old Notes."
UNTIL , 1998 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE
OFFER), ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
<PAGE> 4
AVAILABLE INFORMATION
This Prospectus constitutes part of a Registration Statement (which term
includes any amendments thereto, the "Registration Statement") filed by the
Issuers with the Commission on Form S-4 under the Securities Act or 1933, as
amended (the "Securities Act"), with respect to the New Notes offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all of the information included in the Registration Statement and
the exhibits and schedules thereto. Statements contained in this Prospectus as
to the contents of any contract or other document referred to herein or therein
and filed as an exhibit to the Registration Statement are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information with respect to the Issuers and the New Notes, reference is hereby
made to the Registration Statement and the exhibits and schedules thereto.
As a result of the Exchange Offer, the Company will become subject of the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith will file periodic reports and other information with the Commission.
The Issuers have agreed that, whether or not they are required to do so by the
rules and regulations of the Commission, for so long as the Notes remain
outstanding, they will furnish the registered holders of the Notes and, to the
extent permitted by applicable law or regulation, file with the Commission, all
quarterly, and annual reports and the information, documents and other reports
that are specified in Sections 13(a) and 15(d) of the Exchange Act. The
Registration Statement, all exhibits and schedules thereto and all reports,
proxy statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661-2511. Copies of such material can also be obtained at
prescribed rates by writing to the Commission, Public Reference Section, Room
1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and such
material is contained on the worldwide web site maintained by the Commission at
http://www/sec/gov.
ii
<PAGE> 5
MARKET DATA USED THROUGHOUT THIS PROSPECTUS WAS OBTAINED FROM INTERNAL
COMPANY SOURCES, INDUSTRY PUBLICATIONS AND OTHER CURRENTLY AVAILABLE
INFORMATION. INDUSTRY PUBLICATIONS GENERALLY STATE THAT THE INFORMATION
CONTAINED THEREIN HAS BEEN OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, BUT
THERE CAN BE NO ASSURANCE AS TO THE ACCURACY AND COMPLETENESS OF SUCH
INFORMATION. THE COMPANY HAS NOT INDEPENDENTLY VERIFIED SUCH MARKET DATA.
SIMILARLY, INTERNAL COMPANY SOURCES, WHILE BELIEVED BY THE COMPANY TO BE
RELIABLE, HAVE NOT BEEN VERIFIED BY ANY INDEPENDENT SOURCES.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS." ALL STATEMENTS OTHER
THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING
WITHOUT LIMITATION, CERTAIN STATEMENTS UNDER THE CAPTIONS "PROSPECTUS SUMMARY,"
"RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS" AND LOCATED ELSEWHERE HEREIN REGARDING THE
COMPANY'S OPERATIONS, FINANCIAL POSITION AND BUSINESS STRATEGY, MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS. IN ADDITION, FORWARD-LOOKING STATEMENTS GENERALLY
CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY,"
"WILL," "EXPECT," "INTENT," "ESTIMATE," "ANTICIPATE," "BELIEVE," OR "CONTINUE"
OR THE NEGATIVES THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH
THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS ARE REASONABLE AT THIS TIME, IT CAN GIVE NO ASSURANCE THAT SUCH
EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY
STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION IN
CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND
UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
iii
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus, including information
under "Risk Factors." Unless otherwise indicated, all references to "KCI" or the
"Company" refer collectively, at all times prior to the date of consummation of
the Initial Offering (the "Closing Date"), to Key Components, Inc. and its
predecessors and subsidiaries, and at all times on or after the Closing Date, to
Key Components, LLC, ("KC LLC") and its predecessors and subsidiaries, in each
such case including Key Components Finance Corp. ("Finance Corp."), Hudson Lock,
Inc. ("Hudson"), ESP Lock Products, Inc. ("ESP") and B.W. Elliott Manufacturing
Co., Inc. ("Elliott" which, together with Hudson and ESP are sometimes
collectively referred to herein as the "Operating Subsidiaries").
THE COMPANY
KCI is a leading manufacturer of custom engineered essential componentry
for application in a diverse array of end-use products. The Company targets
original equipment manufacturer ("OEM") markets where KCI believes its
value-added engineering and manufacturing capabilities, along with its timely
delivery, reliability and customer service, enable it to differentiate the
Company from its competitors and enhance profitability. KCI, through its
Operating Subsidiaries, has been designing and manufacturing medium-security
locks and related accessories since 1963 and flexible shaft products since 1932.
The Company's locks and associated hardware are designed to be utilized in a
wide range of end-use markets including the office furniture, point of sale
("POS") terminal and bank and postal accessory markets (the "Specialty Lock
Business"). The Company's flexible shaft products are produced for both rotary
power transmission and remote valve control applications in the industrial,
aerospace and commercial markets (the "Flexible Shaft Business"). The Company
benefits from a diverse customer base, with pro forma sales to approximately
2,200 customers in fiscal 1997 and with the largest customer representing
approximately 7.2% of pro forma consolidated net sales. KCI's products are
critical to the design and function of its customers' products and management
believes the majority of KCI's sales (approximately 62.0% of fiscal 1997 pro
forma consolidated net sales) are to customers for which the Company is the
primary (greater than 70.0% of the customer's total requirements for the
particular product) supplier. For the pro forma year ended December 31, 1997 and
the six months ended June 30, 1998, the Company had net sales of $59.0 million
and $33.0 million, respectively, representing an increase over the pro forma
amounts for the same periods in the previous years of 11.2% and 11.5%,
respectively.
The Specialty Lock Business
The Company, through its wholly-owned subsidiaries, Hudson and ESP, is a
leading domestic designer and manufacturer of medium-security custom and
specialty locks and locking systems. The Specialty Lock Business products are
engineered to meet OEM customers' specifications for use in end products such as
office furniture, electronic cash registers, bank bags, post office boxes and
storage lockers. The Company's expertise in co-engineering product designs with
its customers, substantial manufacturing and testing capabilities and focus on
customer service, have enabled the Company to become the primary supplier to the
majority, in terms of sales, of its Specialty Lock Business customers. Customers
of the Specialty Lock Business include several industry leaders such as Herman
Miller, Inc., International Business Machines Corporation ("IBM"), Steelcase,
Inc. and Knoll, Inc. During fiscal 1997, no single customer represented more
than 9.5% of pro forma segment net sales. For the pro forma year ended December
31, 1997 and the six months ended June 30, 1998, the Specialty Lock Business
generated net sales of $44.8 million and $24.5 million, respectively,
representing an increase over the pro forma amounts for the same periods in the
preceding fiscal year of 13.2% and 10.2%, respectively.
1
<PAGE> 7
KCI management estimates the domestic market for locks to be over $3.0
billion, of which approximately $200 million is estimated to represent is
medium-security locks. The Company targets the medium-security segment where it
believes its value-added design and manufacturing expertise, along with its
timely delivery, reliability and customer service, enable it to differentiate
itself from its competitors and enhance profitability. The office furniture and
POS terminal markets represent the two largest end-user market segments of the
Specialty Lock Business, constituting 43.7% and 7.2%, respectively, of pro forma
fiscal 1997 segment net sales. The office furniture and POS terminal markets
have grown rapidly over the three year period ended December 31, 1997, with a
compounded annual growth rate of approximately 9.1% and 4.8%, respectively.
During the same three year period, Specialty Lock Business net sales to the
office furniture and POS terminal markets grew at a compounded annual growth
rate of approximately 27.9% and 4.4%, respectively. Based on this historical
growth, KCI management anticipates that sales to these markets will continue to
represent the majority of Specialty Lock Business sales and growth for the near
term. See "Business -- Customers and Markets."
The Flexible Shaft Business
The Company, through its wholly-owned subsidiary, Elliott, is the leading
domestic designer and manufacturer of flexible shaft products, which are
engineered to meet the particular design specifications demanded by a variety of
OEM customers. The Company designs and manufactures more than 2,000 flexible
shaft products, all of which utilize wound wire assemblies to transmit rotary
power when applications render rigid shaft technology (such as universal joints)
less efficient or impossible. The Company's flexible shaft technology provides
significant advantages over traditional rigid shaft technology. Use of flexible
shafts improves existing OEM product designs, provides added flexibility in
creating new designs and eliminates the amount of required componentry, which
can lower overall weight and space requirements, reduce a product's
manufacturing costs, improve end product appearance and shorten assembly times.
Product applications are varied and diverse, limited only by the Company's
ability to develop and manufacture new applications. KCI has developed and
introduced over 100 flexible shaft products to the marketplace during the last
three years. The Company's flexible shaft products are currently used in weed
trimmers, lawn tractors, concrete vibrators, plant processing equipment and
aircraft carriers, as well as in aerospace, medical, industrial and other
products. The Company believes that its product innovation, engineering
expertise, proprietary manufacturing process and high standards of quality and
reliability have enabled KCI to differentiate itself from its competitors,
enhance profitability and become the primary supplier of flexible shaft products
to the majority, in terms of sales, of its customers. KCI's Flexible Shaft
Business has over 1,000 customers including Poulan Weed Eater, Inc., Vickers,
Inc., Caterpillar Inc. and John Deere Consumer Products, Inc. ("John Deere"), as
well as several United States Government entities, such as the United States
Navy. Only one customer, Poulan Weed Eater, Inc., represented greater than 10%
of the Flexible Shaft Business net sales for fiscal 1997 and no single customer
represented greater than 12% of Flexible Shaft Business net sales for fiscal
1997. For the year ended December 31, 1997 and the six months ended June 30,
1998, Flexible Shaft Business generated net sales of approximately $14.2 million
and $8.5 million, respectively, representing an increase over net sales for the
same period in the preceding fiscal year of 5.4% and 15.7%, respectively.
Flexible Shaft Business sales to its three largest markets, construction,
lawn and garden power equipment and maritime, represented 25.6%, 21.7% and
13.9%, respectively, of fiscal 1997 segment net sales. According to industry
reports, for the three year period ended December 31, 1997, the construction,
lawn and garden power equipment and maritime markets experienced an average
compounded annual growth rate of approximately 2.1%. During the same three year
period, Flexible Shaft Business sales to these markets experienced similar
growth or remained stable. The fastest growing market segment of the Flexible
Shaft Business has been the commercial aerospace segment, where the Company has
increased market penetration and introduced new product offerings. Over the
three year period ended December 31, 1997, the Company's net sales to this
segment grew at a compounded annual rate of approximately 46.8%. Based on
historical results and the recent or anticipated introduction of new product
offerings, KCI management anticipates the commercial aerospace and lawn and
garden power equipment markets to experience significant growth for the near
term. See "Business -- Customers and Markets."
2
<PAGE> 8
COMPETITIVE STRENGTHS
The Company believes that its leading position in the markets it currently
serves is primarily attributable to the following competitive strengths:
Commitment to Quality. The Company believes its specialty lock and
flexible shaft products are well-known among OEM manufacturers for their
durability, high quality and performance. KCI has passed rigorous quality
standard reviews of such customers as Herman Miller, Inc., Steelcase, Inc., John
Deere, the United States Navy and the United States Air Force. The Company has
received International Standards Organization ("ISO") certification in certain
areas and is seeking to obtain further certifications as part of its ongoing
commitment to maintain its high standards of quality.
Strong Management Team. The Company's management team possesses extensive
experience in the manufacturing industry. Its eight senior operating executives
have over 154 years of manufacturing industry experience, including the
Presidents of KCI's Operating Subsidiaries, each of whom has over 20 years
experience in the specific manufacturing market he serves.
Focus on Niche Markets and Value-Added Services. The Company believes that
its strategic focus on niche OEM markets where customers place a premium on
value-added design and manufacturing capabilities, along with timely delivery
and reliable service, provide it with a competitive advantage over (i)
competitors that are a division of a larger corporate entity and which are
frequently less focused on smaller sales volume opportunities and (ii) smaller
competitors that typically are less sophisticated than the Company and therefore
less capable of providing the level of customer service and aftermarket support
provided by the Company.
Product Innovation. The Company's OEM customers seek new products and
applications that enhance productivity and profitability while satisfying their
specific needs. The Company's experienced management and engineering teams are
able to develop, design and manufacture new products and applications that its
OEM customers demand, which the Company believes enables it to provide superior
service to its OEM customers than that offered by its competitors.
Low-Cost Manufacturing Techniques. The Company believes that its highly
automated and vertically integrated manufacturing capabilities have enabled it
to become a low-cost manufacturer of products within the niche markets it
serves. In the Specialty Lock Business, the Company has focused on further
consolidation and automation with each new acquisition. In the Flexible Shaft
Business, the Company has designed and manufactured its own flexible shaft
winding machines, which are not currently available to its competitors, and has
installed wire drawing equipment capable of drawing less refined (and less
expensive) wire into a grade of wire that can be utilized by the Company in its
flexible shaft products.
Long Standing Relationships with OEMs. Nine of the Company's ten largest
OEM customers in both the Flexible Shaft Business and the Specialty Lock
Business have been customers of the Company for over a decade. Due to the
Company's close working relationship with its customers, KCI believes that it
can better determine its customers' needs, thereby enabling the Company to
develop and design new products and improve the performance of existing
products. Additionally, changing the supplier of a custom designed and
manufactured product often requires a delay in the customer's production due to
the time and capital required for a new supplier to appropriately retool its
machinery; therefore, KCI believes that its OEM customers are reluctant to
change suppliers, so long as KCI continues to satisfy their needs. The Company's
sales to customers for which it believes it was the primary supplier represented
approximately 62.0% of fiscal 1997 pro forma net sales.
3
<PAGE> 9
BUSINESS STRATEGY
The Company has developed a business strategy that focuses on maximizing
profitability while achieving growth, both internally and through acquisitions.
Pursuing Selective Acquisitions. The Company continues to seek to
selectively acquire complementary or related light manufacturing businesses in
markets where value-added design and manufacturing capabilities, as well as
timely delivery and reliable service, enable it to differentiate itself from its
competitors and enhance profitability. In its search for potential acquisitions,
KCI focuses on companies that offer strategic value such as economies of scale,
product line extensions, new customer relationships or increased manufacturing
capacity. Specifically, the Company targets manufacturers of essential
components of a larger OEM end product. KCI seeks companies with a strong
presence in their niche markets or which will be complementary to one of its
existing subsidiaries which is already dominant in its market segment. The
Company will also look for acquisitions which will allow the Company to further
vertically integrate its operations and/or which may share common customers or
engineering processes. The Company seeks to integrate new operations into the
Company's existing businesses, which the Company believes will enhance
profitability for KCI through manufacturing consolidation and implementation of
the Company's operating strategies.
Maximizing Profitability. The Company continues to seek to maximize
profitability through its ongoing strategy of controlled growth in the areas of
both acquisitions and product offerings. As part of this strategy, the Company
attempts to determine the achievable profit margins and production volume for
each new product line prior to accepting an order. The Company only undertakes
production of new products which management believes will achieve an acceptable
return on investment. The Company further seeks to maximize profitability
through automation and efficient integration of complementary acquisitions. See
"Unaudited Pro Forma Consolidated Financial Data."
Introducing New Product Lines. The Company seeks to develop new products
in each of its business segments which enhance productivity and profitability
while satisfying OEM customers' evolving needs. The Company's team of
experienced engineers and industry professionals generally work in tandem with
customers to design and manufacture new products and are continually seeking to
expand existing markets, as well as develop new markets. This collaborative
approach has led the Company to the development of proprietary designs,
technology and relationships with customers that the Company expects will create
future sales opportunities. The Company has introduced over 100 new product
offerings during the last three years.
Maintaining a Diverse Customer Base. The Company seeks to maintain a
diverse customer base through (i) development and introduction of new products,
(ii) acquisition of complementary or related businesses, (iii) focus on customer
retention and (iv) innovative sales and marketing techniques designed to attract
new customers. During fiscal 1997, the Company had pro forma sales to
approximately 2,200 customers and its three largest customers accounted for only
7.1%, 6.4% and 4.5%, respectively, of its pro forma consolidated net sales.
Leveraging Customer Relationships. The Company follows a partnership
approach in establishing customer relationships, founded on innovative
co-engineering and manufacturing capabilities with reliable service and timely
delivery. These integral relationships enable the Company to provide insightful
solutions and innovations to end product design specifications. In addition,
several OEM customers have entered into multi-year supply contracts with KCI,
providing a more formal framework for the Company's customer "partnerships."
4
<PAGE> 10
OWNERSHIP AND MANAGEMENT
The Company is a wholly-owned subsidiary of Key Components, Inc., a New
York corporation (the "Parent"). All of the issued and outstanding stock of the
Parent is owned by affiliates of Millbrook Capital Management, Inc.
("Millbrook") and members of KCI management (together with such affiliates of
Millbrook, the "Shareholders"). KC LLC and Millbrook entered into a management
agreement, dated as of May 28, 1998 (the "Management Agreement"), pursuant to
which Millbrook will continue to provide certain executive level services to the
Company. Millbrook is a private investment and management company which provides
executive level services to various companies owned by Millbrook affiliates, of
which KCI is the largest in terms of estimated value. Since its formation in
1981, Millbrook and its affiliates have invested in and managed 21 companies.
See "Certain Transactions."
FORMATION TRANSACTIONS
The Parent was formed on April 30, 1997 as a holding company for Elliott,
which the Shareholders have owned since 1992. Effective May 15, 1997, the
Shareholders exchanged their shares of Elliott's common stock for shares of the
Parent's common stock. Prior to this exchange, the Parent had no operations of
its own. The exchange ratio for the shares of common stock was determined so as
to leave the Shareholders with the same pro rata interests in the Parent as they
had in Elliott.
On May 15, 1997, the Parent acquired all of the issued and outstanding
capital stock of Hudson from Jordan Industries, Inc. and its affiliates
("Jordan"), for a cash purchase price of $39.1 million and assumed liabilities
of $1.2 million. This acquisition was financed through loans made to the Company
under a Credit and Guaranty Agreement, dated as of May 15, 1997, with Societe
Generale, as agent (the "Old Credit Facility"), and through the sale to Societe
Generale Investment Corporation ("SGIC") of $10 million of 11 1/4% Senior
Subordinated Notes due 2005 (the "Original Notes") and certain warrants to
purchase approximately 12.5% of the Parent's common stock (the "Warrants"). Each
of Societe Generale and SGIC are affiliates of Societe Generale Securities
Corporation, the initial purchaser of the Old Notes (as defined) offered in the
Initial Offering (as defined) (the "Initial Purchaser").
On December 10, 1997, the Parent acquired all of the issued and outstanding
capital stock of ESP from certain individual shareholders, including ESP's
current President, August M. Boucher. The purchase price for ESP consisted of
$16.3 million of cash and $10.4 million of assumed liabilities. The Parent
obtained the funds for this purchase from additional borrowings under the Old
Credit Facility (the acquisitions of Hudson and ESP are sometimes collectively
referred to herein as the "Acquisitions").
In April 1998, KC LLC and Finance Corp. were formed to facilitate the
offering of the 10 1/2% Senior Notes due 2008 (the "Old Notes") which were
issued May 28, 1998 to the Initial Purchaser (the "Initial Offering"). KC LLC is
a wholly-owned subsidiary of the Parent and owns 100% of the Operating
Subsidiaries. Finance Corp. is a wholly-owned subsidiary of KC LLC and has no
assets or operations. See "The Issuers," "The Formation" and "Description of
Notes."
In July 1998, the Company entered into a Credit and Guaranty Agreement (the
"Credit Agreement") with certain institutional lenders (the "Lenders") with
respect to a new credit facility (the "New Credit Facility") that provides for
revolving credit borrowings of up to $15.0 million and additional borrowings of
up to $25.0 million for future acquisitions. Among other provisions, the New
Credit Facility provides that (i) availability of revolving credit loans will be
subject to a borrowing base, (ii) availability of acquisition loans will be
subject to various criteria, including pro forma compliance with certain
financial ratios and (iii) the Company will be required to prepay outstanding
balances out of excess cash flow and proceeds from certain asset sales. See
"Risk Factors -- Substantial Leverage; Ability to Service Debt" and "Description
of Certain Indebtedness -- The New Credit Facility."
The principal executive offices of the Issuers and the Operating
Subsidiaries are located at Wing Road RR1, Box 167D, Millbrook, New York 12545,
and the telephone number is (914) 677-8383.
5
<PAGE> 11
THE EXCHANGE OFFER
Issuers.................Key Components, LLC and Key Components Finance Corp.
Securities Offered......Up to $80,000,000 principal amount of 10 1/2% Senior
Notes due 2008 (the "New Notes"). The Old Notes were
issued on May 28, 1998 to the Initial Purchaser. The
Initial Purchaser resold the Old Notes to certain
qualified institutional buyers in reliance on, and
subject to the restrictions imposed pursuant to, Rule
144A of the Securities Act and outside the United States
in accordance with Regulation S of the Securities Act.
In connection therewith, the Issuers and the Initial
Purchaser entered into an Exchange and Registration
Rights Agreement, dated May 20, 1998 (the "Exchange and
Registration Rights Agreement"), providing, among other
things, for the Exchange Offer. The terms of the New
Notes and the terms of the Old Notes are identical in
all material respects, except that the New Notes will
have been registered under the Securities Act and,
therefore will not be subject to certain transfer
restrictions, registration rights and related provisions
applicable to the Old Notes.
The Exchange Offer......New Notes are being offered in exchange for an equal
principal amount of Old Notes. As of the date hereof,
$80,000,000 aggregate principal amount of Old Notes is
outstanding. Old Notes may be tendered only in integral
multiples of $1,000.
Resale of New Notes.....Based on interpretations by the staff of the Commission
as set forth in no-action letters issued to third
parties (including Exxon Capital Holdings Corporation
(available May 13, 1988), Morgan Stanley & Co.
Incorporated (available June 5, 1991), K-III
Communications Corporation (available May 14, 1993) and
Shearman & Sterling (available July 2, 1993)), the
Issuers believe that the New Notes issued pursuant to
the Exchange Offer may be offered for resale, resold or
otherwise transferred by any holder thereof (other than
any such holder that is a broker-dealer or an
"affiliate" of the Issuers within the meaning of Rule
405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of
the Securities Act, provided that (i) such New Notes are
acquired in the ordinary course of business, (ii) at the
time of the commencement of the Exchange Offer such
holder has no arrangement or understanding with any
person to participate in a distribution of the New Notes
and (iii) such holder is not engaged in, and does not
intend to engage in, a distribution of the New Notes. By
tendering Old Notes in exchange for New Notes each
holder will represent to the Issuers that: (i) it is not
an affiliate of the Issuers, (ii) any New Notes to be
received by it will be acquired in the ordinary course
of business and (iii) at the time of the commencement of
the Exchange Offer it had no arrangement or
understanding with any person to participate in a
distribution of the New Notes, and, if such holder is
not a broker-dealer, it is not engaged in, and does not
intend to engage in, a distribution of New Notes. If a
holder of Old Notes is unable to make the foregoing
representations, such holder may not rely on such
interpretations of the staff of the Commission as set
forth in such no-action letters, will not be permitted
or entitled to tender such Old Notes and must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection with
any secondary resale transaction. See "The Exchange
Offer -- Terms of the Exchange Offer" and "Plan of
Distribution." Each broker-dealer that receives New
Notes for its own account pursuant to the Exchange Offer
in exchange for Old Notes where such Old Notes were
acquired by such broker-dealer as a result of
market-making activities or other trading activities,
must
6
<PAGE> 12
acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act and that it has
not entered into any arrangement or understanding with
the Issuers or an affiliate of the Issuers to distribute
the New Notes in connection with any resale of such New
Notes. A broker-dealer that acquired Old Notes in a
transaction other than as part of its market-making
activities or other trading activities will not be able
to participate in the Exchange Offer. The Letter of
Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time may be
used by a broker-dealer in connection with resales of
New Notes received in exchange for Old Notes where such
Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading
activities. The Issuers have agreed that, starting on
the Expiration Date, and ending on the close of business
90 days after the Expiration Date, it will make this
Prospectus available to any participating broker-dealer
for use in connection with any such resale. See "Plan of
Distribution."
To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for sale
or register the New Notes prior to offering or selling
such New Notes. The Issuers have agreed, pursuant to the
Exchange and Registration Rights Agreement and subject
to certain specified limitations therein, to register or
qualify the New Notes for offer or sale under the
securities or "blue sky" laws of such jurisdictions as
may be necessary to permit the holders of New Notes to
trade the New Notes without any material restrictions or
limitations under the securities laws of the several
states of the United States.
Consequences of Failure
to Exchange Old Notes...Upon consummation of the Exchange Offer, subject to
certain limited exceptions, holders of Old Notes
eligible to participate but who do not exchange their
Old Notes for New Notes in the Exchange Offer will no
longer be entitled to registration rights and will not
be able to offer or sell their Old Notes, unless such
Old Notes are subsequently registered under the
Securities Act (which, subject to certain limited
exceptions, the Issuers will have no obligation to do),
except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and
applicable state securities laws. All untendered and
tendered but unaccepted Old Notes will continue to be
subject to the restrictions on transfer provided in the
Old Notes and the Indenture. See "The Exchange
Offer -- Terms of the Exchange Offer" and
"-- Consequences of Failure to Exchange."
Expiration Date.........5:00 p.m., New York City time, on , 1998
(20 business days following the commencement of the
Exchange Offer), unless the Exchange Offer is extended,
in which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is
extended. In no event, however, will the Expiration Date
be later than November 9, 1998. See "The Exchange
Offer -- Expiration Date; Extensions; Amendments;
Termination."
Conditions to the
Exchange Offer........The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to
certain customary conditions, which may be waived by the
Issuers. See "The Exchange Offer -- Conditions." Except
for the requirements of applicable federal and state
securities laws, there are no federal or state
7
<PAGE> 13
regulatory requirements to be complied with or obtained
by the Issuers in connection with the Exchange Offer.
Procedures for Tendering
Old Notes.............Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes to be exchanged
and any other required documentation to the Exchange
Agent (as defined) at the address set forth herein and
therein or effect a tender of Old Notes pursuant to the
procedures for book-entry transfer as provided for
herein and therein. By executing the Letter of
Transmittal, a holder will make certain representations
to the Issuers. See "The Exchange Offer -- Procedures
for Tendering" and "-- Book Entry Transfer."
Special Procedures for
Beneficial Owners.....Any beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should
contact such registered holder to tender on such
beneficial owner's behalf. See "The Exchange
Offer -- Procedures for Tendering."
Shelf Registration
Statement.............If any holder of the Old Notes (other than any such
holder which is an "affiliate" of the Issuers within the
meaning of Rule 405 under the Securities Act) is not
eligible to participate in the Exchange Offer, and such
holder has satisfied certain conditions relating to the
provision of information to the Company for use therein,
the Issuers have agreed to register the Old Notes on a
shelf registration statement (the "Shelf Registration
Statement") and to use its reasonable best efforts to
cause it to be declared effective by the Commission. The
Issuers have also agreed to file a Shelf Registration
Statement under certain other circumstances. The Issuers
have agreed to maintain the effectiveness of the Shelf
Registration Statement for, under certain circumstances,
a maximum of two years to cover resales of the Old Notes
held by any such holders. See "The Exchange
Offer -- Shelf Registration."
Guaranteed Delivery
Procedures............Holders of Old Notes who wish to tender their Old Notes
and who cannot deliver their Old Notes (or complete the
procedure for book-entry transfer) and a properly
completed Letter of Transmittal or any other documents
required by the Letter of Transmittal to the Exchange
Agent prior to the Expiration Date may tender their Old
Notes according to the guaranteed delivery procedures
set forth in "The Exchange Offer -- Guaranteed Delivery
Procedures."
Withdrawal Rights.......Tenders of Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration
Date. To withdraw a tender of Old Notes, a written or
facsimile transmission notice of withdrawal must be
received by the Exchange Agent at the address set forth
herein under "The Exchange Offer -- Exchange Agent"
prior to 5:00 p.m., New York City time, on the
Expiration Date.
Acceptance of Old Notes
and Delivery of New
Notes.................Subject to certain conditions, any and all Old Notes
that are properly tendered in the Exchange Offer prior
to 5:00 p.m., New York City time, on the Expiration Date
will be accepted for exchange. The New Notes issued
8
<PAGE> 14
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
Certain U.S. Tax
Consequences..........The exchange of Old Notes for New Notes will not
constitute a taxable exchange for U.S. federal income
tax purposes. See "Certain Federal Income Tax
Considerations."
Exchange Agent..........United States Trust Company of New York is serving as
exchange agent for the holders of Old Notes (the
"Exchange Agent") in connection with the Exchange Offer.
The address, telephone number and facsimile number of
the Exchange Agent are set forth in "The Exchange
Offer -- Exchange Agent."
Trustee.................United States Trust Company of New York is serving as
trustee (the "Trustee") for the holders of the Notes.
Fees and Expenses.......All expenses incident to the Issuers' consummation of
the Exchange Offer and compliance with the Exchange and
Registration Rights Agreement will be borne by the
Issuers. See "The Exchange Offer -- Fees and Expenses."
THE NEW NOTES
Maturity Date...........June 1, 2008.
Interest Payment
Dates...................June 1 and December 1 of each year, commencing December
1, 1998.
Optional Redemption.....The Notes will be redeemable, in whole or in part, at
the option of the Issuers, at any time and from time to
time on or after June 1, 2003, at the redemption prices
set forth herein, plus accrued and unpaid interest, if
any, to the date of redemption. In addition, at any time
and from time to time, on or prior to June 1, 2001, the
Issuers may redeem, up to 33 1/3% of the original
aggregate principal amount of the Notes at a redemption
price of 110.50% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of
redemption, with the Net Cash Proceeds (as defined) of
one or more Equity Offerings (as defined); provided,
however, that at least 66 2/3% of the original aggregate
principal amount of the Notes remains outstanding
following each such redemption; and provided, further,
that such redemption shall occur within 60 days of the
closing of any such Equity Offering. See "Description of
Notes -- Optional Redemption."
Subsidiary Guarantees...The Notes will be fully and unconditionally guaranteed,
jointly and severally (the "Subsidiary Guarantees"), on
an unsecured, senior basis, by each of the Company's
Operating Subsidiaries existing on the issue date of the
Notes (the "Issue Date") and by each subsidiary of the
Company (other than Unrestricted Subsidiaries and
Foreign subsidiaries (as defined)) created or acquired
thereafter (collectively, the "Subsidiary Guarantors").
See "Description of Notes -- Subsidiary Guarantees."
Ranking.................The Notes will be unsecured, senior obligations of the
Issuers, will rank pari passu in right of payment with
all other existing and future senior indebtedness of the
Issuers and will rank senior in right of payment to all
existing and future subordinated indebtedness of the
Issuers. The Subsidiary Guarantees will be general,
unsecured, senior obligations of the Subsidiary
Guarantors, ranking senior in right of payment to all
existing and future subordinated obligations of the
Subsidiary Guarantors and pari passu in right of payment
to all existing and future senior indebtedness of the
Subsidiary Guarantors. As of June 30, 1998, the Issuers
had no secured indebtedness and $80 million of senior
9
<PAGE> 15
indebtedness (representing the outstanding Old Notes).
As of the same date on such pro forma basis, the
aggregate principal amount of senior indebtedness of the
Subsidiary Guarantors outstanding (other than the
Subsidiary Guarantees) was approximately $1.5 million,
all of which is secured indebtedness. See "Description
of Notes -- Ranking."
Restrictive Covenants...The Indenture under which the Notes will be issued (the
"Indenture") will contain certain covenants pertaining
to the Issuers and the Company's Restricted Subsidiaries
(as defined), including, but not limited to, covenants
with respect to the following matters: (i) limitations
on indebtedness and preferred stock; (ii) limitations on
liens; (iii) limitations on restricted payments; (iv)
limitations on restrictions on distributions from
restricted subsidiaries; (v) limitations on sales of
assets and subsidiary stock; (vi) limitations on
transactions with affiliates; (vii) limitation on lines
of business; (viii) limitation on business activities of
Finance Corp.; and (ix) limitations on mergers,
consolidations and transfers of all or substantially all
assets. However, all of these covenants are subject to a
number of important qualifications and exceptions. See
"Description of Notes -- Certain Covenants."
Change of Control.......Upon the occurrence of a Change of Control (as defined),
(i) the Issuers will have the option, at any time, prior
to June 1, 2003 (but in no event more than 180 days
after the occurrence of such Change in Control), to
redeem the Notes, in whole, at a redemption price equal
to 100% of the principal amount thereof, plus the
Applicable Premium (as defined), together with accrued
and unpaid interest, if any, to the date of redemption,
and (ii) if the Issuers have not redeemed the Notes,
each holder of Notes may require the Issuers to
repurchase any or all outstanding Notes owned by such
holder at 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, thereon, to the
date of repurchase. There can be no assurance, however,
that sufficient funds will be available to the Issuers
when necessary to make any required repurchases. See
"Description of Notes -- Change of Control."
Use of Proceeds.........There will be no proceeds to the Company from the
issuance of the New Notes pursuant to the Exchange
Offer. The Company used the net proceeds of the Initial
Offering (i) to repay all the Company's outstanding
senior indebtedness under the Old Credit Facility and
(ii) to repurchase all the issued and outstanding
Original Notes and Warrants. The Company currently
intends to use the balance of the proceeds from the
Initial Offering for general corporate purposes, which
may include future acquisitions (although there are
currently no contractual obligations in respect
thereof). See "Use of Proceeds."
RISK FACTORS
Prospective purchasers of the Notes should carefully consider the
information set forth under the caption "Risk Factors" and all other information
set forth in this Prospectus before making any investment in the Notes.
10
<PAGE> 16
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following table sets forth the consolidated statement of operations and
other consolidated financial data of the Company on a pro forma basis for the
periods shown below. The pro forma consolidated statement of operations data
gives effect to the Acquisitions, the acquisition by ESP of the assets of RAD
Lock, Inc. ("RAD") and related transactions (including the Initial Offering) as
though each had occurred as of January 1, 1997. The unaudited pro forma
consolidated financial data is provided for informational purposes only, is
unaudited and is not necessarily indicative of future results or the operating
results or financial condition of the Company that would have actually been
obtained had such transactions been consummated as of the assumed dates. The
following table should be read in conjunction with "Capitalization," "Unaudited
Pro Forma Consolidated Financial Data," "Selected Historical Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the Consolidated Financial Statements of the
Company and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED(A)
--------------------------------------
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- ----------------
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................................... $58,975 $33,016
Cost of goods sold.......................................... 38,203 20,579
------- -------
Gross profit................................................ 20,772 12,437
Selling, general and administrative expenses................ 11,414 5,646
------- -------
Income from operations...................................... 9,358 6,791
Other income................................................ 79 128
Interest expense(b)......................................... (8,683) (4,364)
------- -------
Income before taxes......................................... 754 2,555
Provision for income taxes.................................. 28 95
------- -------
Net income(c)............................................... $ 726 $ 2,460
======= =======
OTHER DATA:
Adjusted EBITDA(d).......................................... $14,961 $ 9,681
Cash flows provided (used) by:
Operating activities...................................... $ 3,064 $ 4,206
Investing activities...................................... (1,772) (675)
Financing activities...................................... (315) (1,722)
Depreciation and amortization............................... 4,371 2,155
Capital expenditures........................................ 1,993 711
Ratio of Adjusted EBITDA to interest expense(b)............. 1.7x 2.2x
Ratio of earnings to fixed charges(e)....................... 1.1x 1.6x
</TABLE>
11
<PAGE> 17
- ---------------
(a) The Company acquired Hudson on May 15, 1997 and ESP on December 10, 1997.
ESP acquired the assets of RAD on June 22, 1997. For an explanation of the
pro forma adjustments, see "Notes to Unaudited Pro Forma Consolidated
Financial Data." The pro forma adjustments are based upon available
information and certain assumptions that the Company believes are
reasonable.
(b) Interest expense reflects an interest rate of 10.50% on the Notes, plus a
commitment fee of 0.50% per annum on the unutilized commitments under the
New Credit Facility, plus interest on existing indebtedness not being
refinanced. See note 9 to "Notes to Unaudited Pro Forma Consolidated
Statement of Operations." Interest expense excludes amortization of deferred
financing costs.
(c) As a limited liability company, the Company pays no federal income taxes.
The provision for income taxes is for taxes on income applicable to certain
states. See note 10 to "Notes to Unaudited Pro Forma Consolidated Statements
of Operations."
(d) Adjusted EBITDA is defined as net income (loss) plus (i) income tax expense,
(ii) interest expense, (iii) depreciation expense, (iv) amortization
expense, (v) management fees and (vi) nonrecurring and noncash charges.
The following is a reconciliation of pro forma net income to pro forma
Adjusted EBITDA for the periods presented.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- ----------------
<S> <C> <C>
Pro forma net income.................................. $ 726 $2,460
Add:
Pro forma interest expense.......................... 8,683 4,364
Pro forma income tax expense........................ 28 95
Pro forma depreciation and amortization............. 4,371 2,155
Pro forma management fees........................... 950 431
Nonrecurring and noncash charges:
Pre acquisition environmental expense............ 40 --
Business relocation and consolidation charges.... 84 100
Donation of land and write off of non-performing
assets......................................... 79 --
------- ------
Pro forma Adjusted EBITDA............................. $14,961 $9,605
======= ======
</TABLE>
Adjusted EBITDA is presented because EBITDA is a widely accepted financial
indicator of a company's ability to service indebtedness. However, EBITDA
should not be considered an alternative to operating income or cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles) and should not be construed as an indication
of a company's operating performance or as a measure of liquidity. Since all
companies and analysts do not necessarily calculate EBITDA in the same
fashion, Adjusted EBITDA as presented in this Prospectus may not be
comparable to similarly titled measures reported by other companies. See
"Certain Transactions" and "Description of Notes."
(e) The ratio of earnings to fixed charges has been calculated by dividing
earnings before income taxes and fixed charges by fixed charges. Fixed
charges include interest expense, amortization of deferred financing costs
and one-third of operating lease payments which are deemed to be
representative of the interest factor.
12
<PAGE> 18
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following table sets forth summary historical statement of operations
and other financial data of the Company as of December 31, 1996 and December 31,
1997 and for each of the three fiscal years ended December 31, 1997 which have
been derived from, and should be read in conjunction with, the audited
consolidated financial statements of the Company included elsewhere in this
Prospectus. The summary consolidated financial data presented below as of
December 31, 1993, December 31, 1994 and December 31, 1995 and for each of the
two years in the period ended December 31, 1994 have been derived from, and
should be read in conjunction with, the audited consolidated financial
statements of the Company which are not included in this Prospectus. The summary
consolidated financial data presented below as of June 30, 1997 and June 30,
1998 and for the six month periods ended June 30, 1997 and June 30, 1998 have
been derived from, and should be read in conjunction with, the unaudited
consolidated financial statements of the Company included elsewhere in this
Prospectus. The summary consolidated balance sheet data presented below as of
June 30, 1997 have been derived from, and should be read in conjunction with,
the unaudited consolidated financial statements of the Company which are not
included in this Prospectus. The information for the interim periods is
unaudited but has been prepared in the same manner as the audited consolidated
financial statements and, in the opinion of management, contain all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the results of operations for such periods. The interim results of operations
may not be indicative of the results for the full year. The summary historical
consolidated financial data presented below should be read in conjunction with
"Capitalization," "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31,(A) JUNE 30,
------------------------------------------------ ------------------
1993 1994 1995 1996 1997 1997(A) 1998
------- ------- ------- ------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales..................................... $12,208 $13,612 $13,185 $13,449 $ 27,318 $ 9,781 $33,016
Cost of goods sold(b)......................... 6,927 7,745 7,356 8,361 15,798 5,253 20,579
------- ------- ------- ------- -------- -------- -------
Gross profit.................................. 5,281 5,867 5,829 5,088 11,520 4,528 12,437
Selling, general and administrative
expenses(b)................................. 3,306 3,987 3,457 4,641 6,405 2,356 5,559
------- ------- ------- ------- -------- -------- -------
Income from operations........................ 1,975 1,880 2,372 447 5,115 2,172 6,878
Other income.................................. 6 24 26 5 31 15 127
Interest expense.............................. (405) (457) (427) (254) (3,007) (645) (3,294)
------- ------- ------- ------- -------- -------- -------
Income before taxes, extraordinary charge and
change in accounting principle.............. 1,576 1,447 1,971 198 2,139 1,542 3,711
Provision for income taxes(c)................. 642 522 724 21 889 828 140
Extraordinary charge -- early repayment of
debt........................................ -- -- -- -- -- -- 4,616
Cumulative effect of change in accounting
principle(d)................................ (22) -- -- (313) -- -- --
------- ------- ------- ------- -------- -------- -------
Net income.................................... $ 956 $ 925 $ 1,247 $ 490 $ 1,250 $ 714 $(1,045)
======= ======= ======= ======= ======== ======== =======
OTHER DATA:
Adjusted EBITDA(e)................................................................... $ 8,352 $ 3,126 $ 9,604
Cash flows provided (used) by:
Operating activities............................................................... 4,028 1,753 5,262
Investing activities............................................................... (56,133) (39,424) (711)
Financing activities............................................................... 53,213 39,539 4,533
Depreciation and amortization........................................................ 1,817 559 2,068
Capital expenditures................................................................. 696 282 711
CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):
Cash.......................................... $ 423 $ 445 $ 821 $ 331 $ 1,440 $ 2,198 $10,525
Working capital............................... 4,164 4,485 4,738 4,702 10,681 7,416 23,135
Total assets.................................. 11,352 11,445 10,709 11,454 79,757 55,148 91,166
Long term debt (including current
maturities)................................. 5,698 5,005 3,608 3,428 66,855 50,105 81,522
Stockholders' equity.......................... 4,311 5,236 6,483 6,974 8,848 7,688 4,626
</TABLE>
13
<PAGE> 19
- ---------------
(a) For the four fiscal years ended December 31, 1996, the financial data set
forth above represents the results and the balance sheet data of Elliott
only. The Company acquired Hudson on May 15, 1997 and ESP on December 10,
1997. The financial data set forth above with respect to the fiscal year
ended December 31, 1997 and for the six months ended June 30, 1998 includes
the results of Hudson and ESP from their respective acquisition dates.
(b) For the fiscal year ended December 31, 1996, cost of goods sold includes a
provision for inventory obsolescence of $431 and selling, general and
administrative expenses include nonrecurring business relocation charges of
$786. For the fiscal year ended December 31, 1997, selling, general and
administrative expenses include miscellaneous nonrecurring and noncash
charges of (i) $340 for a one-time management bonus paid in connection with
the change in control of ESP, (ii) $84 in business relocation charges and
(iii) $55 in charges associated with land donation expenses. For the six
months ended June 30, 1998, cost of goods sold includes charges incurred in
connection with the consolidation of the RAD operations into Hudson. See
note (6) to "Notes to Unaudited Pro Forma Consolidated Statement of
Operations."
(c) The Parent elected to be treated as a subchapter S corporation under the
Internal Revenue Code effective May 31, 1997. As an S corporation, the
Shareholders are personally liable for most taxes on the income of the
Company. Accordingly, subsequent to May 31, 1997, the provision for income
taxes includes only those taxes applicable to certain states. Due to the
change in tax status, the 1997 tax provision includes a charge of $469
representing the write-off of net deferred tax assets.
(d) Effective January 1, 1996, Elliott changed the composition of costs included
in inventory. Accordingly, Elliott recorded an adjustment to inventory cost
at January 1, 1997 as the cumulative effect of a change in accounting
principle. Had the Company applied this new accounting principle in the year
ended December 31, 1995, income before income taxes and net income would not
have been materially affected.
(e) Adjusted EBITDA is defined as net income (loss) plus (i) income tax expense,
(ii) interest expense, (iii) depreciation expense, (iv) amortization
expense, (v) management fees and (vi) nonrecurring and noncash charges.
Adjusted EBITDA is presented because EBITDA is a widely accepted financial
indicator of a company's ability to service indebtedness. However, EBITDA
should not be considered an alternative to operating income or cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles) and should not be construed as an indication
of a company's operating performance or as a measure of liquidity. Since all
companies and analysts do not necessarily calculate EBITDA in the same
fashion, Adjusted EBITDA as presented in this Prospectus may not be
comparable to similarly titled measures reported by other companies. See
footnote (b) above, "Certain Transactions" and "Description of Notes."
14
<PAGE> 20
The following table is a reconciliation of net income to Adjusted EBITDA
for the fiscal year ended December 31, 1997 and the six month periods ended June
30, 1997 and 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1997 1997 1998
------------ ------ -------
<S> <C> <C> <C>
Net income.................................................. $1,250 $ 714 $(1,045)
Add:
Interest expense.......................................... 3,007 645 3,294
Income tax expense........................................ 889 828 140
Depreciation and amortization............................. 1,817 559 2,068
Management fees........................................... 910 355 431
Nonrecurring and noncash charges:
Extraordinary item -- early repayment of debt.......... -- -- 4,616
One time management bonus resulting from change in
control of ESP....................................... 340 -- --
Business relocation and consolidation charges.......... 84 25 100
Donation of land and write off of non-performing
assets............................................... 55 --
------ ------ -------
Historical Adjusted EBITDA.................................. $8,352 $3,126 $ 9,604
====== ====== =======
</TABLE>
15
<PAGE> 21
RISK FACTORS
Prospective investors in the Notes should carefully consider the following
risk factors, in addition to the other information set forth in this Prospectus,
before making an investment in the Notes offered hereby.
HOLDING COMPANY STRUCTURE
The Company is a holding company which conducts all of its operations
through its subsidiaries and currently has no significant operating assets other
than its direct and indirect investments the Operating Subsidiaries. All of the
Company's operating income is generated by the Operating Subsidiaries. The
Company must rely on dividends and other advances and transfers of funds from
its subsidiaries and earnings from its investments in cash and marketable
securities to provide the funds necessary to meet the Issuers' debt service
obligations, including payment of principal and interest on the Notes. Although
the Company is the sole or majority shareholder of each of the Operating
Subsidiaries and therefore able to control their respective declarations of
dividends, applicable laws may prevent the Operating Subsidiaries from being
able to pay such dividends. Dividends may be paid by a New York corporation only
out of its surplus. A Delaware corporation may make dividend payments out of
either its surplus or net profits. Therefore, the Operating Subsidiaries must
have a surplus and/or net profits in order to be legally permitted to make
dividend payments to the Company. In addition, such payments may be restricted
by claims against such subsidiaries by their creditors (such as suppliers,
vendors, lessors, and employees) and by any applicable bankruptcy,
reorganization or similar laws applicable to the Operating Subsidiaries. The
availability of funds, and therefore the ability of the Operating Subsidiaries
to pay dividends or make other payments or advances to the Company, will depend
upon their operating results. The ability of the Operating Subsidiaries to pay
dividends may be subject to restrictions contained in future agreements
governing the indebtedness of such subsidiaries.
The only significant assets of the Company (other than cash and marketable
securities) are its investments in the capital stock of the Operating
Subsidiaries, all of which stock has been pledged as collateral under the New
Credit Facility. In the event the Issuers were unable to pay the principal or
interest on the Notes, the ability of the holders of the Notes to proceed
against the capital stock of the Operating Subsidiaries would be subject to the
prior satisfaction in full of all amounts owing under such loan agreement.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company is highly leveraged. As of June 30, 1998, on a pro forma basis,
after giving effect to the assumptions described in "Unaudited Pro Forma
Consolidated Financial Data," the Company's total indebtedness would have been
approximately $81.5 million. For the six months ended June 30, 1998, the
Company's ratio of earnings to fixed charges would have been 1.55:1. The Company
may incur additional indebtedness in the future, subject to limitations imposed
by the Indenture and the New Credit Facility. See "Capitalization" and
"Unaudited Pro Forma Consolidated Financial Data."
The Company's high degree of leverage could have important consequences to
holders of the Notes, including, but not limited to, the following: (i) a
substantial portion of the Company's cash flow from operations will be required
to be dedicated to debt service and will not be available for other purposes;
(ii) the Company's ability to obtain additional financing in the future could be
limited; (iii) certain of the Company's borrowings are at variable rates of
"interest" which could result in higher interest expense in the event of
increases in interest rates; (iv) the Company may be more vulnerable to extended
economic downturns and may be restricted from making acquisitions, introducing
new technologies or exploiting business opportunities, and (v) the Indenture and
the New Credit Facility will contain financial and restrictive covenants that
limit the ability of the Company to, among other things, borrow additional
funds, dispose of assets or pay cash dividends. Failure by the Company to comply
with such covenants could result in an event of default which, if not cured or
waived, could have a material adverse effect on the Company. In addition, the
degree to which the Company is leveraged could prevent it from repurchasing all
Notes tendered to it upon the occurrence of a Change of Control. See
"Description of Notes" and "Certain Indebtedness -- New Credit Facility."
The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness will depend on its financial and
operating performance, which in turn will be subject to prevailing economic
conditions and to certain financial, business and other factors beyond its
control. If the Company's
16
<PAGE> 22
cash flow and capital resources are insufficient to fund its debt service
obligations, the Company may be forced to reduce or delay planned expansion and
capital expenditures, sell assets, obtain additional equity capital or
restructure its debt. There can be no assurance that the Company's operating
results, cash flow and capital resources will be sufficient for payment of its
indebtedness in the future. In the absence of such operating results and
resources, the Company could face substantial liquidity problems and might be
required to dispose of material assets or operations to meet its debt service
and other obligations, and there can be no assurance as to the timing of such
sales or the proceeds that the Company could realize therefrom. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Notes."
Moreover, the Company has not entered into a definitive agreement with respect
to the New Credit Facility. There can be no assurance that the Company will be
successful in completing the negotiation of the New Credit Facility. Although
the Company has entered into the Commitment Letters, the obligations of the
Lenders thereunder are subject to a number of conditions, including absence of
material adverse changes with respect to the Company and the execution of
definitive documentation. There can be no assurance that such conditions will be
satisfied. See "Description of Certain Indebtedness -- New Credit Facility."
UNSECURED STATUS OF THE NOTES AND SUBSIDIARY GUARANTEES
The Notes and Subsidiary Guarantees are unsecured obligations of the
Issuers and the Subsidiary Guarantors, respectively. The Indenture permits the
Issuers and the Subsidiary Guarantors to incur certain secured indebtedness. The
holders of all existing and future secured indebtedness will have a claim prior
to the holders of the Notes with respect to any assets pledged by the Issuers
and the Subsidiary Guarantors as security for such indebtedness. It is expected
that the New Credit Facility will be secured by a first priority security
interest in (i) substantially all material assets of the Company and all other
assets owned or hereafter acquired; and (ii) all of the capital stock of the
Subsidiary Guarantors and all other direct and indirect subsidiaries owned by
the Company. Upon an event of default under any such future secured indebtedness
of the Issuers, the lenders thereunder would be entitled to foreclose on the
assets of the Issuers and the Subsidiary Guarantors pledged as security for the
indebtedness incurred thereunder. In such event, the assets of the Issuers and
the Subsidiary Guarantors remaining after payment of such secured indebtedness
may be insufficient to satisfy the obligations of the Issuers and the Subsidiary
Guarantors with respect to the Notes and the Subsidiary Guarantees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Notes." In
addition, the Notes are structurally subordinated to all existing and future
indebtedness of any subsidiary of the Issuers that is not a Subsidiary
Guarantor. As of June 30, 1998, the aggregate principal amount of secured
indebtedness of the Issuers and the Subsidiary Guarantors which would have
effectively ranked senior to the Notes and the Subsidiary Guarantees was
approximately $1.5 million (other than the Subsidiary Guarantees).
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture contains certain covenants, including, but not limited to,
covenants with respect to the following matters: (i) limitations on indebtedness
and preferred stock; (ii) limitations on liens; (iii) limitations on restricted
payments; (iv) limitations on restrictions on distributions from restricted
subsidiaries; (v) limitations on sale of assets and subsidiary stock; (vi)
limitations on transactions with affiliates; (vii) limitations on lines of
business; (viii) limitation on business activities of Finance Corp.; and (ix)
limitations on mergers, consolidations and transfers of all or substantially all
assets. In addition, future Senior Indebtedness of the Company may also contain
certain other restrictive covenants which are generally more restrictive than
those contained in the Indenture and limit the Company's ability to prepay its
other indebtedness (including the Notes). Future Senior Indebtedness of the
Company may also require the Company to maintain specified consolidated
financial ratios and satisfy certain consolidated financial tests. See
"Description of Certain Indebtedness -- New Credit Facility" and "Description of
Notes."
The Company's ability to comply with the covenants in the Indenture may be
affected by events beyond its control, including prevailing economic, financial,
competitive, legislative, regulatory and other conditions. The breach of any
such covenants or restrictions could result in a default under the Indenture,
which would permit the holders of the Notes and/or the lenders under other
Senior Indebtedness of the Company, as the
17
<PAGE> 23
case may be, to declare all amounts borrowed thereunder to be due and payable,
together with accrued and unpaid interest, and the commitments of the lenders to
make further extensions of credit under the Company's other senior indebtedness
could be terminated. If the Company were unable to repay any of its other
indebtedness, such lenders could proceed against any or all of the collateral
securing any such indebtedness, which collateral may consist of substantially
all of the assets of the Company and the Subsidiary Guarantors. In addition, if
the Company fails to comply with the financial and operating covenants contained
in any such indebtedness, such failure could result in an event of default
thereunder, which could permit the acceleration of the debt incurred thereunder
and, in some cases, cross-acceleration and cross-default of indebtedness
outstanding under other debt instruments of the Company, including the Notes.
See "Description of Notes."
LIMITATION ON CHANGE IN CONTROL
Upon a Change of Control, the holders of the Notes will be entitled to
require the Issuers to purchase their Notes at a price equal to 101% of the
principal amount thereof plus accrued and unpaid interest thereon, if any, to
the date of repurchase. The Company expects that the New Credit Facility will
prohibit the Company from purchasing any Notes and will also provide that change
of control events with respect to the Company or Parent would constitute a
default thereunder. Any future credit agreements or other agreements relating to
Senior Indebtedness to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Company is prohibited from purchasing the Notes, the Company could seek
the consent of its lenders to purchase the Notes or could attempt to refinance
or repay the borrowings that contain such prohibition. If the Company does not
obtain such a consent or repay such borrowings, the Company will remain
prohibited from purchasing the Notes. In such case, the Company's failure to
purchase tendered Notes would constitute an Event of Default as defined under
the Indenture which the Company expects would, in turn, constitute a default
under the New Credit Facility. There can be no assurance that the Company will
have the financial ability to purchase the Notes upon the occurrence of a Change
of Control. If, as a result thereof, a default occurs with respect to any other
Senior Indebtedness, payments to the holders of the Notes could be limited.
In addition, the Change of Control provisions may not be waived by the
Board of Directors of the Company or the trustee under the Indenture (the
"Trustee") without the consent of holders of at least a majority in principal
amount of the Notes. As a result, the Change of Control provisions of the Notes
may in certain circumstances discourage or make more difficult a sale or
takeover of the Company and, thus, the removal of incumbent management. See
"Description of Notes -- Change of Control."
FRAUDULENT CONVEYANCE
The issuance of the Notes and the Subsidiary Guarantees may be subject to
review by a court under federal bankruptcy law or comparable provisions of state
fraudulent transfer law. Under federal or state fraudulent transfer laws, if a
court were to find that, at the time the Notes and Subsidiary Guarantees were
issued, the Company or a Subsidiary Guarantor, as the case may be, (i) issued
the Notes or a Subsidiary Guarantee with the intent of hindering, delaying or
defrauding current or future creditors or (ii)(A) received less than fair
consideration or reasonably equivalent value for incurring the indebtedness
represented by the Notes or a Subsidiary Guarantee and (B)(1) was insolvent or
was rendered insolvent by reason of the issuance of the Notes or such Subsidiary
Guarantee, (2) was engaged, or about to engage, in a business or transaction for
which its remaining assets constituted unreasonably small capital or (3)
intended to incur, or believed (or should have believed) it would incur, debts
beyond its ability to pay as such debts mature (as all of the foregoing terms
are defined in or interpreted under such fraudulent transfer statutes), such
court could avoid all or a portion of the Company's or a Subsidiary Guarantor's
obligations to the holders of the Notes or subordinate the Company's or a
Subsidiary Guarantor's obligations to the holders of the Notes to other existing
and future indebtedness of the Company or such Subsidiary Guarantor, as the case
may be, the effect of which would be to entitle such other creditors to be paid
in full before any payment could be made on the Notes, and take other action
detrimental to the holders of the Notes, including in certain circumstances,
invalidating the Notes. In that event, there would be no assurance that any
repayment on the Notes would ever be recovered by the holders of the Notes.
18
<PAGE> 24
The definition of insolvency for purposes of the foregoing considerations
varies among jurisdictions depending upon the federal or state law that is being
applied in any such proceeding. However, the Company or a Subsidiary Guarantor
generally would be considered insolvent at the time it incurs the indebtedness
constituting the Notes or a Subsidiary Guarantee, as the case may be, if (i) the
fair market value (or fair saleable value) of its assets is less than the amount
required to pay its total existing debts and liabilities (including the probable
liability on contingent liabilities) as they become absolute or matured or (ii)
it is incurring debts beyond its ability to pay as such debts mature.
There can be no assurance as to what standard a court would apply in order
to evaluate the parties' intent or to determine whether the Company or a
Subsidiary Guarantor, as the case may be, was insolvent at the time, or rendered
insolvent upon consummation, of the sale of the Notes or the issuance of a
Subsidiary Guarantee or that, regardless of the method of valuation, a court
would not determine that the Company or a Subsidiary Guarantor, as the case may
be, was insolvent at the time, or rendered insolvent upon consummation, of the
Initial Offering. Nor can there be any assurance that a court would not
determine, regardless of whether the Company or a Subsidiary Guarantor was
insolvent on the date the Notes and Subsidiary Guarantees were issued, that the
payments constituted fraudulent transfers on another ground.
In addition, the Subsidiary Guarantees could also be subject to the claim
that, since the Subsidiary Guarantees were incurred for the benefit of the
Company (and only indirectly for the benefit of the Subsidiary Guarantors), the
obligations of the Subsidiary Guarantor thereunder were incurred for less than
reasonably equivalent value or fair consideration. A court could avoid a
Subsidiary Guarantor's obligation under its Subsidiary Guarantee, subordinate
the Subsidiary Guarantee to other indebtedness of such Subsidiary Guarantor or
take other action detrimental to the holders of the Notes.
ABSENCE OF PUBLIC MARKET; ADVERSE EFFECT ON MARKET FOR OLD NOTES
There is no public market for the Old Notes, although the Old Notes are
eligible for trading in PORTAL by "Qualified Institutional Buyers" as defined in
Rule 144A under the Securities Act ("QIBs") until the consummation of the
Exchange Offer. The Initial Purchaser has acted as market maker for the Old
Notes and has advised the Company that it currently intends to make a market in
the New Notes. However, the Initial Purchaser is not obligated to do so and any
market making may be discontinued at any time without notice. In addition, such
market making activity may be limited during the pendency of the Exchange Offer
or the effectiveness of a shelf registration statement in lieu thereof. The
Issuers do not intend to apply for listing of the New Notes on any securities
exchange or for quotation of the New Notes through any automated quotation
system. Accordingly, there can be no assurance that an active public market for
the New Notes will develop or as to the liquidity of any market that may
develop, the ability of holders of New Notes to sell their New Notes or the
price at which such holders would be able to sell their New Notes. In addition,
to the extent that Old Notes are tendered and accepted in the Exchange Offer,
the trading market for the untendered and tendered but unaccepted Old Notes
could be adversely affected. The liquidity of, and trading market for, both the
Old Notes and the New Notes also may be adversely affected by general declines
in the market or by declines in the market for similar securities. Such declines
may adversely affect such liquidity and trading markets independent of the
financial performance of, and prospects for, the Company.
DEPENDENCE ON OEM CUSTOMERS
The Company markets its products in large part to OEM customers that
integrate the Company's products into their own end products. The businesses of
the Company's OEM customers are intensely competitive. The Company is therefore
subject to the risk that the price of or demand for the products sold by its OEM
customers will decline, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
because the Company generally markets its products through OEMs, the Company is
subject to the risk that the ultimate consumers of the products of OEMs will
discontinue using such OEMs' products for reasons unrelated to the quality or
price of or demand for the Company's products, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company is also subject to the risk that its OEM customers will
replace the Company's products with products developed internally by them or
with products from the
19
<PAGE> 25
Company's competitors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
COMPETITION
Each of the markets served by the Company is highly competitive, with a
number of competitors offering similar products. The Company focuses its efforts
relating to its business segments on the high-end of their respective markets,
where management believes that product design, quality, service and durability
are the primary competitive factors. The Company faces significant price
competition from its competitors in each of its markets and may encounter
competition from new market entrants. In addition, certain of the Company's
customers have significantly greater resources than the Company and there can be
no assurance that these customers will not explore vertical integration
opportunities to manufacture components that are currently purchased from the
Company. In addition, with respect to its Flexible Shaft Business, the Company
may encounter competition from existing rigid shaft technology, new market
entrants or new technology. There can be no assurance that the Company will be
able to compete successfully in its markets in the future. See
"Business -- Competition."
RISK OF CUSTOMER CONSOLIDATION
Certain industries to which the Company markets its products, particularly,
the office furniture industry, have experienced a move towards consolidation.
Further consolidation could result in the combination of one of the Company's
customers with a customer of a competitor of the Company. Such a consolidation
could result in changes in product purchasing or sourcing decisions or price
erosion due to purchasing economies of scale and could result in the loss of all
or a portion of current sales volumes to a customer, which could have a material
adverse effect on the Company's financial condition and results of operations.
There can be no assurance in such circumstances that any such lost sales that
might occur as a result of industry consolidation could be replaced with sales
to new customers. See "Business -- Business Strategy."
LACK OF PATENT PROTECTION; RISK OF TECHNOLOGICAL OBSOLESCENCE
The Company does not, in general, rely on patented technology. There can be
no assurance that other companies will not independently develop manufacturing
or other technology which will enable them to more effectively compete with the
Company or which may lead to patents relating to specific aspects of the
Company's business segments. Although the Company does not believe any of its
markets to be characterized by rapidly changing technology or evolving industry
standards, there can be no assurance that such technological or industry changes
will not occur or that the Company will be able to keep pace with any such
technological demands of the marketplace. In addition, there can be no assurance
that another company will not develop an automatic winding machine similar to
that used by the Company to produce flexible shafts or develop a new technology
that is superior to that used by the Company. The Company believes that the
current unavailability of such machines is a significant barrier to entry into
the production of flexible shafts and any such development could have a material
adverse effect on the Company's financial condition and results of operation.
The Company continually focuses its efforts on product innovation and
design improvements that enhance existing products and stimulate development of
new products. The Company's approach to custom engineered solutions may subject
the Company to claims of patent infringement by competitors. There can be no
assurance that any future successful assertion of patent infringement claims
will not result in material legal, royalty or other costs to the Company.
PRODUCT LIABILITY EXPOSURE
The Company may be exposed to product liability claims in the future
relating to the performance of one of its products or the performance of a
product in which one of the Company's products was a component part. There can
be no assurance that product liability claims will not be brought against the
Company in the future, either by an injured customer of an end product
manufacturer who used a Company product as a component or by a direct purchaser
from the Company. In addition, no assurance can be given that indemnification
from the Company's customers or coverage under insurance policies will be
adequate to cover future product
20
<PAGE> 26
liability claims against the Company. Moreover, liability insurance is
expensive, difficult to maintain and may be unobtainable in the future on
acceptable terms. The amount and scope of any insurance coverage may be
inadequate if a product liability claim is successfully asserted against the
Company. Furthermore, if any significant claims are made against the Company or
any of the Company's suppliers, the Company's business may be adversely affected
by any resulting negative publicity.
COMPANY GROWTH AND STRATEGIC ACQUISITIONS
A key element of the Company's business strategy is to selectively pursue
acquisition opportunities, whether relating to the Specialty Lock Business, the
Flexible Shaft Business, or other complementary or related light manufacturing
businesses. The Company historically has been able to benefit from acquisitions
through efficient integration and implementation of the Company's operating
strategies. However, there can be no assurance that acquisition opportunities
will continue to be available or that if available, such acquisitions could be
consummated on terms acceptable to the Company, or that the Company would be
able to obtain financing on terms that it deems acceptable to consummate any
potential acquisition. In addition, the Company's future performance will
depend, in part, on its ability to manage expanding operations and to adapt its
operational systems to such expansions. The failure of the Company to
effectively manage its growth or successfully integrate acquired companies or
assets into the Company's operations could have a material adverse effect on the
Company's financial condition and results of operations.
RELIANCE ON KEY PERSONNEL; NEED FOR SKILLED LABOR
The Company believes that the breadth of industry experience of key
management personnel is integral to the Company's success in understanding and
serving its customers' needs. The loss of the President of any of the Operating
Subsidiaries could, among other things, have an adverse effect upon the
Company's business and results of operations. In addition, the Company is
dependent on the services of a team of engineers and sales personnel in the
Flexible Shaft Business, consisting of a limited number of persons with highly
specialized technical knowledge. The Company's future results will depend upon
its ability to attract and retain technical, managerial, and marketing
personnel. Given that the Company operates in geographic areas with low
unemployment rates, there can be no assurance that the Company will be
successful in attracting and retaining the personnel required to sustain its
business. Failure to attract and retain such personnel could have a material
adverse effect on the Company's business, financial condition and results of
operation. See "Business -- Employees" and "Management."
YEAR 2000 COMPLIANCE
The Company is heavily dependent upon computer technology to effectively
carry out its day-to-day operations. In addition, the Company is dependent on
suppliers and customers who also use computer technology in the conduct of their
business. While management believes that the Company's computer and information
systems will be able to accommodate the "year 2000" dating changes necessary to
permit correct recording of year dates for 2000 and later years by mid 1999, the
Company's management is currently addressing all year 2000 issues and is in the
process of evaluating and correcting all year 2000 issues. The initial
assessment indicates that the Company does not have a significant year 2000
issue, and management believes that the cost of addressing its year 2000 issues
will not be material. The Company believes it will be able to achieve year 2000
compliance by the end of 1999, and does not anticipate any material disruption
in its operations as the result of any failure by the Company to be in
compliance, although no assurance to such effect can be given. In the event that
any of the Company's significant suppliers or customers do not successfully and
timely achieve year 2000 compliance, the Company's business or operations could
be adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000."
CONTROL BY PRINCIPAL STOCKHOLDER
John S. Dyson is the Chairman of the Board of Directors and, together with
trusts for the benefit of members of his family, owns approximately 90% of the
outstanding common stock of the Parent, the sole member of KC LLC. Accordingly,
Mr. Dyson will control the Company and have the power to appoint new management
and approve any action requiring the approval of the members, including adopting
amendments
21
<PAGE> 27
to the Company's limited liability company agreement and approving mergers or
sales of substantially all of the Company's assets. There can be no assurance
that the interests of Mr. Dyson will not conflict with the interests of the
holders of the Notes. See "Management" and "Principal Stockholders."
POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES
The Company is subject to various federal, state and local environmental
laws, ordinances, regulations, permits and other authorizations, including those
governing discharges into the air and water, the storage, handling and disposal
of solid and hazardous wastes, discharges of waste water, the remediation of
soil and groundwater contamination, by hazardous substances, wastes or petroleum
products, the health and safety of employees and other matters ("Environmental
Laws"). Some Environmental Laws impose liability for environmental remediation
costs on property owners and operators without regard to fault. Soil and
groundwater contamination exists, and remediation is required, at certain of the
Company's properties which may be a result of either the Company's operations or
other industrial activities. See "Business -- Environmental Matters." In
connection with its present and past ownership and operation of those and other
properties, the Company may be liable under Environmental Laws for the cost of
remediation of such contamination, as well as certain other related costs,
including governmental penalties and claims by third parties for personal injury
and property damage. While the Company has incurred remedial and related costs
in the past, none to date have been material. Future events, such as new
information, changes in existing Environmental Laws or their interpretation, and
more vigorous enforcement by regulatory authorities, may give rise to additional
expenditures, including capital expenditures, and additional compliance
requirements or liabilities.
PRICE OF RAW MATERIALS
The Company generally does not have supply contracts with its suppliers
which lock in the price of its raw materials. The price of the raw materials
used by the Company can fluctuate materially. In the event of an increase in the
price of raw materials, there can be no assurance that the Company will be
successful in passing along such price increases to its customers. See
"Business -- Raw Materials and Suppliers."
ADVERSE CONSEQUENCES OF FAILURE TO ADHERE TO EXCHANGE OFFER PROCEDURES
Issuance of the New Notes in exchange for Old Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Exchange Agent of
such Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of Old Notes desiring to tender
such Old Notes in exchange for New Notes should allow sufficient time to ensure
timely delivery. Neither the Issuers nor the Exchange Agent is under any duty to
give notification of defects or irregularities with respect to the tender of Old
Notes for exchange. Old Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof and, upon
consummation of the Exchange Offer, certain registration rights under the
Exchange and Registration Rights Agreements will terminate.
RECEIPT OF RESTRICTED SECURITIES UNDER CERTAIN CIRCUMSTANCES
Any holder of Old Notes who tenders in the Exchange Offer for the purpose
of participating in a distribution of the New Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer -- Consequences
of Failure to Exchange."
22
<PAGE> 28
THE ISSUERS
KEY COMPONENTS, LLC
KC LLC is a Delaware limited liability company recently formed as a
wholly-owned subsidiary of the Parent to hold and operate the Operating
Subsidiaries. KC LLC, together with Finance Corp., was formed to facilitate the
Initial Offering.
KEY COMPONENTS FINANCE CORP.
Finance Corp., a wholly-owned subsidiary of KC LLC, was recently
incorporated in Delaware for the purpose of serving as a co-issuer of the Old
Notes in order to facilitate the Initial Offering. The Company believes that
certain prospective purchasers of Notes may be restricted in their ability to
purchase debt securities of limited liability companies, such as the Company,
unless such debt securities are jointly issued by a corporation. Finance Corp.
will not have any operations or assets and will not have any sales. As a result,
prospective purchasers of the Notes should not expect Finance Corp. to
participate in servicing the interest and principal obligations of the Notes.
The Indenture imposes substantial restrictions on the activities of Finance
Corp. See "Description of Notes -- Certain Covenants -- Limitation on Business
Activities of Finance Corp."
The principal executive offices of the Issuers are located at Wing Road
RR1, Box 167D, Millbrook, New York 12545, and the telephone number is (914)
677-8383.
23
<PAGE> 29
THE FORMATION
Concurrently with the closing of the sale of the Old Notes, KC LLC acquired
all of the assets and was assigned all of the liabilities of the Parent,
including all right, title and interest of Parent in and to all of the
outstanding equity securities of Elliott, Hudson and ESP, which were then held
by the Parent (the "Formation"). See "Principal Stockholders." As a result of
the Formation, Elliott, Hudson and ESP became, together with Finance Corp., the
sole subsidiaries of the Company.
The following chart depicts the organization of the Company.
[KEY COMPONENTS FLOW CHART]
(1) The Parent, which is classified as a subchapter S corporation, has no assets
except for its membership interests in KC LLC.
(2) KC LLC has no material tangible assets except for its ownership of all the
capital stock of its subsidiaries. The terms of the indenture restrict the
operations of the Company in certain respects. KC LLC is also the borrower
under the New Credit Facility, the terms of which also restrict the
operations of the Company in certain respects. See "Risk Factors -- Holding
Company Structure; -- Restrictions Imposed by Terms of the Company's
Indebtedness" and "Description of Certain Indebtedness -- New Credit
Facility."
(3) Finance Corp. has no assets or operations. The terms of the Indenture
significantly restrict the operations of Finance Corp.
24
<PAGE> 30
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Issuers'
obligations under the Exchange and Registration Rights Agreement. The Issuers
will not receive any cash proceeds from the issuance of the New Notes offered
hereby. In consideration for issuing the New Notes contemplated in this
Prospectus, the Issuers will receive Old Notes in like principal amount, the
form and terms of which are identical to the form and terms of the New Notes
(which replace the Old Notes), except as otherwise described herein. The Old
Notes surrendered in exchange for New Notes will be retired and canceled and
cannot be reissued. Accordingly, issuance of the New Notes will not result in
any increase or decrease in the indebtedness of the Issuers.
The net proceeds to the Issuers from the Initial Offering were
approximately $76.7 million. The Issuers used the proceeds from the Initial
Offering to repay approximately $70.1 million of indebtedness, approximately
$3.6 million of which was related to costs associated with the repayment of such
indebtedness and the repurchase of outstanding warrants. The Issuers currently
intend to use the balance of the proceeds ($6.6 million) from the Initial
Offering, for working capital and other general corporate purposes of the
Company and its Subsidiaries which may include future acquisitions. Pending
utilization of the remaining proceeds from the Initial Offering, the Issuers
currently intend to invest such proceeds in short-term investments earning
interest at rates which are substantially lower than the rate borne by the
Notes.
25
<PAGE> 31
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
at June 30, 1998. This table should be read in conjunction with "Use of
Proceeds," "Unaudited Pro Forma Consolidated Financial Data," "Selected
Historical Consolidated Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's audited and
unaudited consolidated financial statements and notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $10,525
=======
Long-term debt (including current portion):
New Credit Facility(1).................................... $ --
The Old Notes............................................. 80,000
Other long term debt(2)................................... 1,522
-------
Total long-term debt, including current portion........ 81,522
-------
Stockholders' Equity:
Capital stock............................................. 1,536
Retained earnings......................................... 3,090
-------
Total stockholders' equity............................. 4,626
-------
Total capitalization.............................. $86,148
=======
</TABLE>
- ---------------
(1) The Company has entered into the Credit Agreement for the New Credit
Facility which provides for a (i) $15,000 revolving facility and (ii)
$25,000 acquisition facility. Borrowings under the New Credit Facility are
subject to the satisfaction of certain conditions. See "Description of
Certain Indebtedness -- New Credit Facility."
(2) Represents $632 for an obligation related to a lease for a vacated facility,
$490 for an obligation under a licensing agreement, $228 for capital lease
obligations and $172 for an obligation under a covenant not to compete.
26
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Consolidated Balance Sheet as of June 30,
1998 and the Unaudited Pro Forma Consolidated Statements of Operations for the
year ended December 31, 1997 and the six months ended June 30, 1998 have been
prepared to give effect to (i) the acquisition by the Company of all of the
capital stock of Hudson on May 15, 1997 and ESP on December 10, 1997 (the
"Acquisitions"), (ii) the acquisition by ESP of all of the assets of RAD on June
22, 1997, (iii) the Initial Offering and the application of the net proceeds
therefrom, (iv) the conversion of the Parent from a C corporation to a
subchapter S corporation on May 31, 1997, (v) the Formation, and (vi) the New
Credit Facility. The Company's balance sheet at June 30, 1998 includes the
effect of the Acquisitions and the transactions described in clauses (iii) and
(v) above, which had occurred prior to such date. The Unaudited Pro Forma
Consolidated Balance Sheet gives effect to the transaction described in clause
(vi) above as if it were consummated on June 30, 1998. The Unaudited Pro Forma
Consolidated Statements of Operations give effect to the Acquisitions and other
transactions described above as if each had occurred as of January 1, 1997. The
Unaudited Pro Forma Consolidated Financial Data has been derived by the Company
by the application of pro forma adjustments to (i) the audited financial
statements of the Company for the year ended December 31, 1997 and the audited
financial statements of Hudson for the 138 day period ended May 15, 1997 and of
ESP for the 344 day period ended December 10, 1997, their respective dates of
acquisition by the Company, and of RAD for the 83 day period ended June 22,
1997, its date of acquisition by ESP, and (ii) the unaudited financial
statements of the Company for the six month period ended and as of June 30,
1998.
The Company has accounted for the Acquisitions using the purchase method of
accounting, under which tangible and identifiable intangible assets acquired and
liabilities assumed are recorded at their respective fair values. Allocations of
the purchase price in the Acquisitions have been determined based on estimates
of fair value and, therefore, are subject to change. Differences between the
amounts included herein and the final allocations are not expected to be
material.
The Unaudited Pro Forma Consolidated Financial Data is unaudited and does
not purport to be indicative of the financial position or results of operations
which would actually have been attained had the Acquisitions, the Offering and
the other transactions been consummated on the dates indicated or which may be
attained in the future. The pro forma adjustments, as described in the Notes to
the Unaudited Pro Forma Consolidated Balance Sheet and the Notes to the
Unaudited Pro Forma Consolidated Statement of Operations, are based on available
information and upon certain assumptions which management believes are
reasonable. These pro forma statements should be read in conjunction with
"Summary Historical Consolidated Financial Data," "The Formation," "Use of
Proceeds," "Selected Historical Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the historical financial statements and notes thereto of the Company, Hudson,
ESP and RAD, included elsewhere in this Prospectus.
27
<PAGE> 33
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
THE COMPANY ADJUSTMENTS THE COMPANY
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Cash................................................ $10,525 $ (200)(1) $10,325
Accounts receivable, net............................ 9,055 -- 9,055
Inventories......................................... 8,544 -- 8,544
Prepaid expenses and other current assets........... 528 -- 528
------- ------- -------
Total current assets............................. 28,652 (200) 28,452
Property, plant and equipment, net.................. 11,866 -- 11,866
Goodwill............................................ 44,639 -- 44,639
Deferred financing costs............................ 4,264 200(1) 4,464
Intangibles......................................... 1,672 -- 1,672
Other assets........................................ 73 -- 73
------- ------- -------
Total assets..................................... $91,166 $ -- $91,166
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current portion of long term debt................... $ -- $ -- $ --
Current portion of other long term obligations...... 499 -- 499
Accounts payable.................................... 2,026 -- 2,026
Accrued expenses and other liabilities.............. 2,993 -- 2,993
------- ------- -------
Total current liabilities........................ 5,518 -- 5,518
Long term debt...................................... 80,000 -- 80,000
Other long term obligations......................... 1,023 -- 1,023
------- ------- -------
Total liabilities................................ 86,541 -- 86,541
------- ------- -------
Capital stock....................................... 1,536 -- 1,536
Retained earnings................................... 3,089 -- 3,089
------- ------- -------
Total stockholder's equity....................... 4,625 -- 4,625
------- ------- -------
Total liabilities and stockholder's equity....... $91,166 $ -- $91,166
======= ======= =======
</TABLE>
- ---------------
(1) Represents a commitment fee for the New Credit Facility of $200.
28
<PAGE> 34
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------------
FISCAL YEAR 138 DAYS 344 DAYS 173 DAYS PRO FORMA
ENDED ENDED ENDED ENDED FISCAL YEAR ENDED
DECEMBER 31, MAY 15, DECEMBER 10, JUNE 22, DECEMBER 31,
1997 1997 1997 1997 PRO FORMA 1997
THE COMPANY HUDSON ESP RAD CONSOLIDATED ADJUSTMENTS THE COMPANY
------------ -------- ------------ -------- ------------ ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $27,318 $6,809 $23,260 $1,588 $58,975 $ -- $58,975
Cost of goods sold...... 15,798 3,877 17,299 1,154 38,128 -- 38,203
75(1)
------- ------ ------- ------ ------- ------- -------
Gross profit............ 11,520 2,932 5,961 434 20,847 (75) 20,772
Selling, general and
administrative
expenses.............. 6,321 1,217 3,558 258 11,354 -- 11,330
(110)(2)
702(3)
(39)(4)
(277)(5)
(340)(6)
40(7)
Non-recurring business
consolidation
charges............... 84 -- -- -- 84 -- 84
------- ------ ------- ------ ------- ------- -------
Income from
operations............ 5,115 1,715 2,403 176 9,409 (51) 9,358
Other income (expense):
Other income
(expense)........... 31 -- 52 (4) 79 -- 79
Interest expense...... (3,007) (663) (615) (79) (4,364) (4,319)(8) (8,683)
------- ------ ------- ------ ------- ------- -------
Earnings before taxes... 2,139 1,052 1,840 93 5,124 (4,570) 754
Provision for income
taxes................. 889 460 773 -- 2,122 (2,094)(9) 28
------- ------ ------- ------ ------- ------- -------
Net income.............. $ 1,250 $ 592 $ 1,067 $ 93 $ 3,002 $(2,276) $ 726
======= ====== ======= ====== ======= ======= =======
SUPPLEMENTARY DATA:
Depreciation and
amortization.......... $ 1,817 $ 249 $ 1,586 $ 91 $ 3,743 $ 628 $ 4,371
</TABLE>
29
<PAGE> 35
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 PRO FORMA JUNE 30, 1998
THE COMPANY ADJUSTMENTS THE COMPANY
------------- ----------- -------------
<S> <C> <C> <C>
Net sales............................................. $33,016 $ -- $33,016
Cost of goods sold.................................... 20,579 -- 20,579
------- ------- -------
Gross profit.......................................... 12,437 -- 12,437
Selling, general and administrative expenses.......... 5,559 87(4) 5,646
------- ------- -------
Income from operations................................ 6,878 (87) 6,791
Other income (expense):
Other income........................................ 128 -- 128
Interest expense.................................... (3,295) (1,069)(8) (4,364)
------- ------- -------
Earnings before taxes and extraordinary charge........ 3,711 (1,156) 2,555
Provision for income taxes............................ 140 (45)(9) 95
Extraordinary charge -- early repayment of debt....... 4,616 (4,616) --
------- ------- -------
Net income............................................ $(1,045) $(3,505) $ 2,460
======= ======= =======
SUPPLEMENTARY DATA:
Depreciation and amortization......................... $ 2,068 $ 87 $ 2,155
</TABLE>
30
<PAGE> 36
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(1) As required by purchase accounting in connection with the Hudson
acquisition, the Company recorded a net increase of $2,389 to production
related equipment reflecting the difference between book values and fair
values. A pro forma adjustment has been made to reflect additional
depreciation included in cost of goods sold based on the fair value of
assets acquired, as if the acquisition had occurred as of January 1, 1997.
No adjustment was required for the six months ended June 30, 1998.
(2) As required by purchase accounting in connection with the Hudson
acquisition, the Company recorded a net decrease of $3,019 to selling,
general and administrative related fixed assets reflecting the difference
between book values and fair values. A pro forma adjustment has been made to
reflect depreciation included in selling, general and administrative
expenses based on the fair value of assets acquired, as if the acquisition
had occurred as of January 1, 1997. No adjustment was required for the six
months ended June 30, 1998.
(3) As required by purchase accounting in connection with the Acquisitions, the
Company recorded goodwill and other intangibles of $46,912 and eliminated
$6,699 of goodwill previously recorded on the books of the acquired
companies. The Unaudited Pro Forma Consolidated Statements of Operations
assume that the Acquisitions occurred as of January 1, 1997. Accordingly, a
net goodwill and intangible amortization adjustment was included in selling,
general and administrative expenses and is comprised of the following:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Full year amortization of acquisition goodwill and
intangibles............................................... $ 1,383
Amortization included in historical statements of the
Company and acquired companies............................ (681)
-------
Net adjustment.............................................. $ 702
=======
</TABLE>
No pro forma adjustment was required for the six months ended June 30,
1998.
(4) Represents the net adjustment related to the following changes in the
amortization of debt financing costs, assuming the Initial Offering occurred
as of January 1, 1997:
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
Amortization of debt financing costs related to the
Notes and the New Credit Facility(a)................. $ 463 $ 232
Amortization included in historical statements of the
Company and acquired companies....................... -- (35)
Elimination of amortization of debt financing costs
associated with the Old Notes and the Old Credit
Facility(b).......................................... (174) (110)
Elimination of amortization of debt financing costs
associated with debt repaid from the proceeds of the
Original Notes and the Old Credit Facility........... (328) --
------ -----
Net adjustment......................................... $ (39) $ 87
====== =====
</TABLE>
31
<PAGE> 37
- ---------------
(a) Debt financing costs associated with the Notes and the New Credit
Facility are estimated to be $4,500 and include the initial purchase
discount of $2,400 payable in connection with the Initial Offering.
These costs are being amortized on a straight line basis over the
respective lives of the new agreements.
(b) The write-off of the debt financing costs related to the Original Notes
and the Old Credit Facility was recorded as an extraordinary charge
during the six months ended June 30, 1998 and is not included in the
Unaudited Pro Forma Consolidated Statements of Operations.
(5) The adjustment of $277 for the year ended December 31, 1997, represents the
elimination of fees paid to Jordan, the former owner of Hudson, for general
management consulting services prior to its acquisition by the Company.
Since the consummation of the acquisition of Hudson, such services have been
provided by existing management of the Company and Millbrook. No such fees
are included in the six months ended June 30, 1998.
(6) In December 1997, a one-time management bonus of $340 was paid under an
agreement related to the purchase and change in control of ESP to a former
employee and stockholder of ESP who is now employed by the Company.
Management believes it is a nonrecurring charge. Any future bonus that may
be paid is at the sole discretion of the Company. See
"Management -- Employment Agreements and Executive Compensation." No
provision has been made in the Unaudited Pro Forma Consolidated Statements
of Operations for any such bonus to such employee. No pro forma adjustment
was required for the six months ended June 30, 1998, as estimated management
bonuses are included in historical statements of the Company.
(7) Represents the adjustment of Millbrook's management compensation as a result
of a new management agreement effective with the consummation of the
Formation. See "Certain Transactions."
(8) Represents the net adjustment related to the following changes in interest
expense, assuming the Initial Offering occurred as of January 1, 1997:
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
Interest expense related to the Notes and the New
Credit Facility(a)................................... $ 8,600 $ 4,300
Interest included in historical statements of the
Company.............................................. -- (770)
Elimination of interest expense associated with the
Original Notes and the Old Credit Facility........... (2,878) (2,461)
Elimination of interest expense associated with debt
repaid from proceeds of the Original Notes and the
Old Credit Facility.................................. (1,403) --
------- -------
Net adjustment......................................... $ 4,319 $ 1,069
======= =======
</TABLE>
- ---------------
(a) Interest expense reflects an interest rate of 10.50% on the Notes plus
a commitment fee of 0.50% per annum on the unused commitments under the
New Credit Facility. Interest expense excludes amortization of deferred
financing costs. The outstanding borrowings under the Notes and unused
commitments under the New Credit Facility are assumed to remain at
$80,000 and $40,000, respectively, throughout the period.
(9) As a limited liability company, the Company pays no federal income taxes and
the Shareholders are personally liable for taxes on the income of the
Company. Accordingly, the provision for income taxes recorded in the
historical financial statements has been adjusted in the Unaudited Pro Forma
Consolidated Statements of Operations to reflect income taxes applicable
only to certain states. The Indenture will permit the Company to make cash
distributions in an amount equal to the income tax liability of the
Shareholders in respect of the taxable income of the Company. See
"Description of Notes -- Limitation on Restricted Payments."
32
<PAGE> 38
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
THE COMPANY
(DOLLARS IN THOUSANDS)
The following table sets forth the historical statement of operations and
other financial data as of December 31, 1996 and December 31, 1997, and for each
of the three years ending December 31, 1997 which have been derived from, and
are qualified by reference to, the audited consolidated financial statements of
the Company included elsewhere in this Prospectus. The selected consolidated
financial data presented below as of December 31, 1993, December 31, 1994 and
December 31, 1995 and for each of the two years in the period ended December 31,
1994 have been derived from, and should be read in conjunction with, the audited
consolidated financial statements of the Company which are not included in this
Prospectus. The selected consolidated financial data presented below as of June
30, 1997 and June 30, 1998 and for the six month periods ended June 30, 1997 and
June 30, 1998 have been derived from, and should be read in conjunction with,
the unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus. The summary consolidated balance sheet data
presented below as of June 30, 1998 have been derived from, and should be read
in conjunction with, the unaudited consolidated financial statements of the
Company which are not included in this Prospectus. The information for the
interim periods is unaudited but has been prepared in the same manner as the
audited consolidated financial statements and, in the opinion of management,
contains all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of the results of operations for such periods. The
interim results of operations may not be indicative of the results for the full
year. The Selected Historical Consolidated Financial Data presented below should
be read in conjunction with "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31,(A) JUNE 30,
----------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997(A) 1998
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales............................................ $12,208 $13,612 $13,185 $13,449 $27,318 $ 9,781 $33,016
Cost of goods sold(b)................................ 6,927 7,745 7,356 8,361 15,798 5,253 20,579
------- ------- ------- ------- ------- ------- -------
Gross profit......................................... 5,281 5,867 5,829 5,088 11,520 4,528 12,437
Selling, general and administrative expenses(b)...... 3,306 3,987 3,457 4,641 6,405 2,356 5,559
------- ------- ------- ------- ------- ------- -------
Income from operations............................... 1,975 1,880 2,372 447 5,115 2,172 6,878
Other income (expense)............................... 6 24 26 5 31 15 127
Interest expense..................................... (405) (457) (427) (254) (3,007) (645) (3,294)
------- ------- ------- ------- ------- ------- -------
Income before taxes, extraordinary charge and change
in accounting principle............................ 1,576 1,447 1,971 198 2,139 1,542 3,711
Provision for income taxes(c)........................ 642 522 724 21 889 828 140
Extraordinary charge -- early repayment of debt...... -- -- -- -- -- -- 4,616
Cumulative effect of change in accounting
principle(d)....................................... (22) -- -- (313) -- -- --
------- ------- ------- ------- ------- ------- -------
Net income........................................... $ 956 $ 925 $ 1,247 $ 490 $ 1,250 $ 714 $(1,045)
======= ======= ======= ======= ======= ======= =======
OTHER DATA:
Adjusted EBITDA(e)................................... $ 2,928 $ 3,006 $ 3,521 $ 3,203 $ 8,352 $ 3,126 $ 9,604
Cash flows provided (used) by:
Operating activities...................................................................... 4,028 1,753 5,262
Investing activities...................................................................... (56,133) (39,424) (711)
Financing activities...................................................................... 53,213 39,539 4,533
Depreciation and amortization........................ 603 692 713 741 1,817 559 2,068
Capital expenditures................................. 501 389 345 1,298 696 282 711
Ratio of earnings to fixed charges(f)................ 4.1x 3.6x 4.7x 1.5x 1.7x 3.2x 2.1x
CONSOLIDATED BALANCE SHEET DATA (AS OF THE END OF
PERIOD):
Cash................................................. $ 423 $ 445 $ 821 $ 331 $ 1,440 2,198 $10,525
Working capital...................................... 4,164 4,485 4,738 4,702 10,681 7,416 23,135
Total assets......................................... 11,352 11,445 10,709 11,454 79,757 55,148 91,166
Long term debt (including current maturities)........ 5,698 5,005 3,608 3,428 66,855 50,105 81,522
Stockholders' equity................................. 4,311 5,236 6,483 6,974 8,848 7,688 4,626
</TABLE>
33
<PAGE> 39
- ---------------
(a) For each of the four fiscal years ended December 31, 1996 and the six months
ended June 30, 1997, the financial data set forth above represents the
results and balance sheet data of Elliott only. The Company acquired Hudson
on May 15, 1997 and ESP on December 10, 1997. The financial data set forth
above with respect to the fiscal year ended December 31, 1997 and for the
six months ended June 30, 1998 includes the results of Hudson and ESP from
their respective acquisition dates.
(b) For the fiscal year ended December 31, 1996, cost of goods sold includes a
provision for inventory obsolescence of $431 and selling, general and
administrative expenses include a nonrecurring business relocation charge of
$786. For the fiscal year ended December 31, 1997, selling, general and
administrative expenses include miscellaneous nonrecurring and noncash
charges of (i) $340 for a one-time management bonus paid in connection with
the change in control of ESP (ii) $84 in business relocation charges and
(iii) $55 in charges associated with land donation expenses. For the six
months ended June 30, 1998, cost of goods sold includes charges incurred in
connection with the consolidation of the RAD operations into Hudson. See
note (6) to "Notes to Unaudited Pro Forma Consolidated Statement of
Operations."
(c) The Parent elected to be treated as a subchapter S corporation under the
Internal Revenue Code effective May 31, 1997. As an S corporation, the
shareholders are personally liable for most taxes on the income of the
Company. Accordingly, subsequent to May 31, 1997 the provision for income
taxes includes only those taxes applicable to certain states. Due to the
change in tax status, the 1997 tax provision includes a charge of $469
representing the write-off of net deferred tax assets.
(d) Effective January 1, 1996, Elliott changed the composition of costs included
in inventory. Accordingly, Elliott recorded an adjustment to inventory cost
at January 1, 1997 as the cumulative effect of a change in accounting
principle. Had the Company applied this new accounting principle in the year
ended December 31, 1995, income before income taxes and net income would not
have been materially affected.
(e) Adjusted EBITDA is defined as net income (loss) plus (i) income tax expense,
(ii) interest expense, (iii) depreciation expense, (iv) amortization
expense, (v) management fees and (v) nonrecurring and noncash charges. See
footnote (b) above. Adjusted EBITDA is presented because EBITDA is a widely
accepted financial indicator of a company's ability to service indebtedness.
However, EBITDA should not be considered an alternative to operating income
or cash flows from operating activities (as determined in accordance with
generally accepted accounting principles) and should not be construed as an
indication of a company's operating performance or as a measure of
liquidity. Since all companies and analysts do not necessarily calculate
EBITDA in the same fashion, Adjusted EBITDA as presented in this Prospectus
may not be comparable to similarly titled measures reported by other
companies. See "Certain Transactions" and "Description of Notes."
The following table is a reconciliation of net income to Adjusted EBITDA
for the fiscal year ended December 31, 1997 and the six month periods ended
June 30, 1997 and 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1997 1997 1998
------------ ------ -------
<S> <C> <C> <C>
Net income.............................................. $1,250 $ 714 $(1,045)
Add:
Interest expense...................................... 3,007 645 3,294
Income tax expense.................................... 889 828 140
Depreciation and amortization......................... 1,817 559 2,068
Management fees....................................... 910 355 431
Nonrecurring and noncash charges:
Extraordinary item -- early repayment of debt....... -- -- 4,616
One time management bonus resulting from change in
control of ESP................................... 340 -- --
Business relocation and consolidation charges....... 84 25 100
Donation of land and write off of non-performing
assets........................................... 55 --
------ ------ -------
Historical Adjusted EBITDA.............................. $8,352 $3,126 $ 9,604
====== ====== =======
</TABLE>
(f) The ratio of earnings to fixed charges has been calculated by dividing
earnings before income taxes and fixed charges by fixed charges. Fixed
charges include interest expense, amortization of deferred financing costs
and one-third of operating lease payments which are deemed to be
representative of the interest factor.
34
<PAGE> 40
SELECTED HISTORICAL FINANCIAL DATA
HUDSON LOCK, INC.
(DOLLARS IN THOUSANDS)
The following table sets forth the historical financial statement of
operations and other financial data as of December 28, 1996 and for the fiscal
year then ended of Hudson prior to its acquisition by the Company, which have
been derived from, and should be read in conjunction with the audited statements
of Hudson included elsewhere in this Prospectus. The selected financial data
presented below as of May 15, 1997 and for the 138 day period ended May 15, 1997
have been derived from, and should be read in conjunction with, the audited
financial statements of Hudson included elsewhere in this Prospectus. The
selected financial data presented below as of December 30, 1995 and for the
fiscal year then ended is derived from the unaudited internal financial
statements of Hudson. The selected financial data presented below as of June 1,
1996 and for the 154 day period ended June 1, 1996 is unaudited but has been
prepared in the same manner as the audited selected historical financial data of
Hudson and in the opinion of management contains all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of the results
of operations for such period. The interim results of operations may not be
indicative of the results for the full year. The Selected Historical Financial
Data presented below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Hudson"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------- 154 DAYS ENDED 138 DAYS ENDED
DECEMBER 30, 1995 DECEMBER 28, 1996 JUNE 1, 1996 MAY 15, 1997
----------------- ----------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $ 16,150 $ 15,402 $ 6,213 $ 6,809
Cost of goods sold........... 9,368 9,230 3,750 3,877
-------- -------- -------- -------
Gross profit................. 6,782 6,172 2,463 2,932
Selling, general and
administrative
expenses(a)................ 2,569 2,584 1,131 1,217
-------- -------- -------- -------
Income from operations....... 4,213 3,588 1,332 1,715
Other income (expense)....... -- (12) -- --
Interest expense............. (2,268) (2,015) (855) (663)
-------- -------- -------- -------
Income before taxes(b)....... $ 1,945 $ 1,561 $ 477 $ 1,052
======== ======== ======== =======
OTHER DATA:
Depreciation and
amortization............... 758 819 338 249
Capital expenditures......... 539 316 293 225
BALANCE SHEET DATA (AS OF THE END OF PERIOD):
Total assets................. $ 14,101 $ 13,628 $ 14,246 $13,878
Long term debt (including
current maturities)........ -- -- -- --
</TABLE>
- ---------------
(a) Selling, general and administrative expenses include miscellaneous
nonrecurring and noncash charges of $297, $325, $50 and $64 for the fiscal
years ended December 31, 1995 and 1996, the 154 days ended June 1, 1996 and
the 138 days ended May 15, 1997, respectively.
(b) As a limited liability company the Company pays no federal income taxes.
Accordingly, the provision for income taxes has been excluded from the above
Selected Historical Financial Data as KCI management believes it is not
relevant.
35
<PAGE> 41
SELECTED HISTORICAL FINANCIAL DATA
ESP LOCK PRODUCTS, INC.
(DOLLARS IN THOUSANDS)
The following table sets forth the historical financial statement of
operations and other financial data of ESP prior to its acquisition by the
Company. The selected financial data presented below as of December 31, 1995 and
December 31, 1996 and for each of the two years in the period ended December 31,
1996, and the selected financial data presented below as of December 10, 1997,
and for the 344 day period ended December 10, 1997, have been derived from, and
should be read in conjunction with, the audited financial statements of ESP
included elsewhere in this Prospectus. The Selected Historical Financial Data
presented below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- ESP" included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
------------------ 344 DAYS ENDED
1995 1996 December 10, 1997(a)
------- ------- --------------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................................... $20,288 $21,265 $23,260
Cost of goods sold................................. 15,489 16,473 17,299
------- ------- -------
Gross profit....................................... 4,799 4,792 5,961
Selling, general and administrative expenses....... 2,840 3,004 3,558
------- ------- -------
Income from operations............................. 1,959 1,788 2,403
Other income (expense)............................. (11) 35 52
Interest expense................................... (1,015) (702) (615)
------- ------- -------
Income before taxes(b)............................. $ 933 $ 1,121 $ 1,840
======= ======= =======
OTHER DATA:
Depreciation and amortization...................... 1,098 1,138 1,586
Capital expenditures............................... 539 341 1,037
BALANCE SHEET DATA (AS OF THE END OF PERIOD):
Total assets....................................... $10,468 $ 9,540 $14,250
Long term debt (including current maturities)...... 6,169 4,792 8,195
</TABLE>
- ---------------
(a) ESP acquired RAD on June 22, 1997.
(b) As a limited liability company the Company pays no federal income taxes.
Accordingly the provision for income taxes has been excluded from the above
Selected Historical Financial Data as KCI management believes it is not
relevant.
36
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Historical Consolidated Financial Data" and the financial statements
and notes thereto included elsewhere in this Prospectus. This Prospectus
contains forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus.
OVERVIEW
KCI is a leading manufacturer of custom engineered essential componentry
for application in a diverse array of end-use products. The Company targets OEM
markets where KCI believes its value-added engineering and manufacturing
capabilities, along with its timely delivery, reliability and customer service,
enable it to differentiate the Company from its competitors and enhance
profitability. KCI, through its Operating Subsidiaries, has been designing and
manufacturing medium-security locks and related accessories since 1963 and
flexible shaft products since 1932.
The Company designs and manufactures medium-security custom and specialty
locks and locking systems to meet OEM customers' specifications. The Company's
locks and associated hardware are designed to be utilized in a wide range of
end-use markets including the office furniture, POS terminal and bank and postal
accessory markets for use in products such as office furniture, electronic cash
registers, bank bags, post office boxes and storage lockers.
The Company's flexible shaft products are produced for both rotary power
transmission and remote valve control applications in the industrial, aerospace
and commercial markets. The Company designs and manufactures more than 2,000
flexible shaft products, all of which utilize wound wire assemblies to transmit
rotary power when applications render rigid shaft technology (such as universal
joints) less efficient or impossible. The Company's flexible shaft technology
provides significant advantages over traditional rigid shaft technology. The
Company's flexible shaft products are currently used in weed trimmers, lawn
tractors, concrete vibrators, plant processing equipment and aircraft carriers,
as well as in aerospace, medical, industrial and other products.
On May 15, 1997, KCI acquired all of the issued and outstanding capital
stock of Hudson from Jordan for a cash purchase price of $39.1 million and
assumed liabilities of $1.2 million. On December 10, 1997, KCI acquired all of
the issued and outstanding capital stock of ESP, which on June 22, 1997 had
acquired the assets of RAD, from certain individual shareholders for a cash
purchase price of $16.3 million and assumed liabilities of approximately $10.4
million.
In April 1998, KC LLC and Finance Corp. were formed to facilitate the
Initial Offering. KC LLC is a wholly-owned subsidiary of the Parent and owns
100% of the Operating Subsidiaries. Finance Corp. is a wholly-owned subsidiary
of KC LLC and has no assets or operations. See "The Formation."
In July 1998, the Company entered into the New Credit Facility, which
provides for borrowing availability, subject to certain conditions, of an
outstanding principal amount of up to $40 million. See "Certain Indebtedness."
37
<PAGE> 43
RESULTS OF OPERATIONS -- THE COMPANY
The following table sets forth, for the periods indicated, consolidated
statement of operations data for the Company expressed in dollar amounts (in
thousands) and as a percentage of net sales. The results of operations of Hudson
and ESP are included only from the date of their acquisition, May 15, 1997 and
December 10, 1997, respectively. Such acquisitions have been accounted for as
purchases. For a discussion of the results of operations of Hudson and ESP for
periods prior to their respective acquisition dates, see "-- Results of
Operations -- Hudson" and "-- Results of Operations -- ESP."
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------
1997 1998
---------------------- -----------------------
PERCENTAGE OF PERCENTAGE OF
AMOUNT NET SALES AMOUNT NET SALES
------ ------------- ------- -------------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................................... $9,781 100.0% $33,016 100.0%
Cost of goods sold.......................................... 5,253 53.7 20,579 62.3
------ -------
Gross profit................................................ 4,528 46.3 12,437 37.7
Selling, general and administrative expenses(a)............. 2,356 24.1 5,559 16.8
------ -------
Income from operations...................................... 2,172 22.2 6,878 20.8
Other income................................................ 15 0.0 127 0.4
Interest expense............................................ (645) 0.7 (3,294) 10.0
------ -------
Income before taxes, extraordinary charge and change in
accounting principal...................................... 1,542 15.8 3,711 11.2
Provision for income taxes.................................. (828) 8.5 140 0.4
------ -------
Extraordinary charge -- early repayment of debt............. -- -- 4,616 14.0
Net income.................................................. $ 714 7.3% $(1,045) 3.2%
====== =======
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1995 1996 1997
----------------------- ----------------------- -----------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
------- ------------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales............................... $13,185 100.0% $13,449 100.0% $27,318 100.0%
Cost of goods sold...................... 7,356 55.8 8,361 62.2 15,798 57.8
------- ------- -------
Gross profit............................ 5,829 44.2 5,088 37.8 11,520 42.2
Selling, general and administrative
expenses(a)........................... 3,457 26.2 4,641 34.5 6,405 23.4
------- ------- -------
Income from operations.................. 2,372 18.0 447 3.3 5,115 18.7
Other income............................ 26 0.2 5 0.0 31 0.1
Interest expense........................ (427) 3.2 (254) 1.9 (3,007) 11.0
------- ------- -------
Income before taxes and change in
accounting principle.................. 1,971 14.9 198 1.5 2,139 7.8
Provision for income taxes.............. (724) 5.5 (21) 0.2 (889) 3.3
Cumulative effect of change in
accounting principle.................. -- -- 313 2.3 -- --
------- ------- -------
Net income.............................. $ 1,247 9.5% $ 490 3.6% $ 1,250 4.6%
======= ======= =======
</TABLE>
- ---------------
(a) Selling, general and administrative expenses include salaries and other
compensation of customer service, sales, marketing, finance and
administrative personnel, as well as amortization of goodwill and deferred
financing costs, and other fees and expenses related to the management and
administration of the Company.
Six Months Ended June 30, 1998 compared to Six Months Ended June 30, 1997
Net Sales: Net sales increased by approximately $23.2 million, or 237.5%,
from approximately $9.8 million for the six months ended June 30, 1997 to
approximately $33.0 million for the six months ended June 30, 1998. For the six
months ended June 30, 1998, net sales included approximately $24.5 million
attributable to the Specialty Lock Business. For the six months ended June 30,
1997, net sales included approximately $2.4 million attributable to Hudson,
which was acquired on May 15, 1998.
38
<PAGE> 44
Net sales of the Flexible Shaft Business increased by approximately $1.1
million, or 15.7%, from approximately $7.4 million for the six months ended June
30, 1997 to approximately $8.5 million for the six months ended June 30, 1998.
Such net sales growth was primarily attributable to (i) overall growth in the
construction market, (ii) customer consolidation, increased market penetration
and new product acceptance in the lawn and garden power equipment market and
(iii) greater product acceptance in the maritime and aerospace markets.
Gross Profit: Gross profit increased by approximately $7.9 million, or
174.7%, from approximately $4.5 million for the six months ended June 30, 1997
to approximately $12.4 million for the six months ended June 30, 1998. Gross
profit for the six months ended June 30, 1998 included approximately $9.0
million attributable to the Specialty Lock Business compared to approximately
$1.3 million for the comparable period in 1997. The remainder of the increase in
gross profit was generated by the Flexible Shaft Business. Gross profit as a
percentage of net sales decreased from approximately 46.3% for the six months
ended June 30, 1997, to approximately 37.7% for the six months ended June 30,
1998, primarily due to the inclusion, for the full six month period in 1998, of
the Specialty Lock Business, which historically has produced a lower gross
margin than the Flexible Shaft Business. Gross profit from the Specialty Lock
Business as a percentage of such segment's net sales was 36.6% for the six
months ended June 30, 1998. Gross profit from the Flexible Shaft Business as a
percentage of such segment's net sales, decreased from approximately 44.4% for
the six months ended June 30, 1997 to approximately 40.9% for the six months
ended June 30, 1998. This decrease in gross profit as a percentage of net
segment sales was the result of a substantial increase in unit orders for a
particular lower margin product from customers in the lawn and garden power
equipment market.
Selling, General and Administrative Expenses ("SG&A"): SG&A increased by
approximately $3.2 million, or 135.9%, from approximately $2.4 million for the
six months ended June 30, 1997 to approximately $5.6 million for the six months
ended June 30, 1998. Included in SG&A for the six months ended June 30, 1998 is
$1.2 million of amortization of goodwill and other intangibles related to the
Acquisitions. The comparable amortization for the same period in 1997 was
$256,000. Of the remaining increase, $2.0 million is attributable to the SG&A of
the Specialty Lock Business which was not included in the results of the
comparable period in 1997 and approximately $267,000 is due to increased
corporate expenses as a result of adding professional staff, the incurrence of
corporate level professional fees and an increase in management fees in
accordance with the management agreement entered into as of May 28, 1998. SG&A
as a percentage of net sales decreased from approximately 24.1% for the six
months ended June 30, 1997 to approximately 16.8% for the six months ended June
30, 1998. This decrease is primarily attributable to the inclusion, for the full
six month period in 1998, of the Specialty Lock Business, which has lower SG&A
expenses as a percentage of net sales. SG&A of the Specialty Lock Business as a
percentage of such segment's net sales was 13.3% for the six months ended June
30, 1998. SG&A of the Flexible Shaft Business as a percentage of such segment's
net sales decreased from approximately 23.5% for the six months ended June 30,
1997 to approximately 20.5% for the comparable period in 1998. This decrease is
primarily attributable to growth in Flexible Shaft Business net sales which
exceeded growth in such segment's SG&A expenses.
Income from Operations: Income from operations increased by approximately
$4.7 million, or 216.7%, from approximately $2.2 million for the six months
ended June 30, 1997 to approximately $6.9 million for the six months ended June
30, 1998. Operating income of the Specialty Lock Business increased by $4.8
million due to its inclusion in the results for the full six month period in
1998 and its inclusion in only a portion of the comparable period in 1997.
Income from operations of the Flexible Shaft Business increased by $197,000, or
12.8%, from $1.5 million for the six months ended June 30, 1997 to $1.7 million
for the six months ended June 30, 1998, due to the factors discussed above. The
increases in income from operations, discussed above, were partially offset by
the $267,000 increase in corporate expenses, also discussed above.
Interest Expense: Interest expense increased from $645,000 for the six
months ended June 30, 1997 to approximately $3.3 million for the six months
ended June 30, 1998. This increase is primarily due to the incurrence of debt
issued in connection with the acquisition of the Specialty Lock Business.
Provision for Income Taxes: Effective May 31, 1997, the Company elected to
be treated as a subchapter S corporation which causes the Shareholders to be
personally liable for taxes due on the income of
39
<PAGE> 45
the Company. The provision for income taxes for the six months ended June 30,
1998 is for taxes on income due in certain states.
Net Income: Net income decreased from $714,000 for the six months ended
June 30, 1997 to a net loss of approximately $1 million for the six months ended
June 30, 1998 after an extraordinary charge of $4.6 million which resulted from
the early repayment of debt. Net income before the extraordinary charge
increased by approximately $2.9 million, from $714,000 for the six months ended
June 30, 1997 to approximately $3.6 million for the six months ended June 30,
1998. Of the total increase, $2.7 million is attributable to inclusion of the
Specialty Lock Business in the results for the full six month period in 1998 and
only a portion of the comparable period in 1997. Net income of the Flexible
Shaft Business, before the extraordinary charge increased by approximately
$500,000 due to factors discussed above and a decrease in the provision for
income taxes of approximately $800,000. Partially offsetting the aforementioned
increases was an increase in corporate expenses and income taxes totaling
approximately $400,000 for the six months ended June 30, 1998 from the
comparable period in 1997.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
Net Sales: Net sales increased by approximately $13.9 million, or 103.1%,
from approximately $13.4 million for fiscal 1996 to approximately $27.3 million
for fiscal 1997. Of this increase, approximately $13.1 million resulted from the
inclusion of net sales from the Specialty Lock Business from the dates of its
acquisition. Net sales for the Flexible Shaft Business increased by $724,000, or
5.4%, from $13.4 million for fiscal 1996 to $14.2 million for fiscal 1997. This
increase is primarily attributable to overall growth in the construction market
and greater product acceptance in the commercial segment of the aerospace
market. Increases in sales to customers in these markets were partially offset
by a decline in sales to the lawn and garden power equipment market due to the
temporary loss of a particular customer.
Gross Profit: Gross profit increased by approximately $6.4 million, or
126.4%, from approximately $5.1 million for fiscal 1996 to approximately $11.5
million for fiscal 1997. Approximately $5.2 million of this increase is
attributable to the inclusion of the Specialty Lock Business from the dates of
its acquisition. The additional increase of approximately $1.2 million was
attributable to the Flexible Shaft Business. Gross profit as a percentage of net
sales increased from approximately 37.8% for fiscal 1996 to approximately 42.2%
for fiscal 1997 due to increased margins in the Flexible Shaft Business, which
were slightly offset by the inclusion of the Specialty Lock Business which has
historically produced a lower gross margin. Gross profit from the Specialty Lock
Business as a percentage of such segment's, net sales was 39.6% for fiscal 1997.
Gross profit as a percentage of net sales for the Flexible Shaft Business
increased from approximately 37.8% for fiscal 1996 to approximately 44.6% for
fiscal 1997. This improvement in gross profit as a percentage of net sales was
due to (i) a write-off of obsolete inventory in fiscal 1996, (ii) changes in
product mix and (iii) improved efficiencies due to consolidation and vertical
integration.
Selling, General and Administrative Expenses: SG&A increased by
approximately $1.8 million, or 38.0%, from approximately $4.6 million for fiscal
1996 to approximately $6.4 million for fiscal 1997. Of this increase, $665,000
is attributable to the amortization of goodwill and other intangibles associated
with the acquisition of the Specialty Lock Business and approximately $1.5
million is attributable to the SG&A of the Specialty Lock Business since the
dates of its acquisition. SG&A of the Flexible Shaft Business decreased by
$379,000, or 8.2%, from $4.6 million for fiscal 1996 to approximately $4.3
million for fiscal 1997, primarily due to a $702,000 reduction in nonrecurring
business consolidation charges, partially offset by a $130,000 increase in
occupancy costs. SG&A as a percentage of net sales decreased from approximately
34.5% in fiscal 1996 to approximately 23.5% for fiscal 1997, primarily due to
the inclusion of the Specialty Lock Business which has historically had lower
SG&A expenses as a percentage of net sales. SG&A of the Specialty Lock Business
as a percentage of such segment's net sales was 16.3% for fiscal 1997. SG&A as a
percentage of Flexible Shaft Business net sales decreased from approximately
34.5% for fiscal 1996 to approximately 30.1% for fiscal 1997, due to the factors
discussed above.
Income from Operations: Income from operations increased by approximately
$4.7 million, or 1,044.0% from $447,000 for fiscal 1996 to approximately $5.1
million for fiscal 1997. Approximately $3.1 million of this
40
<PAGE> 46
increase is attributable to the inclusion of the Specialty Lock Business from
the dates of its acquisition. Income from operations of the Flexible Shaft
Business increased by approximately $1.6 million, or 360.4%, from $447,000 for
fiscal 1996 to approximately $2.1 million for fiscal 1997, due to the factors
discussed above.
Interest Expense: Interest expense increased from $254,000 for fiscal 1996
to approximately $3.0 million for fiscal 1997. This increase is primarily due to
the incurrence of debt issued in connection with the acquisition of the
Specialty Lock Business.
Provision for Income Taxes: Provision for income taxes increased from
$21,000 in fiscal 1996 to $889,000 in fiscal 1997. Effective May 31, 1997, the
Parent elected to be treated as a subchapter S corporation. Therefore, the
Company ceased accruing a provision for federal income taxes as of such date and
wrote off a net deferred tax asset in the amount of $469,000 in fiscal 1997, as
no future benefit will be derived therefrom.
Net Income: Net income increased from $490,000 for fiscal 1996 to
approximately $1.3 million for fiscal 1997, due to the factors discussed above,
and net of a $313,000 credit for the cumulative effect of a change in accounting
principle in fiscal 1996 relating to the allocation of costs to inventory.
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Net sales: Net sales increased by $264,000, or 2.0%, from approximately
$13.2 million in fiscal 1995 to approximately $13.4 million in fiscal 1996. This
increase is primarily attributable to new product acceptance in the commercial
segment of the aerospace market and greater product acceptance in the maritime
market, partially offset by a voluntary reduction in sales of certain low margin
products to the maritime market. Net sales in the Company's other market
categories for fiscal 1996 remained relatively stable from fiscal 1995.
Gross Profit: Gross profit decreased by $741,000, or 12.7%, from
approximately $5.8 million for fiscal 1995 to approximately $5.1 million for
fiscal 1996. In addition, gross profit as a percentage of net sales decreased
from approximately 44.2% for fiscal 1995 to approximately 37.8% for fiscal 1996.
Of this decrease, $431,000 is attributable to a write-down of obsolete inventory
for fiscal 1996. The remaining decrease in gross profit was due to a change in
overall product mix and customer pricing pressures in the lawn and garden power
equipment market where the Company faces the most competition from other
flexible shaft manufacturers.
Selling, General and Administrative Expenses: SG&A increased by
approximately $1.2 million, or 34.2%, from approximately $3.5 million for fiscal
1995 to approximately $4.6 million for fiscal 1996. This increase in SG&A is
primarily attributable to nonrecurring business consolidation charges of
$786,000, which were incurred in 1996 in connection with relocating operations
to a new facility and an increase in management fees paid to an affiliated
management company. SG&A as a percentage of net sales increased from
approximately 26.2% for fiscal 1995 to approximately 34.5% for fiscal 1996, due
to the factors discussed above.
Income from Operations: Income from operations decreased by approximately
$1.9 million, or 81.2%, from approximately $2.4 million for fiscal 1995 to
$447,000 for fiscal 1996, due to the factors discussed above.
Interest Expense: Interest expense decreased by $173,000, or 40.5%, from
$427,000 for fiscal 1995 to $254,000 for fiscal 1996, due to the refinancing of
a credit facility in March 1996.
Provision for Income Taxes: Provision for income taxes decreased from
$724,000 in fiscal 1995 to $21,000 in fiscal 1996. This decrease was
attributable to a state income tax credit and an adjustment to the provision for
income taxes pertaining to prior years. The effective tax rate for fiscal 1996
was 10.7%, as compared to an effective tax rate for 1995 of 36.7%.
Net Income: Net income decreased by $757,000, or 60.7%, from approximately
$1.2 million for fiscal 1995 to $490,000 for fiscal 1996, due to the factors
discussed above, partially offset by a change in accounting principle in fiscal
1996 of $313,000 relating to the allocation of costs to inventory.
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<PAGE> 47
RESULTS OF OPERATIONS -- HUDSON
The following table sets forth, for the periods indicated, statement of
operations data for Hudson expressed in dollar amounts (in thousands) and as a
percentage of net sales. The 138 days ended May 15, 1997 is the portion of
fiscal 1997 preceding the acquisition of Hudson by the Company. For purposes of
this discussion, this period is compared to the 154 days ended June 1, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------- 154 DAYS ENDED 138 DAYS ENDED
DECEMBER 30, 1995 DECEMBER 28, 1996 JUNE 1, 1996 MAY 15, 1997
-------------------- -------------------- ------------------- -------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
------- ---------- ------- ---------- ------ ---------- ------ ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $16,150 100.0% $15,402 100.0% $6,213 100.0% $6,809 100.0%
Cost of goods sold.................. 9,368 58.0 9,230 59.9 3,750 60.4 3,877 56.9
------- ------- ------ ------
Gross profit........................ 6,782 42.0 6,172 40.1 2,463 39.6 2,932 43.1
Selling, general and administrative
expenses(a)....................... 2,569 15.9 2,584 16.8 1,131 18.2 1,217 17.9
------- ------- ------ ------
Income from operations.............. 4,213 26.1 3,588 23.3 1,332 21.4 1,715 25.2
Other income (expense).............. -- -- (12) 0.1 -- -- -- --
Interest expense.................... (2,268) 14.0 (2,015) 13.1 (855) 13.8 (663) 9.7
------- ------- ------ ------
Income before taxes(b).............. $ 1,945 12.0% $ 1,561 10.1% $ 477 7.7% $1,052 15.5%
======= ======= ====== ======
</TABLE>
- ---------------
(a) Selling, general and administrative expenses include salaries and other
compensation of customer service, sales, marketing, finance and
administrative personnel, as well as amortization of goodwill and deferred
financing costs, and other fees and expenses related to the management and
administration of the Company.
(b) As a limited liability company the Company pays no federal income taxes.
Accordingly, the provision for income taxes has been excluded from the above
table as KCI management believes it is not relevant.
138 Days Ended May 15, 1997 compared to 154 Days Ended June 1, 1996
Net Sales: Net sales increased by $596,000, or 9.6%, from approximately
$6.2 million for the 154 days ended June 1, 1996 to approximately $6.8 million
for the 138 day period ended May 15, 1997. This increase in net sales primarily
resulted from overall market growth and increased market penetration in the
office furniture market. This increase was partially offset by a voluntary
decrease in sales to various miscellaneous markets.
Gross Profit: Gross profit increased by $469,000, or 19.0%, from
approximately $2.5 million for the 154 day period ended June 1, 1996 to
approximately $2.9 million for the comparable period in 1997. Gross profit as a
percentage of net sales increased from 39.6% for the 154 day period ended June
1, 1996 to 43.1% for the comparable period in 1997. The increase as a percentage
of net sales is attributable to (i) operating leverage as a result of increased
sales, (ii) lower prices for certain raw materials and (iii) overall product
mix.
Selling, General and Administrative Expenses: SG&A increased by $86,000,
or 7.6%, from approximately $1.1 million for the 154 day period ended June 1,
1996 to approximately $1.2 million for the 138 day period ended May 15, 1997.
This increase in SG&A is primarily attributable to a write off of $24,000 in
non-performing assets and a one time charge of $40,000 for environmental
evaluation services. SG&A as a percentage of net sales decreased from
approximately 18.2% for the 154 day period ended June 1, 1996 to approximately
17.9% for the comparable period in 1998, due to operating leverage resulting
from the increased sales.
Income from Operations: Income from operations increased by $383,000, or
28.8%, from approximately $1.3 million for the 154 day period ended June 1, 1996
to approximately $1.7 million for the 138 day period ended May 15, 1997, due to
the factors discussed above.
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<PAGE> 48
Interest Expense: Interest expense decreased from $855,000 for the 154 day
period ended June 1, 1996 to $663,000 for the 138 day period ended May 15, 1997.
This decrease was attributable to reductions in the principal balance of
indebtedness through regular amortization payments.
Income before Taxes: Income before taxes increased from $477,000, for the
154 day period ended June 1, 1996 to approximately $1.1 million for the 138 day
period ended May 15, 1997, due to the factors discussed above.
Year Ended December 28, 1996 compared to Year Ended December 30, 1995
Net Sales: Net sales decreased by $748,000, or 4.6%, from approximately
$16.2 million for fiscal 1995, to approximately $15.4 million in fiscal 1996.
This decrease was primarily attributable to decreased demand for certain of the
Company's products sold to the POS terminal market as customers phased out their
redundant product offerings. In addition, sales decreased due to the voluntary
reduction in sales to various miscellaneous markets.
Gross Profit: Gross profit decreased by $610,000, or 9.0%, from
approximately $6.8 million for fiscal 1995 to approximately $6.2 million for
fiscal 1996. Gross profit as a percentage of net sales decreased from
approximately 42.0% for fiscal 1995 to approximately 40.1% for fiscal 1996.
These decreases were primarily attributable to decreased net sales without a
corresponding reduction in fixed manufacturing costs.
Selling, General and Administrative Expenses: SG&A remained relatively
stable from fiscal 1995 to fiscal 1996. As a percentage of net sales, SG&A
increased from approximately 15.9% in fiscal 1995 to approximately 16.8% in
fiscal 1996 due to decreased net sales without a corresponding reduction in
fixed overhead costs.
Income from Operations: Income from operations decreased by $625,000, or
14.8%, from $4.2 million for fiscal 1995 to approximately $3.6 million for
fiscal 1996, due to the factors discussed above.
Interest Expense: Interest expense decreased by $253,000, from $2.3
million for fiscal 1995 to approximately $2.0 million for fiscal 1996. This
decrease was attributable to reductions in outstanding indebtedness through
regular amortization payments.
Income before Taxes: Income before taxes decreased by $384,000 from
approximately $1.9 million for fiscal 1995 to approximately $1.6 million for
fiscal 1996, due to the factors discussed above.
RESULTS OF OPERATIONS -- ESP
The following table sets forth, for the periods indicated, statement of
operations data for ESP expressed in dollar amounts (in thousands) and as a
percentage of net sales. The 344 days ended December 10, 1997 is the portion of
fiscal 1997 preceding the acquisition of ESP by the Company. For purposes of
this discussion, that period is compared to the year ended December 31, 1996.
43
<PAGE> 49
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------- 344 DAYS ENDED
1995 1996 DECEMBER 10, 1997
-------------------- -------------------- --------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $20,288 100.0% $21,265 100.0% $23,260 100.0%
Cost of goods sold.......................... 15,489 76.3 16,473 77.5 17,299 74.4
------- ------- -------
Gross profit................................ 4,799 23.7 4,792 22.5 5,961 25.6
Selling, general and administrative
expenses(a)............................... 2,840 14.0 3,004 14.1 3,558 15.3
------- ------- -------
Income from operations...................... 1,959 9.7 1,788 8.4 2,403 10.3
Other income (expense)...................... (11) 0.1 35 0.2 52 0.2
Interest expense............................ (1,015) 5.0 (702) 3.3 (615) 2.6
------- ------- -------
Income before taxes(b)...................... $ 933 4.6% $ 1,121 5.3% $ 1,840 7.9%
======= ======= =======
</TABLE>
- ---------------
(a) Selling, general and administrative expenses include salaries and other
compensation of customer service, sales, marketing, finance and
administrative personnel, as well as amortization of goodwill and deferred
financing costs, and other fees and expenses related to the management and
administration of ESP.
(b) As a limited liability company the Company pays no federal income taxes.
Accordingly, the provision for income taxes has been excluded from the above
table as KCI management believes it is not relevant.
344 Days Ended December 10, 1997 Compared to Year Ended December 31, 1996
Net Sales: Net sales increased by approximately $2.0 million, or 9.4%,
from approximately $21.3 million for fiscal 1996 to approximately $23.3 million
for the 344 day period ended December 10, 1997. This increase in net sales
primarily resulted from overall market growth and increased market penetration
in the office furniture market. In addition, on June 22, 1997, ESP acquired RAD
which contributed approximately $1.7 million of incremental sales to ESP.
Offsetting the increases in office furniture sales and the increase due to the
acquisition of RAD, was a voluntary decrease in sales to locksmiths and
distributors, an historically lower margin segment.
Gross Profit: Gross profit increased by approximately $1.2 million, from
approximately $4.8 million in fiscal 1996 to approximately $6.0 million for the
344 days ended December 10, 1997. Of this increase, $602,000, or approximately
51.5% of the total increase, was due to the inclusion of RAD sales and
operations from the date of its acquisition. As a percentage of net sales, gross
profit increased from approximately 22.5% in fiscal 1996 to approximately 25.6%
for the comparable period in 1997. This increase is primarily due to the
inclusion of RAD sales, which carry a higher gross margin, and to a change in
the product mix.
Selling, General and Administrative Expenses: SG&A increased by $554,000,
or 18.4%, from approximately $3.0 million for fiscal 1996 to approximately $3.6
million for the 344 day period ended December 10, 1997. Of this increase
$233,000 represented the write-off of deferred financing costs in connection
with a refinancing for the acquisition of RAD. In addition, $196,000 of the
increase resulted from the inclusion of RAD in ESP's results from the date of
its acquisition. SG&A, as a percentage of sales, increased from 14.1% in fiscal
1996 to 15.3% for the comparable period in 1997. This increase was due to the
write-off discussed above.
Income from Operations: Income from operations increased by $615,000, or
34.4%, from approximately $1.8 million for fiscal 1996 to approximately $2.4
million for the 344 day period ended December 10, 1997, due to the factors
discussed above.
Interest Expense: Interest expense decreased by $87,000 from $702,000 for
fiscal 1996 to $615,000 for the 344 day period ended December 10, 1997. This
decrease was the result of a reduction in indebtedness, prior to the RAD
acquisition, through voluntary repayments.
44
<PAGE> 50
Income before Taxes: Income before taxes increased by $719,000, or 64.1%,
from approximately $1.1 million in fiscal 1996 to approximately $1.8 million for
the comparable period in 1997, due to the factors discussed above.
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Net Sales: Net sales increased by $977,000, or 4.8%, from approximately
$20.3 million for fiscal 1995 to approximately $21.3 million for fiscal 1996.
This increase is primarily attributable to overall industry growth and increased
market share in the office furniture market.
Gross Profit: Gross profit remained relatively unchanged for fiscal 1996
as compared to fiscal 1995. Gross profit as a percentage of net sales decreased
from approximately 23.7% for fiscal 1995 to approximately 22.5% for fiscal 1996.
This decrease was primarily attributable to product mix.
Selling, General and Administrative Expenses: SG&A increased by $164,000,
or 5.8%, from approximately $2.8 million for fiscal 1995 to approximately $3.0
million for fiscal 1996. This increase is primarily attributable to bonuses
granted to key management personnel and increased advertising expenditures. SG&A
as a percentage of net sales remained relatively unchanged in fiscal 1996 as
compared to fiscal 1995.
Income from Operations: Income from operations decreased by $171,000, or
8.7%, from approximately $2.0 million for fiscal 1995 to approximately $1.8
million for fiscal 1996, due to the factors discussed above.
Interest Expense: Interest expense decreased by $313,000, or 30.8%, from
approximately $1.0 million for fiscal 1995 to $702,000 for fiscal 1996, due to a
reduction in indebtedness through voluntary repayments.
Income before Taxes: Income before taxes increased by $188,000, or 20.2%,
from $933,000 in fiscal 1995 to approximately $1.1 million in fiscal 1996, due
to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Historical
The Company has historically generated funds from its operations and its
working capital requirements generally do not fluctuate from quarter to quarter.
Cash flow provided by operating activities was approximately $5.2 million
and $1.8 million for the six months ended June 30, 1998 and 1997, respectively.
The operating activities of the Company for 1997 and 1998 include the operations
of the Specialty Lock Business from the dates of its acquisition.
For the six months ended June 30, 1998 and 1997, net cash used in investing
activities was $675,000 and $39.4 million, respectively. Investing activities
for the six months ended June 30, 1998 consisted of expenditures for property,
plant and equipment. For the six months ended June 30, 1997, investing
activities consisted of the acquisition of Hudson for $39.1 million and
expenditures for property, plant and equipment for $282,000.
Financing activities provided net cash of approximately $4.5 million for
the six months ended June 30, 1998 and $39.5 million for the same period of
1997. For the six months ended June 30, 1997, financing activities were
primarily related to the acquisition of the Specialty Lock Business.
Prospective
As of June 30, 1998, the Company had a cash balance of approximately $10.5
million. In addition, in July 1998 the Company entered into the New Credit
Facility, which provides for revolving credit borrowings of up to $15.0 million
and additional borrowings of up to $25.0 million for future acquisitions. Among
other provisions, the New Credit Facility provides that (i) availability of
revolving credit loans will be subject to a borrowing base, (ii) availability of
acquisition loans will be subject to various criteria, including pro forma
compliance with certain financial ratios and (iii) the Company will be required
to prepay outstanding balances out of excess cash flow and proceeds from certain
asset sales.
45
<PAGE> 51
With the consummation of the Initial Offering, the Company became required
to make semiannual interest payments on the Old Notes, together with interest
and principal payments on other existing indebtedness including indebtedness
under the New Credit Facility, if any.
The Company's remaining liquidity demands will be for capital expenditures
and other general corporate purposes. As of June 30, 1998, the Company had
outstanding commitments for capital expenditures of approximately $700,000 and
anticipates further capital expenditures of approximately $700,000 during the
remainder of 1998 and approximately $2.0 million for 1999, primarily to maintain
its facilities, expand its production capacity in order to take advantage of
profitable market opportunities and to further automate its production processes
to maximize profitability. The Company expects that capital expenditure
requirements will decrease subsequent to 1999. To the extent cash flow from
operations is insufficient to cover the Company's capital expenditures, debt
service, and other general requirements, the Company would seek to utilize its
borrowing availability under the New Credit Facility.
Management believes that the Company's cash flow from operations, together
with borrowing availability under the New Credit Facility, will be adequate to
meet its anticipated capital requirements for the forseeable future.
INFLATION
Inflation has not been material to the Company's operations for the periods
presented.
BACKLOG
The Company's backlog of orders as of June 30, 1998 and 1997 was
approximately $10.3 million and $8.6 million, respectively. The Company includes
in its backlog only those orders for which it has accepted purchase orders.
However, backlog is not necessarily indicative of future sales. A substantial
portion of the Company's sales have a three to eight week lead time and,
therefore, only a small portion of orders, in relation to the annual sales of
the Company, are in backlog at any point in time. In addition, purchase orders
can generally be cancelled at any time without penalty.
YEAR 2000
The Year 2000 Problem
The Company is heavily dependent upon computer technology to effectively
carry out its day-to-day operations. In addition, the Company is dependent on
suppliers and customers who also use computer technology in the conduct of their
business. The terms "Year 2000 issues" or "Year 2000 problems," or words of a
similar nature, refer to the potential for failure of computer applications as a
result of the failure of programs to properly recognize and handle dates beyond
the year 1999. In the case of the Company, such computer applications may
include customer order processing, inventory management, shipment of products,
manufacturing process controllers, internal financial systems and other
information systems, among others.
Readiness
The Company's assessment of the possible consequences of Year 2000 issues
on its business, results of operations, or financial conditions is not complete,
but is continuing in accordance with a Year 2000 compliance plan (the "Year 2000
Plan"). The Year 2000 Plan includes (1) upgrading the Company's information
technology software and all applicable software and embedded technology
applications in its manufacturing equipment and systems to become year 2000
compliant, (2) assessing the Year 2000 readiness of suppliers and customers, and
(3) developing contingency plans, if practicable, for critical systems and
processes. Implementation of the Year 2000 Plan has been undertaken at the
Company's three operating subsidiaries and with respect to various operating and
information systems in varying degrees to date. The Year 2000 Plan is expected
to be fully implemented at all locations and with respect to all critical
information systems in 1999.
46
<PAGE> 52
Progress to date includes the purchase of upgraded hardware and software
packages and reprogramming of existing systems. All internal systems are
expected to be Year 2000 compliant by mid 1999. Because the Company is dependent
on its suppliers and customers to successfully and profitably operate its
business, the Year 2000 Plan includes an assessment process with respect to
those vendors and customers deemed most critical to the operations and business
of the Company. To date, the Company has contacted certain vendors and
anticipates completing its vendor assessment process by the end of the first
quarter of 1999. The initial steps of a select analysis of the Company's
significant customers to determine the potential effect of Year 2000 issues on
these customers is expected to begin in the fourth quarter of 1998 with expected
completion by mid 1999. The Year 2000 Plan requires continued assessment
throughout 1999 in these areas.
Costs
The costs of the Year 2000 Plan include the purchase price of computer
hardware and software packages, fees for contract programmers and the cost of
internal information technology resources. The costs of achieving Year 2000
compliance have not been material to date and are not expected to be material.
Risks
The Company expects no material adverse effect on its results of
operations, liquidity, or financial condition as a result of problems
encountered in its own business as a result of Year 2000 issues or as a result
of the impact of Year 2000 problems on its vendors or customers. However, the
risks to the Company associated with Year 2000 issues could be significant.
While the Company is undertaking its own evaluation and testing of its
information technology and non-information technology systems, it is dependent
to some extent on the assurances and guidance provided by suppliers of
technology and programming services as to Year 2000 compliance readiness.
Similarly, the Company's Year 2000 Plan calls for an ongoing analysis of
the possible effects of Year 2000 problems on its suppliers of materials and
non-information technology goods and services as well as its customers and the
demands for its products. The Company has limited ability to independently
verify the possible effects of Year 2000 issues on its customers and suppliers.
Therefore, the Company's assumptions concerning the effect of Year 2000 issues
on its results of operations, liquidity, and financial condition relies on its
ability to analyze the business and operations of each of its critical vendors
or customers. This process, by the nature of the problem, is limited to such
persons' public statements, their responses to the Company's inquiries, and the
information available to the Company from third parties concerning the
industries or particular vendors or customers involved.
Risk also exists that despite the Company's best efforts, critical systems
may malfunction due to Year 2000 problems and disrupt its operations. The
Company is unable to determine at this time the nature or length of time for
such possible disruption and therefore the potential materiality thereof to its
business or profitability.
Interruptions of communication services or power supply due to Year 2000
problems can cause affected locations to cease or curtail production or receipt
and shipment of materials and products. The Company is dependent on the
suppliers of power and communication services that no such disruptions occur.
Contingency Plans
As part of its Year 2000 Plan, the Company will continue to identify and
evaluate risks and possible alternatives should various contingencies arise. The
Company has prioritized remediation of its most critical information systems and
believes that they will be Year 2000 compliant by the end of the first quarter
of 1999. Should unforeseen circumstances result in substantial delay that may
lead to disruption of business, the Company will develop contingency plans where
possible and not cost prohibitive. To some extent the Company may not be able to
develop contingency plans, such as in the case of communication services or the
supply of power.
47
<PAGE> 53
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires companies to record derivatives
on the balance sheet as assets and liabilities, measured at fair value. Gains
and losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. This statement is not expected to have a material impact
on the Company's consolidated financial statements. This statement is effective
for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged.
48
<PAGE> 54
BUSINESS
GENERAL
KCI is a leading manufacturer of custom engineered essential componentry
for application in a diverse array of end-use products. The Company targets OEM
markets where KCI believes its value-added engineering and manufacturing
capabilities, along with its timely delivery, reliability and customer service,
enable it to differentiate the Company from its competitors and enhance
profitability. KCI, through its Operating Subsidiaries, has been designing and
manufacturing medium-security locks and related accessories since 1963 and
flexible shaft products since 1932. The Company's locks and associated hardware
are designed to be utilized in a wide range of end-use markets including the
office furniture, POS terminal and bank and postal accessory markets. The
Company's flexible shaft products are produced for both rotary power
transmission and remote valve control applications in the industrial, aerospace
and commercial markets. The Company benefits from a diverse customer base, with
pro forma sales to approximately 2,200 customers in fiscal 1997 and with the
largest customer representing approximately 7.2% of pro forma consolidated net
sales. KCI's products are critical to the design and function of its customers'
products and management believes the majority of KCI's sales (approximately
62.0% of fiscal 1997 pro forma consolidated net sales) are to customers for
which the Company is the primary (greater than 70.0% of the customer's total
requirements for the particular product) supplier. For the pro forma year ended
December 31, 1997 and the six months ended June 30, 1998, the Company had net
sales of $59.0 million and $33.0 million, respectively, representing an increase
over the pro forma amounts for the same periods in the previous years of 11.2%
and 11.5%, respectively.
The Specialty Lock Business
The Company, through its wholly-owned subsidiaries, Hudson and ESP, is a
leading domestic designer and manufacturer of medium-security custom and
specialty locks and locking systems. Specialty Lock Business products are
engineered to meet OEM customers' specifications for use in end products such as
office furniture, electronic cash registers, bank bags, post office boxes and
storage lockers. The Company's expertise in co-engineering product designs with
its customers, substantial manufacturing and testing capabilities and focus on
customer service, have enabled the Company to become the primary supplier to the
majority, in terms of sales, of its Specialty Lock Business customers. Customers
of the Specialty Lock Business include several industry leaders such as Herman
Miller, Inc., IBM, Steelcase, Inc. and Knoll, Inc. During fiscal 1997, no single
customer represented more than 9.5% of pro forma segment net sales. For the pro
forma year ended December 31, 1997 and the six months ended June 30, 1998, the
Specialty Lock Business generated net sales of $44.8 million and $24.5 million,
respectively, representing an increase over the pro forma amounts for the same
periods in the preceding fiscal year of 13.2% and 10.2%, respectively.
KCI management estimates the domestic market for locks to be over $3.0
billion, of which approximately $200 million is estimated to represent
medium-security locks. The Company targets the medium-security segment where it
believes its value-added design and manufacturing expertise, along with its
timely delivery, reliability and customer service, enable it to differentiate
itself from its competitors and enhance profitability. The office furniture and
POS terminal markets represent the two largest end-user market segments of the
Specialty Lock Business, constituting 43.7% and 7.2%, respectively, of pro forma
fiscal 1997 segment net sales. The office furniture and POS terminal markets
have grown rapidly over the three year period ended December 31, 1997, with a
compounded annual growth rate of approximately 9.1% and 4.8%, respectively.
During the same three year period, Specialty Lock Business net sales to the
office furniture and POS terminal markets grew at a compounded annual growth
rate of approximately 27.9% and 4.4%, respectively. Based on this historical
growth, KCI management anticipates that sales to these markets will continue to
represent the majority of Specialty Lock Business sales and growth for the near
term. See "Business -- Customers and Markets."
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<PAGE> 55
The Flexible Shaft Business
The Company, through its wholly-owned subsidiary, Elliott, is the leading
domestic designer and manufacturer of flexible shaft products, which are
engineered to meet the particular design specifications demanded by a variety of
OEM products. The Company designs and manufactures more than 2,000 flexible
shaft products, all of which utilize wound wire assemblies to transmit rotary
power when applications render rigid shaft technology (such as universal joints)
less efficient or impossible. The Company's flexible shaft technology provides
significant advantages over traditional rigid shaft technology. Use of flexible
shafts improves existing OEM product designs, provides added flexibility in
creating new designs and eliminates the amount of required componentry, which
can lower overall weight and space requirements, reduce a product's
manufacturing costs, improve end product appearance and shorten assembly times.
Product applications are varied and diverse, limited only by the Company's
ability to develop and manufacture new applications. KCI has developed and
introduced over 100 flexible shaft products to the marketplace during the last
three years. The Company's flexible shaft products are currently used in weed
trimmers, lawn tractors, concrete vibrators, plant processing equipment and
aircraft carriers, as well as in aerospace, medical, industrial and other
products. The Company believes that its product innovation, engineering
expertise, proprietary manufacturing process and high standards of quality and
reliability have enabled KCI to differentiate itself from its competitors,
enhance profitability and become the primary supplier of flexible shaft products
to the majority, in terms of sales, of its customers. KCI's Flexible Shaft
Business has over 1,000 customers including Poulan Weed Eater, Inc., Vickers,
Inc., Caterpillar Inc. and John Deere, as well as several United States
Government entities, such as the United States Navy. Only one customer, Poulan
Weed Eater, Inc., represented greater than 10% of Flexible Shaft Business net
sales for fiscal 1997, and no single customer represented greater than 12.0% of
net sales for fiscal 1997. For the year ended December 31, 1997 and the six
months ended June 30, 1998, the Flexible Shaft Business generated net sales of
approximately $14.2 million and $8.5 million, respectively, representing an
increase over net sales for the same period in the preceding fiscal year of 5.4%
and 15.7%, respectively.
Flexible Shaft Business sales to its three largest markets, construction,
lawn and garden power equipment and maritime, represented 25.6%, 21.7% and
13.9%, respectively, of fiscal 1997 segment net sales. According to industry
reports, for the three year period ended December 31, 1997, the construction,
lawn and garden power equipment and maritime markets experienced an average
compounded annual growth rate of 2.1%. During the same three year period,
Flexible Shaft Business sales to these markets experienced similar growth or
remained stable. The fastest growing market segment of the Flexible Shaft
Business has been the commercial aerospace segment, where the Company has
increased market penetration and introduced new product offerings. Over the
three year period ended December 31, 1997, the Company's net sales to this
segment grew at a compounded annual rate of approximately 46.8%. Based on
historical results and the recent or anticipated introduction of new product
offerings, KCI management anticipates the commercial aerospace and lawn and
garden power equipment markets to experience significant growth for the near
term. See "Business -- Customers and Markets."
COMPETITIVE STRENGTHS
The Company believes that its leading position in the markets it currently
serves is primarily attributable to the following competitive strengths:
Commitment to Quality. The Company believes its specialty lock and
flexible shaft products are well-known among OEM manufacturers for their
durability, high quality and performance. KCI has passed rigorous quality
standard reviews of such customers as Herman Miller, Inc., Steelcase, Inc., John
Deere, the United States Navy and the United States Air Force. The Company has
received ISO certification in certain areas and is seeking to obtain further
certifications as part of its ongoing commitment to maintain its high standards
of quality.
Strong Management Team. The Company's management team possesses extensive
experience in the manufacturing industry. Its eight senior operating executives
have over 154 years of manufacturing industry
50
<PAGE> 56
experience, including the Presidents of KCI's Operating Subsidiaries, each of
whom has over 20 years experience in the specific manufacturing market he
serves.
Focus on Niche Markets and Value-Added Services. The Company believes that
its strategic focus on niche OEM markets where customers place a premium on
value-added design and manufacturing capabilities, along with timely delivery
and reliable service, provide it with a competitive advantage over (i)
competitors that are a division of a larger corporate entity and which are
frequently less focused on smaller sales volume opportunities and (ii) smaller
competitors that typically are less sophisticated than the Company, and
therefore less capable of providing the level of customer service and
aftermarket support provided by the Company.
Product Innovation. The Company's OEM customers seek new products and
applications that enhance productivity and profitability while satisfying their
specific needs. The Company's experienced management and engineering teams are
able to develop, design and manufacture new products and applications that its
OEM customers demand, which the Company believes enables it to provide superior
service to its OEM customers than that offered by its competitors.
Low-Cost Manufacturing Techniques. The Company believes that its highly
automated and vertically integrated manufacturing capabilities have enabled it
to become a low-cost manufacturer of products within the niche markets it
serves. In the Specialty Lock Business, the Company has focused on further
consolidation and automation with each new acquisition. In the Flexible Shaft
Business, the Company has designed and manufactured its own flexible shaft
winding machines, which are not currently available to its competitors, and has
installed wire drawing equipment capable of drawing less refined (and less
expensive) wire into a grade of wire that can be utilized by the Company in its
flexible shaft products.
Long Standing Relationships with OEMs. Nine of the Company's ten largest
OEM customers in both the Flexible Shaft Business and the Specialty Lock
Business have been customers of the Company for over a decade. Due to the
Company's close working relationship with its customers, KCI believes that it
can better determine its customers' needs, thereby enabling the Company to
develop and design new products and improve the performance of existing
products. Additionally, changing the supplier of a custom designed and
manufactured product often requires a delay in the customer's production due to
the time and capital required for a new supplier to appropriately retool its
machinery; therefore, KCI believes that its OEM customers are reluctant to
change suppliers, so long as KCI continues to satisfy their needs. The Company's
sales to customers for which it believes it was the primary supplier represented
approximately 62.0% of fiscal 1997 pro forma net sales.
BUSINESS STRATEGY
The Company has developed a business strategy that focuses on maximizing
profitability while achieving growth, both internally and through acquisitions.
Pursuing Selective Acquisitions. The Company continues to seek to
selectively acquire complementary or related light manufacturing businesses in
markets where value-added design and manufacturing capabilities, as well as
timely delivery and reliable service, enable it to differentiate itself from its
competitors and enhance profitability. In its search for potential acquisitions,
KCI focuses on companies that offer strategic value such as economies of scale,
product line extensions, new customer relationships or increased manufacturing
capacity. Specifically, the Company targets manufacturers of essential
components of a larger OEM end product. KCI seeks companies with a strong
presence in their niche markets or which will be complementary to one of its
existing subsidiaries which is already dominant in its market segment. The
Company will also look for acquisitions which will allow the Company to further
vertically integrate its operations and/or which may share common customers or
engineering processes. The Company seeks to integrate new operations into the
Company's existing businesses, which the Company believes will enhance
profitability for KCI through manufacturing consolidation and implementation of
the Company's operating strategies.
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<PAGE> 57
Maximizing Profitability. The Company continues to seek to maximize
profitability through its ongoing strategy of controlled growth in the areas of
both acquisitions and product offerings. As part of this strategy, the Company
attempts to determine the achievable profit margins and production volume for
each new product line prior to accepting an order. The Company only undertakes
production of new products which management believes will achieve an acceptable
return on investment. The Company further seeks to maximize profitability
through automation and efficient integration of complementary acquisitions. See
"Unaudited Pro Forma Consolidated Financial Data."
Introducing New Product Lines. The Company seeks to develop new products
in each of its business segments which enhance productivity and profitability
while satisfying OEM customers' evolving needs. The Company's team of
experienced engineers and industry professionals generally work in tandem with
customers to design and manufacture new products and are continually seeking to
expand existing markets, as well as develop new markets. This collaborative
approach has led the Company to the development of proprietary designs,
technology and relationships with customers that the Company expects will create
future sales opportunities. The Company has introduced over 100 new product
offerings during the last three years.
Maintaining a Diverse Customer Base. The Company seeks to maintain a
diverse customer base through (i) development and introduction of new products,
(ii) acquisition of complementary or related businesses, (iii) focus on customer
retention and (iv) innovative sales and marketing techniques designed to attract
new customers. During fiscal 1997, the Company had pro forma sales to
approximately 2,200 customers and its three largest customers accounted for only
7.1%, 6.4% and 4.5%, respectively, of its pro forma consolidated net sales.
Leveraging Customer Relationships. The Company follows a partnership
approach in establishing customer relationships, founded on innovative
co-engineering and manufacturing capabilities with reliable service and timely
delivery. These integral relationships enable the Company to provide insightful
solutions and innovations to end product design specifications. In addition,
several OEM customers have entered into multi-year supply contracts with KCI,
providing a more formal framework for the Company's customer "partnerships."
ACQUISITION HISTORY
In 1992, KCI's management began an acquisition program to acquire small to
medium size manufacturers of essential niche components for use in various OEM
customer products. The 1992 acquisition of Elliott from certain individual
shareholders, including the current President of Elliott, George M. Scherer,
marked the first of such acquisitions. In 1993, the Company acquired the
flexible shaft division of Stow Manufacturing Company, Inc. as a consolidation
opportunity for Elliott. On May 15, 1997, the Company acquired all of the issued
and outstanding capital stock of Hudson from Jordan for a cash purchase price of
$39.1 million and assumed liabilities of $1.2 million. The acquisition of Hudson
marked the Company's entree into the medium-security lock business. Such
acquisition was financed through loans made to the Parent under the Old Credit
Facility and the proceeds from the sale of the Old Notes and the Warrants. On
December 10, 1997, the Company acquired all of the issued and outstanding
capital stock of ESP from certain individual shareholders, including the current
President of ESP, August M. Boucher, as a consolidation opportunity for Hudson.
The ESP acquisition price consisted of $16.3 million of cash and $10.4 million
of assumed liabilities, and such acquisition was financed through additional
borrowings under the Old Credit Facility.
The Company has historically acquired complementary or related
manufacturing businesses and sought to integrate them into existing operations.
Following an acquisition, management seeks to rationalize operations, reduce
overhead costs, develop additional cross-selling opportunities and establish new
customer relationships. As a result of its integration efforts and internal
growth, the Company's consolidated net sales have increased from approximately
$9.1 million in fiscal year 1992 to approximately $59.0 million on a pro forma
basis for fiscal 1997.
The Company continues to seek to make selective acquisitions of light
industrial manufacturing companies, but there are no written agreements
regarding any such acquisitions existing as of the date hereof.
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<PAGE> 58
Priority will be given to consolidation opportunities or acquisitions of
complementary businesses with sales in the $5 million to $50 million range.
INDUSTRY BACKGROUND
The Specialty Lock Business. KCI management estimates the market for
domestic locks to be over $3.0 billion in 1997. The lock manufacturing industry
is divided into three distinct market segments: high-security locks,
medium-security locks and low-security locks. The Company currently competes in
the medium-security lock segment where it believes its value-added design and
manufacturing expertise, along with its timely delivery, reliability and
customer service, enable it to differentiate itself from its competitors and
enhance profitability. The Company believes that the overall size of the
medium-security lock segment was approximately $200.0 million in 1997. In
addition, KCI management estimates that this market segment has grown by
approximately 33.0% since 1990 and will grow by an additional 6.0% to 8.0% per
year, to approximately $250.0 million by 2000. Medium-security locks are used in
applications that involve non-life threatening situations or when articles of
low to moderate financial value are being secured. Medium-security locks are
sold to OEM's across a wide variety of end product industries, such as the
office furniture, vending and gaming, computer, POS terminal and post office box
industries. Management believes customers in this segment of the lock market are
seeking custom lock suppliers who provide quality products designed to meet
precise customer specifications with reliable service and on time delivery.
High-security locks are used to protect life and property of great value.
Such locks are primarily used in residential and commercial doors, automotive
doors, ignition switches and other higher-security applications. Customers of
this segment are typically seeking suppliers with name recognition in the retail
marketplace. The high-security market segment is dominated by large
manufacturers such as Medeco Security Locks Inc., Yale Security Inc., Schlage
Lock Co., and Master Lock Co. The low-security market segment can be
characterized as a commodity-type market, with an emphasis placed on low cost
and high volume delivery capabilities. Low-security locks are sold to OEM's as
components in a variety of end products such as paper towel and toilet tissue
dispensers and certain types of luggage. Currently many manufacturers of
low-security locks are located outside the United States in countries such as
Mexico, China and Taiwan.
The Flexible Shaft Business. Flexible shaft products are a submarket
within the power transmission market. Based on data obtained from the United
States Bureau of the Census, management estimates the power transmission market
was approximately $2.5 billion in 1996. This market has experienced a compounded
annual growth rate of approximately 6.0% over the three year period ended
December 31, 1996. The Company estimates that sales of flexible shaft products
to the markets currently being addressed by the Company totaled approximately
$30.0 million in 1997, and that such markets had an estimated compounded annual
growth rate of approximately 6.3% over the three year period ended December 31,
1997. However, management believes that the potential market for flexible shaft
products is limited only by a manufacturer's ability to develop and manufacture
new product applications, as flexible shafts can be used in most low torque
(less than 10 horsepower) rotary power transmission applications of existing
rigid shaft technology. Often the application of the flexible shaft product
entails the replacement of existing rigid shaft technology (such as universal
joints). The industry related to flexible shaft products is therefore highly
fragmented as a result of the broad range of potential applications of both
rigid and flexible shaft technology. There are only three principal domestic
manufacturers of flexible shafts and the Company currently competes against the
other two manufacturers in all segments of the industry except the automotive
market segment. The Company does not address the automotive market, except in
certain after-market applications, due to the high volume, commodity nature of
the market segment. The Company believes that OEM's will continue to trend
towards outsourcing, streamlining of end products and one piece assembly.
Therefore, the Company anticipates continued expansion of flexible shaft product
applications and overall acceptance. Management estimates that the total
industry sales for flexible shaft products to markets currently being served by
the Company will expand to approximately $38.0 million by 2000 as a result of
the successful introduction of applications for new markets, as well as growth
in existing markets.
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<PAGE> 59
CUSTOMERS AND MARKETS
The Specialty Lock Business. The Company supplies specialty lock products
to a variety of customers and markets. The end-use markets comprising the
largest component of Specialty Lock Business sales are the office furniture and
POS terminal markets which accounted for 43.7% and 7.2%, respectively, of pro
forma 1997 segment net sales. No other end-use market accounted for greater than
5.0% of pro forma segment net sales for such period. The Company's top ten
customers comprised 49.1% of the Company's pro forma 1997 segment net sales and
no single customer comprised more than 9.5% of pro forma segment net sales.
Approximately 58.4% of Specialty Lock Business pro forma 1997 net sales were to
customers with which the Company had primary source relationships.
The following table summarizes the Company's sales of specialty locks by
end market:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
OFFICE FURNITURE POS TERMINALS OTHER
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRODUCTS OR APPLICATIONS: Furniture locks Electronic cash registers Bank bags
Drawer locking systems Post office boxes
Gang locking systems Lockers
Gas pumps
Key blanks and hardware
- --------------------------------------------------------------------------------------------------------------
CUSTOMERS: Herman Miller, Inc. IBM Block & Co.
Steelcase, Inc. NCR Corp. Axxess Entry Technologies Inc.
Knoll, Inc. Gilbarco, Inc.
Hon Company Canada Post
- --------------------------------------------------------------------------------------------------------------
PERCENTAGE OF PRO FORMA
1997 SEGMENT NET SALES: 43.7% 7.2% 49.1%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Office Furniture. The Business and Institutional Furniture Manufacturers
Association ("BIFMA") reported that domestic shipments of office furniture sales
grew by approximately 14.5% to approximately $11.5 billion during 1997. In
addition, from 1994 through 1997, office furniture sales were estimated to have
grown at a compounded annual rate of approximately 9.1%. Furthermore, domestic
office furniture shipments have experienced annual sales growth in 23 of the
past 25 years. By the end of 2000, BIFMA expects industry shipments to reach
approximately $14.5 billion, a 26.1% increase from 1997. Sales to this market
accounted for approximately $19.6 million, or approximately 43.7%, of the
Company's pro forma 1997 segment net sales. Net sales to this market have grown
rapidly, with a compounded annual growth rate of approximately 27.9% for the
three year period ended December 31, 1997. Management anticipates that sales to
this market will continue to represent a growing percentage of segment sales for
the near term.
POS Terminals. This market was estimated by Frost & Sullivan to total
approximately $1.1 billion in 1997. In addition, from 1994 through 1997, sales
in the POS terminal market were estimated by Frost & Sullivan to have grown at a
compounded annual rate of approximately 4.8%. Furthermore they have estimated
that this market will continue to grow through 2000 at a compounded annual rate
of approximately 4.8%. Management believes that the recent and future
anticipated growth in this market reflects the increasing reliance of retailers
on electronic cash registers and other electronic retail equipment to facilitate
the distribution of domestic goods and services. Sales by the Company to this
market accounted for approximately 7.2% of the Company's fiscal 1997 segment net
sales and have grown at a compounded annual rate of approximately 4.4% for the
three year period ended December 31, 1997. Management believes that sales to
this market will remain stable for the near term.
Other. Net sales to the banking and postal industries totaled
approximately $3.0 million in fiscal 1997, representing approximately 6.6% of
the Company's pro forma segment net sales. The balance of the Company's net
sales in this segment are comprised of sales to OEM customers in industries such
as the aerospace, automotive and electronic industries, none of which accounted
for more than 2.5% of 1997 pro forma segment net sales. In addition, the Company
also sells key blanks and hardware for use in a variety of
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<PAGE> 60
end markets, primarily through locksmith distribution channels. The Company's
pro forma net sales of key blanks and hardware totaled $5.4 million in fiscal
1997.
The Flexible Shaft Business. The Company currently supplies flexible shaft
products to the construction, lawn and garden power equipment, maritime,
aerospace and general industrial markets. However, the Company believes that
since flexible shafts can be used in most low torque applications (less than 10
horsepower) for rotary transmission, the markets available to the Company are
only limited by KCI's innovation and ability to develop new applications. The
construction market is the largest segment of the Company's flexible shaft
business, accounting for approximately 25.6% of the Company's fiscal 1997
segment net sales, and, along with the commercial segment of the aerospace
market, has been the fastest growing. Sales to these segments accounted for
approximately $3.6 million and $1.0 million, respectively, of the Company's
fiscal 1997 segment net sales, representing an increase over fiscal 1996 of
approximately 29.8% and 56.3%, respectively. The Company's top ten customers
comprised approximately 40.0% of the Company's fiscal 1997 segment net sales and
no single customer comprised more than approximately 12.0% of such net sales.
Approximately 72.6% of Flexible Shaft Business fiscal 1997 net sales were to
customers with which the Company believes it has primary source relationships.
The following table summarizes the Company's sales of flexible shaft
products by end market:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
LAWN AND GARDEN GENERAL
CONSTRUCTION POWER EQUIPMENT MARITIME AEROSPACE INDUSTRIAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRODUCTS OR Concrete vibrator Combines Valve control Flap drives Conveyor belts
APPLICATIONS: shafts Weed trimmers systems Thrust reversers Valve control systems
Rubber casings Small tractors
Offroad construction Post hole diggers
vehicles Nylon liners
- ----------------------------------------------------------------------------------------------------------------------------
CUSTOMERS: Wacker Corporation John Deere Elcon Distributing Vickers, Inc. Goodway Technologies
Stow Manufacturing Poulan Weed Company, Inc. Hughes Corporation Corp.
Company, Inc. Eater, Inc. (U.S. Navy) Dowty Aerospace Emerson Electric
Multiquip Inc. Echo, Inc. Pearl Harbor Corp. Corp.
Caterpillar Inc. Ford New Holland Naval Shipyard General Dynamics Intermagnetics
Newport News Corporation General Corporation
Shipbuilding
Inc.
- ----------------------------------------------------------------------------------------------------------------------------
PERCENTAGE OF
PRO FORMA 1997
SEGMENT NET 25.6% 21.7% 13.9% 11.1% 27.7%
SALES:
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Construction. The United States Bureau of the Census estimates the total
construction market to have been approximately $600.9 billion in 1997. In
addition, from 1994 through 1997, sales in the construction market were
estimated to have grown at a compounded annual rate of approximately 4.9%. Sales
to the construction market accounted for approximately 25.6% of the Company's
1997 segment net sales, approximately 83.0% of which were the sale of flexible
shafts and rubber casings for use in concrete vibrators. The Company is
currently the primary supplier of flexible shafts and rubber casings to the
concrete vibrator segment, a subset of the general construction market. Company
net sales to the construction market grew rapidly in fiscal 1997 (29.8% over
fiscal 1996 net sales) due to a resurgence of construction activities in the
particular segments served by the Company; however, the compounded annual growth
rate for the three year period ended December 31, 1997 was 2.2%. The Company
anticipates that sales to this market will remain stable for the near term.
Lawn and Garden Power Equipment. This market was estimated by Find/SVP,
Inc. to total approximately $9.7 billion in 1997. In addition, from 1994 through
1997, sales in the lawn and garden power equipment market were estimated to have
grown at a compounded annual rate of approximately 4.5%. Furthermore, Find/SVP,
Inc. estimates that sales to the lawn and garden power equipment market will
grow at a compounded annual rate of approximately 4.8% to approximately $11.2
billion by 2000. The Company's flexible shaft products are used in weed
trimmers, post hole diggers, small garden tractors and similar equipment. Sales
to this market accounted for approximately 21.7% of the Company's 1997 net
segment sales,
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<PAGE> 61
approximately 68.2% of which were related to weed trimmers. Sales to this market
have remained relatively stable during the past three years; however, the
Company believes that this market will be a significant source of growth in the
near term due to its introduction of new products, including the nylon liner for
weed trimmers and steering assemblies in John Deere lawn tractors. In addition,
the Company anticipates an increase in overall market share in 1998 based on
first quarter results.
Maritime. This market was estimated by Marketline International to total
approximately $8.0 billion in 1997. In addition, Marketline International has
estimated this market to have remained relatively stable over the last three
years and expects it to remain relatively stable over the next several years.
The Company's valve control systems and products are used to control valves in
various applications on a variety of United States naval ships. Net sales to
this market accounted for approximately $2.0 million, or approximately 13.9% of
the Company's fiscal 1997 segment net sales. Management anticipates that sales
to this market will experience growth in the near term due to the Navy's
acceptance of certain value control systems manufactured by the Company on all
surface ship platforms in 1997.
Aerospace. Company sales to the aerospace market accounted for
approximately 11.1% of the Company's 1997 segment net sales, of which
approximately 62% was to the commercial segment and 38% was to the military
segment. The fastest growing segment of the Company's aerospace market has been
in the commercial segment where the Company's flexible shafts are used in a
variety of applications, including flap drive systems on small commuter jets and
thrust reverser systems for use on larger jumbo jets. This market segment was
estimated by the Aerospace Industries Association to total $25.8 billion in
1997. In addition, from 1994 through 1997, sales in the commercial segment were
estimated to have grown at a compounded annual rate of approximately 12.5%.
Company net sales to the commercial segment have grown rapidly, with a
compounded annual growth rate for the three year period ended December 31, 1997
of approximately 46.8%. The Company anticipates that the commercial segment will
continue to represent a growing percentage of the Company's business due to the
increased acceptance of the Company's flexible shaft products for commercial
aerospace applications.
General Industrial. The Company's flexible shaft products are used in a
wide range of other low torque (less than 10 horsepower) applications, such as
plant processing equipment in the food processing, packaging and printing
industries, as well as for use in the medical equipment market. Due to the
commodity nature of products sold to the automotive sector, the Company has
opted not to serve this market, with the exception of certain after-market
applications. Sales to the general industrial market accounted for approximately
$3.9 million or 27.7% of the Company's fiscal 1997 segment net sales. Although
sales to this market have been relatively stable, the Company anticipates that
the introduction of new products, such as flexible shafts for use in the
steering assemblies of golf carts, will result in growth for the near term.
PRODUCTS
Specialty Lock Products. The Company is a fully integrated manufacturer of
custom and specialty medium-security locks for use by OEM customers. The Company
custom designs and manufactures both pin-and wafer-tumbler locks. Tumbler locks
contain small movable parts, or tumblers, which must be brought to a particular
arrangement in order to enable the lock to be opened. In most cases, the
Company's lock products are small, low-cost but highly engineered essential
components of a much larger, more expensive end product. The primary markets
served by the Company's security products are the office furniture market and
the market relating to electronic retail devices such as POS registers and
computers.
The Company's primary lock product is its wafer-tumbler lock, which
consists of an outer cylinder that encases a rotating inner cylinder or plug.
Wafer-tumbler locks use a series of thin, flat movable metal wafers, engaged by
notches in one or both sides of a key. In a locked position, the wafers extend
partially within the plug, preventing the plug from turning. Insertion of the
correctly notched key lifts the wafers, which in turn raises the drivers to the
shear line between the plug and cylinder, allowing the plug to rotate and
release the locking bolt or turn the locking cam.
The Company also manufacturers and distributes pin-tumbler locks. This type
of lock uses rod-shaped movable pins, which are engaged by notches on one or
both sides of a key. Insertion of the correctly notched
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<PAGE> 62
key retracts the pins into the plug, allowing it to be turned. Except for the
substitution of pins for wafers, the mechanics of the pin-tumbler lock are
identical to the wafer-tumbler lock. The Company also produces the "Ultra-Track"
locking system, a safety feature used to prevent multiple drawers from being
opened simultaneously in filing cabinets and desks. In addition to wafer- and
pin-tumbler locks, the Company acts as a distributor of a small quantity of
imported locks in the United States and manufactures lock parts and related
hardware for sale to its customers, including washers, nuts, screws, bolts,
mounting clips, back plates and dust covers, as well as a selection of keys.
All of the Company's specialty lock products can be manufactured with a
number of varying features to suit the customized requirements of each
particular customer and end product. The Company has the ability to manufacture
its products, including locks, keys and related hardware, out of a number of
different base metals. Available metals include zinc alloy, steel, brass,
stainless steel, and aluminum. Zinc alloy locks can also be finished with a
variety of metal coatings, including chromium, brass, nickel, zinc, cadmium, or
powder. In addition, customers can request a key changeable core. This feature
allows OEM's and end users to change the core or plug of a lock on-site to code
or recode high-volume applications. Key changeable lock cores provide end-users
with an efficient and versatile method to manage their individual security
levels. Other variables which customers can specify include the size, strength,
internal mechanisms, mounting, and operation of the products.
While the Company is not involved with research and design of new specialty
lock product technologies, the nature of the niche markets that the Company
serves has required the continual development of new products, such as
"anti-riffing" devices, as solutions to customers' problems and needs. The
Company also gives office furniture manufacturers the ability to purchase
customized, changeable core locks which allow furniture manufacturers to ship
desks and cabinets to their customers with only the lock housing in place and
the end-user to decide how to tailor its security needs. The Company has
consistently focused on its ability to adapt products to the customers' needs.
Flexible Shaft Products. The Company designs and manufactures
approximately 2,200 flexible shaft products, all of which utilize wound wire
assemblies to transmit rotary power when applications render the predominant
rigid shaft technology less efficient or impossible. Flexible shaft products are
used in connection with the transmission of rotary power when the source of the
rotary power being generated and desired destination of that power are not
aligned. This occurs frequently in many designs and has been dealt with
historically by using several rigid shafts connected by gear boxes, universal
joints, chains and sprockets or belts and pulleys in order to change the
direction of the rotary power being transmitted. While such systems are
functional, they tend to be cumbersome and include multiple exposed rotating
components. The Company's flexible shaft products, which are intended for use in
low torque applications (using 10 horsepower or less), require less space and
have no exposed rotating components. Assembly time of the shaft portion of an
OEM's product is also greatly reduced. Additionally, there are certain flexible
shaft product applications where the use of rigid shaft technology is not only
inefficient, but not physically feasible. For example, in the aerospace market,
the wing profile of new regional jets has been reduced to improve fuel
efficiency, virtually eliminating the possible use of rigid shaft technology.
Each flexible shaft product is made of wound wire covered with a sheath and
is used for transmitting rotary power around, above or below obstacles and
corners. Because the shaft itself is flexible, these products can be snaked
through and around obstacles, improving many existing designs and increasing the
ability to create new, more compact and more complex designs to effect the
transmission of the rotary power. Since this whole rotary power system consists
of one shaft, it is also less cumbersome, easier to assemble and install and is
often lighter and less expensive than the conventional system of multiple
connecting rigid shafts which have a series of joints at each turn. The
Company's rotary power transmission products are utilized in connection with the
construction, lawn and garden power equipment, maritime, aerospace and general
industrial markets. See "Customers and Markets."
As with rotary power transmission, flexible shafts used for the remote
operation of valves are designed to be used when the valve and the mechanism for
controlling the valve are not aligned. Control valves in tight spaces or in
spaces where there are many obstacles to go around, such as on a ship, are not
easily accessed by
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<PAGE> 63
rigid shafts. The flexible shafts can facilitate the control of such valves from
remote, hazardous or inaccessible locations as the shaft can be snaked up and
around obstacles. Currently, the three largest markets for the Company's remote
valve control products are ship building, including sales to the United States
Navy, power generation and miscellaneous industrial applications. The Company
designs and assembles valve control systems based upon the needs of a customer
for each specific application.
Elliott's engineers are focused on developing potential new applications
for its flexible shaft products. The Company's growth in the rotary power
transmission componentry market has been a function of both growth in its
current end-user markets as well as the Company's ability to expand applications
for flexible shaft products. The Company's success in this area has hinged on
the rapidity at which new applications can be created, accepted and implemented
by the customer. The Company has introduced over 100 flexible shaft products to
the marketplace over the last three years. New markets where flexible shaft
technology is rapidly gaining acceptance are in the production of steering shaft
assemblies in general industrial and lawn and garden power equipment markets, as
well as the use of flexible shaft technology for flap drives on smaller planes
in the aerospace market. The Company believes that it will be able to continue
to engineer and manufacture new and improved applications for its flexible shaft
technology, and that it will continue to be able to meet the precise design
specifications of its customers, which may vary as to weight, flexibility and
cost requirements.
MANUFACTURING AND OPERATIONS
The Company's production processes are designed to reduce costs and improve
overall profitability. Using its operating strategy, the Company endeavors to
design its manufacturing process so that machine and labor utilization are
optimized and total costs are reduced. Cost savings are generated through
effective management of monthly product line profit and loss. On a monthly
basis, gross margins of every product line within each product group are
reviewed. The Company monitors the progress of its efficiency efforts on an
ongoing basis, both monthly and quarterly, and reacts quickly to resolve
problems or exploit unanticipated opportunities.
Custom products are sold at a premium to direct manufacturing costs, based
on factors such as lot size and availability. Management believes it has a
thorough understanding of the products and customers in the markets it serves,
enabling the Company to utilize aggressive but competitive pricing practices.
Capacity
The Company's plants currently run on highly automated double, or single
and partial second shifts, to meet the demands of its customers. Management
believes that as it continues to expand its operations, the ability to increase
capacity and move to full second shifts, if required, could be accomplished
without compromising product quality or requiring significant additional capital
expenditures.
Inventory Management
The Company has implemented an inventory management program designed to
balance customer delivery requirements with economically optimal inventory
levels. In this program, each product is categorized based on characteristics
including order frequency, number of customers and sales volume. Using this
classification system, management's primary goal is to maintain a sufficient
supply of standard items while minimizing warehousing costs. In addition,
production cost savings are achieved by optimizing plant scheduling around
inventory levels and customer delivery requirements. This leads to more
efficient utilization of manufacturing facilities and minimized plant production
changes while maintaining sufficient inventories to service customer needs.
Integration of Acquisitions
The Company has demonstrated an ability to institute programs which improve
the performance of acquired companies. This process involves applying the
Company's operating strategy, rationalizing product offerings and appropriately
capitalizing the acquired business.
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<PAGE> 64
SALES AND MARKETING
The Company employs both salaried and commission-based sales personnel, as
well as independent sales representatives, to facilitate the marketing and sales
of its products. The Company's sales and marketing teams have adopted an
integrated approach to product development, marketing and sales. They seek to
work closely with the Company's engineers to address customer's specific design
requirements and the hurdles associated therewith, as well as potential product
profitability. In addition, the sales team is responsible for keeping the
Company's engineering, manufacturing and management personnel advised of
possible future trends and requirements of customers. The Company's sales and
marketing personnel also focus on bringing customers a level of personal service
the Company believes to be superior to its competitors.
COMPETITION
The Specialty Lock Business. The lock industry is divided into three
segments, high-security, medium-security and low-security. In the
medium-security lock segment, the Company has four primary competitors.
Generally, these competitors are either divisions of larger entities or family
owned and run operations. Competition in this segment is based on cost, as well
as such value-added services as timely delivery, consistency in quality and
design. In order to compete effectively, suppliers must be focused on each
customer's specific needs and must have the level of sophistication necessary to
meet their particular requirements. The Company believes its ability to focus on
these niche markets, coupled with the level of sophistication provided by its
experienced management team, enables KCI to compete effectively in the
medium-security lock segment. In addition, due to its vertically integrated
manufacturing processes, the Company believes that it is able to manufacture its
products at a lower cost with a higher quality and faster turnaround time than
its competitors.
The high-security segment, which produces locks used in residential,
commercial and automotive doors, as well as other high-security applications, is
dominated by such companies as Schlage Lock Co., Master Lock, Inc. and Medeco
Security Locks Inc. The Company believes competition in the high-security
segment is principally based on name recognition. The low-security lock industry
is a commodity-type business, in which competition is principally based on low
cost and high volume delivery capabilities and not timely delivery or service.
Competitors in this segment are generally located outside the United States in
countries such as Mexico, China and Taiwan. Due to the dramatically different
competitive dynamics of each market segment, management does not anticipate that
the lock industry will experience significant shifts from one segment to
another.
The Flexible Shaft Business. KCI is the leading supplier to most of its
end user markets, evidencing its ability to differentiate itself from its
competitors based on quality as well as its design and manufacturing
capabilities. Currently, there are two primary competing manufacturers of
flexible shafts serving the segments addressed by KCI, one of which primarily
competes in the weed trimmer market and the other of which primarily competes in
the aerospace and general industrial markets. KCI management believes that KCI's
competitor in the weed trimmer market currently focuses its resources in the
automotive market, a high volume commodity-type market in which the Company
chooses not to compete. In the aerospace and general industrial markets, the
Company's principal competitor specializes in small diameter flexible shaft
products, representing only a small segment of these markets. Although it is
possible other competitors may seek to serve these markets, the Company believes
that there exists today significant barriers to entry, including the
availability of the Company's automatic winding machinery, which is not
available for purchase and must be individually constructed, the availability of
rubber covered casings for use in the construction market, which are only
manufactured by the Company and the capital investment required to purchase the
other capital equipment needed to manufacture products of similar quality. The
Company also faces competition from companies that use the alternate rigid shaft
technology. Typically, such companies either have in-house machine shops that
manufacture the individual components needed for the rigid shaft or look to
small machine shops to manufacture the components. Once the components are
manufactured, the OEMs then assemble the rigid shaft systems needed for the
specific application themselves.
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<PAGE> 65
ENVIRONMENTAL MATTERS
The Company's operations are subject to numerous permitting and other
compliance obligations under Environmental Laws, including those regulating
discharges to air and water, and the storage, handling and disposal of solid and
hazardous waste. The Company believes that it is in substantial compliance with
such obligations. Changes in Environmental Laws and other adverse developments
could cause the Company's environmental capital expenditures and costs for
environmental compliance to increase in the future.
The Company has potential liability for the remediation of soil and
groundwater contamination at its Hudson, Massachusetts lock manufacturing
facility, which contains two separately reported and confirmed oil and hazardous
material "disposal sites" within the meaning of applicable Massachusetts laws
and regulations. As the owner and operator of these disposal sites, the Company
is required to undertake and complete response actions, and to document the
completion of such response actions in a "response action outcome" statement
("RAO"), to be filed with the Massachusetts Department of Environmental
Protection. With minor exceptions, the filing of an RAO is the final step in the
required response action. As required by law, the Company has engaged a licensed
site professional ("LSP") to oversee these response actions. The LSP is
currently performing remedial and investigative activities necessary to achieve
an RAO for each of the two disposal sites. The Company expects these steps to be
completed before the end of 1998 at an additional cost of no more than
approximately $25,000. However, there can be no assurance that such response
actions will be completed to the satisfaction of the relevant regulatory
authorities within such period or that the cost thereof will not be materially
greater than currently estimated.
In addition, remediation is required at the Company's Binghamton, New York
flexible shaft manufacturing facility, which is listed on the New York State
Registry of Inactive Hazardous Waste Sites. The Company believes that the
facility's former owner is responsible for completing such remediation to the
satisfaction of regulatory authorities and the former owner has contractually
agreed to indemnify Elliott in connection with such remediation. The Company has
also entered into a voluntary clean-up participation agreement with the New York
State Department of Environmental Conservation (the "DEC"). Management believes
it has taken all action required by this participation agreement and it expects
to receive a waiver from the State of New York holding it harmless from future
liability to the DEC. However, it is possible that the Company could incur costs
in connection with the required remediation or could incur liability to private
parties, the amount of which could be material.
RAW MATERIALS AND SUPPLIERS
The primary raw materials used by the Company are brass, zinc, stainless
steel, steel wire and rubber, all of which are commodity items, readily
available from a wide range of sources. The Company has enjoyed and continues to
enjoy good relations with its suppliers and has not suffered any material
interruptions in the delivery of its required materials. Additionally, the
Company is not dependent on any single supplier. In the event a supply
arrangement is terminated, the Company would be forced to look elsewhere for its
raw materials which alternative sources management believes can be obtained with
minimal, if any, business interruption. However, the prices for such materials
can fluctuate, and such fluctuations can be material. A material increase in raw
material prices could materially adversely effect the results of operations of
the Company.
FACILITIES
The Company owns a five-story, 208,000 square foot building in Hudson,
Massachusetts, which it uses as the corporate headquarters, manufacturing and
warehouse facilities for Hudson. In addition, the Company leases approximately
2,500 square feet in Hudsonville, Michigan, to serve as a distribution center
for Specialty Lock Business products. The lease, which expires on August 31,
2001, provides for an annual rent of $45,000, payable monthly. The Company
leases a 55,000 square foot building in Leominster, Massachusetts, which it uses
as the corporate headquarters and manufacturing facilities of ESP. The lease,
which expires on May 31, 2003, provides that beginning on June 1, 1998, the base
rent shall be $200,000 plus annual increases based on the Consumer Price Index
("CPI"), not to exceed $10,000 per year. Rental payments for 1997 were $225,000.
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<PAGE> 66
The Company also leases 10,800 square feet in Worcester, Massachusetts, which it
currently uses as the manufacturing facilities of RAD. This lease, which expires
November 30, 1998, provides for an annual rent of $28,127. The Company currently
does not intend to renew this lease.
The Company owns a 250,000 square foot facility in Binghamton, New York,
which serves as the corporate headquarters, manufacturing and warehouse
facilities for Elliott. In addition, the Company leases a 28,500 square foot
building in Binghamton, New York, which it formerly used as an office and
manufacturing facility. The lease, which expires on December 31, 2008, provides
that, the base rent shall be $130,734 plus 5.0% annual increases. Rental
payments for 1997 were $133,493. The Company currently sublets 5,947 square feet
to an unrelated third party. In 1997, the sublet generated $7,597 in lease
revenue. The Company also leases a 18,125 square foot building in Chenago
Bridge, New York, which it currently uses as a manufacturing facility. This
lease, which expires June 30, 2000, provides for an annual rent of $93,165, plus
a 1.5% annual increase. Rental payments for 1997 were $93,165.
EMPLOYEES
The Company currently employs 719 persons on a full-time basis. Neither the
Company nor any of its subsidiaries has any collective bargaining agreement and
no employee of the Company or any of its subsidiaries is represented by a labor
union. In addition, neither the Company nor any of its subsidiaries has ever had
a work stoppage and each of the Company and its subsidiaries considers its
relationship with its employees to be satisfactory.
LEGAL PROCEEDINGS
Except as disclosed under "Environmental Matters," there are no pending
material legal proceedings to which the Company or its properties is subject.
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<PAGE> 67
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information with respect to the directors,
executive officers and other key employees of the Company and the Parent. All
directors and officers of the Company and the Parent hold office until the
annual meeting of stockholders next following their election, or until their
successors are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John S. Dyson............... 55 Chairman of the Board of Directors of the Parent, KC
LLC and Finance Corp., Director of Hudson, Director of
Elliott and Director of ESP
Clay B. Lifflander.......... 35 President and Director of the Parent, KC LLC and
Finance Corp., Vice President and Director of Hudson,
Director of Elliott and Vice President and Director of
ESP
Alan L. Rivera.............. 35 Vice President, Secretary and Director of the Parent,
KC LLC and Finance Corp., Vice President, Secretary and
Director of Hudson, Assistant Secretary and Director of
Elliott and Vice President, Secretary and Director of
ESP
David H. Bova............... 39 Vice President -- Development and Director of the
Parent, KC LLC and Finance Corp., Director of Hudson,
Director of Elliott and Director of ESP
George M. Scherer........... 44 Vice President -- Manufacturing and Director of the
Parent, KC LLC and Finance Corp., Vice President and
Director of Hudson, President and Director of Elliott
and Director of ESP
James D. Wilcox............. 49 Chief Financial Officer and Vice President of the
Parent, KC LLC, Finance Corp., Elliott, Hudson and ESP
and Treasurer of the Parent, KC LLC and Finance Corp.
Michael L. Colecchi......... 49 President of Hudson
August M. Boucher........... 46 President of ESP
</TABLE>
John S. Dyson has been Chairman of the Board of Directors of the Parent, KC
LLC and Finance Corp. since their inception. Since 1996, Mr. Dyson has been
Chairman of the Board of Directors of Millbrook, a management company providing
executive level services to the Company under the Management Agreement, and he
currently serves as Chairman of the Mayor of the City of New York's Council of
Economic Advisors. From 1994 to 1996, Mr. Dyson served as Deputy Mayor for
Finance and Economic Development for the City of New York. From 1982 to 1993 Mr.
Dyson was the Chairman of Dyson-Sinclair Associates, a management company and
the predecessor of Millbrook. From 1976 to 1979, he served as Commissioner of
the New York State Department of Commerce. Mr. Dyson was Vice Chairman of
Dyson-Kissner-Moran Corporation from 1970 to 1975, at which time he was
appointed to the position of Commissioner of the New York State Department of
Agriculture.
Clay B. Lifflander has been the President and a Director of the Parent, KC
LLC and Finance Corp. since their inception. Mr. Lifflander has been President
of Millbrook since 1995, and from 1994 to 1995, Mr. Lifflander was President of
the New York City Economic Development Corporation. Previously, Mr. Lifflander
was Managing Director in the Mergers and Acquisitions Group at Smith Barney
Inc., where he worked from 1984 to 1994.
Alan L. Rivera has been the Vice President, Secretary and a Director of the
Parent, KC LLC and Finance Corp. since their inception. Since September 1996,
Mr. Rivera has also been employed by Millbrook, where he serves as Chief
Financial Officer and General Counsel. From 1994 to 1996, Mr. Rivera served as
Executive Vice President of Finance and Administration and General Counsel of
the New York City Economic Development Corporation. From 1990 to 1994, Mr.
Rivera was an associate with the New York City law firm of Townley & Updike,
specializing in corporate finance matters, and from 1987 to 1990, Mr. Rivera was
an associate with Mudge, Rose, Guthrie, Alexander and Ferdon, specializing in
public finance matters.
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<PAGE> 68
David H. Bova has been the Vice President -- Development and a Director of
the Parent, KC LLC and Finance Corp., since their inception. He has also served
as President of Millbrook Vineyards Winery, Inc., and Pebble Ridge Vineyards,
Inc. since 1994 and 1992, respectively, and he has been Vice President --
Development of Millbrook since 1995.
George M. Scherer has been the Vice President -- Manufacturing and a
Director of the Parent and KC LLC since their inception. Mr. Scherer has been
with Elliott since 1978 when he began as Engineering Manager. He has served as
the President and a Director of Elliott since 1982. Prior to joining Elliott,
Mr. Scherer was a product application engineer for Stow Manufacturing Company,
Inc. in Binghamton, N.Y. from 1975 to 1978. Prior to his position at Stow
Manufacturing Company, Inc., Mr. Scherer was a plant engineer at GAF Corporation
in Binghamton, N.Y. from 1973 to 1975.
James D. Wilcox joined the Parent as Chief Financial Officer in April 1998.
Before joining the Company, Mr. Wilcox had, since 1992, been the Chief Financial
Officer of Systems Engineering and Manufacturing Corp., an international
manufacturer of automated capital equipment. From 1990 to 1992, Mr. Wilcox was
the Vice President -- Finance and Administration of Docktor Pet Holdings, Ltd.,
a national chain of specialty retail and franchised stores and a subsidiary of a
publicly held company.
Michael L. Colecchi has been with Hudson since 1970, when he began as a
tool and die maker. He subsequently assumed various positions of responsibility
in Hudson's manufacturing department until 1980, when he was appointed Plant
Manager. In 1984, Mr. Colecchi was promoted to Vice President of Manufacturing.
In 1989, Mr. Colecchi was promoted to Vice President and General Manager. Mr.
Colecchi has served as President of Hudson since 1996.
August M. Boucher has been with ESP since 1972, when he began as a tool
designer and manufacturing manager. He subsequently assumed various positions of
responsibility in ESP's manufacturing department until 1979 when he was
appointed Plant Manager. In 1982, Mr. Boucher was promoted to Vice President --
Manufacturing. Mr. Boucher has served as President of ESP since 1993.
EMPLOYMENT AGREEMENTS AND EXECUTIVE COMPENSATION
The Company has employment agreements with each of the Presidents of the
Operating Subsidiaries and James D. Wilcox, Chief Financial Officer of the
Company.
The employment agreement with George M. Scherer, President of Elliott, is
dated January 16, 1996, terminates on January 16, 2001 and provides Mr. Scherer
with a base salary of $225,000 per year, as well as an annual cash bonus in the
event Elliott reaches certain targeted levels of earnings. This agreement also
provides that Mr. Scherer (i) will not compete with Elliott for three years
after termination of his agreement, (ii) will keep all proprietary information
confidential and (iii) will assign to Elliott all innovations that may be
developed by Mr. Scherer during his employment. The employment agreement with
Michael L. Colecchi, President of Hudson, is dated as of May 15, 1997,
terminates on December 30, 2001 and provides Mr. Colecchi with a base salary of
$205,000 per year, subject to a yearly increase based on the CPI, as well as an
annual cash bonus based on Hudson attaining certain earnings targets. Pursuant
to an amendment to Mr. Colecchi's employment agreement, the Parent has granted
Mr. Colecchi a ten year option to purchase 1.5 shares of the Parent's common
stock pursuant to the Parent's 1998 Long-Term Incentive Plan (the "1998 Plan"),
which shall vest and become exercisable over a period of four years at an
exercise price of $250,000 per share, in consideration for the elimination of
certain contingent bonus provisions contained in Mr. Colecchi's agreement. See
"Certain Transactions." The employment agreement with August M. Boucher,
President of ESP, is dated as of December 10, 1997, terminates on December 31,
2002, and provides Mr. Boucher with a base salary of $165,000 per year, subject
to a yearly increase based on the CPI. Mr. Boucher is also eligible for bonuses,
in such amounts and at such times as ESP's Board of Directors may, in its sole
discretion, determine. Included in Mr. Colecchi's and Mr. Boucher's agreements
are provisions that the officers are not to compete with their respective
employers for five years after termination of their respective agreements as
well as confidentiality provisions.
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<PAGE> 69
The employment agreement with James D. Wilcox, Chief Financial Officer of
the Company, is dated as of April 17, 1998. The employment agreement terminates
on March 29, 2003 and provides Mr. Wilcox with a base salary of $130,000 per
year, subject to a yearly increase based on the CPI, as well as an annual cash
bonus subject to the sole discretion of the Board of Directors of the Company.
Pursuant to such agreement, Mr. Wilcox has been granted a five year option to
purchase 0.8 shares of the Parent's common stock under the Parent's 1998 Plan,
which shall vest and become exercisable over a period of four years at an
exercise price of $350,000 per share. Included in this agreement are provisions
that Mr. Wilcox is not to compete with the Company for two years after
termination of his agreement, as well as a confidentiality provision.
KC LLC was recently formed. Accordingly no historical executive
compensation information is included in this Prospectus.
LONG-TERM INCENTIVE PLAN
The Parent's 1998 Plan was adopted to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to employees, directors and consultants of the Parent, KC LLC and the
Operating Subsidiaries and to promote the success of the Parent's business.
Options granted under the 1998 Plan may be either incentive stock options, as
defined in Section 422A of the Internal Revenue Code of 1986, as amended, or
non-qualified stock options. In addition, stock appreciation rights, and
restricted stock awards and other stock-based awards may be granted under the
1998 Plan. The Parent has reserved 20 shares of its no par value common stock
(the "Common Stock") for issuance in respect of options and other awards granted
under the 1998 Plan. As of the date hereof, options to purchase an aggregate of
2.3 shares were outstanding under the 1998 Plan at a weighted average exercise
price of $284,783, of which options to purchase 0.4 shares are currently
exercisable. Such outstanding options consisted of an option granted to Michael
L. Colecchi in April 1998 in connection with an amendment to his employment
agreement and an option granted to James D. Wilcox pursuant to his employment
agreement with the Company. See "-- Employment Agreements and Executive
Compensation."
The 1998 Plan is administered by the Board of Directors, which has the
power to determine the terms of any options or awards granted thereunder,
including the exercise price, the number of shares subject to the option or
award, and the exercisability thereof. Options and awards granted under the 1998
Plan are generally not transferable, and each option or award is exercisable
during the lifetime of the optionee only by such optionee. The exercise price of
all incentive stock options granted under the 1998 Plan must be at least equal
to the fair market value of the shares of Common Stock on the date of grant.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of stock of the Parent, the exercise price of any
stock option granted must be equal to at least 110% of the fair market value on
the grant date and the maximum term of the option must not exceed five years.
The term of all other options or awards under the 1998 Plan may not exceed ten
years. The specific terms of each option grant or award are approved by the
Board of Directors and are reflected in a written stock option or award
agreement.
INDEMNIFICATION OF DIRECTORS
The Parent's Certificate of Incorporation authorizes it to indemnify its
officers and directors to the fullest extent permitted by New York law. The
By-laws of the Parent provide broad indemnification for directors against
reasonable expenses (including attorney fees, fines, judgments and amounts paid
in settlement) incurred in connection with any action or proceeding which arises
from serving as a director of the Parent. The By-laws also provide that the
Parent will indemnify such persons to the fullest extent permitted by law and
that the Parent may, in its discretion, indemnify other persons, including
officers of the Parent.
DIRECTORS
Directors of the Parent or the Company do not receive compensation for
acting in such capacity other than reimbursement for out-of-pocket expenses
incurred to attend meetings of the Board of Directors.
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<PAGE> 70
PRINCIPAL STOCKHOLDERS
Finance Corp. is a wholly-owned subsidiary of KC LLC and KC LLC is a
wholly-owned subsidiary of the Parent, which owns all the membership interests
to KC LLC. The following table sets forth information concerning the beneficial
ownership of the Parent's Common Stock as of August 1, 1998 by (i) each person
known to the Company to own beneficially more than 5.0% of the Parent's
outstanding Common Stock, (ii) each director, executive officer and key employee
of the Parent and/or the Company and (iii) all such directors, executive
officers, and key employees as a group. All shares are owned with sole voting
and investment power, unless otherwise indicated.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED
------------------
BENEFICIAL OWNER SHARES(1) %
- ---------------- --------- -----
<S> <C> <C>
John S. Dyson(a)........................................ 64.5(2) 63.0%
Charles H. Dyson Trust #1
F/B/O John S. Dyson
U/A DTD 8/2/68........................................ 10.75(2) 10.5%
Charles H. Dyson Trust #1
F/B/O John S. Dyson
U/A DTD 4/15/76....................................... 10.75(2) 10.5%
Margaret M. Dyson Trust #1
F/B/O John S. Dyson
U/A DTD 3/26/68....................................... 10.75(2) 10.5%
Clay B. Lifflander(b)................................... 50.25(3) 49.1%
George M. Scherer(b).................................... 10.00 9.8%
Alan L. Rivera(b)....................................... 4.50 4.4%
David H. Bova(b)........................................ 3.00 2.9%
August M. Boucher....................................... 2.00 2.0%
Michael L. Colecchi..................................... 0.40(4) 0.40%
James D. Wilcox(b)...................................... 0(5) 0%
All Officers and Directors (8 persons).................. 102.40(6) 100%
</TABLE>
- ---------------
(a) Affiliate of Millbrook, KC LLC and Finance Corp.
(b) Affiliate of KC LLC and Finance Corp.
(1) Unless otherwise indicated, the Company believes that the beneficial owners
of the securities have sole investment and voting power with respect to such
securities, subject to community property laws where applicable.
(2) Includes an aggregate of 32.25 shares of Common Stock owned of record by the
Charles H. Dyson Trust #1 F/B/O John S. Dyson U/A DTD 8/2/68, Charles H.
Dyson Trust #1 F/B/O John S. Dyson U/A DTD 4/15/76 and the Margaret M. Dyson
Trust #1 F/B/O John S. Dyson U/A DTD 3/26/68 (the "Dyson Trusts"), of which
Mr. Dyson is a beneficiary and trustee and as to which he has shared voting
and investment power.
(3) Includes 32.25 shares of Common Stock owned of record by the Dyson Trusts,
of which Mr. Lifflander is a trustee and as to which he has shared voting
and investment power.
(4) Consists of an option to purchase 1.5 shares of Common Stock, of which 0.4
shares is currently exercisable. See "Management -- Employment Agreements
and Executive Compensation."
(5) Mr. Wilcox has the right to acquire 0.8 shares of Common Stock pursuant to
options which become exercisable in part after March 30, 1999. See
"Management -- Employment Agreements and Executive Compensation."
(6) Includes 32.25 shares of Common Stock owned of record by the Dyson Trusts.
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<PAGE> 71
CERTAIN TRANSACTIONS
ESP Lease
The Company rents its Leominster, Massachusetts manufacturing facility
under an operating lease agreement entered into with a company that is co-owned
by an affiliate of August M. Boucher, an officer and shareholder of the Company.
The lease, which expires on May 31, 2003, provides for annual rent increase
based on the CPI. Rental payments amounted to $225,000 in each of 1997 and 1996.
Management Agreement
The Company pays management fees to Millbrook, a party related to John S.
Dyson, Chairman of the Board and a shareholder of the Company. These management
and other administrative fees totaled $643,329 and $760,000 in 1996 and 1997,
respectively. To date, the Company has paid $371,000 in management and other
administrative fees for 1998. The Company has entered into the Management
Agreement with Millbrook. Pursuant to such Management Agreement, Millbrook
provides the Company with executive level services, for an annual base
management fee equal to $500,000 (the "Base Fee") payable in quarterly
installments, plus an additional fee of $300,000 per year (the "Additional
Fee"), payable following completion of the Company's audited financial
statements for such year. No portion of the Base Fee or the Additional Fee may
be paid at the time that any Event of Default (as defined) exists under the
Indenture. In addition, the Additional Fee may only be paid to the extent that,
after giving effect thereto, the Company's Consolidated Coverage Ratio (as
defined) exceeds 2.0:1, for the fiscal years ending on or prior to December 31,
1999, and 2.25:1 for the fiscal years ending after December 31, 1999. The
Additional Fee may be increased, beginning with the fiscal year ending December
31, 2000, by an amount up to 15% of the aggregate amount of the Base Fee and the
then current amount of the Additional Fee; provided, however, that the
percentage increase shall not exceed the percentage increase in pro forma EBITDA
for such fiscal year as compared to the prior fiscal year. Notwithstanding the
foregoing, total management fees payable under the Management Agreement may not
exceed $1.2 million in any fiscal year. Any management fees which are not
permitted to be paid at the time due will be deferred (without interest) and
will be paid as soon as permitted. Millbrook will also be entitled to be
reimbursed for its out of pocket expenses.
In 1997, the Company paid Millbrook $400,000 for advisory services related
to the acquisition of ESP. Pursuant to the Management Agreement, the Company
paid Millbrook an investment fee equal to $900,000 upon consummation of the
Initial Offering for financial advisory and other services rendered to the
Company in connection with the Initial Offering and the financing of ESP.
Employee Shareholder Agreements
On April 27, 1998, the Parent and August M. Boucher, President of ESP,
entered into a subscription agreement, pursuant to which Mr. Boucher purchased
two shares of the Parent's Common Stock for an aggregate purchase price of
$500,000. In addition, on April 27, 1998, the Parent entered into a separate
shareholder's agreement, with each of Messrs. Boucher, Michael L. Colecchi and
James D. Wilcox (each an "Employee Shareholder"). Each such shareholder's
agreement: (i) restricts the right of each Employee Shareholder to transfer any
shares of the Common Stock owned by him, (ii) gives the Parent the right to
cause each Employee Shareholder to sell all of his shares of the Common Stock
upon termination of his employment, and (iii) allows each Employee Shareholder
to cause the Parent to purchase all of the shares of the Common Stock still held
by him by April 27, 2001, in the case of Mr. Colecchi, or by March 30, 2003 in
the case of Mr. Wilcox or by April 27, 2003 in the case of Mr. Boucher, or upon
the death or disability of such Employee Shareholder, at a purchase price equal
to the fair market value thereof. Each shareholder's agreement also provides
that the Parent will use its best efforts to cause any person owning more than
50% of the outstanding stock of the Parent to refrain from disposing of its
shares of stock in an arm's length transaction with a third party unless such
third party also agrees to purchase an appropriately proportionate number of
shares of Common Stock from the Employee Shareholder, except in the case of a
merger or reorganization, in which case each of the Employee Shareholders shall
receive shares in the surviving entity on the same terms as any other
stockholder of the Parent that is deemed an "affiliate" of the Parent.
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On April 27, 1998, the Parent and Michael L. Colecchi, President of Hudson
entered into an amendment to Mr. Colecchi's employment agreement, pursuant to
which Mr. Colecchi agreed to waive his right to receive a bonus of $750,000 in
the year 2000 which would have been payable on a sale of Hudson or Hudson
achieving certain EBITDA targets, in exchange for an option to purchase 1.5
shares of Common Stock at an exercise price of $250,000 per share, which is
currently vested and exercisable as to 0.4 shares, the remainder of which shall
vest over the next three years, or immediately in the event of a sale of all or
substantially all of the assets of the Parent.
New Credit Facility
Societe Generale was agent and lender under the Old Credit Facility. In
addition, SGIC purchased the Original Notes and Warrants. In connection
therewith, Societe General and its affiliate, SGIC, received customary fees and
other expenses from the Company during fiscal 1997. The Company has entered into
the New Credit Facility and Societe Generale acts as agent and lender thereunder
and an affiliate thereof has acted as arranger in respect thereof. In connection
with the New Credit Facility, Societe Generale and its affiliates have received
customary fees. See "Description of Certain Indebtedness -- New Credit
Facility."
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THE LIMITED LIABILITY COMPANY AGREEMENT
GENERAL
The rights and obligations of the equityholders of the Company (the
"Members") are governed by an agreement (the "Limited Liability Company
Agreement") entered into concurrently with the Initial Offering. The Parent is
the sole Member of the Company. The Member's interest in the Company, including
its interest in the capital, profits, losses and distributions, have been issued
to it in consideration of shares of stock of the Operating Subsidiaries that
were contributed by the Member in exchange for its interest in the Company. The
Member has been credited with the capital associated with such shares on the
Company's books of account. The Member will also be credited and/or charged with
the profits, losses and distributions made with respect to or in respect of the
Operating Subsidiaries at any time while they are owned by the Company. The
Member will be credited or charged with any gain or loss on any capital
transaction, sale, exchange or other disposition of any assets of the Operating
Subsidiaries and with the proceeds of property received in exchange for such
assets in any transaction. The Member's interest will be adjusted from time to
time to take into account subsequent contributions to and all distributions from
the Company, and sales or other transfers of all or a part of the Member's
interest.
Voting Rights. The Company is also managed by the Member subject to the
right of the Member to delegate management authority to officers and directors
appointed by it. The Member has the right to direct in all respects the voting
of all capital stock of the Operating Subsidiaries and the directors of each
Operating Subsidiary so elected shall operate and manage each respective entity
in accordance with and with full rights and authority under applicable law.
CASH DISTRIBUTIONS
Subject to the prior rights of the Company's creditors, including but not
limited to the restrictions contained in the Indenture and the New Credit
Facility, the Company will make distributions to the Member from time to time of
its available cash.
Distributions Relating to Income Taxes. Subject to the prior rights of the
Company's creditors, including but not limited to the restrictions contained in
the Indenture and the New Credit Facility, the Company is required to distribute
to the Member each year an amount equal to the Company's taxable income
multiplied by the sum of the highest federal individual tax rate of that year
plus the New York state individual tax rate of that year, plus any additional
income tax liability incurred by the shareholders of the Member as a result of
the reporting of the Company's income, deductions, gains or losses on the
Member's federal or state income tax returns of such shareholders.
INDEMNIFICATION
The Limited Liability Company Agreement provides that the Company will
indemnify the Member, any former Member, any person who is or was an affiliate
of a Member or any former Member, any person who is or was a officer, director,
employee or agent of the Company or any Subsidiary, or any person who is or was
serving at the request of the Company, the Member or a director of the Company
as an officer, director, employee, member, partner, agent, fiduciary or trustee
of another person ("Indemnitees"), to the fullest extent permitted by law, from
and against any and all losses, claims, damages, liabilities (joint or several),
expenses (including, without limitation, legal fees and expenses), judgments,
fines, penalties, interest, settlements and other amounts arising from any and
all claims, demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, by reason of its status as
an Indemnitee; provided that in each case the Indemnitee acted in good faith and
in a manner that such Indemnitee reasonably believed to be in or not opposed to
the best interests of the Company and, with respect to any criminal proceeding,
had no reasonable cause to believe its conduct was unlawful. Any indemnification
under these provisions will be only out of the assets of the Company, and the
Member shall not be personally liable for, or have any obligation to contribute
or loan funds or assets to the Company to enable it to effectuate, such
indemnification. The
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Company is authorized to purchase insurance against liabilities asserted against
and expenses incurred by such persons in connection with the Company's
activities, regardless of whether the Company would have the power to indemnify
such person against such liabilities under the provisions described above.
AMENDMENT OF LIMITED LIABILITY COMPANY AGREEMENT
The Limited Liability Company Agreement may be modified, altered, changed
or amended in accordance with the Delaware Limited Liability Company Act (the
"Act"), provided, however, that the Limited Liability Company Agreement may not
be amended as to matters which would: (i) change adversely any Member's rights
and interest in the income, expense, gains, losses or income tax allocations of
the Company or change any Member's rights with respect to liquidation of the
Company, without the unanimous affirmative vote of the Members; or (ii) cause
the Company to violate the terms of the Indenture or the New Credit Facility.
TERMINATION AND DISSOLUTION
Subject to the prior rights of the Company's creditors, including but not
limited to the restrictions contained in the New Credit Facility, the existence
of the Company shall terminate and the Company shall be dissolved upon the first
to occur of the following: (i) on December 31, 2048; (ii) the determination of
all the Members to dissolve the Company upon the written consent of all the
Members; (iii) as provided in the Operating Agreement; or (iv)as may be required
by the Act, as the same may be amended from time to time.
The Company shall be dissolved and its affairs shall be wound up upon the
occurrence of any of the following: (i) termination of the Company as set forth
in the immediately preceding paragraph or (ii) entry of a decree of judicial
dissolution.
Upon dissolution and winding up of the affairs of the Company, the assets
of the Company shall be distributed or sold for cash and any gain or loss
resulting therefrom shall be allocated among the Members as provided in the
Limited Liability Company Agreement, subject to the prior rights of the
Company's creditors. Such proceeds of the Company shall be distributed in the
following order of priority; (i) to creditors (including Members who are
creditors) in satisfaction of the liabilities of the Company (other than
liabilities to existing and former members of distributions from the Company);
(ii) to existing and former Members in satisfaction of liabilities to them, if
any, for distributions from the Company; and (iii) any remaining assets shall be
distributed to Members in accordance with their interests as set forth in the
Limited Liability Company Agreement, as the same may be amended from time to
time.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW CREDIT FACILITY
KC LLC (the "Borrower") has entered into the New Credit Facility with
Societe Generale, as administrative agent (the "Agent") for the Lenders. The
following summary, which sets forth the material terms of the New Credit
Facility, does not purport to be complete and is subject to, and qualified by
reference to, all of the provisions of the New Credit Facility, including all of
the definitions therein of terms not defined in this Prospectus. See "Risk
Factors -- Substantial Leverage; Ability to Service Debt."
General. The New Credit Facility provides for borrowings in an aggregate
principal amount of $40,000,000 at any one time outstanding, comprised of up to
(i) $15.0 million under a revolving credit facility (the "Revolving Credit
Facility") and (ii) $25.0 million under an acquisition loan facility (the
"Acquisition Facility"). Borrowings under the Revolving Credit Facility may only
be used for acquisitions, working capital needs and other general corporate
purposes of the Borrower and its subsidiaries (as defined in the Credit
Agreement). Borrowings under the Acquisition Facility may only be used to fund
future acquisitions. Borrowings under the New Credit Facility are collectively
referred to herein as the "Loans." See "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Interest. For purposes of calculating interest, the Loans can, at the
election of the Borrower, be Base Rate Loans or LIBOR Loans, or a combination
thereof. Base Rate Loans under the Revolving Credit Facility will bear interest
at Societe Generale's base rate plus 1.375% and LIBOR Loans under the Revolving
Credit Facility will bear interest at Societe Generale's LIBOR (Reserve
Adjusted) plus 2.375%. Base Rate Loans under the Acquisition Facility will bear
interest at Societe Generale's Base Rate plus 1.625% and LIBOR Loans under the
Acquisition Facility will bear interest at Societe Generale's LIBOR (Reserve
Adjusted) plus 2.625%. The foregoing interest rates will be effective through
December 31, 1998, and thereafter be subject to step downs based upon the
provisions of the New Credit Facility. Interest will be payable (i) on the last
day of each calendar quarter for Base Rate Loans and (ii) at the end of each
applicable Interest Period (and if such Interest Period shall exceed 90 days, on
the 90th day of such Interest Period).
Availability and Repayment. Subject to the provisions of the New Credit
Facility, the Borrower may, from time to time, borrow, repay and reborrow under
the Revolving Credit Facility, subject to a borrowing base consisting of
specified percentages of outstanding accounts receivable cash equivalents and
inventory on hand. Subject to the provisions of the New Credit Facility,
borrowings under the Acquisition Facility may be made up to the full amount
available thereunder, subject to certain financial and non-financial conditions
satisfactory to the Lenders. Availability under the Acquisition Facility shall
be permanently reduced by any amounts borrowed under the Acquisition Facility,
and amounts repaid under the Acquisition Facility may not be reborrowed. The New
Credit Facility will require, subject to certain exceptions, prepayments in the
amount of 50% of Excess Cash Flow (as defined in the New Credit Facility), 100%
of net cash proceeds from certain asset sales, and 100% of net cash proceeds
from certain offerings of debt and/or equity securities, with such prepayments
to be applied pro rata to the remaining maturities of acquisition loans, if any.
The entire unpaid balance under the New Credit Facility will be payable no later
than June 30, 2004.
Security. Borrowings under the New Credit Facility are secured, for the
ratable benefit of the Lenders, by a first priority perfected security interest
in favor of Societe Generale, as collateral agent (the "Collateral Agent"), in
(a) all of the capital stock of the Subsidiary Guarantors and all other direct
and indirect subsidiaries owned by the Company and (b) all present and future
tangible and intangible property and interests in property of the Borrowers,
Subsidiary Guarantors and the Borrowers' other direct and indirect subsidiaries.
Guarantees. The Borrowers' payment obligations under the New Credit
Facility are jointly and severally guaranteed, on a senior secured basis, by the
Subsidiary Guarantors. The terms of the New Credit Facility currently require
that the Borrowers' payment obligations be guaranteed by the Borrowers' future
direct and indirect operating subsidiaries.
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Covenants. The New Credit Facility contains financial covenants pursuant
to which the Company and its direct and indirect subsidiaries must, on a
consolidated basis, maintain (i) a Minimum Fixed Charge Coverage Ratio (as
defined in the New Credit Facility); (ii) a Minimum Interest Coverage Ratio (as
defined in the New Credit Facility) and (iii) a Maximum Funded Debt to EBITDA
Ratio (as defined in the New Credit Facility).
In addition, the New Credit Facility contains covenants pertaining to the
management and operation of the Company and its subsidiaries. These covenants
include, among others, requirements that each of the Parent, the Company and its
subsidiaries (i) preserve its corporate existence and not amend its charter or
by-laws; (ii) maintain adequate insurance coverage; (iii) maintain its
properties and all necessary licenses, permits and intellectual property; (iv)
perform its obligations under leases, related documents, material contracts and
other agreements; and (v) comply with applicable laws and regulations, including
those related to tax, employee, pension and environmental matters.
The New Credit Facility also subjects the Company and its subsidiaries to
significant limitations on indebtedness, guarantees, capital expenditures, liens
or encumbrances, mergers, consolidations, divestitures, acquisitions,
investments, capital contributions, joint ventures, partnerships, creation of
new subsidiaries, changes of business, loans and advances, dividends and other
stock payments, repurchases or redemptions of equity, asset sales or transfers,
leases, voluntary prepayments or repurchases or redemptions of debt,
transactions with affiliates, management fees, and changes in accounting
treatment.
Events of Default. The New Credit Facility provides for events of default
customarily found in facilities of this type, including: (i) non-payment of
principal or interest or fees when due; (ii) inaccuracy of any representation or
warranty in any material respect; (iii) failure to perform or observe covenants
after any applicable grace period; (iv) cross-defaults to other material
indebtedness; (v) bankruptcy or insolvency defaults; (vi) material judgment
defaults; (vii) change of control; (viii) ERISA defaults; and (ix) impairment of
security.
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THE EXCHANGE OFFER
The summary herein of certain provisions of the Exchange and Registration
Rights Agreement does not purport to be complete and reference is made to the
provisions of the Exchange and Registration Rights Agreement, which has been
filed as an exhibit to the Registration Statement, and a copy of which is
available as set forth under the heading "Available Information."
TERMS OF THE EXCHANGE OFFER
In connection with the issuance of the Old Notes pursuant to a Purchase
Agreement, dated as of May 20, 1998 between the Issuers and the Initial
Purchaser (the "Purchase Agreement"), the Initial Purchaser and its assignees
became entitled to the benefits of the Exchange and Registration Rights
Agreement.
Under the Exchange and Registration Rights Agreement, the Issuers have
agreed (i) to file with the Commission prior to 60 days after May 28, 1998, the
date the Old Notes were issued (the "Issue Date"), the Registration Statement of
which this Prospectus is a part with respect to a registered offer to exchange
the Old Notes for the New Notes, (ii) to use their best efforts to cause the
Registration Statement to be declared effective under the Securities Act within
150 days after the Issue Date and (iii) to use their best efforts to consummate
the Exchange Offer within 165 days after the Issue Date. The Company will keep
the Exchange Offer open for not less than 20 business days after the date notice
of the Exchange Offer is mailed to holders of the Old Notes. The Exchange Offer
being made hereby, if commenced and consummated within the time periods
described in this paragraph, will satisfy those requirements under the Exchange
and Registration Rights Agreement.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, all Old Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date will be
accepted for exchange. New Notes will be issued in exchange for an equal
principal amount of outstanding Old Notes accepted in the Exchange Offer. Old
Notes may be tendered only in integral multiples of $1,000. This Prospectus,
together with the Letter of Transmittal, is being sent to all registered holders
as of , 1998. The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being tendered for exchange. However, the
obligation to accept Old Notes for exchange pursuant to the Exchange Offer is
subject to certain conditions as set forth herein under "-- Conditions."
The form and terms of the New Notes are identical in all material respects
to the form and terms of the Old Notes, except that the New Notes will have been
registered under the Securities Act and, therefore the New Notes will not be
subject to certain transfer restrictions, registration rights and certain
related provisions applicable to the Old Notes. The New Notes will evidence the
same debt as the Old Notes (which they replace) and will be issued under and be
entitled to the benefits of the Indenture.
Old Notes shall be deemed to have been accepted as validly tendered when,
as and if the Issuers have given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of Old
Notes for the purposes of receiving the New Notes and delivering New Notes to
such holders.
Based on interpretations by the staff of the Commission as set forth in
no-action letters issued to third parties in other transactions (including Exxon
Capital Holdings Corporation (available May 13, 1988), Morgan Stanley & Co.
Incorporated (available June 5, 1991), K-III Communications Corporation
(available May 14, 1993) and Shearman & Sterling (available July 2, 1993)), the
Issuers believe that the New Notes issued pursuant to the Exchange Offer may be
offered for resale, resold and otherwise transferred by any holder thereof
(other than any such holder that is a broker-dealer or an "affiliate" of the
Issuers within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that (i) such New Notes are acquired in the ordinary
course of business, (ii) at the time of the commencement of the Exchange Offer
such holder has no arrangement with any person to participate in a distribution
of such New Notes and (iii) such holder is not engaged in, and does not intend
to engage in, a distribution of such New Notes. The Issuers have not sought, and
do not intend to seek, a no-action letter from the Commission with respect to
the effects of the Exchange Offer, and there
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can be no assurance that the staff would make a similar determination with
respect to the New Notes as it has in such no-action letters.
By tendering Old Notes in exchange for New Notes and by executing the
Letter of Transmittal, each holder will represent to the Issuers that: (i) it is
not an affiliate of the Issuers, (ii) any New Notes to be received by it will be
acquired in the ordinary course of business and (iii) at the time of the
commencement of the Exchange Offer it had no arrangement with any person to
participate in a distribution of the New Notes and, if such holder is not a
broker-dealer, it is not engaged in, and does not intend to engage in, a
distribution of New Notes. If a holder of Old Notes is unable to make the
foregoing representations, such holder may not rely on the applicable
interpretations of the staff of the Commission, will not be able to tender its
Old Notes in the Exchange Offer and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
secondary resale transaction unless such sale is made pursuant to an exemption
from such requirements.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution."
Upon consummation of the Exchange Offer, subject to certain limited
exceptions, holders of Old Notes who do not exchange their Old Notes for New
Notes in the Exchange Offer will no longer be entitled to registration rights
and will not be able to offer or sell their Old Notes, unless such Old Notes are
subsequently registered under the Securities Act (which, subject to certain
limited exceptions, the Issuers will have no obligation to do), except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998 (20 business days following the commencement of the
Exchange Offer), unless the Issuers, in their sole discretion, extend the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date to which the Exchange Offer is extended. In no event, however, shall the
Expiration Date be later than November 9, 1998. Notwithstanding any extension of
the Exchange Offer, if the Exchange Offer is not consummated on or prior to
November 9, 1998, the Company must pay additional interest on the Notes until
the Exchange Offer is consummated, at a rate of 0.5% per annum, (increasing at
the rate of 0.5% per annum at the end of each 90-day period thereafter);
provided, however, that such additional interest on the Notes may not exceed, in
the aggregate, 1.0% per annum.
To extend the Expiration Date, the Issuers will notify the Exchange Agent
of any extension by oral or written notice and will notify the holders of the
Old Notes by means of a press release or other public announcement prior to 9:00
A.M., New York City time, on the next business day after the previously
scheduled Expiration Date. Such announcement may state that the Issuers are
extending the Exchange Offer for a specified period of time.
The Issuers reserve the right (i) to delay acceptance of any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not permit
acceptance of Old Notes not previously accepted if any of the conditions set
forth herein under "-- Conditions" shall have occurred and shall not have been
waived by the Issuers, by giving oral or written notice of such delay, extension
or termination to each Exchange Agent, or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to each Exchange Agent. If the Exchange Offer is amended
in a manner determined by the Issuers to constitute a material change, the
Issuers will promptly disclose such amendment in a manner reasonably calculated
to inform the holders of the Old Notes of such amendment.
Without limiting the manner in which the Issuers may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Issuers shall have no obligations to
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publish, advertise, or otherwise communicate any such public announcement, other
than by making a timely release to an appropriate news agency.
SHELF REGISTRATION
If (i) because of any change in law or currently prevailing interpretations
of the staff of the Commission, the Issuers are not permitted to effect an
Exchange Offer, (ii) the Exchange Offer is not consummated within 165 days of
the Issue Date or (iii) any holder (A) is not eligible to participate in the
Exchange Offer, (B) participates in the Exchange Offer and does not receive
freely transferable New Notes in exchange for tendered Old Notes or (C) is a
broker-dealer that holds Old Notes acquired directly from the Issuers or one of
their affiliates, the Issuers shall (i) promptly upon becoming aware of any of
the foregoing matters deliver to the holders of the Old Notes and the Trustee
written notice thereof and (ii) use their best efforts to as promptly as
practicable file with the Commission a Shelf Registration Statement on or prior
to the 30th day after the Shelf Filing Date (as defined) to cover resales of
Transfer Restricted Securities by such holders who satisfy certain conditions
relating to, among other things, the provision of information in connection with
the Shelf Registration Statement (the date such filing obligation arises as
provided above is referred to herein as the "Shelf Filing Date"). For purposes
of the foregoing, "Transfer Restricted Securities" means each Old Note until the
earliest to occur of (i) the date on which such Old Notes has been exchanged for
a freely transferable New Note in the Exchange Offer, (ii) the date on which
such Old Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement or (iii) the
date on which such Old Note is distributed to the public pursuant to Rule 144
under the Securities Act or is saleable pursuant to Rule 144(k) under the
Securities Act.
INTEREST ON THE NEW NOTES
The New Notes will accrue interest at the rate of 10 1/2% per annum from
the Issue Date of the Old Notes. Interest on the New Notes is payable on June 1
and December 1 of each year, commencing December 1, 1998.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes to be exchanged any other required documents, to the Exchange Agent at the
address set forth herein and therein, or effect a tender of Old Notes pursuant
to the procedures for book-entry transfer as provided for herein and therein,
prior to 5:00 p.m., New York City time, on the Expiration Date. In addition,
either (i) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes into the Exchange Agent's account at The
Depository Trust Company (the "DTC") (the "Book-Entry Transfer Facility")
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent, prior to the Expiration Date or (ii) the holder
must comply with the guaranteed delivery procedures described below. THE METHOD
OF DELIVERY OF LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED
THAT AN OVERNIGHT OR HAND DELIVERY SERVICE BE USED. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR
OTHER REQUIRED DOCUMENTS SHOULD BE SENT TO THE ISSUERS. Delivery of all
documents must be made to the Exchange Agent, at its address set forth below.
Holders may also request their respective brokers, dealers, commercial banks,
trust companies or nominees to effect such tender for such holders in each case
as set forth herein and in the Letter of Transmittal.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Issuers in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal. Any beneficial
owner whose Old Notes are registered in the name of a broker, dealer, commercial
bank, trust
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company or other nominee and who wishes to tender should contact such registered
holder promptly and instruct such registered holder to tender on his behalf.
By executing a Letter of Transmittal, each holder will make to the Issuers
the representations set forth above under the heading "-- Terms of the Exchange
Offer."
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor' institution within the meaning of Rule
17Ad-15 under the Exchange Act (each an "Eligible Institution") unless the Old
Notes tendered pursuant thereto are tendered (i) by a registered holder of Old
Notes (or by a participant in DTC whose name appears on a security position
listing as owner of such Old Notes) who has not completed Box 3 ("Special
Delivery Instructions") on the Letter of Transmittal, or (ii) for the account of
an Eligible Institution.
If the Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such person should so indicate
when signing, and unless waived by the Issuers, evidence satisfactory to the
Issuers of their authority to so act must be submitted with the Letter of
Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) acceptance and withdrawal of the tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Issuers reserve the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes which, if accepted, would, in the opinion
of counsel for the Issuers, be unlawful. The Issuers also reserve the absolute
right to waive any irregularities or conditions of tender as to particular Old
Notes. The Company's interpretation of the terms and conditions of the Exchange
Offer (including the instructions in the Letter of Transmittal) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Issuers shall determine. Neither the Issuers, the Exchange Agents nor any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Old Notes, nor shall any of them incur any liability
for failure to give such notification. Tenders of Old Notes will not be deemed
to have been made until such irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned without cost to such holder by the Exchange Agent or the Exchangeable
Preferred Stock Exchange Agent, as the case may be, unless otherwise provided in
the Letter of Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Indenture, (i) to purchase or make offers for any Old
Notes that remains outstanding subsequent to the Expiration Date or, as set
forth under "-- Conditions," (ii) to terminate the Exchange Offer in accordance
with the terms of the Exchange and Registration Rights Agreement, (iii) to
redeem Old Notes as a whole or in part at any time and from time to time, as set
forth, with respect to the Old Notes, under "Description of the
Notes -- Optional Redemption" and (iv) to the extent permitted by applicable
law, to purchase Old Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Old Notes properly tendered will be accepted promptly after the Expiration
Date, and the New Notes will be issued promptly after acceptance of the Old
Notes. See "-- Conditions." For purposes of the Exchange Offer, Old Notes shall
be deemed to have been accepted as validly tendered for exchange when, as and if
the Issuers have given oral or written notice thereof to the Exchange Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of a Book-Entry Confirmation
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<PAGE> 81
of such Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility, a properly completed and duly executed Letter of Transmittal and all
other required documents. If any tendered Old Notes are not accepted for any
reason set forth in the terms and conditions of the Exchange Offer, such
unaccepted or such nonexchanged Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility as promptly as practicable
after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish accounts with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, the Letter of
Transmittal or facsimile thereof with any required signature guarantees and any
other required documents must, in any case, be transmitted to and received by
the Exchange Agent at its address set forth below under "-- Exchange Agent" on
or prior to the Expiration Date or, if the guaranteed delivery procedures
described below are complied with, within the time period provided under such
procedures.
EXCHANGING BOOK-ENTRY NOTES
The Exchange Agent and the Book Entry Transfer Facility have confirmed that
any financial institution that is a participant in the Book Entry Transfer
Facility may utilize the Book-Entry Transfer Facility Automated Tender Offer
Program ("ATOP") procedures to tender Old Notes.
Any financial institution that is a participant in the Book Entry Transfer
Facility may make book-entry delivery of Old Notes by causing the Book Entry
Transfer Facility to transfer such Old Notes into the Exchange Agent's relevant
account in accordance with the Book Entry Transfer Facility's ATOP procedures
for transfer. However, the exchange for the Old Notes so tendered will only be
made after a Book-Entry Confirmation of such book-entry transfer of Old Notes
into the Exchange Agent's relevant account, and timely receipt by the Exchange
Agent of an Agent's Message (as such term is defined in the next sentence) and
any other documents required by the Letter of Transmittal. The term "Agent's
Message" means a message, transmitted by the Book Entry Transfer Facility and
received by the Exchange Agent and forming part of a Book-Entry Confirmation,
which states that the Book Entry Transfer Facility has received an express
acknowledgment from a participant tendering Old Notes that are the subject of
such Book-Entry Confirmation that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal, and that the Issuers may
enforce such agreement against such participant.
GUARANTEED DELIVERY PROCEDURES
If the procedures for book-entry transfer cannot be completed on a timely
basis, a tender may be effected if (i) the tender is made through an Eligible
Institution, (ii) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by the Issuers (by facsimile transmission,
mail or hand delivery), setting forth the name and address of the holder of Old
Notes and the amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that within three New York Stock Exchange ("NYSE")
trading days after the date of execution of the Notice of Guaranteed Delivery, a
Book-Entry Confirmation and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent and (iii) a Book-Entry Confirmation and all other documents required by
the Letter of Transmittal are received by the Exchange Agent within three NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
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WITHDRAWAL OF TENDERS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to the Expiration Date at its respective
address set forth below under "-- Exchange Agent." Any such notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility from which the Old Notes were tendered, identify the principal amount
of the Old Notes to be withdrawn, and specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notice
will be determined by the Issuers, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for any
reason will be credited to an account maintained with such Book-Entry Transfer
Facility for the Old Notes as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "-- Procedures for
Tendering" and "-- Book-Entry Transfer" above at any time on or prior to the
Expiration Date.
CONDITIONS
The Issuers have no obligation to consummate the Exchange Offer if:
(i) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company, or
any material adverse development has occurred in any existing action or
proceeding with respect to the Issuers or any of its subsidiaries; or
(ii) any law, statute, rule or regulation is proposed, adopted or
enacted, which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company; or
(iii) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as the Exchange
Agent for the Exchange Offer. Questions and requests for assistance and requests
for additional copies of this Prospectus or of the Letter of Transmittal should
be directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Mail or Overnight Delivery: United States Trust Company of New York
P.O. Box 843 Cooper Station
New York, New York 10276
Attention: Corporate Trust Services
By Hand to 4:30 p.m.: United States Trust Company of New York
111 Broadway
New York, New York 10006
Attention: Lower Level
Corporate Trust Window
Facsimile: (212) 780-0592
Attention: Customer Service
Confirm by Telephone to: (800) 548-6565
</TABLE>
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FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for their services and will
reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of the Prospectus and related documents to
the beneficial owners of the Old Notes, and in handling or forwarding tenders
for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of the Exchange Agent and
Trustee and accounting, legal, printing and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, New Notes or Old Notes
for principal amounts or liquidation preferences, as the case may be, not
tendered or accepted for exchange are to be registered or issued in the name of
any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in such applicable legend set forth
thereon as a consequence of the issuance of the Old Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Issuers does not
currently anticipate that it will register the Old Notes under the Securities
Act. To the extent that Old Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Old Notes
could be adversely affected.
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DESCRIPTION OF NOTES
GENERAL
The New Notes are issued under the Indenture, dated as of May 28, 1998 (the
"Indenture"), among the Issuers, the Subsidiary Guarantors and United States
Trust Company of New York, as trustee (the "Trustee"), a copy of which Indenture
has been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.
The following is an accurate summary of the material provisions of the
Indenture and the Notes but does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all the provisions of the
Indenture and the Notes, including the definitions of certain terms therein and
those terms made a part of the Indenture by the Trust Indenture Act of 1939, as
amended ("TIA"). Capitalized terms used herein and not otherwise defined have
the meanings set forth under "Certain Definitions." For purposes of this
summary, the term "Company" refers only to KC LLC and not to any of its
subsidiaries and the term "Issuers" collectively refers to KC LLC and Finance
Corp.
The Company is a holding company and has no material operations or assets
other than its 100% interest in the capital stock of each of its subsidiaries.
Finance Corp. was formed in connection with the Initial Offering, as a
wholly-owned subsidiary of the Company, and has no operations and assets and
will not have any revenues. As a result, prospective investors should not expect
Finance Corp. to participate in servicing the principal, interest, premium or
any other payment obligations on the Notes.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially shall
be the corporate trust office of the Trustee, at 114 West 47th Street, New York,
New York 10036), except that, at the option of the Company, payment of interest
may be made by check mailed to the registered holders of the Notes at such
addresses appearing in the Note Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
The definition of "Restricted Subsidiary" in the Indenture will exclude any
"Unrestricted Subsidiary" and, as a result, Unrestricted Subsidiaries generally
will not be bound by the restrictive provisions of the Indenture and will not be
Subsidiary Guarantors. As of the Issue Date, all of the Company's Subsidiaries
were Restricted Subsidiaries.
TERMS OF THE NOTES
The Notes will be unsecured, senior obligations of the Issuers, will be
guaranteed on a senior basis by the Subsidiary Guarantors, will be limited to
$80 million aggregate principal amount and will mature on June 1, 2008. Each
Note will bear interest at the rate per annum shown on the front cover of this
Prospectus from May 28, 1998, or from the most recent date to which interest has
been paid or provided for, payable semiannually to Holders of record at the
close of business on the May 15 or November 15 immediately preceding the
interest payment date on June 1 and December 1 of each year, commencing December
1, 1998. Interest on the Notes will be computed on the basis of a 360-day year
of twelve 30-day months.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time and from time to time, on or after June 1, 2003, and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first-class mail to each Holder's registered address, at the following
redemption prices (expressed as a percentage of principal amount), plus accrued
and unpaid interest, if any, to the redemption date (subject to
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<PAGE> 85
the right of Holders of record on the relevant record date to receive interest
due on the relevant interest payment date), if redeemed during the 12 month
period commencing on June 1 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ------ ----------
<S> <C>
2003.............................................. 105.25%
2004.............................................. 103.50%
2005.............................................. 101.75%
2006 and thereafter............................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to June 1, 2001, the
Company may redeem in the aggregate up to 33 1/3% of the original aggregate
principal amount of the Notes with the Net Cash Proceeds of one or more Equity
Offerings at a redemption price (expressed as a percentage of principal amount
thereof) of 110.50% plus accrued and unpaid interest, if any, to the redemption
date (subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, however,
that at least 66 2/3% of the original aggregate principal amount of the Notes
remains outstanding after each such redemption; and provided, further, that such
redemption shall occur within 60 days of the closing of any such Equity
Offering.
At any time on or prior to June 1, 2003, the Notes may also be redeemed as
a whole at the option of the Company upon the occurrence of a Change of Control,
upon not less than 30 nor more than 60 days' prior notice (but in no event more
than 180 days after the occurrence of such Change of Control) mailed by first-
class mail to each Holder's registered address, at a redemption price equal to
100% of the principal amount thereof plus the Applicable Premium as of, and
accrued but unpaid interest, if any, to, the date of redemption (the "Redemption
Date") (subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date).
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount will be
redeemed in part. If any Note is to be redeemed in part only, the notice of
redemption relating to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note.
In addition, as more fully described under "-- Change of Control," each
Holder will have the right to require the Issuers to repurchase all or any part
of such Holder's Notes following a Change of Control at a purchase price in cash
equal to 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the date of repurchase.
SUBSIDIARY GUARANTEES
Each Subsidiary Guarantor fully and unconditionally guarantees, jointly and
severally, to each Holder and the Trustee, on an unsecured, senior basis, the
full and prompt payment of principal of and interest on the Notes, and of all
other obligations of the Company under the Indenture.
The Indebtedness evidenced by each Subsidiary Guarantee (including the
payment of principal of, premium, if any, and interest on the Notes) will be
senior in right of payment to any subordinated indebtedness of the Subsidiary
Guarantors and pari passu in right of payment to all existing and future senior
indebtedness of the Subsidiary Guarantors. As of June 30, 1998, there would have
been approximately $1.5 million of senior indebtedness of the Subsidiary
Guarantors (other than the Subsidiary Guarantees), all of which is Secured
Indebtedness. Although the Indenture contains limitations on the amount of
additional Indebtedness that the Company's Restricted Subsidiaries, including
the Subsidiary Guarantors, may Incur, under certain circumstances the amount of
such Indebtedness could be substantial and, in any case, such Indebtedness may
be secured. See "-- Ranking" and "-- Certain Covenants -- Limitation on
Indebtedness and Preferred Stock" below.
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The obligations of each Subsidiary Guarantor will be limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor (including, without limitation, any
guarantees under the New Credit Facility) and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Subsidiary Guarantee or pursuant to its contribution obligations under the
Indenture, result in the obligations of such Subsidiary Guarantor under the
Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law.
Each Subsidiary Guarantee is a continuing guarantee and shall (a) remain in
full force and effect until payment in full of the Notes, (b) be binding upon
such Subsidiary Guarantors, and (c) inure to the benefit of and be enforceable
by the Trustee, the Holders and their successors, transferees and assigns.
No Subsidiary Guarantor may consolidate with or merge with or into any
Person other than the Company or any other Subsidiary Guarantor or sell
substantially all of its assets unless: (i) subject to the provisions of the
following paragraph, the entity formed by or surviving any such consolidation or
merger (if other than the Subsidiary Guarantor) or to which such sale, lease,
conveyance or other disposition shall have been made is a corporation or a
limited liability company and existing under the laws of the United States or
any State thereof or the District of Columbia; (ii) subject to the provisions of
the following paragraph, such entity assumes by supplemental indenture all of
the obligations of the Subsidiary Guarantor under the Indenture and the
Subsidiary Guarantee; (iii) immediately after giving effect to such transaction,
no Default or Event of Default shall have occurred and be continuing; and (iv)
immediately after giving pro forma effect to such transaction the Company would
have been able to Incur $1.00 of additional Indebtedness pursuant to paragraph
(a) of the covenant "-- Limitation on Indebtedness and Preferred Stock."
Notwithstanding the foregoing, each Subsidiary Guarantor may consolidate with or
merge into or sell its assets to the Company or another Subsidiary Guarantor.
Notwithstanding the preceding paragraph, concurrently with any sale or
disposition (by merger or otherwise) of any Subsidiary Guarantor in accordance
with the terms of the Indenture (including the covenant described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock") by
the Company or a Restricted Subsidiary to any Person that is not an Affiliate of
the Company, such Subsidiary Guarantor will automatically and unconditionally be
released from all obligations under its Subsidiary Guarantee; provided, however,
that any such release shall occur only to the extent that all obligations of
such Subsidiary Guarantor under, and all of its guarantees of, and all of its
pledges of assets or other security interests which secure, any Bank
Indebtedness of the Company shall also terminate upon such release, sale or
transfer (other than with respect to any such Indebtedness that is assumed by
any Person that is not an Affiliate of the Company).
RANKING
The indebtedness evidenced by the Notes will be unsecured senior
indebtedness of the Company, will rank pari passu in right of payment with all
existing and future senior indebtedness of the Company and will rank senior in
right of payment to all existing and future Subordinated Obligations of the
Company. The Notes will also be effectively subordinated to all existing and
future Secured Indebtedness of the Company to the extent of the value of the
assets securing such Secured Indebtedness and structurally subordinated to all
existing and future Indebtedness of any Subsidiary of the Company that is not a
Subsidiary Guarantor.
As of June 30, 1998, the Issuers would have had no Secured Indebtedness and
$80 million of senior indebtedness (representing the outstanding Old Notes). As
of June 30, 1998, the Subsidiary Guarantors would have had $1.5 million of
senior indebtedness outstanding (other than the Subsidiary Guarantees), all of
which is Secured Indebtedness. Although the Indenture contains limitations on
the amount of additional Indebtedness which the Company may Incur, under certain
circumstances the amount of such Indebtedness could be substantial and, in any
case, such Indebtedness may be senior indebtedness, Secured Indebtedness or
Indebtedness of Subsidiaries which are no Subsidiary Guarantors. See "-- Certain
Covenants -- Limitation on Indebtedness and Preferred Stock."
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CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control") with respect to the Company or Parent, each Holder will have the right
to require the Issuers to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's Notes at a purchase price in cash
equal to 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the date of repurchase (subject to the right of Holders of record on
the relevant record date to receive interest due on the related interest payment
date):
(i) (A) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, of more than 35% of the total voting power of
the Voting Stock of the Company or Parent and (B) the Permitted Holders
"beneficially own" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company or Parent than such
other person and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the Board of
Directors of the Company or Parent;
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of the
Company or Parent (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders of
the Company or Parent, as the case may be, was approved by a vote of a
majority of the directors of the Company or Parent, as the case may be,
then still in office who were either directors at the beginning of such
period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office;
(iii) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, the
assets of Parent, or the Company and its Restricted Subsidiaries taken as a
whole, to any "person" or group of "persons" for purposes of Section 13(d)
of the Exchange Act (other than to the Company or to any Wholly Owned
Subsidiary or to one or more Permitted Holders);
(iv) the merger or consolidation of the Company or Parent with or into
another Person or the merger of another person with or into the Company or
Parent and the securities of the Company or Parent that are outstanding
immediately prior to such transaction and which represent 100% of the
aggregate voting power of the Voting Stock of the Company or Parent are
changed into or exchanged for cash, securities or property, unless pursuant
to such transaction such securities are changed into or exchanged for, in
addition to any other consideration, securities of the surviving
corporation that represent immediately after such transaction, at least a
majority of the aggregate voting power of the Voting Stock of the surviving
corporation; or
(v) the adoption of a plan of liquidation of the Company.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase any or all of such Holder's Notes at a purchase price in cash equal
to 101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the date of repurchase (subject to the right of Holders of record on a
record date to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts regarding such Change of Control; (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by the
Company, consistent with this covenant, that a Holder must follow in order to
have its Notes purchased by the Company. Notwithstanding the occurrence of a
Change of Control, the Company shall not be obligated to repurchase the Notes
upon a Change of Control if the Company has
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<PAGE> 88
irrevocably elected to redeem all of the Notes under the provisions described
under "Optional Redemption" above; provided that the Company does not default in
its redemption obligations pursuant to such election.
The phrase "all or substantially all," as used with respect to a sale of
assets in the definition in the Indenture of "Change of Control," varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (the law governing the Indenture)
and is subject to judicial interpretation. Accordingly, in certain
circumstances, there may be a degree of uncertainty in ascertaining whether a
particular transaction would involve a disposition of "all or substantially all"
of the assets of a Person and therefore it may be unclear whether a Change of
Control has occurred.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant, including
Rules 13e-4 and 14e-1, promulgated by the Commission under the Exchange Act. To
the extent that the provisions of any securities laws or regulations conflict
with provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this paragraph by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company or the Parent could decide to do so in the future. Subject to
the limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of Indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit rating.
The Holders of a majority of the outstanding Notes may waive the covenant
relating to the Issuers' obligation to repurchase the Notes upon a Change of
Control.
The New Credit Facility generally will prohibit the Company from
repurchasing any Notes and will also provide that change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to senior indebtedness to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
repurchasing Notes, the Company could seek the consent of its lenders to the
repurchase of Notes or could attempt to refinance or repay the borrowings that
contain such prohibition. If the Company does not obtain such a consent or repay
such borrowings, the Company will remain prohibited from repurchasing Notes. In
such case, the Company's failure to repurchase tendered Notes would constitute
an Event of Default under the Indenture which would, in turn, constitute a
default under the New Credit Facility. In such circumstances, the subordination
provisions in the Indenture would likely restrict payments to the Holders of
Notes. Moreover, the exercise by the Holders of their right to require the
Company to repurchase the Notes could cause a default under such Indebtedness,
even if the Change of Control itself does not, due to the financial effect of
such repurchase on the Company. Finally, the Company's ability to pay cash to
the Holders upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness and Preferred Stock. (a)(i) The Company
will not Incur, and will not permit any Restricted Subsidiary to Incur, any
Indebtedness (including Acquired Indebtedness) or issue Disqualified Stock
and (ii) the Company will not permit any of its Restricted Subsidiaries
that are not Subsidiary Guarantors to issue any shares of Preferred Stock;
provided, however, that the Company or any Subsidiary Guarantor may Incur
Indebtedness (including Acquired Indebtedness) or issue Disqualified Stock
if on the date of such Incurrence (and after giving effect to the
application of proceeds therefrom) the Consolidated Coverage Ratio would be
greater than 2.0:1.
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(b) Notwithstanding the foregoing paragraph(a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness and issue the
following Disqualified Stock:
(i) Indebtedness (including, without limitation, letters of credit
and Guarantees) of the Company or any Subsidiary Guarantor Incurred
under the New Credit Facility in an aggregate principal amount
outstanding at any time not to exceed $40 million, less the aggregate
amount of all proceeds from all Asset Dispositions that have been
applied since the Issue Date to permanently reduce the outstanding
amount of such Indebtedness pursuant to the covenant "Limitation on Sale
of Assets and Subsidiary Stock";
(ii) Indebtedness of the Company owing to and held by any
Subsidiary Guarantor or Indebtedness of a Restricted Subsidiary owing to
and held by the Company or any Subsidiary Guarantor; provided, however,
that any subsequent issuance or transfer of any Capital Stock or any
other event which results in any such Subsidiary Guarantor ceasing to be
a Subsidiary Guarantor or any subsequent transfer of any such
Indebtedness (except to the Company or a Subsidiary Guarantor or a
pledge or other transfer thereof intended to create a security interest
therein) will be deemed to constitute the Incurrence of such
Indebtedness by the issuer thereof at the time of such transfer or such
event;
(iii) Indebtedness represented by the Notes (including the
Subsidiary Guarantees) and any Indebtedness or Disqualified Stock of the
Company or any Restricted Subsidiary (other than the Indebtedness
described in clauses (i) and (ii) above) outstanding on the Issue Date;
(iv) Indebtedness of any Restricted Subsidiary that is Indebtedness
of another Person assumed by such Restricted Subsidiary in connection
with its acquisition of assets from such Person and any Refinancing
Indebtedness with respect thereto; provided, however, that at the time
of such acquisition of assets the Company shall have been able to Incur
at least an additional $1.00 of Indebtedness under paragraph (a) above
after giving effect to such acquisition;
(v) Indebtedness of a Restricted Subsidiary issued and outstanding
on or prior to the date on which such Restricted Subsidiary was acquired
by the Company and any Refinancing Indebtedness with respect thereto;
provided, however, that on the date of any such acquisition, the Company
shall have been able to Incur at least $1.00 of Indebtedness under
paragraph (a) above after giving effect to such acquisition;
(vi) Indebtedness (A) in respect of performance bonds, bankers'
acceptances, workers' compensation claims, surety or appeal bonds,
payment obligations in connection with self-insurance or similar
obligations, and bank overdrafts (and letters of credit in respect
thereof) provided by the Company or any Subsidiary Guarantor in the
ordinary course of its business and which do not secure other
Indebtedness and (B) under Currency Agreements and Interest Rate
Agreements Incurred which, at the time of Incurrence, is in the ordinary
course of business; provided that such agreements are entered into for
bona fide hedging purposes, are not for speculation or trading purposes
and are designed to protect against fluctuations in interest rates or
currency exchange rates, as the case may be, and, in the case of
Interest Rate Agreements, any such Interest Rate Agreement has a
notional amount corresponding to the Indebtedness being hedged thereby;
(vii) Indebtedness represented by Guarantees by the Company of
Indebtedness otherwise permitted to be Incurred pursuant to this
covenant and Indebtedness represented by Guarantees by a Subsidiary
Guarantor of Indebtedness of the Company or of another Restricted
Subsidiary otherwise permitted to be Incurred pursuant to this covenant;
(viii) Indebtedness Incurred by the Company or any Subsidiary
Guarantor and arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, from guarantees or
letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any Restricted Subsidiary pursuant to such
agreements, in each case Incurred in connection with the purchase or
sale of a business or assets otherwise permitted by the Indenture;
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(ix) the Incurrence by the Company or any Subsidiary Guarantor of
Indebtedness represented by Capitalized Lease Obligations, mortgage
financings or purchase money obligations, in each case Incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of the Company or such Subsidiary Guarantor, in an aggregate
principal amount not to exceed $5.0 million at any time outstanding;
(x) the issuance by the Company or any Subsidiary Guarantor of
Refinancing Indebtedness in exchange for, or the net proceeds which are
used to refund, refinance or replace, Indebtedness that was permitted by
paragraph (a) or by clauses (iii), (iv) and (v) of this paragraph (b) to
be Incurred; and
(xi) other Indebtedness in an aggregate principal amount which,
together with all other Indebtedness of the Company and the Restricted
Subsidiaries then outstanding (other than Indebtedness permitted by
clauses (i) through (x) of this paragraph (b) or by paragraph (a)) does
not exceed $5.0 million.
(c) Notwithstanding the foregoing, neither the Company nor any
Restricted Subsidiary shall Incur any Indebtedness pursuant to the
foregoing paragraph (b) if the proceeds thereof are used, directly or
indirectly, to Refinance any Subordinated Obligations of the Company unless
such new Indebtedness shall be subordinated to the Notes to at least the
same extent as such Subordinated Obligations being Refinanced. No
Subsidiary Guarantor shall Incur any Indebtedness pursuant to the foregoing
paragraph (b) if the proceeds thereof are used, directly or indirectly, to
Refinance any Guarantor Subordinated Obligation of such Subsidiary
Guarantor unless such Indebtedness shall be subordinated to the obligations
of such Subsidiary Guarantor under the Subsidiary Guarantee to at least the
same extent as such Guarantor Subordinated Obligation of such Subsidiary
Guarantor.
(d) The Company will not permit any Unrestricted Subsidiary to Incur
any Indebtedness other than Non-Recourse Debt; provided, however, if any
such Indebtedness ceases to be Non-Recourse Debt, such event shall be
deemed to constitute an Incurrence of Indebtedness by the Company or a
Restricted Subsidiary.
(e) For purposes of determining compliance with the foregoing
covenant, (i) in the event that an item of Indebtedness meets the criteria
of more than one of the types of Indebtedness described above, the Company
will classify (and may reclassify from time to time) such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of the above clauses and (ii) an item of Indebtedness
may be divided and classified in more than one of the types of Indebtedness
described above.
Limitation on Liens. The Indenture will provide that the Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, Incur or suffer to exist any Lien (other than Permitted Liens) of
any nature whatsoever on any property or assets (including Capital Stock of a
Restricted Subsidiary, but excluding Capital Stock of an Unrestricted
Subsidiary) now owned or hereafter acquired, or any income or profits therefrom
or assign or convey any right to receive income therefrom, unless
contemporaneously therewith effective provision is made to secure the Notes
equally and ratably with (or prior to) such Indebtedness for so long as such
Indebtedness is secured by a Lien.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) except (x) dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) or in options, warrants or other rights to
purchase such Capital Stock and (y) dividends or distributions payable to the
Company or another Restricted Subsidiary (and, if such Restricted Subsidiary
making such dividend or distribution is not wholly-owned, to its other
shareholders on a pro rata basis), (ii) purchase, repurchase, redeem, retire or
otherwise acquire or retire for value any Capital Stock of the Company or any
Restricted Subsidiary held by Persons other than the Company or another
Restricted
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Subsidiary, (iii) purchase, repurchase, redeem, defease or otherwise acquire or
retire for value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment, any Subordinated Obligations (other than regular scheduled
payments of interest and the purchase, repurchase or other acquisition of
Subordinated Obligations in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due within one
year of the date of such purchase, repurchase or acquisition) or (iv) make any
Investment (other than a Permitted Investment) in any Person (any such dividend,
distribution, purchase, redemption, repurchase, defeasance, other acquisition,
retirement, payment or Investment which is prohibited by the foregoing
provisions of this paragraph (a) being herein referred to as a "Restricted
Payment") if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment:
(1) a Default or Event of Default shall have occurred and be continuing (or
would result therefrom);
(2) the Company and its Restricted Subsidiaries could not Incur at least
$1.00 of additional Indebtedness under paragraph (a) of the covenant described
under "-- Limitation on Indebtedness and Preferred Stock;" or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors of the Company) declared or
made subsequent to the Issue Date, would exceed the sum of:
(A) 50% of the Consolidated Net Income with respect to the period
(treated as one accounting period) from the beginning of the fiscal quarter
in which the Issue Date occurs, to the end of the most recent fiscal
quarter for which internal financial statements are available ending at
least 30 days prior to the date of such Restricted Payment (or, in case
such Consolidated Net Income is a deficit, minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company from the
issue or sale of Capital Stock (other than Disqualified Stock) subsequent
to the Issue Date (other than an issuance or sale to a Subsidiary) and,
without duplication, the aggregate amount of any other capital
contributions received by the Company in cash subsequent to the Issue Date
and on or prior to the date the Restricted Payment occurs;
(C) the amount by which Indebtedness of the Company or a Restricted
Subsidiary is reduced on the Company's consolidated balance sheet upon the
conversion or exchange (other than by a Restricted Subsidiary) subsequent
to the Issue Date of any Indebtedness of the Company or a Restricted
Subsidiary convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any cash or other
property distributed by the Company upon such conversion or exchange); and
(D) the amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from (i) dividends, repayments of the
principal of loans or advances or other transfers of assets to the Company
or any Restricted Subsidiary from Unrestricted Subsidiaries or (ii) the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries or
(iii) the sale or liquidation of any Unrestricted Subsidiaries (valued in
each case as provided in the definition of "Investment") not to exceed, in
the case of any Unrestricted Subsidiary, the amount of Investments
previously made by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary, which amount was previously included in the
calculation of the amount of Restricted Payments.
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(i) any purchase, redemption, defeasance or other acquisition of
Capital Stock of the Company or the Parent or Subordinated Obligations made
by exchange for, or out of the net proceeds of the substantially concurrent
sale of, Capital Stock of the Company (other than Disqualified Stock and
other than Capital Stock issued or sold to a Subsidiary); provided,
however, that (A) such purchase, redemption, defeasance or other
acquisition will be excluded in the calculation of the amount of
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Restricted Payments pursuant to clause (3) of paragraph (a) above and (B)
the Net Cash Proceeds from such sale will be excluded from clause (3)(B) of
paragraph (a) above;
(ii) any purchase, redemption, defeasance or other acquisition of
Subordinated Obligations made by exchange for, or out of the net proceeds
of the substantially concurrent sale of, Subordinated Obligations of the
Company; provided, however, that (A) the principal amount of such new
Indebtedness does not exceed the principal amount (or accreted value, if
applicable) of the Subordinated Obligations being so redeemed, repurchased,
defeased, acquired or retired for value (plus the amount of any premium
required to be paid under the terms of the instrument governing the
Subordinated Obligations being so redeemed, repurchased, defeased, acquired
or retired and related fees and expenses) (except to the extent such excess
is a result of a simultaneous incurrence of additional Indebtedness
permitted to be incurred under the Indenture), (B) such new Indebtedness is
subordinated to the Notes on terms substantially the same as those
contained in the instrument or agreement governing or evidencing such
Subordinated Obligations so purchased, exchanged, redeemed, repurchased,
defeased, acquired or retired for value, (C) such new Indebtedness has a
final scheduled maturity date no earlier than the final scheduled maturity
date of such Subordinated Obligations (or, if earlier, the Notes)
purchased, exchanged, redeemed, repurchased, defeased, acquired or retired
for value and (D) such new Indebtedness has an Average Life equal to or
greater than the Average Life of such Subordinated Obligations purchased,
exchanged, redeemed, repurchased, defeased, acquired or retired for value;
provided further, however, that such purchase, redemption, defeasance or
other acquisition will be excluded in the calculation of the amount of
Restricted Payments pursuant to clause (3) of paragraph (a) above;
(iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with this covenant; provided, however, that the amount of such dividend was
included in the calculation of the amount of Restricted Payments pursuant
to clause (3) of paragraph (a) above at the time of declaration;
(iv) Investments in securities not constituting cash or Temporary Cash
Investments received in connection with an Asset Disposition made pursuant
to the provisions of the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" below;
provided that such amounts will be excluded in the calculation of the
amount of Restricted Payments pursuant to clause (3) of paragraph (a)
above;
(v) dividends to the Parent for the purpose of any repurchase,
redemption or other acquisition or retirement for value of any Capital
Stock of the Parent, or any options or warrants to acquire any Capital
Stock of the Parent, held by any member of the management of the Parent,
the Company or any of the Restricted Subsidiaries pursuant to employee
benefit plans or employment, option, warrant or other agreements; provided
that the aggregate amount of dividends to be used for all such repurchases
shall not exceed $400,000 in any fiscal year prior to 2001 and $750,000 in
any fiscal year thereafter; provided, however, that the Company may not
make any dividends in respect of this clause (v) after January 1, 2001
unless the Consolidated Coverage Ratio as of the date of distribution shall
equal or exceed 2.25:1 and provided, further, that the amount of such
repurchases will be included in the calculation of the amount of Restricted
Payments pursuant to clause (3) of paragraph (a) above. In addition,
payments and transactions permitted pursuant to clauses (v) and (vi) of
paragraph (b) under "-- Certain Covenants -- Limitation on Transactions
with Affiliates" below shall not be deemed to be Restricted Payments; and
(vi) during the period that the Company is disregarded or is treated
as a pass through entity for U.S. federal income tax purposes and after
such period to the extent relating to liability for such period, the
Company may make cash distributions to the Parent for the benefit of the
Taxpayers, in respect of each Estimation Period, in an aggregate amount not
to exceed the Permitted Quarterly Tax Distribution; provided, that the
amount of distributions made pursuant to this clause (vi) will be excluded
in the calculation of the amount of Restricted Payments pursuant to clause
(3) of paragraph (a) above.
Within 10 days following the Parent's filing of its required federal
income tax return for the immediately preceding taxable year, the Tax
Amounts CPA shall file with the Trustee a written
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statement indicating in reasonable detail the calculation of the True-up
Amount. In the case of a True-up Amount due to the Taxpayers, the Permitted
Quarterly Tax Distribution payable in respect of such Estimation Period
shall be increased by such True-up Amount. In the case of a True-up Amount
due to the Company, the Permitted Quarterly Tax Distribution payable in
respect of the immediately following Estimation Period shall be reduced by
such True-up Amount and the excess, if any, of the True-up Amount over such
Permitted Quarterly Tax Distribution shall be applied to reduce the
immediately following Permitted Quarterly Tax Distributions until such
True-up Amount is entirely offset.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligation owed to the Company, (ii) make
any loans or advances to the Company or (iii) transfer any of its property or
assets to the Company or any Restricted Subsidiary, except:
(1) any encumbrance or restriction pursuant to an agreement in effect at or
entered into on the Issue Date or pursuant to the New Credit Facility;
(2) any encumbrance or restriction with respect to a Restricted Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred by such
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company or a Restricted Subsidiary and
outstanding on such date (other than Indebtedness Incurred in connection with,
or in contemplation of, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company or a Restricted Subsidiary);
(3) any encumbrance or restriction contained in agreements or instruments
with respect to purchase money obligations for property acquired or capitalized
leases or mortgages entered into in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property so
acquired;
(4) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement referred to in
clause (1), (2) or (3) of this covenant or contained in any amendment to an
agreement referred to in clause (1), (2) or (3) of this covenant; provided,
however, that the encumbrances and restrictions contained in any such
refinancing agreement or amendment are not, taken as a whole, materially less
favorable to the Noteholders than the encumbrances and restrictions contained in
any such agreement as determined in good faith by the Company;
(5) in the case of clause (iii), any encumbrance or restriction (A) that
restricts in a customary manner the subletting, assignment or transfer of any
property or asset that is subject to a lease, license or similar contract, (B)
by virtue of any transfer of, agreement to transfer, option or right with
respect to, or Lien on, any property or assets of the Company or any Restricted
Subsidiary not otherwise prohibited by the Indenture or (C) contained in
security agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such encumbrance or restrictions restrict the transfer
of the property subject to such security agreements or mortgages;
(6) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of Capital
Stock or assets of such Restricted Subsidiary pending the closing of such sale
or disposition;
(7) any encumbrance or restriction arising under or by reason of applicable
law;
(8) any encumbrance or restriction contained in the Indenture; and
(9) customary net worth provisions contained in leases and other agreements
entered into by a Restricted Subsidiary in the ordinary course of business.
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Limitation on Sales of Assets and Subsidiary Stock. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless:
(i) the Company or such Restricted Subsidiary receives consideration
at the time of such Asset Disposition at least equal to the fair market
value, as determined in good faith by the Board of Directors of the Company
(including as to the value of all non cash consideration), of the shares
and assets subject to such Asset Disposition;
(ii) at least 75% of the consideration thereof received by the Company
or such Restricted Subsidiary is in the form of cash or Temporary Cash
Investments; and
(iii) an amount equal to 100% of the Net Available Cash from such
Asset Disposition is applied by the Company or such Restricted Subsidiary,
as the case may be, within 365 days from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash,
(A) first, to the extent the Company or any Restricted Subsidiary,
as the case may be, elects (or is required by the terms of the New
Credit Facility or any Senior Indebtedness), to prepay, repay or
purchase Indebtedness under the New Credit Facility or other Senior
Indebtedness or Indebtedness (other than Disqualified Stock) of a Wholly
Owned Subsidiary (in each case other than Indebtedness owed to the
Company or an Affiliate of the Company);
(B) second, to the extent of any remaining balance of Net Available
Cash after any election in accordance with clause (A) (or in any
combination with clause (A)), to the extent the Company or such
Restricted Subsidiary, as the case may be, elects, to the investment by
the Company or any Wholly Owned Subsidiary in Additional Assets;
(C) third, to the extent of any remaining balance of such Net
Available Cash after any election in accordance with clauses (A) and
(B), to make an Offer (as defined below) to purchase Notes pursuant to
and subject to the conditions set forth in paragraph (b) of this
covenant within 45 days from the 365th day after the later of the date
of such Asset Disposition and the receipt of such Net Available Cash;
and
(D) fourth, to the extent of any remaining balance of such Net
Available Cash after election or application in accordance with clauses
(A), (B) and (C), to general corporate purposes;
provided, however, that in connection with any prepayment, repayment, purchase
or other acquisition of Indebtedness pursuant to clause (A) above, the Company
or such Restricted Subsidiary will retire such Indebtedness and will cause any
related loan commitment or availability (if any) to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions, the Company and its Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
herewith except to the extent that the aggregate Net Available Cash from all
Asset Dispositions exceeds $3.0 million.
For the purposes of this covenant, the following are deemed to be cash: (w)
Cash Equivalents, (x) the assumption by the transferee of Indebtedness of the
Company or any Restricted Subsidiary (other than Indebtedness that is
subordinated to the Notes or the Subsidiary Guarantees) and the release of the
Company or such Restricted Subsidiary from all liability on such Indebtedness in
connection with such Asset Disposition, (y) Indebtedness of any Restricted
Subsidiary that is no longer a Restricted Subsidiary as a result of such Asset
Disposition, to the extent that the Company and each other Restricted Subsidiary
is released from any Guarantee of such Indebtedness in connection with such
Asset Disposition, and (z) securities received by the Company or any Restricted
Subsidiary from the transferee that are promptly converted by the Company or
such Restricted Subsidiary into cash or Temporary Cash Investments.
(b) In the event of an Asset Disposition that requires the purchase of
Notes pursuant to clause (a)(iii)(C) of this covenant, the Company will be
required to purchase Notes tendered pursuant to an offer by the Company for the
Notes (the "Offer") at a purchase price of 100% of their principal amount plus
accrued interest, if any, to the date of purchase (but without premium) in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of
Notes tendered pursuant to the Offer is less than the Net Available Cash
allotted to the purchase of
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the Notes, the Company will apply the remaining Net Available Cash in accordance
with clause (a)(iii)(D) above.
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
Limitation on Transactions with Affiliates. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
or conduct any transaction or series of transactions (including the purchase,
sale, lease or exchange of any property, or rendering of any service) with any
Affiliate of the Company or a Restricted Subsidiary (an "Affiliate Transaction")
unless the terms of such transaction shall have been approved by a majority of
the members of the Board of Directors of the Company and such majority
determines that the terms of such Affiliate Transaction are no less favorable to
the Company or such Restricted Subsidiary, as the case may be, than those that
could be obtained at the time of such transaction in arm's-length dealings with
a Person who is not such an Affiliate; provided, however, that if the Affiliate
Transaction involves an amount in excess of $2.5 million, then the Company shall
obtain a written opinion (a "Fairness Opinion") from a nationally recognized
independent investment banking, accounting or appraisal firm that such Affiliate
Transaction is (x) no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the time of
such transaction in arms-length dealings with a Person who is not an Affiliate
or (y) fair to the Company or such Restricted Subsidiary from a financial point
of view.
(b) The foregoing shall not apply to or prohibit (i) any Restricted Payment
permitted to be made pursuant to "Limitation on Restricted Payments," (ii) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors of the
Company, (iii) any fees, indemnities, loans or advances to employees in the
ordinary course of business, (iv) any transaction between the Company and a
Restricted Subsidiary or between Restricted Subsidiaries, (v) any amounts
payable on the Issue Date pursuant to agreements in effect on such date, and
(vi) so long as no Event of Default shall have occurred and be continuing,
payments in respect of the Management Fee in an amount not to exceed $500,000
(the "Base Fee") in any fiscal year, plus an annual additional payment (the
"Additional Fee") in respect of any fiscal year, which Additional Fee shall be
payable on the later of March 31 of the following year or the date of the
completion of the Company's audited financial statements for such year, and
which Additional Fee shall not exceed $300,000 with respect to fiscal 1998 or
fiscal 1999, provided, however, that at the time of payment of the Additional
Fee the Consolidated Coverage Ratio of the Company shall be equal to or greater
than (i) 2.0:1 for fiscal years ended on or prior to December 31, 1999 and (ii)
2.25:1 for fiscal years ended after December 31, 1999 after giving effect to
such payment, provided, further, that the Base Fee, the Additional Fee, or any
portion thereof, may be deferred until such time as payment is permitted
pursuant to the preceding clause; plus, in any case, reasonable out of pocket
expenses incurred in connection with services performed under the Management
Agreement. For each fiscal year, beginning in fiscal year 2000, the Additional
Fee may be increased by up to 15% of the aggregate amount of the Base Fee and
the then current amount of the Additional Fee; provided, however, that the
percentage increase to the aggregate amount of the Management Fees payable under
the Management Agreement in any fiscal year compared to the prior fiscal year
shall not exceed the percentage increase in Consolidated Cash Flow for such
fiscal year as compared to the prior fiscal year (consistent with the pro forma
adjustments allowed to "Consolidated Cash Flow" provided in the definition of
"Consolidated Coverage Ratio"). Notwithstanding the foregoing, the aggregate
amount of all increases to the Additional Fee shall not exceed $400,000.
Limitation on Sales of Subsidiary Capital Stock. The Company (i) will not,
and will not permit any Restricted Subsidiary of the Company to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any Restricted
Subsidiary to any Person (other than to the Company or a Wholly Owned
Subsidiary) and (ii) will not permit any Restricted Subsidiary to issue any of
its Capital Stock (other than to management of such Restricted Subsidiary and,
if necessary, shares of its Capital Stock constituting directors' qualifying
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shares) to any Person other than to the Company or a Wholly Owned Subsidiary,
unless (a) after any such transfer, conveyance, sale, lease, disposition or
issuance, such Restricted Subsidiary continues to be a Restricted Subsidiary and
(b) the net cash proceeds from such transfer, conveyance, sale, lease,
disposition or issuance are applied in accordance with the covenant described
above under "Limitation on Sales of Assets and Subsidiary Stock"; provided,
however, that this provision shall not prohibit (x) the transfer, conveyance,
sale, lease or other disposition of all of the Capital Stock of any Restricted
Subsidiary or the retention of Preferred Stock which is not Disqualified Stock
in connection with any such transfer, conveyance, sale, lease or other
disposition, (y) the transfer, conveyance, sale, lease or other disposition of
Preferred Stock of a Subsidiary in compliance with the terms of the covenant
described under "Limitation on Sale of Assets and Subsidiary Stock," and (z) the
issuance of any Preferred Stock of a Restricted Subsidiary if such issuance or
sale would be in compliance with the terms of the covenant described under
"Limitation on Indebtedness and Preferred Stock."
Limitation on Lines of Business. The Company and its Restricted
Subsidiaries will not engage in any business other than a Permitted Business.
Limitation on Business Activities of Finance Corp. In addition, to the
restrictions set forth above, Finance Corp. may not hold any material assets or
engage in any significant business activities; provided that Finance Corp. may
be a co-obligor with respect to Indebtedness permitted to be Incurred pursuant
to the covenant described under " -- Limitation on Indebtedness and Preferred
Stock" if the Company is a primary co-obligor or guarantor of such Indebtedness
and the net proceeds of such Indebtedness are lent to the Company or any of its
Restricted Subsidiaries, used to acquire outstanding debt securities issued by
the Company or any Restricted Subsidiary or used directly or indirectly to
refinance or discharge Indebtedness permitted under the limitation of this
paragraph.
SEC Reports. Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, so long as
any Notes are outstanding, the Company will furnish to the Trustee and the
holders of Notes (i) within 45 days after the end of each of the first three
fiscal quarters of each fiscal year and 90 days of the end of each fiscal year
all quarterly and annual financial information, as the case may be, that would
be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if
the Company were required to file any such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports. In addition, whether or not required by the rules
and regulations of the SEC, the Company will file with the SEC a copy of all
such information and make such information available to securities analysts and
prospective investors upon request. Furthermore, for so long as any of the Notes
remain outstanding, the Company has agreed to make available to any prospective
purchaser of the Notes or beneficial owner of the Notes, in connection with any
sale thereof, the information required by Rule 144(d)(4) under the Securities
Act.
Future Guarantors. The Company shall cause each new Subsidiary (other than
(i) a new Subsidiary designated as an Unrestricted Subsidiary and (ii) Foreign
Subsidiaries) to become a Subsidiary Guarantor under the Indenture and thereby
Guarantee the Notes on the terms and conditions set forth in the Indenture.
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its consolidated assets to, any
Person, unless: (i) the resulting, surviving or transferee Person (the
"Successor Company") will be a corporation organized and existing under the laws
of the United States of America, any State thereof or the District of Columbia
and the Successor Company (if not the Company) will expressly assume, by
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the Notes
and the Indenture; (ii) immediately after giving pro forma effect to such
transaction (and treating any Indebtedness which becomes an obligation of the
Successor Company or any Restricted Subsidiary as a result of such transaction
as having been Incurred by the Successor Company or such Restricted Subsidiary
at the time of such transaction), no Default or Event of
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Default will have occurred and be continuing; (iii) immediately after giving pro
forma effect to such transaction, the Successor Company would be able to Incur
an additional $1.00 of Indebtedness under paragraph (a) of the covenant
described under "-- Limitation on Indebtedness and Preferred Stock;" (iv)
immediately after giving effect to such transaction, the Successor Company will
have a Consolidated Net Worth in an amount which is not less than the
Consolidated Net Worth of the Company immediately prior to such transaction; and
(v) the Company will have delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger or transfer
and such supplemental indenture (if any) comply with the Indenture, as set forth
in the Indenture, provided, however, that clauses (ii) and (iv) shall not apply
to a merger or consolidation involving only the Company and one or more of the
Restricted Subsidiaries.
Finance Corp. may not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its consolidated assets to, any
Person, unless: (i) the Successor Company will be a corporation organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia and a Wholly-Owned Subsidiary of the Company; (ii) the
Successor Company (if not Finance Corp.) will expressly assume, by supplemental
indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of Finance Corp. under the Notes and the Indenture;
and (iii) immediately after giving pro forma effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor Company
or any Restricted Subsidiary as a result of such transaction as having been
Incurred by the Successor Company or such Restricted Subsidiary at the time of
such transaction), no Default or Event of Default will have occurred and be
continuing.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company or Finance Corp., as the case may
be, under the Indenture, but the predecessor Company in the case of a lease of
all or substantially all its assets will not be released from the obligation to
pay the principal of and interest on the Notes.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default by the
Issuers or any Subsidiary Guarantor in any payment of interest on any Note when
due, and such default continues for a period of 30 days, (ii) a default by the
Issuers or any Subsidiary Guarantor in the payment of principal of any Note when
due at its Stated Maturity, upon optional redemption, upon required repurchase,
upon declaration or otherwise, (iii) the failure by the Issuers or any
Subsidiary Guarantor to comply with their obligations under "-- Merger and
Consolidation," (iv) the failure by the Issuers or any Subsidiary Guarantor to
comply for 30 days after notice with any of its obligations under the covenants
described under "-- Change of Control" or "-- Certain Covenants" (in each case,
other than a failure to purchase Notes), (v) the failure by the Issuers or any
Subsidiary Guarantor to comply for 60 days after notice with its other
agreements contained in the Indenture or the Notes, (vi) the failure by the
Company or any Significant Subsidiary of the Company to pay any interest or
principal of or premium on Indebtedness within any applicable grace period
provided in such Indebtedness after final maturity or the acceleration of any
such Indebtedness by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $5 million or its
foreign currency equivalent (the "cross acceleration provision"), (vii) certain
events of bankruptcy, insolvency or reorganization of the Issuers or any
Significant Subsidiary (the "bankruptcy provisions"), (viii) any final,
non-appealable judgment or decree by a court of competent jurisdiction for the
payment of money in excess of $5 million is rendered against the Company,
Finance Corp. or any Significant Subsidiary and such judgment or decree remains
outstanding for a period of 60 day following such judgment and is not
discharged, waived or stayed within such period (the "judgment default
provision"), (ix) except as permitted by the Indenture, a Subsidiary Guarantee
ceases to be in full force and effect or a Subsidiary Guarantor denies or
disaffirms its obligations under the Indenture or its Subsidiary Guarantee and
(x) Parent engaging in a line of business or activity other than the ownership
of the Capital Stock of the Company.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
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However, a default under clauses (iv) or (v) of the first paragraph above
will not constitute an Event of Default until the Trustee or the Holders of 25%
in aggregate principal amount of the outstanding Notes notify the Issuers as
provided in the Indenture of the default and the Issuers do not cure such
default within the time specified in clauses (iv) and (v) hereof after receipt
of such notice.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount of the outstanding Notes by
written notice to the Issuers and the Trustee specifying the respective Event of
Default and that it is a notice of acceleration may declare the principal of and
accrued but unpaid interest on all the Notes to be due and payable. Upon such a
declaration, such principal and interest will be due and payable immediately. If
an Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of the Issuers or a Significant Subsidiary occurs and is
continuing, the principal of and accrued interest on all the Notes will become
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holders. Under certain circumstances, the Holders of a
majority in aggregate principal amount of the outstanding Notes may rescind any
such acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
shall have offered to the Trustee reasonable indemnity or security against any
loss, liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder shall
have previously given the Trustee notice that an Event of Default is continuing,
(ii) Holders of at least 25% in aggregate principal amount of the outstanding
Notes shall have requested the Trustee to pursue the remedy, (iii) such Holders
shall have offered the Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Trustee shall not have complied with such
request within 60 days after the receipt of the request and the offer of
security or indemnity, and (v) the Holders of a majority in principal amount of
the outstanding Notes shall not have given the Trustee a direction inconsistent
with such request within such 60-day period. Subject to certain restrictions,
the Holders of a majority in principal amount of the outstanding Notes are given
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or of exercising any trust or power
conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other Holder or that would
involve the Trustee in personal liability. Prior to taking any action under the
Indenture, the Trustee will be entitled to indemnification satisfactory to it in
its sole discretion against all losses and expenses caused by taking or not
taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within the earlier of 90 days after it occurs or 30 days after it is known to a
Trust Officer or written notice of it is received by the Trustee. Except in the
case of a Default in the payment of principal of, premium (if any) or interest
on any Note, the Trustee may withhold notice if and so long as a committee of
its Trust Officers in good faith determines that withholding notice is in the
interests of the Noteholders. In addition, the Company is required to deliver to
the Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred during
the previous year. The Company also is required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any event which
would constitute certain Defaults, their status and what action the Company is
taking or proposes to take in respect thereof.
NO PERSONAL LIABILITY OF MEMBERS, DIRECTORS, OFFICERS, EMPLOYEES, PARTNERS AND
STOCKHOLDERS
No member of the Company or director, officer, employee, partner,
incorporator or stockholder of the Parent or Finance Corp., or any Subsidiary
Guarantor as such, shall have any liability for any obligations of the Issuers
under the Notes or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each holder of Notes by accepting
a Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. Such waiver may not be
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effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding (including, without limitation, consents obtained in connection with
the purchase of, or tender offer or exchange offer for, Notes) and any past
default or compliance with any provisions may be waived with the consent of the
Holders of a majority in principal amount of the Notes then outstanding
(including, without limitation, consents obtained in connection with the
purchase of, or tender offer or exchange offer for, Notes). However, without the
consent of each Holder of an outstanding Note affected, no amendment may, among
other things, (i) reduce the amount of Notes whose Holders must consent to an
amendment, supplement or waiver, (ii) reduce the rate of or extend the time for
payment of interest on any Note, (iii) reduce the principal of or extend the
Stated Maturity of any Note, (iv) reduce the premium payable upon the redemption
of any Note or change the time at which any Note may be redeemed as described
under "-- Optional Redemption," (v) make any Note payable in money other than
that stated in the Note, (vi) impair the right of any Holder to receive payment
of principal of and interest on such Holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such Holder's Notes, (vii) make any change in the foregoing amendment
provisions which require each Holder's consent or in the waiver provisions or
(viii) make any change in any Subsidiary Guaranty that could adversely affect
such holder.
Without the consent of any Holder, the Issuers and the Trustee may amend
the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation of the obligations of the
Issuers under the Indenture, to provide for uncertificated Notes in addition to
or in place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are as described in Section
163(f)(2)(B) of the Code), to add additional Guarantees with respect to the
Notes, to secure the Notes, to add to the covenants of the Issuers for the
benefit of the Noteholders or to surrender any right or power conferred upon the
Issuers, to make any change that does not adversely affect the rights of any
Holder and to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the TIA.
The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Noteholders a notice briefly describing such amendment.
However, the failure to give such notice to all Noteholders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Noteholder may transfer or exchange Notes in accordance with the
Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Noteholder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Noteholder to pay any taxes
required by law or permitted by the Indenture, including any transfer tax or
other similar governmental charge payable in connection therewith. The Company
is not required to transfer or exchange any Note selected for redemption or to
transfer or exchange any Note for a period of 15 days prior to a selection of
Notes to be redeemed. The Notes will be issued in registered form and the
registered holder of a Note will be treated as the owner of such Note for all
purposes.
DEFEASANCE
The Issuers at any time may terminate all their obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those with respect to the defeasance trust and obligations to register
the transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen
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Notes and to maintain a registrar and paying agent in respect of the Notes. The
Issuers at any time may terminate their obligations under the covenants
described under "-- Certain Covenants" and "-- Change of Control," the operation
of the cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under
"-- Defaults" and the limitations contained in clauses (iii) and (iv) under
"-- Merger and Consolidation" will not be applicable ("covenant defeasance").
The Issuers may exercise their legal defeasance option notwithstanding the
prior exercise of their covenant defeasance option. If the Issuers exercise
their legal defeasance option, payment of the Notes may not be accelerated
because of an Event of Default with respect thereto. If the Issuers exercise
their covenant defeasance option, payment of the Notes may not be accelerated
because of an Event of Default specified in clause (iv), (v), (vi), (vii) (with
respect only to Significant Subsidiaries), (viii) or (x) under "-- Defaults"
above or because of the failure of the Issuers to comply with clause (iii) or
(iv) under "-- Merger and Consolidation" above.
In order to exercise either defeasance option, the Issuers must irrevocably
deposit or cause to be deposited in trust (the "defeasance trust") with the
Trustee money or U.S. Government Obligations which through the scheduled payment
of principal and interest in respect thereof in accordance with their terms will
provide cash at such times and in such amounts as will be sufficient to pay
principal and interest when due on all the Notes (except lost, stolen or
destroyed Notes which have been replaced or repaid) to maturity or redemption,
as the case may be, and must comply with certain other conditions, including
delivery to the Trustee of an Opinion of Counsel to the effect that holders of
the Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and defeasance and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable federal income tax law).
CONCERNING THE TRUSTEE
United States Trust Company of New York is to be the Trustee under the
Indenture and has been appointed by the Company as Registrar and Paying Agent
with regard to the Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Acquired Indebtedness" of any specified Person means Indebtedness of any
other Person existing at the time such other Person is merged with or into or
becomes a Restricted Subsidiary of such specified Person, including Indebtedness
Incurred in connection with, or in contemplation of, such other Person's
becoming a Restricted Subsidiary of such specified Person.
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"Additional Assets" means, as of any date, (i) any property or assets
(other than Indebtedness and Capital Stock) used in connection with the business
of the Company or any of its Restricted Subsidiaries on such date or in a
Permitted Business or (ii) the Capital Stock of a Person that is a Restricted
Subsidiary prior to the acquisition of such Capital Stock or becomes a
Restricted Subsidiary as a result of the acquisition of such Capital Stock by
the Company or another Restricted Subsidiary; provided, however, that, in the
case of clause (ii), such Restricted Subsidiary is primarily engaged in a
Permitted Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing;
provided that the beneficial ownership of more than 10% of the Voting Stock of a
Person shall be deemed to be control.
"Applicable Premium" means, with respect to a Note at any Redemption Date,
the greater of (i) 1.0% of the then outstanding principal amount of such Note
and (ii) the excess of (A) the present value at such time of (1) the redemption
price of such Note at June 1, 2003 plus (2) all required interest and principal
payments (excluding accrued but unpaid interest) due on such Note through June
1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis
points, over (B) the then-outstanding principal amount of such Note.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) of shares of
Capital Stock of a Restricted Subsidiary (other than directors' qualifying
shares), property or other assets, including by way of a Sale/Leaseback
Transaction (each referred to for the purposes of this definition as a
"disposition"), by the Company or any of its Restricted Subsidiaries, in each
case resulting in Net Available Cash of $300,000 or more (including any
disposition by means of a merger, consolidation or similar transaction, except
that the sale, lease, conveyance or other disposition of all or substantially
all of the assets of the Company and its Subsidiaries taken as a whole will be
governed by the provisions of the Indenture described above under the caption
"-- Change of Control" and/or the provisions described above under the caption
"-- Merger and Consolidation" and not by the provisions of the covenant
"Limitation on Sales of Assets and Subsidiary Stock") other than (i) a
disposition by a Restricted Subsidiary to the Company or by the Company or a
Restricted Subsidiary to a Restricted Subsidiary, (ii) a disposition of property
or assets in the ordinary course of business, (iii) dispositions of inventory in
the ordinary course of business, (iv) for purposes of the "Limitation on Sales
of Assets and Subsidiary Stock" covenant only, a disposition that constitutes a
Restricted Payment permitted by the "Limitation on Restricted Payments" covenant
and (v) dispositions of obsolete or worn-out equipment.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the product of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all Obligations, whether outstanding on
the Issue Date or thereafter Incurred, payable by the Company or its
Subsidiaries under or in respect of the New Credit Facility and any related
notes, collateral documents, letters of credit and guarantees, including,
without limitation, principal, premium (if any), interest (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company whether or not a claim for post filing
interest is allowed in such proceedings), fees, charges, expenses, reimbursement
obligations, guarantees, indemnities and all other amounts payable thereunder or
in respect thereof.
"Board of Directors" means the Board of Directors or equivalent governing
body of a Person (or the general partner of such Person, as the case may be) or
any committee thereof duly authorized to act on behalf of such Board of
Directors or equivalent governing body.
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"Business Day" means a day other than a Saturday, Sunday or other day on
which banking institutions in New York State are authorized or required by law
to close.
"Capitalized Lease Obligation" of a Person means an obligation of such
Person that is required to be classified and accounted for on the balance sheet
of such Person as a capitalized lease for financial reporting purposes in
accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment or
penalty.
"Capital Stock" of any Person means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership or limited
liability company, partnership or membership interests (whether general or
limited) and (iv) any other interest or participation that confers on a Person
the right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person, in each case, including Preferred Stock.
"Cash Equivalents" means any of the following: (a) securities issued or
fully guaranteed or insured by the United States Government or any agency or
instrumentality thereof, (b) time deposits, certificates of deposit or bankers'
acceptances of (i) any lender under the New Credit Facility or (ii) any
commercial bank having capital and surplus in excess of $500,000,000 and the
commercial paper of the holding company of which is rated at least A-1 or the
equivalent thereof by Standard & Poor's Ratings Group or at least P-1 or the
equivalent thereof by Moody's Investors Service, Inc. (or if at such time
neither is issuing ratings, then a comparable rating of another nationally
recognized rating agency), (c) commercial paper rated at least A-1 or the
equivalent thereof by Standard & Poor's Ratings Group or at least P-1 or the
equivalent thereof by Moody's Investors Service, Inc. (or if at such time
neither is issuing ratings, then a comparable rating of another nationally
recognized rating agency) and (d) investments in money market funds complying
with the risk limiting conditions under Rule 2a-7 or any successor rule of the
SEC under the Investment Company Act.
"Code" means the Internal Revenue Code of 1986, as amended,
"Consolidated Cash Flow" for any period means the Consolidated Net Income
for such period, plus the following (without duplication) to the extent deducted
in calculating such Consolidated Net Income: (i) provision for income taxes
based on income or profits of such Person and its Subsidiaries for such period,
to the extent that such provision for taxes was deducted in computing such
Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) depreciation
expense, (iv) amortization expense (including amortization of goodwill and other
intangibles), (v) non-cash management compensation expense, (vi) Management
Fees; (vii) any increase in cost of sales resulting from the write-up of
inventory in accordance with Accounting Principles Board Opinion No. 16 (or a
successor provision) and (viii) all other non-cash items reducing Consolidated
Net Income (excluding any non-cash item to the extent it requires an accrual of
or reserve for cash disbursements for any future period), in each case for such
period, (ix) any extraordinary, non-recurring or unusual loss plus any net loss
realized in connection with an asset disposition and (x) all premiums or
prepayments of Indebtedness and minus (xi) all non-cash items increasing
Consolidated Net Income.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period of
the most recent four consecutive fiscal quarters for which internal financial
information is available ending at least 30 days prior to the date of such
determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that, without duplication, (1) if the Company or
any Restricted Subsidiary has Incurred any Indebtedness (other than in the case
of Indebtedness arising under revolving credit borrowings, in which case
Consolidated Interest Expense shall be computed based upon the average daily
balance of such Indebtedness during the period) since the beginning of such
period that remains outstanding or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or
both, Consolidated Cash Flow and Consolidated Interest Expense for such period
shall be calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the first day of such
period and the discharge
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of any other Indebtedness repaid, repurchased, defeased or otherwise discharged
with the proceeds of such new Indebtedness as if such discharge had occurred on
the first day of such period, (2) if since the beginning of such period the
Company or any Restricted Subsidiary shall have made any Asset Disposition or if
the transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Asset Disposition, the Consolidated Cash Flow for such period shall
be reduced by an amount equal to the Consolidated Cash Flow (if positive)
directly attributable to the assets which are the subject of such Asset
Disposition for such period, or increased by an amount equal to the Consolidated
Cash Flow (if negative) directly attributable thereto for such period and
Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (and, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (3) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment in
any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary)
or an acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business,
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro form effect thereto (including the Incurrence or
retirement of any Indebtedness) as if such Investment or acquisition occurred on
the first day of such period and Consolidated Cash Flow for such period shall be
calculated without giving effect to clause (ii) set forth in the definition of
Consolidated Net Income and (4) if since the beginning of such period any Person
(that subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) shall
have made any Asset Disposition or any Investment that would have required an
adjustment pursuant to clause (2) or (3) above if made by the Company or a
Restricted Subsidiary during such period, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition or Investment occurred on
the first day of such period. For purposes of this definition, whenever pro
forma effect is to be given to an acquisition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible financial or
accounting officer of the Company. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest expense on such
Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and is consolidated Restricted Subsidiaries, plus, to the
extent not included in such interest expense, without duplication (i) interest
expense attributable to capital leases, (ii) amortization of debt discount and
debt issuance cost (excluding the amortization of deferred financing fees),
(iii) capitalized interest, (iv) non-cash interest expense, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) interest actually paid by the Company or any
such Restricted Subsidiary under any Guarantee of Indebtedness or other
obligation of any other Person, (vii) net costs associated with Hedging
Obligations (including amortization of fees), (viii) (A) Disqualified Stock
dividends and (B) Preferred Stock dividends of a Restricted Subsidiary that is
not a Subsidiary Guarantor, in each case other than dividends paid in Capital
Stock (except Disqualified Stock) and only in respect of such Disqualified Stock
or Preferred Stock held by Persons other than the Company or a Wholly Owned
Subsidiary and (ix) the cash contributions to any employee stock ownership plan
or similar trust to the extent such contributions are used by such plan or trust
to pay interest or fees to any Person (other than the Company) in connection
with Indebtedness Incurred by such plan or trust; provided, however, that there
shall be excluded therefrom any such interest expense of any Unrestricted
Subsidiary to the extent the related Indebtedness is not Guaranteed or paid by
the Company or any Restricted Subsidiary.
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"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; provided, however, that there
shall not be included in such Consolidated Net Income:
(i) any net income (loss) of any Person (other than the Company) if
such Person is not a Restricted Subsidiary, except that (A), subject to the
limitations contained in clause (iv) below, the Company's equity in the net
income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution paid to a Restricted Subsidiary,
to the limitations contained in clause (iii) below) and (B) the Company's
equity in a net loss of any such Person (other than an Unrestricted
Subsidiary) for such period shall be included in determining such
Consolidated Net Income,
(ii) any net income (loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition,
(iii) any net income of any Restricted Subsidiary to the extent such
Restricted Subsidiary is prohibited, directly or indirectly, from paying
dividends or distributions, directly or indirectly, to the Company or any
other Restricted Subsidiary (at the time of determination of Consolidated
Net Income), except that (A) subject to the exclusion contained in clause
(iv) below, the Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in the
case of a dividend paid to another Restricted Subsidiary, to the limitation
contained in this clause) and (B) the Company's equity in a net loss of any
such Restricted Subsidiary for such period shall be included in determining
such Consolidated Net Income,
(iv) any gain or loss realized upon the sale or other disposition of
any property, plant or equipment of the Company or its consolidated
Subsidiaries (including pursuant to any Sale/Leaseback Transaction) which
is not sold or otherwise disposed of in the ordinary course of business and
any gain or loss realized upon the sale or other disposition of any Capital
Stock of any Person,
(v) any extraordinary gain or loss,
(vi) the cumulative effect of a change in accounting principles,
(vii) foreign currency exchange gains and losses,
(viii) any income (loss) from discontinued operations, and
(ix) the tax effect of any of the items described in clauses (i) thru
(viii) above; provided further, however, that for purposes of any
determination pursuant to the covenant described under "Certain
Covenants -- Limitation on Restricted Payments" there will be deducted from
the Consolidated Net Income of the Company and the Restricted Subsidiaries
for such period an amount equal to the Permitted Quarterly Tax
Distributions for such period, whether or not distributed.
Notwithstanding the foregoing, for the purpose of the covenant described
under "-- Certain Covenants -- Limitation on Restricted Payments" only, there
shall be excluded from Consolidated Net Income any dividends, repayments of
loans or advances or other transfers of assets from Unrestricted Subsidiaries to
the Company or a Restricted Subsidiary to the extent such dividends, repayments
or transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means with respect to the Company and its
Restricted Subsidiaries at any date, determined on a consolidated basis in
accordance with GAAP, the consolidated stockholders' equity, partners' capital
or members' capital of the Company and its Restricted Subsidiaries less the
amount of such stockholders' equity, partners' capital or members' capital
attributable to Disqualified Stock.
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"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable automatically or at the option of the holder
thereof, for Indebtedness or other Disqualified Stock or (iii) is redeemable by
such Person at the option of the holder thereof in whole or in part, in each
case on or prior to the 365th day following the Stated Maturity of the Notes.
"Dyson Family Member" means any of (i) John S. Dyson's spouse; (ii) his
issue; (iii) the respective executors, administrators, committees, conservators,
guardians or custodians or donees of powers during the minority of or with
respect to any of the Persons referred to in clauses (i) and (ii) of this
definition; or (iv) the trustee or trustees of any inter vivos or testamentary
trust created for the benefit of John S. Dyson or any of the persons in clauses
(i) and (ii) of this definition.
"Equity Offering" means a public or private offering of common stock (other
than public offerings with respect to the Company's or Parent's common stock
registered on Form S-8) of the Company or Parent for aggregate gross proceeds to
the Company or Parent of at least $15.0 million.
"Estimation Period" means the period for which a Taxpayer is required to
estimate for Federal income tax purposes his allocation of taxable income from
the Company during a calendar year in connection with determining his estimated
federal income tax liability for such period.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Foreign Subsidiary" means any Subsidiary which is incorporated or
otherwise organized under the laws of any jurisdiction other than the United
States of America, any state thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture shall be computed in conformity with GAAP.
"Guarantee" means a guarantee, direct or indirect, in any manner
(including, without limitation, letters of credit and reimbursement agreements
in respect thereof), of all or any part of any Indebtedness; provided, however,
that the term "Guarantee" shall not include endorsements for collection or
deposit in the ordinary course of business. The term "Guarantee" used as a verb
has a corresponding meaning.
"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding on
the Issue Date or thereafter Incurred) which is subordinate or junior in right
of payment to the obligations of such Subsidiary Guarantor under the Subsidiary
Guarantee pursuant to a written agreement.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" or "Securityholder" means the Person in whose name
a Note is registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Disqualified Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
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Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of and, if any is due and payable at such time,
premium in respect of indebtedness of such Person for borrowed money,
(ii) the principal of and, if any is due and payable at such time,
premium in respect of obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments,
(iii) all obligations of such Person in respect of unreimbursed
drawings under letters of credit or other similar instruments (including
reimbursement obligations with respect thereto) (other than letters of
credit securing obligations entered into in the ordinary course of business
to the extent any drawings thereunder are reimbursed no later than the
fifth Business Day following receipt by such Person of a demand for
reimbursement following payment on the letter of credit),
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables), which
purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion
of such services,
(v) all Capitalized Lease Obligations of such Person,
(vi) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Restricted Subsidiary that is not a Subsidiary
Guarantor, the aggregate liquidation preference of any Preferred Stock (but
excluding, in each case, any accrued dividends),
(vii) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of such Indebtedness shall be the lesser
of (A) the fair market value of such asset at such date of determination
and (B) the amount of such Indebtedness of such other Person,
(viii) all Indebtedness of other Persons to the extent Guaranteed by
such Person,
(ix) to the extent not otherwise included in this definition, Hedging
Obligations, and,
(x) Acquired Indebtedness.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above (or the accreted value thereof, in the case of Indebtedness that does not
require current payments of interest) and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date. Indebtedness shall not include interest or commitment
or other fees.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person and advances
to employees of such Person and its Restricted Subsidiaries made in the ordinary
course of business) or other extension of credit (including by way of Guarantee
or similar arrangement) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition for consideration of
Capital Stock, Indebtedness or other similar instruments issued by such Person;
provided that if the sole consideration for any such investment is Capital Stock
of such Person or its Subsidiaries that is not Disqualified Stock, then such
investment shall not be deemed an Investment for purposes of the Indenture.
"Investment" shall exclude extensions of trade credit by the Company and its
Restricted Subsidiaries on
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commercially reasonable terms in accordance with such Person's normal trade
practices. For purposes of the definition of "Unrestricted Subsidiary" and the
"Limitation on Restricted Payments" covenant, (i) "Investment" shall include the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of any Subsidiary of the Company at the
time that such Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of such original
designation less (y) the portion (proportionate to the Company's equity interest
in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time that such Subsidiary is so re-designated a Restricted
Subsidiary; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
For the purposes of calculating the amount of other "Investments," including
Permitted Investments, the amount of any Investment shall be the original cost
of such Investment plus the cost of all additional Investments by the Company or
any of its Restricted Subsidiaries, without any adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment, reduced by the payment of dividends or distributions in connection
with such Investment or any other amounts received in respect of such
Investment; provided that no such payment of dividends or distributions or
receipt of any such other amounts shall reduce the amount of any Investment if
such payment of dividends or distributions or receipt of any such amounts would
be included in Consolidated Net Income.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Agreement" means the Management Agreement, dated May 28, 1998,
between the Company, certain of its Subsidiaries and Millbrook Capital
Management, Inc., as it may be amended, modified, supplemented or restated from
time to time. See "Certain Transactions."
"Management Fee" means those certain fees (excluding reimbursements of
out-of-pocket expenses) payable under the Management Agreement.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a Note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other non-cash form) therefrom,
in each case net of (i) all legal, accounting, investment banking, financial
advisory, brokerage, consultant, title and recording tax expenses, commissions
and other fees and expenses incurred, and provision for all Federal, state,
provincial, foreign and local taxes payable (and all tax liability of the
Taxpayers determined without regard to any other tax items of the Company or the
Taxpayer and assuming the Taxpayer is subject to taxation at the highest
applicable marginal rates), in each such case as a consequence of such Asset
Disposition, (ii) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of any
Lien upon such assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law be repaid out
of the proceeds from such Asset Disposition, (iii) all distributions and other
payments required to be made to minority interest holders in Subsidiaries or
joint ventures as a result of such Asset Disposition, and (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Disposition and retained by the Company or any Restricted Subsidiary
after such Asset Disposition, including, without limitation, in respect of sales
price adjustments, pension and other post-employment benefit liabilities and
liabilities related to indemnification obligations associated with the assets
sold or disposed of in such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees,
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discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable (and all tax liability of the Taxpayers determined without regard to any
other tax items of the Company or the Taxpayer determined and assuming the
Taxpayer is subject to taxation at the highest applicable marginal rates) as a
result thereof.
"New Credit Facility" means that certain credit facility entered into in
July 1998 among the Company (as borrower), the Subsidiary Guarantors, and the
lenders from time to time party thereto, including all collateral documents,
instruments and agreements executed in connection therewith, and the term New
Credit Facility shall also include any amendments, supplements, modifications,
extensions, renewals, restatements or refundings thereof and any new or
subsequent loan or credit facilities or agreements that replace, refund or
refinance any part of the loans, other credit facilities or commitments
thereunder, including any such replacement, refunding or refinancing facility
that increases the amount borrowable thereunder or alters the maturity thereof,
and regardless of the lenders party thereto.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any Guarantee or credit support of
any kind (including any undertaking, Guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or indirectly
liable (as a guarantor or otherwise) and (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any
Restricted Subsidiary to declare a default under such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity.
"Obligations" means any principal, interest, penalties, fees, indemnities,
damages and other liabilities payable under the instruments governing, or under
agreements entered into in connection with, any Indebtedness.
"Permitted Business" means the business of the Company and the Restricted
Subsidiaries on the date of the Indenture and any business related, ancillary or
complementary thereto, or which is an extension thereof, or which involves the
light manufacturing of component products being sold to OEM markets. The
determination of whether a business is a Permitted Business shall be made by the
Company in good faith.
"Permitted Holders" means (i) John S. Dyson, (ii) any Dyson Family Member,
(iii) any trustee of any voting or "blind" trust established with respect to
investments of or assets held by John S. Dyson or any Dyson Family Member as a
consequence of or during the period of service by John S. Dyson as an appointed
or elected public official, of which Clay B. Lifflander (or, following his death
or disability, another member of the management of the Parent or the Company),
either individually or together with one or more additional trustees, are
trustees and (iv) Clay B. Lifflander.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company or in a Restricted Subsidiary or a Person which
will, upon the making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of such Restricted Subsidiary is a
Permitted Business; (ii) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Permitted Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
Restricted Subsidiary, if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances; (v) payroll, travel, relocation and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses for accounting purposes and that are made in the ordinary course of
business; (vi) loans or advances to employees made in the ordinary course of
business of the Company or such Restricted Subsidiary; (vii) stock, obligations
or securities received in settlement of debts created in the ordinary course of
business and owing to the Company or any Restricted Subsidiary or in
satisfaction of judgments; (viii) Guarantees permitted to be made pursuant to
the covenant "Limitation on Indebtedness and Preferred Stock"; (ix) Investments
in securities of trade creditors received in settlement of obligations or
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pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of any trade creditors of customers, (x) Currency
Agreements and Interest Rate Agreements entered into in the ordinary course of
business; provided that such agreements are entered into for bona fide hedging
purposes, are not for speculation or trading purposes and are designed to
protect against fluctuations in interest rates, currency exchange rates or
commodity prices, as the case may be, and, in the case of Interest Rate
Agreements, any such Interest Rate Agreement has a notional amount corresponding
to the Indebtedness being hedged thereby, (xi) Investments made by the Company
or a Restricted Subsidiary in connection with an Asset Disposition made in
compliance with the covenant "Limitation on Sales of Assets and Subsidiary
Stock," (xii) any acquisition of assets of a Permitted Business solely in
exchange for the issuance of Capital Stock (other than Disqualified Stock) of
the Company; and (xiii) any Investment existing on the date of the Indenture.
"Permitted Liens" means (i) Liens securing Indebtedness under the New
Credit Facility; (ii) Liens securing Indebtedness Incurred for the purpose of
financing all or a part of the purchase price of Additional Assets; (iii) Liens
in favor of the Company or any Restricted Subsidiary; (iv) Liens on property of
a Person existing at the time such Person becomes a Subsidiary of the Company or
is merged into or consolidated with the Company or any Subsidiary of the
Company, provided that such Liens were in existence prior to the time such
Person becomes a Subsidiary or the contemplation of such merger or consolidation
and do not extend to any assets other than those of the Person merged into or
consolidated with the Company; (v) Liens on property existing at the time of
acquisition thereof by the Company or any Subsidiary of the Company, provided
that such Liens were in existence prior to the contemplation of such
acquisition; (vi) Liens to secure Indebtedness permitted by clauses (vi) and
(viii) of the second paragraph of the covenant entitled "-- Limitation on
Indebtedness and Preferred Stock;" (vii) Liens to secure Indebtedness (including
Capital Lease Obligations) permitted by clause (ix) of the second paragraph of
the covenant entitled "-- Limitation on Indebtedness and Preferred Stock"
covering only the assets acquired with such Indebtedness; (viii) Liens existing
on the date of the Indenture; (ix) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
concluded, provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (x) statutory
Liens or landlords', carriers', warehousemens', mechanics', suppliers' or
similar Liens Incurred in the ordinary course of business of the Company or any
Subsidiary of the Company; (xi) easements, minor title defects, irregularities
in title or other charges or encumbrances on property not interfering in any
material respect with the use of such property by the Company or a Subsidiary of
the Company; (xii) Liens Incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security; (xiii) liens securing industrial revenue bonds
or other tax-favored financing; (xiv) deposit arrangements entered into in
connection with acquisitions or in the ordinary course of business; and (xv) any
extensions, substitutions, replacements or renewals of the foregoing.
"Permitted Quarterly Tax Distributions" means quarterly distributions of
Tax Amounts determined on the basis of the annualized estimated taxable income
of the Company and its consolidated subsidiaries for the related Estimation
Period, but not less than the minimum amount, based upon the prior tax year's
tax liability (taking into account only tax items attributable to the Company)
required to avoid any underpayment penalties or interest, provided, however,
that (A) prior to any distributions of Tax Amounts the Company shall deliver an
officers' certificate certifying that the Tax Amounts to be distributed were
determined pursuant to the terms of the Indenture and stating to the effect that
the Company is disregarded or is treated as a pass-through entity for Federal
income tax purposes and whether or not the Parent is a pass-through entity for
the relevant period and (B) at the time of such distributions, the most recent
audited financial statements of the Company reflect that the Company was
disregarded or treated as a pass-through entity for Federal income tax purposes
for the period covered by such financial statements.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
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"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Refinancing Indebtedness" means Indebtedness issued in exchange for, or
that refunds, refinances, replaces, renews, repays or extends (including
pursuant to any defeasance or discharge mechanism) (collectively, "refinances,"
and "refinanced" shall have a correlative meaning) any Indebtedness existing on
the date of the Indenture or Incurred in compliance with the Indenture
(including Indebtedness of the Company that refinances Indebtedness of any
Restricted Subsidiary and Indebtedness of any Restricted Subsidiary that
refinances Indebtedness of another Restricted Subsidiary) including Indebtedness
that refinances other Refinancing Indebtedness; provided, however, that (i) the
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being refinanced (or, if earlier, the Notes), (ii)
the Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the Average Life of
the Indebtedness being refinanced, and (iii) such Refinancing Indebtedness is
Incurred in an aggregate principal amount (or if issued with original issue
discount, an aggregate issue price) that is equal to or less than the sum of the
aggregate principal amount (or if issued with original issue discount, the
aggregate accreted value) then outstanding of the Indebtedness being refinanced
plus the amount of reasonable fees and expenses and prepayment premiums Incurred
in connection with such refinancing; provided further, however, that Refinancing
Indebtedness shall not include (x) Indebtedness of a Restricted Subsidiary which
is not a Subsidiary Guarantor that refinances Indebtedness of the Company or (y)
Indebtedness of the Company or a Restricted Subsidiary that refinances
Indebtedness of an Unrestricted Subsidiary (unless such Unrestricted Subsidiary
is concurrently redesignated a Restricted Subsidiary).
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person (other than to the Company or a Restricted
Subsidiary) and the Company or a Restricted Subsidiary leases it from such
Person.
"SEC" means the U.S. Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company or a
Subsidiary Guarantor secured by a Lien.
"Senior Indebtedness" means all Indebtedness of the Company including
interest thereon, whether outstanding on the Issue Date or thereafter Incurred,
unless in the instrument creating or evidencing the same or pursuant to which
the same is outstanding it is provided that such obligations are subordinated in
right of payment to the Notes; provided, however, that Senior Indebtedness shall
not include (1) any obligation of the Company to any subsidiary, (2) any
liability for Federal, state, local or other taxes owed or owing by the Company,
(3) any accounts payable or other liability to trade creditors arising in the
ordinary course of business (including Guarantees thereof or instruments
evidencing such liabilities), (4) any Indebtedness, Guarantee or obligation of
the Company which is subordinate or junior in any respect to any other
Indebtedness, Guarantee or obligation of the Company, including any Subordinated
Obligations, (5) any obligations with respect to any Capital Stock, (6)
Indebtedness which, when Incurred and without respect to any election under
Section 1111(b) of Title 11, United States code, is without recourse to the
Company, or (7) any Indebtedness Incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at
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the option of the holder thereof upon the happening of any contingency unless
such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person.
"Subsidiary Guarantee" means the Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes.
"Subsidiary Guarantor" means each Subsidiary of the Company existing on the
Issue Date and each new Subsidiary (other than Foreign Subsidiaries and
Unrestricted Subsidiaries) that guarantees the Company's obligations with
respect to the Notes.
"Tax Amounts" with respect to any taxable period shall not exceed an amount
equal to (A) the product of (x) the taxable income of the Company and its
consolidated Subsidiaries for such period as determined by the Tax Amounts CPA
and (y) the Tax Percentage reduced by (B) to the extent not previously taken
into account, any income tax benefit attributable to the tax items of the
Company and its consolidated Subsidiaries which could legally be realized
(without regard to the actual realization) by the Taxpayers with respect to tax
items of the Company and its consolidated subsidiaries in the current or any
prior taxable year, or portion thereof, commencing on or after the Issue Date
(including any tax losses or tax credits up to the aggregate amount of income
tax benefits previously legally realizable by the Taxpayers), computed at the
applicable Tax Percentage for the year that such benefit is taken into account
for purposes of this computation.
"Tax Amounts CPA" means a nationally recognized certified public accounting
firm.
"Taxpayer(s)" means, (i) for any period when Parent is a pass through
entity for federal income tax purposes, the stockholders of Parent and (ii) for
any period when the Parent is not a pass through entity for federal income tax
purposes, the Parent.
"Tax Percentage" means, for a particular taxable year, the highest
effective marginal combined rate of Federal, state and local income tax, imposed
on any Taxpayer, as certified by the Tax Amounts CPA in a certificate filed with
the Trustee. The rate of "state income tax" to be taken into account for
purposes of determining the Tax Percentage for a particular taxable year shall
be deemed to be the highest state marginal tax rate applicable to any Taxpayer.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit, eurodollar
time deposits, bankers' acceptances and money market deposits maturing within
360 days of the date of acquisition thereof issued by a bank or trust company
which is organized under the laws of the United States of America, any state
thereof or any foreign country recognized by the United States of America having
capital, surplus and undivided profits aggregating in excess of $500,000,000 (or
the foreign currency equivalent thereof) and whose long-term debt is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act), (iii) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clause (i) above
entered into with a bank meeting the qualifications described in clause (ii)
above, (iv) investments in commercial paper, maturing not more than 270 days
after the date of acquisition, issued by a corporation (other than an Affiliate
of the Company) organized and in existence under the laws of the United States
of America or any foreign country recognized by the United States of America
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with a rating at the time as of which any investment therein is made of "P-1"
(or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher)
according to Standard & Poor's Ratings Group, (v) investments in securities with
maturities of six months or less from the date of acquisition issued or fully
guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by Standard & Poor's Ratings Group or "A" by Moody's Investors
Service, Inc. and (vi) investment funds registered under the Investment Company
Act of 1940, as amended, investing at least 95% of their assets in securities of
any of the types described in clauses (i) through (v) above.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C.
sec.sec.77aaa-77bbbb) as in effect on the date of the Indenture.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H:15(519) which
has become publicly available at least two Business Days prior to the Redemption
Date (or, if such Statistical Release is no longer published, any publicly
available source or similar market data)) most nearly equal to the period from
the Redemption Date to the Stated Maturity; provided, however, that if the
period from the Redemption Date to the Stated Maturity is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the period from the Redemption Date to the Stated Maturity
is less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
"True-up Amount" means, in respect of a particular taxable year, an amount
determined by the Tax Amounts CPA equal to the difference between (i) the
aggregate Permitted Quarterly Tax Distributions actually distributed in respect
of such taxable year and (ii) the actual Tax Amounts for such year. For purposes
of this Agreement, the amount equal to the excess, if any, of the amount
described in clause (i) over the amount described in clause (ii) above shall be
referred to as the "True-up Amount due to the Company" and the excess, if any,
of the amount described in clause (ii) over the amount described in clause (i)
above shall be referred to as the "True-up Amount due to the Taxpayers."
"True-up Determination Date" means the date on which the Tax Amounts CPA
delivers a statement to the Trustee indicating the True-up Amount.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; provided, however,
that either (A) the Subsidiary to be so designated has total consolidated assets
of $10,000 or less or (B) if such Subsidiary has consolidated assets greater
than $10,000, then such designation would be permitted under "Limitation on
Restricted Payments." The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under clause (a) of "Limitation on Indebtedness and
Preferred Stock" and (y) no Default shall have occurred and be continuing. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions. Notwithstanding the foregoing, Finance
Corp. may not be designated an Unrestricted Subsidiary.
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"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or another Wholly Owned Subsidiary.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the New Notes will initially be issued in the
form of one or more registered notes in global form without coupons (each a
"Global Note"). Each Global Security will be deposited with the Trustee as
custodian (the "Custodian") for DTC, and registered in the name of the DTC or a
nominee thereof. The Global Notes will be subject to certain restrictions on
transfer set forth in the Indenture.
DTC has advised the Company that it is (i) a limited purpose trust company
organized under the laws of the State of New York, (ii) a member of the Federal
Reserve System, (iii) a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and (iv) a "Clearing Agency" registered pursuant to
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants (collectively, the "Participants") and facilitates the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes to the accounts of its Participants, thereby
eliminating the need for physical transfer and delivery of certificates. DTC's
Participants include securities brokers and dealers (including the Initial
Purchaser), banks and trust companies, clearing corporations and certain other
organizations. Indirect access to DTC's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly.
The Company expects that pursuant to procedures established by DTC (i) upon
deposit of the Global Notes, DTC will credit the accounts of Participants
designated by the Initial Purchasers with an interest in the Global Note and
(ii) ownership of the Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with respect
to the interest of Participants), the Participants and the Indirect
Participants. The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own and that security
interests in negotiable instruments can only be perfected by delivery of
certificates representing the instruments. Consequently, the ability to transfer
interests in the New Notes represented by a Global Note to such persons in such
states may be limited.
Transfers between Participants will be effected in the ordinary way through
DTC's same-day funds systems in accordance with DTC rules and will be settled in
same-day funds. If a holder requires Certificated Securities for any reason,
including to sell Notes to persons in jurisdictions which require physical
delivery of Notes or to pledge such securities, such holder must transfer its
interest in a Global Note in accordance with the normal procedures of DTC and
with the procedures set forth in the Indenture. Consequently, the ability to
transfer Notes or to pledge the Notes as collateral will be limited to such
extent.
So long as DTC or its nominee is the registered owner of the Global Note,
DTC or such nominee, as the case may be, will be considered the sole owner or
Holder of the Notes represented by the Global Note for all purposes under the
Indenture. Except as provided below, owners of beneficial interests in a Global
Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of Certificated Securities, and will not be considered the owners or
holders thereof under the Indenture for any purpose, including with respect to
giving of any directions, instruction or approval to the Trustee thereunder. As
a result, the ability of a person having a beneficial interest in Notes
represented by a Global Note to pledge such interest to persons or entities that
do not participate in DTC's
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system or to otherwise take action with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Each owner of a beneficial interest in a Global Note must rely on the
procedures of DTC and, if such owner is not a Participant or an Indirect
Participant, on the procedures of the Participant through which such owner owns
its interest, to exercise any rights of a Holder under the Indenture or such
Global Note. The Company understands that under existing industry practice, in
the event the Company requests any action of holders or an owner of a beneficial
interest in a Global Note desires to take any action that DTC, as the Holder of
such Global Note, is entitled to take, DTC would authorize the Participants to
take such action and the Participant would authorize persons owning through such
Participants to take such action or would otherwise act upon the instruction of
such person. Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of Notes by DTC, or for maintaining, supervising or reviewing any records of DTC
relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest on
any Notes represented by a Global Note registered in the name of DTC or its
nominee on the applicable record date will be payable by the Trustee to or at
the direction of DTC or its nominee in its capacity as the registered Holder of
the Global Note representing such Notes under the Indenture. Under the terms of
the Indenture, the Company and the Trustee may treat the persons in whose names
the Notes, including the Global Notes, are registered as the owners thereof for
the purpose of receiving such payment and for any and all other purposes
whatsoever. Consequently, neither the Company nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of Notes (including principal, premium, if any, and interest), or to
immediately credit the accounts of the relevant Participants with such payment,
in amounts proportionate to their respective holdings in principal amount of
beneficial interest in the Global Note as shown on the records of DTC. Payments
by the Participants and the Indirect Participants to the beneficial owners of
Notes will be governed by standing instructions and customary practice and will
be the responsibility of the Participants or the Indirect Participants.
Neither the Issuers nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related Notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the Notes to be issued).
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depository and the Company is unable to locate a
qualified successor within 90 days, (ii) the Company, at its option, notifies
the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture or (iii) upon the occurrence of certain
other events, then, upon surrender by DTC of its Global Notes, Certificated
Securities will be issued to each person that DTC identifies as the beneficial
owner of the Notes represented by the Global Note. Upon any such issuance, the
Trustee is required to register such Certificated Securities in the name of such
person or persons (or the nominee of any thereof), and cause the same to be
delivered thereto.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following presents the material United States Federal income tax
consequences of the acquisition, ownership and disposition of the Notes. This
summary applies only to a beneficial owner of a Note who acquires the Note at
the initial offering and for the original offering price thereof.
This summary is based on provisions of the "Code" existing and proposed
Treasury regulations promulgated thereunder (the "Treasury Regulations") and
administrative and judicial interpretations thereof, all as of the date hereof
and all of which are subject to change, possibly on a retroactive basis.
This summary does not address the tax consequences to subsequent purchasers
of the Notes and is limited to Notes that are held as capital assets. This
summary is for general information only and does not address all of the tax
consequences that may be relevant to particular acquirors in light of their
personal circumstances, or to certain types of acquirors (such as banks and
other financial institutions, real estate investment trusts, regulated
investment companies, insurance companies, tax-exempt organizations, dealers in
securities, persons who have hedged the interest rate on the Notes or persons
whose functional currency is not the U.S. dollar). In addition, this summary
does not include any description of the tax laws of any state, local or non-U.S.
government that may be applicable to a particular acquiror.
As used herein, the term "U.S. Holder" means a holder that is, for U.S.
Federal income tax purposes, (a) a citizen or resident of the United States, (b)
a corporation or partnership created or organized in the United States or under
the laws of the United States or of any state of the United States, (c) an
estate whose income is includable in gross income for U.S. Federal income tax
purposes regardless of its source or (d) a trust if (i) a court within the
United States is able to exercise primary supervision over the administration of
the trust and (ii) at least one U.S. person has authority to control all
substantial decisions of the trust.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE PARTICULAR U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO
THEM OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NOTES, AS WELL AS THE
TAX CONSEQUENCES UNDER STATE, LOCAL, NON-U.S. AND OTHER U.S. FEDERAL TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN TAX LAWS.
TAXATION OF U.S. HOLDERS
Payment of Interest on the Notes. In general, interest paid on a Note will
be taxable to a U.S. Holder as ordinary interest income, as received or accrued,
in accordance with such holder's method of accounting for U.S. Federal income
tax purposes. If original issue discount on a Note is not greater than a de
minimis amount equal to 0.25% of its stated principal amount multiplied by the
number of complete years to its maturity, any such discount will be deemed to be
equal to zero, and a holder will not be required to accrue a portion of such
discount as income in each taxable year.
Sale, Exchange or Retirement of Notes. Upon the sale, exchange,
redemption, retirement at maturity or other disposition of a Note, a U.S. Holder
will generally recognize taxable gain or loss equal to the difference between
the sum of the cash and the fair market value of all other property received on
such disposition (except to the extent such cash or property is attributable to
accrued interest, which will be taxable as ordinary income) and such holder's
adjusted tax basis in the Note.
Gain or loss recognized on the disposition of a Note generally will be
capital gain or loss, and will be long-term capital gain or loss if, at the time
of such disposition, the holder's holding period for the Note is more than one
year. Under recently enacted legislation, a reduced tax rate on capital gain
will apply to a U.S. Holder that is an individual, estate or trust if such
holder's holding period for the Note is more than eighteen months at the time of
disposition.
The exchange of an Old Note by a holder for a New Note should not
constitute a taxable exchange of the Note. As a result, the New Notes should
have the same issue price (and adjusted issue price immediately
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after the exchange) as the Old Notes, and each holder should have the same
adjusted tax basis and holding period in the New Notes as it had in the Notes
immediately before the exchange.
Backup Withholding and Information Reporting. In general, a U.S. Holder
will be subject to backup withholding at the rate of 31% with respect to
interest, principal and premium, if any, paid on a Note, and the proceeds of a
sale of a Note, unless the holder (a) is an entity that is exempt from
withholding (including corporations, tax-exempt organizations and certain
qualified nominees) and, when required, demonstrates this fact, or (b) provides
the payor with its taxpayer identification number ("TIN") (which for an
individual would be the holder's social security number), certifies that the TIN
provided to the payor is correct and that the holder has not been notified by
the Internal Revenue Service (the "IRS") that it is subject to backup
withholding due to underreporting of interest or dividends, and otherwise
complies with applicable requirements of the backup withholding rules. In
addition, such payments of principal, premium and interest to, and the proceeds
of a sale of a Note by, U.S. Holders that are not exempt entities will generally
be subject to information reporting requirements. A U.S. Holder who does not
provide the payor with his correct TIN may be subject to penalties imposed by
the IRS.
The Company will report to U.S. Holders and the IRS the amount of any
"reportable payments" (including any interest paid) and any amounts withheld
with respect to the Notes during the calendar year.
The amount of any backup withholding from a payment to a U.S. Holder will
be allowed as a credit against such holder's U.S. Federal income tax liability
and may entitle such holder to a refund, provided that the required information
is furnished to the IRS.
TAXATION OF NON-U.S. HOLDERS
Payment of Interest on the Notes. In general, payments of interest
received by any holder of a Note that is not a U.S. Holder (a "Non-U.S. Holder")
will not be subject to a U.S. Federal income tax (or any withholding thereof,
except as described below under "Backup Withholding and Information Reporting"),
provided that (a) under an exemption for certain portfolio interest, (i) the
Non-U.S. Holder does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Parent entitled to vote,
(ii) the Non-U.S. Holder is not a "controlled foreign corporation" (generally, a
non-U.S. corporation controlled by U.S. shareholders) that is related to the
Parent actually or constructively through stock ownership and (iii) either (x)
the beneficial owner of the Note, under penalties of perjury, provides the
Company or its agent with the beneficial owner's name and address and certifies
that it is not a U.S. person on IRS Form W-8 (or a suitable substitute form) or
(y) a securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business
holds the Note and certifies to the Company or its agent under penalties of
perjury that such a Form W-8 (or suitable substitute form) has been received by
it from the beneficial owner or qualifying intermediary and furnishes the payor
a copy thereof, (b) the Non-U.S. Holder is subject to U.S. Federal income tax
with respect to the Note on a net basis because payments received with respect
to the Note are effectively connected with the conduct of a trade or business
within the United States by the holder (in which case the holder may also be
subject to U.S. "branch profits tax") and provides the Company with a properly
executed IRS Form 4224, or (c) the Non-U.S. Holder is entitled to the benefits
of an income tax treaty under which the interest is exempt from U.S. withholding
tax and the holder or such holder's agent provides a properly executed IRS Form
1001 claiming the exemption. Payments of interest not exempt from U.S. Federal
income tax as described above will be subject to withholding at the rate of 30%
(subject to reduction under any applicable income tax treaty).
Recently issued Treasury Regulations (the "New Withholding Regulations")
generally will be effective with respect to payments made after December 31,
1999, regardless of the issue date of the instrument with respect to which such
payments are made. The New Withholding Regulations generally will not affect the
certification rules described in the preceding paragraph, but will provide
alternative methods for satisfying such requirements. The New Withholding
Regulations also generally will require, in the case of Notes held by a non-U.S.
partnership, that (a) the certification described in the preceding paragraph be
provided by the partners rather than the foreign partnership and (b) the
partnership provide certain information. A
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lookthrough rule will apply in the case of tiered partnerships. In addition, the
New Withholding Regulations may require that a Non-U.S. Holder (including a
non-U.S. partnership or a partner thereof) obtain a taxpayer identification
number and make certain certifications if interest in respect of a Note is not
portfolio interest and the Non-U.S. Holder wishes to claim a reduced rate of
withholding under an income tax treaty. Each Non-U.S. Holder should consult its
own tax advisor regarding the application of the New Withholding Regulations.
Sale, Exchange or Retirement of the Notes. A Non-U.S. Holder generally
will not be subject to U.S. Federal income tax (or withholding thereof) in
respect of gain realized on the sale, exchange, redemption, retirement at
maturity or other disposition of Notes, unless (a) the gain is effectively
connected with the conduct of a trade or business within the United States by
the holder, or (b) the holder is an individual who is present in the United
States for a period or periods aggregating 183 or more days in the taxable year
of the disposition and certain other conditions are met.
With respect to a Non-U.S. Holder subject to U.S. Federal income tax as
described in the preceding paragraph, an exchange of a Note for an Exchange Note
should not be treated as a taxable exchange of the Note.
Backup Withholding and Information Reporting. Under current Treasury
Regulations, backup withholding and information reporting do not apply to
payments made by the Company or a paying agent to Non-U.S. Holders if the
certification described under "Payment of Interest on the Notes" is received,
provided that the payor does not have actual knowledge that the holder is a U.S.
person. If any payments of principal and interest are made to the beneficial
owner of a Note by or through the non-U.S. office of a non-U.S. custodian,
non-U.S. nominee or other non-U.S. agent of such beneficial owner, or if the
non-U.S. office of a non-U.S. "broker" (as defined in applicable Treasury
Regulations) pays the proceeds of the sale of a Note or a coupon to the seller
thereof, backup withholding and information reporting will not apply.
Information reporting requirements (but not backup withholding) will apply,
however, to a payment by a non-U.S. office of a broker that is a U.S. person
that derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States, or that is a "controlled
foreign corporation" (generally, a non-U.S. corporation controlled by U.S.
shareholders) with respect to the United States, unless the broker has
documentary evidence in its records that the holder is a non-U.S. person and
certain other conditions are met, or the holder otherwise establishes an
exemption. Payment by a U.S. office of a broker is subject to both backup
withholding at a rate of 31% and information reporting unless the holder
certifies under penalties of perjury that it is a non-U.S. person, or otherwise
establishes an exemption. A Non-U.S. Holder may obtain a refund or a credit
against such Holder's U.S. Federal income tax liability of any amounts withheld
under the backup withholding rules, provided the required information is
furnished to the IRS. In addition, in certain circumstances, interest on a Note
owned by a Non-U.S. Holder will be required to be reported annually on IRS Form
1042S, in which case such form will be filed with the IRS and furnished to the
holder.
The New Withholding Regulations revise (substantially in certain respects)
the procedures that withholding agents and payees must follow to comply with, or
to establish an exemption from, these information reporting and backup
withholding provisions for payments after December 31, 1999. Each Non-U.S.
Holder should consult its own tax advisor regarding the application to such
holder of the New Withholding Regulations.
Estate Tax. Subject to applicable estate tax treaty provisions, Notes held
at the time of death (or theretofore transferred subject to certain retained
rights or powers) by an individual who at the time of death is a Non-U.S. Holder
will not be included in such holder's gross estate for U.S. Federal estate tax
purposes, provided that (a) the individual does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock of
the Parent entitled to vote and (b) the income on the Notes is not effectively
connected with the conduct of a U.S. trade or business by the individual.
112
<PAGE> 118
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Issuers have agreed that, for a period of 90 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until , 1998, all dealers effecting transactions in the
New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit or any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date the Issuers will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Issuers have agreed to pay all expenses incident to the
Exchange Offer (including the expenses of one firm of attorneys for the Holders
of the Old Notes) other than commissions or concessions of any brokers-dealers
and will indemnify the holders of the Old Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The legality of the New Notes being offered hereby will be passed upon for
the Company by Rubin Baum Levin Constant & Friedman (a partnership which
includes professional corporations), New York, New York.
EXPERTS
The consolidated financial statements of Key Components, Inc. as of
December 31, 1997 and 1996 and for the years then ended included in this
Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of B.W. Elliott Manufacturing Co., Inc. as of
December 31, 1995 and for the year then ended included in this Prospectus have
been so included in reliance on the report of by Fulgieri & Randall, LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of Hudson Lock, Inc. (a wholly-owned subsidiary of
Jordan Industries, Inc.) as of May 15, 1997 and December 28, 1996 and for the
periods December 29, 1996 through May 15, 1997 and December 31, 1995 through
December 28, 1996 included in this Prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
113
<PAGE> 119
The financial statements of ESP Lock Products, Inc. as of December 10, 1997
and for the period January 1, 1997 through December 10, 1997 included in this
Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of ESP Lock Products, Inc. as of December 31, 1996
and 1995 and for the years then ended included in this Prospectus have been so
included in reliance on the report of BDO Seidman, LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of RAD Lock, Inc. as of June 22, 1997 and December
31, 1996 and for the periods January 1, 1997 through June 22, 1997 and January
1, 1996 through December 31, 1996 included in this Prospectus have been so
included in reliance on the report of Greenberg, Rosenblatt, Kull & Bitsoli,
P.C., independent accountants, given on the authority of said firm as experts in
auditing and accounting.
114
<PAGE> 120
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KEY COMPONENTS, INC.
Report of Independent Accountants......................... F-2
Consolidated Balance Sheet as of December 31, 1997 and
1996................................................... F-3
Consolidated Statement of Income for the years ended
December 31, 1997, 1996 and 1995....................... F-4
Consolidated Statement of Stockholders' Equity for the
years ended
December 31, 1997, 1996 and 1995....................... F-5
Statement of Cash Flows for the years ended December 31,
1997, 1996 and 1995.................................... F-6
Notes to Consolidated Financial Statements................ F-7
UNAUDITED KEY COMPONENTS, INC.
Consolidated Balance Sheet as of June 30, 1998 and
December 31, 1997...................................... F-15
Consolidated Statement of Income for the six months ended
June 30, 1998 and 1997................................. F-16
Consolidated Statement of Cash Flows for the six months
ended June 30, 1998 and 1997........................... F-17
Notes to Consolidated Financial Statements................ F-18
B.W. ELLIOTT MANUFACTURING CO., INC.
Independent Auditor's Report.............................. F-21
Balance Sheet as of December 31, 1995..................... F-22
Statement of Income and Retained Earnings for the year
ended December 31, 1995................................ F-23
Statement of Cash Flows for the year ended December 31,
1995................................................... F-24
Notes to Financial Statements............................. F-25
HUDSON LOCK, INC. (a wholly-owned subsidiary of Jordan
Industries, Inc.)
Report of Independent Accountants......................... F-32
Balance Sheet as of May 15, 1997 and December 28, 1996.... F-33
Statement of Income and Retained Earnings for the periods
December 29, 1996 through May 15, 1997 and December 31,
1995 through December 28, 1996......................... F-34
Statement of Cash Flows for the periods December 29, 1996
through May 15, 1997 and December 31, 1995 through
December 28, 1996...................................... F-35
Notes to Financial Statements............................. F-36
ESP LOCK PRODUCTS, INC.
Report of Independent Accountants......................... F-40
Balance Sheet as of December 10, 1997..................... F-41
Statement of Income and Retained Earnings for the period
January 1, 1997 through December 10, 1997.............. F-42
Statement of Cash Flows for the period January 1, 1997
through December 10, 1997.............................. F-43
Notes to Financial Statements............................. F-44
Independent Accountants' Report........................... F-48
Balance Sheets as of December 31, 1996 and 1995........... F-49
Statements of Income and Retained Earnings for the years
ended December 31, 1996 and 1995....................... F-50
Statements of Cash Flows for the years ended December 31,
1996 and 1995.......................................... F-51
Summary of Accounting Policies............................ F-52
Notes to Financial Statements............................. F-54
RAD LOCK, INC.
Independent Auditors' Report.............................. F-58
Balance Sheet as of June 22, 1997 and December 31, 1996... F-59
Statements of Income and Accumulated Deficit for the
period ended June 22, 1997 and the year ended December
31, 1996............................................... F-60
Statements of Cash Flows for the period ended June 22,
1997 and the year ended
December 31, 1996...................................... F-61
Notes to Financial Statements............................. F-62
</TABLE>
F-1
<PAGE> 121
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Key Components, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity, and of cash flows
present fairly, in all material respects, the financial position of Key
Components, Inc. (formerly B.W. Elliott Manufacturing Co., Inc.) (the Company)
and its subsidiaries at December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. The financial statements of the Company for the year ended December 31,
1995 were audited by other independent accountants whose report dated February
9, 1996, expressed an unqualified opinion on those statements.
As discussed in Note 11 to the financial statements, the Company changed
the composition of costs included in inventory in 1996.
PRICE WATERHOUSE LLP
Syracuse, New York
February 20, 1998
F-2
<PAGE> 122
KEY COMPONENTS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS:
Current assets
Cash...................................................... $ 1,440,452 $ 331,338
Accounts receivable, net of allowance for doubtful
accounts of $80,882 and $36,337 in 1997 and 1996,
respectively........................................... 7,762,631 1,780,500
Inventories (Note 3)...................................... 8,432,074 3,749,594
Prepaid expenses and other current assets................. 576,127 472,768
Deferred income taxes (Notes 1 and 5)..................... -- 17,028
----------- -----------
Total current assets.............................. 18,211,284 6,351,228
----------- -----------
Property and equipment at cost less accumulated depreciation
(Notes 1 and 4)........................................... 11,980,074 4,053,183
----------- -----------
Deferred income taxes (Notes 1 and 5)....................... -- 216,435
Deferred financing costs (Note 1)........................... 2,100,761 --
Goodwill (Note 1)........................................... 45,206,386 --
Intangibles (Note 1)........................................ 2,197,499 775,907
Other assets................................................ 60,597 57,380
----------- -----------
49,565,243 1,049,722
----------- -----------
Total assets...................................... $79,756,601 $11,454,133
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities
Notes payable -- current (Note 6)......................... $ 3,395,187 $ 596,588
Capital lease obligation (Note 7)......................... 66,981 --
Accrued lease costs -- current (Note 7)................... 14,757 --
Accounts payable.......................................... 1,702,328 789,270
Accrued expenses.......................................... 2,351,228 263,118
----------- -----------
Total current liabilities......................... 7,530,481 1,648,976
Notes payable -- long term (Note 6)....................... 62,557,990 2,190,290
Capital lease obligation (Note 7)......................... 194,031 --
Accrued lease costs (Note 7).............................. 626,398 641,155
----------- -----------
Total liabilities................................. 70,908,900 4,480,421
----------- -----------
Commitments (Note 7)
Stockholders' equity (Note 8)
Capital stock, no par value; 200 shares authorized; 100
shares issued and outstanding in 1997................. 1,036,254 1,066,500
Paid-in capital........................................ 738,600 13,000
Retained earnings...................................... 7,072,847 7,312,707
Less treasury stock.................................... -- (1,418,495)
----------- -----------
Total stockholders' equity........................ 8,847,701 6,973,712
----------- -----------
Total liabilities and stockholders' equity........ $79,756,601 $11,454,133
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 123
KEY COMPONENTS, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................... $27,317,808 $13,449,447 $13,184,944
Cost of goods sold.................................. 15,798,171 8,360,984 7,355,650
----------- ----------- -----------
Gross profit.............................. 11,519,637 5,088,463 5,829,294
Selling, general and administrative expenses........ 5,560,420 3,212,197 3,197,358
Related party management fees (Note 10)............. 760,000 643,329 259,992
Non-recurring business consolidation charges (Note
12)............................................... 84,069 785,718 --
----------- ----------- -----------
Income from operations.................... 5,115,148 447,219 2,371,944
Other income (expense)
Other income...................................... 31,252 5,074 25,830
Interest expense.................................. (3,007,459) (254,124) (426,550)
----------- ----------- -----------
2,138,941 198,169 1,971,224
----------- ----------- -----------
Provision (benefit) for income taxes (Notes 1 and 5)
Current........................................... 655,190 600,740 751,256
Deferred.......................................... 233,463 (579,586) (27,547)
----------- ----------- -----------
Total income taxes........................ 888,653 21,154 723,709
----------- ----------- -----------
Income before cumulative effect of change in
accounting principle.............................. 1,250,288 177,015 1,247,515
Cumulative effect of change in accounting principle
(Note 11)......................................... -- 313,256 --
----------- ----------- -----------
Net income................................ $ 1,250,288 $ 490,271 $ 1,247,515
=========== =========== ===========
Earnings per share:
Basic............................................. $ 12,503 $ 4,903 $ 12,475
=========== =========== ===========
Diluted........................................... $ 11,471 $ 4,903 $ 12,475
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 124
KEY COMPONENTS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
CAPITAL PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
---------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
December 31, 1994........... $1,066,500 $ 13,000 $ 5,574,921 $(1,418,495) $5,235,926
Net income.................. -- -- 1,247,515 -- 1,247,515
---------- -------- ----------- ----------- ----------
December 31, 1995........... 1,066,500 13,000 6,822,436 (1,418,495) 6,483,441
Net income.................. -- -- 490,271 -- 490,271
---------- -------- ----------- ----------- ----------
December 31, 1996........... 1,066,500 13,000 7,312,707 (1,418,495) 6,973,712
Issuance of warrants to
purchase 14.2857 shares... -- 738,600 -- -- 738,600
Retirement of treasury
stock..................... (30,246) (13,000) (1,375,249) 1,418,495 --
Stockholder distributions... -- -- (114,899) -- (114,899)
Net income.................. -- -- 1,250,288 -- 1,250,288
---------- -------- ----------- ----------- ----------
December 31, 1997........... $1,036,254 $738,600 $ 7,072,847 $ -- $8,847,701
========== ======== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 125
KEY COMPONENTS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 1,250,288 $ 490,271 $ 1,247,515
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 1,817,296 740,866 713,147
Bond discount amortization..................... 61,550 -- --
Deferred income taxes.......................... 233,463 (367,514) (27,547)
Loss on disposal of assets..................... 53,331 96,500 7,471
Net increase (decrease) in cash caused by
changes in assets and liabilities:
Accounts receivable.......................... (212,174) (17,726) 380,447
Inventories.................................. 597,246 (419,083) 475,178
Prepaid expenses and other assets............ 259,969 (124,266) (137,860)
Accounts payable............................. (474,680) 470,653 (250,047)
Accrued expenses............................. 442,169 109,803 (307,632)
Accrued lease costs.......................... -- 641,155 --
----------- ----------- -----------
Net cash provided by operating activities.... 4,028,458 1,620,659 2,100,672
----------- ----------- -----------
Cash flows from investing activities:
Business acquisitions (Note 2).................... (55,441,916) -- --
Capital expenditures.............................. (695,670) (1,297,536) (345,135)
Proceeds from sale of equipment................... 4,800 8,600 16,570
----------- ----------- -----------
Net cash used in investing activities........ (56,132,786) (1,288,936) (328,565)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of notes payable........................ (12,422,978) (2,885,937) (1,396,704)
Additional borrowing.............................. 68,071,500 2,065,000 --
Repayment of capital lease obligation............. (45,094) -- --
Deferred financing costs.......................... (2,275,087) -- --
Dividends to stockholders......................... (114,899) -- --
----------- ----------- -----------
Net cash provided (used) by financing
activities................................ 53,213,442 (820,937) (1,396,704)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 1,109,114 (489,214) 375,403
Cash and cash equivalents, beginning of year........ 331,338 820,552 445,149
----------- ----------- -----------
Cash and cash equivalents, end of year.............. $ 1,440,452 $ 331,338 $ 820,552
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year:
Interest.......................................... $ 2,632,130 $ 252,115 $ 429,749
Income taxes...................................... 451,030 711,160 842,358
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 126
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements as of and for the two years ended
December 31, 1997 relate to Key Components, Inc. (the Company), a parent holding
company of the wholly-owned subsidiaries, B.W. Elliott Manufacturing Co., Inc.
(Elliott), Hudson Lock, Inc. (Hudson), and ESP Lock Products, Inc. (ESP). All
significant intercompany transactions have been eliminated.
On May 15, 1997, in conjunction with the Hudson acquisition, all of the
Elliott shareholders exchanged their ownership interests for an interest in the
Company. The Company had no operations of its own prior to the exchange of
ownership interests with Elliott. The exchange ratio was determined to leave the
shareholders of Elliott with the same pro rata interests in the Company as they
had in Elliott. The ownership transfer is between entities under common control
and accounted for at historical cost.
NATURE OF OPERATIONS
The Company is engaged in the manufacturing of medium-security custom and
specialty locks, keys and locking systems, primarily for original equipment
manufacturers and flexible shafting and remote valve control components used for
power transmission applications.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, on a first-in,
first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over useful lives ranging from three to forty years.
Expenditures for repairs and maintenance are charged to expense as incurred.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resultant gain or
loss is recognized.
INCOME TAXES
The Company has elected to be treated as a Subchapter S corporation under
the Internal Revenue Code effective May 31, 1997. As an S Corporation, the
stockholders are personally liable for taxes on the income of the Company.
Accordingly, no provision for income taxes has been recognized in the financial
statements subsequent to May 31, 1997. Prior to the conversion to a subchapter S
Corporation, Elliott provided income taxes based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Deferred income taxes had been recorded to reflect
the tax consequences on future years of temporary differences between the tax
basis of assets and liabilities and their financial reporting amount at each
year end.
F-7
<PAGE> 127
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLES
Intangibles at December 31, 1997 primarily consist of costs associated with
a licensing agreement and a covenant not to compete arising from business
acquisitions. These assets are being amortized on a straight-line basis over the
life of the related agreements which range from five to seven years. Accumulated
amortization at December 31, 1997 and 1996 was $1,255,850 and $948,217,
respectively.
GOODWILL
Goodwill represents the excess of the cost of acquired businesses over the
fair market value of their net tangible assets. Goodwill is being amortized on
the straight-line method over forty years. Amortization charged to continuing
operations amount to $505,130 for the year ended December 31, 1997. At each
balance sheet date, the Company evaluates the realizability of goodwill based on
expectations of non-discounted cash flows and operating income for each
operation having a material goodwill balance. Based on its most recent analysis,
the Company believes that no impairment of goodwill exists at December 31, 1997.
DEFERRED FINANCING COSTS
Debt issuance costs have been deferred and are being amortized on a
straight-line basis over the lives of the related agreements which range from
five to eight years.
INTEREST RATE SWAP AGREEMENT
The Company has entered into an interest rate swap agreement as a means of
managing its interest rate exposure. This agreement has the effect of converting
certain of the Company's variable rate obligations to fixed rate obligations.
Net amounts paid or received are reflected as adjustments to interest expense.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of products to customers.
EARNINGS PER SHARE
Earnings per share (EPS) is computed based on the weighted average number
of common shares outstanding during the period in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share. The number of shares
outstanding for 1996 and 1995 have been restated to give retroactive effect to
the change in corporate structure discussed in Note 1. Shares used in the
calculation of basic and diluted EPS were:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Shares used in the calculation of basic EPS (weighted
average shares outstanding)............................... 100 100 100
Effect of dilutive potential securities (weighted average
shares issuable upon conversion of warrants).............. 9 -- --
--- --- ---
Shares used in the calculation of diluted EPS............... 109 100 100
=== === ===
</TABLE>
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's customer base includes a significant number involved with the
domestic lawn and garden and furniture industries. Although the Company is
directly affected by the well-being of these industries, management does not
believe that a significant concentration credit risk exists at December 31,
1997.
F-8
<PAGE> 128
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash,
accounts receivable, accounts payable and accrued expenses, management believes
that the carrying amounts approximate fair value due to their short maturities.
The estimated fair value of the Company's long-term debt is based on the current
rates offered to the Company for debt of similar maturities and approximates
carrying value at December 31, 1997. The approximate fair value of the Company's
interest rate swap agreement at December 31, 1997 is an $108,000 obligation.
2. ACQUISITIONS OF BUSINESSES
During 1997, the Company acquired the entities described below, which were
accounted for by the purchase method of accounting, and the results of
operations have been included in the consolidated financial statements since the
date of acquisition.
On May 15, 1997, the Company acquired all of the outstanding shares of
Hudson Lock, Inc. (Hudson) for a cash purchase price of $39.1 million and
assumed liabilities of approximately $1.2 million. Hudson manufactures
medium-security custom and specialty locks, primarily for original equipment
manufacturers. The purchase price was allocated based on estimated fair values
at the date of acquisition resulting in a negative fair value adjustment to
property and equipment of $565,000. The excess of purchase price over assets
acquired of $31 million is being amortized on a straight-line basis over forty
years.
On December 10, 1997, the Company acquired all of the outstanding shares of
ESP Lock Products, Inc. (ESP) for a cash purchase price of $16.3 million and
assumed liabilities of approximately $10.4 million. ESP primarily manufactures
medium-security custom and specialty locks, and key blanks. The purchase price
was allocated based on estimated fair values at the date of acquisition and
included $1.2 million for a covenant not to compete. This resulted in an excess
of purchase price over assets acquired of $14.7 million, which is being
amortized on a straight-line basis over forty years.
On an unaudited pro-forma basis, assuming the Hudson Lock and ESP
acquisitions had occurred as of the beginning of the periods presented, the
consolidated results of the Company would have been as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Pro forma net sales....................................... $58,975,000 $53,019,000
Pro forma income before taxes and change in accounting
principle............................................... 3,760,000 (9,000)
</TABLE>
The unaudited pro-forma financial information presented above is not
necessarily indicative of the results that would have actually occurred had the
companies been combined for the periods presented.
The following is summarized financial information for the two acquired
subsidiaries as of and for the period ended from the dates of their respective
acquisitions through December 31, 1997:
<TABLE>
<CAPTION>
HUDSON ESP
----------- -----------
<S> <C> <C>
Current assets............................................ $ 4,286,453 $ 6,737,482
Noncurrent assets......................................... 36,820,920 19,647,526
Current liabilities....................................... 2,634,150 2,811,117
Noncurrent liabilities.................................... 24,164,031 23,951,688
Net sales................................................. 11,956,963 1,187,697
Gross profit.............................................. 5,191,297 8,333
Net income................................................ 1,869,724 (644,892)
</TABLE>
F-9
<PAGE> 129
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials............................................... $2,810,259 $1,202,443
Work-in-process............................................. 3,609,454 1,317,598
Finished goods.............................................. 2,012,361 1,229,553
---------- ----------
Total inventory................................... $8,432,074 $3,749,594
========== ==========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Land, building and improvements............................ $ 3,266,131 $1,203,652
Equipment, furniture and fixtures.......................... 12,344,556 5,873,921
Leasehold improvements..................................... 172,236 89,988
Construction-in-progress................................... 340,664 215,069
----------- ----------
16,123,587 7,382,630
Less accumulated depreciation.............................. (4,143,513) (3,329,447)
----------- ----------
Total property, plant and equipment.............. $11,980,074 $4,053,183
=========== ==========
</TABLE>
Depreciation expense amounted to $835,890, $490,412 and $462,173 for the
years ended December 31, 1997, 1996 and 1995, respectively.
5. FEDERAL AND STATE INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal taxes...................................... $781,356 $ 50,611 $646,613
New York State..................................... 107,297 (29,457) 77,096
-------- -------- --------
Total income tax expense................. $888,653 $ 21,154 $723,709
======== ======== ========
</TABLE>
A reconciliation between income taxes computed at the statutory federal
rate and income tax expense is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Federal income tax rate..................................... 34.0% 34.0% 34.0%
State income taxes, net of federal.......................... 3.3 (9.8) 2.6
Write-off of net deferred tax asset......................... 21.9 -- --
Income taxed directly to shareholders....................... (20.7) -- --
Adjustment to prior year tax liabilities.................... -- (15.4) --
Other, net.................................................. 3.0 1.9 .1
----- ----- -----
41.5% 10.7% 36.7%
===== ===== =====
</TABLE>
As discussed in Note 1, the Company elected to be treated as a subchapter S
Corporation effective May 31, 1997 and as such income is taxed directly to the
stockholders. Due to the change in tax status, the 1997 deferred tax provision
includes a charge of $468,986 representing net deferred tax assets that were
F-10
<PAGE> 130
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
eliminated. At December 31, 1997, the Company's net assets for financial
reporting purposes were approximately $11,997,000 greater than the related tax
basis of such net assets, principally related to the goodwill generated from the
acquisition of ESP which is not deductible for tax purposes.
The Company has earned New York State investment tax credits and economic
development zone investment tax credits. The current tax provision was reduced
by $32,752 in 1997 and $89,887 in 1996 reflecting the benefit of these credits.
The tax effects of the significant temporary differences which comprise
deferred tax assets and liabilities at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Assets:
Intangible amortization................................... $ 453,346
Accrued costs............................................. 296,090
Inventory provisions...................................... 38,100
---------
787,536
---------
Liabilities:
Depreciation.............................................. (554,073)
---------
Net deferred tax asset...................................... $ 233,463
---------
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Term loan, payable in quarterly instalments ranging from
$500,000 to $1,750,000 through May 2004.................. $29,000,000 $ --
Acquisition loan, payable in quarterly instalments ranging
from $250,000 to $1,500,000 through June 30, 2004........ 20,000,000 --
Senior Subordinated Notes, due May 15, 2005; interest paid
semi-annually at 11.25%, net of unamortized discount of
$677,050................................................. 9,322,950 --
Revolving credit facility, payable at May 15, 2004......... 6,771,500 --
Obligation under licensing agreement, discounted at 7.85%,
quarterly payments of $87,500, including principal and
interest through December 1999........................... 641,227 926,462
Obligation under covenant not to compete agreement, monthly
principal instalments of $7,250 payable through June
2000..................................................... 217,500 --
Bank note at 7.85%......................................... -- 1,843,750
Other notes payable........................................ -- 16,666
----------- ----------
65,953,177 2,786,878
Less current portion....................................... (3,395,187) (596,588)
----------- ----------
Total long-term debt....................................... $62,557,990 $2,190,290
----------- ----------
</TABLE>
On May 15, 1997, the Company issued $10 million of 11.25% Senior
Subordinated Notes due May 15, 2005 with interest payable semi-annually. The
Notes have detachable warrants which are convertible into 14.2857 shares of
common stock at $.01 per share at any time prior to maturity. The warrants were
valued at $738,600 and recorded as a debt discount which is being amortized over
the life of the notes.
On May 15, 1997, the Company entered into a $60 million credit agreement
with a group of financial institutions which was used in part to finance the
acquisition of Hudson Lock, Inc. and ESP Lock Products, Inc., (see Note 2), to
repay existing debt and provide working capital. The agreement provides for a
seven
F-11
<PAGE> 131
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
year $30 million term loan, a seven year $10 million revolving credit facility,
and a seven year $20 million acquisition loan. As of September 26, 1997, the
revolving credit facility was amended and increased to $13 million in
conjunction with the ESP Lock Products, Inc. acquisition. Borrowings under the
revolver are subject to borrowing base limitation measured by eligible inventory
and accounts receivable. Additional availability under the revolver was
$4,642,000 at December 31, 1997. The credit agreement is collateralized by
receivables, inventories, equipment and certain intangible property.
The credit agreement provides for a continuation and conversion election
whereby the Company can elect to have the borrowings outstanding under a base
rate loan or a LIBOR based rate loan. The base rate loan bears interest at a
fluctuating interest rate determined by reference to the agent's base rate plus
1.50% with respect to the term loan and revolving credit facility, and 2% for
the acquisition loan. The LIBOR based rate loan bears interest during an
applicable period not to exceed six months at a fixed rate of interest
determined by reference to the LIBOR rate, plus a margin of 2.75% for the term
loan and revolving credit facility and 3.25% for the acquisition loan.
Currently, the Company has elected the LIBOR based rate loan for all borrowings
outstanding under the credit agreement. At December 31, 1997, the interest rate
was 8.6875% for the revolving credit facility and term loan and 9.1875% for the
acquisition loan.
The credit agreement and Senior Subordinated Notes contain certain
affirmative and negative covenants and restrictions which require the
maintenance of financial ratios, and restrict or limit dividends and other
stockholder distributions, capital expenditures, rental obligations, incurrence
of indebtedness and business acquisitions. At December 31, 1997, the Company was
in compliance with these covenants and restrictions.
As of August 15, 1997, the Company had entered into an interest rate swap
agreement with the agent for the lenders providing bank financing. The agreement
effectively fixed the interest rate on a portion of the floating rate debt at a
rate of 6.24% for a notional principal amount of $14,750,000 through September
30, 2000.
At December 31, 1997, aggregate principal payments required on all amounts
due after one year, excluding the unamortized debt discount of $694,010, are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1999............................................ $ 4,437,000
2000............................................ 5,543,500
2001............................................ 8,000,000
2002............................................ 10,000,000
Thereafter...................................... $35,271,500
-----------
$63,252,000
===========
</TABLE>
7. LEASE COMMITMENTS
The Company rents several manufacturing and warehouse facilities under
operating lease agreements, one of which is with a related party (Note 10).
Rental payments under all lease agreements amounted to $253,000, $333,178 and
$316,152 in 1997, 1996 and 1995, respectively.
The Company also leases certain machinery and equipment with a bargain
purchase option. These leases are classified as capital leases and expire at
various dates through 2002.
During 1996, the Company initiated a program to consolidate manufacturing
and administrative facilities (Note 12). As a result, the Company has determined
that a leased facility will not be used for operating purposes beyond 1997.
Accordingly, the Company has established a liability of $641,155 representing
the discounted future rental payments net of estimated sublease income.
F-12
<PAGE> 132
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of the future minimum lease payments (net of
sublease income) required under operating and capital leases:
<TABLE>
<CAPTION>
MINIMUM ESTIMATED
YEAR ENDED RENTAL SUBLEASE CAPITAL
MAY 15, PAYMENTS INCOME NET LEASES
---------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C>
1998................................. $ 463,315 $ 77,000 $ 386,315 $ 91,164
1999................................. 468,043 78,540 389,503 91,368
2000................................. 427,703 80,111 347,592 79,778
2001................................. 387,013 81,713 305,300 42,292
2002................................. 395,052 83,347 311,705 10,188
Thereafter........................... 1,306,726 536,277 770,449 --
---------- -------- ---------- --------
Total minimum lease payments......... $3,447,852 $936,988 $2,510,864 314,790
========== ======== ==========
Less: Estimated amount representing
interest........................... (53,778)
--------
Present value of net minimum lease
payments........................... 261,012
Less: Current portion................ (66,981)
--------
Long-term obligation under capital
lease.............................. $194,031
========
</TABLE>
8. STOCKHOLDERS' EQUITY
The Company's capital stock consists of 200 authorized shares of common
stock, without par value, of which 100 shares are issued and outstanding at
December 31, 1997. At December 31, 1996, Elliott's capital stock consisted of
3,000 authorized shares, of which 500 shares are $100 par value, 5% cumulative
preferred stock and the remaining 2,500 shares are common stock, without par
value. At December 31, 1996, 815 shares of common stock were issued and 512.54
were outstanding. Effective May 15, 1997, B.W. Elliott Manufacturing Co., Inc.
shareholders exchanged their shares of common stock for shares in the Company.
On May 15, 1997, detachable warrants for the purchase of 14.2857 shares of
the Company's common stock at $.01 per share were issued in connection with $10
million of subordinated debt. The approximate fair value of the warrants was
$738,600 at May 15, 1997. The warrants are exercisable at any time and expire on
May 15, 2005.
9. RETIREMENT PLANS
The Company has defined contribution plans covering substantially all
employees of the Company. The Company's contribution expense was $46,634,
$46,784 and $48,588 in 1997, 1996 and 1995, respectively.
10. RELATED PARTY TRANSACTIONS
The Company rents one of its manufacturing facilities under an operating
lease agreement entered into with a company which is co-owned by one of the
Company's stockholders. The terms of the lease, which expires December 31, 2008,
provide for annual rent increases of 5%. Rental payments amounted to $130,734,
$124,509 and $118,580 in 1997, 1996 and 1995, respectively.
The Company pays management fees to Millbrook Capital Management, Inc.,
(Millbrook) a party related to John Dyson, who is a Company stockholder. These
management fees amounted to $660,000, $643,329 and $259,992 in 1997, 1996 and
1995, respectively. The Company paid $100,000 to Millbrook for administrative
support services in 1997. Additionally, in 1997 Millbrook was compensated
$400,000 for advisory services related to the financing and acquisition of ESP
Lock Products, Inc., which is included as part of the deferred financing and
acquisition costs.
11. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1996, Elliott changed the composition of costs
included in inventory. Prior to 1997, nonproductive time and benefit pay related
to production workers had not been included in the cost of inventory. Elliott
believes that including such costs more accurately reflects inventory at cost.
Accordingly, Elliott has recorded an adjustment to inventory cost at January 1,
1997 as the cumulative effect of a change in
F-13
<PAGE> 133
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting principle. The effect of this adjustment was to increase net income
for the year ended December 31, 1996 by $313,256 (net of income taxes of
$212,072). This change had an immaterial effect on income before income taxes
for the year ended December 31, 1996. Had the Company applied this new
accounting principle in the year ended December 31, 1995, income before income
taxes and net income would not have been materially affected.
12. NON-RECURRING BUSINESS CONSOLIDATION CHARGES
During 1996, the Company initiated a program at Elliott to consolidate
manufacturing and administrative facilities. In connection with the program and
in accordance with EITF 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" the Company recorded provisions during 1996
for the write-down of certain leasehold improvement totaling $76,897 and the
accrual of lease costs on facilities which have no substantive future use to the
Company of $641,155 (Note 7). Additionally, the Company expensed as incurred
moving costs of $84,068 and $67,666 during 1997 and 1996, respectively.
Non-recurring business consolidation charges aggregated $84,069 and $785,718 in
1997 and 1996, respectively.
13. OPERATING SEGMENTS
The Company's operations have been classified into two reportable business
segments: the flexible shaft business and the specialty lock business. The
specialty lock business was formed with the 1997 acquisitions of Hudson and ESP.
The flexible shaft business was the single operating segment of the Company
prior to the acquisitions in 1997. Accordingly, operating segment information
for 1996 and 1995 is not presented. Segment information for 1997 is as follows:
<TABLE>
<CAPTION>
SPECIALTY FLEXIBLE
LOCK SHAFT
BUSINESS BUSINESS ADJUSTMENTS CONSOLIDATED
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue from external
customers...................... $13,144,660 $14,173,148 $ -- $27,317,808
Income from operations........... 3,057,477 2,831,546 (773,875) 5,115,148
Depreciation and amortization.... 992,367 824,879 -- 1,817,246
Segment assets................... 67,492,391 12,259,510 4,700 79,756,601
Capital expenditures............. 276,598 419,072 -- 695,670
</TABLE>
The adjustments represent management fees and other corporate and
administrative expenses and assets.
14. SUBSEQUENT EVENTS (UNAUDITED)
In May 1998, a newly formed wholly-owned subsidiary of the Company, Key
Components, LLC (KC LLC), along with its wholly-owned subsidiary Key Components
Finance Corp. (KCFC), completed the sale of $80,000,000 principal amount of
unsecured 10 1/2% senior notes due 2008. The notes may be redeemed by KC LLC
beginning June 1, 2003 at premiums which range from 105.25% to 100% of the
principal amount. In addition, prior to June 1, 2001 up to one-third of the
notes may be redeemed by KC LLC with the proceeds of one or more equity
offerings at a premium of 110.5% of the principal amount. There are also
redemption provisions in the event of a change in control.
The net proceeds from the notes were used in part to repay the outstanding
principal and interest on the Term Loan, Acquisition Loan, Revolving Credit
Facility and Senior Subordinated Notes (including a redemption premium) and to
repurchase warrants for the purchase of 14.2857 shares of common stock.
The Indenture relating to the notes contains certain covenants and
restrictions which limit dividends and other stockholder distributions,
transactions with affiliates, capital expenditures, rental obligations,
incurrence of indebtedness, and the issuance of preferred stock, among others.
The notes are fully and unconditionally guaranteed, on a joint and several
basis, by certain Subsidiary Guarantors, (as defined). At the date of issuance,
guarantees were provided by Elliott, Hudson and ESP (Subsidiary Guarantors),
each a wholly-owned subsidiary of the Company. At December 31, 1997, the parent
company (Key Components, Inc.) has no assets or operations other than its
investment in the Subsidiary Guarantors. Accordingly, the consolidated financial
statements present the combined assets and operations of the Subsidiary
Guarantors.
F-14
<PAGE> 134
KEY COMPONENTS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets
Cash...................................................... $10,525,174 $ 1,440,452
Accounts receivable, net of allowance for doubtful
accounts of $85,493 and $80,882 at June 30, 1998 and
December 31, 1997 respectively......................... 9,055,311 7,762,631
Inventories............................................... 8,544,155 8,432,074
Prepaid expenses and other current assets................. 527,175 576,127
----------- -----------
Total current assets.............................. 28,651,815 18,211,284
Property and equipment at cost less accumulated
depreciation.............................................. 11,865,622 11,980,074
Deferred financing costs.................................... 4,264,167 2,100,761
Goodwill.................................................... 44,638,802 45,206,386
Intangibles................................................. 1,672,155 2,197,499
Other assets................................................ 73,597 60,597
----------- -----------
Total assets...................................... $91,166,158 $79,756,601
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities
Current portion of notes payable.......................... $ -- $ 3,000,000
Current portion of other long term obligations............ 498,698 476,925
Accounts payable.......................................... 2,026,013 1,702,328
Accrued expenses and other current liabilities............ 2,992,663 2,351,228
----------- -----------
Total current liabilities......................... 5,517,374 7,530,481
10 1/2% Senior Notes due 2008............................... 80,000,000 --
Notes payable -- long term.................................. -- 62,094,450
Other long term obligations................................. 1,023,152 1,283,969
----------- -----------
Total liabilities................................. 86,540,526 70,908,900
----------- -----------
Stockholders' equity
Capital stock, no par value; 200 shares authorized; 102
and 100 shares issued and outstanding at June 30, 1998
and December 31, 1997, respectively.................... 1,536,254 1,036,254
Paid-in capital........................................... -- 738,600
Retained earnings......................................... 3,089,378 7,072,847
----------- -----------
Total stockholders' equity........................ 4,625,632 8,847,701
----------- -----------
Total liabilities and stockholders' equity........ $91,166,158 $79,756,601
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE> 135
KEY COMPONENTS, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
----------- ----------
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $33,015,561 $9,781,285
Cost of goods sold.......................................... 20,578,794 5,253,353
----------- ----------
Gross profit........................................... 12,436,767 4,527,932
Selling, general and administrative expenses................ 5,158,953 2,076,370
Related party management fees............................... 400,000 280,000
----------- ----------
Income from operations................................. 6,877,814 2,171,562
Other income (expense):
Other income.............................................. 127,847 15,773
Interest expense.......................................... (3,294,345) (644,868)
----------- ----------
Income before income taxes and extraordinary charge......... 3,711,316 1,542,467
Provision for income taxes.................................. 139,966 828,003
----------- ----------
Income before extraordinary charge.......................... 3,571,350 714,464
Extraordinary charge -- early repayment of debt............. 4,616,363 --
----------- ----------
Net income (loss)........................................... $(1,045,013) $ 714,464
=========== ==========
Earnings (loss) per share:
Basic earnings (loss) per share:
Income before extraordinary charge..................... $ 35,360 $ 7,115
Extraordinary charge................................... (45,707) --
----------- ----------
Net Income............................................. $ (10,347) $ 7,115
=========== ==========
Diluted earnings (loss) per share:
Income before extraordinary charge..................... $ 31,887 $ 6,870
Extraordinary charge................................... (41,217) --
----------- ----------
Net Income............................................. $ (9,330) $ 6,870
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE> 136
KEY COMPONENTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
SIX MONTH PERIOD ENDED
JUNE 30,
---------------------------
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(1,045,013) $ 714,464
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary charge -- early repayment of debt........ 4,616,363 --
Depreciation and amortization.......................... 2,067,734 558,761
Bond discount amortization............................. 30,775 --
Deferred income taxes.................................. -- 216,435
Net increase (decrease) in cash caused by changes in
assets and liabilities:
Accounts receivable.................................. (1,292,680) (714,372)
Inventories.......................................... (112,081) 193,896
Prepaid expenses and other assets.................... 31,750 335,227
Accounts payable..................................... 323,685 (337,937)
Accrued expenses..................................... 641,435 786,384
----------- ------------
Net cash provided by operations................... 5,261,968 1,752,858
----------- ------------
Cash flows from investing activities:
Business acquisition...................................... -- (39,142,795)
Capital expenditures...................................... (710,671) (282,048)
----------- ------------
Net cash used in investing activities............. (710,671) (39,424,843)
----------- ------------
Cash flows from financing activities:
Repayment of debt......................................... (66,010,543) (2,392,282)
Costs associated with early repayment of debt............. (1,978,976) --
Sale of Old Notes......................................... 80,000,000 --
Debt issued............................................... -- 43,838,093
Deferred financing costs.................................. (4,300,000) (1,907,116)
Sale of common stock...................................... 500,000 --
Repurchase of warrants.................................... (1,650,000) --
Dividends to stockholders................................. (2,027,056) --
----------- ------------
Net cash provided by investing activities......... 4,533,425 39,538,695
----------- ------------
Net increase in cash and cash equivalents................... 9,084,722 1,866,710
Cash and cash equivalents, beginning of period.............. 1,440,452 331,338
----------- ------------
Cash and cash equivalents, end of period.................... $10,525,174 $ 2,198,048
=========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................. $ 2,843,168 $ 250,335
=========== ============
Income taxes.............................................. $ 37,450 $ 237,880
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE> 137
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are for Key
Components, Inc. ("KCI"), its wholly owned subsidiary, Key Components, LLC
("KCLLC") and the wholly owned subsidiaries of KCLLC, one of which is Key
Components Finance Corp. On May 28, 1998 (the "Formation Date"), KCLLC acquired
all of the assets and assumed all of the liabilities of KCI, including all
right, title and interest of KCI in and to all of the outstanding equity
securities of B.W. Elliot Manufacturing Co., Inc., Hudson Lock, Inc. and ESP
Lock Products, Inc. KCI has no assets or operations other than its investment in
KCLLC. Accordingly, the accompanying consolidated financial statements represent
the operations and financial position of KCLLC. Unless otherwise indicated, all
references to "KCI" or the "Company" refer to collectively, at all times prior
to the Formation Date, to KCI and its predecessors and subsidiaries and at all
times on and after the Formation Date, to KCLLC and its predecessors and
subsidiaries.
The accompanying unaudited financial statements of the Company contain all
adjustments which are, in the opinion of management, necessary for a fair
statement of results for the interim periods presented. While certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, the Company believes that the disclosures herein
are adequate to make the information not misleading. The results of operations
for the three months and six months ended June 30, 1998, are not necessarily
indicative of the results for the full year. These statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 1997.
2. ACQUISITIONS OF BUSINESSES
KCI was formed in April 1997 as a holding company for B.W. Elliot
Manufacturing Co., Inc. ("Elliot") Effective May 15, 1997, the shareholders of
Elliot (the "Shareholders") exchanged their shares of Elliot common stock for
shares of KCI's common stock. KCI had no operations of its own prior to the
exchange of ownership interests with Elliott. The exchange ratio was determined
to leave the Shareholders with the same pro rata interests in the Parent as they
had in Elliott. The ownership transfer was between entities under common control
and is accounted for at historical costs. Elliot is the manufacturer and
distributor of flexible shaft products (the Company's "Flexible Shaft
Business").
During 1997, the Company acquired the entities described below (the
"Acquisitions"), which were accounted for by the purchase method of accounting,
and the results of operations have been included in the consolidated financial
statements since the date of acquisition.
On May 15, 1997, the Company acquired all of the outstanding shares of
Hudson Lock, Inc. ("Hudson") for a cash purchase price of $39.1 million and
assumed liabilities of approximately $1.2 million. Hudson manufactures
medium-security custom and specialty locks, primarily for original equipment
manufacturers (the Company's "Specialty Lock Business"). The purchase price was
allocated based on estimated fair values at the date of acquisition. This
resulted in an excess of purchase price over assets acquired of $31 million,
which is being amortized on a straight-line basis over forty years.
On December 10, 1997, the Company acquired all of the outstanding shares of
ESP Lock Products, Inc. ("ESP") for a cash purchase price of $16.3 million and
assumed liabilities of approximately $10.4 million. ESP primarily manufactures
medium-security custom and specialty locks for the Specialty Lock Business. The
purchase price was allocated based on estimated fair values at the date of
acquisition and included $1.2 million for a covenant not to compete. This
resulted in an excess of purchase price over assets acquired of $14.7 million,
which is being amortized on a straight-line basis over forty years.
F-18
<PAGE> 138
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On an unaudited pro-forma basis, assuming the Hudson and ESP acquisitions
had occurred as of January 1, 1997, the consolidated results of the Company for
the six months ended June 30, 1997 would have been as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997
-------------
<S> <C>
Pro forma net sales......................................... $29,599,000
Pro forma income before taxes............................... 2,175,000
</TABLE>
The unaudited pro-forma financial information presented above is not
necessarily indicative of the results that would have actually occurred had the
companies been combined for the periods presented.
The following is summarized financial information for the two acquired
subsidiaries as of and for the six months ended June 30, 1998:
<TABLE>
<CAPTION>
HUDSON ESP
----------- -----------
<S> <C> <C>
Current assets.............................................. $ 5,043,290 $ 6,510,737
Noncurrent assets........................................... 35,854,282 17,913,608
Current liabilities......................................... 1,096,116 1,516,971
Noncurrent liabilities...................................... 506,447 258,993
Net sales................................................... 11,498,859 12,986,998
Gross profit................................................ 4,854,903 4,095,703
Income before extraordinary charge.......................... 2,196,657 1,307,425
Net Income.................................................. 1,183,210 970,835
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Raw materials............................................... $2,760,194 $2,810,259
Work-in-process............................................. 4,173,007 3,609,454
Finished goods.............................................. 1,610,954 2,012,361
---------- ----------
Total inventory............................................. $8,544,155 $8,432,074
========== ==========
</TABLE>
4. OPERATING SEGMENTS
The Company's operations have been classified into two reportable business
segments: the Flexible Shaft Business and the Specialty Lock Business. The
Specialty Lock Business was formed with the 1997 acquisitions of Hudson and ESP.
The Flexible Shaft Business was the single operating segment of the Company
prior to the acquisitions in 1997. Segment information for the six months ended
June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
SPECIALTY LOCK FLEXIBLE SHAFT
BUSINESS BUSINESS ADJUSTMENTS CONSOLIDATED
-------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Six months ended June 30, 1998:
Net sales........................ $24,485,857 $ 8,529,704 $33,015,561
Income from operations........... 5,688,704 1,736,642 $ (547,532) 6,877,814
Depreciation and amortization.... 1,626,516 404,353 1,032 2,031,901
Segment assets................... 65,321,917 21,570,261 4,273,980 91,166,158
Capital expenditures............. 282,392 417,433 10,846 710,671
</TABLE>
F-19
<PAGE> 139
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SPECIALTY LOCK FLEXIBLE SHAFT
BUSINESS BUSINESS ADJUSTMENTS CONSOLIDATED
-------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Six months ended June 30, 1997:
Net sales........................ 2,411,963 7,369,322 9,781,285
Income from operations........... 911,636 1,539,926 (280,000) 2,171,562
Depreciation and amortization.... 165,497 393,264 558,761
Segment assets................... 41,792,309 13,355,813 55,148,122
Capital expenditures............. -- 282,048 282,048
</TABLE>
The adjustments represent management fees and other corporate and
administrative expenses and assets.
5. SALE OF NOTES
In May 1998, KCLLC, along with one of its wholly-owned subsidiaries, Key
Components Finance Corp. (Finance Corp.), completed the sale (the "Initial
Offering") of $80,000,000 principal amount of unsecured 10 1/2% senior notes due
2008 (the "Old Notes"). The Old Notes may be redeemed by KCLLC beginning June 1,
2003 at premiums which range from 105.25% to 100% of the principal amount. In
addition, prior to June 1, 2001 up to one-third of the notes may be redeemed by
KCLLC with the proceeds of one or more equity offerings at a premium of 110.5%
of the principal amount. There are also redemption provisions in the event of a
change in control.
The net proceeds from the notes were used in part to repay certain
indebtedness, including a redemption, premium and to repurchase warrants for the
purchase of 14.2857 shares of common stock.
The Indenture relating to the Old Notes contains certain covenants and
restrictions which limit dividends and other stockholder distributions,
transactions with affiliates, capital expenditures, rental obligations,
incurrence of indebtedness, and the issuance of preferred stock, among others.
The Old Notes are fully and unconditionally guaranteed on a joint and
several basis by the Subsidiary Guarantors (as defined). At the date of
issuance, guarantees were provided by Elliott, Hudson and ESP (Subsidiary
Guarantors), each a wholly-owned subsidiary of the Company. At June 30, 1998,
KCI has no assets or operations other than its membership interests in KCLLC and
Finance Corp. has no assets or operations. Accordingly, the consolidated
financial statements present the combined assets and operations of KCLLC and the
Subsidiary Guarantors.
6. EARNINGS PER SHARE
Earnings per share (EPS) is computed based on the weighted average number
of common shares outstanding during the period in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share. The number of shares
outstanding for the six months ended June 30, 1997 have been restated to give
retroactive effect to the change in corporate structure discussed in Note 1.
Shares used in the calculation of basic and diluted EPS were:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1998 1997
---- ----
<S> <C> <C>
Shares used in the calculation of basic EPS (weighted
average shares outstanding)............................. 101 100
Effect of dilutive potential securities (weighted average
shares issuable upon conversion of warrants)............ 11 4
---- ----
Shares used in the calculation of diluted EPS............. 112 104
==== ====
</TABLE>
F-20
<PAGE> 140
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders,
B.W. Elliott Manufacturing Co., Inc.
We have audited the accompanying balance sheets of B.W. Elliott
Manufacturing Co., Inc. as of December 31, 1995, and the related statements of
income and retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the accompanying financial statements present fairly after
the restatement referred to in Note 8, in all material respects, the financial
position of B.W. Elliott Manufacturing Co., Inc. as of December 31, 1995 and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information is
presented for the purposes of additional analysis and is not a required part of
the basic financial statements. Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statements, and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
Fulgieri & Randall, LLP
Binghamton, New York
February 9, 1996, except for
Note 8 and Note 4, which are as of
February 21, 1997
F-21
<PAGE> 141
B. W. ELLIOTT MANUFACTURING CO., INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash...................................................... $ 820,552
Accounts receivable....................................... 1,762,774
Inventory................................................. 3,330,511
Prepaid expenses.......................................... 209,928
Prepaid income taxes...................................... 187,744
Deferred income taxes..................................... 12,155
-----------
Total Current Assets.............................. 6,323,664
-----------
Property and Equipment -- Net............................... 3,351,159
-----------
Other Assets
Deposits with vendors..................................... 8,210
Unamortized intangibles................................... 1,026,362
-----------
Total Other Assets................................ 1,034,572
-----------
Total Assets...................................... $10,709,395
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable -- current.................................. $ 1,113,496
Accounts payable.......................................... 318,617
Payroll taxes payable..................................... 12,073
Accrued expenses.......................................... 141,242
-----------
Total Current Liabilities......................... 1,585,428
Other Liabilities
Notes payable -- long-term................................ 2,494,319
Deferred income taxes payable............................. 146,207
-----------
Total Liabilities................................. 4,225,954
-----------
Shareholders' Equity
Capital stock............................................. 1,066,500
Paid in capital........................................... 13,000
Retained earnings......................................... 6,822,436
-----------
7,901,936
Less treasury stock....................................... (1,418,495)
-----------
Total Shareholders' Equity........................ 6,483,441
-----------
Total Liabilities and Shareholders' Equity........ $10,709,395
===========
</TABLE>
See notes to financial statements and accountant's report.
F-22
<PAGE> 142
B.W. ELLIOTT MANUFACTURING CO., INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Net Sales................................................... $13,184,944
Cost of Goods Sold.......................................... 7,355,650
-----------
Gross Profit................................................ 5,829,294
Selling, General and Administrative Expenses................ 3,457,350
-----------
Income from Operations...................................... 2,371,944
-----------
Other Income (Expense)
Other income.............................................. 25,830
Interest expense.......................................... (426,550)
-----------
Total Other Income (Expense)................................ (400,720)
-----------
Income before Income Taxes.................................. 1,971,224
-----------
Provision for Income Taxes
Current................................................... 751,256
Deferred.................................................. (27,547)
-----------
Total Income Taxes.......................................... 723,709
-----------
Net Income................................................ 1,247,515
-----------
Retained Earnings, beginning of year
As reported............................................... 5,680,759
Adjustments............................................... (105,838)
-----------
As restated............................................... 5,574,921
-----------
Retained Earnings, end of year.............................. $ 6,822,436
===========
</TABLE>
See notes to financial statements and accountant's report.
F-23
<PAGE> 143
B.W. ELLIOTT MANUFACTURING CO., INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Cash Flows from Operating Activities
Net income................................................ $ 1,247,515
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and amortization.......................... 713,147
Deferred income taxes.................................. (27,547)
Loss on sale of assets................................. 7,471
(Increase) decrease in assets
Accounts receivable.................................. 380,447
Inventory............................................ 475,178
Prepaid expenses..................................... (57,207)
Prepaid income taxes................................. (87,668)
Other assets......................................... 7,015
Increase (decrease) in liabilities
Accounts payable..................................... (250,047)
Payroll taxes payable................................ (2,671)
Accrued expenses..................................... (304,961)
-----------
Net Cash Flows from Operating Activities.......... 2,100,672
-----------
Cash Flows from Investing Activities
Purchase of assets........................................ (345,135)
Proceeds from sale of equipment........................... 16,570
-----------
Net Cash Flows from Investing Activities.......... (328,565)
-----------
Cash Flows from Financing Activities
Repayment of notes payable................................ (1,396,704)
-----------
Net Cash Flows from Financing Activities.......... (1,396,704)
-----------
Net Increase in Cash........................................ 375,403
Cash, Beginning of Year..................................... 445,149
-----------
Cash, End of Year........................................... $ 820,552
===========
Supplemental Disclosure
Cash paid during the year for:
Interest............................................... $ 429,749
===========
Income taxes........................................... $ 842,358
===========
</TABLE>
See notes to financial statements and accountant's report.
F-24
<PAGE> 144
B.W. ELLIOTT MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 NATURE OF OPERATIONS
The Company primarily manufactures flexible shafting and remote valve
control components used for power-transmission applications. Of these product
lines, the sales volume of flexible shafting is much larger than that of remote
valve control components. The principal markets for flexible shafting are the
lawn and garden, construction equipment and defense industries and general
industrial users. Remote valve control components are sold primarily to
commercial and military shipbuilders and to the nuclear industry. Although the
majority of sales are to domestic markets, overseas sales are increasing.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING METHOD -- The Company uses the accrual basis method for both
financial reporting and tax purposes. Revenue is recorded when earned and
expenses are recorded when incurred.
CASH AND CASH EQUIVALENTS -- For the purposes of the statement of cash
flows, cash and cash equivalents are defined as demand deposits at banks and
cash on hand.
ACCOUNTS RECEIVABLE -- The Company uses the allowance method to provide for
uncollectible accounts. The allowance is two percent of the accounts receivable
balance as follows:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Accounts receivable......................................... $1,798,749
Allowance for bad debts..................................... 35,975
----------
Accounts Receivable -- Net................................ $1,762,774
==========
</TABLE>
INVENTORY -- Inventory is stated at the lower of cost or market, on a
first-in, first-out basis under the full absorption method. The components of
inventory are as follows:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Raw materials............................................... $1,178,313
Work in process............................................. 1,159,671
Finished goods.............................................. 992,527
----------
Total Inventory........................................... $3,330,511
==========
</TABLE>
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost and
consist of the following:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Land, building and improvements............................. $ 420,005
Equipment, furniture and fixtures........................... 5,596,240
Leasehold improvements...................................... 223,152
Construction in progress.................................... 28,921
----------
6,268,318
Less accumulated depreciation............................... 2,917,159
----------
Total Property and Equipment.............................. $3,351,159
==========
</TABLE>
F-25
<PAGE> 145
B.W. ELLIOTT MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is computed as follows:
<TABLE>
<CAPTION>
YEARS OF
ASSET METHOD(S) USEFUL LIFE
----- --------- -----------
<S> <C> <C>
Building and Improvements.................... Straight-line 31.5 and 39
Office Equipment, Furniture and Fixtures..... Straight-line 5-10
Machinery and Equipment...................... Straight-line and Double 3-10
Declining Balance
Vehicles..................................... Straight-Line and Double 3-5
Declining Balance
Leasehold Improvements....................... Straight-line 10
</TABLE>
The depreciation expense amounted to $462,173 in 1995.
DEFERRED INCOME TAXES -- Statement of Financial Accounting Standards (SFAS)
109, Accounting for Income Taxes, requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities. The temporary differences relate
primarily to the use of, for tax purposes, an accelerated cost recovery system
of depreciation, additional amortization, inventoried Section 263A costs, and
direct write-off of bad debts.
INTANGIBLES -- Intangibles consist primarily of costs associated with a
brand name licensing agreement the Company entered into in 1993 in connection
with its acquisition of certain assets of Stow Manufacturing Co. Under the
agreement, the Company is permitted to use any and all Stow brand names and
trademarks related to the acquired assets. The cost of agreement is being
amortized on a straight-line basis over seven years, the life of the agreement.
Amortization expense amounts to $250,974.
INCOME TAX CREDITS -- Tax credits reduce the provision for taxes in the
year in which they are recognized under the flow-through method.
The Company has earned and used New York State tax credits during the
period as follows:
<TABLE>
<CAPTION>
1995
--------------------------------
FEDERAL NEW YORK TOTAL
-------- -------- --------
<S> <C> <C> <C>
Current Tax Provision before Credits............... $669,658 $190,250 $859,908
Credit Used to Reduce Tax Provision................ -- 108,652 108,652
-------- -------- --------
Current Tax Provision.............................. $669,658 $ 81,598 $751,256
======== ======== ========
</TABLE>
The Company earned New York State investment tax credits of $60,779 and New
York State economic development zone investment tax credits of $23,108 in 1995
and had $75,223 in carryover credits from 1994 for a total of $159,110. The tax
provision was reduced by $108,652 resulting in a carryover of $50,458. Of this
carryover, $19,677 will expire in 2005 and the balance of $30,781 will be
carried forward indefinitely.
CONCENTRATION OF CREDIT RISK -- Demand deposits held by one banking
institution are in excess of federally insured limits. A potential credit risk
exists for the amount in excess of $100,000.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial
F-26
<PAGE> 146
B.W. ELLIOTT MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
MAJOR CUSTOMERS AND SUPPLIERS -- Approximately 56% of the Company's income
from operations resulted from sales to twenty customers. Approximately 65% of
direct material purchases were from ten suppliers. The Company does not expect
any adverse changes in these business relationships.
NOTE 3 RELATED PARTY TRANSACTIONS
On January 1, 1986, the Company entered into a long-tern lease with Empire
Realty Company (owned by Michael Urda, an employee and prior shareholder, and
George Scherer, a shareholder) for general and manufacturing facility located at
35 Milford Street, Binghamton, New York. The terms of the lease provide for
annual increases of 5%. The lease expires December 31, 2008. Rental payments
amount to $118,580 in 1995.
The Company pays management fees in the amount of $259,992 to Millbrook
Management, Inc. (formerly Dyson Sinclair Associates, Inc.), a related party to
Whitehall -- Dyson Company, LLC (formerly Whitehall -- Dyson Partners, L.P.),
which is the majority shareholder.
NOTE 4 NOTES PAYABLE
The Company is liable at December 31, 1995 for the following notes payable:
<TABLE>
<S> <C>
BANK NOTES
BSB BANK & TRUST (FORMERLY BINGHAMTON SAVINGS BANK)
Note Payable -- Term Note. On March 17, 1993, the Company
borrowed $2,100,000 for the asset-based purchase of certain
divisions of Stow Manufacturing Co. The monthly payment is
$29,167 plus interest at a rate of prime plus .75% (9.25%)
for six years. The note is scheduled to mature in March
1999. ...................................................... $1,137,500
Note Payable -- Term Note. On March 17, 1993, the Company
borrowed $1,550,000 to refinance all outstanding debt with
Chemical Bank. The monthly payment is $25,833 plus interest
at a rate of prime plus .75% (9.25%) for five years. The
note is scheduled to mature in March 1998. ................. 697,500
RELATED PARTY NOTE
WHITEHALL-DYSON COMPANY, LLC
Note Payable -- Term Note. On April 1, 1992, the company
borrowed $1,430,000 for the purchase of treasury stock. On
March 17, 1993, the Company borrowed an additional $250,000
related to the asset-based purchase of certain divisions of
Stow Manufacturing Co. On October 20, 1994, an additional
$125,000 was borrowed. The monthly payment is $17,024 plus
interest at a rate of prime plus 5.00% (13.50%) for seven
years. The note is scheduled to mature in November 1998. ... 580,477
OTHER NOTE
TAMREN TOOL, INC.
Note Payable -- Term Note. On November 1, 1989, the Company
financed $160,000 of it asset-based purchase of Tamren Tool,
Inc. The monthly payment is $1,667 plus interest at a rate
of prime plus 1% (9.50%) for eight years. The note is
scheduled to mature in November 1997. ...................... 36,664
</TABLE>
F-27
<PAGE> 147
B.W. ELLIOTT MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
STOW MANUFACTURING COMPANY
Installment obligation discounted at 7.85% quarterly
payments of $87,500 including principle and interest through
December 1997. ............................................. 1,155,674
----------
3,607,815
Less Current................................................ 1,113,496
----------
Long-term................................................... $2,493,319
==========
</TABLE>
Based on current interest rates, scheduled maturities for the above notes
are as follows:
<TABLE>
<CAPTION>
PRINCIPAL
----------
<S> <C>
1996............................................. $1,113,496
1997............................................. 1,165,874
1998............................................. 907,592
1999............................................. 420,853
----------
$3,607,815
==========
</TABLE>
Interest expense amounted to $316,152 in 1995
The Company has pledged to BSB Bank & Trust all of its tangible and
intangible property as a security interest for all debt to BSB Bank & Trust,
along with life insurance on George Scherer. Also John Dyson is a limited
guarantor to BSB Bank & Trust.
The BSB Bank & Trust debt contains covenants, certain of which require the
maintenance of working capital, net worth, debt service coverage levels and
restricts asset purchases. The Company complied with all covenants except
capital expenditures, which exceeded the $300,000 limitation, for the period
ended December 31, 1995. Management received a waiver of the capital expenditure
covenant.
NOTE 5 RETIREMENT PLAN
The Company contributes to a deferred compensation plan. The contribution
is equal to 1/2% of the annual compensation to all full time employee with more
than one year of service who have chosen to be covered by the plan. An
additional contribution of up to 1% may be made at the discretion of the
Company's management. Vesting is full and immediate. The Company's contribution
is invested at the employee's discretion. Any contribution made by the employees
are also invested at their discretion. The Company's plan expense amounts to
$48,588.
The Company has established a deferred compensation plan for certain key
employees in which benefits began to accrue in 1995.
NOTE 6 LEASE COMMITMENTS
The Company leases a manufacturing facility located at 57 Front Street,
Binghamton, New York from Colonial Plaza Associates (formerly Route 12A
Associates). The lease is classified as an operating lease and provides for
monthly rental payments of $7,592 plus certain expenses including real estate
taxes, utilities, and insurance. Rental payments amount to $90,432.
The Company entered into a three-year lease for manufacturing space located
on Brandywine Highway, Binghamton, New York from Stow Manufacturing Co. The
lease is classified as an operating lease and provides for monthly rental
payments of $9,740, plus certain expenses including a portion of special
assessments, utilities, maintenance, and insurance. Rental payments amount to
$107,140.
F-28
<PAGE> 148
B.W. ELLIOTT MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of the future minimum lease payments required
under all operating real estate leases (includes related party lease):
<TABLE>
<S> <C>
1996............................................. $ 245,518
1997............................................. 223,900
1998............................................. 232,284
1999............................................. 240,116
2000............................................. 199,689
----------
Total.................................. $1,141,507
==========
</TABLE>
NOTE 7 SHAREHOLDERS' EQUITY
The Company's capital stock consists of 3,000 authorized shares of which
500 shares are $100 par value, 5% cumulative preferred stock, and the remaining
2,500 shares are common stock, without par value. At December 31, 1995, 815
shares of common stock are issued and 512.54 are outstanding.
The Company's treasury stock consists of 302.46 shares, redeemed at cost,
133 shares on December 19, 1986 and 169.46 shares (net) on April 1, 1992. The
later transaction provided an excess of $13,000, which is recorded as pain in
capital.
NOTE 8 RESTATEMENT OF FINANCIAL STATEMENTS
The Company has restated its financial statements for the year ended
December 31, 1995. This restatement is a result of a determination by the
Company that its method of accounting for cost associated with a brand name
licensing agreement the Company entered into in 1993 in connection with its
acquisition of certain assets of Stow Manufacturing Company (Stow) was
incorrect. Under the agreement, the Company is permitted to use any and all of
Stow's brand names and trademarks related to the acquired assets for a period of
seven years in exchange for specified quarterly payments through December 1999,
aggregated $2.2 million. The Company had previously recorded expense when each
payment was due.
During 1996, the Company changed its accounting for the agreement,
recording an intangible asset of $1,658,053, net of accumulated amortization of
$661,248 and other adjustments with a net change to retained earnings of
$105,838.
F-29
<PAGE> 149
B.W. ELLIOTT MANUFACTURING CO., INC.
SUPPLEMENTARY INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
SCHEDULES OF NET SALES
Sales....................................................... $13,215,759
Less sales returns and discounts............................ 30,815
-----------
Net Sales................................................. $13,184,944
===========
SCHEDULES OF COST OF GOODS SOLD
Inventory, Beginning of Year
Raw materials............................................. $ 1,443,311
Work in process........................................... 1,227,958
Finished goods............................................ 1,134,420
-----------
Total Beginning Inventory............................ 3,805,689
-----------
Direct Material Purchases, Includes Freight-in of
$101,814.................................................. 2,636,261
Direct Labor................................................ 1,491,572
Indirect Expenses
Indirect labor............................................ 621,320
Group insurance........................................... 423,407
Equipment depreciation.................................... 369,895
Plant, shipping and janitorial supplies................... 273,307
Building -- rent, repairs, and maintenance................ 266,573
Utilities................................................. 229,121
Payroll taxes............................................. 199,561
Equipment -- rent, repairs, and maintenance............... 140,441
Tooling................................................... 108,910
Real estate taxes......................................... 37,445
Indirect materials........................................ 29,482
Outside services.......................................... 29,295
Building depreciation..................................... 18,459
Other expenses............................................ 5,423
-----------
Total Direct and Indirect Expenses................... 6,880,472
-----------
Total Cost of Goods Available for Sale............ 10,686,161
-----------
Less Inventory, End of Year
Raw materials............................................. 1,178,313
Work in process........................................... 1,159,671
Finished goods............................................ 992,527
-----------
Total Ending Inventory............................... 3,330,511
-----------
Total Cost of Goods Sold.......................... $ 7,355,650
===========
</TABLE>
See accountant's report.
F-30
<PAGE> 150
B.W. ELLIOTT MANUFACTURING CO., INC.
SUPPLEMENTARY INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
SCHEDULES OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Officers' and office salaries............................... $1,815,487
Management fees............................................. 409,992
Amortization................................................ 250,974
Payroll taxes............................................... 121,758
General insurance........................................... 93,155
Group insurance and dental plan............................. 86,908
Advertising................................................. 84,004
Occupancy................................................... 80,882
Travel and entertainment.................................... 59,876
Equipment depreciation...................................... 58,787
Office supplies and expense................................. 57,455
Retirement plan............................................. 48,588
Commissions................................................. 46,606
Bad debts................................................... 40,774
Professional fees........................................... 38,701
Outside services............................................ 36,519
Telephone................................................... 34,766
Employee relations and education............................ 33,541
Miscellaneous............................................... 19,695
Equipment -- rent, repair and maintenance................... 15,831
Building depreciation....................................... 15,032
Freight-out................................................. 4,732
Officers' life insurance.................................... 3,287
----------
Total Selling, General and Administrative
Expenses.......................................... $3,457,350
==========
</TABLE>
See accountant's report.
F-31
<PAGE> 151
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Key Components, Inc.
In our opinion, the accompanying balance sheet and the related statements
of income and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Hudson Lock, Inc. (a wholly-owned
subsidiary of Jordan Industries, Inc.) (the Company) at May 15, 1997 and
December 28, 1996, and the results of its operations and its cash flows for the
periods December 29, 1996 through May 15, 1997 and December 31, 1995 through
December 28, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As described in Note 8, on May 15, 1997, all of the outstanding shares of
the Company were acquired by Key Components, Inc.
PRICE WATERHOUSE LLP
Syracuse, New York
February 20, 1998
F-32
<PAGE> 152
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
BALANCE SHEET
<TABLE>
<CAPTION>
MAY 15, 1997 DECEMBER 28, 1996
------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 91 $ 209
Accounts receivable, net of allowance for doubtful
accounts of $23 and $23, respectively.................. 2,230 1,928
Inventories (Notes 1 and 2)............................... 1,589 1,287
Prepaid expenses.......................................... 123 272
------- -------
Total current assets.............................. 4,033 3,696
Property and equipment, less accumulated depreciation
(Notes 1 and 3)........................................ 5,925 5,967
Goodwill, net (Note 1).................................... 3,920 3,965
------- -------
Total assets...................................... $13,878 $13,628
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable.......................................... $ 136 $ 440
Accrued liabilities....................................... 706 355
Due to related party (Note 7)............................. 12,166 13,133
Current portion of obligation under capital leases (Note
4)..................................................... 62 38
Income tax payable........................................ 428 --
------- -------
Total current liabilities......................... 13,498 13,966
Obligation under capital leases (Note 4).................... 245 122
Deferred income taxes (Note 5).............................. 1,725 1,722
------- -------
Total liabilities................................. 15,468 15,810
------- -------
Stockholder's equity (deficit)
Common stock, $1 par value, 10,000 shares authorized;
1,000 shares subscribed................................ 1 1
Retained deficit.......................................... (1,590) (2,182)
Common stock subscriptions receivable..................... (1) (1)
------- -------
Total stockholder's (deficit)..................... (1,590) (2,182)
------- -------
Total liabilities and stockholder's equity........ $13,878 $13,628
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 153
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE PERIOD
--------------------------------------
DECEMBER 29, 1996 DECEMBER 31, 1995
THROUGH THROUGH
MAY 15, 1997 DECEMBER 28, 1996
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Net sales.................................................. $ 6,809 $15,402
Cost of goods sold......................................... 3,877 9,230
------- -------
Gross profit............................................... 2,932 6,172
Selling, general and administrative expenses............... 1,217 2,584
------- -------
Income from operations................................... 1,715 3,588
------- -------
Other expense.............................................. -- 12
Interest expense........................................... 663 2,015
------- -------
663 2,027
------- -------
Income before income taxes................................. 1,052 1,561
------- -------
Provision for income taxes (Notes 1 and 5)
Current.................................................. 457 133
Deferred................................................. 3 531
------- -------
Total income taxes....................................... 460 664
------- -------
Net income............................................... 592 897
Retained deficit:
Beginning of year........................................ (2,182) (3,079)
------- -------
End of year.............................................. $(1,590) $(2,182)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 154
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
--------------------------------------
DECEMBER 29, 1996 DECEMBER 31, 1995
THROUGH THROUGH
MAY 15, 1997 DECEMBER 28, 1996
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 592 $ 897
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 249 819
Loss on disposal of property, plant and equipment..... 64 --
Net increase (decrease) in cash caused by changes in
assets and liabilities:
Accounts receivable................................. (302) 85
Inventories......................................... (302) 151
Prepaid expenses.................................... 149 (125)
Accounts payable.................................... (304) 110
Accrued expenses.................................... 351 (326)
Income tax payable.................................. 428 74
Deferred income taxes............................... 3 446
----- -------
Net cash provided by operating activities........... 928 2,131
----- -------
Cash flows from investing activities:
Acquisition of property, plant and equipment............. (67) (316)
----- -------
Net cash used in investing activities............... (67) (316)
----- -------
Cash flows from financing activities:
Repayment of due to related party........................ (967) (1,699)
Repayment of obligation under capital lease.............. (12) (15)
----- -------
Net cash used by financing activities............... (979) (1,714)
----- -------
Net increase (decrease) in cash and cash equivalents....... (118) 101
Cash and cash equivalents, beginning of year............... 209 108
----- -------
Cash and cash equivalents, end of year..................... $ 91 $ 209
===== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest................... $ 630 $ 2,078
Cash paid during the year for income taxes............... 15 147
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 155
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS
MAY 15, 1997 AND DECEMBER 28, 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Hudson Lock, Inc. (the Company) (a wholly-owned subsidiary of Jordan
Industries, Inc.) manufactures medium-security custom and specialty locks
primarily for original equipment manufacturers (OEM). The majority of the
Company's sales is derived from a small number of significant customers.
REVENUE RECOGNITION
Revenue and related cost of sales are recognized upon shipment of products.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Repairs, maintenance
and tooling cost are expensed in the year incurred. Expenditures which result in
betterments or extensions of the useful lives of assets are capitalized and
depreciated over the remaining lives of such assets. Depreciation expense is
computed using the straight-line method over the estimated useful lives ranging
from four to thirty one and a half years.
GOODWILL
The excess of purchase price over the fair market value of net assets when
the Company was acquired in 1989 by Jordan Industries, Inc. represents goodwill
which is being amortized over forty years using the straight-line method.
Amortization expense for the periods ended May 15, 1997 and December 28, 1996
was $46 and $123, respectively. Accumulated amortization amounted to $900 and
$854 at May 15, 1997 and December 28, 1996, respectively.
INCOME TAXES
The Company joins with Jordan Industries, Inc. in the filing of a
consolidated federal income tax return for the periods reflected in the
financial statements. However, for purposes of computing the tax accounts of the
Company, Statement of Accounting Standards No. 109, Accounting for Income Taxes,
was applied as if the Company were a separate taxpayer.
The income tax provision included in the statement of income is based upon
pre-tax income for financial reporting purposes and includes an appropriate
provision for the effect of temporary differences between the amount of assets
and liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-36
<PAGE> 156
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MAY 15, 1997 DECEMBER 28, 1996
------------ -----------------
<S> <C> <C>
Raw materials.......................................... $ 425 $ 239
Work-in-process........................................ 869 810
Finished goods......................................... 295 238
------ ------
Total........................................ $1,589 $1,287
====== ======
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
MAY 15, 1997 DECEMBER 28, 1996
------------ -----------------
<S> <C> <C>
Land................................................... $ 308 $ 308
Building and improvements.............................. 3,280 3,127
Equipment, furniture and fixtures...................... 5,670 5,789
Office and automotive equipment........................ 442 434
------- -------
9,700 9,658
Less accumulated depreciation.......................... (3,775) (3,691)
------- -------
Total property, plant and equipment.......... $ 5,925 $ 5,967
======= =======
</TABLE>
Depreciation expense was $267 and $696 for the periods ended May 15, 1997
and December 28, 1996, respectively.
4. LEASES
The Company leases certain machinery and equipment with a bargain purchase
option. These are classified as capital leases and expire at various dates
through 2002. The Company also has an operating lease for warehouse space which
expires in 1998. Remaining future minimum payments for noncancellable capital
and operating leases with initial or remaining terms in excess of one year are
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MAY 15, TOTAL OPERATING CAPITAL
------------------ ----- --------- -------
<S> <C> <C> <C>
1998...................................................... $104 $12 $ 92
1999...................................................... 91 -- 91
2000...................................................... 88 -- 88
2001...................................................... 63 -- 63
2002...................................................... 34 -- 34
Thereafter................................................ -- -- --
---- --- ----
Total minimum lease payments.................... $380 $12 368
==== ===
Less: Estimated amount representing interest.............. (61)
----
Present value of net minimum lease payments............... 307
Less: Current portion..................................... (62)
----
Long-term obligation under capital lease at May 15,
1997.................................................... $245
====
</TABLE>
F-37
<PAGE> 157
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
Deferred tax liabilities and (assets) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
MAY 15, 1997 DECEMBER 28, 1996
------------ -----------------
<S> <C> <C>
Accrued bonus.......................................... $ (45) $ --
Accrued vacation....................................... (90) (78)
Net operating loss carryforward........................ -- (66)
Other.................................................. (19) (14)
------ ------
Total deferred tax assets.............................. (154) (158)
------ ------
Depreciation........................................... 1,879 1,880
------ ------
Total deferred tax liabilities......................... 1,879 1,880
------ ------
Net deferred tax liability............................. $1,725 $1,722
====== ======
</TABLE>
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
--------------------------------------
DECEMBER 29, 1996 DECEMBER 31, 1995
THROUGH THROUGH
MAY 15, 1997 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
Federal taxes -- current........................... $336 $ --
State taxes -- current............................. 121 133
Federal taxes -- deferred.......................... 3 451
State taxes -- deferred............................ -- 80
---- ----
$460 $664
==== ====
</TABLE>
6. EMPLOYEE BENEFIT PLAN
Employees who worked at least 1,000 hours during the previous consecutive
twelve-month period and who are 21 years of age are eligible to participate in a
401(k) plan sponsored by Jordan Industries, Inc. Employees can contribute up to
15% of pretax income or the yearly maximum determined by the Internal Revenue
Service. The Company does not contribute to the plan.
7. RELATED PARTY TRANSACTIONS
The Company pays certain fees to Jordan Industries, Inc. principally to
cover general management consulting services performed by Jordan Industries,
Inc. on behalf of the Company.
The Company also has a revolving demand loan payable to Jordan Industries,
Inc. which bears interest at 14.50% per annum. Interest is payable on a
quarterly basis.
The related party account balances with Jordan Industries, Inc. are
summarized below (in thousands):
<TABLE>
<CAPTION>
MAY 15, 1997 DECEMBER 28, 1996
------------ -----------------
<S> <C> <C>
Consulting fee payable................................. $ 92 $ 177
Interest expense payable............................... 512 479
Loan payable........................................... 11,562 12,477
------- -------
$12,166 $13,133
======= =======
</TABLE>
F-38
<PAGE> 158
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Consulting fees and interest expense amounted to $277 and $654,
respectively, for the period ended May 15, 1997, and $706 and $2,001,
respectively, for the period ended December 28, 1996.
8. SUBSEQUENT EVENTS
On May 15, 1997, Key Components, Inc. acquired all of the outstanding
shares of the Company for $34.1 million.
F-39
<PAGE> 159
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Key Components Inc.
In our opinion, the accompanying balance sheet and the related statements
of income and retained earnings and of cash flows present fairly, in all
material respects, the financial position of ESP Lock Products, Inc. at December
10, 1997 and the results of its operations and its cash flows for the period
January 1, 1997 through December 10, 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
As discussed in Note 1, there was a change in ownership of the Company
effective December 10, 1997.
PRICE WATERHOUSE LLP
Syracuse, New York
January 16, 1998
F-40
<PAGE> 160
ESP LOCK PRODUCTS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 10, 1997
-----------------
<S> <C>
ASSETS
Current assets
Cash...................................................... $ 430,282
Accounts receivable, net of allowance for doubtful
accounts of $36,468.................................... 3,539,465
Inventory (Note 2)........................................ 3,904,296
Prepaid expenses.......................................... 96,840
-----------
Total current assets.............................. 7,970,883
Property and equipment, less accumulated depreciation
(Notes 1 and 3)........................................ 2,911,594
Goodwill, net............................................. 2,780,014
Covenant not to compete, net.............................. 518,771
Other intangibles......................................... 38,240
Deferred income taxes (Notes 1 and 4)..................... 30,100
-----------
Total assets...................................... $14,249,602
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank line of credit (Note 5).............................. $ 3,232,485
Notes payable -- current (Note 6)......................... 711,996
Accounts payable.......................................... 1,251,410
Accrued payroll and withholdings.......................... 510,048
Accrued expenses.......................................... 210,648
-----------
Total current liabilities......................... 5,916,587
Notes payable -- long term (Note 6)......................... 4,250,346
-----------
Total liabilities................................. 10,166,933
-----------
Stockholders' equity
Common stock, $.01 par value, 20,000 shares authorized;
10,000 shares issued and outstanding................... 100
Paid in capital........................................... 1,249,900
Retained earnings......................................... 2,832,669
-----------
Total stockholders' equity........................ 4,082,669
-----------
Total liabilities and stockholders' equity........ $14,249,602
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 161
ESP LOCK PRODUCTS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1997
THROUGH
DECEMBER 10, 1997
-----------------
<S> <C>
Net sales................................................... $23,259,783
Cost of goods sold.......................................... 17,299,297
-----------
Gross profit................................................ 5,960,486
Selling, general and administrative expenses................ 3,557,553
-----------
Income from operations................................. 2,402,933
-----------
Other income (expense):
Other income.............................................. 51,492
Interest expense.......................................... (614,612)
-----------
(563,120)
-----------
Income before income taxes.................................. 1,839,813
-----------
Provision for income taxes (Notes 1 and 4):
Current................................................... 891,700
Deferred.................................................. (119,100)
-----------
Total income taxes..................................... 772,600
-----------
Net income............................................. 1,067,213
Retained earnings:
Beginning of year......................................... 1,765,456
-----------
End of year............................................... $ 2,832,669
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 162
ESP LOCK PRODUCTS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1997
THROUGH
DECEMBER 10, 1997
-----------------
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 1,067,213
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,586,900
Deferred income taxes.................................. (119,100)
Net increase (decrease) in cash caused by changes in
assets and liabilities:
Accounts receivable.................................. (737,504)
Inventory............................................ (644,826)
Prepaid expenses..................................... 18,853
Accounts payable..................................... (43,327)
Accrued payroll...................................... 186,349
Accrued expenses..................................... 22,326
-----------
Net cash provided by operating activities............ 1,336,884
-----------
Cash flows from investing activities:
Acquisition of property, plant and equipment.............. (1,022,829)
Business acquisition, net of cash acquired................ (2,959,834)
Other..................................................... (35,620)
-----------
Net cash used in investing activities................ (4,018,283)
-----------
Cash flows from financing activities:
Proceeds from notes....................................... 5,000,000
Repayment of notes payable................................ (2,449,525)
Net borrowings (repayments) on line of credit............. 552,706
-----------
Net cash provided by financing activities............ 3,103,181
-----------
Net increase in cash and cash equivalents................... 421,782
Cash and cash equivalents, beginning of year................ 8,500
-----------
Cash and cash equivalents, end of year...................... $ 430,282
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 608,851
Cash paid during the year for income taxes................ 936,321
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 163
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 10, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
ESP Lock Products, Inc. (the Company) primarily manufactures
medium-security custom and specialty locks and key blanks. The sales volume of
the lock products is substantially larger than that of key blanks and other
products. The custom and specialty lock product line is manufactured primarily
for original equipment manufacturers (OEM) throughout the U.S. and Canada. The
key blanks product line is marketed mainly to distributors.
BASIS OF ACCOUNTING
On December 10, 1997, the shareholders of the Company sold their shares of
common stock to Key Components, Inc. These financial statements are presented on
the Company's historic basis of accounting and do not give effect to the change
in ownership.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, on a first-in,
first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over useful lives ranging from five to twenty years.
Expenditures for repairs and maintenance are charged to expense as incurred.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resultant gain or
loss is recognized.
INCOME TAXES
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Deferred income taxes are recorded to reflect the tax consequences
on future years of temporary differences between the tax basis of assets and
liabilities and their financial reporting amount at each year end.
GOODWILL
The excess of purchase price over the fair market value of net assets when
the Company was acquired in 1993 and when the Company acquired RAD Lock, Inc. in
1997 represents goodwill which is being amortized using the straight-line method
over periods ranging from fifteen to twenty years. Amortization expense for the
period was $116,230 and accumulated amortization amounted to $333,466 at
December 10, 1997.
F-44
<PAGE> 164
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COVENANT NOT TO COMPETE
The cost of the covenant agreement is being amortized using the
straight-line method over the five-year term of the agreement. Amortization
expense for the period was $592,229 and accumulated amortization amounted to
$2,742,229 at December 10, 1997.
DEFERRED FINANCING COSTS
During the period, $286,554 in deferred financing costs were written off
when the related debt was refinanced. Additionally, amortization expense for the
period was $56,537.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
This risk is limited due to the large number of customers comprising the
Company's customer base and their dispersion across different business and
geographic regions. The Company has insurance for certain larger customer
balances.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
Raw materials............................................... $1,419,790
Work-in-process............................................. 1,650,090
Finished goods.............................................. 834,416
----------
Total....................................................... $3,904,296
==========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<S> <C>
Land........................................................ $ 60,000
Equipment, furniture and fixtures........................... 6,938,302
Leasehold improvements...................................... 771,948
----------
7,770,250
Less accumulated depreciation............................... (4,858,656)
----------
Total property, plant and equipment......................... $2,911,594
==========
</TABLE>
Depreciation expense amounted to $540,568 for the period.
4. FEDERAL AND STATE INCOME TAXES
Income tax expense for the period ended consists of the following:
<TABLE>
<S> <C>
Federal..................................................... $572,200
State....................................................... 200,400
--------
Total income tax expense.................................... $772,600
========
</TABLE>
The gross income tax assets recognized at December 10, 1997 were $387,000.
Gross deferred income tax liabilities recognized at December 10, 1997 were
$312,000. The gross deferred income tax assets are primarily the result of
temporary differences relating to inventory, allowance for doubtful accounts,
accrued lease costs and amortization of intangible assets. The gross deferred
income tax liabilities are primarily the result of
F-45
<PAGE> 165
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
temporary difference related to fixed assets. These amounts have been netted and
aggregated by current and non-current components for financial statement
presentation.
5. BANK LINE-OF-CREDIT
The Company has a $4,500,000 bank line of credit which is collateralized by
all assets and expires on May 31, 1998. Credit available under the line is based
on a percentage of eligible accounts receivable and inventory. Interest is at
the bank's prime rate plus .5% (9.00% at December 10, 1997). Availability at
December 10, 1997 totaled $3,701,548 of which $3,232,485 was outstanding.
This debt was refinanced after the change in ownership discussed in Note 1.
6. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<S> <C>
Bank note at 9.25%, monthly principal instalments of
$52,083, collateralized by machinery and equipment,
payable through May 2003.................................. $4,740,280
Obligation under covenant not to compete agreement,
discounted at 9.25%, monthly principal instalments of
$7,250 payable through June 2000.......................... 222,062
Current portion............................................. (711,996)
----------
Total long-term............................................. $4,250,346
==========
</TABLE>
The bank note was refinanced after the change in ownership discussed in
Note 1.
Aggregate principal payments required on all amounts due after one year,
before giving effect to the refinancing, are as follows:
<TABLE>
YEAR AMOUNT
- ------------------------------------------------- ----------
<S> <C>
1999............................................. $ 711,996
2000............................................. 673,058
2001............................................. 624,996
2002............................................. 624,996
Thereafter....................................... 1,615,300
----------
$4,250,346
==========
</TABLE>
7. COMMITMENTS
OPERATING LEASE
The Company rents a facility under an operating lease which expires in May
2003. The lease requires annual rental payments of $225,000.
8. EMPLOYEE BENEFIT PLAN
Employees who are 21 years of age and have completed at least one year of
service are eligible to participate in a 401(k) and profit sharing plan
sponsored by the Company. Employees may elect to contribute up to 15% of pre-tax
income or the yearly maximum determined by the Internal Revenue Service. The
Company may make matching and/or profit sharing contributions at the discretion
of the Board of Directors. Company contributions were $57,353 for the period.
F-46
<PAGE> 166
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. BUSINESS ACQUISITION
On June 24, 1997, the Company acquired the assets and certain obligations
of RAD Lock, Inc. The acquisition was accounted for as a purchase. Accordingly,
the aggregate purchase price of $2,959,997 was assigned to the fair value of
assets acquired and liabilities assumed, and the excess of $1,901,000 was
recorded as goodwill. The operating results of RAD Lock have been included in
the Company's results from the acquisition date.
10. CONTINGENCIES
In the normal course of business, the Company is subject to lawsuits and
claims. It is the Company's practice to accrue for any probable losses. At
December 10, 1997, there were no such losses which management considers probable
or reasonably possible.
F-47
<PAGE> 167
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders and Directors
ESP Lock Products, Inc.
We have audited the accompanying balance sheets of ESP Lock Products, Inc.
as of December 31, 1996 and 1995, and the related statements of income and
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ESP Lock Products, Inc. as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Gardner, Massachusetts
February 7, 1997
F-48
<PAGE> 168
ESP LOCK PRODUCTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---------- -----------
<S> <C> <C>
ASSETS (Notes 3 and 6)
Current:
Cash and cash equivalents................................. $ 8,500 $ 37,308
Accounts receivable, less allowance for doubtful accounts
of $20,000 in 1996..................................... 2,398,430 2,759,974
Inventories (Note 1)...................................... 3,013,158 2,770,754
Prepaid expenses and other................................ 107,537 91,764
---------- -----------
Total current assets................................... 5,527,625 5,659,800
---------- -----------
Property and equipment, less accumulated depreciation and
amortization (Note 2)..................................... 1,826,300 1,856,515
---------- -----------
Other:
Noncompetition agreement.................................. 3,000,000 3,000,000
Goodwill.................................................. 1,212,480 1,212,480
Deferred debt expenses.................................... 668,589 668,589
Organization expenses..................................... 49,918 49,918
---------- -----------
4,930,987 4,930,987
Less accumulated amortization.......................... 2,745,252 1,979,136
---------- -----------
Net other assets....................................... 2,185,735 2,951,851
---------- -----------
Total assets........................................... $9,539,660 $10,468,166
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 3)................................... $2,679,779 $ 2,659,751
Checks issued against future deposits..................... 378,560 701,058
Accounts payable.......................................... 847,284 801,405
Accrued liabilities (Note 4).............................. 417,602 346,868
Current maturities of long-term bank debt (Note 5)........ 43,752 43,752
Current maturities of subordinated notes payable (Note
6)..................................................... 100,000 150,000
---------- -----------
Total current liabilities.............................. 4,466,977 4,702,834
Long-term subordinated notes payable, less current
maturities (Note 6)....................................... 1,950,000 3,250,000
Long-term bank debt, less current maturities (Note 5)....... 18,227 65,623
Deferred income taxes (Note 7).............................. 89,000 64,000
---------- -----------
Total liabilities...................................... 6,524,204 8,082,457
---------- -----------
Commitments (Note 8)
Stockholders' equity:
Common stock, voting, $.01 par value, 20,000 shares
authorized 10,000 shares issued and outstanding........ 100 100
Additional paid-in capital................................ 1,249,900 1,249,900
Retained earnings......................................... 1,765,456 1,135,709
---------- -----------
Total stockholders' equity............................. 3,015,456 2,385,709
---------- -----------
Total liabilities and stockholders' equity............. $9,539,660 $10,468,166
========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-49
<PAGE> 169
ESP LOCK PRODUCTS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net sales................................................... $21,264,792 $20,287,940
Cost of sales............................................... 16,472,606 15,488,892
----------- -----------
Gross profit................................................ 4,792,186 4,799,048
Operating expenses.......................................... 3,004,550 2,839,485
----------- -----------
Operating income............................................ 1,787,636 1,959,563
Other income (expense):
Interest.................................................. (701,593) (1,015,287)
Miscellaneous............................................. 34,704 (11,053)
----------- -----------
Total other expense............................... (666,889) (1,026,340)
----------- -----------
Income before taxes on income............................... 1,120,747 933,223
Taxes on income (Note 7).................................... 491,000 421,000
----------- -----------
Net income.................................................. 629,747 512,223
Retained earnings, beginning of year........................ 1,135,709 623,486
----------- -----------
Retained earnings, end of year.............................. $ 1,765,456 $ 1,135,709
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-50
<PAGE> 170
ESP LOCK PRODUCTS, INC.
STATEMENTS OF CASH FLOWS (NOTE 9)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 629,747 $ 512,223
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 371,636 331,555
Amortization........................................... 766,116 766,116
Deferred income taxes.................................. 25,000 34,000
Changes in operating assets and liabilities:
Accounts receivable.................................. 361,544 (401,569)
Inventories.......................................... (242,404) 41,191
Prepaid expenses and other........................... (15,773) 7,859
Refundable income taxes.............................. -- 11,000
Checks issued against future deposits................ (322,498) 289,108
Accounts payable and accrued expenses................ 116,613 43,653
----------- -----------
Net cash provided by operating activities......... 1,689,981 1,635,136
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions.......................... (341,421) (538,631)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings(repayments) on line of credit.............. 20,028 (404)
Payments on notes payable................................. (47,396) (43,750)
Payments of subordinated notes payable.................... (1,350,000) (1,100,000)
----------- -----------
Net cash used by financing activities............. (1,377,368) (1,144,154)
----------- -----------
Net decrease in cash and cash equivalents................... (28,808) (47,649)
Cash and cash equivalents, beginning of year................ 37,308 84,957
----------- -----------
Cash and cash equivalents, end of year...................... $ 8,500 $ 37,308
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-51
<PAGE> 171
ESP LOCK PRODUCTS, INC.
SUMMARY OF ACCOUNTING POLICIES
Operations................. ESP Lock Products, Inc. (the "Company") is a
manufacturer of locks and key blanks which are
marketed throughout the United States.
Cash Equivalents........... For purposes of the statement of cash flows, the
Company considers all highly liquid debt
instruments purchased with a maturity of three
months or less to be cash equivalents.
Inventories................ Inventories are valued at the lower of cost
(first-in, first-out) or market.
Property, Equipment and
Depreciation............. Property and equipment are stated at cost.
Depreciation is computed over the estimated useful
lives of the related assets using both straight-
line and accelerated methods. The estimated useful
lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Machinery and equipment................................ 5-10
Furniture and fixtures................................. 5-10
Leasehold improvements................................. 5-20
</TABLE>
Income Taxes............... Deferred income taxes are recognized for the tax
consequences of temporary differences between the
financial reporting bases and the tax bases of the
Company's assets and liabilities. Valuation
allowances are established when necessary to reduce
deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable for
the period and the change during the period in
deferred tax assets and liabilities.
Concentration of Credit
Risk....................... Concentration of credit risk consists principally
of trade receivables. This risk is limited due to
the large number of customers comprising the
Company's customer base and their dispersion across
different business and geographic regions. Ongoing
credit reviews of customers' financial condition
are performed, and collateral is not required. The
Company also has insurance against certain larger
customer balances.
Estimates and
Assumptions................ The preparation of financial statements in
conformity with generally accepted accounting
principles requires Company management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of
the financial statements and the reported amounts
of revenues and expenses during the reporting
period. Actual results could differ from those
estimates and assumptions.
Noncompetition Agreement... The cost of the noncompetition agreement is being
amortized on a straight-line basis over the five
year term of the agreement.
Goodwill................... Goodwill, representing the excess of the purchase
price over the fair value of net assets acquired is
being amortized on a straight-line basis over the
period of expected benefit of twenty years.
Deferred Debt Expenses..... Costs incurred in connection with obtaining
financing have been capitalized and are being
amortized over the seven year term of the financing
arrangement.
Organization Expenses...... Certain costs in connection with the organization
of the Company have been capitalized and are being
amortized over five years.
F-52
<PAGE> 172
Long-Lived Assets.......... The Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" during
the year ended December 31, 1996. SFAS 121
establishes accounting standards for the impairment
of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to
be held and used for long-lived assets and certain
identifiable intangibles to be disposed of.
The Company reviews the carrying values of its
long-lived and identifiable intangible assets for
possible impairment whenever events or changes in
circumstances indicate that the carrying amount of
the assets may not be recoverable. Any long-lived
assets held for disposal are reported at the lower
of their carrying amounts or fair value less cost
to sell.
Reclassifications.......... Prior year amounts have been reclassified to
reflect 1996 changes in reporting classifications.
F-53
<PAGE> 173
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Finished goods...................................... $ 777,397 $ 703,309
Work-in-process..................................... 1,254,636 1,227,940
Raw materials....................................... 981,125 839,505
---------- ----------
Total..................................... $3,013,158 $2,770,754
========== ==========
</TABLE>
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Land................................................ $ 60,000 $ 60,000
Machinery and equipment............................. 5,074,005 4,832,551
Furniture and fixtures.............................. 187,204 162,273
Leasehold improvements.............................. 751,038 748,143
Machinery and equipment deposits.................... 72,141 --
---------- ----------
Total............................................... 6,144,388 5,802,967
Less accumulated depreciation and amortization...... 4,318,088 3,946,452
---------- ----------
Net property and equipment.......................... $1,826,300 $1,856,515
========== ==========
</TABLE>
3. LINE-OF-CREDIT
The Company has a $3,400,000 bank line of credit which is collateralized by
all assets and expires on May 31, 1997. The credit line is advanced based on 80%
of qualified accounts receivable, 50% of raw materials inventory, eligible
finished goods and work-in-process inventories not to exceed $1,200,000, plus
$550,000 advanced against the machinery and equipment. The $550,000 declines by
$110,000 per year. Interest is at the bank's prime rate plus 1.25% (9.25% at
December 31, 1996). The line of credit contains covenants relating to
profitability, minimum equity, liquidity, leverage and restricts capital
expenditures in excess of $150,000. The Company was not in compliance with the
capital expenditures covenant. Noncompliance has been waived by the bank.
Outstanding borrowings amounted to $2,679,779 and $2,659,751 at December 31,
1996 and 1995, respectively.
4. ACCRUED LIABILITIES
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Payroll and payroll taxes.............................. $290,610 $229,153
Income taxes........................................... 88,795 77,722
Other.................................................. 38,197 39,993
-------- --------
$417,602 $346,868
======== ========
</TABLE>
F-54
<PAGE> 174
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM BANK DEBT
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Note payable in monthly installments of $3,646 plus
interest at the bank's prime rate plus 1.25% (9.25% at
December 31, 1996) through June, 1998. Collateralized
by machinery and equipment. .......................... $61,979 $109,375
Less current maturities................................. 43,752 43,752
------- --------
Long-term portion....................................... $18,227 $ 65,623
======= ========
</TABLE>
Maturities of long-term bank debt are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C> <C>
1997............................................ $43,752
1998............................................ 18,227
-------
$61,979
=======
</TABLE>
6. SUBORDINATED NOTES PAYABLE
In connection with the acquisition of ESP Lock Corporation common stock,
the Company issued notes payable as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
$5,000,000 senior subordinated note payable to
Churchill Capital Limited Partners II with
interest at 21%, principal payments of $150,000
due quarterly beginning in August, 1995 through
May, 2000, reduced by prepayments of $3,100,000.
Collateralized by a second security position in
all assets. ...................................... $1,000,000 $2,200,000
$1,200,000 junior subordinated notes payable to
Massachusetts Colony Corporation with interest at
the prime rate plus 1.0% (9.75% at December 31,
1996) through May, 1988 and prime plus 2%
thereafter, due in quarterly installments of
$25,000 through June, 1998 and $37,500 beginning
September, 1998 through March, 2001. Balance of
$487,500 due June 1, 2001. Collateralized by third
security position in all assets. ................. 1,050,000 1,200,000
---------- ----------
Total............................................... 2,050,000 3,400,000
Less current maturities............................. 100,000 150,000
---------- ----------
Long-term subordinated notes payable................ $1,950,000 $3,250,000
========== ==========
</TABLE>
The notes are subordinated to bank indebtedness and contain financial
covenants which the Company must maintain relating to profitability, equity
liquidity, leverage, and restricts capital expenditures in excess of $300,000.
The Company was not in compliance with the capital expenditures covenant.
Noncompliance has been waived by the lenders.
The amounts of subordinated debt maturing in each of the next five years
have been reduced by $3,100,000 of prepayments on the senior subordinated note,
and are as follows: 1997, $100,000; 1998, $125,000; 1999, $150,000; 2000,
$1,150,000; and 2001 $525,000.
F-55
<PAGE> 175
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. TAXES ON INCOME
Taxes on income consist of the following components:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
CURRENT:
Federal.............................................. $346,000 $297,000
State................................................ 120,000 90,000
-------- --------
466,000 387,000
-------- --------
DEFERRED:
Federal.............................................. 19,000 25,500
State................................................ 6,000 8,500
-------- --------
25,000 34,000
-------- --------
Total taxes on income.................................. $491,000 $421,000
======== ========
</TABLE>
The following summary reconciles taxes at the federal statutory tax rate to
the effective rate:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Federal statutory income tax rate........................... 34.0% 34.0%
State income taxes, net of federal income tax benefit....... 7.4 7.0
Other, net.................................................. 2.4 4.1
---- ----
43.8% 45.1%
==== ====
</TABLE>
Deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Assets................................................. $(36,000) $(40,000)
Liabilities............................................ 125,000 104,000
-------- --------
Net deferred tax liability............................. $ 89 000 $ 64 000
======== ========
</TABLE>
Deferred tax liabilities are primarily due to tax depreciation deductions
greater than book depreciation. Deferred tax assets are primarily the result of
the vacation accrual, which is not currently deductible for tax purposes.
8. COMMITMENTS
Retirement Plan
The Company established a 401k and profit sharing plan during 1996 which
replaced a previous profit sharing plan. Employees who have obtained age 21 and
have at least one year of service may elect to contribute up to 15 percent of
their compensation. The Company may make matching and/or profit sharing
contributions at the discretion of the board of directors. Company contributions
were $24,851 in 1996. Company contributions to the previous profit sharing plan
were $50,000 in 1995.
Operating Lease
The Company rents its facility under an operating lease with a company that
is co-owned by an affiliate of an officer and stockholder of the Company. The
lease expires in May, 1998 and has a renewal option for an additional 5 years,
through May, 2003. The lease calls for annual rent of $225,000 paid in equal
monthly installments.
F-56
<PAGE> 176
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental payments required under the operating lease that has
remaining non-cancelable terms in excess of one year, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997......................................... $225,000
1998......................................... 93,750
--------
$318,750
========
</TABLE>
The lease includes a provision for the payment of real estate taxes and
additional expenses, which are not included in the above amounts. Rent expense
was $225,000 in 1996 and 1995.
Employment Agreement
The Company has an employment agreement with a key employee, which expires
in May, 1998. The agreement provides for an annual base salary of $125,000.
9. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid interest of $703,499 in 1996 and $1,016,576 in 1995.
F-57
<PAGE> 177
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Directors
RAD Lock, Inc.
We have audited the accompanying balance sheets of RAD Lock, Inc. (an S
Corporation) as of June 22, 1997 and December 31, 1996, and the related
statements of income and accumulated deficit and cash flows for the period ended
June 22, 1997 and year ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of RAD Lock, Inc. as of June
22, 1997 and December 31, 1996, and the results of its operations and cash flows
for the period ended June 22, 1997 and year ended December 31, 1996 in
conformity with generally accepted accounting principles.
GREENBERG, ROSENBLATT, KULL & BITSOLI, P.C.
Worcester, Massachusetts
July 9, 1997
F-58
<PAGE> 178
RAD LOCK, INC.
BALANCE SHEETS
JUNE 22, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 72,469 $ 64,438
Accounts receivable....................................... 403,898 313,367
Inventories............................................... 246,312 211,170
Prepaid expenses and other................................ 22,456 1,380
----------- -----------
Total current assets................................. 745,135 590,355
----------- -----------
Property and equipment:
Jigs, fixtures and tools.................................. 736,567 705,077
Machinery and equipment................................... 731,918 718,542
Furniture, fixtures and office equipment.................. 116,796 108,636
Motor vehicle............................................. -- 19,148
Leasehold improvements.................................... 55,580 55,580
----------- -----------
1,640,861 1,606,983
Accumulated depreciation.................................. (1,037,827) (961,518)
----------- -----------
Net property and equipment........................... 603,034 645,465
----------- -----------
Total assets...................................... $ 1,348,169 $ 1,235,820
=========== ===========
LIABILITIES AND SHAREHOLDER'S DEFICIENCY
Current liabilities:
Notes payable -- bank..................................... $ 525,771 $ 525,000
Current maturities of capital lease obligations........... 47,394 52,600
Accounts payable.......................................... 125,158 107,296
Accrued liabilities....................................... 427,750 335,242
----------- -----------
Total current liabilities............................ 1,126,073 1,020,138
----------- -----------
Long-term liabilities:
Capital lease obligations................................. 112,165 131,514
Notes payable -- shareholder.............................. 723,000 723,000
----------- -----------
Total long-term liabilities.......................... 835,165 854,514
----------- -----------
Shareholder's deficiency:
Common stock, no par value; 10,000 shares authorized; 500
shares issued; 400 shares outstanding.................. 10,000 10,000
Additional paid-in capital................................ 1,498,500 1,498,500
Accumulated deficit....................................... (2,121,568) (2,147,331)
----------- -----------
(613,068) (638,831)
Treasury stock, 100 shares at cost........................ (1) (1)
----------- -----------
Total shareholder's deficiency....................... (613,069) (638,832)
----------- -----------
Total liabilities and shareholder's deficiency.... $ 1,348,169 $ 1,235,820
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-59
<PAGE> 179
RAD LOCK, INC.
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
PERIOD ENDED JUNE 22, 1997 AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Sales....................................................... $ 1,587,811 $ 2,903,125
Cost of goods sold.......................................... 1,153,946 2,132,930
----------- -----------
Gross profit................................................ 433,865 770,195
Operating expenses.......................................... 257,797 487,041
----------- -----------
Income from operations...................................... 176,068 283,154
----------- -----------
Other expense:
Interest expense.......................................... 78,654 164,588
Other..................................................... 4,026 32,452
----------- -----------
Total other expense............................... 82,680 197,040
----------- -----------
Net income.................................................. 93,388 86,114
S Corporation dividend...................................... 67,625 --
----------- -----------
25,763 86,114
Accumulated deficit -- beginning............................ (2,147,331) (2,233,445)
----------- -----------
Accumulated deficit -- ending............................... $(2,121,568) $(2,147,331)
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-60
<PAGE> 180
RAD LOCK, INC.
STATEMENTS OF CASH FLOWS
PERIOD ENDED JUNE 22, 1997 AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Operating activities:
Net income................................................ $ 93,388 $ 86,114
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 91,172 174,038
Interest accrued on amounts due to shareholder......... 48,156 85,882
Changes in assets and liabilities:
Accounts receivable.................................. (90,531) 19,009
Inventories.......................................... (35,142) (21,237)
Prepaid expenses and other........................... (21,076) 5,858
Accounts payable..................................... 17,862 4,918
Accrued liabilities.................................. 44,352 (73,108)
-------- ---------
Net cash provided by operating activities......... 148,181 281,474
-------- ---------
Investing activities:
Property and equipment additions, (net)................... (48,741) (172,001)
-------- ---------
Financing activities:
Net proceeds (repayments) of notes payable -- bank........ 771 (94,784)
Repayment of capital lease obligations.................... (24,555) (46,586)
S Corporation dividend.................................... (67,625) --
-------- ---------
Net cash used in financing activities............. (91,409) (141,370)
-------- ---------
Net increase (decrease) in cash............................. 8,031 (31,897)
Cash -- beginning........................................... 64,438 96,335
-------- ---------
Cash -- ending.............................................. $ 72,469 $ 64,438
======== =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for
interest.......................................... $ 28,475 $ 78,706
======== =========
Supplemental Disclosure of Noncash Investing and Financing
Transactions
Property and equipment additions financed............ $ -- $ 168,101
======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-61
<PAGE> 181
RAD LOCK, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 22, 1997 AND DECEMBER 31, 1996
(1) SUBSEQUENT EVENT AND PURPOSE OF THE FINANCIAL STATEMENTS
The Company and its sole shareholder entered into an agreement with ESP
Lock Products, Inc. (ESP) to sell substantially all cash, accounts receivable,
inventories, prepaid expenses, property and equipment and certain assumed
liabilities. Under the terms of the agreement, on June 24, 1997, the Company
will provide ESP a net asset value of approximately $949,000.
The terms of the transaction require a closing balance sheet and a
statement of income excluding the effect of this transaction.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business:
RAD Lock, Inc., located in Worcester, Massachusetts, is a manufacturer of
metal products and a supplier of such products to industrial customers. Credit
is extended to the customers, substantially all of whom are located in the
United States.
Revenues:
The Company had sales of approximately $1,061,000 and $1,900,000 to one
customer in the period ended June 22, 1997 and year ended December 31, 1996,
respectively. Included in accounts receivable are amounts due from this customer
totalling $271,000 and $219,000 at June 22, 1997 and December 31, 1996,
respectively.
Cash:
The Company maintains its cash with high credit quality financial
institutions. At times, such balances may exceed Federal Deposit Insurance
Corporation (FDIC) insurance limits.
Inventories:
Inventories are valued at the lower of cost or market on the first-in,
first-out (FIFO) method.
Property and Equipment:
Property and equipment are recorded at cost and depreciated using the
straight-line and double declining balance methods for financial reporting
purposes and accelerated methods for income tax purposes. Depreciation is based
upon the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Jigs, fixtures and tools.............................. 3 to 7
Machinery and equipment............................... 5 to 7
Furniture, fixtures and office equipment.............. 5 to 7
Motor vehicle......................................... 3
Lesser of estimated
useful life or remaining
Leasehold improvements................................ term of the lease
</TABLE>
Included in property and equipment are capital lease assets of
approximately $250,000 at June 22, 1997 and December 31, 1996.
F-62
<PAGE> 182
RAD LOCK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense for the period June 22, 1997 and year ended December
31, 1996 was $91,172 and $174,038, respectively, including amortization of
equipment under capital leases of $15,219 and $23,018 in 1997 and 1996,
respectively.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that affect
the reported amounts of assets, liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities. Actual results could differ
from these estimates.
Income Taxes:
The Company, with the consent of its shareholder, elected to be treated as
an S Corporation effective January 1, 1994. In accordance with the provisions of
such election, the Company's income and losses are passed through to its
shareholder. Accordingly, no provision for federal or state income taxes is
included in these financial statements.
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Cash, accounts receivable and notes payable: The carrying amounts
reported in the balance sheet approximate fair value.
Capital lease obligations: These amounts have been discounted to
present value using the applicable discount rate as designated in the lease
agreement.
(4) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Raw materials.......................................... $141,518 $119,308
Work in process........................................ 97,724 83,136
Finished good.......................................... 7,070 8,726
-------- --------
$246,312 $211,170
======== ========
</TABLE>
(5) NOTES PAYABLE -- BANK
The Company is obligated pursuant to a revolving loan agreement with a
commercial bank. The demand notes are secured personally by the shareholder of
the Company. The interest rate at June 22, 1997 and December 31, 1996 was 8 1/2%
and 8 1/4%, respectively.
(6) CAPITAL LEASE OBLIGATIONS
At June 22, 1997 and December 31, 1996, the Company is obligated under
noncancellable leases in the amount of $159,559 and $184,114, respectively.
There were no capital lease acquisitions in 1997. Capital lease obligations
incurred during 1996 for the acquisition of equipment totaled approximately
$168,000.
F-63
<PAGE> 183
RAD LOCK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate maturities of capital lease obligations are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 67,287
1999........................................................ 57,152
2000........................................................ 46,295
2001........................................................ 28,904
--------
Total minimum lease payments................................ 199,638
Less amount representing interest........................... 40,079
--------
Present value of net minimum less payments.................. 159,559
Less current maturities..................................... 47,394
--------
Long-term capital lease obligation.......................... $112,165
========
</TABLE>
(7) NOTES PAYABLE -- SHAREHOLDER
The Company's shareholder has made advances to the Company for working
capital purposes. The advances bear interest at prime plus 2% and are
subordinated to the bank debt. The balance outstanding at June 22, 1997 and
December 31, 1996 amounted to $723,000. The advances have been classified as
long-term as it is the shareholder's intent not to demand payment within twelve
months of the balance sheet date.
Included in accrued liabilities is accrued interest on these advances
totalling approximately $304,000 and $256,000, at June 22, 1997 and December 31,
1996, respectively.
(8) INCENTIVE COMPENSATION
The Company has incentive compensation agreements with certain key
employees. The incentive calculations are based primarily on operating income
and net sales. The 1997 incentive compensation reflected in cost of goods sold
and operating expenses amounted to $26,031 and $12,596, respectively, and is
included in accrued liabilities at June 22, 1997. The amounts for 1996 were
$4,474 and $14,070, respectively, and were included in accrued liabilities at
December 31, 1996.
(9) COMMITMENTS AND RELATED PARTY TRANSACTIONS
RAD Lock, Inc. leases office and warehouse facilities from an officer of
the Company pursuant to a six-year lease agreement which expires on November 30,
1998. The lease provides for monthly rent of $2,344, the payment of real estate
taxes, insurance and certain other charges. The base rent expense amounted to
approximately $14,000 in 1997 and $28,000 in 1996.
Approximate future minimum rental payments under this lease agreement are
as follows and are based on a calendar year:
<TABLE>
<S> <C>
1997........................................................ $14,000
1998........................................................ 26,000
-------
$40,000
=======
</TABLE>
F-64
<PAGE> 184
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
- ----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. ii
Prospectus Summary.................... 1
Risk Factors.......................... 16
The Issuers........................... 23
The Formation......................... 24
Use of Proceeds....................... 25
Capitalization........................ 26
Unaudited Pro Forma Consolidated
Financial Data...................... 27
Selected Historical Consolidated
Financial Data...................... 33
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 37
Business.............................. 47
Management............................ 62
Principal Stockholders................ 65
Certain Transactions.................. 66
The Limited Liability Company
Agreement........................... 68
Description of Certain Indebtedness... 70
The Exchange Offer.................... 72
Description of Notes.................. 79
United States Federal Income Tax
Consequences........................ 110
Plan of Distribution.................. 113
Legal Matters......................... 113
Experts............................... 113
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
[KCI LOGO]
KEY COMPONENTS, LLC
KEY COMPONENTS FINANCE CORP.
$80,000,000
OFFER TO EXCHANGE
10 1/2% SENIOR NOTES DUE 2008,
FOR ANY AND ALL OUTSTANDING
10 1/2% SENIOR NOTES DUE 2008
---------------------------
PROSPECTUS
---------------------------
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 185
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) Pursuant to the terms of the Limited Liability Company Agreement of the
Company, the Company shall indemnify the Members, any former Members, any person
who is or was an affiliate of any Member or former Member, any person who is or
was an officer, director, employee or agent of the Registrant or any subsidiary
thereof, and any person who is or was serving at the request of the Company, the
Members or a director of the Company as an officer, director, employee, member,
partner, agent, fiduciary or trustee of another person ("Indemnitees"), to the
fullest extent of the law, from and against any and all losses, claims, damages,
liabilities (joint or several), expenses (including, without limitation, legal
fees and expenses), judgments, fines, penalties, interest, settlements and other
amounts arising from any and all claims, demands, actions, suits or proceedings,
whether civil, criminal, administrative or investigative, in which any
Indemnitee may be involved, or is threatened to be involved, as party or
otherwise, by reason of its status as an Indemnitee; provided that in each case
the Indemnitee acted in good faith and in a manner that such Indemnitee
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal proceeding, had no reasonable cause to believe
its conduct was unlawful. Any indemnification under this Agreement will be only
out of the assets of the Company, and the Members shall not be personally liable
for, or have any obligation to contribute or loan funds or assets to the Company
to enable it to effectuate, such indemnification. The Company is authorized to
purchase insurance against liabilities asserted against and expenses incurred by
such persons in connection with the Company's activities, regardless of whether
the Company would have the power to indemnify such persons against such
liabilities under the provisions of this paragraph.
(b) See the Purchase Agreement (the form of which is included as Exhibit
10.1 to this Registration Statement) for provisions regarding the
indemnification under certain circumstances of the Issuers, their directors and
certain of their officers by the Initial Purchaser.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
3.1 Certificate of Formation of the Company.*
3.2 Limited Liability Company Agreement of Company.*
3.3 Certificate of Incorporation of Finance Corp.*
3.4 By-Laws of Finance Corp.*
4.1 Indenture, dated as of May 28, 1998, by and among the
Issuers, the Subsidiary Guarantors and United States Trust
Company of New York, as trustee.*
4.2 Form of 10 1/2% Senior Notes, Due 2008 (filed as part of
Exhibit 4.1).*
4.3 Exchange and Registration Rights Agreement, dated May 20,
1998, among the Issuers, the Subsidiary Guarantors and
Societe Generale Securities Corporation.*
5.1 Opinion of Counsel to the Issuers concerning the legality of
the Securities being offered.
10.1 Purchase Agreement among the Issuers, the Subsidiary
Guarantors and Societe Generale Securities Corporation,
dated May 20, 1998.*
10.2 Form of 10 1/2% Senior Notes, issued by the Issuers to
certain purchasers, and dated as of May 28, 1998 (filed as
part of Exhibit 4.1).*
10.3 Employment Agreement between Elliott and George M. Scherer,
dated as of January 16, 1996, as amended March 16, 1996.
10.4 Employment Agreement between Parent and Michael L. Colecchi,
dated as of May 15, 1997, as amended April 27, 1998.
10.5 Employment Agreement between ESP and August M. Boucher,
dated as of December 10, 1997.
10.6 Employment Agreement between the Company and James D.
Wilcox, dated as of April 17, 1998.
</TABLE>
II-1
<PAGE> 186
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
10.7 1998 Long-Term Incentive Plan of the Parent.
10.8 Management Agreement, dated May 28, 1998, with Millbrook
Capital Management Inc.*
10.9 Lease, dated January 1, 1989, between Elliot and Empire
Realty Company.
10.10 Lease, dated December 1, 1992, between RAD and S&S
Properties, Inc.
10.11 Lease Agreement, dated June 7, 1990, between Elliott and
Route 12A Associates, as amended.
10.12 Lease of Real Property, dated June 1, 1993, between ESP and
Massachusetts Colony Corporation.
10.13 Commercial Lease and Deposit Receipt, dated August 17, 1998,
between Hudson and Jim Jelsema.
10.14 Credit and Guaranty Agreement, dated as of July 27, 1998,
among the Issuers, Elliott, Hudson, ESP, Societe Generale,
as agent and certain financial institutions named therein.
10.15 Guarantor Security Agreement, dated as of July 27, 1998,
among Elliott, Hudson, Finance Corp., ESP and Societe
Generale.
10.16 Borrower Security Agreement, dated as of July 27, 1998,
between KC LLC and Societe Generale.
10.17 Pledge Agreement, dated as of July 27, 1998, between KC LLC
and Societe Generale.
12.1 Statements re Computation of Ratios.
21.1 List of the Company's Subsidiaries.*
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Fulgieri & Randall, LLP
23.3 Consent of Greenberg, Rosenblatt, Kull & Bitsoli, PC
23.4 Consent of BDO Seidman, LLP.
23.5 Consent of Rubin Baum Levin Constant & Friedman (contained
in the opinion filed as Exhibit 5.1).
25.1 Form T-1 Statement of Eligibility of Trustee.
99.1 Form of Letter of Transmittal for 10 1/2% Senior Notes with
respect to the Exchange Offer.*
99.2 Form of Notice of Guaranteed Delivery with respect to the
Exchange Offer.
99.3 Form of Instruction to Registered Holder and/or Book-Entry
Transfer Participant from Beneficial Owner relating to the
10 1/2% Senior Notes.
99.4 Form of Letter to Registered Holders and The Depository
Trust Company.
99.5 Form of Client Letter
</TABLE>
- ---------------
* Filed with initial filing of the registration statement
ITEM 22. UNDERTAKINGS
The undersigned Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
II-2
<PAGE> 187
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the Securities offered therein, and
the offering of such Securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the Securities being registered which remain unsold at the
termination of the Offering.
(4) That, for purposes of determining any liability under the
Securities Act, each filing of the Registrants' Annual Report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to
be a new Registration Statement relating to the Securities offering
therein, and the offering of such Securities at the time shall be deemed to
be the initial bona fide offering thereof.
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
date of the Registration Statement through the date of responding to the
request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it
became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the Registrants
have been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrants of expenses incurred or
paid by a director, officer or controlling person of the Registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-3
<PAGE> 188
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on August 28, 1998.
KEY COMPONENTS, LLC
By: /s/ CLAY B. LIFFLANDER
------------------------------------
Clay B. Lifflander
President
By: /s/ JAMES D. WILCOX
------------------------------------
James D. Wilcox
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes appoints Alan L. Rivera and Clay B.
Lifflander and each of them, his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and all documents relating thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing necessary or advisable to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on the 28th day of August, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN S. DYSON Director August 28, 1998
- ---------------------------------------------------
John S. Dyson
/s/ CLAY B. LIFFLANDER Director August 28, 1998
- ---------------------------------------------------
Clay B. Lifflander
/s/ ALAN L. RIVERA Director August 28, 1998
- ---------------------------------------------------
Alan L. Rivera
/s/ DAVID H. BOVA Director August 28, 1998
- ---------------------------------------------------
David H. Bova
/s/ GEORGE M. SCHERER Director August 28, 1998
- ---------------------------------------------------
George M. Scherer
</TABLE>
II-4
<PAGE> 189
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on August 28, 1998.
KEY COMPONENTS FINANCE CORP.
By: /s/ CLAY B. LIFFLANDER
------------------------------------
Clay B. Lifflander
President
By: /s/ JAMES D. WILCOX
------------------------------------
James D. Wilcox
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes appoints Alan L. Rivera and Clay B.
Lifflander and each of them, his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and all documents relating thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing necessary or advisable to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on the 28th day of August, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN S. DYSON Director August 28, 1998
- ---------------------------------------------------
John S. Dyson
/s/ CLAY B. LIFFLANDER Director August 28, 1998
- ---------------------------------------------------
Clay B. Lifflander
/s/ ALAN L. RIVERA Director August 28, 1998
- ---------------------------------------------------
Alan L. Rivera
/s/ DAVID H. BOVA Director August 28, 1998
- ---------------------------------------------------
David H. Bova
/s/ GEORGE M. SCHERER Director August 28, 1998
- ---------------------------------------------------
George M. Scherer
</TABLE>
II-5
<PAGE> 190
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on August 28, 1998.
B.W. ELLIOTT MANUFACTURING CO., INC.
By: /s/ GEORGE M. SCHERER
------------------------------------
George M. Scherer
President
By: /s/ JAMES D. WILCOX
------------------------------------
James D. Wilcox
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes appoints Alan L. Rivera and Clay B.
Lifflander and each of them, his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and all documents relating thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing necessary or advisable to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on the 28th day of August, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN S. DYSON Director August 28, 1998
- ---------------------------------------------------
John S. Dyson
/s/ CLAY B. LIFFLANDER Director August 28, 1998
- ---------------------------------------------------
Clay B. Lifflander
/s/ ALAN L. RIVERA Director August 28, 1998
- ---------------------------------------------------
Alan L. Rivera
/s/ DAVID H. BOVA Director August 28, 1998
- ---------------------------------------------------
David H. Bova
/s/ GEORGE M. SCHERER Director August 28, 1998
- ---------------------------------------------------
George M. Scherer
</TABLE>
II-6
<PAGE> 191
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on August 28, 1998.
HUDSON LOCK, INC.
By: /s/ MICHAEL L. COLECCHI
------------------------------------
Michael L. Colecchi
President
By: /s/ JAMES D. WILCOX
------------------------------------
James D. Wilcox
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes appoints Alan L. Rivera and Clay B.
Lifflander and each of them, his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and all documents relating thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing necessary or advisable to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on the 28th day of August, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN S. DYSON Director August 28, 1998
- ---------------------------------------------------
John S. Dyson
/s/ CLAY B. LIFFLANDER Director August 28, 1998
- ---------------------------------------------------
Clay B. Lifflander
/s/ ALAN L. RIVERA Director August 28, 1998
- ---------------------------------------------------
Alan L. Rivera
/s/ DAVID H. BOVA Director August 28, 1998
- ---------------------------------------------------
David H. Bova
/s/ GEORGE M. SCHERER Director August 28, 1998
- ---------------------------------------------------
George M. Scherer
</TABLE>
II-7
<PAGE> 192
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on August 28, 1998.
ESP LOCK PRODUCTS, INC.
By: /s/ AUGUST M. BOUCHER
------------------------------------
August M. Boucher
President
By: /s/ JAMES D. WILCOX
------------------------------------
James D. Wilcox
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes appoints Alan L. Rivera and Clay B.
Lifflander and each of them, his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and all documents relating thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing necessary or advisable to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on the 28th day of August, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN S. DYSON Director August 28, 1998
- ---------------------------------------------------
John S. Dyson
/s/ CLAY B. LIFFLANDER Director August 28, 1998
- ---------------------------------------------------
Clay B. Lifflander
/s/ ALAN L. RIVERA Director August 28, 1998
- ---------------------------------------------------
Alan L. Rivera
/s/ DAVID H. BOVA Director August 28, 1998
- ---------------------------------------------------
David H. Bova
/s/ GEORGE M. SCHERER Director August 28, 1998
- ---------------------------------------------------
George M. Scherer
</TABLE>
II-8
<PAGE> 193
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
3.1 Certificate of Formation of the Company.*
3.2 Limited Liability Company Agreement of Company.*
3.3 Certificate of Incorporation of Finance Corp.*
3.4 By-Laws of Finance Corp.*
4.1 Indenture, dated as of May 28, 1998, by and among the
Issuers, the Subsidiary Guarantors and United States Trust
Company of New York, as trustee.*
4.2 Form of 10 1/2% Senior Notes, Due 2008 (filed as part of
Exhibit 4.1).*
4.3 Exchange and Registration Rights Agreement, dated May 20,
1998, among the Issuers, the Subsidiary Guarantors and
Societe Generale Securities Corporation.*
5.1 Opinion of Counsel to the Issuers concerning the legality of
the Securities being offered.
10.1 Purchase Agreement among the Issuers, the Subsidiary
Guarantors and Societe Generale Securities Corporation,
dated May 20, 1998.*
10.2 Form of 10 1/2% Senior Notes, issued by the Issuers to
certain purchasers, and dated as of May 28, 1998 (filed as
part of Exhibit 4.1).*
10.3 Employment Agreement between Elliott and George M. Scherer,
dated as of January 16, 1996, as amended March 16, 1996.
10.4 Employment Agreement between Parent and Michael L. Colecchi,
dated as of May 15, 1997, as amended April 27, 1998.
10.5 Employment Agreement between ESP and August M. Boucher,
dated as of December 10, 1997.
10.6 Employment Agreement between the Company and James D.
Wilcox, dated as of April 17, 1998.
10.7 1998 Long-Term Incentive Plan of the Parent.
10.8 Management Agreement, dated May 28, 1998, with Millbrook
Capital Management Inc.
10.9 Lease, dated January 1, 1989, between Elliot and Empire
Realty Company.
10.10 Lease, dated December 1, 1992, between RAD and S&S
Properties, Inc.
10.11 Lease Agreement, dated June 7, 1990, between Elliott and
Route 12A Associates, as amended.
10.12 Lease of Real Property, dated June 1, 1993, between ESP and
Massachusetts Colony Corporation.
10.13 Commercial Lease and Deposit Receipt, dated August 27, 1998,
between Hudson and Jim Jelsema.
10.14 Credit and Guaranty Agreement, dated as of July 27, 1998,
among the Issuers, Elliott, Hudson, ESP, Societe Generale,
as agent and certain financial institutions named therein.
10.15 Guarantor Security Agreement, dated as of July 27, 1998,
among Elliott, Hudson, Finance Corp., ESP and Societe
Generale.
10.16 Borrower Security Agreement, dated as of July 27, 1998,
between KC LLC and Societe Generale.
10.17 Pledge Agreement, dated as of July 27, 1998, between KC LLC
and Societe Generale.
12.1 Statements re Computation of Ratios.
21.1 List of the Company's Subsidiaries.*
23.1 Consent of PricewaterhouseCoopers, LLP.
23.2 Consent of Fulgieri & Randall, LLP
23.3 Consent of Greenberg, Rosenblatt, Kull & Bitsoli, PC
23.4 Consent of BDO Seidman, LLP.
23.5 Consent of Rubin Baum Levin Constant & Friedman (contained
in the opinion filed as Exhibit 5.1).
25.1 Form T-1 Statement of Eligibility of Trustee.
99.1 Form of Letter of Transmittal for 10 1/2% Senior Notes with
respect to the Exchange Offer.*
99.2 Form of Notice of Guaranteed Delivery with respect to the
Exchange Offer.
99.3 Form of Instruction to Registered Holder and/or Book-Entry
Transfer Participant from Beneficial Owner relating to the
10 1/2% Senior Notes.
99.4 Form of Letter to Registered Holders and The Depository
Trust Company.
99.5 Form of Client Letter
</TABLE>
- ---------------
* Filed with initial filing of the registration statement
<PAGE> 1
Exhibit 5.1
RUBIN BAUM LEVIN CONSTANT AND FRIEDMAN
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
August 28, 1998
Key Components, LLC
Key Components Finance Corp.
Wing Road
RR 1, Box 167D
Millbrook, New York 12545
Re: 10 1/2% Senior Notes due 2008 (the "New Notes")
Gentlemen:
We have acted as counsel to Key Components, LLC, a Delaware limited
liability Company (the "Company") and Key Components Finance Corp., a Delaware
corporation (together with the Company, the "Issuers") in connection with the
Issuers' exchange offer (the "Exchange Offer") for its 10 1/2% Senior Notes due
2008 (collectively the "Old Notes") as described in the Prospectus (the
"Prospectus") contained in Amendment No. 1 to the Registration Statement on Form
S-4 (the "Registration Statement"), to be filed with the Securities and Exchange
Commission.
In furnishing this opinion, we have examined the Certificate of
Formation and the Limited Liability Company Agreement and the Certificate of
Incorporation and By-laws of the Issuers, as each may have been amended, as well
as the originals or photostatic or certified copies of such documents, records,
certificates, agreements and other papers as we have deemed necessary for the
purposes of this opinion. In such examination, we have assumed the genuineness
of all signatures, the authenticity of all documents submitted to us as
originals, the conformity to executed documents of all unexecuted copies
submitted to us, and the authenticity of, and the conformity to, original
documents of all documents submitted to us as certified or photostatic copies.
As to various questions of fact material to our opinion, we have relied upon
oral statements, written information and certificates of officials and
representatives of the Issuers and others.
Based upon the foregoing, we are of the opinion that the New Notes to
be offered and issued by the Issuers have been duly authorized and, when
executed and authenticated in accordance with the terms of the Indenture
pursuant to which they will be issued and delivered in exchange for the
<PAGE> 2
Key Components, LLC
Key Components Finance Corp.
August 28, 1998
Page 2
applicable Old Notes in accordance with the Exchange Offer will be validly
issued and constitute binding obligations of the Issuers, except as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally or by general equitable
principles.
As members of the Bar of the State of New York, we do not purport to be
experts on any laws other than those of the United States and New York, and the
General Corporation Law of Delaware.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference made to this firm under the caption
"Legal Matters" in the Prospectus. In giving this consent, we do not thereby
admit that we are included within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
This opinion is rendered solely to you in connection with the above
matter. This opinion may not be relied upon by you for any other purpose or
relied upon by or furnished to any other person without our prior written
consent.
Very truly yours,
/s/ Rubin Baum Levin Constant & Friedman
RUBIN BAUM LEVIN CONSTANT & FRIEDMAN
<PAGE> 1
Exhibit 10.3
AMENDMENT OF 1/16/96 EMPLOYMENT AGREEMENT
Dated: March 15, 1996
THIS AMENDMENT of the Employment Agreement of January 16, 1996, entered
into by and between B.W. ELLIOTT MANUFACTURING CO., INC., a New York corporation
with an office at Binghamton, New York (the "Company"), and GEORGE M. SCHERER,
residing at 9 Pamela Drive, Binghamton, New York 13901 (the "Executive"), this
Amendment itself being entered into on the 15th day of March, 1996.
W I T N E S S E T H:
WHEREAS the Company and the Executive have heretofore entered into an
Employment Agreement dated January 16, 1996, under which the Executive has been
employed as the principal executive of the Company, upon the terms and
conditions therein more particularly set forth, and
WHEREAS John S. Dyson and Millbrook Management Company (Inc.) (the name of
which has subsequently been changed to Millbrook Capital Management, Inc.)
joined in the execution of the Employment Agreement pursuant to, and for the
purpose of signifying their consent to be bound by the terms of Article V,
Section 5.12 thereof, and
WHEREAS the Company and the Executive wish to provide, acknowledge and
confirm that the Executives basic compensation has been and will continue to be
the sum of $254,000.00 per annum, and
WHEREAS the Company's Board of Directors has duly approved a formal
revision of the Employment Agreement expressly to confirm such level of basic
compensation;
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Company and the Executive hereby mutually
acknowledge, confirm and agree as follows:
A. Effective January 16, 1996 the Executive's basic compensation for
services under the Employment Agreement has been and shall be the sum of
$254,000.00 per annum, payable weekly. Accordingly, the first sentence of
paragraph (a) of Section 1.3 (under Article I) of the Employment Agreement is
changed (effective retroactively January 16, 1996) to read the sum of "Two
Hundred Fifty-Four Thousand Dollars ($254,000.00) per annum" instead of "One
Hundred Twenty Thousand Dollars ($120,000.00) per annum".
B. All other terms and provisions of the Employment Agreement shall remain
the same, without revision, modification or change of any kind, to be fully
operative in accordance with their tenor and terminology (including, without
limitation, "Annex I" thereof, regarding computation of the Executive's bonus).
<PAGE> 2
IN WITNESSETH WHEREOF, the parties hereto have duly executed this
Amendment or caused it to be executed on the date first above written, to be
effective as of January 16, 1996.
B. W. ELLIOTT MANUFACTURING CO, INC.,
the Company
/s/ George M. Scherer
--------------------------------------
George M Scherer, the Executive
The undersigned hereby join in the
execution of this Amendment for the
purpose of signifying their consent to
be bound by the terms of Section 5.12 of
the Employment Agreement (as modified by
this Amendment) (see also Article IV of
the Employment Agreement):
/s/ John S. Dyson
- -------------------------------------
John S. Dyson. (Individually)
MILLBROOK CAPITAL MANAGEMENT, INC.*
By: /s/ Clay B. Lifflander
---------------------------------
Clay B. Lifflander,
- -------
* formerly Millbrook Management Company, Inc.
- 2 -
<PAGE> 3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), dated January 16, 1996, is by and
between B.W. ELLIOTT MANUFACTURING CO., INC. a New York corporation (the
"Company"), and GEORGE M. SCHERER, residing at 9 Pamela Drive, Binghamton, New
York 13901 (the "Executive").
W I T N E S S E T H:
WHEREAS the Executive possesses valuable skills and experience of a
special and personal nature and unique, personal and confidential knowledge
about the Company and its business and is currently serving as President of the
Company; and
WHEREAS the Company wishes to assure that the Executive will continue to
make his skills, knowledge and experience available to the Company; and
WHEREAS the Executive wishes to remain a principal executive employee of
the Company under the terms and conditions set forth herein;
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Company and the Executive hereby mutually
agree as follows:
ARTICLE I
1.1 Term. The Company shall employ the Executive and the Executive shall
hold office for the Company in Binghamton, New York, for a term (the "Term of
Employment") beginning on the date hereof and ending on the fifth (5th)
anniversary of the date hereof, and thereafter (if mutually agreed) until the
employment of the Executive is terminated pursuant to the provisions of Article
III of this Agreement; provided, however, that the provisions of Article II of
this Agreement shall survive the termination of the Agreement and shall continue
in full force and effect thereafter as provided in such Article II.
1.2 Duties.
(a) During the Term of Employment, the Executive shall continue to
perform the duties and responsibilities of the President of the Company, shall
serve as a Director of the Company and shall assume and perform such duties and
responsibilities as are necessary for the management of the Company, all subject
to the discretion and control of the Board of Directors of the Company (the
"Board").
(b) The Executive shall at all times during the Term of Employment
discharge all such duties and responsibilities conscientiously, in good faith
and to the best of his ability, giving to the Company the full benefit of his
knowledge, expertise, skill and judgment. The
<PAGE> 4
Executive shall be employed on a full-time basis, but shall be responsible for
maintaining his own working schedule consistent therewith. Unless approved by
the Board of Directors, the Executive shall not render services of a business,
professional or commercial nature for compensation to or for other entities or
persons or engage or participate in other trades, businesses or occupations
during the Term of Employment; provided, however, that nothing herein shall
prohibit the Executive from devoting reasonable amounts of time to civic and
community activities or the management of personal matters (such as passive
investments in stocks, bonds and real estate), so long as the foregoing do not
unduly interfere with the performance of his duties hereunder.
1.3 Compensation; Expenses; Benefits.
(a) As compensation for the services of the Executive hereunder,
commencing on the date hereof, the Company shall pay to the Executive the sum of
One Hundred Twenty Thousand Dollars ($120,000.00) per annum, payable weekly. If,
however, the Company and the Executive hereafter (at any time or from time to
time) agree upon a deferred compensation or similar or related arrangement(s),
such compensation may be appropriately reduced by such amount(s) and under such
terms as may be called for by the arrangement(s). As additional compensation,
the Executive will be paid an annual performance bonus ("Bonus") in an amount to
be determined under the formula set forth in Annex I hereinafter. Should the
Executive's employment terminate prior to the end of a calculation year (i.e.,
prior to March 31st), the Bonus shall be determined in accordance with Annex I;
but, as therein provided, (i) the partial-period results will be appropriately
annualized and, accordingly, (ii) the amount payable shall be appropriately
pro-rated over the portion of the calculation year actually worked, in which
case (as also therein provided) the amount will be paid within one hundred
twenty (120) days after the termination of employment.
(b) The Company shall reimburse the Executive for reasonable travel,
entertainment and related expenses incurred in connection with the performance
of his duties hereunder, upon presentation of receipts, vouchers or other
evidence of such expenses reasonably acceptable to the Company.
(c) In addition, the Executive shall be entitled to those
perquisites he currently enjoys from the Company, which include:
(i) a personal term life insurance policy in the amount (death
benefit) of at least $50,000 (such policy to be assigned to the Executive,
without cost, upon termination of his employment);
(ii) full medical and dental insurance coverage for the
Executive and his family, at least consistent with his present coverage and
guaranteed for at least six (6) years from the date of this Agreement or for one
(1) year after termination of his employment, whichever is longer; provided,
however, that should an event covered by Article IV, Section 4.1 occur, any
- 2 -
<PAGE> 5
new owner shall assume these obligations if the Executive continues his
employment beyond one year of such event;
(iii) participation in the Company's 401(k) plan;
(iv) full-time use of one (1) current model Company-owned or
leased automobile, including all insurance, fuel, maintenance, repair and
related costs, such automobile to be transferred to the Executive, as additional
compensation at the NADA wholesale value therefor, when the vehicle is five (5)
years old; and
(v) four (4) weeks of paid vacation during each contract year
(12-month period), commencing on the date hereof, during the Term of Employment,
such vacation to be taken at such times as the Board shall reasonably consider
convenient, it being understood that any vacation not taken by the Executive may
not be carried over into any subsequent year(s) and that the Executive shall not
be entitled to receive any payment in lieu of any such unused vacation.
ARTICLE II
NON-COMPETITION, CONFIDENTIALITY AND PROPRIETARY DEVELOPMENTS
2.1 Non-Competition. For a period commencing on the date hereof and ending
on the third (3rd) anniversary of the-date upon which the Executive's employment
with the Company is terminated, but in no event for less than five (5) years
from the date of this Agreement, the Executive shall not do any of the
following:
(a) invest (other than as a passive investor in securities of a
publicly-traded entity whose holding therein does not exceed 5% of all such
securities outstanding), engage in or be associated with as a director, officer,
agent, employee, partner, consultant, affiliate or otherwise, the ownership or
operation of any enterprise that is engaged in or will shortly engage in any
business activity (manufacturing, developing, selling or distributing flexible
power transmission shafting or any other material business engaged in by the
Company or any of its subsidiaries at the time of the Executive's termination)
which would directly compete with any of the Company's product lines or customer
base at the time of termination, in any geographic area where the business of
the Company is operating or its products are being sold at the time of the
Executive's termination;
(b) employ, solicit for employment or endeavor in any way to entice
away from employment by the Company or any of its affiliates, any person who is
(at the time of the Executive's termination) employed by the Company or any of
its affiliates;
(c) engage or solicit for engagement in any enterprise that is
engaged in the business of manufacturing, developing, selling or distributing
flexible power transmission shafting
- 3 -
<PAGE> 6
which directly competes with the Company at the time of the Executive's
termination, or endeavor in any way to entice away from the engagement of the
Company or any of its affiliates, any customer, client, vendor or supplier of
the Company or any of its affiliates; provided, however, that (i) if the
prohibition contained in this Article II is more restrictive than permitted by
the applicable law in the jurisdiction in which enforcement is sought, such
prohibition shall be limited to the extent limited by law; and (ii) the
prohibition contained in this Article II shall not apply in the event that the
Company shall default in any payment obligation to the Executive under this
Agreement after a reasonable time to cure.
2.2 Confidentiality. The Executive recognizes and acknowledges that all
information pertaining to the affairs, business, operations, customers, clients,
vendors or suppliers of the Company or its affiliates, as such information may
exist from time to time, is confidential information and is a unique and
valuable asset of the Company or its affiliates. The Executive shall not at any
time divulge to any person, firm, association, corporation, partnership,
government agency or other entity information concerning such affairs, business,
operations, customers, clients, vendors or suppliers of the Company or any of
its affiliates (except such information as is required by law to be divulged to
a government agency or other third party), or make use of any such information
for his own purposes or for the benefit of any person, firm, association,
corporation, partnership, government agency or other entity (except for the
benefit of the Company or its affiliates).
2.3 Proprietary Developments. The Executive hereby assigns and/or will
assign to the Company, its successors, assigns or nominees, all of the
Executive's right, title and interest in, to and under discoveries, inventions
and improvements, whether patentable or not, which the Executive at any time
during the Term of Employment may make, conceive, acquire or suggest, either
alone or with others, relating to or in any reasonable way connected with the
Company or its business or activities. The Executive, further, will promptly
disclose to the Company such discoveries, inventions and improvements and,
without charge to the Company but at the Company's expense, will execute,
acknowledge and deliver all such documents or instruments (including
applications for, and renewals of, patents, copyrights, trademarks, trade names
or similar protections) as the Company may reasonably deem necessary or
desirable in order to obtain protection for such discoveries, inventions or
improvements in any and all countries and to vest title thereto in the Company,
its successors, assigns or nominees.
2.4 Survival of Provisions. Except as otherwise provided under 2.1(c)
above, the obligations of the Executive under this Article II shall survive the
termination of the Executive's employment and the termination of this Agreement.
ARTICLE III
TERMINATION OF EMPLOYMENT
3.1 Termination or Right to Terminate.
- 4 -
<PAGE> 7
(a) Death. This Agreement shall terminate upon the Executive's
death.
(b) Disability. In the event that at least two-thirds (2/3) of the
members of the Board determine that, because of accidental or other disability
or physical or mental illness, the ability of the Executive to perform his
duties hereunder is substantially impaired, the Executive's duties and
obligations hereunder shall be suspended without loss of compensation or other
benefits for a period as determined by the Board. If, as a result of the
Executive's disability or illness, the Executive shall have missed 128 or more
consecutive working days in any 12-month period or 150 or more working days in
any 12-month period, this Agreement shall, upon notice to such effect from the
Board to the Executive, be terminated upon the date set forth in such notice.
(c) Breach of Agreement.
(i) In the event that the Executive breaches, or fails, to the
reasonable satisfaction of the Board, to comply in any material manner with, any
material provision of this Agreement (including, without limitation, Article II
hereof the Board shall, upon ten (10) business days prior written notice to the
Executive specifying the nature of the breach or failure to comply, have the
right to terminate the Executive's employment hereunder; provided, however, that
the Executive shall have the right to be heard before the Board prior to any
termination (unless the Executive shall fail to appear at two (2) consecutive
Board meetings for which notice is given in accordance with the Company's
By-Laws) and that if such breach or failure to comply may be cured, the
Executive's employment hereunder shall not be terminated if the Executive cures
such breach or failure to comply within thirty (30) days after such hearing.
(ii) The Executive's employment hereunder may be terminated
for cause upon action by the Board and written notice to the Executive. As used
herein, "cause" means the occurrence of any one or more of the following events:
(1) the conviction of the Executive for commission of a felony; (2) manifest
dishonesty, fraud, embezzlement or misappropriation by the Executive relating to
the Company or any of its funds, properties, opportunities or other assets; (3)
gross neglect or misconduct by the Executive in the performance of his duties;
and (4) the Executive's unexcused absence from work, not caused by physical or
mental disability or illness, for a period of more than thirty (30) consecutive
days or for a total period of more than fifty (50) days in any 12-month period.
(d) Voluntary Termination. This Agreement shall terminate upon the
voluntary written resignation, by the Executive, from his employment with the
Company.
3.2 Executive's Rights Upon Termination.
(a) Subject to the next sentence of this 3.2(a) and also to the
provisions of 3.2(b), upon termination of the Executive's employment pursuant to
3.1(a) [death] or 3.1(b) [disability], the Company shall have no further
obligation to the Executive under this Agreement except to distribute to the
Executive or to the Executive's estate or designated beneficiary the
- 5 -
<PAGE> 8
Executive 's appropriately pro-rated salary and Bonus, if any, due pursuant to
Section 1.3 hereof. If the Executive's employment is terminated pursuant to
3.1(b) hereof (disability), the Company shall pay the Executive, in respect of
the first six (6) months following termination, the shortfall (if any) between
(i) the amount in respect of such six (6) months the Executive is entitled to
receive under any long-term disability insurance policy in favor of the
Executive which may be maintained by and at the cost and expense of the Company
and (ii) the total of what the Executive would have been paid as salary and
Bonus by the Company in respect of such six (6) month period if the Executive's
employment had not been so terminated.
(b) If the Executive shall be terminated for any reason whatsoever
(including death, disability, breach, cause or any other reason covered under
Section 3.1 hereof) during the Term of Employment under this Agreement, he shall
be entitled to compensation of One Hundred Twenty-Five Thousand Dollars
($125,000) per year for the period subsequent to termination and up to March 31,
1997. However, in the case of termination on account of the Executive's
disability, such "remaining period" will not start until six (6) months after
such termination.
ARTICLE IV
SALE OF THE COMPANY
4.1 Successor Obligation. In the event that W a controlling interest in
the Company is sold by the Purchaser (as that term is defined in the Stock
Purchase Agreement among the Executive, Whitehall-Dyson Partners, L.P. and the
Company, dated the date hereof and in the execution of which John S. Dyson and
Millbrook Management Company joined) to any person other than an affiliate or
(ii) substantially all of the assets of the Company are sold to any third party,
then:
(a) As a condition to such sale, the purchaser of such controlling
interest or assets (the "Successor") must become bound by the terms of this
Agreement; or
(b) The Company and the Guarantors shall continue to be bound to
make payments to the Executive in accordance with the provisions of this
Agreement if the Successor does not do so; provided, however, that if the
Executive continues to be employed by the Successor for one (1) year following
the date of such sale, neither the Company nor the Guarantors shall have any
further obligations to the Executive under this Agreement, except those accrued
and unpaid at the date of sale.
4.2 Affiliate. For purposes of this Agreement, the term "affiliate" means
any corporation or other business entity which is controlled by, controls or is
under common control with the Company, including Millbrook Management Company
(and any subsidiary or affiliate of that firm) and Whitehall-Dyson Partners,
L.P. (and any affiliate of that firm).
ARTICLE V
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<PAGE> 9
MISCELLANEOUS
5.1 Entire Agreement, Modification and Waiver. This Agreement constitutes
the entire agreement of the parties hereto respecting the subject matter hereof
and supersedes all prior agreements, understandings, arrangements, negotiations
and discussions, whether oral or written, of the parties (including, without
limitation, the April 1, 1992 "Employment Agreement" (as amended) between the
Company and the Executive (which said prior agreement is hereby expressly
terminated and rendered of no further operative force or effect whatsoever); and
there are no warranties, representations or other agreements, express or
implied, made by either party to the other party in connection with the subject
matter hereof. No supplement, modification, waiver or termination of this
Agreement shall be binding unless executed in writing by the party to be bound
thereby. No waiver of any of the provisions of this Agreement shall be deemed to
be, or shall constitute, a waiver of any other provision hereof, nor shall any
such waiver constitute a continuing waiver.
5.2 Notices. Any and all notices, demands, requests or other
communications required or permitted hereunder to be served on, given to or
delivered to either party to this Agreement shall be in writing and shall be
deemed to have been duly given when delivered in person or when dispatched by
telegram, electronic facsimile transfer (confirmed in writing by regular mail
simultaneously dispatched) or sent by certified or registered mail, return
receipt requested, to the party at its or his address set forth below:
(a) In the case of the Company:
B.W. Elliott Manufacturing Co., Inc.
P.O. Box 773
Binghamton, NY 13902
Attn: John S. Dyson
(b) In the case of the Executive:
George M. Scherer
9 Pamela Drive
Binghamton, NY 13901
with a copy to:
David G. Stearns, Esq.
Hinman, Howard & Kattell, LLP
700 Security Mutual Building
80 Exchange Street
Binghamton, NY 13901-3490
- 7 -
<PAGE> 10
5.3 Benefit; Assignment. This Agreement shall inure to the benefit of and
be binding upon the parties hereto and upon each of their respective heirs,
executors, administrators, conservators, personal representatives, successors
and assigns; provided, that none of the rights, obligations or liabilities of
the Executive hereunder shall be assignable without the prior written consent of
the Company.
5.4 Governing Law. This Agreement and the legal relations between the
parties hereto shall be governed by and construed in accordance with the
substantive laws of the State of New York, without giving effect to the
principles of conflicts of law thereof.
5.5 Severability. Each section and subsection (and further division) of
this Agreement constitutes a separate and distinct provision hereof. It is the
intent of the parties hereto that the provisions of this Agreement shall be
enforced to the fullest extent permissible under the laws and public policies
applicable in each Jurisdiction in which enforcement is sought. Accordingly, if
any provision of this Agreement shall be adjudicated to be invalid, ineffective
or unenforceable, the remaining provisions shall not be affected thereby. The
invalid, ineffective or unenforceable provision shall, without further action by
the parties, be automatically amended to effect the original purpose and intent
thereof; provided however, that such amendment shall apply only with respect to
the operation of such provision in the particular jurisdiction with respect to
which such adjudication is made.
5.6 Headings. The headings of the Articles and sections (or other
divisions) of this Agreement have been inserted solely for convenience in
reference and shall in no way restrict or modify any of the terms or provisions
hereof.
5.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
5.8 Currency. Unless stipulated otherwise herein, all references in this
Agreement to "dollars", "money", "payments" or other similar financial or
monetary terms are references to currency of the United States of America.
5.9 Gender and Number. The masculine, feminine or neuter gender and the
singular or plural number shall be deemed to include the other(s) whenever the
context so requires.
5.10 Third Parties. Nothing express or implied in this Agreement is
intended, or shall be construed, to confer upon or give any person or entity
other than the Company and the Executive any rights or remedies under, or by
reason of, this Agreement.
5.11 Equitable Relief. Each of the parties to this Agreement hereby
acknowledges that the Company will have no adequate remedy at law if the
Executive fails to perform any of his obligations under Article II of this
Agreement. In the event of a breach, or a threatened or
- 8 -
<PAGE> 11
attempted breach, of any provision of Article II of this Agreement by the
Executive, the Company shall, in addition to all other remedies, be entitled to
a temporary or permanent injunction against such breach without the necessity of
showing any actual monetary damages.
5.12 Guarantees. Money payments due the Executive hereunder shall be
jointly and severally guaranteed by John S. Dyson, individually (personally),,
and by Millbrook Management Company, unless such obligation shall have expired
under the provisions of Article IV.
5.13 Arbitration. Except as otherwise provided in Section 5.11, any
dispute or controversy arising under this Agreement, including (without
limitation) those with respect to the Bonus set forth in Annex I, shall be
promptly determined and settled by arbitration under the rules of the American
Arbitration Association, before a panel of three (3) adult arbitrators, one to
be selected by the Chairman of the Board, one by the Executive and one by the
first two such arbitrators thus appointed. The dispute shall be heard by the
panel, which shall promptly consider the matter and render its written decision
by majority vote. Such decision shall be binding and conclusive upon both
parties and shall not be appealable; and any award based upon such decision may
be entered by either party in any court of competent jurisdiction. All expenses
shall be paid by the non-prevailing party, either fully or as may be otherwise
specified in and by the panel's decision, except that the legal, witness and
other like expenses of each party shall be borne and paid for by such party.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
or caused it to be executed as of the date first above written.
B.W. ELLIOTT MANUFACTURING CO., INC.
By/s/ George M. Scherer
-----------------------------------
George M. Scherer (the "Executive")
The undersigned hereby join in the
execution of this Agreement pursuant to,
and for purpose of signifying their
consent to be bound by the terms of,
Article V, Section 5.12 hereof (see also
Article IV):
/s/ John S. Dyson
- ----------------------------------------
John S. Dyson (Individually)
MILLBROOK MANAGEMENT COMPANY
By :/s/ Clay B. Lifflander
- ----------------------------------------
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<PAGE> 12
ANNEX I
BONUS FORMULA
By June 30th of each calendar year, a calculation shall be made to
determine the amount, if any, and the payment of the Performance Bonus ("Bonus")
owed to the Executive for the periods as defined below.
Such Bonus shall be calculated by multiplying (i) the excess of the
Financial Statement Adjusted Earnings before Interest and Taxes ("ADJUSTED
EBIT") over a Target Earnings before Interest and Taxes ("Target") by (ii)
twelve and one-half percent (12.5%). The Target for the period from April 1,
1995 through March 31, 1996 will be $2,623,000.00; for April 1, 1996 through
March 31, 1997, $2,948,000.00; for April 1, 1997 through March 31, 1998,
$3,316,500.00; for April 1, 1998 through March 31, 1999, $3,731,063.00; and for
April 1, 1999 through March 31, 2000, $4,197,446.00. In the case of any future
acquisition of a business generating additional EBIT, the Target for any such
period in which any such additional EBIT is duly included shall be appropriately
adjusted (increased) as may be mutually agreed upon, in writing, by the Company
and the Executive, taking into account and dependent upon the terms of the
acquisition.
EBIT shall be defined in accordance with Generally Accepted Accounting
Principles; and ADJUSTED EBIT shall be Financial Statement EBIT plus the sum of
(i) the full salary of the Executive, (ii) with respect to any year(s)
subsequent to March 31, 1995, the full compensation paid to Michael W. Urda,
(iii) the total fees to Millbrook Management Company and/or Whitehall-Dyson
Partners, L.P. and/or John S. Dyson, individually, and/or its, his or their
employees, affiliates and/or assigns or designees and (v) all licensing,
management and consulting fees paid to Stow Manufacturing Co. and/or any
member(s) of the Hotchkiss family (for the indicated 12-month periods).
Should the Executive's employment terminate prior to the end-of a
calculation year (i - e., prior to March 31st), the Bonus shall be determined in
accordance with all of the foregoing provisions; but (A) the partial-period
results will be appropriately annualized and, accordingly, (B) the amount
payable shall be appropriately pro-rated over the portion of the calculation
year actually worked.
Any Bonus hereunder shall be paid (whether for a partial or full year) in
cash within one hundred twenty (120) days after the end of the calculation year
or, in the case of a termination prior to the end of a calculation year, within
one hundred twenty (120) days after such termination.
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<PAGE> 1
Exhibit 10.4
EMPLOYMENT AGREEMENT
THIS AGREEMENT (together with all exhibits hereto, the "Agreement"), made
as of the 15th day of May, 1997, between HUDSON LOCK, INC., a Delaware
corporation (the "Company"), having its executive offices and principal place of
business in Hudson, Massachusetts ("Hudson"), and Michael Colecchi, the
undersigned individual ("Executive").
In consideration of the mutual covenants and agreements hereinafter set
forth, the Company and Executive agree as follows:
1. Agreement Term.
The term of this Agreement shall be the period ("Agreement Term")
commencing on the date hereof (the "Employment Date") and ending on December 31,
2001, unless sooner terminated by either party upon one year's prior written
notice ("Voluntary Termination") or pursuant to the provisions of Section 5 of
this Agreement.
2. Employment.
(a) Employment by the Company. Executive agrees to be employed by
the Company for the Agreement Term upon the terms and subject to the conditions
set forth in this Agreement. Executive shall have the title of President, and
report to the Board of Directors of the Company (the "Board"). Executive shall
have such duties as may be prescribed by the Company and shall serve in such
other and/or additional position(s) as the Company may determine from time to
time. If so requested, and for no additional consideration, Executive will serve
as a member of the Board or any affiliate.
(b) Performance of Duties. Throughout the Agreement Term, Executive
shall faithfully and diligently perform Executive's duties in conformity with
the directions of the Company and serve the Company to the best of Executive's
ability. Executive shall devote Executive's entire working time, attention and
energies to the business and affairs of the Company, subject to vacations and
sick leave as provided herein and in accordance with Company policy.
(c) Place of Performance. During the Agreement Term, Executive
shall, subject to travel requirements on behalf of the Company, be based at the
Company's offices in Hudson, Massachusetts or such other location(s) as the
Company may determine and, in this regard, Executive
<PAGE> 2
shall maintain Executive's personal residence in such city or such other
location within reasonable access to Executive's place of employment.
3. Compensation and Benefits.
(a) Base Salary. The Company agrees to pay to Executive for
employment hereunder a base salary ("Base Salary") at the annual rate of
$205,000, based on the calendar year. Executive shall be eligible for an annual
increase to the Base Salary on each anniversary of the Employment Date during
the Agreement Term, which increase shall be equal to the percentage increase of
the Consumer Price Index (the "CPI") over the preceding year calculated by
comparing the CPI for the month of April immediately preceding the anniversary
of the Employment Date to the CPI for the prior April. As used in this Agreement
the term "Consumer Price Index" shall mean the Consumer Price Index for All
Urban Consumers (1982-84 = 100) specified for "All Items" issued by the Bureau
of Labor Statistics of the U.S. Department of Labor or the successor thereto.
The Base Salary shall be payable in installments consistent with the Company's
payroll practices then in effect.
(b) Bonus. (i) Executive shall be eligible for an annual cash bonus
to be paid within thirty (30) days after the annual audited financial statements
of the Company are delivered to the Company by the Company's accountants. Such
bonus shall be based on a formula set forth on Exhibit A with respect to
Adjusted EBITDA Targets as set forth on Exhibit A. "Adjusted EBITDA" means net
income as set forth on such financial statements, plus interest, taxes,
depreciation, amortization, and any executive bonuses to Michael Colecchi and
James Boucher and any management fees. The Adjusted EBITDA Targets shall be
reasonably adjusted by the Board for any prospective acquisitions.
(ii) Executive shall be eligible for an additional one-time
bonus of $750,000 payable within sixty (60) days after the audited financial
statements of the Company for the year ending December 31, 2000 are delivered to
the Company by the Company's accountants if (a) the minimum Adjusted EBITDA
Target, as set forth on Exhibit A, is reached in each of the years ending
December 31, 1999 and 2000, or (b) the average of Adjusted EBITDA for the years
ending December 31, 1999 and 2000 is at least equal to the average of the
minimum Adjusted EBITDA Targets for the years ending December 31, 1999 and 2000
($7,346,824). The Adjusted EBITDA Targets shall be reasonably adjusted by the
Board for any prospective acquisitions. The bonus
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<PAGE> 3
provided for in this Section 3(b)(ii) shall not be subject to prorations and
shall be payable only upon the attainment of the goals set forth in clauses (a)
and (b) above. In the event of (x) a Change of Ownership (as hereinafter
defined) of the Company or (y) the consummation of an initial public offering of
the Company's securities, prior to December 31, 2000, Key Components, Inc.,
shall guarantee the obligation of the Company to make payment of the bonus set
forth in this Section 3(b)(ii) if otherwise earned. "Change of Ownership" means
acquisition and control of at least 51% of the Company's outstanding voting
securities by a single entity not affiliated with any current shareholder.
(c) Benefits and Perquisites. Executive shall be entitled to
participate in, to the extent Executive is otherwise eligible under the terms
thereof, the benefit plans and programs, including medical and vacation plans,
and receive the benefits and perquisites, generally provided to employees of the
same level and responsibility as Executive. Nothing in this Agreement shall
preclude the Company from terminating or amending from time to time any employee
benefit plan or program.
(d) Travel and Business Expenses. Upon submission of itemized
expense statements in the manner specified by the Company, Executive shall be
entitled to reimbursement for reasonable travel and other reasonable business
expenses duly incurred by Executive in the performance of Executive's duties
under this Agreement in accordance with the policies and procedures established
by the Company from time to time for employees of the same level and
responsibility as Executive.
(e) Car Allowance. The Company will provide to Executive an
automobile allowance in the amount of $500 per month.
(f) Life Insurance. If Executive obtains life insurance coverage on
the life and for the benefit of Executive or his family, the Company shall
reimburse Executive up to $3,000 per year for any life insurance premiums paid
by Executive.
(g) No Other Compensation or Benefits; Payment. The compensation and
benefits specified in Sections 3 and 5 of this Agreement shall be in lieu of any
and all other compensation and benefits. Payment of all compensation and
benefits to Executive hereunder shall be made in
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<PAGE> 4
accordance with the relevant Company policies in effect from time to time,
including normal payroll practices, and shall be subject to all applicable
employment and withholding taxes.
(h) Cessation of Employment. In the event Executive shall cease to
be employed by the Company for any reason, then Executive's compensation and
benefits shall cease on the date of such event, except as otherwise provided
herein or in any applicable employee benefit plan or program.
4. Exclusive Employment; Noncompetition.
(a) No Conflict; No Other Employment. During the period of
Executive's employment with the Company, Executive shall not: (i) engage in any
activity which conflicts or interferes with or derogates from the performance of
Executive's duties hereunder nor shall Executive engage in any other business
activity, whether or not such business activity is pursued for gain or profit,
except as approved in advance in writing by the Board; or (ii) accept any other
full-time or substantially full-time employment, whether as an executive or
consultant or in any other capacity, and whether or not compensated therefor.
(b) No Competition. Without limiting the generality of the
provisions of Sections 2(b) or 4(a), during the period of Executive's employment
with the Company, and for a period of five years thereafter (the "Restricted
Period"), Executive shall not, directly or indirectly, own, manage, operate,
join, control, participate in, invest in or otherwise be connected or associated
with, in any manner, including as an officer, director, employee, partner,
stockholder, joint venturer, lender, consultant, advisor, agent, proprietor,
trustee or investor, any Competing Business located in the United States or in
any other location where the Company operates or sells its products or services;
provided, however, that if Executive's employment hereunder is terminated by the
Company under Section 5(d), then the provisions of this Section 4(b) shall
remain in effect only so long as the Company continues to pay to Executive
amounts as severance pursuant to Section 5(d).
(i) As used in this Agreement, the term "Competing Business"
shall mean any business or venture which engages in any business area or
sells or provides products or services that compete or overlap with any
business area in which the Company engages or
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<PAGE> 5
contemplates engaging in, or the products or services as sold or provided,
or as contemplated to be sold or provided, by the Company.
(ii) For purposes of this Section 4(b), the term "invest"
shall not preclude an investment in not more than one percent (1%) of the
outstanding capital stock of a corporation whose capital stock is listed
on a national securities exchange or included in the NASDAQ Stock Market,
so long as Executive does not have the power to control or direct the
management of, or is not otherwise associated with, such corporation.
(c) No Solicitation of Employment. During the Restricted Period,
Executive shall not solicit or encourage any employee of the Company to leave
the employ, or cease his or her relationship with, the Company for any reason,
nor employ such an employee in a Competing Business or any other business.
(d) Company Customers. Executive shall not, during the Restricted
Period, directly or indirectly, contact, solicit or do business with any
"customers" (as hereinafter defined) of the Company for the purpose of selling
or providing any product or service then sold or provided by the Company to such
customers or proposed to be sold or provided to such customers during
Executive's employment by the Company or at the time of termination of
Executive's employment hereunder.
For the purposes of the provisions of this Section 4(d), "customer"
shall include any entity that purchased any product or service from the Company
within eight months of the termination of Executive's employment hereunder,
without regard to the reason for such termination. The term "customer" also
includes any former customer or potential customer of the Company which the
Company has solicited within eight months of such termination, for the purpose
of selling or providing any product or service then sold or provided, or then
contemplated to be sold or provided, by the Company.
(e) Modification of Covenants. The restrictions against competition
set forth in this Section 4 are considered by the parties to be reasonable for
the purposes of protecting the business of the Company. However, if any such
restriction is found by any court of competent jurisdiction to be unenforceable
because it extends for too long a period of time or over too great a
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<PAGE> 6
range of activities or in too broad a geographic area, it shall be interpreted
to extend only over the maximum period of time, range of activities or
geographic area as to which it may be enforceable.
5. Termination of Employment.
(a) Termination. The Company may terminate Executive's employment
for Cause (as hereinafter defined) or for any breach of this Agreement, in which
case the provisions of Section 5(b) shall apply. The Company may also terminate
Executive's employment in the event of Executive's Disability (as hereinafter
defined), in which case the provisions of Section 5(c) shall apply. If
Executive's employment is terminated by reason of Executive's death, retirement
or Voluntary Termination, the provisions of Section 5(b) shall apply.
(b) Termination for Cause; Termination by Reason of Death or
Retirement or Voluntary Termination. (1) In the event that Executive's
employment hereunder is terminated during the Agreement Term (x) by the Company
for Cause (as hereinafter defined), (y) by reason of Executive's death or
retirement or (z) by reason of Voluntary Termination, then the Company shall pay
to Executive, within thirty (30) days of the date of such termination, only the
Base Salary through such date of termination.
(2) For purposes of this Agreement, "Cause" shall mean (i)
conviction of any crime (whether or not involving the Company) constituting a
felony in the jurisdiction involved; (ii) engaging in any act which subjects, or
if generally known would subject, the Company to public ridicule or
embarrassment; (iii) gross neglect or misconduct in the performance of
Executive's duties hereunder; (iv) willful or repeated failure or refusal to
perform such duties as may be relegated to Executive commensurate with
Executive's position; or (v) breach of any provision of this Agreement by
Executive.
(3) In the event the Company desires to terminate Executive's
employment for Cause as defined in clauses (iv), (v) or (vi) of the definition
thereof, the Company shall first attempt to resolve the matter(s) at issue
through a meeting between Executive and the President of Key Components, Inc. If
such meeting fails to resolve the matter(s), then Executive and the President of
Key Components, Inc. will meet with the Board and attempt to resolve the
matter(s). The decision of the Board as to the matter(s) shall be final and
binding on the parties and not subject to review or appeal by any other person.
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<PAGE> 7
(c) Disability. If, as a result of Executive's incapacity due to
physical or mental illness, Executive shall have been absent from Executive's
duties hereunder on a full time basis for either (i) ninety (90) days within any
six-month period, or (ii) sixty (60) consecutive days, and within thirty (30)
days after written notice of termination is given shall not have returned to the
performance of Executive's duties hereunder on a full time basis, the Company
may terminate Executive's employment hereunder for "Disability". In that event,
the Company shall pay to Executive, within thirty (30) days of the date of such
termination, only the Base Salary through such date of termination. During any
period that Executive fails to perform Executive's duties hereunder as a result
of incapacity due to physical or mental illness (a "Disability Period"),
Executive shall continue to receive the compensation and benefits provided by
Section 3 hereof until Executive's employment hereunder is terminated; provided,
however, that the amount of compensation and benefits received by Executive
during the Disability Period shall be reduced by the aggregate amounts, if any,
payable to Executive under disability benefit plans and programs of the Company
or under the Social Security disability insurance program.
(d) No Further Liability; Release. Payment made and performance by
the Company in accordance with this Section 5 shall operate to fully discharge
and release the Company and its directors, officers, employees, subsidiaries,
affiliates, stockholders, successors, assigns, agents and representatives from
any further obligation or liability with respect to Executive's employment and
termination of employment. Other than paying Executive's Base Salary through the
date of termination of Executive's employment and making any severance payment
and continuing benefits and perquisites pursuant to and in accordance with this
Section 5 (as applicable), the Company and its directors, officers, employees,
subsidiaries, affiliates, stockholders, successors, assigns, agents and
representatives shall have no further obligation or liability to Executive or
any other person under this Agreement.
6. Confidential Information.
(a) Existence of Confidential Information. The Company owns and has
developed and compiled, and will develop and compile, certain proprietary
technology, know-how and confidential information which have great value to its
business (referred to in this Agreement, collectively, as
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<PAGE> 8
"Confidential Information"). Confidential Information includes not only
information disclosed by the Company to Executive, but also information
developed or learned by Executive during the course or as a result of employment
with the Company, which information shall be the property of the Company.
Confidential Information includes all information that has or could have
commercial value or other utility in the business in which the Company is
engaged or contemplates engaging, and all information of which the unauthorized
disclosure could be detrimental to the interests of the Company, whether or not
such information is specifically labelled as Confidential Information by the
Company. By way of example and without limitation, Confidential Information
includes any and all information developed, obtained, licensed by or to or owned
by the Company concerning trade secrets, techniques, know-how (including
research data, designs, plans, procedures, merchandising, marketing,
distribution and warehousing know-how, processes, and research records),
software, computer programs, and any other intellectual property created, used
or sold (through a license or otherwise) by the Company, product know-how and
processes, innovations, discoveries, improvements, research, development, test
results, reports, specifications, data, formats, marketing data and plans,
business plans, strategies, forecasts, unpublished financial information,
orders, agreements and other forms of documents, price and cost information,
merchandising opportunities, expansion plans, budgets, projections, customer,
supplier, licensee, licensor and subcontractor identities, characteristics,
agreements and operating procedures, and salary, staffing and employment
information.
(b) Protection of Confidential Information. Executive acknowledges
and agrees that in the performance of duties hereunder Executive develops and
acquires, and the Company discloses to and entrusts Executive with, Confidential
Information which is the exclusive property of the Company and which Executive
may possess or use only in the performance of duties for the Company. Executive
also acknowledges that Executive is aware that the unauthorized disclosure of
Confidential Information, among other things, may be prejudicial to the
Company's interests, an invasion of privacy and an improper disclosure of trade
secrets. Executive shall not, directly of indirectly, use, make available, sell,
disclose or otherwise communicate to any corporation, partnership, individual or
other third party, other than in the course of Executive's assigned duties and
for the benefit of the Company, any Confidential Information, either during the
Agreement Term or
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<PAGE> 9
thereafter. In the event Executive desires to publish the results of Executive's
work for or experiences with the Company through literature, interviews or
speeches, Executive will submit requests for such interviews or such literature
or speeches to the Board at least fourteen (14) days before any anticipated
dissemination of such information for a determination of whether such disclosure
is in the best interests of the Company, including whether such disclosure may
impair trade secret status or constitute an invasion of privacy. Executive
agrees not to publish, disclose or otherwise disseminate such information
without the prior written approval of the Board.
(c) Delivery of Records, Etc. In the event Executive's employment
with the Company ceases for any reason, Executive will not remove from the
Company's premises without its prior written consent any records, notes,
notebooks, files, drawings, documents, equipment, materials and writings
received from, created for or belonging to the Company, including those which
relate to or contain Confidential Information, or any copies thereof. Upon
request or when employment with the Company terminates, Executive will
immediately deliver the same to the Company.
7. Invention and Patents.
(a) Executive will promptly and fully disclose to the Company any
and all inventions, discoveries, trade secrets and improvements, whether or not
patentable or whether or not they are made, conceived or reduced to practice
during working hours or using the Company's data or facilities, which Executive
shall develop, make, conceive or reduce to practice during Executive's
employment by the Company, either solely or jointly with others (collectively,
"Developments"). All such Developments shall be the sole property of the
Company, and Executive hereby assigns to the Company, without further
compensation, all his right, title and interest in and to such Developments and
any and all related patents, patent applications, copyrights, copyright
applications, trademarks and trade names in the United States and elsewhere.
(b) Executive shall keep and maintain adequate and current written
records of all Developments (in the form of notes, sketches, drawings and as may
be specified by the Company), which records shall be available to and remain the
sole property of the Company at all times.
(c) Executive shall assist the Company in obtaining and enforcing
patent, copyright and other forms of legal protection for the Developments in
any country. Upon request, Executive shall sign all applications, assignments,
instruments and papers and perform all acts necessary or
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<PAGE> 10
desired by the Company and to enable the Company its successors, assigns and
nominees, to secure and enjoy the full exclusive benefits and advantages
thereof.
(d) Executive understands that Executive's obligations under this
section will continue after the termination of his employment with the Company
and that during his employment Executive shall perform such obligations without
further compensation, except for reimbursement of expenses incurred at the
request of the Company. Executive further understands that if he is not employed
by the Company as an employee at the time he is requested to perform any
obligations under this section, Executive shall receive for such performance a
reasonable per diem fee, as well as reimbursement of any expenses incurred at
the request of the Company.
8. Assignment and Transfer.
(a) Company. This Agreement shall inure to the benefit of and be
enforceable by, and may be assigned by the Company to, any purchaser of all or
substantially all of the Company's business or assets, any successor to the
Company or any assignee thereof (whether direct or indirect, by purchase,
merger, consolidation or otherwise). The Company will require any such
purchaser, successor or assignee to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such purchase, succession or assignment had taken
place.
(b) Executive. Executive's rights and obligations under this
Agreement shall not be transferable by Executive by assignment or otherwise, and
any purported assignment, transfer or delegation thereof shall be void;
provided, however, that if Executive shall die, all amounts then payable to
Executive hereunder shall be paid in accordance with the terms of this Agreement
to Executive's devisee, legatee or other designee or, if there be no such
designee, to Executive's estate.
9. Miscellaneous.
(a) Other Obligations. Executive represents and warrants that he is
not a party to any other employment agreement and that neither Executive's
employment with the Company nor Executive's performance of Executive's
obligations hereunder will conflict with or violate or otherwise are
inconsistent with any other agreements to which Executive is or has been a party
or with any other obligations, legal or otherwise, which Executive may have.
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<PAGE> 11
(b) Nondisclosure; Other Employers. Executive will not disclose to
the Company, or use, or induce the Company to use, any proprietary information,
trade secrets or confidential business information of others. Executive
represents and warrants that Executive has returned all property, proprietary
information, trade secrets and confidential business information belonging to
all prior employers.
(c) Cooperation. Following termination of employment with the
Company, Executive shall cooperate with the Company, as requested by the
Company, to affect a transition of Executive's responsibilities and to ensure
that the Company is aware of all matters being handled by Executive.
(d) Protection of Reputation. During the Agreement Term and
thereafter, Executive agrees that he will take no action which is intended, or
could reasonably be expected, to harm the Company or its reputation or which
could reasonably be expected to lead to unwanted or unfavorable publicity to the
Company.
(e) Governing Law. This Agreement, including the validity,
interpretation, construction and performance of this Agreement, shall be
governed by and construed in accordance with the laws of the Commonwealth of
Massachusetts applicable to agreements made and to be performed in such state
without regard to such states conflicts of law principles. All actions and
proceedings relating directly or indirectly to this Agreement shall be litigated
in any state court or federal court located in New York, New York. The parties
hereto expressly consent to the jurisdiction of any such court and to venue
therein and consent to the service of process in any such action or proceeding
by certified or registered mailing of the summons and complaint therein directed
to Executive at the address as provided in Section 9(l) hereof and to the
Company's designated agent for service of process (which initially shall be
which agent may be changed by the Company upon thirty (30) days' prior written
notice to Executive).
(f) Entire Agreement. This Agreement (including the Exhibits hereto)
contains the entire agreement and understanding between the parties hereto in
respect of the subject matter hereof and supersedes, cancels and annuls any
prior or contemporaneous written or oral agreements, understandings, commitments
and practices between them respecting the subject matter hereof,
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<PAGE> 12
including all prior employment agreements, if any, between the Company and
Executive, which agreement(s) hereby are terminated and shall be of no further
force or effect.
(g) Amendment. This Agreement may be amended only by a writing which
makes express reference to this Agreement as the subject of such amendment and
which is signed by Executive and, on behalf of the Company, by its duly
authorized officer.
(h) Severability. If any term, provision, covenant or condition of
this Agreement or part thereof, or the application thereof to any person, place
or circumstance, shall be held to be invalid, unenforceable or void, the
remainder of this Agreement and such term, provision, covenant or condition
shall remain in full force and effect, and any such invalid, unenforceable or
void term, provision, covenant or condition shall be deemed, without further
action on the part of the parties hereto, modified, amended and limited to the
extent necessary to render the same and the remainder of this Agreement valid,
enforceable and lawful. In this regard, Executive acknowledges that the
provisions of Sections 4 and 6 are reasonable and necessary for the protection
of the Company.
(i) Construction. The headings and captions of this Agreement are
provided for convenience only and are intended to have no effect in construing
or interpreting this Agreement. The language in all parts of this Agreement
shall be in all cases construed according to its fair meaning and not strictly
for or against the Company or Executive. The use herein of the word "including,"
when following any general provision, sentence, clause, statement, term or
matter, shall be deemed to mean "including, without limitation". As used herein,
"Company" shall mean the Company and its subsidiaries and any purchaser of,
successor to or assignee (whether direct or indirect, by purchase, merger,
consolidation or otherwise) of all or substantially all of the Company's
business or assets which is obligated to perform this Agreement by operation of
law, agreement pursuant to Section 7 hereof or otherwise. As used herein, the
words "day" or "days" shall mean a calendar day or days.
(j) Nonwaiver. Neither any course of dealing nor any failure or
neglect of either party hereto in any instance to exercise any right, power or
privilege hereunder or under law shall constitute a waiver of any other right,
power or privilege or of the same right, power or privilege in any other
instance. All waivers by either party hereto must be contained in a written
instrument signed by the party to be charged and, in the case of the Company, by
its duly authorized officer.
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<PAGE> 13
(k) Remedies for Breach. The parties hereto agree that Executive is
obligated under this Agreement to render personal services during the Agreement
Term of a special, unique, unusual, extraordinary and intellectual character,
thereby giving this Agreement peculiar value, and, in the event of a breach or
threatened breach of any covenant of Executive herein, the injury or imminent
injury to the value and the goodwill of the Company's business could not be
reasonably or adequately compensated in damages in an action at law.
Accordingly, Executive expressly acknowledges that the Company shall be entitled
to specific performance, injunctive relief or any other equitable remedy against
Executive, without the posting of a bond, in the event of any breach or
threatened breach of any provision of this Agreement by Executive (including
Sections 4 and 6 hereof). Without limiting the generality of the foregoing, if
Executive breaches Sections 4 or 6 hereof, such breach will entitle the Company
to enjoin Executive from disclosing any Confidential Information to any
Competing Business, to enjoin such Competing Business from receiving Executive
or using any such Confidential Information and/or to enjoin Executive from
rendering personal services to or in connection with such Competing Business.
The rights and remedies of the parties hereto are cumulative and shall not be
exclusive, and each such party shall be entitled to pursue all legal and
equitable rights and remedies and to secure performance of the obligations and
duties of the other under this Agreement, and the enforcement of one or more of
such rights and remedies by a party shall in no way preclude such party from
pursuing, at the same time or subsequently, any and all other rights and
remedies available to it.
(l) Notices. Any notice, request, consent or approval required or
permitted to be given under this Agreement or pursuant to law shall be
sufficient if in writing, and if and when sent by certified or registered mail,
return receipt requested, with postage prepaid, to Executive's residence (as
reflected in the Company's records or as otherwise designated by Executive on
thirty (30) days' prior written notice to the Company) or to the Company's
principal executive office, attention: Chief Executive Officer (with copies to
the General Counsel), as the case may be. All such notices, requests, consents
and approvals shall be effective upon being deposited in the United States mail.
However, the time period in which a response thereto must be given shall
commence to run from the date of receipt on the return receipt of the notice,
request, consent or approval by the addressee thereof. Rejection or other
refusal to accept, or the inability to deliver because of changed address
- 13 -
<PAGE> 14
of which no notice was given as provided herein, shall be deemed to be receipt
of the notice, request, consent or approval sent.
(m) Assistance in Proceedings, Etc. Executive shall, without
additional compensation, during and after expiration of the Agreement Term, upon
reasonable notice, furnish such information and proper assistance to the Company
as may reasonably be required by the Company in connection with any legal or
quasi-legal proceeding, including any external or internal investigation,
involving the Company or any of its affiliates or in which any of them is, or
may become, a party.
(n) Survival. Cessation or termination of Executive's employment
with the Company shall not result in termination of this Agreement. The
respective obligations of Executive and rights and benefits afforded to the
Company as provided in this Agreement shall survive cessation or termination of
Executive's employment hereunder. This Agreement shall not terminate upon, and
shall remain in full force and effect following, expiration of the Agreement
Term and all rights and obligations of the parties hereto as and to the extent
provided herein shall survive such expiration.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed on its behalf by an officer thereunto duly authorized and Executive has
duly executed this Agreement, all as of the date and year first written above.
HUDSON LOCK, INC.
By: /s/
---------------------------
Name:
Title:
/s/ Michael Colecchi
------------------------------
Michael Colecchi
- 14 -
<PAGE> 15
Exhibit A
For Year Ending 12/31/97:
<TABLE>
<CAPTION>
Adjusted EBITDA Targets(1) Bonus(2)(3)
- -------------------------- -----------
<S> <C>
$6,200,000 $50,000
$7,000,000 $150,000
over $7,000,000 To be determined by the Board
</TABLE>
For Year Ending 12/31/98:
<TABLE>
<CAPTION>
Adjusted EBITDA Targets Bonus
- ----------------------- -----
<S> <C>
$6,634,000 $50,000
$7,490,000 $150,000
over $7,490,000 To be determined by the Board
</TABLE>
For Year Ending 12/31/99:
<TABLE>
<CAPTION>
Adjusted EBITDA Targets Bonus
- ----------------------- -----
<S> <C>
$7,098,380 $50,000
$8,014,300 $150,000
over $8,014,300 To be determined by the Board
</TABLE>
For Year Ending 12/31/2000:
<TABLE>
<CAPTION>
Adjusted EBITDA Targets Bonus
- ----------------------- -----
<S> <C>
$7,595,267 $50,000
$8,575,301 $150,000
over $8,575,301 To be determined by the Board
</TABLE>
<PAGE> 16
For Year Ending 12/31/97:
For Year Ending 12/31/2001:
<TABLE>
<CAPTION>
Adjusted EBITDA Targets Bonus
- ----------------------- -----
<S> <C>
$8,126,936 $50,000
$9,175,572 $150,000
over $9,175,572 To be determined by the Board
</TABLE>
- ----------
(1) The Adjusted EBITDA Targets are increased 7% per annum from the Adjusted
EBITDA Targets of the immediately preceding year.
(2) Bonuses shall be prorated between $50,000 and $150,000 to the extent that
the Adjusted EBITDA falls within the two Adjusted EBITDA Target numbers
for a given year.
(3) Bonuses for the year ending December 31, 1997 shall be reduced pro rata to
the extent that this Agreement has not been in effect for the entire
calendar year 1997.
<PAGE> 17
AMENDMENT NO. 1
TO EMPLOYMENT AGREEMENT
This Amendment No. 1 to the Employment Agreement is dated as of April 27,
1998 and is by and between Hudson Lock, Inc., a Delaware corporation (the
"Company"), and Michael Colecchi, the undersigned individual ("Executive").
W I T N E S S E T H:
WHEREAS, the Company and Executive entered into an Employment Agreement,
dated May 15, 1997 (the "Agreement");
WHEREAS, the Agreement provides for a one-time bonus of $750,000 in the
event certain targets are met in each of the years ending December 31, 1999 and
2000; and
WHEREAS, the Company and the Executive desire to provide Executive with an
opportunity to participate in the ownership of the Company.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements set forth herein, the Company and the Executive agree
that Section 3(b)(ii) of the Agreement be amended as follows:
1. In lieu of an additional one-time bonus of $750,000 payable in
the event certain Adjusted EBITDA Targets are met in the years ending
December 31, 1999 and 2000, the Executive shall receive an option to
purchase 1.5 shares of the no par value Common Stock of Key Components,
Inc., the parent of the Company (the "Option") exercisable at a price of
$250,000.00 per share. The Option shall be for a term of ten years and
shall vest and become exercisable as to .4 shares on April 27 in each of
the years 1998, 1999 and 2000 and as to .3 shares on April 27, 2001.
2. The Option shall be issued pursuant to an Incentive Stock Option
Agreement which shall be substantially in the form attached hereto as
Exhibit A.
3. Concurrently with the execution and delivery of the Incentive
Stock Option Agreement referred to in paragraph 2, Key Components, Inc.
and the Executive shall enter in to a Shareholder's Agreement setting
forth the rights and obligations of Executive and the Company, which
agreement shall be substantially in the form attached hereto as Exhibit B.
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
HUDSON LOCK, INC.
By: /s/ Alan Rivera
--------------------------
Name: Alan Rivera
Title:
/s/ Michael Colecchi
-----------------------------
Michael Colecchi
<PAGE> 1
Exhibit 10.5
EMPLOYMENT AGREEMENT
THIS AGREEMENT (together with all exhibits hereto, the "Agreement"), made
as of the 10th day of December, 1997, between ESP LOCK PRODUCTS, INC., a
Delaware corporation, having its executive offices and principal place of
business in Leominster, Massachusetts (the "Company") and AUGUST M. BOUCHER, the
undersigned individual ("Executive").
In consideration of the mutual covenants and agreements hereinafter set
forth, the Company and Executive agree as follows:
1. Agreement Term.
The term of this Agreement shall be the period ("Agreement Term")
commencing on the date hereof (the "Employment Date") and ending on December 31,
2002, unless sooner terminated by either party upon one year's prior written
notice ("Voluntary Termination") or pursuant to the provisions of Section 5 of
this Agreement.
2. Employment.
(a) Employment by the Company. Executive agrees to be employed by
the Company for the Agreement Term upon the terms and subject to the conditions
set forth in this Agreement. Executive shall have the title of President, and
report to the Board of Directors of the Company (the "Board"). Executive shall
have such duties as may be prescribed by the Company and shall serve in such
other and/or additional position(s) as the Company may determine from time to
time. If so requested, and for no additional consideration, Executive will serve
as a member of the Board of the Company or any affiliate.
(b) Performance of Duties. Throughout the Agreement Term, Executive
shall faithfully and diligently perform Executive's duties in conformity with
the directions of the Company and serve the Company to the best of Executive's
ability. Executive shall devote Executive's entire working time, attention and
energies to the business and affairs of the Company, subject to vacations and
sick leave as provided herein and in accordance with Company policy.
(c) Place of Performance. The principal location at which
Executive's services are to be performed is within a fifty (50) mile radius of
Leominster, Massachusetts. The Executive shall not be required to change such
principal location of the performance of his services without his consent,
except in the event that the Company's principal offices are, for good cause,
relocated to another area.
<PAGE> 2
3. Compensation and Benefits.
(a) Base Salary. The Company agrees to pay to Executive for
employment hereunder a base salary ("Base Salary") at the annual rate of
$165,000, based on the calendar year. Executive shall be eligible for an annual
increase to the Base Salary on each anniversary of the Employment Date during
the Agreement Term, which increase shall be equal to the percentage increase of
the Consumer Price Index (the "CPI") over the preceding year calculated by
comparing the CPI for the month of September immediately preceding the
anniversary of the Employment Date to the CPI for the prior September. As used
in this Agreement the term "Consumer Price Index" shall mean the Consumer Price
Index for All Urban Consumers (1982-84 = 100) specified for "All Items" issued
by the Bureau of Labor Statistics of the U.S. Department of Labor or the
successor thereto. The Base Salary shall be payable in installments consistent
with the Company's payroll practices then in effect.
(b) Bonus. Executive shall be eligible for bonuses, at such times
and in such amounts as shall be determined at the discretion of the Board.
Executive shall be guaranteed a bonus of $340,000 for the year ending December
31, 1997.
(c) Benefits and Perquisites. Executive shall be entitled to
participate in, to the extent Executive is otherwise eligible under the terms
thereof, the benefit plans and programs, including medical and vacation plans,
and receive the benefits and perquisites, generally provided to employees of the
same level and responsibility as Executive. Nothing in this Agreement shall
preclude the Company from terminating or amending from time to time any employee
benefit plan or program.
(d) Travel and Business Expenses. Upon submission of itemized
expense statements in the manner specified by the Company, Executive shall be
entitled to reimbursement for reasonable travel and other reasonable business
expenses duly incurred by Executive in the performance of Executive's duties
under this Agreement in accordance with the policies and procedures established
by the Company from time to time for employees of the same level and
responsibility as Executive.
(e) Car Allowance. The Company will provide to Executive an
automobile allowance in the amount of $550 per month. The Company shall pay
certain expenses relating to the automobile including insurance, maintenance,
repairs and automobile excise taxes. The Company shall not be responsible for
gasoline expenses.
(f) No Other Compensation or Benefits; Payment. The compensation and
benefits specified in Sections 3 and 5 of this Agreement shall be in lieu of any
and all other compensation and benefits. Payment of all compensation and
benefits to Executive hereunder shall be made in accordance with the relevant
Company policies in effect from time to time, including normal payroll
practices, and shall be subject to all applicable employment and withholding
taxes.
-2-
<PAGE> 3
(g) Cessation of Employment. In the event Executive shall cease to
be employed by the Company for any reason, then Executive's compensation and
benefits shall cease on the date of such event, except as otherwise provided
herein or in any applicable employee benefit plan or program.
4. Exclusive Employment; Noncompetition.
(a) No Conflict; No Other Employment. During the period of
Executive's employment with the Company, Executive shall not: (i) engage in any
activity which conflicts or interferes with or derogates from the performance
of Executive's duties hereunder nor shall Executive engage in any other business
activity, whether or not such business activity is pursued for gain or profit,
except as approved in advance in writing by the Board, except for Executive's
investment in a soccer facility, which Executive may pursue without Board
approval; or (ii) accept any other full-time or substantially full-time
employment, whether as an executive or consultant or in any other capacity, and
whether or not compensated therefor.
(b) No Competition. Executive, pursuant to a Stock Purchase
Agreement dated as of November ___, 1997 (the "Purchase Agreement"), has agreed
to sell, together with the other Sellers, as defined in the Purchase Agreement,
all of the outstanding capital stock of the Company. To induce the purchasers of
such capital stock, who shall be third party beneficiaries hereof, to enter into
the Purchase Agreement, and without limiting the generality of the provisions of
Sections 2(b) or 4(a), during the Agreement Term, Executive shall not, directly
or indirectly, own, manage, operate, join, control, participate in, invest in or
otherwise be connected or associated with, in any manner, including as an
officer, director, employee, partner, stockholder, joint venturer, lender,
consultant, advisor, agent, proprietor, trustee or investor, any Competing
Business located in the United States or in any other location where the Company
operates or sells its products or services. In addition, in the event that
Executive's employment hereunder is terminated during the Agreement Term for
Cause (as hereinafter defined) or by reason of Voluntary Termination, Executive
shall not compete with the Company, as specified in this Section 4(b), for a
period from the date of termination until two years after the end of the
Agreement Term. In the event that Executive's employment hereunder is terminated
during the Agreement Term without Cause, Executive shall not compete with the
Company, as specified in this Section 4(b), for a period from the date of
termination until one year after the end of the Agreement Term (such termination
without Cause shall not relieve the Company of its obligation to pay to
Executive the Base Salary through the end of the Agreement Term);
(i) As used in this Agreement, the term "Competing Business"
shall mean any business or venture which engages in any business area or
sells or provides products or services that compete or overlap with any
business area in which the Company engages or contemplates engaging, or
the products or services sold or provided, or contemplated to be sold or
provided, by the Company.
(ii) For purposes of this Section 4(b), the term "invest"
shall not preclude an investment in not more than one percent (1%) of the
outstanding capital stock of a
-3-
<PAGE> 4
corporation whose capital stock is listed on a national securities
exchange or included in the NASDAQ Stock Market, so long as Executive does
not have the power to control or direct the management of, or is not
otherwise associated with, such corporation.
(c) No Solicitation of Employment. During the period from the date
hereof until one year after the end of the Agreement Term, Executive will not,
directly or indirectly, employ or solicit the employment or engagement by others
of any employee of the Company who was such an employee at the time of or within
six (6) months prior to the date of any such proposed employment or
solicitation.
(d) Company Customers. Executive shall not, during the Agreement
Term, and for a period of five years thereafter, directly or indirectly,
contact, solicit or do business with any "customers" (as hereinafter defined) of
the Company for the purpose of selling or providing any product or service then
sold or provided by the Company to such customers or proposed to be sold or
provided to such customers during Executive's employment by the Company or at
the time of termination of Executive's employment hereunder.
For the purposes of the provisions of this Section 4(d), "customer"
shall include any entity that purchased any product or service from the Company
within eight months of the termination of Executive's employment hereunder,
without regard to the reason for such termination. The term "customer" also
includes any former customer or potential customer of the Company which the
Company has solicited within eight months of such termination, for the purpose
of selling or providing any product or service then sold or provided, or then
contemplated to be sold or provided, by the Company.
(e) Modification of Covenants. The restrictions against competition
set forth in this Section 4 are considered by the parties to be reasonable for
the purposes of protecting the business of the Company. However, if any such
restriction is found by any court of competent jurisdiction to be unenforceable
because it extends for too long a period of time or over too great a range of
activities or in too broad a geographic area, it shall be interpreted to extend
only over the maximum period of time, range of activities or geographic area as
to which it may be enforceable.
5. Termination of Employment.
(a) Termination. The Company may terminate Executive's employment
for Cause or for any breach of this Agreement, in which case the provisions of
Section 5(b) shall apply. The Company may also terminate Executive's employment
in the event of Executive's Disability (as hereinafter defined), in which case
the provisions of Section 5(c) shall apply. If Executive's employment is
terminated by reason of Executive's death, retirement or Voluntary Termination,
the provisions of Section 5(b) shall apply.
(b) Termination for Cause; Termination by Reason of Death or
Retirement or Voluntary Termination. (1) In the event that Executive's
employment hereunder is terminated during
-4-
<PAGE> 5
the Agreement Term (x) by the Company for Cause (as hereinafter defined), (y) by
reason of Executive's death or retirement or (z) by reason of Voluntary
Termination, then the Company shall pay to Executive, within thirty (30) days of
the date of such termination, only the Base Salary through such date of
termination.
(2) For purposes of this Agreement, "Cause" shall mean (i)
conviction of any crime (whether or not involving the Company) constituting a
felony in the jurisdiction involved; (ii) engaging in any act which subjects, or
if generally known would subject, the Company to public ridicule or
embarrassment; (iii) gross neglect or misconduct in the performance of
Executive's duties hereunder; (iv) willful or repeated failure or refusal to
perform such duties as may be relegated to Executive commensurate with
Executive's position; or (v) breach of any provision of this Agreement by
Executive.
(3) In the event the Company desires to terminate Executive's
employment for Cause as defined in clauses (iv), (v) or (vi) of the definition
thereof, the Company shall first attempt to resolve the matter(s) at issue
through a meeting between Executive and the President of Key Components, Inc. If
such meeting fails to resolve the matter(s), then Executive and the President of
Key Components, Inc. will meet with the Board and attempt to resolve the
matter(s). The decision of the Board as to the matter(s) shall be final and
binding on the parties and not subject to review or appeal by any other person.
(c) Disability. If, as a result of Executive's incapacity due to
physical or mental illness, Executive shall have been absent from Executive's
duties hereunder on a full time basis for either (i) ninety (90) days within any
six-month period, or (ii) sixty (60) consecutive days, and within thirty (30)
days after written notice of termination is given shall not have returned to the
performance of Executive's duties hereunder on a full time basis, the Company
may terminate Executive's employment hereunder for "Disability". In that event,
the Company shall pay to Executive, within thirty (30) days of the date of such
termination, only the Base Salary through such date of termination. During any
period that Executive fails to perform Executive's duties hereunder as a result
of incapacity due to physical or mental illness (a "Disability Period"),
Executive shall continue to receive the compensation and benefits provided by
Section 3 hereof until Executive's employment hereunder is terminated; provided,
however, that the amount of compensation and benefits received by Executive
during the Disability Period shall be reduced by the aggregate amounts, if any,
payable to Executive under disability benefit plans and programs of the Company
or under the Social Security disability insurance program.
(d) No Further Liability; Release. Payment made and performance by
the Company in accordance with this Section 5 shall operate to fully discharge
and release the Company and its directors, officers, employees, subsidiaries,
affiliates, stockholders, successors, assigns, agents and representatives from
any further obligation or liability with respect to Executive's employment and
termination of employment. Other than paying Executive's Base Salary through the
date of termination of Executive's employment and making any severance payment
and continuing benefits and perquisites pursuant to and in accordance with this
Section 5 (as applicable), the Company and
-5-
<PAGE> 6
its directors, officers, employees, subsidiaries, affiliates, stockholders,
successors, assigns, agents and representatives shall have no further obligation
or liability to Executive or any other person under this Agreement.
6. Confidential Information.
(a) Existence of Confidential Information. The Company owns and has
developed and compiled, and will develop and compile, certain proprietary
technology, know-how and confidential information which have great value to its
business (referred to in this Agreement, collectively, as "Confidential
Information"). Confidential Information includes not only information disclosed
by the Company to Executive, but also information developed or learned by
Executive during the course or as a result of employment with the Company, which
information shall be the property of the Company. Confidential Information
includes all information that has or could have commercial value or other
utility in the business in which the Company is engaged or contemplates
engaging, and all information of which the unauthorized disclosure could be
detrimental to the interests of the Company, whether or not such information is
specifically labeled as Confidential Information by the Company. By way of
example and without limitation, Confidential Information includes any and all
information developed, obtained, licensed by or to or owned by the Company
concerning trade secrets, techniques, know-how (including research data,
designs, plans, procedures, merchandising, marketing, distribution and
warehousing know-how, processes, and research records), software, computer
programs, and any other intellectual property created, used or sold (through a
license or otherwise) by the Company, product know-how and processes,
innovations, discoveries, improvements, research, development, test results,
reports, specifications, data, formats, marketing data and plans, business
plans, strategies, forecasts, unpublished financial information, orders,
agreements and other forms of documents, price and cost information,
merchandising opportunities, expansion plans, budgets, projections, customer,
supplier, licensee, licensor and subcontractor identities, characteristics,
agreements and operating procedures, and salary, staffing and employment
information.
(b) Protection of Confidential Information. Executive acknowledges
and agrees that in the performance of duties hereunder Executive develops and
acquires, and the Company discloses to and entrusts Executive with, Confidential
Information which is the exclusive property of the Company and which Executive
may possess or use only in the performance of duties for the Company. Executive
also acknowledges that Executive is aware that the unauthorized disclosure of
Confidential Information, among other things, may be prejudicial to the
Company's interests, an invasion of privacy and an improper disclosure of trade
secrets. Executive shall not, directly of indirectly, use, make available, sell,
disclose or otherwise communicate to any corporation, partnership, individual or
other third party, other than in the course of Executive's assigned duties and
for the benefit of the Company, any Confidential Information, either during the
Agreement Term or thereafter. In the event Executive desires to publish the
results of Executive's work for or experiences with the Company through
literature, interviews or speeches, Executive will submit requests for such
interviews or such literature or speeches to the Board at least fourteen (14)
days before any anticipated dissemination of such information for a
determination of whether such
-6-
<PAGE> 7
disclosure is in the best interests of the Company, including whether such
disclosure may impair trade secret status or constitute an invasion of privacy.
Executive agrees not to publish, disclose or otherwise disseminate such
information without the prior written approval of the Board.
(c) Delivery of Records, Etc. In the event Executive's employment
with the Company ceases for any reason, Executive will not remove from the
Company's premises without its prior written consent any records, notes,
notebooks, files, drawings, documents, equipment, materials and writings
received from, created for or belonging to the Company, including those which
relate to or contain Confidential Information, or any copies thereof. Upon
request or when employment with the Company terminates, Executive will
immediately deliver the same to the Company.
7. Invention and Patents.
(a) Executive will promptly and fully disclose to the Company any
and all inventions, discoveries, trade secrets and improvements, whether or not
patentable or whether or not they are made, conceived or reduced to practice
during working hours or using the Company's data or facilities, which Executive
shall develop, make, conceive or reduce to practice during Executive's
employment by the Company, either solely or jointly with others (collectively,
"Developments"). All such Developments shall be the sole property of the
Company, and Executive hereby assigns to the Company, without further
compensation, all his right, title and interest in and to such Developments and
any and all related patents, patent applications, copyrights, copyright
applications, trademarks and trade names in the United States and elsewhere.
(b) Executive shall keep and maintain adequate and current written
records of all Developments (in the form of notes, sketches, drawings and as may
be specified by the Company), which records shall be available to and remain the
sole property of the Company at all times.
(c) Executive shall assist the Company in obtaining and enforcing
patent, copyright and other forms of legal protection for the Developments in
any country. Upon request, Executive shall sign all applications, assignments,
instruments and papers and perform all acts necessary or desired by the Company
and to enable the Company its successors, assigns and nominees, to secure and
enjoy the full exclusive benefits and advantages thereof.
(d) Executive understands that Executive's obligations under this
section will continue after the termination of his employment with the Company
and that during his employment Executive shall perform such obligations without
further compensation, except for reimbursement of expenses incurred at the
request of the Company. Executive further understands that if he is not employed
by the Company as an employee at the time he is requested to perform any
obligations under this section, Executive shall receive for such performance a
reasonable per diem fee, as well as reimbursement of any expenses incurred at
the request of the Company.
-7-
<PAGE> 8
8. Assignment and Transfer.
(a) Company. This Agreement shall inure to the benefit of and be
enforceable by, and may be assigned by the Company to, any purchaser of all or
substantially all of the Company's business or assets, any successor to the
Company or any assignee thereof (whether direct or indirect, by purchase,
merger, consolidation or otherwise). The Company will require any such
purchaser, successor or assignee to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such purchase, succession or assignment had taken
place.
(b) Executive. Executive's rights and obligations under this
Agreement shall not be transferable by Executive by assignment or otherwise, and
any purported assignment, transfer or delegation thereof shall be void;
provided, however, that if Executive shall die, all amounts then payable to
Executive hereunder shall be paid in accordance with the terms of this Agreement
to Executive's devisee, legatee or other designee or, if there be no such
designee, to Executive's estate.
9. Miscellaneous.
(a) Other Obligations. Executive represents and warrants that he is
not a party to any other employment agreement and that neither Executive's
employment with the Company nor Executive's performance of Executive's
obligations hereunder will conflict with or violate or otherwise are
inconsistent with any other agreements to which Executive is or has been a party
or with any other obligations, legal or otherwise, which Executive may have.
(b) Nondisclosure; Other Employers. Executive will not disclose to
the Company, or use, or induce the Company to use, any proprietary information,
trade secrets or confidential business information of others. Executive
represents and warrants that Executive has returned all property, proprietary
information, trade secrets and confidential business information belonging to
all prior employers.
(c) Cooperation. Following termination of employment with the
Company, Executive shall cooperate with the Company, as requested by the
Company, to affect a transition of Executive's responsibilities and to ensure
that the Company is aware of all matters being handled by Executive.
(d) Protection of Reputation. During the Agreement Term and
thereafter, Executive agrees that he will take no action which is intended, or
could reasonably be expected, to harm the Company or its reputation or which
could reasonably be expected to lead to unwanted or unfavorable publicity to the
Company.
(e) Governing Law. This Agreement, including the validity,
interpretation, construction and performance of this Agreement, shall be
governed by and construed in accordance with the laws of the Commonwealth of
Massachusetts applicable to agreements made and to be
-8-
<PAGE> 9
performed in such state without regard to such states conflicts of law
principles. All actions and proceedings relating directly or indirectly to this
Agreement shall be litigated in any state court or federal court located in New
York, New York. The parties hereto expressly consent to the jurisdiction of any
such court and to venue therein and consent to the service of process in any
such action or proceeding by certified or registered mailing of the summons and
complaint therein directed to Executive at the address as provided in Section
9(l) hereof and to the Company's designated agent for service of process (which
agent may be changed by the Company upon thirty (30) days' prior written notice
to Executive).
(f) Entire Agreement. This Agreement (including the Exhibits hereto)
contains the entire agreement and understanding between the parties hereto in
respect of the subject matter hereof and supersedes, cancels and annuls any
prior or contemporaneous written or oral agreements, understandings, commitments
and practices between them respecting the subject matter hereof, including all
prior employment agreements, if any, between the Company and Executive, which
agreement(s) hereby are terminated and shall be of no further force or effect.
(g) Amendment. This Agreement may be amended only by a writing which
makes express reference to this Agreement as the subject of such amendment and
which is signed by Executive and, on behalf of the Company, by its duly
authorized officer.
(h) Severability. If any term, provision, covenant or condition of
this Agreement or part thereof, or the application thereof to any person, place
or circumstance, shall be held to be invalid, unenforceable or void, the
remainder of this Agreement and such term, provision, covenant or condition
shall remain in full force and effect, and any such invalid, unenforceable or
void term, provision, covenant or condition shall be deemed, without further
action on the part of the parties hereto, modified, amended and limited to the
extent necessary to render the same and the remainder of this Agreement valid,
enforceable and lawful. In this regard, Executive acknowledges that the
provisions of Sections 4 and 6 are reasonable and necessary for the protection
of the Company.
(i) Construction. The headings and captions of this Agreement are
provided for convenience only and are intended to have no effect in construing
or interpreting this Agreement. The language in all parts of this Agreement
shall be in all cases construed according to its fair meaning and not strictly
for or against the Company or Executive. The use herein of the word "including,"
when following any general provision, sentence, clause, statement, term or
matter, shall be deemed to mean "including, without limitation". As used herein,
"Company" shall mean the Company and its subsidiaries and any purchaser of,
successor to or assignee (whether direct or indirect, by purchase, merger,
consolidation or otherwise) of all or substantially all of the Company's
business or assets which is obligated to perform this Agreement by operation of
law, agreement pursuant to Section 7 hereof or otherwise. As used herein, the
words "day" or "days" shall mean a calendar day or days.
(j) Nonwaiver. Neither any course of dealing nor any failure or
neglect of either party hereto in any instance to exercise any right, power or
privilege hereunder or under law shall
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constitute a waiver of any other right, power or privilege or of the same right,
power or privilege in any other instance. All waivers by either party hereto
must be contained in a written instrument signed by the party to be charged and,
in the case of the Company, by its duly authorized officer.
(k) Remedies for Breach. The parties hereto agree that Executive is
obligated under this Agreement to render personal services during the Agreement
Term of a special, unique, unusual, extraordinary and intellectual character,
thereby giving this Agreement peculiar value, and, in the event of a breach or
threatened breach of any covenant of Executive herein, the injury or imminent
injury to the value and the goodwill of the Company's business could not be
reasonably or adequately compensated in damages in an action at law.
Accordingly, Executive expressly acknowledges that the Company shall be entitled
to specific performance, injunctive relief or any other equitable remedy against
Executive, without the posting of a bond, in the event of any breach or
threatened breach of any provision of this Agreement by Executive (including
Sections 4 and 6 hereof). Without limiting the generality of the foregoing, if
Executive breaches Sections 4 or 6 hereof, such breach will entitle the Company
to enjoin Executive from disclosing any Confidential Information to any
Competing Business, to enjoin such Competing Business from receiving Executive
or using any such Confidential Information and/or to enjoin Executive from
rendering personal services to or in connection with such Competing Business.
The rights and remedies of the parties hereto are cumulative and shall not be
exclusive, and each such party shall be entitled to pursue all legal and
equitable rights and remedies and to secure performance of the obligations and
duties of the other under this Agreement, and the enforcement of one or more of
such rights and remedies by a party shall in no way preclude such party from
pursuing, at the same time or subsequently, any and all other rights and
remedies available to it.
(l) Notices. Any notice, request, consent or approval required or
permitted to be given under this Agreement or pursuant to law shall be
sufficient if in writing, and if and when sent by certified or registered mail,
return receipt requested, with postage prepaid, to Executive's residence (as
reflected in the Company's records or as otherwise designated by Executive on
thirty (30) days' prior written notice to the Company) or to the Company's
principal executive office, attention: Chief Executive Officer (with copies to
the General Counsel), as the case may be. All such notices, requests, consents
and approvals shall be effective upon being deposited in the United States mail.
However, the time period in which a response thereto must be given shall
commence to run from the date of receipt on the return receipt of the notice,
request, consent or approval by the addressee thereof. Rejection or other
refusal to accept, or the inability to deliver because of changed address of
which no notice was given as provided herein, shall be deemed to be receipt of
the notice, request, consent or approval sent.
(m) Assistance in Proceedings, Etc. Executive shall, without
additional compensation, during and after expiration of the Agreement Term, upon
reasonable notice, furnish such information and proper assistance to the Company
as may reasonably be required by the Company in connection with any legal or
quasi-legal proceeding, including any external or internal investigation,
involving the Company or any of its affiliates or in which any of them is, or
may become, a party.
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(n) Survival. Cessation or termination of Executive's employment
with the Company shall not result in termination of this Agreement. The
respective obligations of Executive and rights and benefits afforded to the
Company as provided in this Agreement shall survive cessation or termination of
Executive's employment hereunder. This Agreement shall not terminate upon, and
shall remain in full force and effect following, expiration of the Agreement
Term and all rights and obligations of the parties hereto as and to the extent
provided herein shall survive such expiration.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed on its behalf by an officer thereunto duly authorized and Executive has
duly executed this Agreement, all as of the date and year first written above.
ESP LOCK PRODUCTS, INC.
By: /s/ Alan L. Rivera
----------------------------------------
Name:
Title:
/s/ August M. Boucher
--------------------------------------------
August M. Boucher
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Exhibit 10.6
EMPLOYMENT AGREEMENT
THIS AGREEMENT (together with all exhibits hereto, the "Agreement"), made
as of the 17th day of April, 1998, between KEY COMPONENTS, LLC, a Delaware
limited liability company (the "Company"), at its offices located in Hudson,
Massachusetts ("Hudson"), and JAMES D. WILCOX, the undersigned individual
("Executive").
In consideration of the mutual covenants and agreements hereinafter set
forth, the Company and Executive agree as follows:
1. Agreement Term.
The term of this Agreement shall be the period ("Agreement Term")
commencing on March 30, 1998 (the "Employment Date") and ending on March 29,
2003, unless sooner terminated pursuant to the provisions of Section 5 of this
Agreement.
2. Employment.
(a) Employment by the Company. Executive agrees to be employed by
the Company for the Agreement Term upon the terms and subject to the conditions
set forth in this Agreement. Executive shall have the title of Chief Financial
Officer, and report to the President of Key Components, Inc. ("KCI"), Manager of
the Company. Executive shall have such duties as may be prescribed by KCI and
shall serve in such other and/or additional position(s) as KCI may determine
from time to time. Without limitation, the Executive shall, if requested by KCI
and without additional compensation, serve as an officer and/or director of KCI
or any other entity controlled by KCI or in which KCI has an ownership interest.
(b) Performance of Duties. Throughout the Agreement Term, Executive
shall faithfully and diligently perform Executive's duties in conformity with
the directions of the Company and serve the Company to the best of Executive's
ability. Executive shall devote Executive's entire
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working time, attention and energies to the business and affairs of the Company,
subject to vacations and sick leave as provided herein and in accordance with
Company policy.
(c) Place of Performance. During the Agreement Term, Executive
shall, subject to travel requirements on behalf of the Company, be based at the
Company's offices in Hudson or such other location as the Company and Executive
may reasonably determine and, in this regard, Executive shall maintain
Executive's personal residence in such city or such other location within
reasonable access to Executive's place of employment.
3. Compensation and Benefits.
(a) Base Salary. The Company agrees to pay to Executive for
employment hereunder a base salary ("Base Salary") at the annual rate of
$130,000, based on the calendar year. Executive shall be eligible for an annual
increase to the Base Salary on each January 1 (each, an "Increase Date") during
the Agreement Term, which increase shall be equal to the percentage increase of
the Consumer Price Index (the "CPI") over the year preceding the Increase Date
calculated by comparing the CPI for the month of December immediately preceding
the Increase Date in question to the CPI for the prior December. As used in this
Agreement the term "Consumer Price Index" shall mean the Consumer Price Index
for All Urban Consumers (1982-84 = 100) specified for "All Items" issued by the
Bureau of Labor Statistics of the U.S. Department of Labor or the successor
thereto. The Base Salary shall be payable in installments consistent with the
Company's payroll practices then in effect. In addition, in the sole discretion
of the KCI, Executive shall be eligible for a merit increase in the Base Salary
after his second year of employment hereunder.
(b) Bonus. Executive shall be eligible for an annual cash bonus in
respect of each calendar year during the Agreement Term of up to 25% of the Base
Salary, to be paid within thirty (30) days after the annual audited financial
statements of the Company are delivered to the Company by the Company's
accountants. Such bonus shall be based on yearly objectives jointly set by KCI
and Executive, and shall be pro rated in respect of any partial year during the
Agreement Term.
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(c) Stock Options. (i) Concurrently herewith Executive shall enter
into an option agreement (the "Option Agreement") with KCI, of which the Company
is a wholly-owned subsidiary, pursuant to which KCI shall grant to Executive
options (the "Options") to purchase .8 shares of KCI's no par value common stock
at an exercise price of $350,000.00 per share, subject to adjustments as
provided therein. The Options shall vest and shall be exercisable as are
provided in the Option Agreement.
(ii) In the event Executive is terminated for cause pursuant
to Section 5(b) or breaches any terms under this Agreement, including but not
limited to Section 4 and Section 6 hereof, Executive acknowledges that any and
all of the Options (including any Options theretofore vested) may be cancelled
pursuant to the terms of the Option Agreement.
(d) Vacation. Upon completion of three months of continuous
employment hereunder, Executive shall accrue 5 days of paid vacation.
Thereafter, Executive will be entitled to receive up to a total of 20 days of
paid vacation per calender year which shall accrue monthly on a ratable basis,
provided, however, that Executive shall not be entitled to carry forward unused
vacation days from year to year or to be compensated for any unused vacation
days upon termination of this Agreement.
(e) Benefits and Perquisites. Executive shall be entitled to
participate in, to the extent Executive is otherwise eligible under the terms
thereof, the benefit plans and programs, including medical and vacation plans,
and receive the benefits and perquisites, generally provided to employees of the
same level and responsibility as Executive. Nothing in this Agreement shall
preclude the Company from terminating or amending from time to time any employee
benefit plan or program.
(f) Travel and Business Expenses. Upon submission of itemized
expense statements in the manner specified by the Company, Executive shall be
entitled to reimbursement for reasonable travel and other reasonable business
expenses duly incurred by Executive in the
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performance of Executive's duties under this Agreement in accordance with the
policies and procedures established by the Company from time to time for
employees of the same level and responsibility as Executive.
(g) No Other Compensation or Benefits; Payment. The compensation and
benefits specified in Sections 3 and 5 of this Agreement shall be in lieu of any
and all other compensation and benefits. Payment of all compensation and
benefits to Executive hereunder shall be made in accordance with the relevant
Company policies in effect from time to time, including normal payroll
practices, and shall be subject to all applicable employment and withholding
taxes.
(h) Cessation of Employment. In the event Executive shall cease to
be employed by the Company for any reason, then Executive's compensation and
benefits shall cease on the date of such event, except as otherwise provided
herein or in any applicable employee benefit plan or program.
4. Exclusive Employment; Noncompetition.
(a) No Conflict; No Other Employment. During the period of
Executive's employment with the Company, Executive shall not: (i) engage in any
activity which conflicts or interferes with or derogates from the performance of
Executive's duties hereunder nor shall Executive engage in any other business
activity, whether or not such business activity is pursued for gain or profit,
except as approved in advance in writing by KCI; or (ii) accept any other
full-time or substantially full-time employment, whether as an executive or
consultant or in any other capacity, and whether or not compensated therefor.
(b) No Competition. Without limiting the generality of the
provisions of Sections 2(b) or 4(a), during the period of Executive's employment
with the Company, any Severance Period (as defined below), and for a period of
two years thereafter (the "Restricted Period"), Executive shall not, directly or
indirectly, own, manage, operate, join, control, participate in, invest in or
otherwise
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<PAGE> 5
be connected or associated with, in any manner, including as an officer,
director, employee, partner, stockholder, joint venturer, lender, consultant,
advisor, agent, proprietor, trustee or investor, any Competing Business located
in the United States or in any other location where the Company operates or
sells its products or services; provided, however, that if Executive's
employment hereunder is terminated by the Company under Section 5(d), then the
provisions of this Section 4(b) shall remain in effect only so long as the
Company continues to pay to Executive amounts as severance pursuant to Section
5(d).
(i) As used in this Agreement, the term "Competing Business"
shall mean any business or venture which engages in any business area or
sells or provides products or services that compete or overlap with any
business area in which the Company engages or contemplates engaging in, or
the products or services as sold or provided, or as contemplated to be
sold or provided, by the Company.
(ii) For purposes of this Section 4(b), the term "invest"
shall not preclude an investment in not more than one percent (1%) of the
outstanding capital stock of a corporation whose capital stock is listed on a
national securities exchange or included in the NASDAQ Stock Market, so long as
Executive does not have the power to control or direct the management of, or is
not otherwise associated with, such corporation.
(c) No Solicitation of Employment. During the Restricted Period,
Executive shall not solicit or encourage any employee of the Company to leave
the employ, or cease his or her relationship with, the Company for any reason,
nor employ such an employee in a Competing Business or any other business.
(d) Company Customers. Executive shall not, during the Restricted
Period, directly or indirectly, contact, solicit or do business with any
"customers" (as hereinafter defined) of the Company for the purpose of selling
or providing any product or service then sold or provided by the Company to such
customers or proposed to be sold or provided to such customers during Exec-
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utive's employment by the Company or at the time of termination of Executive's
employment hereunder.
For the purposes of the provisions of this Section 4(d), "customer"
shall include any entity that purchased any product or service from the Company
within eight months of the termination of Executive's employment hereunder,
without regard to the reason for such termination. The term "customer" also
includes any former customer or potential customer of the Company which the
Company has solicited within eight months of such termination, for the purpose
of selling or providing any product or service then sold or provided, or then
contemplated to be sold or provided, by the Company.
(e) Modification of Covenants. The restrictions against competition
set forth in this Section 4 are considered by the parties to be reasonable for
the purposes of protecting the business of the Company. However, if any such
restriction is found by any court of competent jurisdiction to be unenforceable
because it extends for too long a period of time or over too great a range of
activities or in too broad a geographic area, it shall be interpreted to extend
only over the maximum period of time, range of activities or geographic area as
to which it may be enforceable.
5. Termination of Employment.
(a) Termination. The Company may terminate Executive's employment
for Cause (as hereinafter defined) or for any breach of this Agreement, in which
case the provisions of Section 5(b) shall apply. The Company may also terminate
Executive's employment in the event of Executive's Disability (as hereinafter
defined), in which case the provisions of Section 5(c) shall apply. If
Executive's employment is terminated by reason of Executive's death, retirement
or Voluntary Termination, the provisions of Section 5(b) shall apply. In
addition to the foregoing, the Company shall have the right to terminate
Executive without cause, in which case the provisions of Section 5(d) will
apply.
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(b) Termination for Cause; Termination by Reason of Death or
Retirement or Voluntary Termination. (1) In the event that Executive's
employment hereunder is terminated during the Agreement Term (x) by the Company
for Cause (as hereinafter defined), (y) by reason of Executive's death or
retirement or (z) by reason of Voluntary Termination, then the Company shall pay
to Executive, within thirty (30) days of the date of such termination, only the
Base Salary through such date of termination.
(2) For purposes of this Agreement, "Cause" shall mean (i)
conviction of any crime (whether or not involving the Company) constituting a
felony in the jurisdiction involved; (ii) engaging in any act which subjects, or
if generally known would subject, the Company to public ridicule or
embarrassment; (iii) gross neglect or misconduct in the performance of
Executive's duties hereunder; (iv) willful or repeated failure or refusal to
perform such duties as may be relegated to Executive commensurate with
Executive's position; (v) breach of any provision of this Agreement by
Executive; or (vi) use of alcohol or other chemical substance in a manner
adversely affecting Executive's ability to perform his duties hereunder;
provided, however, Executive's reasonable refusal to relocate his place of
employment shall not constitute "Cause." For purposes of this Agreement,
"Voluntary Termination" shall mean the resignation by the Executive from the
position held by Executive with the Company or the voluntary termination by the
Executive of his employment.
(3) In the event the Company desires to terminate Executive's
employment for Cause as defined in clauses (iv), (v) or (vi) of the definition
thereof, the Company shall resolve the matter(s) at issue through a meeting
between Executive and KCI. The decision of KCI as to the matter(s) shall be
final and binding on the parties and not subject to review or appeal by any
other person.
(c) Disability. If, as a result of Executive's incapacity due to
physical or mental illness, Executive shall have been absent from Executive's
duties hereunder on a full time basis for either (i) ninety (90) days within any
six-month period, or (ii) sixty (60) consecutive days, and within thirty (30)
days after written notice of termination is given shall not have returned to the
performance of Executive's duties hereunder on a full time basis, the Company
may terminate Executive's
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employment hereunder for "Disability". In that event, the Company shall pay to
Executive, within thirty (30) days of the date of such termination, only the
Base Salary through such date of termination. During any period that Executive
fails to perform Executive's duties hereunder as a result of incapacity due to
physical or mental illness (a "Disability Period"), Executive shall continue to
receive the compensation and benefits provided by Section 3 hereof until
Executive's employment hereunder is terminated; provided, however, that the
amount of compensation and benefits received by Executive during the Disability
Period shall be reduced by the aggregate amounts, if any, payable to Executive
under disability benefit plans and programs of the Company or under the Social
Security disability insurance program.
(d) Termination Without Cause. The Company may, at any time upon
three days' prior written notice to Executive, relieve Executive of all of his
duties and offices held with the Company or any affiliate thereof. Such action
by the Company shall not relieve the Company of its obligations to pay to
Executive the Base Salary pursuant to Section 3(a) hereof for a period of twelve
months from and after the date on which Executive is relieved of his duties and
offices (the "Severance Period") such payment of Base Salary to be made in
accordance with the Company's normal payroll practices. In the event Executive
becomes employed during the Severance Period, the Base Salary to be paid
pursuant to this Section 5(d) shall be offset by any salary received by
Executive from any such employment.
(e) No Further Liability; Release. Payment made and performance by
the Company in accordance with this Section 5 shall operate to fully discharge
and release the Company and its directors, officers, employees, subsidiaries,
affiliates, stockholders, successors, assigns, agents and representatives from
any further obligation or liability with respect to Executive's employment and
termination of employment. Other than paying Executive's Base Salary through the
date of termination of Executive's employment and making any severance payment
and continuing benefits and perquisites pursuant to and in accordance with this
Section 5 (as applicable), the Company and its directors, officers, employees,
subsidiaries, affiliates, stockholders, successors, assigns, agents and
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representatives shall have no further obligation or liability to Executive or
any other person under this Agreement.
6. Confidential Information.
(a) Existence of Confidential Information. The Company owns and has
developed and compiled, and will develop and compile, certain proprietary
technology, know-how and confidential information which have great value to its
business (referred to in this Agreement, collectively, as "Confidential
Information"). Confidential Information includes not only information disclosed
by the Company to Executive, but also information developed or learned by
Executive during the course or as a result of employment with the Company, which
information shall be the property of the Company. Confidential Information
includes all information that has or could have commercial value or other
utility in the business in which the Company is engaged or contemplates
engaging, and all information of which the unauthorized disclosure could be
detrimental to the interests of the Company, whether or not such information is
specifically labelled as Confidential Information by the Company. By way of
example and without limitation, Confidential Information includes any and all
information developed, obtained, licensed by or to or owned by the Company
concerning trade secrets, techniques, know-how (including research data,
designs, plans, procedures, merchandising, marketing, distribution and
warehousing know-how, processes, and research records), software, computer
programs, and any other intellectual property created, used or sold (through a
license or otherwise) by the Company, product know-how and processes,
innovations, discoveries, improvements, research, development, test results,
reports, specifications, data, formats, marketing data and plans, business
plans, strategies, forecasts, unpublished financial information, orders,
agreements and other forms of documents, price and cost information,
merchandising opportunities, expansion plans, budgets, projections, customer,
supplier, licensee, licensor and subcontractor identities, characteristics,
agreements and operating procedures, and salary, staffing and employment
information.
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(b) Protection of Confidential Information. Executive acknowledges
and agrees that in the performance of duties hereunder Executive develops and
acquires, and the Company discloses to and entrusts Executive with, Confidential
Information which is the exclusive property of the Company and which Executive
may possess or use only in the performance of duties for the Company. Executive
also acknowledges that Executive is aware that the unauthorized disclosure of
Confidential Information, among other things, may be prejudicial to the
Company's interests, an invasion of privacy and an improper disclosure of trade
secrets. Executive shall not, directly of indirectly, use, make available, sell,
disclose or otherwise communicate to any corporation, partnership, individual
or other third party, other than in the course of Executive's assigned duties
and for the benefit of the Company, any Confidential Information, either during
the Agreement Term or thereafter. In the event Executive desires to publish the
results of Executive's work for or experiences with the Company through
literature, interviews or speeches, Executive will submit requests for such
interviews or such literature or speeches to the Board at least fourteen (14)
days before any anticipated dissemination of such information for a
determination of whether such disclosure is in the best interests of the
Company, including whether such disclosure may impair trade secret status or
constitute an invasion of privacy. Executive agrees not to publish, disclose or
otherwise disseminate such information without the prior written approval of the
Board.
(c) Delivery of Records, Etc. In the event Executive's employment
with the Company ceases for any reason, Executive will not remove from the
Company's premises without its prior written consent any records, notes,
notebooks, files, drawings, documents, equipment, materials and writings
received from, created for or belonging to the Company, including those which
relate to or contain Confidential Information, or any copies thereof. Upon
request or when employment with the Company terminates, Executive will
immediately deliver the same to the Company.
7. Assignment and Transfer.
(a) Company. This Agreement shall inure to the benefit of and be
enforceable by, and may be assigned by the Company to, any purchaser of all or
substantially all of the Company's
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business or assets, any successor to the Company or any assignee thereof
(whether direct or indirect, by purchase, merger, consolidation or otherwise).
The Company will require any such purchaser, successor or assignee to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such purchase,
succession or assignment had taken place.
(b) Executive. Executive's rights and obligations under this
Agreement shall not be transferable by Executive by assignment or otherwise, and
any purported assignment, transfer or delegation thereof shall be void;
provided, however, that if Executive shall die, all amounts then payable to
Executive hereunder shall be paid in accordance with the terms of this Agreement
to Executive's devisee, legatee or other designee or, if there be no such
designee, to Executive's estate.
8. Miscellaneous.
(a) Other Obligations. Executive represents and warrants that he is
not a party to any other employment agreement and that neither Executive's
employment with the Company nor Executive's performance of Executive's
obligations hereunder will conflict with or violate or otherwise are
inconsistent with any other agreements to which Executive is or has been a party
or with any other obligations, legal or otherwise, which Executive may have.
(b) Nondisclosure; Other Employers. Executive will not disclose to
the Company, or use, or induce the Company to use, any proprietary information,
trade secrets or confidential business information of others. Executive
represents and warrants that Executive has returned all property, proprietary
information, trade secrets and confidential business information belonging to
all prior employers.
(c) Cooperation. Following termination of employment with the
Company, Executive shall cooperate with the Company, as requested by the
Company, to affect a transition of
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Executive's responsibilities and to ensure that the Company is aware of all
matters being handled by Executive.
(d) Protection of Reputation. During the Agreement Term and
thereafter, Executive agrees that he will take no action which is intended, or
could reasonably be expected, to harm the Company or its reputation or which
could reasonably be expected to lead to unwanted or unfavorable publicity to the
Company.
(e) Governing Law. This Agreement, including the validity,
interpretation, construction and performance of this Agreement, shall be
governed by and construed in accordance with the laws of the State of New York
applicable to agreements made and to be performed in such state without regard
to such states conflicts of law principles. All actions and proceedings relating
directly or indirectly to this Agreement shall be litigated in any state court
or federal court located in New York, New York. The parties hereto expressly
consent to the jurisdiction of any such court and to venue therein and consent
to the service of process in any such action or proceeding by certified or
registered mailing of the summons and complaint therein directed to Executive at
the address as provided in Section 8(l) hereof and to the Company's designated
agent for service of process (which initially shall be which agent may be
changed by the Company upon thirty (30) days' prior written notice to
Executive).
(f) Entire Agreement. This Agreement (including the Exhibits hereto)
contains the entire agreement and understanding between the parties hereto in
respect of the subject matter hereof and supersedes, cancels and annuls any
prior or contemporaneous written or oral agreements, understandings, commitments
and practices between them respecting the subject matter hereof, including all
prior employment agreements, if any, between the Company and Executive, which
agreement(s) hereby are terminated and shall be of no further force or effect.
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(g) Amendment. This Agreement may be amended only by a writing which
makes express reference to this Agreement as the subject of such amendment and
which is signed by Executive and, on behalf of the Company, by its duly
authorized officer.
(h) Severability. If any term, provision, covenant or condition of
this Agreement or part thereof, or the application thereof to any person, place
or circumstance, shall be held to be invalid, unenforceable or void, the
remainder of this Agreement and such term, provision, covenant or condition
shall remain in full force and effect, and any such invalid, unenforceable or
void term, provision, covenant or condition shall be deemed, without further
action on the part of the parties hereto, modified, amended and limited to the
extent necessary to render the same and the remainder of this Agreement valid,
enforceable and lawful. In this regard, Executive acknowledges that the
provisions of Sections 4 and 6 are reasonable and necessary for the protection
of the Company.
(i) Construction. The headings and captions of this Agreement are
provided for convenience only and are intended to have no effect in construing
or interpreting this Agreement. The language in all parts of this Agreement
shall be in all cases construed according to its fair meaning and not strictly
for or against the Company or Executive. The use herein of the word "including,"
when following any general provision, sentence, clause, statement, term or
matter, shall be deemed to mean "including, without limitation." As used herein,
"Company" shall mean the Company and its subsidiaries and any purchaser of,
successor to or assignee (whether direct or indirect, by purchase, merger,
consolidation or otherwise) of all or substantially all of the Company's
business or assets which is obligated to perform this Agreement by operation of
law, agreement pursuant to Section 7 hereof or otherwise. As used herein, the
words "day" or "days" shall mean a calendar day or days.
(j) Nonwaiver. Neither any course of dealing nor any failure or
neglect of either party hereto in any instance to exercise any right, power or
privilege hereunder or under law shall constitute a waiver of any other right,
power or privilege or of the same right, power or privilege in
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any other instance. All waivers by either party hereto must be contained in a
written instrument signed by the party to be charged and, in the case of the
Company, by its duly authorized officer.
(k) Remedies for Breach. The parties hereto agree that Executive is
obligated under this Agreement to render personal services during the Agreement
Term of a special, unique, unusual, extraordinary and intellectual character,
thereby giving this Agreement peculiar value, and, in the event of a breach or
threatened breach of any covenant of Executive herein, the injury or imminent
injury to the value and the goodwill of the Company's business could not be
reasonably or adequately compensated in damages in an action at law.
Accordingly, Executive expressly acknowledges that the Company shall be entitled
to specific performance, injunctive relief or any other equitable remedy against
Executive, without the posting of a bond, in the event of any breach or
threatened breach of any provision of this Agreement by Executive (including
Sections 4 and 6 hereof). Without limiting the generality of the foregoing, if
Executive breaches Sections 4 or 6 hereof, such breach will entitle the Company
to enjoin Executive from disclosing any Confidential Information to any
Competing Business, to enjoin such Competing Business from receiving Executive
or using any such Confidential Information and/or to enjoin Executive from
rendering personal services to or in connection with such Competing Business.
The rights and remedies of the parties hereto are cumulative and shall not be
exclusive, and each such party shall be entitled to pursue all legal and
equitable rights and remedies and to secure performance of the obligations and
duties of the other under this Agreement, and the enforcement of one or more of
such rights and remedies by a party shall in no way preclude such party from
pursuing, at the same time or subsequently, any and all other rights and
remedies available to it.
(l) Notices. Any notice, request, consent or approval required or
permitted to be given under this Agreement or pursuant to law shall be
sufficient if in writing, and if and when sent by certified or registered mail,
return receipt requested, with postage prepaid, to Executive's residence (as
reflected in the Company's records or as otherwise designated by Executive on
thirty (30) days' prior written notice to the Company) or to the Company's
principal executive office, attention: Chief Executive Officer (with copies to
the General Counsel), as the case may be. All such notices,
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requests, consents and approvals shall be effective upon being deposited in the
United States mail. However, the time period in which a response thereto must be
given shall commence to run from the date of receipt on the return receipt of
the notice, request, consent or approval by the addressee thereof. Rejection or
other refusal to accept, or the inability to deliver because of changed address
of which no notice was given as provided herein, shall be deemed to be receipt
of the notice, request, consent or approval sent.
(m) Assistance in Proceedings, Etc. Executive shall, without
additional compensation, during and after expiration of the Agreement Term, upon
reasonable notice, furnish such information and proper assistance to the Company
as may reasonably be required by the Company in connection with any legal or
quasi-legal proceeding, including any external or internal investigation,
involving the Company or any of its affiliates or in which any of them is, or
may become, a party.
(n) Survival. Cessation or termination of Executive's employment
with the Company shall not result in termination of this Agreement. The
respective obligations of Executive and rights and benefits afforded to the
Company as provided in this Agreement shall survive cessation or termination of
Executive's employment hereunder. This Agreement shall not terminate upon, and
shall remain in full force and effect following, expiration of the Agreement
Term and all rights and obligations of the parties hereto as and to the extent
provided herein shall survive such expiration.
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<PAGE> 16
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed on its behalf by an officer thereunto duly authorized and Executive has
duly executed this Agreement, all as of the date and year first written above.
KEY COMPONENTS, LLC
By: Key Components, Inc.,
its Manager
By: /s/ Alan Rivera
--------------------------------------
Name: Alan Rivera
Title: Vice-President
/s/ James D. Wilcox
-----------------------------------------
James D. Wilcox
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<PAGE> 1
EXHIBIT 10.7
KEY COMPONENTS, INC.
1998 LONG-TERM INCENTIVE PLAN
1. PURPOSE. The purpose of the Long-Term Incentive Plan (the "Plan") of
Key Components, Inc., a New York corporation (the "Company"), is to advance the
interests of the Company and its shareholders by providing a means to attract,
retain and reward executive officers, employee directors, other key employees,
non-employee and advisory directors and consultants of and service providers to
the Company and its subsidiaries and to enable such persons to acquire or
increase a proprietary interest in the Company, thereby promoting a closer
identity of interests between such persons and the Company's shareholders.
2. DEFINITIONS. The definitions of awards under the Plan, including
Options, SARs (including Limited SARs), Restricted Stock, Stock granted as a
bonus or in lieu of other awards, and Other Stock-Based Awards are set forth in
Sections 6 and 8 of the Plan. Such awards, together with any other right or
interest granted to a Participant under the Plan, are termed "Awards." For
purposes of the Plan, the following additional terms shall be defined as set
forth below:
(a) "Award Agreement" means any written agreement, contract,
notice or other instrument or document evidencing an Award.
(b) "Beneficiary" shall mean the person, persons, trust or
trusts which have been designated by a Participant in his or her most recent
written beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or, if there is no
designated Beneficiary or surviving designated Beneficiary, then the person,
persons, trust or trusts entitled by will or the laws of descent and
distribution to receive such benefits.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended
from time to time. References to any provision of the Code shall be deemed to
include regulations thereunder and successor provisions and regulations thereto.
(e) "Committee" means a committee, as described in Section
3(a) hereof, designated by the Board to administer the Plan; provided, if no
such committee has been designated, the term "Committee" shall mean the Board.
(f) "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time. References to any provision of the Exchange Act
shall be deemed to include rules thereunder and successor provisions and rules
thereto.
(g) "Fair Market Value" means, with respect to Stock, Awards,
or other property, the fair market value of such Stock, Awards, or other
property determined by such methods or procedures as shall be established from
time to time by the Committee, provided, however, that: (i)
<PAGE> 2
if the Stock is listed on a national securities exchange or quoted in an
interdealer quotation system, the Fair Market Value of such Stock on a given
date shall be based upon the last sales price or, if unavailable, the average of
the closing bid and asked prices per share of the Stock on such date (or, if
there was no trading or quotation in the Stock on such date, on the next
preceding date on which there was trading or quotation) as reported in the WALL
STREET JOURNAL (or other reporting service approved by the Committee); or (ii)
the "Fair Market Value" of Stock subject to Options granted effective upon
commencement of the Initial Public Offering shall be the Initial Public Offering
price of the shares so issued and sold in the Initial Public Offering, as set
forth in the first final prospectus used in such offering (the provisions of
clause (i) notwithstanding); or (iii) the "Fair Market Value" of Stock prior to
the date of the Initial Public Offering as determined by the Board.
(h) "Initial Public Offering" shall mean an initial public
offering of shares of Stock in a firm commitment underwriting registered with
the Securities and Exchange Commission in compliance with the provisions of the
Securities Act of 1933, as amended.
(i) "ISO" means any Option intended to be and designated as an
incentive stock option within the meaning of Section 422 of the Code.
(j) "Participant" means a person who has been granted an Award
under the Plan.
(k) "Rule 16b-3" means Rule 16b-3, as from time to time in
effect and applicable to the Plan and Participants, promulgated by the
Securities and Exchange Commission under Section 16 of the Exchange Act.
(l) "Stock" means the Common Stock, $.01 par value, of the
Company and such other securities as may be substituted for Stock or such other
securities pursuant to Section 4.
3. ADMINISTRATION
(a) Authority of the Committee. The Plan shall be administered
by the Committee, which shall hold meetings at such times as may be necessary
for the proper administration of the Plan. The Committee shall keep minutes of
its meetings. A quorum shall consist of not fewer than two members of the
Committee and a majority of a quorum may authorize any action. Any decision or
determination reduced to writing and signed by a majority of all of the members
of the Committee shall be as fully effective as if made by a majority vote at a
meeting duly called and held. Prior to the date of an Initial Public Offering,
the Committee shall consist of at least two (2) directors of the Company and may
consist of the entire Board. From and after the date of an Initial Public
Offering, the Committee shall consist of at least two (2) directors of the
Company and may consist of the entire Board; provided, however, that (A) if the
Committee consists of less than the entire Board, each member shall be a
"non-employee director" within the meaning of Rule 16b-3 under the Exchange Act
and (B) to the extent necessary for any Option or Award intended to qualify as
performance-based compensation under Section 162(m) of the Code to so qualify,
each member of the Committee, whether or not it consists of the entire Board,
shall be an "outside director" within
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<PAGE> 3
the meaning of Section 162(m) of the Code. From time to time the Board may
increase the size of the Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies however caused, or remove all members of the Committee
and thereafter directly administer the Plan. The Committee shall have the power
from time to time: (i) to select persons to whom Awards may be granted; (ii) to
determine the type or types of Awards to be granted to each such person; (iii)
to determine the number of Awards to be granted, the number of shares of Stock
to which an Award will relate, the terms and conditions of any Award granted
under the Plan (including, but not limited to, any exercise price, grant price
or purchase price, any restriction or condition, any schedule for lapse of
restrictions or conditions relating to transferability or forfeiture, vesting,
exercisability or settlement of an Award, and waivers or accelerations thereof,
performance conditions relating to an Award (including performance conditions
relating to Awards not intended to be governed by Section 7(e) and waivers and
modifications thereof), based in each case on such considerations as the
Committee shall determine), and all other matters to be determined in connection
with an Award; (iv) to determine whether, to what extent and under what
circumstances an Award may be settled, or the exercise price of an Award may be
paid, in cash, Stock, other Awards, or other property, or an Award may be
cancelled, forfeited, or surrendered; (v) to determine whether, to what extent
and under what circumstances cash, Stock, other Awards or other property payable
with respect to an Award will be deferred either automatically, at the election
of the Committee or at the election of the Participant; (vi) to determine
whether restrictions such as repurchase options are to be imposed on stock
subject to Awards and the nature of such restrictions, if any; (vii) to
prescribe the form of each Award Agreement, which need not be identical for each
Participant; (viii) to adopt, amend, suspend, waive and rescind such rules and
regulations and appoint such agents as the Committee may deem necessary or
advisable to administer the Plan; (ix) to correct any defect or supply any
omission or reconcile any inconsistency in the Plan and to construe and
interpret the Plan and any Award, rules and regulations, Award Agreement or
other instrument hereunder; and (x) to make all other decisions and
determinations as may be required under the terms of the Plan or as the
Committee may deem necessary or advisable for the administration of the Plan.
(b) Manner of Exercise of Committee Authority. Unless
authority is specifically reserved to the Board under the terms of the Plan, the
Company's Certificate of Incorporation or Bylaws, or applicable law, the
Committee shall have sole discretion in exercising authority under the Plan. Any
action of the Committee with respect to the Plan shall be final, conclusive and
binding on all persons, including the Company, subsidiaries of the Company,
Participants, any person claiming any rights under the Plan from or through any
Participant and shareholders, except to the extent the Committee may
subsequently modify, or take further action not consistent with, its prior
action. If not specified in the Plan, the time at which the Committee must or
may make any determination shall be determined by the Committee, and any such
determination may thereafter by modified by the Committee (subject to Section
9(e)). The express grant of any specific power to the Committee, and the taking
of any action by the Committee, shall not be construed as limiting any power or
authority of the Committee. The Committee may delegate to officers or managers
of the Company or any subsidiary of the Company the authority, subject to such
terms as the Committee shall determine, to perform administrative functions and,
with respect to Participants not subject to Section 16 of the
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<PAGE> 4
Exchange Act, to perform such other functions as the Committee may determine, to
the extent permitted under Rule 16b-3, if applicable, and other applicable law.
(c) Limitation of Liability. Each member of the Committee
shall be entitled to, in good faith, rely or act upon any report or other
information furnished to him or her by any officer or other employee of the
Company or any subsidiary, the Company's independent certified public
accountants or any executive compensation consultant, legal counsel or other
professional retained by the Company to assist in the administration of the
Plan. No member of the Committee, nor any officer or employee of the Company
acting on behalf of the Committee, shall be personally liable for any action,
determination or interpretation taken or made in good faith with respect to the
Plan, and all members of the Committee and any officer or employee of the
Company acting on its behalf shall, to the extent permitted by law, be fully
indemnified and protected by the Company with respect to any such action,
determination or interpretation.
4. STOCK SUBJECT TO PLAN.
(a) Amount of Stock Reserved. The total amount of Stock that
may be subject to outstanding Awards shall not exceed 20 shares, subject to
adjustment as provided in Section 4(b); provided, however, that shares subject
to ISOs or Restricted Stock shall not be deemed delivered if such Awards are
forfeited, expire or otherwise terminate without delivery of shares to the
Participant. If an Award valued by reference to Stock may only be settled in
cash, the number of shares to which such Award relates shall be deemed to be
Stock subject to such Award for purposes of this Section 4(a). Any shares of
Stock delivered pursuant to an Award may consist, in whole or in part, of
authorized and unissued shares, treasury shares or shares acquired in the market
for a Participant's account.
(b) Adjustments. In the event that the Committee shall
determine that any dividend or other distribution (whether in the form of cash,
Stock or other property), recapitalization, forward or reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase or
exchange of Stock or other securities, liquidation, dissolution, or other
similar corporate transaction or event, affects the Stock such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of Participants under the Plan, then the Committee shall, in such manner
as it may deem equitable, adjust any or all of (i) the number and kind of shares
of Stock reserved and available for Awards under Section 4(a), including shares
reserved for the ISOs and Restricted Stock, (ii) the number and kind of shares
of outstanding Restricted Stock or other outstanding Award in connection with
which shares have been issued, (iii) the number and kind of shares that may be
issued in respect of other outstanding Awards and (iv) the exercise price, grant
price or purchase price relating to any Award (or, if deemed appropriate, the
Committee may make provision for a cash payment with respect to any outstanding
Award). In addition, the Committee is authorized to make adjustments in the
terms and conditions of, and the criteria included in, Awards in recognition of
unusual or nonrecurring events (including, without limitation, events described
in the preceding sentence) affecting the Company or any subsidiary or the
financial statements of the Company or any subsidiary, or in response to changes
in applicable laws, regulations, or accounting principles. The
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<PAGE> 5
foregoing notwithstanding, no adjustments shall be authorized under this Section
4(b) with respect to ISOs or SARs in tandem therewith to the extent that such
authority would cause the Plan to fail to comply with Section 422(b)(1) of the
Code, and no such adjustment shall be authorized with respect to Options, SARs
or other Awards subject to Section 7(e) to the extent that such authority would
cause such Awards to fail to qualify as "qualified performance-based
compensation" under Section 162(m)(4)(C) of the Code.
5. ELIGIBILITY FOR ALL AWARDS All officers and other employees of the
Company and its subsidiaries, including any director or officer who is also such
an employee, and persons who provide consulting or other services to the Company
and/or its subsidiaries deemed by the Committee to be of substantial value to
the Company, are eligible to be granted Awards under the Plan. In addition, a
person who has been offered employment by the Company or its subsidiaries is
eligible to be granted an Award under the Plan, provided that such Award shall
be canceled if such person fails to commence such employment, and no payment of
value may be made in connection with such Award until such person has commenced
such employment.
6. SPECIFIC TERMS OF AWARDS
(a) General. Awards may be granted on the terms and conditions
set forth in this Section 6. In addition, the Committee may impose on any Award
or the exercise thereof such additional terms and conditions, not inconsistent
with the provisions of the Plan, as the Committee shall determine, including
terms requiring (i) forfeiture of Awards in the event of termination of
employment or service of the Participant, or a breach by a Participant of any
covenant not to compete, confidentiality agreement or similar restriction, and
(ii) payment of consideration for an award by a Participant.
(b) Options. The Committee is authorized to grant Options
(including "reload" options automatically granted to offset specified exercises
of Options) on the following terms and conditions ("Options"):
(i) Exercise Price. The exercise price per share of
Stock purchasable under an Option shall be determined by the Committee;
provided, however, that, in the case of ISOs, such exercise price shall be not
less than the Fair Market Value of a share on the date of grant of such ISO.
(ii) Time and Method of Exercise. The Committee shall
determine the time or times at which an Option may be exercised in whole or in
part, the methods by which such exercise price may be paid or deemed to be paid,
the form of such payment, including, without limitation, cash, Stock, other
Awards or awards granted under other Company plans or other property (including
notes or other contractual obligations of Participants to make payment on a
deferred basis, such as through "cashless exercise" arrangements, to the extent
permitted by applicable law), and the methods by which Stock will be delivered
or deemed to be delivered to Participants.
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<PAGE> 6
(iii) ISOs. The terms of any ISO granted under the
Plan shall comply in all respects with the provisions of Section 422 of the
Code, including but not limited to the requirement that no ISO shall be granted
more than 10 years after the effective date of the Plan. Anything in the Plan to
the contrary notwithstanding, no term of the Plan relating to ISOs shall be
interpreted, amended, or altered, nor shall any discretion or authority granted
under the Plan be exercised, so as to disqualify either the Plan or any ISO
under Section 422 of the Code, unless requested by the affected Participant.
(iv) Termination of Relationship. (a) If the
Participant's relationship with the Company or any related corporation ceases
for any reason other than termination for cause, death or disability (within the
meaning of Section 22(e)(3) of the Code), and unless by its terms the Option
sooner terminates or expires, then the Participant may exercise, for a
three-month period, that portion of the Participant's Option which is
exercisable at the time of such cessation, but the Participant's Option shall
terminate at the end of the three-month period following such cessation as to
all shares for which it has not theretofore been exercised, unless, in the case
of a nonqualified stock option, such provision is waived in the agreement
evidencing the Option or by resolution adopted by the Committee within 90 days
of such cessation; (b) if the Company has terminated a Participant's status with
the Company for cause (as such term is defined in any employment or similar
agreement between the Participant and the Company or, if there is no such
agreement, or such agreement does not contain provisions relating to termination
or removal for cause, as such term is defined by the law of the State of
Delaware), such Option will, to the extent not terminated, be deemed to be
terminated on the date immediately preceding the date the Participant was
terminated for cause; and (c) if a Participant has become disabled (within the
meaning of Section 22(e)(3) of the Code) or dies, such Participant's Option
shall terminate on the earlier of (i) one year after the date such Participant
became disabled, or (ii) the date on which the Option expires by its terms.
(c) Stock Appreciation Rights. The Committee is authorized to
grant SARs on the following terms and conditions ("SARs"):
(i) Right to Payment. An SAR shall confer on the
Participant to whom it is granted a right to receive, upon exercise thereof, the
excess of (A) the Fair Market Value of one share of Stock on the date of
exercise (or, if the Committee shall so determine in the case of any such right
other than one related to an ISO, the Fair Market Value of one share at any time
during a specified period before or after the date of exercise), over (B) the
grant price of the SAR as determined by the Committee as of the date of grant of
the SAR.
(ii) Other Terms. The Committee shall determine the
time or times at which an SAR may be exercised in whole or in part, the method
of exercise, method of settlement, form of consideration payable in settlement,
method by which Stock will be delivered or deemed to be delivered to
Participants, whether or not an SAR shall be in tandem with any other Award, and
any other terms and conditions of any SAR. Limited SARs that may only be
exercised upon the occurrence of a Change in Control may be granted on such
terms, not inconsistent with this Section
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<PAGE> 7
6(c), as the Committee may determine. Limited SARs may be either freestanding or
in tandem with other Awards.
(d) Restricted Stock. The Committee is authorized to grant
Restricted Stock on the following terms and conditions ("Restricted Stock"):
(i) Grant and Restrictions. Restricted Stock shall be
subject to such restrictions on transferability and other restrictions, if any,
as the Committee may impose, which restrictions may lapse separately or in
combination at such times, under such circumstances, in such installments, or
otherwise, as the Committee may determine. Except to the extent restricted under
the terms of the Plan and any Award Agreement relating to the Restricted Stock,
a Participant granted Restricted Stock shall have all of the rights of a
shareholder including, without limitation, the right to vote Restricted Stock
and the right to receive dividends thereon.
(ii) Forfeiture. Except as otherwise determined by
the Committee, upon termination of employment or service (as determined under
criteria established by the Committee) during the applicable restriction period,
Restricted Stock that is at that time subject to restrictions shall be forfeited
and reacquired by the Company; provided, however, that the Committee may
provide, by rule or regulation or in any Award Agreement, or may determine in
any individual case, that restrictions or forfeiture conditions relating to
Restricted Stock will be waived in whole or in part in the event of termination
resulting from specified causes.
(iii) Certificates for Stock. Restricted Stock
granted under the Plan may be evidenced in such manner as the Committee shall
determine. If certificates representing Restricted Stock are registered in the
name of the Participant, such certificates may bear an appropriate legend
referring to the terms, conditions, and restrictions applicable to such
Restricted Stock, the Company may retain physical possession of the certificate,
and the Participant shall have delivered a stock power to the Company, endorsed
in blank, relating to the Restricted Stock.
(iv) Dividends. Dividends paid on Restricted Stock
shall be either paid at the dividend payment date in cash or in shares of
unrestricted Stock having a Fair Market Value equal to the amount of such
dividends, or the payment of such dividends shall be deferred and/or the amount
or value thereof automatically reinvested in additional Restricted Stock, other
Awards, or other investment vehicles, as the Committee shall determine or permit
the Participant to elect. Stock distributed in connection with a Stock split or
Stock dividend, and other property distributed as a dividend, shall be subject
to restrictions and a risk of forfeiture to the same extent as the Restricted
Stock with respect to which such Stock or other property has been distributed,
unless otherwise determined by the Committee.
(e) Bonus Stock and Awards in Lieu of Cash Obligations. The
Committee is authorized to grant Stock as a bonus, or to grant Stock or other
Awards in lieu of Company obligations to pay cash under other plans or
compensatory arrangements. Stock or Awards granted hereunder shall be subject to
such other terms as shall be determined by the Committee.
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<PAGE> 8
(f) Other Stock-Based Awards. The Committee is authorized,
subject to limitations under applicable law, to grant such other Awards that may
be denominated or payable in, valued in whole or in part by reference to, or
otherwise based on, or related to, Stock and factors that may influence the
value of Stock, as deemed by the Committee to be consistent with the purposes of
the Plan, including, without limitation, convertible or exchangeable debt
securities, other rights convertible or exchangeable into Stock, purchase rights
for Stock, Awards with value and payment contingent upon performance of the
Company or any other factors designated by the Committee and Awards valued by
reference to the book value of Stock or the value of securities of or the
performance of specified subsidiaries ("Other Stock Based Awards"). The
Committee shall determine the terms and conditions of such Awards. Stock issued
pursuant to an Award in the nature of a purchase right granted under this
Section 6(f) shall be purchased for such consideration, paid for at such times,
by such methods, and in such forms, including, without limitation, cash, Stock,
other Awards, or other property, as the Committee shall determine. Cash awards,
as an element of or supplement to any other Award under the Plan, may be granted
pursuant to this Section 6(f).
7. CERTAIN PROVISIONS APPLICABLE TO AWARDS
(a) Stand-Alone, Additional, Tandem, and Substitute Awards.
Awards granted under the Plan may, in the discretion of the Committee, be
granted either alone or in addition to, in tandem with or in substitution for
any other Award granted under the Plan or any award granted under any other plan
of the Company, any subsidiary or any business entity to be acquired by the
Company or a subsidiary, or any other right of a Participant to receive payment
from the Company or any subsidiary. Awards granted in addition to or in tandem
with other Awards or awards may be granted either as of the same time as or a
different time from the grant of such other Awards or awards.
(b) Term of Awards. The term of each Award shall be for such
period as may be determined by the Committee; provided, however, that in no
event shall the term of any ISO or an SAR granted in tandem therewith exceed a
period of 10 years from the date of its grant (or such shorter period as may be
applicable under Section 422 of the Code).
(c) Form of Payment Under Awards. Subject to the terms of the
Plan and any applicable Award Agreement, payments to be made by the Company or a
subsidiary upon the grant, exercise or settlement of an Award may be made in
such forms as the Committee shall determine, including, without limitation,
cash, Stock, other Awards or other property, and may be made in a single payment
or transfer, in installments or on a deferred basis. Such payments may include,
without limitation, provisions for the payment or crediting of reasonable
interest on installment or deferred payments.
(d) Loan Provisions. With the consent of the Committee, and
subject at all times to, and only to the extent, if any, permitted under and in
accordance with, laws and regulations and other binding obligations or
provisions applicable to the Company, the Company may make, guarantee or arrange
for a loan or loans to a Participant with respect to the exercise of any Option
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<PAGE> 9
or other payment in connection with any Award, including the payment by a
Participant of any or all federal, state or local income or other taxes due in
connection with any Award. Subject to such limitations, the Committee shall have
full authority to decide whether to make a loan or loans hereunder and to
determine the amount, terms and provisions of any such loan or loans, including
the interest rate to be charged in respect of any such loan or loans, whether
the loan or loans are to be with or without recourse against the borrower, the
terms on which the loan is to be repaid and conditions, if any, under which the
loan or loans may be forgiven.
(e) Performance-Based Awards. The Committee may, in its
discretion, designate any Award the exercisability or settlement of which is
subject to the achievement of performance conditions as a performance-based
Award subject to this Section 7(e), in order to qualify such Award as "qualified
performance-based compensation" within the meaning of Code Section 162(m) and
regulations thereunder. The performance objectives for an Award subject to this
Section 7(e) shall consist of one or more business criteria and a targeted level
or levels of performance with respect to such criteria, as specified by the
Committee but subject to this Section 7(e). Performance objectives shall be
objective and shall otherwise meet the requirements of Section 162(m)(4)(C) of
the Code. Business criteria used by the Committee in establishing performance
objectives for Awards subject to this Section 7(e) shall be selected exclusively
from among the following: (1) Annual return on capital; (2) Annual earnings per
share; (3) Annual cash flow provided by operations; (4) Changes in annual
revenues; and/or (5) Strategic business criteria, consisting of one or more
objectives based on meeting specified revenue, market penetration, geographic
business expansion goals, cost targets, and goals relating to acquisitions or
divestitures. The levels of performance required with respect to such business
criteria may be expressed in absolute or relative levels. Achievement of
performance objectives with respect to such Awards shall be measured over a
period of not less than one year nor more than five years, as the Committee may
specify. Performance objectives may differ for such Awards to different
Participants. The Committee shall specify the weighting to be given to each
performance objective for purposes of determining the final amount payable with
respect to any such Award. The Committee may, in its discretion, reduce the
amount of a payout otherwise to be made in connection with an Award subject to
this Section 7(e), but may not exercise discretion to increase such amount, and
the Committee may consider other performance criteria in exercising such
discretion. All determinations by the Committee as to the achievement of
performance objectives shall be in writing. The Committee may not delegate any
responsibility with respect to an Award subject to this Section 7(e).
(f) Consolidations or Mergers. If the Company is to be
consolidated with or acquired by another entity in a merger, sale of all or
substantially all of the Company's assets or otherwise (an "Acquisition"),
unless the Board shall otherwise determine by resolution adopted at least ten
(10) days prior to the closing of the Acquisition, all outstanding Awards shall
become fully vested and exercisable as of the closing of the Acquisition. In
addition, the Board or Committee or the board of directors of any entity
assuming the obligations of the Company hereunder (the "Successor Board") may
take one or more of the following actions:
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<PAGE> 10
(i) make the appropriate provision for the
continuation of such Awards by substituting on an equitable basis for the shares
then subject to such Awards the consideration payable with respect to the
outstanding shares of Common Stock in connection with the Acquisition; or
(ii) make appropriate provision for the continuation
of such Awards by substituting on an equitable basis for the shares then subject
to such Awards any equity securities of the successor corporation; or
(iii) upon written notice to the holders of the
Awards, provide that all Awards must be exercised, to the extent then
exercisable, within a specified number of days of the date of such notice, at
the end of which period the Awards shall terminate; or
(iv) terminate all Awards in exchange for a cash
payment equal to the excess of the fair market value of the shares subject to
such Awards (to the extent then exercisable) over the exercise price thereof; or
(v) terminate all Awards in exchange for the right to
participate in any stock option or other employee benefit plan of any successor
corporation.
(g) Recapitalization or Reorganization. In the event of a
recapitalization or reorganization of the Company (other than a transaction
described in paragraph (f) above) pursuant to which securities of the Company or
of another corporation are issued with respect to the outstanding shares of
Common Stock, upon exercising an Award, the holder thereof shall be entitled to
receive for the purchase price paid upon such exercise the securities he would
have received if he had exercised his Award prior to such recapitalization or
reorganization.
8. GENERAL PROVISIONS.
(a) Compliance With Laws and Obligations. The Company shall
not be obligated to issue or deliver Stock in connection with any Award or take
any other action under the Plan in a transaction subject to the registration
requirements of the Securities Act of 1933, as amended ("1933 Act"), or any
other federal or state securities law, any requirement under any listing
agreement between the Company and any national securities exchange or automated
quotation system or any other law, regulation or contractual obligation of the
Company until the Company is satisfied that such laws, regulations, and other
obligations of the Company have been complied with in full. Certificates
representing shares of Stock issued under the Plan will be subject to such
stop-transfer orders and other restrictions as may be applicable under such
laws, regulations and other obligations of the Company, including any
requirement that a legend or legends be placed thereon. The Company shall be
under no obligation to qualify shares or to cause a registration statement or a
post-effective amendment to any registration statement to be prepared for the
purpose of covering the issuance of shares in respect of which any Option may be
exercised or to cause the issuance of such shares to be
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<PAGE> 11
exempt from registration and qualification under applicable federal and state
securities acts now in force or as hereinafter amended, except as otherwise
agreed to by the Company in writing in its sole discretion. In the event that
the Company shall, nevertheless, deem it necessary or desirable to register
under the 1933 Act or other applicable statutes any shares with respect to which
an option shall have been exercised, or to qualify any such shares for exemption
from the 1933 Act or other applicable statutes, then the Company may take such
action and may require from each Participant such information in writing for use
in any registration statement, supplementary registration statement, prospectus,
preliminary prospectus, offering circular or any other document that is
reasonably necessary for such purpose and may require reasonable indemnity to
the Company and its officers and directors from such holder against all losses,
claims, damages and liabilities from such use of the information so furnished
and caused by any untrue statement of any material fact thereon or caused by the
omission to state a material fact required to be stated herein or necessary to
make the statements therein not misleading in the light of the circumstances
under which they were made.
(b) Limitations on Transferability. Awards and other rights
under the Plan will not be transferable by a Participant except by will or the
laws of descent and distribution or to a Beneficiary in the event of the
Participant's death, and, if exercisable, shall be exercisable during the
lifetime of a Participant only by such Participant or his guardian or legal
representative. Notwithstanding the foregoing, the Committee may, in its
discretion, authorize all or a portion of the Award (other than an ISO) to be
granted to a Participant to be on terms which permit transfer by such
Participant to (i) the spouse, children or grandchildren of such Participant
("Immediate Family Members"), (ii) a trust or trusts for exclusive benefit of
such Immediate Family Members, or (iii) a partnership in which such Immediate
Family Members are the only partners, provided that (x) there may be no
consideration for any such transfer, (y) the Award agreement pursuant to which
such Awards are granted must be approved by the Committee and must expressly
provide for transferability in a manner consistent with this Section, and (z)
subsequent transfers of transferred Awards shall be prohibited except those
occurring by laws of descent and distribution. Following transfer, any such
Awards shall continue to be subject to the same terms and conditions as were
applicable immediately prior to transfer, provided that for purposes of the
Plan, the term Participant shall be deemed to refer to the transferee. The
events of termination of employment set forth in Section 6 hereof shall continue
to be applied with respect to the original Participant, following which the
Options shall be exercisable by the transferee only to the extent and for the
periods specified in Section 6. Awards and other rights under the Plan may not
be pledged, mortgaged, hypothecated or otherwise encumbered, and shall not be
subject to the claims of creditors.
(c) No Right to Continued Employment or Service or to Continue
as an Eligible Non-Employee Director. Neither the Plan nor any action taken
hereunder shall be construed as giving any employee or other person or any
Eligible Non-Employee Director the right to be retained in the employ or service
of the Company or any of its subsidiaries or as an Eligible Non-Employee
Director, nor shall it interfere in any way with the right of the Company or any
of its subsidiaries to terminate any employee's employment or other person's
service at any time.
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<PAGE> 12
(d) Taxes. The Company and any subsidiary is authorized to
withhold from any Award granted or to be settled, any delivery of Stock in
connection with an Award, any other payment relating to an Award or any payroll
or other payment to a Participant amounts of withholding and other taxes due or
potentially payable in connection with any transaction involving an Award, and
to take such other action as the Committee may deem advisable to enable the
Company and Participants to satisfy obligations for the payment of withholding
taxes and other tax obligations relating to any Award. This authority shall
include authority to withhold or receive Stock or other property and to make
cash payments in respect thereof in satisfaction of a Participant's tax
obligations.
(e) Changes to the Plan and Awards. The Board may amend,
alter, suspend, discontinue or terminate the Plan or the Committee's authority
to grant Awards under the Plan without the consent of shareholders or
Participants, except that any such action shall be subject to the approval of
the Company's shareholders at or before the next annual meeting of shareholders
for which the record date is after such Board action if such shareholder
approval is required by any federal or state law or regulation or the rules of
any stock exchange or automated quotation system on which the Stock may then be
listed or quoted, and the Board may otherwise, in its discretion, determine to
submit other such changes to the Plan to shareholders for approval; provided,
however, that, without the consent of an affected Participant, no such action
may materially impair the rights of such Participant under any Award theretofore
granted to him. The Committee may waive any conditions or rights under, or
amend, alter, suspend, discontinue, or terminate, any Award theretofore granted
and any Award Agreement relating thereto; provided, however, that, without the
consent of an affected Participant, no such action may materially impair the
rights of such Participant under such Award.
(f) No Rights to Awards; No Shareholder Rights. No Participant
or employee shall have any claim to be granted any Award under the Plan, and
there is no obligation for uniformity of treatment of Participants and employees
(other than as set forth herein with respect to Eligible Non-Employee
Directors). No Award shall confer on any Participant any of the rights of a
shareholder of the Company unless and until Stock is duly issued or transferred
and delivered to the Participant in accordance with the terms of the Award or,
in the case of an Option, the Option is duly exercised.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant
pursuant to an Award, nothing contained in the Plan or any Award shall give any
such Participant any rights that are greater than those of a general creditor of
the Company; provided, however, that the Committee may authorize the creation of
trusts or make other arrangements to meet the Company's obligations under the
Plan to deliver cash, Stock, other Awards, or other property pursuant to any
Award, which trusts or other arrangements shall be consistent with the
"unfunded" status of the Plan unless the Committee otherwise determines with the
consent of each affected Participant.
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<PAGE> 13
(h) Nonexclusivity of the Plan. Neither the adoption of the
Plan by the Board nor its submission to the shareholders of the Company for
approval shall be construed as creating any limitations on the power of the
Board to adopt such other compensatory arrangements as it may deem desirable,
including, without limitation, the granting of stock options otherwise than
under the Plan, and such arrangements may be either applicable generally or only
in specific cases.
(i) No fractional shares. No fractional shares of Stock shall
be issued or delivered pursuant to the Plan or any Award. The Committee shall
determine whether cash, other Awards, or other property shall be issued or paid
in lieu of such fractional shares or whether such fractional shares or any
rights thereto shall be forfeited or otherwise eliminated.
(j) Compliance with Code Section 162(m). It is the intent of
the Company that employee Options, SARs and other Awards designated as Awards
subject to Section 7(e) shall constitute "qualified performance-based
compensation" within the meaning of Code Section 162(m). Accordingly, if any
provision of the Plan or any Award Agreement relating to such an Award does not
comply or is inconsistent with the requirements of Code Section 162(m), such
provision shall be construed or deemed amended to the extent necessary to
conform to such requirements, and no provision shall be deemed to confer upon
the Committee or any other person discretion to increase the amount of
compensation otherwise payable in connection with any such Award upon attainment
of the performance objectives.
(k) Governing Law. The validity, construction and effect of
the Plan, any rules and regulations relating to the Plan and any Award Agreement
shall be determined in accordance with the laws of the State of Delaware,
without giving effect to principles of conflicts of laws, and applicable federal
law.
(l) Effective Date; Plan Termination. The Plan shall become
effective as of the date of its adoption by the Board, subject to shareholder
approval prior to the commencement of the Initial Public Offering, and shall
continue in effect until terminated by the Board.
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<PAGE> 1
EXHIBIT 10.8
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (this "Agreement") is made and entered into
as of this 28th day of May, 1998 between Key Components, LLC (the "Company"), a
Delaware limited liability company, having its principal address at Wing Road,
RR 1, Box 167D, Millbrook, New York, 12545 and Millbrook Capital Management,
Inc., a New York corporation ("Millbrook"), having its principal address at 152
West 57th Street, New York, New York 10019.
W I T N E S S E T H:
WHEREAS, the Company is the sole shareholder of B.W. Elliott
Manufacturing Co., Inc., a New York corporation ("Elliott"), Hudson Lock, Inc.,
a Delaware corporation ("Hudson"), Key Components Finance Corp., a Delaware
corporation ("Finance Corp.") and ESP Lock Products, Inc. ("ESP"), a Delaware
corporation (collectively referred to herein as the "Subsidiaries"); and
WHEREAS, the Company desires the benefit of the experience, supervision
and services of Millbrook and desires to employ it upon the terms and conditions
hereinafter set forth, and Millbrook is willing and able to accept such
employment on such terms and conditions;
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein contained, the Company and Millbrook agree as follows:
1. Defined Terms. All terms used herein, and not otherwise defined
herein, shall have the meaning set forth in the Indenture, dated as of May __,
1998, between the Company, the Subsidiaries and U.S. Trust Company, as indenture
trustee (the, "Indenture").
2. Employment. The Company agrees to employ, and Millbrook agrees to
serve the Company, in the management capacity and upon the other terms and
conditions hereinafter set forth.
3. Term. The employment of Millbrook shall be renewed on the date
hereof and shall continue for the term of the Company, unless such employment
shall be terminated as hereinafter provided.
4. Termination for Cause.
(a) The Company may terminate this Agreement if Millbrook
violates any one or more of the terms of this Agreement and such violations
result in substantial detriment to the Company's business. If the Company
reasonably determines that Millbrook has violated the terms of this Agreement,
it shall give written notice thereof describing the default and granting thirty
(30) days in which to cure the default. If Millbrook fails or refuses to cure
the default within thirty
<PAGE> 2
(30) days of the receipt of such notice, the Company may terminate this
Agreement at the end of the thirty (30) day period.
(b) Millbrook may terminate this Agreement if the Company
fails to pay amounts owing to Millbrook. If Millbrook reasonably determines that
the Company has failed to pay amounts owing under this Agreement, it shall give
written notice thereof describing the amount owing and granting thirty (30) days
in which to cure such failure. If the Company fails or refuses to pay amounts
owing to Millbrook within thirty (30) days of the receipt of such notice,
Millbrook may terminate this Agreement at the end of the thirty (30) day period.
5. Duties. Millbrook shall perform (or supervise the performance of)
certain executive and administrative activities relating to the internal
operation of the Company and its Subsidiaries, subject always to the general
control and direction of Key Components, Inc., the sole member of the Company
(the "Sole Member"). Millbrook's duties shall consist of the following:
(a) Millbrook shall provide certain executive level employee
services to the Company and its Subsidiaries, consisting of the provision of the
services of Mr. Clay Lifflander (or his successor in office) as Chief Executive
Officer and President, Mr. Alan Rivera (or his successor in office) as General
Counsel, and Mr. David Bova (or his successor in office) as the Director of
Corporate Development and Administrative Services (collectively, the
"Executives"). Notwithstanding anything in this Agreement to the contrary,
Millbrook shall not be obligated to provide executive level services to the
Company in the nature of those generally performed by a Chief Financial Officer
and/or Controller;
(b) Millbrook shall monitor all matters relating to the legal
and tax status of the Company and its Subsidiaries, including supervising the
preparation of the Company's and its Subsidiaries' financial statements and tax
returns, and shall hire any necessary attorneys and accountants, which
professionals shall be retained by the Company at its expense. Millbrook shall
assist with any presentations to any taxing authorities upon audit of the
Company or any of its Subsidiaries, as may be necessary or appropriate in
connection with the Company's tax objectives;
(c) Millbrook shall supervise office systems, filing systems,
accounting systems, and bookkeeping systems for the Company and its
Subsidiaries;
(d) Millbrook shall consult with and advise the other
officers, directors, agents and employees of either the Company, its Sole Member
or the Subsidiaries regarding the internal operations of the Company or the
Subsidiaries;
(e) Millbrook shall prepare and distribute to the Sole Member
quarterly and annual reports regarding the operations of the Company's
Subsidiaries; and
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<PAGE> 3
(f) Millbrook shall provide (or supervise the provision by a
third party hired at the Company's expense) certain financial advisory, research
and consulting services in the nature of those generally provided by investment
banking firms and management consulting firms.
In the event that Millbrook provides services to the Company
or its Subsidiaries that exceed those described above (including but not limited
to consultation, negotiation, review and analysis in connection with joint
ventures, mergers and acquisitions or bank financings involving or transactions
with respect to the sale or disposition of, the Company or any of its
Subsidiaries), Millbrook shall be entitled to negotiate with the Company for the
receipt of additional fees, subject to any applicable limitations contained in
the Indenture.
The Company shall have the right to hire any or all of the
Executives as employees of the Company and pay them for their services directly.
To the extent that the aggregate amount of compensation payable to the
Executives exceeds $10,000 in any calendar year, the Base Fee (as hereinafter
defined) payable to Millbrook shall be reduced by said excess.
6. Powers. So that it may properly perform its duties, Millbrook shall
have the power to take all action and do all things necessary and proper to
bring about the efficient operation of the Company and its Subsidiaries, subject
to the overall direction and control of the Sole Member. Millbrook shall have
the power to employ, supervise and discharge all employees of the Company and
its Subsidiaries and to fix their compensation, subject to the overall direction
and control of the Sole Member.
7. Liabilities and Expenses. All reasonable costs, expenses, losses,
and damages incurred by Millbrook in the provision of the services to the
Company or its Subsidiaries provided for hereunder shall be paid by the Company,
or if paid for by Millbrook, shall be reimbursed by the Company upon provision
of a written record of said costs. However, Millbrook shall not be reimbursed
for, and shall itself pay for the cost of its offices, equipment, management
personnel (either employees or independent contractors, including the
Executives) and facilities and supplies necessary to enable it to fully perform
the management duties to be performed by it hereunder.
8. Compensation.
(a) As compensation for its services performed hereunder,
Millbrook shall be entitled to the following compensation from the Company:
(i) a $500,000 annual base fee (the "Base Fee"),
payable by the Company in quarterly installments on the first day of each
calendar quarter, commencing June 1, 1998. In the event that there exists an
Event of Default on the day that an installment of the Base Fee is otherwise due
and payable, the payment of that installment of the Base Fee (as well as any
payment that may be due and payable under Section 8(a)(ii) hereto) shall be
deferred and shall accrue (without interest) until such time that the Event of
Default is cured. From and after the
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<PAGE> 4
cure or waiver of any Event of Default, any and all deferred installments of the
Base Fee (and any payments owing pursuant to Section 8(a)(ii) hereunder) may be
paid.
(ii) an additional fee payable with respect to each
calendar year or portion thereof during the term of this Agreement (the
"Additional Fee"), such additional fee to be paid on the later of (i) March 31
of each year or (ii) the date of the completion of the Company's audited
financial statements for the previous fiscal year (the "Financial Statements"),
provided that, (i) at the time for payment of the Additional Amount, no Event of
Default exists, and (ii) after giving pro forma effect to the payment of the
Additional Fee, the Consolidated Coverage Ratio for the fiscal year or period
covered by the Financial Statements is equal to or greater than the Applicable
Ratio (as defined herein). The amount of the Additional Fee shall initially be
$300,000 per year, and shall be subject to increase as set forth in Section 8(b)
below. In the event that (i) there is an Event of Default, or (ii) the
Consolidated Coverage Ratio is less than the Applicable Ratio, payment of the
Additional Fee (or such portion thereof as shall result in the pro forma
Consolidated Coverage Ratio being equal to or greater than the Applicable Ratio)
shall be deferred and shall accrue (without interest) until such time that,
after giving pro forma effect to the payment of the portion of the Additional
Fee then being paid, the Consolidated Coverage Ratio, as determined as of the
last day of the most recently ended fiscal quarter of the Company for which
internal financial statements of the Company are available, is equal to or
greater than the Applicable Ratio. As used herein, the Applicable Ratio shall
mean: (i) for fiscal years ending on or prior to December 31, 1999, 2.0:1 and
(ii) for fiscal years ending after December 31, 1999, 2.25:1.
(b) For the fiscal year ending December 31, 2000, and for each
fiscal year thereafter, the then current amount of the Additional Fee (after
giving effect to prior increases under this Section 8 (b)) with respect to such
year, may be increased in the discretion of the Board of Directors', by an
amount up to 15% of the aggregate amount of the Base Fee and Additional Fee,
computed as of such date of increase (each an "Annual Increase Amount");
provided however, the percentage obtained by dividing the Annual Increase Amount
by the aggregate amount of the annual Base Fee and Additional Fee immediately
prior to giving effect to such increase shall not exceed the Cash Flow Growth
Percentage. "Cash Flow Growth Percentage" is defined hereunder as the percentage
increase in Consolidated Cash Flow for the year to which the Annual Increase
Amount relates over the Consolidated Cash Flow for the preceding fiscal year;
provided however, for this purpose, Consolidated Cash Flow shall be computed on
a pro forma basis in accordance with the manner that Consolidated Cash Flow is
computed for purposes of computing the Consolidated Coverage Ratio. The Annual
Increase Amount for any fiscal year shall be paid at the same time as the
Additional Fee with respect to that fiscal year and shall be subject to the same
restrictions as to payment as are set forth in Section 8 (a) (ii) above with
respect to the Additional Fee. Notwithstanding the foregoing, the aggregate of
all Annual Increase Amounts shall not exceed $400,000.
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<PAGE> 5
(c) Upon consummation of the Offering, the Company shall pay
to Millbrook an investment fee equal to $900,000 for financial advisory and
other services rendered to the Company in connection with the Offering.
9. Covenant of Millbrook. Millbrook covenants and agrees that it will
maintain (or will otherwise have available to it) facilities and staff necessary
and adequate in all material respects to perform properly its obligations
hereunder.
10. Notices. All notices and other communications required or permitted
to be given hereunder shall be in writing and shall be deemed to have been duly
given if delivered or mailed first class mail postage prepaid to the address of
the Company and Millbrook set forth above.
11. Construction. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
12. Benefit. This Agreement shall bind and inure to the benefit of the
parties and their legal representatives, successors and assigns, including,
without limitation, a successor by merger.
13. Assignment. No party hereto may assign or transfer its rights or
obligations arising under this Agreement without the prior written consent of
the other party hereto, which consent shall not be unreasonably withheld.
14. Entire Agreement. The parties hereto agree that this Agreement
constitutes the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements and understandings between
them as to such subject matter; and there are no restrictions, agreements,
arrangements, oral or written, between the parties relating to the subject
matter hereof which are not fully expressed or referred to herein.
15. Waivers and Further Agreements. Any waiver of any terms or
conditions of this Agreement shall not operate as a waiver of any other breach
of such terms or conditions or any other term or condition, nor shall any
failure to enforce any provision hereof operate as a waiver of such provision or
of any other provision hereof; provided, however, that no such waiver unless it
by its own terms explicitly provides as to the contrary, shall be construed to
effect a continuing waiver of the provision being waived and no such waiver in
any instance shall constitute a waiver in any other instance or for any other
purpose or impair the right of the party against whom such waiver is claimed in
all other instances or for all other purposes to require full compliance with
such provision. Each of the parties hereto agrees to execute all such further
instruments and documents and to take all such further action as the other party
may reasonably require in order to effectuate the terms and purposes of this
Agreement.
16. Amendments. This Agreement may not be amended nor shall any waiver,
change, modification, consent or discharge be effected except by an instrument
in writing executed by or on behalf of the party or parties against whom
enforcement of any amendment, waiver, change,
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<PAGE> 6
modification, consent or discharge is sought, subject to the terms of any
outstanding loans of the Company.
17. Severability. If any provision of this Agreement shall be held or
deemed to be, or shall in fact be, invalid, inoperative or unenforceable as
applied to any particular case in any jurisdiction or jurisdictions, or in all
jurisdictions or in all cases, because of the conflict of any provision with any
constitution or statute or rule of public policy or for any other reason, such
circumstance shall not have the effect of rendering the provision or provisions
in question, invalid, inoperative or unenforceable in any other jurisdiction or
in any other case or circumstance or of rendering any other provision or
provisions herein contained invalid, inoperative or unenforceable to the extent
that such other provisions are not themselves actually in conflict with such
constitution, statute or rule of public policy, but this Agreement shall be
reformed and construed in any such jurisdiction or case as if such invalid,
inoperative or unenforceable provision had never been contained herein and such
provision reformed so that it would be valid, operative and enforceable to the
maximum extent permitted in such jurisdiction or in such case.
18. Section Headings. The headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
KEY COMPONENTS, LLC, a Delaware
limited liability company
___________________________________
By:
Title:
MILLBROOK CAPITAL
MANAGEMENT, INC., a New York
corporation
___________________________________
By:
Title:
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<PAGE> 1
Exhibit 10.9
THIS AGREEMENT between EMPIRE REALTY COMPANY, a partnership with its
principal place of business at Binghamton, New York (P.O. Box 2361), as
Landlord, and B.W. ELLIOTT MANUFACTURING CO., INC., a New York corporation with
a place of business at 35-37 Milford Street, P.O. Box 773, Binghamton, New York
13902, as Tenant.
W I T N E S S E T H:
The Landlord hereby leases to the Tenant the following premises: Land,
buildings and parking lot located at 33, 35-37, 39 and 44 Milford Street,
Binghamton, New York 13904, for the term of twenty (20) years, to commence the
1st day of January, 1989 to end on the 31st day of December, 2008, to be used
and occupied only for the operation of a manufacturing business, including
offices and storage space, upon the conditions and covenants following:
1st. That the Tenant shall pay annual rent as follow upon the conditions
and covenants following: $88,486.00 for the first calendar year; thereafter, the
annual rent for each and every calendar year will increase by five percent (5%)
over the previous year's annual rent, said rent to be paid in equal monthly
payments in advance on the 1st day of each and every month during the term
aforesaid, as follows: One-twelfth (1/12) of the annual rent (as determined
above) for each calendar year.
2nd. That the Tenant shall take good care of the premises and shall, at
the Tenant's own cost and expense make all repairs and at the end or other
expiration of the term, shall deliver up the demised premises in good order or
condition, damages by the elements excepted, as well as reasonable use and wear
and tear.
3rd. That the Tenant shall promptly execute and comply with all statutes,
ordinances, rules, orders, regulations and requirements of the Federal, State
and Local Governments and of any and all their Departments and Bureaus
applicable to said premises, for the correction, prevention, and abatement of
nuisances or other grievances, in, upon, or connected with said premises during
said term; and shall also promptly comply with and execute all rules, orders and
regulations of the New York Board of Fire Underwriters, or any other similar
body, at the Tenant's own cost and expense.
4th. That the Tenant, successors, heirs, executors or administrators shall
not assign this agreement, or underlet or underlease the premises, or any part
thereof, or make any alterations on the premises, without the Landlord's consent
in writing (which consent shall not be unreasonably withheld) or occupy, or
permit or suffer the same to be occupied for any business or purpose deemed
disreputable or extra-hazardous on account of fire, under the penalty of damages
and forfeiture, and in the event of a breach thereof, the term herein shall
immediately cease and determine at the option of the Landlord as if it were the
expiration of the original term.
<PAGE> 2
5th. Tenant must give Landlord prompt notice of fire, accident, damage or
dangerous or defective condition. Landlord need only repair the damaged
structural parts of the Premises. Landlord is not required to repair or replace
any equipment, fixtures, furnishings or decorations unless originally installed
by Landlord. Landlord is not responsible for delays due to settling insurance
claims, obtaining estimates, labor and supply problems or any other cause not
fully under Landlord's control.
If the fire or other casualty is caused by an act of neglect of Tenant,
Tenant's employees or invitees, or at the time of the fire or casualty Tenant is
in default in any term of this Lease, then all repairs will be made at Tenant's
expense and Tenant must pay the full rent with no adjustment.
The cost of the repairs will be added rent.
Landlord has the right to demolish or rebuild the Building if there is
substantial damage by fire or other casualty. Landlord may cancel this Lease
within 30 days after the substantial fire or casualty by giving Tenant notice of
Landlord's intention to demolish or rebuild. The Lease will end 30 days after
Landlord's cancellation notice to Tenant. Tenant must deliver the Premises to
Landlord on or before the cancellation date in the notice and pay all rent due
to the date of the fire or casualty. If the Lease is canceled Landlord is not
required to repair the Premises or Building. The cancellation does not release
Tenant of liability in connection with the fire or casualty. This Section is
intended to replace the terms of New York Real Property Law Section 227.
6th. The said Tenant agrees that the said Landlord and the Landlord's
agents and other representatives shall have the right to enter into and upon
said premises, or any part thereof, at all reasonable hours for the purpose of
examining the same, or making such repairs or alterations therein as may be
necessary for the safety and preservation thereof.
7th. The Tenant also agrees to permit the Landlord or the Landlord's
agents to show the premises to persons wishing to hire or purchase the same; and
the Tenant further agrees that on and after the sixth month, next preceding the
expiration of the term hereby granted, the Landlord or the Landlord's agents
shall have the right to place notices on the front of said premises, or any part
thereof, offering the premises "To Let" or "For Sale", and the Tenant hereby
agrees to permit the same to remain thereon without hindrance or molestation.
8th. That if the said premises, or any part thereof shall be deserted or
become vacant during said term, or if any default be made in the payment of the
said rent or any part thereof, or it any default be made in the performance of
any of the covenants herein contained, the Landlord or representatives may
re-enter the said premises by force, summary proceedings or otherwise, and
remove all persons therefrom, without being liable to prosecution therefor, and
the Tenant hereby expressly waives the service of any notice in writing of
intention to re-enter, and the Tenant shall pay at the same time as the rent
becomes payable under the terms hereof a sum equivalent to the rent reserved
herein, and the Landlord may rent the premises on behalf of the Tenant,
reserving the right to rent the premises for a longer period of time than fixed
in the original lease without releasing the original Tenant from any liability,
applying any moneys collected, first to the expense
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<PAGE> 3
of resuming or obtaining possession, second to restoring the premises to a
rentable condition, and then to the payment of the rent and all other charges
due and to grow due to the Landlord, any surplus to be paid to the Tenant, who
shall remain liable for any deficiency.
9th. Landlord may replace, at the expense of Tenant, any and all broken
glass in and about the demised premises. Landlord may insure, and keep insured,
all plate glass in the demised premises for and in the name of Landlord. Bills,
for the premiums therefor shall be rendered by Landlord to Tenant at such times
as Landlord may elect, and shall be due from, and payable by Tenant when
rendered, and the amount thereof shall be deemed to be, and be paid as,
additional rental. Damage and injury to the said premises, caused by the
carelessness, negligence or improper conduct on the part of the said Tenant or
the Tenant's agents or employees shall be repaired as speedily as possible by
the Tenant at the Tenant's own cost and expense.
10th. That the Tenant shall neither encumber nor obstruct the sidewalk in
front of, entrance to, or halls and stairs of said premises, nor allow the same
to be obstructed or encumbered in any manner.
11th. The Tenant shall neither place, or cause or allow to be placed, any
sign or signs of any kind whatsoever at, in, or about the entrance to said
premises or any other part of same except in or at such place or places as may
be indicated by the Landlord and consented to by the Landlord in writing. And in
case the Landlord or the Landlord's representatives shall deem it necessary to
remove any such sign or signs in order to paint the said premises or the
building wherein same is situated at the Tenant's cost and expense or make any
other repairs, alterations or improvements in or upon said premises or building
or any part thereof at the Tenant's cost and expense, the Landlord shall have
the right to do so, providing the same be removed and replaced at the Landlord's
expense, whenever the said repairs, alterations or improvements shall be
completed. Said consent shall not be unreasonably withheld by the Landlord.
12th. That the Landlord is exempt from all liability for any damage or
injury to person or property caused by or resulting from steam, electricity,
gas, water, rain, ice or snow, or any leak or flow from or into any part of said
building or from any damage or injury resulting or arising from any other cause
or happening whatsoever unless said damage or injury be caused by or due to the
negligence of the Landlord.
13th. That if default be made in any of the covenants herein contained,
then it shall be lawful for the said Landlord to re-enter the said premises, and
the same to have again, re-possess and enjoy. The said Tenant hereby expressly
waives the service of any notice in writing of intention to re-enter.
14th. That this instrument shall not be a lien against said premises in
respect to any mortgages that are now on or that hereafter may be placed against
said premises, and that the recording of such mortgage or mortgages shall have
preference and precedence and be superior and prior in lien of this lease,
irrespective of the date of recording and the Tenant agrees to
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execute without cost, any such instrument which may be deemed necessary or
desirable to further effect the subordination of this lease to any such mortgage
or mortgages, and a refusal to execute such instrument shall entitle the
Landlord, or the Landlord's assigns and legal representatives to the option of
cancelling this lease without incurring any expense or damage and the term
hereby granted is expressly limited accordingly.
15th. It is expressly understood and agreed that in case the demised
premises shall be deserted or vacated, or if default be made in the payment of
the rent or any part thereof as herein specified, or if, without the consent of
the Landlord, the Tenant shall sell, assign, or mortgage this lease or if
default be made in the performance of any of the covenants and agreements in
this lease contained on the part of the Tenant to be kept and performed, or if
the Tenant shall fail to comply with any of the statutes, ordinances, rules,
orders, regulations and requirements of the Federal, State and Local Governments
or of any and all their Departments and Bureaus, applicable to said premises, or
if the Tenant shall file or there be filed against Tenant a petition in
bankruptcy or arrangement, or Tenant be adjudicated a bankrupt or make an
assignment for the benefit of creditors or take advantage of any insolvency act,
the Landlord may, if the Landlord so elects, at any time thereafter terminate
this lease and the term hereof, on giving to the Tenant five days' notice in
writing of the Landlord's intention so to do, and this lease and the term hereof
shall expire and come to an end on the date fixed in such notice as if the said
date were the date originally fixed in this lease for the expiration hereof.
Such notice may be given by mail to the Tenant addressed to the demised
premises.
16th. Tenant shall pay the rent or charge, which may, during the demised
term, be assessed or imposed for the water used or consumed in or on the said
premises, whether determined by meter or otherwise, as soon as and when the same
may be assessed or imposed, and will also pay the expenses for the setting of a
water meter in the said premises should the latter be required. Tenant shall pay
Tenant's proportionate part of the sewer rent or charge imposed upon the
building, or the property or the operation of the property. All such rents or
charges or expenses shall be paid as additional rent and shall be added to the
next month's rent thereafter to become due.
17th. That the Tenant will not nor will the Tenant permit undertenants or
other persons to do anything in said premises, or bring anything into said
premises, or permit anything to be brought into said premises or to be kept
therein, which will in any way increase the rate of fire insurance on said
demised premises, nor use the demised premises or any part thereof, nor suffer
or permit their use for any business or purpose which would cause an increase in
the rate of fire insurance on said building, and the Tenant agrees to pay on
demand any such increase.
18th. The failure of the Landlord to insist upon a strict performance of
any of the terms, conditions and covenants herein, shall not be deemed a waiver
of any rights or remedies that the Landlord may have, and shall not be deemed a
waiver of any subsequent breach or default in the terms, conditions and
covenants herein contained. This instrument may not be changed, modified,
discharged or terminated orally.
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<PAGE> 5
19th. If the whole or any part of the demised premises shall be acquired
or condemned by Eminent Domain, or sold under threat or imminence of such
Eminent Domain, or any public or quasi public use or purpose when and in that
event, the term of this lease shall cease and terminate from the date of title
vesting in such proceeding, or sold under threat or imminence of such Eminent
Domain, and Tenant shall have no claim against Landlord for the value of any
unexpired term of said lease. No part of any award shall belong to the Tenant.
20th. That after default in payment of rent or violation of any other
provision of this lease, or upon the expiration of this Lease the Tenant moves
out or is dispossessed and fails to remove any trade fixtures or other property
prior to such said default, removal, expiration of lease, or prior to the
issuance of the final order or execution of the warrant, then and in that event,
the said fixtures and property shall be deemed abandoned by the said Tenant and
shall become the property of the Landlord.
21st. In the event that the relation of the Landlord and Tenant may cease
or terminate by reason of the re-entry of the Landlord under the terms and
covenants contained in this lease or by the ejectment of the Tenant by summary
proceedings or otherwise, or after the abandonment of the premises by the
Tenant, it is hereby agreed that the Tenant shall remain liable and shall pay in
monthly payments the rent which accrues subsequent to the re-entry by the
Landlord, and the Tenant expressly agrees to pay as damages for the breach of
the covenants herein contained, the difference between the rent reserved and the
rent collected and received, if any, by the Landlord during the remainder of the
unexpired term, such difference or deficiency between the rent herein reserved
and the rent collected, if any, shall become due and payable in monthly payments
during the remainder of the unexpired term, as the amounts of such difference or
deficiency shall from time to time be ascertained; and it is mutually agreed
between Landlord and Tenant that the respective parties hereto shall and hereby
do waive trial by jury in any action, proceeding or counterclaim brought by
either of the parties against the other on any matters whatsoever arising out of
or in any way connected with this lease, the Tenant's use or occupancy of said
premises, and/or any claim of injury or damage.
22nd. The Tenant waives all rights to redeem under any law of the State of
New York.
23rd. This lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in nowise be affected, impaired or excused because Landlord
is unable to supply or is delayed in supplying any service expressly or
impliedly to be supplied or is unable to make, or is delayed in making any
repairs, additions, alterations or decorations or is unable to supply or is
delayed in supplying any equipment or fixtures if Landlord is prevented or
delayed from so doing by reason of governmental preemption in connection with a
National Emergency or in connection with any rule, order or regulation of any
department or subdivision thereof of any governmental agency or by reason of the
condition of supply and demand which have been or are affected by war or other
emergency.
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<PAGE> 6
24th. No diminution or abatement of rent, or other compensation, shall be
claimed or allowed for inconvenience or discomfort arising from the making of
repairs or improvements to the building or to its appliances, nor for any space
taken to comply with any law, ordinance or order of a governmental authority.
SEE ALSO ATTACHED RIDER, CONTAINING ADDITIONAL PARAGRAPHS "25th" THROUGH
"32nd", HEREBY EXPRESSLY INCORPORATED HEREIN AND MADE A PART OF THIS LEASE
AGREEMENT.
And the said Landlord doth covenant that the said Tenant on paying the
said yearly rent, and performing the covenants aforesaid, shall and may
peacefully and quietly have and enjoy the said demised premises for the term
aforesaid, provided however, that this covenant shall be conditioned upon the
retention of title to the premises by the Landlord.
AND IT IS MUTUALLY UNDERSTOOD AND AGREED that the covenants and
agreements contained in the within lease shall be binding upon the parties
hereto and upon their respective successors, heirs, executors and
administrators.
IN WITNESS WHEREOF, the parties have interchangeably set their hands and
seals (or caused these presents to be signed by their proper corporate officers
and caused their proper corporate seal to be hereto affixed) this 1st day of
June, 1988.
Signed, sealed and delivered
in presence of B.W. ELLIOTT MANUFACTURING CO.,
INC., Tenant
By: /s/ George M. Scherer, President
--------------------------------
George M. Scherer, President
[SEAL]
EMPIRE REALTY COMPANY, Landlord
By: /s/ Michael Urda, Partner
--------------------------------
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<PAGE> 7
RIDER TO (LEASE) AGREEMENT OF JUNE 1, 1988
BETWEEN EMPIRE REALTY COMPANY
AND B.W. ELLIOTT MANUFACTURING CO., INC.
25th. (a) Except as otherwise expressly provided in "(b)" below, it
is the intention of Landlord and Tenant (i) that the rent hereinabove specified
shall be net to the Landlord during the term of this (Lease) Agreement and (ii)
that all costs, expenses and obligations of operating and maintaining the
facilities which may arise or become due during the term of this (Lease)
Agreement shall be seasonably and fully paid and satisfied by Tenant.
(b) Landlord shall pay the total heating fuel expenses and
real estate taxes (including special assessments), together with any mortgage
amortization or other payments on the Landlord's obligation to any mortgagee or
mortgagees of the premises.
(c) Without limiting or in any other manner restricting the
scope or effect of "(a)" above, Tenant shall, at its own cost and expense, make
all necessary structural repairs and replacements to the premises and equipment,
including (without limitation) any heating system, plumbing system, electrical
system, window glass, fixtures and all other appliances and appurtenances
belonging to or incidental to the structure, devices and equipment used in
connection with the premises and any black-topped or other areas adjoining or
appurtenant to the highway or to the structure on the premises. Such structural
repairs and replacements, interior and exterior, shall be made promptly, as and
when necessary.
26th. Through the term of this (Lease) Agreement, Tenant shall at
its own cost and expense maintain and carry fire insurance (with appropriate
"loss payable" clauses) and public liability insurance (with respect to both
personal injury and property damage), in such amounts and with such companies as
may be approved by the Landlord, which approval will not be unreasonably
withheld. In the case of public liability insurance, coverage shall be in the
amount of at least $500,000.00. Upon demand, the policy or policies evidencing
such insurance coverage (or certificate or copies thereof) shall be deposited
with Landlord or its agent.
27th. In the event of any partial or complete condemnation (or
threat or imminence thereof) of the premises or any part thereof, Landlord shall
give notice thereof to Tenant as promptly as possible.
28th. Landlord shall have the right, without disposing of its fee
interest in the premises, at any time or f rom time to time, to assign the whole
or any part of the rent at any time payable hereunder, to any person, firm,
corporation, trust or other entity designated by Landlord in a written notice to
Tenant, and in any such case Tenant shall pay the net rent directly to
Landlord's designee at the address mentioned in any such notice, for the period
covered by such assignment.
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<PAGE> 8
29th. Landlord shall not be liable to Tenant for injury or damage,
however caused, to any property or person on the premises.
30th. Tenant will keep the premises in a clean and neat condition,
in accordance with all applicable laws and ordinances and any regulations made
pursuant thereto.
31st. Any improvements and additions to the premises by Tenant
(which can only be made with Landlord's consent) and/or any structural
replacements shall be and become the property of Landlord at the end or other
expiration of this (Lease) Agreement. No such improvements, additions,
structural improvements or other components, systems or paraphernalia (or any
part(s) thereof) may be removed (or caused to be removed) by Tenant.
32nd. The "(Lease) Agreement" between the Landlord and the Tenant,
dated January 2, 1986, and the term thereof, will be terminated on December 31,
1988 and be of no further force or effect.
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Exhibit 10.10
LEASE
This Lease made as of the 1st day of December, 1992 by and between S & S
PROPERTIES, INC., of Worcester, Massachusetts, (the "Lessor"), and RAD LOCK,
INC., a Massachusetts corporation, of Worcester, Massachusetts (the "Lessee").
W I T N E S S E T H:
Section 1. LEASED PREMISES
1.1 Description. The Lessor hereby leases to the Lessee and the Lessee
hereby leases from the Lessor 10,818 square feet of manufacturing, office, and
storage space in buildings (the "Buildings") owned by Lessor and located at 38
Austin Street, and space in the parking lot located at 40 Irving Street
(sufficient to accommodate Lessee's employees) in Worcester, Massachusetts (the
"Leased Premises"). The Leased Premises are more particularly described and
detailed in Exhibit "A" hereto.
1.2 Rights and Encumbrances. The Leased Premises are hereby leased to the
Lessee together with the right to use in common with the Lessor and those
claiming under it, subject to reasonable rules and regulations from time to time
made by the Lessor of which Lessee is given notice, the common walkways, exits
and approaches to the Leased Premises.
Section 2. TERM
2.1 The Leased Premises for a term commencing on December 1, 1992 and
ending on November 30, 1998 unless sooner terminated as herein provided.
Section 3. RENT
3.1 Lessee covenants and agrees to pay rent for the Leased Premises
according to the following schedule:
The annual rate of $2.60 per square foot for 10,818 square feet of
manufacturing, office and storage space in the Buildings for a total sum
of $28,127.00 per annum, payable each year in twelve (12) equal monthly
installments of $2,343.90, in advance, on the first day of each and every
month.
3.2 Payment. The Lessee covenants that it will pay such Rent to the Lessor
at the Lessor's address set forth in Paragraph 18.2 hereof without demand, at
the time specified herein, and without offset or deduction of any kind.
<PAGE> 2
Section 4. COVENANT OF QUIET ENJOYMENT
4.1 The Lessor covenants that the Lessor has the right to make this Lease,
and that the Lessee upon paying rent and performing and observing the Lessee's
obligations in the Lease, shall peacefully and quietly have, hold, and enjoy the
Leased Premises, subject to the terms and provisions hereof, and subject to
mortgages, rights, easements, restrictions, covenants and other matters of
records.
Section 5. MAINTENANCE AND REPAIRS
5.1 Lessee's Repairs. The Lessee shall, at its expense (as apportioned
below), make all repairs to the Leased Premises, including without limitation,
repairs to:
(a) The exterior and structure of the building including exterior
walls, foundation, and roof providing that the damage to said exterior walls,
foundation, and roof were caused by an act or omission of the Lessee or its
agents, servants, employees, or invitees.
(b) The interior of the building, including all fixtures,
improvements and additions within the Leased Premisses;
(c) The plumbing, heating, ventilating and air conditioning, fire
protection, wiring and electrical systems; and
(d) The grounds, sidewalks, approaches and parking areas within the
Leased Premises.
The Lessee agrees to maintain the Leased Premises and such repair,
order and condition as the Leased Premises are in at the commencement of the
term or at the time of their completion or installation. The Lessee also agrees
that any expenses for the foregoing repairs shall be apportioned with the
Lessor's other tenant, Sonju Corporation, as follows: Lessee: 27%; and Sonju
Corporation: 73%.
5.2 Maintenance of Grounds and Building. The Lessee shall maintain the
building and grounds in the Leased Premises in good order and shall be
responsible for all snow removal within the Leased Premises and on any common
walkways, exits and approaches giving access to the Leased Premises and used by
the Lessee. Lessee shall share the expense of said maintenance with Sonju
Corporation in the same proportion as it shares in the repairs, as set forth in
Section 5.1 hereof.
5.3 Lessee's Alterations. The Lessee may make improvements and additions
to the Leased Premises and alterations to the Buildings provided that it has
received the written consent and approval of the Lessor to make such
improvements or alterations. All improvements, additions, and alterations made
or installed by or on behalf of the Lessee shall immediately
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<PAGE> 3
become the property of the Lessor without payment therefor by the Lessor and
remain for the benefit of the Lessor at the termination of the Lease. All
machinery, equipment, trade fixtures, removable partitions, furniture and
furnishings installed at the expense of the Lessee, prior to and during the term
of this Lease, shall remain the property of the Lessee, but the Lessee shall, at
its own cost and expense, repair any and all damage to the Leased Premises
caused by the removal thereof and restore the Leased Premises to their condition
as they originally existed prior to installation of such items, subject to usual
wear and tear.
Section 6. INSURANCE
6.1 Liability Insurance. Lessee shall, at all times during the Term of
this Lease, at Lessee's sole cost and expense, maintain in full force and effect
with one or more responsible insurance companies licensed to do business in
Massachusetts broad form public liability insurance with combined single limit
of not less than One Million ($1,00,000.00) Dollars indemnifying Lessor and
Lessee, as the named insureds, against and with respect to all claims for or
related to death and personal injury, and with limits of Two Hundred Fifty
Thousand ($250,000.00) Dollars for property damage which may be claimed to have
occurred on or from the Leased Premises or the approaches, exit ways and walks,
with contractual liability endorsements attached.
Each policy of insurance placed by the Lessee under this Lease shall
provide that it may not be cancelled without at least ten (10) days prior
written notice from the insurer to the Lessor. Any insurance carried by either
the Lessor or Lessee with respect to the Leased Premises and property therein or
occurrences thereon shall, if available, include a clause or endorsement denying
to the insurer rights of subrogation against the other party to the extent
rights have been waived by the insured prior to the occurrence of damage or
loss. Each of the Lessor and Lessee, notwithstanding any provisions of this
Lease to the contrary, hereby waives any rights or recovery against the other
for injury, loss or damage due to hazards covered by insurance containing such
clause or endorsement to the extent of the indemnification received thereunder.
6.2 Other Insurance. Lessee shall insure its goods and effects against
hazards normally insured against by lessees in businesses similar to Lessee.
6.3 Evidence of Insurance. Upon execution of this Lease and thereafter not
less than fifteen (15) days prior to the expiration dates of the expiring
policies, the Lessee shall deliver to the Lessor certificates or binders
evidencing insurance coverage as provided for in Section 6.1 and renewals
thereof.
Section 7. DAMAGE OF DESTRUCTION
7.1 In the event that the Leased Premises or any part thereof shall,
during the term of this Lease, be destroyed or damaged by fire, explosion, the
elements or other casualty, the Lessee shall give immediate notice thereof to
the Lessor, which shall thereupon cause the damage to be repaired forthwith
unless the Lease is terminated as hereinafter provided. If the Leased Premises
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<PAGE> 4
or any part thereof shall have been rendered untenantable from the time of the
damage until the completion of said repair and restoration, a just and
reasonable portion of the rent shall abate during such period of repair and
restoration until said repair and restoration are completed. In the event,
however, that the Leased Premises are thereby damaged by more than seventy-five
(75%) percent of the replacement cost thereof, either party may elect to
terminate this Lease within thirty (30) days of the date of such damage by
giving written notice thereof to the other party, and thereupon this Lease shall
immediately terminate, and the Lessee shall have no further obligation hereunder
other than to pay the rent accrued to the date of such damage.
Section 8. OIL, OTHER PETROLEUM PRODUCTS AND OTHER HAZARDOUS SUBSTANCES
8.1 Compliance with Environmental Laws. Lessee shall at all time and all
respects comply with all local, state, and federal laws, ordinances,
regulations, and orders (collectively "Hazardous Substances Laws") relating to
industrial hygiene, environmental protection, or the use, analysis, generation,
manufacture, disposal, or transportation of any oil, other petroleum products or
other hazardous substance defined by local, state, or federal environmental laws
or regulations.
8.2 Handling of Oil, Other Petroleum Products, and Other Hazardous
Substances. Lessee shall at its own expense procure, maintain in effect, and
comply with all conditions of any and all permits, licenses and other
governmental and regulatory approvals required for the Lessee's use of the
premises, including, without limitation, storing and disposal of oil, other
petroleum products, and other hazardous substances. Lessee shall cause at its
own expense any and all oil, other petroleum products, and other hazardous
substances generated by the Lessee or otherwise present on the Leased Premises
because of Lessee's activities to be removed and transported solely by duly
licensed haulers to duly licensed facilities for final disposal of such
materials and wastes. Lessee in all respects shall handle, treat, deal with, and
manage any and all oil, other petroleum products, and other hazardous substances
in, on, under, or about the Leased Premises in total conformity with all
applicable Hazardous Substances Laws and prudent industry practices regarding
the management of such and prudent industry practices regarding the management
of such oil, other petroleum products, and other hazardous substances. Upon
expiration or earlier termination of the term of the Lease, Lessee shall cause
all oil, other petroleum products, and other hazardous substances to be removed
from the Leased Premises (except such hazardous substances, if any, as were
located in the premises prior to the commencement of the Lessee's occupancy
thereof) and to be transported for use, storage, or disposal in accordance and
with compliance with all applicable Hazardous Substances Laws. The Lessee shall
keep all containers of oil, other petroleum products, and other hazardous
substances either inside the Buildings or at some other appropriate location
other than the Leased Premises, but in no event shall the Lessee keep any
containers with such substances outside the Buildings.
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Section 9. TAXES AND UTILITIES
9.1 Taxes. The Lessee, during the term of this Lease, shall pay when due,
but in any event prior to the accrual of any interest or penalties being added
thereto, twenty-seven (27%) percent of any and all real estate taxes and
assessments imposed by any governmental agency or political subdivision which
are levied against the Leased Premises. Lessor agrees to provide Lessee with
copies of any tax bills or notices of assessments within ten (10) days of
Lessor's receipt thereof.
9.2 Utilities. The Lessee shall pay promptly as they become due all
charges for any gas, electricity, water, fuel oil or other utility service,
commodity, or facility supplied to the Leased Premises and consumed by the
Lessee during the term of this Lease.
Section 10. INDEMNIFICATION
10.1 The Lessee hereby saves the Lessor harmless and indemnified from and
against any and all liability for damages to any person, firm or corporation
occasioned by or resulting from accidents on the Leased Premises during the term
of this Lease, caused by the negligence or fault of Lessee or its agents and
employees. Lessee shall also assume the burden and expense of defending all such
suits, whether brought before the expiration of the term of this Lease or
thereafter and commenced to recover for injuries occasioned by any such
accident. The obligation of the Lessee shall extend to both injuries to persons
and to property, and its obligation to hold Lessor harmless and indemnified
shall extend to claims arising from such accidents which are either valid or
groundless.
Section 11. ASSIGNMENT OR SUBLETTING
11.1 Assignment. The Lessee agrees that it will not assign this Lease
without the prior express written consent of the Lessor, which consent shall not
be unreasonably withheld.
11.2 Subletting. The Lessee agrees that it will not sublet the whole or
any part of the Leased Premises or permit the same to be occupied or used by any
person without first obtaining the prior express written consent of the Lessor
in each case, which consent shall not be unreasonably withheld. In the event of
such subletting, the Lessee shall remain liable to the Lessor for all Rent and
other pecuniary obligations of the Lessee set forth under the provisions of this
Lease and for the performance of all covenants herein to be performed by the
Lessee.
Section 12. USE OF THE LEASED PREMISES
12.1 The Leased Premises shall be used as a manufacturing plant for
general light manufacturing, including but not limited to the manufacture and
installation of locks and other security devices, and the marketing and sale of
such items. If the Lessee desires to use the Leased Premises for any other
purpose, it must first obtain the prior express written consent of the
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<PAGE> 6
Lessor, which consent shall not be unreasonably withheld. The Lessee shall, at
its own expense. (a) promptly execute and comply with and conform to all
applicable rules, regulations, orders and requirements of any public authority;
and (b) obtain and maintain all permits, licenses, certificates and franchises
necessary for its use and occupation of the Leased Premises. Failure to obtain
or maintain the same shall not excuse the Lessee from its obligations under this
Lease.
Section 13. YIELDING UP
13.1 The Lessee, at the expiration or earlier termination of this Lease,
will remove the Lessee's property which it is entitled to remove pursuant to
Section 5.3 of this Lease, and will peaceably yield up to the Lessor the Leased
Premises, and all improvements, additions, and alterations made to or upon the
same, in a neat and clean condition reasonably free from all spilled oil, trash,
other objectionable matter and in such repair, order, and condition as the same
are in at the commencement of the term or at the time of their completion or
installation, reasonable use and wear excepted.
Section 14. ENTRY BY LESSOR
14.1 The Lessor, the Mortgagee, or their respective agents may, so often
as they desire, enter upon the Leased Premises during the term of this Lease for
the purpose of maintaining same and inspecting the same or for placing signs
thereon or offering the same for lease after the term of this Lease or for sale
of the Buildings and the real estate of which the Leased Premises are a part,
provided that such entry is made at reasonable hours and in a reasonable and
proper manner and does not unduly or unnecessarily interfere with the Lessee's
legitimate business operation.
Section 15. DEFAULT
15.1 Events of Default. The following events shall constitute Events of
Default:
(a) Any failure of the Lessee to pay the rent and/or other sums of
money payable to the Lessor as and when due and payable hereunder within ten
(10) days after notice of such failure;
(b) Any failure of the Lessee to comply with any other covenant,
provision, or condition of this Lease within ten (10) days after notice of such
failure;
(c) The Lessee is adjudged bankrupt, or makes an assignment for the
benefit of creditors, or a receiver of any property of the Lessee in or upon the
Leased Premises or for all or part of the Lessee's interest hereunder is
appointed by any action, suit or proceedings, by or against the Lessee and such
adjudication, assignment, or appointment is not vacated or annulled within sixty
(60) days; or
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(d) The interest of the Lessee in this Lessee in this Lease is sold
under execution, or other legal process.
Section 16. TERMINATION AND LESSOR'S REMEDIES
16.1 Termination.
(a) Upon the occurrence of the Event of Default specified in Section
15.1(a) (non-payment of rent), the Lessor, at its option may terminate this
Lease and the Lessee's rights hereunder by notice informing the Lessee of the
default or defaults and that the Lessor has terminated the Lease by reason of
the Lessee's default or defaults. Termination of this Lease shall be effective
upon receipt of said notice by the Lessee or three (3) days after said notice is
mailed in accordance with this Section 16.1(a), whichever occurs first.
(b) Upon the occurrence of any other Event of Default, the Lessor
may terminate this Lease in the same manner as set forth in Section 16.1(a)
above; provided, however, that termination of this Lease shall be effective ten
(10) days after said notice is sent by Lessor to Lessee.
16.2 Lessor's Remedies.In the event of termination, the Lessor, or the
Mortgage in the name of Lessor, shall have any and all of the following rights
and remedies:
(a) In the event that Lessee does not comply with the provisions of
Section 13.1, to bring suit against the Lessee for summary process and
possession;
(b) To bring suit against the Lessee to recover all rent due up to
the time of termination;
(c) To relet the Leased Premises for the remainder of the term of
this Lease and recover from the Lessee any difference between the amount
obtained from such reletting and the rent herein reserved; and.
(d) To pursue any other rights it may have in law or equity against
the Lessee.
The rights and remedies set forth herein are cumulative and are set
forth by way of example and not by way of limitation or restriction. Lessee
agrees to pay all costs, expenses, and reasonable attorney's fees incurred or
expended by Lessor or the Mortgage in any action against Lessee brought pursuant
to this Section 16.2.
Section 17. EMINENT DOMAIN
17.1 In the event the Leased Premises or a substantial portion thereof is
taken under the power or eminent domain for any public or quasi-public use, then
the Lessee may terminate and
- 7 -
<PAGE> 8
cancel this Lease by giving Lessor notice thereof, and thereupon both parties
shall be relieved of any further obligation under this Lease, excepting that
Lessee shall fulfill all its obligations hereunder to be performed to the date
of such termination. In the event this Lease is not terminated and cancelled
after a condemnation of a portion of the Leased Premises, the rent payable by
Lessee shall be reduced by a reasonable sum directly proportioned to the total
rent in such ratio as the value of the part of the Leased Premises condemned
plus the damage to the residue shall bear to the value of the entire premises of
the Lessor of which the Leased Premises are a part.
Section 18. MISCELLANEOUS
18.1 Waiver. No failure to insist on performance in any instance of any
obligation hereunder shall be deemed a waiver of such performance, of any
subsequent performance of such obligation or of the performance of any other
obligation hereunder, and no waiver in any instance of the performance of any
obligation hereunder shall be deemed a waiver of any subsequent performance of
such obligation or of the performance of any other obligation hereunder.
18.2 Notices. For all purposes hereunder, (excepting the payment of rent),
the addresses of the parties hereto are as follows, and all notices required or
permitted hereunder shall be sent by registered or certified mail, return
receipt requested (postage prepaid) and shall be deemed received three (3)
business days after the same shall have been deposited with the U.S.
Postal Service:
LESSOR 38 Austin Street
Worcester, MA 01601
Attn: David Sonju, President
LESSEE: 38 Austin Street
Worcester, MA 01601
Attn: Raymond F. Richard, Treasurer
18.3 Merger. It is expressly understood and agreed by and between the
parties hereto that this Lease sets forth all the promises, agreements,
conditions, and understandings between Lessor and/or its agents and Lessee
relative to the Leased Premises and that there are no promises, agreements,
conditions, or understandings either oral or written, between them other than as
herein set forth.
18.4 Binding Effect. This Lease and all the covenants, provisions, and
conditions herein contained shall inure to the benefit of and be binding upon
the parties hereto and their respective successors and assigns.
- 8 -
<PAGE> 9
IN WITNESS WHEREOF, the parties have hereunto set their hands the day and
year first written above.
RAD LOCK INC. S & S PROPERTIES, INC.
By: /s/ Raymond F. Richard By: /s/ David A. Sonju
----------------------------- ----------------------
Raymond F. Richard, President David Sonju, President
(Lessee) (Lessor)
/s/ Lisa S. Conrad /s/
- ------------------ --------------------------
Witness Witness
- 9 -
<PAGE> 10
EXHIBIT A
RAD Lock Occupancy Summary
<TABLE>
<S> <C> <C>
2nd Floor
Office Space 1,450 sq ft @ $2.60 = $ 3,770
1/2 Cafeteria 300 sq ft @ $2.60 = 780
1st Floor
Manufacturing 3,528 sq ft @ $2.60 = 9,173
RAD Look Bldg
Manufacturing 5,220 sq ft @ $2.60 = 13,572
Loading Dock 320 sq ft @ $2.60 = 832
------ --------
10,818 sq ft $28,127
====== ========
</TABLE>
- 10 -
<PAGE> 11
2nd Floor
- 11 -
<PAGE> 12
1st Floor
- 12 -
<PAGE> 13
RAD Lock
- 13 -
<PAGE> 14
SUPPLEMENT
This supplements the lease made as of the 1st day of December, 1992, by
and between S & S PROPERTIES, INC., of Worcester, Massachusetts, (the "Lessor"),
and RAD LOCK, INC., a Massachusetts corporation, of Worcester, Massachusetts
(the "Lessee").
Section 3. RENT
3.1 Lessee covenants and agrees to pay supplemental rent for the
additional Leased Premises, as described in Exhibit A attached hereto, according
to the following Schedule:
The annual rate of $2.60 per square foot for 390 square feet of office
space in the Buildings for a total sum of $1,014.00 per annum, payable
each year in twelve (12) equal monthly installments of $84.50, in advance,
on the first day of each and every month.
The effective date of this supplement is to be June1, 1996.
IN WITNESS WHEREOF, the parties have hereunto set their hands this 13th
day of May, 1996.
RAD LOCK INC. S & S PROPERTIES, INC.
By: /s/ Raymond F. Richard By: /s/ David A. Sonju
------------------------------- ------------------------
Raymond F. Richard, President David Sonju, President
(Lessee) (Lessor)
/s/ Lisa A. Conrad /s/
- ------------------ ----------------------------
Witness Witness
- 14 -
<PAGE> 15
2nd Floor
- 15 -
<PAGE> 1
Exhibit 10.11
LEASE AGREEMENT
THIS LEASE AGREEMENT (the "Lease") , made this 7th day of June, 1990
between ROUTE 12A ASSOCIATES, of 57 Front Street, Binghamton, New York 13905
(the "Landlord"), and B.W. ELLIOTT MANUFACTURING CO., INC., of 37 Milford
Street, Binghamton, New York 13904 (the "Tenant").
W i t n e s s e t h:
Landlord hereby leases to Tenant and Tenant hereby hires from Landlord
that certain building of approximately 18,125 square feet located at Route 12A
(Chenango Bridge Road) and "Francis Street", Binghamton, New York, and other
adjacent land, together with and including all parking (spaces) required under
any applicable zoning provisions; the entire premises (the "Premises") being
more fully set forth in Exhibit "A" annexed hereto. The following are the terms
and provisions of this Lease:
1. COMMENCEMENT OF LEASE. The lease term will commence on or about June ,
1990. If Tenant's obligation to commence paying rent begins on other than the
first day of the month, the monthly rent for that particular month shall be
adjusted pro rata; and if Tenant actually takes possession of the Premises
earlier than June , 1990, its monetary obligations under this lease will be
limited to utilities only (see also Section "9" hereunder).
2. DURATION OF LEASE. This Lease shall be for a period of five (5) years;
the five (5) years shall be measured from the first day of the month during
which the Tenant is first obligated to pay rent.
<PAGE> 2
3. RENT. All rent shall be due on a monthly basis, in advance, without
demand, on the first day of each and every month, as follows:
<TABLE>
<S> <C>
Year 1 - $6,645.83/mo.
Year 2 - $6,845.21/mo.
Year 3 - $7,050.56/mo.
Year 4 - $7,262.08/mo.
Year 5 - $7,479.94/mo.
</TABLE>
If Tenant fails to pay any monthly installment of rent by the 12th day of the
month, there shall be automatically assessed a $50.00 late charge, which shall
be collected as additional rent. Furthermore, if Landlord is compelled to pay
any of Tenant's monetary obligations under this Lease, said amount shall also be
collectible as additional rent. Conversely, if Tenant is compelled to perform
any of the Landlord's obligations under this Lease (e.g., structural repairs),
the reasonable amount(s) paid therefor by Tenant may be appropriately offset
(recouped) by it against the next installment(s) of rent due. See also "10"
hereinafter.
4. USE. Tenant shall use and occupy the Premises for office, warehousing,
manufacturing and associated purposes and none other without the prior written
consent of the Landlord, which consent shall not be unreasonably withheld.
5. ALTERATIONS AND IMPROVEMENTS; CERTAIN "LANDLORD" REPAIRS; SIGNS.
(a) Prior to the start of this lease, Landlord will repair or
replace all broken windows and window panes on the building within the Premises.
- 2 -
<PAGE> 3
(b) Landlord will be responsible for any repairs needed to the
existing heating systems and air conditioning and to the rain electrical
services to the building, for any structural repair(s) and for the operation of
the water and sewer systems for employee sanitary use; landlord's responsibility
for water and sewer system and their operation will appropriately expand if and
when municipal water and sewer facilities (mains) are provided to the building
(replacing the present well and septic system) (see also "10" hereinafter).
Tenant will be responsible for, and has Landlord's permission to remove,
interior, non-loadbearing walls and to remove plumbing and office partitioning,
and to make such other and further alterations to the building as may be
necessary to accommodate its equipment and operations, provided that at the end
of Lease term such modifications are restored to a state reasonably agreed upon
between Landlord and Tenant, but provided, further, that if removed by Tenant,
any "back office" walls need not be so restored or replaced. Any improvements by
Tenant will be subject to Landlord's prior consent, which consent shall not be
unreasonably withheld. Any improvements either to the interior or to the
exterior which cannot be removed without injury to the Premises shall become
part of the Premises, at landlord's option. Tenant Pay, at its own cost and
expense, erect and maintain such identification, advertising or other signs upon
or within the building, or elsewhere in the Premises, and at such places and in
such manner, as it may determine; provided only that upon termination of this
Lease, all such signs shall be promptly removed, likewise at Tenant's own cost
and expense, and any damage caused either by the erection or maintenance or by
the removal thereof shall be promptly and fully repaired at Tenant's own cost
and expense. Incident to any such sign(s), Tenant will, at its own cost and
expense, obtain appropriate authority or permit(s) from any and all public
officials or bodies regulating same.
- 3 -
<PAGE> 4
6. ASSIGNMENT, SUBLET & MORTGAGE. Tenant shall not assign, sublet,
mortgage or encumber this Lease nor use or permit the Premises or any part
thereof to be used by others without the prior written consent of the Landlord
in each instance, such consent not to be unreasonably withheld.
7. SUBORDINATION. Tenant acknowledges that this lease will be subject to
any mortgage lien currently on or hereafter placed upon the Premises by
Landlord, and Tenant shall execute and deliver on demand of Landlord, without
cost, any further instruments subordinating this Lease to any such lien.
8. TAXES. Tenant will, within the time limits set by the respective taxing
authorities, pay all real estate and school taxes assessed against the Premises
and properly allocable to the period (s) of its occupancy thereof .
9. UTILITIES. Tenant shall be responsible for all its utility usage at the
Premises, except as otherwise expressly provided in this lease.
10. MAINTENANCE AND REPAIRS; WATER/SEWER CLEANING, ETC. Landlord shall be
responsible for structural and roof maintenance (repairs). Tenant shall be
responsible for non-structural exterior maintenance and repairs and for any
non-structural maintenance and repairs in the area occupied by it; except that
heating and air conditioning repairs, other than routine maintenance, will be
paid for by Landlord. When municipal water and sewer services become available
in the area where the Premises are situated, the Landlord will, at its cost and
expense, prorptly procure appropriate hook-ups for the Premises, to replace the
present well and septic system; and thereafter Tenant will pay for its
water/sewer usage charges. It is expressly acknowledged, however, that until
such "municipal" hookup is effected, Landlord
- 4 -
<PAGE> 5
shall be fully and exclusively liable and responsible for all maintenance and
repairs for and with respect to the well and septic system. Tenant shall be
responsible for cleaning the Premises and for the replacanent of any glass at
the Premises. Tenant shall be responsible to maintain the Premises in a
reasonably clean and reasonably safe condition and shall not violate any laws,
rules or regulations applicable to its business operation or its occupancy of
the Premises. Tenant will be responsible for its own garbage removal. If, within
a reasonable period of time, Landlord does not effect a repair for which it is
responsible under this Lease, Tenant may thereafter effect such repair, in which
event it may recoup and offset the reasonable cost and/or expense thereof
against the next occurring installment(s) of rent due. Conversely, if, within a
reasonable period of time, Tenant does not effect a repair for which it is
responsible under this Lease, landlord may thereafter effect such repair, in
which event the reasonable cost and/or expense thereof may thereafter be
collected by the Landlord from the Tenant as additional rent due under this
Lease; and the full amount thereof, in each instance, shall be due not later
than the next rent installment date.
11. INSURANCE. Tenant shall be responsible to carry fire insurance on the
premises in the amount of at least $500,000, and to name both the Landlord and
Stanley J. and Mary E. Koniuto (mortgagees) as insureds. Tenant shall be
responsible to carry any contents or business interruption insurance it may
desire. Tenant shall also be responsible to carry and maintain a public
liability insurance policy which shall name the Landlord as an additional
insured party. Said public liability coverage shall have a limit of at least
$500,000 for each occurrence, for bodily injury or property damage. All
insurance shall provide that it may not be cancellable by the insurance carrier
except upon ten (10) days' written notice to Landlord. Prior to its taking
- 5 -
<PAGE> 6
possession under this lease and not later than May 15th of each succeeding year
hereunder, Tenant shall forward to Landlord appropriate proof of Tenant's
compliance with the insurance requirements as set forth herein.
12. TENANT'S GENERAL INDEMNIFICATION OF LANDLORD. Tenant will reimburse
and save Landlord harmless from and against all damages, injury and expenses
which Landlord may sustain or incur as a result of the carelessness, negligence,
default, improper conduct or failure to comply with the terms of this Lease or
with any law or ordinance, on the part of the Tenant, its employees and agents.
Tenant's obligation hereunder is not restricted by or limited to Tenant's
insurance coverage as required under "11" above.
13. LANDLORD'S ACCESS TO PREMISES. Landlord shall, at reasonable times and
upon reasonable notice, have access to the Premises for the purpose of
inspection or making repairs and of showing the Premises to prospective
purchasers or lessees.
14. TENANT'S COMPLIANCE WITH REQUIREMENTS OF LAW; ENVIRONMENTAL MATTERS;
LANDLORD'S "ENVIRONMENTAL" REPRESENTATIONS AND UNDERTAKINGS.
(a) Tenant shall comply with all requirements of all laws, orders,
ordinances and regulations of the federal, state, county and municipal
authorities and with any directions, pursuant to law, of any public officer or
officers, which (i) shall impose any duty upon Tenant with respect to the
Premises or its use and occupancy thereof and (ii) are not the Landlord's
obligation under this Lease.
(b) Neither Tenant's business operation nor its use of the Premises
will violate any environmental laws or regulations. Tenant will not allow or
cause to be allowed any toxic or hazardous materials or conditions to exist or
be created within the Premises (including especially,
- 6 -
<PAGE> 7
but not by way of limitation, any discharge(s) into any septic system of any
materials or waste other than such as is normal for employee sanitary uses); and
if any governmental entity, department, agency or office makes any claim that
the Premises are in violation of some environmental law or regulation caused by
an act of Tenant, then Tenant will promptly and fully discharge its obligations
under the law, at its sole cost and expense, and will fully and promptly
indemnify Landlord and save Landlord harmless from and against any claim,
demand, fine, penalty, damages or other exposure on account thereof, including
(without limitation) reasonable legal fees in connection therewith.
(c) Landlord represents and warrants that Landlord is currently
unaware of any fact or circumstance which currently exists or, with the passage
of time or the giving of notice, or both, would constitute a violation of any
applicable environmental law or regulation relating to toxic or other hazardous
materials. If any governmental entity, department, agency or office or any bank
or other lending institution makes any claim that the Premises are in violation
of some environmental law or regulation not caused by the exclusive act of
Tenant, then Landlord will promptly and fully discharge its obligations under
the law, at Landlord's sole cost and expense, and will fully and promptly
indennify Tenant and save Tenant harmless from and against any claim, demand,
fine, penalty, damages or other exposure on account thereof, including (without
limitation) reasonable legal fees in connection therewith.
15. SURRENDER OF PREMISES. On the last day of the term (or sooner
termination of the Lease), Tenant shall peaceably surrender the Premises to
Landlord, its successors and assigns, in as good a state and condition as
reasonable use thereof will permit (reasonable wear and tear and action of the
elements, therefore, excepted); and if the Premises be
- 7 -
<PAGE> 8
not so surrendered, the Tenant will save the Landlord harmless from and against
all damages which the Landlord shall suffer by reason thereof, and will
indemnify the Landlord therefor.
16. CONDEMNATION. In the event that a public authority condemns the
Premises or such portion thereof as to render the continued operation of the
Tenant's business thereat either impossible or unfeasible, either party shall
have the right to terminate this Lease upon 60 (sixty) days' prior written
notice to the other. In the event of any condemnation, Landlord shall be
entitled to any award relating to the Premises (including the building thereon).
17. DAMAGE OR DESTRUCTION. If, as a result of damage to or destruction of
the Premises arising out of any cause, the whole or any part of the Premises
shall thereby become untenantable or unfit for Tenant's use, rent shall abate
proportionately (or, as the case may be, cease entirely) during the continuance
of such condition. In case of fire, Tenant shall give immediate notice thereof
to Landlord; and if the Premise are so damaged that repairs cannot reasonably be
completed within ninety (90) days, then this Lease shall, at the option of
either party, terminate, and rent shall be adjusted up to and including the time
of the fire.
18. MECHANIC'S OR OTHER LIEN. Neither party will permit a mechanic's (or
other) lien to stand against the Premises. The responsible party shall be
obligated forthwith either to procure a release of or to bond any such asserted
lien; and failure to do so by the responsible party within fifteen (15) days of
written demand from the other party shall be cause for the demanding party to
declare this lease terminated. If the demanding party is landlord, Landlord
shall have all of the rights provided to Landlord under Section "22" hereof, but
shall not be limited thereby. In addition thereto, Landlord may elect, without
waiving any other rights hereunder, to satisfy the lien and charge the payment,
costs and expenses for same against Tenant as additional
- 8 -
<PAGE> 9
rent. In all events, Landlord may immediately commence civil litigation against
Tenant for reimbursement of any sums paid or advanced in order to remove the
lien from the Premises. If Tenant is the demanding party, Tenant may, without
forfeiting any of its rights under this Lease, elect to pay or otherwise satisfy
the lien and charge the same back against Landlord by taking an abatement
(offset) in monthly rental payments.
19. CONDITIONS PRECEDENT AND SUBSEQUENT TO TENANT'S LEASE OBLIGATIONS. All
of Tenant's obligations for, with respect to and/or under this Lease (including
any or all of its monetary and other obligations thereunder) are expressly
subject to and conditioned upon the following:
(a) Any and all responsibilities (mandated by any federal, New York
State or other governmental entity or agency or by any lending or other
financial institution) for the examination or investigation into or abatement,
correction and/or removal of any toxic or other hazardous materials or
conditions existing in, under or in connection with the Premises on or prior to
the commencement of this Lease shall, promptly upon discovery or notification,
be fully discharged by and at the sole cost and expense of the Landlord. The
discharge of any such responsibilities (hereafter mandated) must be fully and
duly accomplished by Landlord within ninety (90) days after notice; and if,
during all or any part of such remedial period, Tenant is prevented from
occupying or using the Premises, rent under this Lease shall abate for and
during such prevention period Landlord will fully and promptly indemnify Tenant
and save it harmless from and against any claim demand, fine, penalty, damages
or other exposure on account of any such responsibility of the Landlord,
including (without limitation) reasonable legal fees in connection therewith.
- 9 -
<PAGE> 10
(b) All applicable zoning and other land use laws, regulations
and/or rulings are and will be fully and continuously maintained as appropriate
for and with respect to Tenant's intended occupancy and operation. An
appropriate certificate of compliance for the Premises will be duly issued. An
appropriate certificate of occupancy can and will be issued to or for Tenant,
and such certificate will be maintained fully operative, without interruption,
throughout Tenant's occupancy. Tenant undertakes to initiate and maintain any
and all required zoning or related proceedings, at its own cost and expense;
however, Landlord will fully cooperate with Tenant in any and all such
proceedings. Furthermore, if, on account of any non-compliance with any
applicable zoning or related requirement, Tenant is prevented from occupying or
using the Premises, rent under this Lease shall abate for and during such
prevention period; and if such prevention period lasts more than ninety (90)
days, this condition shall, for all purposes, be conclusively deemed
unsatisfied. For purposes of this Paragraph "(b)" and, in particular, the
immediately preceding sentence thereof, the term "non-compliance" shall not mean
or include any violation caused by a material change in Tenant's intended
manufacturing operations in winding, casing and light assembly; and,
accordingly, if there is or subsequently arises a violation not caused by any
such material change, both the provisions regarding rent abatement and those
regarding termination of the Lease will be applicable and fully operative.
(c) All main electric services in or to the Premises and all
existing heating systems and air conditioning in or incident thereto are and
will be maintained in full compliance with all applicable building or other
health, safety and other pertinent codes. The discharge of any such
responsibilities hereunder with respect to such compliance must be fully and
duly accomplished by Landlord within thirty (30) days after notice; and if,
during all or any part of
- 10 -
<PAGE> 11
such remedial period, Tenant is prevented from occupying or using the Premises,
rent under this Lease shall abate for and during such prevention period.
The foregoing conditions precedent and subsequent apply both
(i) to Tenant's obligation initially to enter into the responsibilities
incumbent upon it under this Lease and (ii) to Tenant's continued responsibility
as lessee, for and during the term of this Lease; except that the condition
described in Paragraph "(a)" (i.e., toxic or other hazardous materials or
conditions) shall apply only with respect to clause "(ii)" of this sentence. If
any such condition is at any time not duly satisfied, this Lease may, at the
exclusive option of Tenant, thereupon or at any time thereafter be terminated by
written notice thereof to Landlord, in which event neither party shall have any
further obligation to the other under this Lease except for any rights
theretofore accrued.
20. NOTICES. Unless otherwise provided, any and all notices under this
Lease shall be in writing and may be given, and shall be deemed to have been
duly and sufficiently given if, either delivered personally or mailed through
the United States mail, enclosed in a certified or registered post-paid wrapper
properly addressed to the respective party at the address or addresses set forth
in this Lease (or at such other address(es) as may from time to time be provided
by either party, to the other, in writing).
21. ENTIRE AGREEMENT: NO WAIVER. This document embodies the entire
agreement of the parties with respect to its subject matter. There may be no
modification of that agreement except in a writing duly signed on behalf of the
party against which any such modification is sought to be enforced. Any waiver
or failure to enforce any of the covenants or conditions of this lease upon any
occasion(s) shall not void the same with respect to any future
- 11 -
<PAGE> 12
occasion(s) or estop either party from enforcement of the remaining covenants
and conditions herein set forth.
22. DEFAULT. If Tenant fails to pay rent by the twelfth (12th) day of the
month, or if Tenant otherwise fails to comply with the (other) conditions and
obligations of this Lease (including, without limitation, payment of amounts
considered as additional rent) after having received notification from Landlord
to comply, Landlord shall have the right to terminate this Lease as follows:
Landlord shall give Tenant ten (10) days' written notice of the
termination of this Agreement. The Notice shall state that this lease will
automatically terminate ten (10) days from the date of giving notice, as if said
day were the date originally fixed in this Lease for the expiration thereof.
Upon the giving of such termination Notice, this Lease shall irrevocably and
automatically terminate and expire and for all purposes come to an end ten (10)
days from the date Tenant is given said Notice. Said Notice may be delivered
personally or by first class, registered or certified mail, return receipt
requested. Upon such expiration, Tenant will surrender the Premises, and
Landlord shall have the right to re-enter and repossess the Premises, including
(without limitation) the right, if Tenant fails to vacate, immediately to
institute a summary holdover proceeding under Article 7 of the New York Real
Property Actions and Proceedings Law. If, with the exercise of diligence,
Landlord is unable to relet the Premises, Tenant shall remain liable to Landlord
for the rent reserved under this lease.
23. BINDING EFFECT. This Lease shall be binding upon the parties hereto,
their respective successors, assigns and heirs, administrators, executors and
distributees.
- 12 -
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have executed this Lease on the day
and year first above written.
ROUTE 12A ASSOCIATES, Landlord
By: /s/
------------------------------------
B.W. ELLIOTT MANUFACTURING CO., INC.,
Tenant
By: /s/
------------------------------------
- 13 -
<PAGE> 14
EXHIBIT A
SITE PLAN
- 14 -
<PAGE> 15
Colonial Plaza Associates
57 Front Street
Binghamton, New York 13905
Telephone 607-772-0313
FAX 607-772-0575
February 16, 1995
Mr. George Scherer
B. W. Elliott Manufacturing Company, Inc.
Box 773
Binghamton, New York 13902
Dear George:
This letter will serve as an addendum to the current lease between our two firms
to extend our lease agreement for an additional five years under the same terms
and conditions as the current lease except for rent which shall be increased 1
1/2% each year as follows, effective July 1, 1995:
<TABLE>
<S> <C>
Year 1 - $7592.14
Year 2 - $7706.02
Year 3 - $7821.61
Year 4 - $7938.94
Year 5 - $8058.02
</TABLE>
This addendum also includes an option to renew this lease for an additional
five-year term under the same terms and conditions as the current lease, except
for rent which will be negotiated at the time of renewal, but not to exceed an
increase of 3% per year. This renewal option will include a release clause which
allows either party to cancel upon twelve months written notice to the other
party.
If this meets with your approval, would you please have the appropriate party
sign below and return one copy f or our files.
We are looking forward to our continued fine association with you and your firm
and please feel free to call if you have any questions.
Sincerely,
Prescott D. Perkins
Managing Partner
Agreed to by:
/s/ George M. Scherer Date: June 16, 1995
- ------------------------------------
B.W. Elliott Manufacturing Company, Inc.
- 15 -
<PAGE> 1
Exhibit 10.12
LEASE OF REAL PROPERTY
BETWEEN
MASSACHUSETTS COLONY CORPORATION
OWNER
AND
ESP LOCK PRODUCTS, INC.
TENANT
From the office of:
Erb & Erb
444 Main Street
P.O. Box 7615
Fitchburg, MA 01420
(508) 343-4856
<PAGE> 2
TABLE OF CONTENTS
Page
----
1. Premises...............................................................1
2. Quiet Enjoyment........................................................1
3. Terms..................................................................2
4. Rent...................................................................2
5. Payments of Rent.......................................................2
6. Additions to Rent......................................................3
7. Interest on Delinquent Payments........................................3
8. Taxes and Assessments..................................................3
9. Utilities, Septic Tank.................................................4
10. Compliance with Law....................................................4
11. Maintenance and Repair.................................................5
12. Alterations............................................................5
13. Hazardous Materials....................................................6
14. Use....................................................................6
15. Snow Removal...........................................................6
16. Trash Removal..........................................................7
17. Landscaping and Maintenance of Grounds.................................7
18. Signs..................................................................7
19. Liens..................................................................7
20. Indemnification........................................................7
- i -
<PAGE> 3
21. Condemnation and Casualty..............................................8
22. Insurance.............................................................10
23. Assignment and Subletting.............................................12
24. Estoppel Certificates.................................................12
25. Subordination of Lease to Mortgage....................................12
26. Conditional Limitations; Default Provision............................13
27. Additional Rights of OWNER............................................15
28. Notices, Demands and other Instruments................................16
29. Inspection; Showing Premises..........................................17
30. Surrender.............................................................17
31. Right of First Refusal................................................17
32. Option to Purchase....................................................18
33. Procedure Upon Purchase...............................................18
34. Owner's Consent to Lender's Interest in Tenant's Assets...............19
35. Separability; Binding Effect; Miscellany..............................20
SCHEDULE A - Description of Land....................................Appendix A
SCHEDULE B - Specimen Landlord's Waiver and Consent.................Appendix B
SCHEDULE C - Hazardous Materials, Remediation
and Indemnity Agreement...........................Appendix C
- ii -
<PAGE> 4
SUMMARY OF PRINCIPAL PROVISIONS
The following summary of the lease between MASSACHUSETTS COLONY
CORPORATION, with an office c/o Vincent D. Spadafora, 266 Merriam Avenue,
Leominster, Massachusetts 01453, hereinafter called "OWNER", and ESP LOCK
PRODUCTS, INC. a Delaware Corporation, with a place of business at 375 Harvard
Street, Leominster, Massachusetts 01453, hereinafter called "TENANT", is not
part of the lease. This Summary is qualified in its entirety by the provisions
of the lease.
OWNER: Massachusetts Colony Corporation, with an office c/o Vincent
D. Spadafora, 266 Merriam Avenue, Leominster, Massachusetts
01453
TENANT: ESP Lock Products, Inc. a Delaware Corporation, with a place
of business at 375 Harvard Street, Leominster, Massachusetts
01453
PREMISES: The approximately 10.2 acres of land and the building thereon
located at 375 Harvard Street, Leominster, Massachusetts
PRIMARY TERM: From 1 June 1993 through 31 May 1998.
EXTENDED TERM: From 1 June 1998 through 31 May 2003 - Option to extend
expires 30 November 1997.
RENT: Fixed Base Rent during the Primary Term is at the rate of
$225,000.00 per year.
Fixed Base Rent during the first year of the Extended Term is
at the rate of $200,000.00 per year.
Fixed Base Rent during each year of the second through fifth
years of the Extended Term shall bear the same relation to
$200,000.00 as the CPI-U for the January that precedes the
lease year bears to the CPI-U for January 1998, subject to the
limitation that the Fixed Base Rent for a particular lease
year shall not be less than the Fixed Base Rent for the prior
lease year nor more that $10,000.00 greater than the Fixed
Base Rent for the prior lease year.
TENANT to pay/perform/purchase real estate taxes, insurance,
utilities, maintenance, non-structural repairs, heat, air
conditioning, electric power, water, sewage, snow removal and
other similar items.
OPTION TO TENANT has an option to purchase the Premises. TENANT also has
PURCHASE, a right of first refusal.
RIGHT OF FIRST
REFUSAL:
<PAGE> 5
LEASE OF REAL PROPERTY
MASSACHUSETTS COLONY CORPORATION, with an office c/o Vincent D. Spadafora,
266 Merriam Avenue, Leominster, Massachusetts 01453, (herein, together with its
successors and assigns as lessors herein, called "OWNER"),
AND
ESP CORPORATION, a Delaware business corporation, (herein, together with
any corporation succeeding thereto by consolidation, merger or acquisition of
its assets substantially as an entity, called "TENANT"), soon to have an address
of 375 Harvard Street, Leominster, Massachusetts 01453,
IN CONSIDERATION OF THE RENTS AND COVENANTS
HEREIN STIPULATED TO BE PAID AND PERFORMED
BY TENANT AND UPON THE TERMS AND CONDITIONS
HEREIN SPECIFIED, OWNER HEREBY LEASES
TO TENANT, AND TENANT HEREBY LEASES
FROM OWNER, THE PREMISES HEREINAFTER DESCRIBED
1. Premises. The leased premises (the Premises) consists of (a) the
approximately 10.2 acres of land described in Schedule A, (b) all buildings and
other improvements now or hereafter located thereon (the Improvements) and (c)
all easements rights and appurtenances relating thereto. The Premises are leased
in their present condition without representation or warranty by OWNER, subject
to the existing state of title, and subject to all applicable legal requirements
now or hereafter in effect. TENANT has examined the Premises and title thereto
and has found the same satisfactory.
2. Quiet Enjoyment. So long as TENANT shall pay all Fixed Base Rent (as
hereinafter defined) and additional rental obligations as the same become due
and shall fully comply with all of the terms of this Lease and fully perform its
obligations hereunder, TENANT shall peacefully and quietly have, hold and enjoy
the Premises for the term hereof, free of any claim or other action by OWNER
(except as provided in this Lease) or anyone claiming by, through or under OWNER
other than the holder of a mortgage which by subordination of this Lease is
superior to this Lease, excepting only the existing mortgage described in
Paragraph 25(b). No failure to comply with the foregoing covenant during the
term hereof shall give TENANT any right while TENANT is occupying the Premises
to cancel or terminate this Lease or abate, reduce or make a deduction from or
offset against the Fixed Base Rent or additional rental obligations or any sum
payable under this Lease, or to fail to perform any other obligation of TENANT
hereunder. Any sale of the Premises by OWNER shall be subject to this Lease and
the rights of TENANT hereunder.
<PAGE> 6
3. Terms. The Premises are leased for a primary term that commences on 1
June 1993 and terminates on 31 May 1998, (the Primary Term), and unless and
until the term of this Lease shall expire or be terminated pursuant to any
provision hereof, at TENANT'S option, for an Extended Term that commences on 1
June 1998 and terminates on 31 May 2003, (the Extended Term). TENANT shall
exercise its option to extend the term of this Lease for the Extended Term by
giving written notice thereof to OWNER not later than 30 November 1997. This
Lease shall not be subject to termination by OWNER or by TENANT, except as
expressly provided herein.
4. Rent.
During the Primary Term, TENANT shall pay to OWNER, or its assignee,
Fixed Base Rent at the rate of $225,000.00 for each lease year.
During the Extended Term (in the event TENANT elects such an
extension), TENANT shall pay to OWNER, or its assignee, Fixed Base Rent for each
lease year as follows:
(a) The Fixed Base Rent shall be $200,000.00 for the first lease
year of the Extended Term (1 June 1998 through 31 May 1999);
(b) Fixed Base Rent for each lease year during the second through
fifth lease years of the Extended Term (1 June 1999 through 31 May 2003), shall
be that amount which bears the same relationship to $200,000.00 as the Consumer
Price Index for all Urban Consumers (CPI-U) for the January preceding the
commencement of the lease year bears to the CPI-U for January 1998, adjusted to
the nearest multiple of $60.00, provided, however, that the Fixed Base Rent for
a lease year shall not be less than the Fixed Base Rent for the preceding lease
year nor more than $10,000.00 greater than the Fixed Base Rent for the preceding
lease year.
Provided, further, that in the event the CPI-U, or its substitute or
equivalent, ceases to be compiled and published by some agency of the Government
of the United States of America, OWNER and TENANT shall mutually select some
other computation and publication of an index measuring inflation and,
thereafter, use such other computation and publication for purposes of
increasing or decreasing the rent called for herein. In the event OWNER and
TENANT shall be unable to agree on such substitute computation and publication,
they shall request the FIRST JUDGE of the Leominster District Court (in his
non-judicial capacity) to name a qualified individual to select the necessary
replacement computation and publication, with the charges for the services of
such individual to be paid one-half by OWNER and one-half by TENANT.
5. Payments of Rent. All rents shall be paid in equal monthly installments
with the payment for each calendar month to be paid on or before the first day
of the month. Each such payment shall be mailed or delivered to MASSACHUSETTS
COLONY CORPORATION, C/O VINCENT D. SPADAFORA, 266 MERRIAM AVENUE, LEOMINSTER,
MASSACHUSETTS 01453, unless and until OWNER shall notify TENANT in writing to
mail or deliver the payments
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<PAGE> 7
to some other entity or individual and/or some other address. Should this Lease
commence other than on the first day of a month, the rent for the month in which
the Lease commences shall be pro rated.
6. Additions to Rent. All amounts which TENANT is required to pay pursuant
to this Lease to OWNER or to others - other than Fixed Base Rent and amounts
payable as liquidated damages pursuant to Paragraph (26) - together with every
fine, penalty, interest and cost which may be added for non-payment or late
payment thereof, shall constitute additional rental obligations. If TENANT shall
fail to pay an additional rental obligation payable to someone other than OWNER,
OWNER shall have the right, after fourteen (14) days' notice to TENANT to pay
the obligation and the amount paid by OWNER shall be an additional rental
obligation due OWNER. OWNER shall have the rights, powers and remedies with
respect to additional rental obligations as are provided herein or by law in the
case of non-payment of Fixed Base Rent.
7. Interest on Delinquent Payments. TENANT shall pay OWNER interest at
that rate which is two (2%) percent over the prevailing prime rate of interest
as reported in the Wall Street Journal on (a) all overdue interest as report
installments of Fixed Base Rent from the due date thereof until paid, and (b)
all overdue additional rental obligations paid by OWNER on behalf of TENANT from
the date of payment by OWNER until repaid by TENANT. Such interest shall be
waived if the Fixed Base Rent or other additional rental obligation is paid in
full (except interest) within ten (10) days of its due date. TENANT shall
perform all its obligations under this Lease at its sole cost and expense, and
shall pay all Fixed Base Rent and additional rental obligations when due,
without notice or demand, except as provided otherwise herein.
8. Taxes and Assessments.
TENANT shall pay, in addition to the Fixed Base Rent:
(a) all taxes, assessments, levies, fees, water and sewer rents and
charges, all other governmental charges, general and special, excluding only
income taxes and franchise taxes based on OWNER'S income, which are imposed or
levied upon or assessed against the Premises at any time (including after
termination of this Lease) on account of any event or a period of time that
occurred, in whole or in part, after the commencement of this Lease and before
the termination of this Lease. TENANT'S obligations to pay such charges shall be
pro-rated if the charge is based on an event or a period of time which occurred
partly before or after the commencement of this Lease or partly before or after
the termination of this Lease and any holding over;
To provide OWNER with the funds required to pay the taxes
assessed on the Premises, TENANT shall pay to OWNER on or before the first day
of each month, an amount equal to eight (8%) percent of the amount of such tax
for the prior fiscal year of the City of Leominster (1 July through the
following 30 June). OWNER shall deposit such payments in a special interest
bearing savings account registered in OWNER'S name and shall use all funds so
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<PAGE> 8
deposited and the interest earned thereon solely to pay such real property taxes
when and as they become due and, in the event the funds in such special account
shall be less than such taxes paid, TENANT shall promptly pay the amount of the
shortage to OWNER, upon OWNER demanding the same and providing evidence of the
same. Conversely, if the funds in the special account shall be more than
required to pay such real property taxes, OWNER shall promptly remit the excess
to TENANT at the end of the Municipal Fiscal Year in question.
(b) all premiums for the insurance required by Paragraph 22 hereof.
TENANT shall pay, when due, directly to the entity entitled thereto,
all charges for expenses (in addition to the real property taxes) for which it
is responsible under the provisions of this paragraph, and will furnish OWNER
with proof that it has done so, within ten (10) days after receiving a written
request for such proof from the OWNER.
9. Utilities, Septic Tank. TENANT shall pay all charges for utilities
serving the Premises and for fuel used to heat the Premises. Any utility charges
or fuel charges which TENANT does not pay and which OWNER pays (i) to prevent
damage to the Premises (such as paying electrical power and fuel charges to
maintain sufficient heat in the Premises during the winter to prevent the
freezing of water pipes) or (ii) to prevent a lien attaching to OWNER'S property
(such as a lien for water charges) or (iii) to release such a lien, shall
constitute additional rental obligations.
A septic system is part of the sanitary sewage disposal system that
serves the Improvements. TENANT shall, at its expense, clean out the system's
septic tank annually.
10. Compliance with Law.
(a) TENANT shall comply with and cause the Premises to comply with:
(i) all legal requirements applicable to the Premises or the
use thereof; and
(ii) all contracts (including insurance policies), agreements
and restrictions applicable to the Premises or the
occupancy or use thereof.
(b) TENANT will obtain and keep in full force and effect whatever
governmental or regulatory approvals, consents, authorizations and/or licenses,
if any, which may be required by TENANT or OWNER or any other party having an
interest in the Premises in connection with the Premises or the use thereof.
(c) OWNER represents and warrants that as of 1 June 1993 the
Premises may be lawfully used for the purposes for which they were used during
May 1993 and that the
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<PAGE> 9
Premises are in compliance with all applicable laws, rules, regulations and
ordinances of all federal, state and municipal government authorities, including
but not limited to, zoning, building, health, safety, and laws concerning access
by handicapped and disabled persons.
11. Maintenance and Repair.
(a) TENANT will, at its expense, maintain the Premises in good
repair and condition, except for ordinary wear and tear. The word "Premises" as
used in this paragraph includes (but is not limited to) interior walls, wall
coverings, ceilings, lights, door frames, doors, windows, window glass, window
frames, floor coverings - all electrical, plumbing, heating and air
conditioning, wires, pipes, apparatus, equipment, machinery and fixtures in or
on the Premises exterior surfaces, street entrances, parking lots, driveways,
fences, exterior lighting facilities, and landscaping. TENANT shall cause all
electrical, plumbing, heating, and air conditioning maintenance and repair work
to be performed only by duly licensed, qualified service people. TENANT will
make all foreseen and unforeseen, ordinary and extraordinary, changes and
repairs which may be required to keep the Premises in good repair and condition.
(b) OWNER shall, at its expense, make all required structural (by
way of example - exterior walls, foundation, beam, members, columns and
sub-floor) repairs but shall not otherwise be required to maintain or repair the
Premises. OWNER may from time to time, and with a minimum of interference to the
TENANT, enter the Premises in order to make repairs required of it hereunder.
After making any such repairs or replacements, OWNER will, at its expense,
restore the Premises to their condition prior thereto.
(c) The roof of the building of which the Premises are a part was
installed by an authorized installer of a national company or organization (the
Roofing Company) and was warranted against leaks by the Roofing Company. If the
roof develops a leak, TENANT shall notify OWNER and OWNER shall notify the
Roofing Company's representative to repair the roof as promised in the warranty,
if the Roofing Company does not repair the roof within a reasonable time, OWNER
will repair the roof at its sole expense.
12. Alterations. TENANT may, at its expense, alter the interior of the
Premises, provided (i) the market value of the Premises shall not be materially
lessened thereby, (ii) with reference to alterations that will cost in excess of
$25,000.00, TENANT has submitted plans and specifications for the alterations to
OWNER and obtained OWNER'S approval of the alterations prior to the commencement
of work, which approval OWNER will not unreasonably withhold or delay, (iii)
TENANT has provided builder's risk insurance acceptable to OWNER, (iv) the
alterations are expeditiously completed in a good and workmanlike manner and in
compliance with all applicable legal requirements and the requirements of any
insurance policy required to be maintained hereunder, (v) no Improvements shall
be demolished unless TENANT shall have first furnished OWNER with such surety
bonds or other security acceptable to OWNER as shall be necessary to assure
completion of the alterations and (vi) the Premises will not be changed from a
building suitable for use as a general purpose industrial building.
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<PAGE> 10
No work shall be performed involving - and no object shall be
attached to or pass through - the structural components of the Premises
(exterior walls, foundation, beam, member, column, and sub-floor) or the roof -
and no exterior alterations shall be made without OWNER'S prior written
approval, which approval OWNER will not unreasonably withhold or delay. (OWNER
agrees to the installation of exterior signs as authorized in Paragraph 18.)
All alterations shall be at TENANT'S expense and shall be in quality
at least equal to the present construction. TENANT shall not permit any
mechanics' liens, or similar liens, to be placed on the Premises for labor and
material furnished to TENANT or claimed to have been furnished to TENANT in
connection with work of any character performed or claimed to have been
performed at the direction of TENANT and shall cause any such lien to be
released of record within a reasonable time and without cost to OWNER.
Any alterations or improvements made by TENANT, which are, or become
a fixture, shall - unless OWNER agrees in writing to the contrary - become the
property of OWNER at the termination of occupancy, unless TENANT is notified by
OWNER prior to the termination of this Lease to remove said alterations or
improvements.
13. Hazardous Materials. OWNER and TENANT have this day signed a Hazardous
Materials Remediation and Indemnity Agreement ("Remediation Agreement"). A copy
of the Remediation Agreement is attached hereto as Appendix C. The Remediation
Agreement is, by reference, made part of this Lease as fully as though all of
its provisions appeared in this Lease. With reference to matters covered by the
Remediation Agreement, to the extent any provision of the Remediation Agreement
is contrary to any provision of this Lease, the Remediation Agreement shall
control. TENANT shall have the right (in addition to any other remedy that may
be available hereunder or at law or in equity) to set off against TENANT'S
rental obligations hereunder, any losses or other sums for which it is entitled
to indemnification pursuant to this Agreement.
14. Use. TENANT (and all sub-lessees) shall use the Premises only for the
manufacture and distribution of locks, keys and related goods and related office
use. No activity shall be conducted in the Premises or use made thereof which
will be unlawful, improper, noisy or offensive, Or contrary to any law or any
municipal ordinance or by-law in force in the City of Leominster.
TENANT shall not permit any use of the Premises which will make
voidable any insurance on the Premises, or on the contents of the Premises, or
which shall be contrary to any law or regulation from time to time established
by the New England Fire Insurance Rating Association or any similar body
succeeding to its powers.
15. Snow Removal. TENANT shall, with reasonable promptness, remove snow
and ice from the entrances, walkways, driveways and parking areas and keep the
same free of snow and ice.
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<PAGE> 11
16. Trash Removal. TENANT shall remove all its trash and solid waste.
TENANT may locate a commercial-type trash container at a suitable place on the
Premises. TENANT shall keep the doorways, walkways, driveways, parking areas and
grounds free and clear of trash and debris.
17. Landscaping and Maintenance of Grounds. TENANT shall maintain and keep
in good condition the parking lots and landscaping located on the Premises.
TENANT shall keep the same reasonably clean and tidy.
18. Signs. TENANT may, at its expense, install such signs as TENANT
desires on and about the Premises, subject to the limitation that permanent
exterior signs must be installed by a commercial sign company in accordance with
good construction practices.
19. Liens. TENANT will promptly remove and discharge any charge, lien,
padlocking, security interest or encumbrance upon the Premises or any Fixed Base
Rent, additional rental obligations or other sum payable hereunder which arises
for any reason, including all liens which arise out of the TENANT'S use or
occupancy of the Premises or by reason of labor or materials furnished or
claimed to have been furnished to TENANT, or by reason of taxes owed by TENANT,
or imposed by Chapter 21E of the Massachusetts General Laws or 42 United States
Code, Sections 9601 et. seq. (except as provided otherwise in the Remediation
Agreement) but not including any mortgage, charge, lien, padlocking, security
interest or encumbrance created by - or attributable to OWNER. The obligations
of this Paragraph shall survive termination of this Lease for two years (except
as provided otherwise in the Remediation Agreement).
20. Indemnification. In case of any claim against OWNER by any third party
or any liability on the part of OWNER to any third party, TENANT shall pay, and
shall protect, indemnify and save harmless OWNER from and against, all
liabilities, losses, damages, costs, expenses (including reasonable Attorneys'
fees and expenses), causes of action, suits, claims, demands or judgments of any
nature arising from:
(a) injury to or death of any person, or damage to or loss of
property, on the Premises, or immediately adjacent to the Premises, caused by
the use, or occupancy of the Premises, or caused by a condition of the Premises
that TENANT is obligated to maintain in good condition by Paragraph 11(a) of
this Lease;
(b) any failure on the part of TENANT to perform or comply with any
of the terms of this Lease; or
(c) any act of negligence of TENANT or any person for whose conduct
TENANT is legally responsible.
The obligations of this Paragraph shall survive termination of this
Lease for two years.
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<PAGE> 12
In case of any claim against TENANT by any third party or any
liability on the part of TENANT to any third party, OWNER shall pay, and shall
protect, indemnify and save harmless TENANT from and against, all liabilities,
losses, damages, costs, expenses (including reasonable Attorneys, fees and
expenses), causes of action, suits, claims, demands or judgments of any nature
arising from:
(d) injury to or death of any person, or damage to or loss of
property, on the Premises, or immediately adjacent to the Premises, caused by a
condition of the Premises that OWNER is obligated to maintain and repair by
Paragraphs 11(b) and 11(c) of this Lease;
(e) any failure on the part of OWNER to perform or comply with any
of the terms of this Lease; or
(f) any act of negligence of OWNER or any person for whose conduct
OWNER is legally responsible.
The obligations of this Paragraph shall survive termination of this
Lease for two years.
21. Condemnation and Casualty.
(a) TENANT shall promptly notify OWNER and OWNER shall promptly
notify TENANT:
(i) if the Premises are damaged or destroyed by fire or other
casualty;
or
(ii) if the use, occupancy or title of the Premises or any
part thereof is or may be taken, requisitioned or sold in, by or on account of
any actual or threatened eminent domain proceeding, other action by any person
having the power of eminent domain or any claim of or eviction by paramount
title.
OWNER shall have the right to require TENANT to reasonably
assist OWNER in any proceeding or action (but at no cost to TENANT) to collect
any award, compensation or insurance payment to which OWNER may become entitled
by reason of OWNER'S interest in the Premises, and to assist OWNER to negotiate,
prosecute and adjust any claim for any award, compensation or insurance payment
on account of any such damage, destruction, taking, requisition, sale, or claim
of or eviction by paramount title. Both OWNER and TENANT shall be entitled and
do not forfeit their respective rights to participate in any such proceedings,
action, negotiation, prosecution or adjustment by the exercise of the rights set
forth in the preceding sentences. TENANT may make its own claim for trade
fixtures, lease hold improvements and moving expenses.
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<PAGE> 13
(b) If an occurrence of the character referred to in Paragraph 21(a)
hereof shall:
(i) be such that the Premises cannot be substantially restored
by OWNER within ninety (90) days after notice of such damage, destruction or
condemnation, or
if such damage, destruction or condemnation occurred
during the last three (3) months of the Primary Term and TENANT has not given
notice of TENANT'S election to extend this Lease for the Extended Term, or
such damage, destruction or condemnation occurred during
the last three (3) months of the Extended Term,
TENANT shall have the option within thirty (30) days aft
the occurrence of an occurrence of the character referred in Paragraph 21(a), to
deliver to OWNER notice of TENANT'S intention to terminate this Lease on a day
specified by TENANT (the Termination Date) which day shall be within thirty (30)
days after delivery of such notice.
(ii) be such that the cost of substantially restoring the
Premise shall exceed twenty-five (25%) percent of the value of the Premises
before such damage, destruction or condemnation, or
if such damage, destruction or condemnation occurred
during the last three (3) months of the Primary Term and TENANT has not given
notice of TENANT'S election to extend this Lease for the Extended Term, or
such damage, destruction or condemnation occurred during
the last three (3) months of the Extended Term,
OWNER shall have the option within thirty (30) days
after the occurrence of an occurrence of the character described in Paragraph
21(a), to deliver to TENANT notice of OWNER'S intention to terminate this Lease
on a day to be specified by TENANT (the Termination Date) which day shall be
within thirty (30) days after delivery of such notice, and if TENANT fails to
specify the Termination Date, the Termination Date shall be the thirtieth (30th)
day after delivery of such notice to TENANT.
(c) if, after an occurrence of the character referred to in
Paragraph 21(a), this Lease is not terminated under Paragraph 21(b), then this
Lease shall continue in full force and effect, and OWNER shall commence the
restoration or repair of the Premises and shall substantially complete such
restoration or repair with reasonable diligence, provided, however, OWNER shall
not be obligated to commence any restoration or repair work costing in total in
excess of $100,000.00 until after either:
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<PAGE> 14
(i) OWNER shall have collected an award, compensation or
insurance payment on account of such occurrence which equals or exceeds that sum
of money which is $100,000.00 less than the total cost of such restoration or
repair work, or
(ii) the holder of any mortgage on the Premises has collected
an award, compensation or insurance payment on account of such occurrence which
equals or exceeds that sum of money which is $100,000.00 less than the total
cost of such restoration or replacement work and such mortgagee has made the
amount so collected available to OWNER for such restoration or replacement work.
Should OWNER fail to commence the restoration or repair of the
Premises within thirty (30) days after an occurrence of the character referred
to in Paragraph 21(a), or should OWNER fail to substantially complete such
restoration or repair work with reasonable diligence, TENANT shall have the
option while the restoration or repair work remains substantially not completed,
to (A) do the work at OWNER'S expense, with the right to off set against future
rent payments the cost of such work paid by TENANT, or (B) cancel this Lease.
(d) If an occurrence of the character referred to in Paragraph 21(a)
deprives TENANT of full use of the Premises, whether or not insured against, and
the occurrence was not caused by TENANT, its agents or employees, TENANT'S
obligation to pay Fixed Base Rent (Paragraph 41), additional rental obligations
(Paragraph 6) and, real estate taxes and other payments (Paragraph 8) shall be
reduced month by month while the effects of such damage, destruction or
condemnation continue by the fractional reduction in rental value of the
Premises during each such month attributable to such damage, destruction or
condemnation.
(e) In the event this Lease is terminated by either OWNER or TENANT
under the provisions of Paragraphs 21(b) or 21(c), the term of this Lease and
the estate hereby granted shall expire as of the Termination Date as fully and
completely and with the same effect as if such date were the date herein fixed
for the expiration of the term of this Lease, except with respect to obligations
and liabilities of TENANT hereunder, actual or contingent, which have arisen on
or prior to the Termination Date. TENANT'S obligation to pay Fixed Base Rent,
additional rental obligations and other sums payable under this Lease shall be
pro-rated as of the Termination Date.
22. Insurance.
(a) TENANT will maintain or cause to be maintained, insurance on the
Premises of the following character:
(i) Insurance against loss by fire, lightening and other risks
from time to time included under "extended coverage" policies, in amounts not
less than the actual replacement value of the Improvements, exclusive of
foundations, excavations, landscaping, paving and similar non-insurable
improvements, insuring as a named insured OWNER and every holder of a Mortgage
on the Premises to the extent of its interest. So long as no event of default
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<PAGE> 15
shall have occurred and be continuing, said policies may include deductibles not
to exceed $5,000.00 for any single loss. TENANT shall reimburse OWNER for any
loss sustained by OWNER because of a deductible.
(ii) General public liability insurance insuring OWNER and
TENANT against claims for bodily injury, death or property damage occurring on,
in or about the Premises and adjoining parking lots and walkways, in the minimum
amounts of $1,000,000.00 for bodily injury or death to any one person,
$1,000,000.00 for any one accident, and $500,000.00 for property damage.
(iii) Workman's compensation insurance to the extent required
by the law of The Commonwealth of Massachusetts.
Such insurance shall be written by companies of nationally
recognized financial standing, having an A.M. Best rating of A or better and in
a financial category of 10 or better, legally qualified to issue such insurance.
(b) Every such policy (other than any general public liability or
workman's compensation policy) shall bear a mortgagee endorsement in favor of
any Mortgagee holding a mortgage on the Premises, and any loss under such policy
shall be payable to the Mortgagee to the extent of its interest. Every policy
referred to Paragraph 22(a) hereof shall provide that it will not be cancelled
except after thirty (30) days' written notice to OWNER and, if applicable, the
Mortgagee and that it shall not be invalidated by any act or negligence of OWNER
or TENANT, nor by occupancy of the Premises for purposes more hazardous than
permitted by such policy, nor by any foreclosure or other proceedings relating
to the Premises, nor by change in title to the Premises.
(c) TENANT hereby waives to the extent permitted by its insurance
policies, and shall attempt to cause its insurance carriers to waive in writing,
all causes and rights of recovery against OWNER, OWNER'S agents, officers and
employees for any loss occurring to property placed on the Premises by TENANT,
regardless of cause or origin, including OWNER'S negligence, and the negligence
of his agents, officers and employees.
(d) TENANT shall deliver to OWNER original or duplicate policies or
certificates of insurers, evidencing the existence of all insurance which is
required to be maintained by TENANT hereunder, such delivery to be made:
(i) prior to the commencement date of this Lease; and
(ii) within thirty (30) days prior to the expiration of any
such insurance.
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<PAGE> 16
Any insurance required hereunder may be provided under blanket
policies which comply with the provisions hereof and specify the coverage and
amount thereof with respect to the Premises.
23. Assignment and Subletting. Subject to OWNER'S prior written approval
which shall not be unreasonably withheld or delayed, TENANT may sublet all or
any part of the Premises or assign its interests hereunder, provided that each
sub-lease shall expressly be made subject to the provisions hereof. No such
assignment or sub-lease shall modify or limit any right or power of OWNER
hereunder or affect or reduce any obligation of TENANT hereunder, and all such
obligations shall continue in full effect as obligations of a principal and not
of a guarantor or surety, as though no assignment or subletting had been made.
Neither this Lease nor the term hereby demised shall be mortgaged by TENANT, nor
shall TENANT mortgage or pledge its interest in any sub-lease of the Premises or
the rentals payable thereunder. Any such mortgage or pledge, and any sub-lease
or assignment made otherwise than as permitted by this Paragraph 23 shall be
void.
24. Estoppel Certificates. TENANT will, from time to time, upon twenty
(20) days' prior request by OWNER, execute, acknowledge and deliver to OWNER a
certificate of TENANT stating that this Lease is unmodified and in full effect
(or, if there have been modifications, that this Lease is in full effect as
modified, and setting forth such modifications) and the dates to which Fixed
Base Rent, additional rental obligations and other sums payable hereunder have
been paid, and either stating that to the knowledge of the signer of such
certificate no default exists hereunder or specifying each such default of which
the signer has knowledge. Any such certificate may be relied upon by any
prospective mortgagee or purchaser of the Premises.
25. Subordination of Lease to Mortgage.
(a) This Lease shall be subordinated to any mortgage hereafter
granted on the property of which the Premises are a part, or the Premises or any
part of the Premises as though the mortgage had been executed, delivered and
recorded prior to the execution and delivery of this Lease if, and only if, the
mortgagee executes and delivers to TENANT as reasonable agreement that in the
event of an entry by the mortgagee to foreclose the mortgage, or in the event of
a foreclosure of the mortgage by entry or by sale, the mortgagee, and any person
claiming through or under the mortgagee, including a purchaser at a foreclosure
sale, (a) shall not disturb TENANT'S possession under this Lease so long as
TENANT substantially complies with the terms of this Lease, and (b) will permit
TENANT to remove property as provided in Paragraph 30. "Mortgage" as used herein
includes any modification, consolidation, extension, renewal, replacement or
substitution of any existing or subsequent mortgage on the Premises. The
provisions of this Paragraph 25(a) are self-operative. No instrument of
subordination shall be necessary to effectuate the subordination. TENANT agrees,
however, to execute and deliver any appropriate instrument OWNER requests to
confirm the subordination of this Lease to any such mortgage.
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<PAGE> 17
(b) The Premises are currently subject to the mortgage Massachusetts
Colony Corporation granted to Leominster Savings Bank on 3 November 1976,
recorded in the Worcester Northern District Registry of Deeds (in Fitchburg,
Massachusetts) in Book 1169, Page 557. The Premises are not subject to any other
mortgage. OWNER shall timely pay all its obligations under the loan secured by
said mortgage and under said mortgage as they become due. Should OWNER fail to
do so, TENANT may pay such obligations that are past due and set off the amount
TENANT pays against TENANT'S rental obligations hereunder. OWNER represents that
as of 1 June 1993 the balance due on the loan secured by said mortgage was
approximately $147,346.24. OWNER shall use reasonable due diligence to obtain a
Non-Disturbance Agreement from the present holder of such mortgage with
reference to TENANT'S right to occupy under this Lease.
(c) Notwithstanding anything herein to the contrary, TENANT agrees
at the written request of any party purchasing the Premises at a foreclosure
sale to accept such party as OWNER under this Lease and to observe the
obligations imposed on TENANT by this Lease, provided that such party recognizes
the rights of TENANT under this Lease and agrees to observe OWNER'S obligations
under this Lease, in which event this Lease shall remain in full force and
effect. TENANT agrees to execute and deliver any appropriate instruments
necessary to reasonably carry out the agreements contained in this Paragraph.
26. Conditional Limitations; Default Provision.
(a) Any of the following occurrences or acts shall constitute an
event of default under this Lease:
(i) if TENANT shall:
(1) fail to pay any Fixed Base Rent, additional rental
obligations referred to in Paragraph 6 hereof or other sum required to be paid
by TENANT hereunder and such failure shall continue for ten (10) days after
notice to TENANT of such failure; or
(2) fail to observe or perform any other provision
hereof and such failure shall continue for thirty (30) days after notice to
TENANT of such failure (provided, that, in the case of any such default which
cannot be cured by the payment of money and cannot with diligence be cured
within such thirty (30) day period, if TENANT shall commence promptly to cure
the same and thereafter prosecute the curing thereof with diligence, the time
within which such default may be cured shall be extended for such period as is
necessary to complete the curing thereof with diligence); or
(ii) if TENANT shall file a petition commencing a voluntary
case under any federal bankruptcy or similar law, federal or state, or for
reorganization or an arrangement pursuant to any bankruptcy law, insolvency or
any similar law, federal or state, or shall be adjudicated a debtor or bankrupt
under any bankruptcy, insolvency or any similar law, federal or
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<PAGE> 18
state, or become insolvent, or shall make an assignment for the benefit of
creditors, or shall admit in writing its inability to pay its debts generally as
they become due, or if a petition commencing an involuntary case against TENANT
or answer proposing the adjudication of TENANT as a debtor or bankrupt or its
reorganization pursuant to any federal or state bankruptcy law or any similar
law shall be filed in any court and TENANT shall consent to or acquiesce in the
filing thereof or such petition or answer shall not be dismissed, discharged or
denied within ninety (90) days after the filing thereof; or
(iii) if a custodian, receiver , trustee, United States
Trustee or liquidator of TENANT or of all or substantially all of the assets of
TENANT or of the Premises or TENANT'S estate therein shaft be appointed in any
proceeding brought by TENANT, or if any such custodian, receiver, trustee,
United States Trustee or liquidator shall be appointed in any proceeding brought
against TENANT and shall not be discharged within ninety (90) days after such
appointment, or if TENANT shall consent to or acquiesce in such appointment in
writing; or
(iv) if the Premises shall have been left unoccupied and,
wholly unattended for a period of thirty (30) consecutive days.
(b) If an event of default shall have happened and be continuing,
OWNER shall have the right to give TENANT notice of OWNER'S intention to
terminate the term of this Lease on a date not less than ten (10) days after the
date of such notice. Upon the giving of such notice, the term of this Lease and
the estate hereby granted shall expire and terminate on such date as fully and
completely and with the same effect as if such date were the date herein fixed
for the expiration of the term of this Lease, and all rights of TENANT hereunder
shall expire and terminate, but TENANT shall remain liable as hereinafter
provided.
(c) If an event of default shall have happened and be continuing,
OWNER shall have the immediate right, whether or not the term of this Lease
shall have been terminated pursuant to Paragraph 26(b) hereof, to re-enter and
repossess the Premises by summary proceedings, ejectment or in any other manner
permitted by law and the right to remove all persons and property therefrom.
OWNER shall be under no liability by reason of any such re-entry, repossession
or removal, except for gross negligence or willful misconduct. No such re-entry
or repossession of the Premises shall be construed as an election by OWNER to
terminate the term of this Lease unless a notice of such intention is given to
TENANT pursuant to Paragraph 26(b) hereof, or unless such termination is decreed
by a court of competent jurisdiction.
(d) After the re-entry or repossession of the Premises pursuant to
Paragraph 26(c) hereof, whether or not the term of this Lease shall have been
terminated pursuant to Paragraph 26(b) hereof, OWNER shall make best effort to
relet the Premises for the account of TENANT in the name of TENANT or OWNER or
otherwise, with notice to TENANT, for such commercially reasonable term or terms
and on such conditions and for such uses as OWNER, in its reasonable discretion,
may determine. OWNER may collect and receive any rents payable by
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<PAGE> 19
reason of such reletting. OWNER shall not be liable for any failure to relet the
Premises (after making best efforts to relet) or for any failure to collect
(after making best efforts to collect) any rent due upon any such reletting.
(e) No expiration or termination of the term of this Lease pursuant
to Paragraph 26(b) hereof, by operation of law or otherwise, and no re-entry or
repossession of the Premises pursuant to Paragraph 26(c) hereof or otherwise,
and no reletting of the Premises pursuant to Paragraph 26(d) hereof or
otherwise, shall relieve TENANT of its liabilities and obligations hereunder,
all of which shall survive such expiration, termination, re-entry, repossession
or reletting.
(f) In the event of any expiration or termination of the term of
this Lease or re-entry or repossession of the Premises by reason of the
occurrence of any event of default, TENANT will pay to OWNER all Fixed Base
Rent, additional rental obligations and other sums required to be paid by TENANT
to and including the date of such expiration, termination, re-entry or
repossession, including any reasonable Attorneys' fees and expenses incurred in
connection with such expiration, termination, re-entry or repossession; and,
thereafter, TENANT shall, until the end of what would have been the term of this
Lease in the absence of such expiration, terminations, re-entry, or
repossession, and whether or not the Premises shall have been relet, be liable
to OWNER for, and shall pay to OWNER, as liquidated and agreed current damages:
(i) all Fixed Base Rent, additional rental obligations and
other sums which would be payable under this Lease by TENANT in the absence of
such expiration, termination, re-entry, or repossession, including any
reasonable Attorneys' fees and expenses incurred in connection with such
expiration, termination, re-entry, or repossession, less;
(ii) the net proceeds, if any, of any reletting effected for
the account of TENANT pursuant to Paragraph 28(d) hereof, after deducting from
such proceeds all OWNER'S reasonable expenses in connection with such reletting
(including all reasonable repossession costs, brokerage commissions, reasonable
Attorneys' fees and expenses, reasonable employees' expenses, reasonable
alteration costs and reasonable expenses of preparation for such reletting).
TENANT will pay such current damages on the days on which Fixed Base
Rent would be payable under this Lease in the absence of such expiration,
termination, re-entry, or repossession, and OWNER shall be entitled to recover
the same from TENANT on each such day.
27. Additional Rights of OWNER.
(a) No right or remedy hereunder shall be exclusive of any other
right or remedy, but shall be cumulative and in addition to any other right or
remedy hereunder or now or hereafter existing under law or in equity. Failure to
insist upon the strict performance of any
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<PAGE> 20
provision hereof or to exercise any option, right, power or remedy contained
herein shall not constitute a waiver or relinquishment thereof for the future.
Receipt by OWNER of any Fixed Base Rent, additional rental obligations or other
sums payable hereunder with knowledge of the breach of any provision hereof
shall not constitute a waiver of such breach, and no waiver by OWNER of any
provision hereof shall be deemed to have been made unless made in writing. OWNER
shall be entitled to injunctive relief in case of the violation, or threatened
violation, of any of the provisions hereof, or to a decree compelling
performance of any of the provisions hereof, or to any other remedy allowed to
OWNER by law.
(b) If TENANT shall be in default in the performance of any of its
obligations hereunder, beyond the term of all applicable notice and cure
periods, TENANT shall pay to OWNER, on demand, all expenses reasonably incurred
by OWNER as a result thereof, including reasonable Attorneys' fees and expenses.
If TENANT is obligated under Paragraph 20 to defend OWNER in any litigation
commenced against OWNER, and TENANT, at its expense, shall fail to provide OWNER
with counsel reasonably approved by OWNER, TENANT shall pay all costs and
reasonable Attorneys' fees and expenses reasonably incurred by OWNER in
connection with such litigation.
(c) If OWNER shall be in default in the performance of any of its
obligations hereunder, OWNER shall pay to TENANT, an demand, all expenses
reasonably incurred by TENANT as a result thereof, including reasonable
Attorneys' fees and expenses. If OWNER is obligated under Paragraph 20 to defend
TENANT in any litigation commenced against TENANT, and OWNER, at its expense,
shall fail to provide TENANT with counsel approved by TENANT, OWNER shall pay
all costs and reasonable Attorneys' fees and expenses incurred by TENANT in
connection with such litigation.
28. Notices, Demands and other Instruments. All notices, demands,
designations, certificates, requests, offers, consents, approvals and other
instruments given pursuant to this Lease shall be in writing and shall be
validly given when mailed by prepaid registered or certified mail:
(a) if to OWNER, addressed to OWNER at its address set forth above,
with copy to Elisha W. Erb, Esquire, Erb and Erb, 444 Main Street, P.O. Box
7615, Fitchburg, MA 01420-9615; and
(b) if to TENANT, addressed to TENANT at its address set forth
above, with copy to Alan Siegal, Esquire, Baker & McKenzie, 805 Third Avenue,
New York, New York 10022.
OWNER and TENANT each may from time to time specify any address in
the United States as their address for purposes of this Lease by giving fifteen
(15) days' notice to the other party.
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<PAGE> 21
29. Inspection; Showing Premises. Upon reasonable notice, OWNER may
inspect the Premises from time to time during normal business hours for
compliance with the terms of this Lease. Upon reasonable prior notice, OWNER may
exhibit the Premises to prospective mortgagees and purchasers during normal
business hours. During the two months preceding termination of this Lease OWNER
may (a) upon reasonable prior notice exhibit the Premises to prospective tenants
and others and (b) place "For Rent" and "For Sale" notices on the Premises. Upon
the expiration or termination of the term of this Lease
30. Surrender. Upon the expiration or termination of the term of this
lease or holdover period, TENANT shall surrender the Premises to OWNER in the
condition in which the Premises were originally received from OWNER except as
repaired, rebuilt, restored, altered or added to as permitted or required
hereby, and except for ordinary wear and tear. TENANT shall remove from the
Premises on or prior to such expiration or termination all property situated
thereon which is not owned by OWNER, unless such property is or has become a
fixture. TENANT shall not remove any fixture installed by TENANT unless directed
to do so by OWNER, in which event TENANT shall remove the fixture and repair any
damage caused by such removal. Any property not removed shall become the
property of OWNER; provided, however, if OWNER does not want such property,
OWNER may ask TENANT to remove such property from the Premises and if TENANT
does not promptly remove such property from the Premises, OWNER may cause such
property to be removed from the Premises at TENANT'S reasonable expense and
discarded as trash. OWNER may, after giving TENANT seven (7) days' notice, cause
such property to be removed from the Premises.
31. Right of First Refusal. If at any time during the Primary Term or the
Extended Term of the Lease OWNER receives a bona fide offer to purchase the
Premises other than a bid or offer to purchase the Premises at a sale incidental
to the exercise of any remedy provided for in a mortgage held by a commercial
lending institution, which OWNER desires to accept, OWNER will, prior to
accepting the same, give TENANT the right to purchase the Premises upon the same
terms and conditions contained in such offer. If TENANT elects to exercise its
right, TENANT shall (a) give OWNER notice of TENANT'S election within thirty
(30) days of receiving written notice of the full terms of the proposed sale and
OWNER'S intention to sell, and (b) pay OWNER a deposit of $100,000.00 to be
applied to the purchase price or retained by OWNER as provided in Paragraph 33.
The $100,000.00 shall be deposited in an interest bearing account in a financial
institution insured by the Federal Deposit Insurance Corporation. Interest
earned on the account shall be paid to TENANT. TENANT must complete the purchase
within one hundred twenty (120) days of receiving written notice of the full
terms of sale and OWNER'S intention to sell. If TENANT fails to exercise its
right to purchase, OWNER may proceed to sell the Premises in accordance with the
terms of the offer. If such sale is not made, TENANT'S right to purchase shall
be reinstated as aforesaid. The rights granted TENANT under this paragraph are
coupled with an interest in the Premises. Except only that a conveyance or
transfer pursuant to this paragraph shall forever terminate TENANT'S rights
under this paragraph, any conveyance or transfer pursuant to this paragraph
shall be expressly subject to this Lease.
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<PAGE> 22
32. Option to Purchase. If no event of default shall have occurred and be
continuing, TENANT shall have the option to purchase the Premises for its fair
market value (the Purchase Price), such amount to be determined as hereinafter
specified, the option to be exercised in the manner hereinafter specified. To
exercise the option, TENANT must deliver to OWNER written notice that TENANT has
elected to exercise its option under this Paragraph to purchase the Premises.
The notice must specify a date selected by TENANT on which the purchase is to be
consummated (the Purchase Date). The Purchase Date must be prior to the
termination of this Lease and at least sixty (60) days after - and not more one
one hundred twenty (120) days after the day the notice is delivered to OWNER.
The notice must be accompanied by a cash deposit of $100,000.00, to be applied
to the purchase price or retained by OWNER as provided in Paragraph 33. The
$100,000.00 shall be deposited in an interest bearing account in a financial
institution insured by the Federal Deposit Insurance Corporation. Interest
earned on the account shall be paid to TENANT. If OWNER and TENANT are unable to
agree upon the fair market value of the premises within twenty (20) days of when
TENANT gave written notice to OWNER of TENANT'S desire to purchase the Premises,
the fair market value of the Premises shall be determined as follows:
OWNER and TENANT shall each, within ten (10) days of the expiration
of said twenty (20) days, name an arbitrator by written notice to the other. If
the two (2) arbitrators agree on the fair market value of the Premises within
twenty (20) days after their appointment, the agreed amount shall be the fair
market value of such property for purposes of this option. If the two (2)
arbitrators do not reach an agreement on the fair market value of the Premises
within twenty (20) days of their appointment, they shall each set forth in
writing his opinion (without explanation) of the Premises' fair market value and
deliver his written opinion of value to the other, and they shall jointly name a
third arbitrator. It shall be the duty of the third arbitrator to select that
one of said written opinions of value that is closest to the third arbitrator's
opinion of the Premises' fair market value. The written opinion of value so
selected shall be the fair market value of the Premises for purposes of this
option. If an arbitrator is not named by OWNER within the applicable ten (10)
day period, or such arbitrator fails to perform his duties hereunder, the single
arbitrator named by TENANT shall determine such fair market value. OWNER and
TENANT shall each pay all expenses of the arbitrator it named, and they shall
both pay one-half (1/2) of the expenses of the third arbitrator.
33. Procedure Upon Purchase. If TENANT shall purchase the Premises
pursuant to this Lease, OWNER shall convey good record and marketable fee simple
title to TENANT or its designee subject only to this Lease and the matters
reported in Schedule A, and TENANT or its designee shall accept such title,
subject however, to provisions of local building and zoning laws, lien for such
taxes for the current municipal fiscal year which are not due and payable on the
Purchase Date, lien for any municipal betterments assessed after the date of
this Lease; easements, rights of way and restrictions of record now existing or
hereafter created which do not unreasonably interfere with TENANT'S use of the
Premises, but free of the lien of any mortgage granted by OWNER and free of
charges, liens, and security interests resulting from acts of
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<PAGE> 23
OWNER. OWNER represents and warrants its title in the premises on the date this
Lease is signed (except as to current real estate taxes) is as set forth in
Schedule A.
Upon the Purchase Date, or such other date as the parties may by
agreement fix for the purchase of the Premises hereunder, TENANT shall pay OWNER
the Purchase Price therefor specified herein together with all Fixed Base Rent,
additional rental obligations and other sums then due and payable hereunder to
and including such date of purchase, less the $100,000.00 deposit paid by
TENANT, and OWNER shall deliver to TENANT or TENANT'S designee a quitclaim deed
(as defined in Massachusetts General Laws Chapter 183, Section 11) to the
Premises, in recordable form, and any other instruments necessary to assign any
other property then required to be assigned by OWNER pursuant hereto. TENANT
shall pay all charges incident to such conveyance and assignment, including
escrow fees, recording fees, and title Insurance premiums (but not document tax
stamps for the deed and not Attorney's fees incurred by OWNER) which may be
Imposed by reason of such conveyance and assignment and the delivery of said
deed and other instruments. Upon the completion of such purchase, but not prior
thereto (whether or not any delay or failure in the completion of such purchase
shall be the fault of OWNER), this Lease shall terminate, except with respect to
obligations and liabilities of TENANT hereunder, actual or contingent, which
have arisen on or prior to such date of purchase.
If TENANT shall have given notice, pursuant to Paragraph 31 or 32 of
TENANT'S intention to purchase the Premises, and should OWNER be ready, willing
and able to consummate the purchase of the Premises by TENANT on the date fixed
for the purchase, and should TENANT fail to consummate the purchase on such
date, except as provided in the following sentence, OWNER shall retain the
$100,000.00 deposit as liquidated damages and thereafter neither party shall
have any rights against the other on account of such intended purchase. If
TENANT fails to purchase the Premises because TENANT, or its designee, was not
able, after using due diligence and reasonable effort, to borrow seventy (70%)
percent of the purchase price from a commercial money lending institution on a
loan to be secured by a first mortgage of the Premises and terms then currently
available for similar loans, OWNER shall return the $100,000.00 deposit to
TENANT, and, thereafter, neither party shall have any rights against the other
on account of such intended purchase and this Lease shall continue.
If TENANT shall have given notice, pursuant to Paragraphs 31 or 32
of TENANT'S intention to purchase the Premises, and should OWNER fall to
consummate the purchase on the date fixed for the purchase, TENANT's obligation
to pay ongoing rent shall terminate on the dated fixed for the purchase, TENANT
may bring an action seeking specific performance of OWNER'S obligation to sell
the Premises to TENANT, or damages, or both and OWNER shall reimburse TENANT for
all reasonable costs incurred by TENANT, including reasonable Attorney's fees,
in connection with such action.
34. Owner's Consent to Lender's Interest in Tenant's Assets. OWNER will,
if TENANT is not in default hereunder, from time to time, upon twenty (20) days'
prior request by TENANT, beyond any applicable notice and grace periods
hereunder, execute, acknowledge and
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<PAGE> 24
deliver to TENANT a LANDLORD'S WAIVER AND CONSENT substantially identical to the
Specimen Landlord's Waiver and Consent in Schedule B.
35. Separability; Binding Effect; Miscellany. Each provision hereof shall
be separate and independent and the breach of any such provision by OWNER shall
not discharge or relieve TENANT from its obligations to perform each and every
covenant to, be performed by TENANT hereunder. If any provision hereof or the
application thereof to any person or circumstance or at any time shallot any
extent be invalid or unenforceable, the remaining provisions hereof, or the
application of such provision to persons or circumstances or at times other than
those as to which it is invalid or unenforceable shall not be affected thereby,
and each provision hereof shall be valid and shall be enforced to the extent
permitted by law. All provisions contained in this Lease shall be binding upon,
inure to the benefit of and be enforceable by, the respective successors and
assigns of OWNER and TENANT to the same extent as if each successor and assign
were named as a party hereto. If OWNER is a representative or fiduciary, only
the assets of the estate represented shall be bound, and neither the OWNER, nor
any shareholder nor any beneficiary of any trust, shall be personally liable for
any obligation expressed or implied hereunder. This Lease shall be governed by
the law of The Commonwealth of Massachusetts. This Lease may not be changed,
modified or discharged except by a writing signed by OWNER and TENANT. This
Lease may be executed in any number of counterparts, each of which shall be an
original, and such counterparts shall together constitute but one and the same
Lease. The headings of the various paragraphs herein have been inserted - and
the Summary preceding this Lease has been included - for reference only and
shall not to any extent have the effect of modifying or amending the express
terms and provisions hereof.
IN WITNESS WHEREOF, OWNER and TENANT have each caused this Lease to be
duly executed and delivered to take effect as a sealed instrument on 1 June
1993, regardless of the date in fact signed.
MASSACHUSETTS COLONY CORPORATION
By: /s/ Ronald R. Strachan
----------------------
Ronald R. Strachan, President
ESP LOCK PRODUCTS, INC.
By: /s/ Peter B. Orthwein
---------------------
Peter B. Orthwein, President
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<PAGE> 25
SCHEDULE A
Attached to and forming a part of the Lease between
MASSACHUSETTS COLONY CORPORATION, Owner,
and
ESP LOCK PRODUCTS, INC., Tenant
Property situated in Leominster, Mass., on the westerly side of Harvard Street
and the easterly side of White Street, which is shown as Lot 2 on plan entitled
"Land in Leominster, Mass. owned by Elmer S. Fitzgerald et ux," dated August 20,
1973, prepared by William R. Bingham & Associates, Registered Engineers and
Surveyors, and recorded in Worcester Northern District Registry of Deeds, Plan
Book 180, Page 20, and bounded and described as follows:
Beginning at the northeasterly corner thereof at a point on said westerly
side of Harvard Street, which point is 214.06 feet southerly of the point
of tangency of said westerly side of Harvard Street with the curve at the
southerly corner of the intersection of said Harvard Street and said White
Street, and at Lot 1 as shown on said plan;
THENCE, South 19(degrees) 42' 40" East by said westerly side of Harvard
Street, one hundred sixty-six and 79/100 (166.79) feet;
THENCE, South 37(degrees) 31' 10" East, still by said westerly side of
Harvard Street, eight hundred fifty and 45/100 (850.45) feet to land of
Elmer S. Fitzgerald;
THENCE, South 24(degrees) 36' 30" West by said land one hundred
seventy-seven and 31/100 (177.31) feet to an iron rod at land now or
formerly of New England Power Co.;
THENCE, North 66(degrees) 01' 40" West, two hundred eighty-six and 92/100
(286.92) feet to an iron rod;
THENCE, North 67(degrees) 04' 40" West, fifty-six and 66/100 (56.66) feet;
THENCE, North 74(degrees) 15' 15" West, fifty-one and 20/100 (51.20) feet
to an iron rod;
THENCE, North 67(degrees) 54' 30" West-, one hundred eighty-seven and
98/100 (187.98) feet to a drill hole;
THENCE, North 69(degrees) 00' West, one hundred sixteen and 52/100
(116.52) feet to an iron rod;
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<PAGE> 26
THENCE, North 67(degrees) 05' 30" West, two hundred seventeen and 23/100
(217.23) feet to the easterly side of White Street, the last six courses
all being by New England Power Co. land;
THENCE, North 16(degrees) 18' East by said easterly side of White Street
two hundred forty-eight and 31/100 (248.31) feet;
THENCE, North 12(degrees) 36' East, still by said easterly side of White
Street, two hundred eighty-nine and 01/100 (289.01) feet;
THENCE, North 19(degrees) 07' 15" East, still by said easterly side of
White Street one hundred forty-five and 50/100 (145.50) feet to Lot 1 as
shown on the plan above referred to;
THENCE, South 71(degrees) 07' 35" East by said Lot 1, one hundred seven
and 74/100 (107.74) feet;
THENCE, North 70(degrees) 17' 20" East, still by said Lot 1, seventy-four
(74.00) feet to the place of beginning.
Containing 10.214 acres.
Being the same premises Elmer S. Fitzgerald conveyed to Massachusetts
Colony Corporation by deed dated October 6, 1976, recorded in said Registry of
Deeds in Book 1168, Page 163.
Subject to the Mortgage Massachusetts Colony Corporation granted to
Leominster Savings Bank on 3 November 1976, recorded in said Registry of Deeds
in Book 1169, Page 557.
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<PAGE> 27
SCHEDULE B
Attached to and forming a part of the Lease between
MASSACHUSETTS COLONY CORPORATION, Owner,
and
ESP LOCK PRODUCTS, INC., Tenant
Copy of Lessor's Agreement with Shawmut Bank and Churchill Capital
Partners to be inserted here.
- 23 -
<PAGE> 28
SCHEDULE C
Attached to and forming a part of the Lease between
MASSACHUSETTS COLONY CORPORATION, Owner,
and
ESP LOCK PRODUCTS, INC., Tenant
Copy of Hazardous Materials, Remediation and Indemnity Agreement to be
inserted here.
- 24 -
<PAGE> 1
Exhibit 10.13
COMMERCIAL LEASE AND DEPOSIT RECEIPT
RECEIVED FROM Hudson Lock, Inc., 81 Apsley Street, Hudson, MA 01749
(hereinafter referred to as "Lessee"), the sum of Two Thousand Five Hundred
($2,500) Dollars, evidenced by _____________ as a deposit, which, upon
acceptance of this lease, shall belong to Lessor and shall be applied as
follows:
<TABLE>
<S> <C>
Rent for the period from 09/01/98 to 09/30/98: $ 1,250.00
Security Deposit: 1,250.00
----------
Total: $ 2,500.00
</TABLE>
In the event that this lease is not accepted by the Lessor within 15
days, the total deposit shall be refunded.
Lessee hereby offers to lease from Lessor the premises situated in the
City of Hudsonville, Ottawa County, MI, described as 5040 40th Avenue, upon the
following terms and conditions:
1. TERM. The term hereof shall commence on September 1, 1998, and
expire on August 31, 2001.
2. RENT. The total rent shall be $45,000.00, payable as follows:
$1,250.00 for 36 months, due and payable on the first day of each month. All
rents shall be paid to the Lessor or his authorized agent, at the following
address: 1670 Ottawa Beach Road, Holland, MI 49424.
3. USE. The premises are to be used for the operation of distribution
and light assembly of security hardware, and for no other purpose, without prior
written consent of the Lessor.
4. ASSIGNMENT AND SUBLETTING. Lessee shall not assign this lease or
sublet any portion of the premises without prior written consent of the Lessor,
which shall not be unreasonably withheld.
5. ORDINANCES AND STATUTES. Lessee shall comply with all statutes,
ordinances and requirements of all municipal, state and federal authorities.
6. MAINTENANCE, REPAIRS, ALTERATIONS. Lessee acknowledges that the
premises are in good order and repair, unless otherwise indicated herein. Lessee
shall, at his own expense and at all times, maintain the premises in good and
safe condition, including electrical wiring, plumbing and heating installations
and any other system or equipment upon the promises and shall surrender the
same, at termination hereof, in as good condition as received, normal wear
<PAGE> 2
and tear excepted. Lessee shall be responsible for all repairs required,
excepting the roof, exterior walls and structural foundations. Lessee's expense
for repair of mechanical systems shall be limited to $500.00 per year. Lessee
shall also maintain in good condition any lawns and shrubbery.
No improvement or alteration of the premises shall be made without the
prior written consent of the Lessor.
7. ENTRY AND INSPECTION. Lessee shall permit Lessor or Lessor's agent
to enter upon the premises at reasonable times and upon reasonable notice, for
the purpose of inspecting the same, and will permit Lessor at any time within
sixty (60) days prior to the expiration of this lease, to place upon the
premises any usual "For Lease" signs and permit persons desiring to lease the
same to inspect the premises thereafter.
8. INDEMNIFICATION OF LESSOR. Lessor shall not be liable for any damage
or injury to Lessee, or any other person, or to any property, occurring on the
demised premises or part thereof, and Lessee agrees to hold Lessor harmless from
any claims for damages, no matter how caused.
9. POSSESSION. If Lessor is unable to deliver possession at the
premises at the commencement hereof, Lessor shall not be liable for any damage
caused thereby, nor shall this lease be void or voidable, but Lessee shall not
be liable for any rent until possession is delivered. Lessee may terminate this
lease if possession is not delivered within ____ days of the commencement of the
term hereof.
10. INSURANCE. Lessee, at his expense, shall maintain public liability
insurance, including bodily injury and property damage, insuring Lessee and
Lessor with minimum coverages as follows: $1,000,000.00. Lessee shall provide
Lessor with a Certificate of Insurance showing Lessor as additional insured. The
Certificate shall provide for a ten-day written notice to Lessor in the event of
cancellation or material change of coverage.
To the maximum extent permitted by insurance policies which
may be owned by Lessor or Lessee, Lessee and Lessor, for the benefit of each
other, waive any and all rights of subrogation which might otherwise exist.
11. TRADE FIXTURES. Any and all improvements made to the premises
during the term hereof shall belong to the Lessor, except trade fixtures of the
Lessee. Lessee may, upon termination hereof, remove all his trade fixtures, but
shall repair or pay for all repairs necessary for damages to the premises
occasioned by removal.
12. SECURITY. The security deposit set forth above, if any, shall
secure the performance of the Lessee's obligations hereunder. Lessor may, but
shall not he obligated to apply all or portions of said deposit on account of
Lessee's obligations hereunder. Any balance
- 2 -
<PAGE> 3
remaining upon termination shall be returned to Lessee. Lessee shall not have
the right to apply the Security Deposit in payment of the last month's rent.
13. DEPOSIT REFUNDS. The balance of all deposits shall be refunded
within two weeks from date possession is delivered to Lessor or his authorized
agent, together with a statement showing any charges made against such deposits
by Lessor.
14. WAIVER. No failure of Lessor to enforce any term hereof shall be
deemed to be a waiver.
15. NOTICES. Any notice which either party may or is required to give,
shall be given by mailing the name, postage prepaid, to Lessee at the premises,
or Lessor at address shown below, or at such other places as may be designated
by the parties from time to time.
16. TIME. Time is of the essence of this lease.
17. HEIRS, ASSIGNS, SUCCESSORS. This lease is binding upon and inures
to the benefit of the heirs, assigns and successors in interest to the parties.
18. ESTOPPEL CERTIFICATE. Lessee shall at any time, upon written notice
from Lessor, execute, acknowledge and deliver to Lessor an estoppel Certificate.
19. LATE PAYMENT CHARGES. Any payment of rent not paid when due shall
incur a late charge of Ten Dollars ($10.00) per day until paid. Determination of
when a payment is late shall be made by the Lessor based upon the postmark of
the envelope containing the payment or, if the Payment is hand delivered, the
date payment is actually made.
20. ADDENDUM. An addendum, signed by the parties, is attached hereto.
21. ENTIRE AGREEMENT. The foregoing constitutes the entire agreement
between the Parties and may be modified only by a writing signed by both
parties. The following Exhibits, if any, have been made part of this lease
before the Parties' execution hereof: NONE.
- 3 -
<PAGE> 4
The undersigned Lessee hereby acknowledges receipt of a copy hereof.
DATED: August 20, 1998
Lessee:
HUSDON LOCK, INC.
By: /s/ Michael Colecchi
----------------------------
Its: President
81 Aspley Street
Hudson, MA 01749
(978) 362-3481
ACCEPTANCE
The undersigned Lessor accepts the foregoing offer and agrees to lease
the herein described premises on the terms and conditions herein specified.
The undersigned Lessor hereby acknowledges receipt of a copy hereof.
DATED: August 17, 1998
Lessor:
/s/ Jim Jelsema
----------------------------
Jim Jelsema, Owner
11 Ottawa Beach Road
Holland, MI 49424
(616) 399-9463
- 4 -
<PAGE> 5
ADDENDUM
This is an addendum to the lease dated August 17, 1998, covering the
premises located at 5040 40th Avenue, Hudsonville, Michigan.
Lessor and Lessee agree as follows:
1. Lessor agrees to be responsible for any environmental contamination of
the premises existing prior to the commencement of this lease.
2. Lessor agrees to insure, or bear the personal responsibility for, all
casualties to the premises. Lessee will insure their own property
contained in or on the premises. These responsibilities are in addition
to actions numbered 8 and 10 in the lease.
3. Lessor agrees that Lessee may modify or remove the concrete steps on
the north side of the building. All expenses incurred from the removal,
modification and/or replacement of the steps shall be paid by the
Lessee. Lessee and Lessor agree to put the details of any removal,
modification and/or replacement of the steps in writing, prior to the
commencement of any such activity.
LESSOR
/s/ Jim Jelsema
----------------------------
Date: August 17, 1998
LESSEE:
/s/ Michael Colecchi
----------------------------
Date: August 20, 1998
- 5 -
<PAGE> 1
EXECUTION COPY
Exhibit 10.14
$40,000,000
CREDIT AND GUARANTY AGREEMENT,
dated as of July 27, 1998
among
KEY COMPONENTS, LLC,
as Borrower,
B.W. ELLIOTT MANUFACTURING CO., INC.,
HUDSON LOCK, INC.,
KEY COMPONENTS FINANCE CORP. and
ESP LOCK PRODUCTS, INC.,
as Guarantors,
CERTAIN FINANCIAL INSTITUTIONS,
as Lenders,
and
SOCIETE GENERALE,
as Agent for the Lenders.
<PAGE> 2
CREDIT AND GUARANTY AGREEMENT
CREDIT AND GUARANTY AGREEMENT, dated as of July 27, 1998 among the
following:
(a) KEY COMPONENTS, LLC, a Delaware limited liability company (the
"Borrower"),
(b) each of the Subsidiaries of the Borrower identified under the
caption "GUARANTORS" on the signature pages hereto (individually, a
"Guarantor" and, collectively, the "Guarantors" and, together with the
Borrower, the "Obligors"),
(c) the various financial institutions as are or may become parties
hereto (collectively, the "Lenders"), and
(d) SOCIETE GENERALE ("SG"), as agent (in such capacity, the
"Agent") for the Lenders.
W I T N E S S E T H:
WHEREAS, each of the Guarantors is a wholly-owned Subsidiary (such
capitalized term and other capitalized terms used in these recitals without
definition shall have the meanings provided for in Section 1.1) of the Borrower;
and
WHEREAS, the Borrower and its Subsidiaries are currently engaged in the
business of manufacturing, distributing and marketing flexible shaft products
and medium-security locks; and
WHEREAS, in order to finance the working capital needs of the Borrower and
its Subsidiaries, including the issuance of standby letters of credit, and to
finance future Permitted Acquisitions, including the issuance of standby letters
of credit, the Borrower desires to obtain from the Lenders:
(a) Acquisition Loan Commitments pursuant to which Acquisition Loans
will be made in a maximum aggregate amount not to exceed $25,000,000;
(b) Revolving Loan Commitments pursuant to which Revolving Loans may
be made in a maximum aggregate amount at any one time outstanding not to
exceed the lesser of (x) $15,000,000 and (y) the Borrowing Base Amount as
in effect at such time; and
(c) Letter of Credit Commitments pursuant to which the Issuers will
issue Letters of Credit from time to time in a maximum aggregate Stated
Amount at any one time outstanding not to exceed $5,000,000; provided
that, in any event, the aggregate outstanding principal amount of all
Revolving Loans, together with the aggregate amount of all Letter of
Credit Outstandings, shall not at any one time exceed the lesser of
$15,000,000 and the Borrowing Base Amount in effect at such time;
WHEREAS, in order to induce the Lenders, each Issuer and the Agent to
enter into this Agreement and to make Credit Extensions hereunder, the Borrower
and the Guarantors have agreed to deliver the Security Agreements, the Pledge
Agreement and the Mortgages to secure all of the Obligations; and
WHEREAS, the Lenders and the Issuers are willing, on the terms and subject
to the conditions hereinafter set forth (including Article V), to extend such
Commitments and make such Loans to the Borrower and issue (or participate in)
Letters of Credit for the account of the Borrower;
<PAGE> 3
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.1. Defined Terms. The following terms (whether or not
underscored) when used in this Agreement, including its preamble and recitals,
shall, except where the context otherwise requires, have the following meanings
(such meanings to be equally applicable to the singular and plural forms
thereof):
"Account" means any "account" (as that term is defined in Section 9-106 of
the U.C.C.).
"Account Debtor" is defined in clause (d) of the definition of "Eligible
Account" in this Section 1.1.
"Acquisition Loan" is defined in Section 2.1.3.
"Acquisition Loan Commitment" is defined in Section 2.1.3.
"Acquisition Loan Commitment Amount" means, on any date prior to the
Acquisition Loan Commitment Termination Date, $25,000,000, as such amount is
reduced from time to time pursuant to Section 2.3.
"Acquisition Loan Commitment Termination Date" means the earliest of
(a) July 27, 2000;
(b) the date on which the Acquisition Loan Commitment Amount is
terminated in full or reduced to zero pursuant to Section 2.3; and
(c) the date on which any Commitment Termination Event occurs.
Upon the occurrence of any event described above, the Acquisition Loan
Commitments shall terminate automatically and without any further action.
"Acquisition Note" means a promissory note of the Borrower payable to any
Lender, in the form of Exhibit B hereto (as such promissory note may be amended,
endorsed or otherwise modified from time to time), evidencing the aggregate
Indebtedness of the Borrower to such Lender resulting from outstanding
Acquisition Loans, and also means all other promissory notes accepted from time
to time in substitution therefor or renewal thereof.
"Affiliate" of any Person means any other Person which, directly or
indirectly, controls, is controlled by or is under common control with such
Person (excluding any trustee under, or any committee with responsibility for
administering, any Plan). A Person shall be deemed to be "controlled by" any
other Person if such other Person has, directly or indirectly,
(a) power to vote more than 10% of the securities or other ownership
interests (in each case, on a fully diluted basis) having ordinary voting
power for the election of directors or managing general partners;
(b) power to direct or cause the direction of the management and
policies of such Person whether by contract or otherwise; or
(c) beneficial ownership of more than 10% of any class of the voting
stock of such Person or 10% or more of all outstanding equity interests or
other interests in such Person.
-2-
<PAGE> 4
For purposes of Section 7.2.13 only, the term "Affiliate" shall not
include any Subsidiary that is wholly-owned directly or indirectly by the
Borrower.
"Agent" is defined in the preamble and includes each other Person as shall
have subsequently been appointed as the successor Agent pursuant to Section
10.4.
"Agreement" means this Credit Agreement, as amended, supplemented,
restated or otherwise modified from time to time.
"Applicable Margin" means
(a) with respect to Revolving Loans that are LIBO Rate Loans, 2.375%
and with respect to Revolving Loans that are Base Rate Loans, 1.375%, and
(b) with respect to Acquisition Loans that are LIBO Rate Loans,
2.625% and with respect to Acquisition Loans that are Base Rate Loans,
1.625%,
provided that if the Funded Debt to EBITDA Ratio as at the last day of any two
consecutive Fiscal Quarters ending after June 30, 1998 shall fall within any of
the ranges set forth in the Schedule below then, subject to the delivery to the
Agent of a certificate of a senior financial officer of the Borrower
demonstrating such fact prior to the end of the next succeeding fiscal quarter,
the "Applicable Margin" for each Loan shall be reduced to the rate set forth
below during the period commencing on the Quarterly Payment Date on or
immediately following the date of receipt of such certificate to but not
including the next succeeding Quarterly Payment Date thereafter (except that
notwithstanding the foregoing, the Applicable Margin shall not be reduced for
any period during which an Event of Default shall have occurred and be
continuing):
<TABLE>
<CAPTION>
Funded Debt to Revolving Loans Acquisition Loans
EBITDA Ratio LIBO Rate Base Rate LIBO Rate Base Rate
- -------------- --------- --------------- --------- ---------
<S> <C> <C> <C> <C>
greater than 4.5 2.25% 1.25% 2.50% 1.50%
less than 4.5 greater than or equal to 4.0x 2.00% 1.00% 2.25% 1.25%
less than 4.0x greater than or equal to 3.5x 1.75% 0.75% 2.00% 1.00%
less than 3.5x greater than or equal to 3.0x 1.50% 0.50% 1.75% 0.75%
less than 3.0x 1.25% 0.25% 1.50% 0.50%
</TABLE>
"Assignee Lender" is defined in Section 11.11.1.
"Authorized Officer" means, relative to any Obligor, those of its officers
or general partners, whose signatures and incumbency shall have been certified
to the Agent and the Lenders pursuant to Section 5.1.1.
"Base Rate Loan" means a Loan bearing interest at a fluctuating interest
rate determined by reference to the SG Base Rate.
"Borrower" is defined in the preamble.
"Borrower Security Agreement" means the Borrower Security Agreement
executed and delivered pursuant to Section 5.1.9, substantially in the form of
Exhibit I-1 hereto, together with the Security Agreement (Trademark), Security
Agreement (Patents) and Security Agreement (Copyright) related thereto, in each
case as amended,
-3-
<PAGE> 5
supplemented, restated or otherwise modified from time to time.
"Borrowing" means the Loans of the same type and, in the case of LIBO Rate
Loans, having the same Interest Period, made by all Lenders on the same Business
Day and pursuant to the same Borrowing Request in accordance with Section 2.1.
"Borrowing Base Amount" means, at any time, an amount equal to the sum of,
without duplication,
(a) 85% of the aggregate amount of all Eligible Accounts at such
time; and
(b) 60% of the aggregate amount of all Eligible Inventory at such
time; and
(c) 100% of the aggregate amount of all Eligible Cash Equivalents at
such time.
The Borrowing Base Amount shall initially be computed by the Borrower in each
Borrowing Base Certificate delivered from time to time to the Agent pursuant to
Section 5.1.13 and clause (d) of Section 7.1.1. The Agent shall have the right
to review such computations and if, in the Agent's reasonable judgment, such
computations have not been computed in accordance with the terms of this
Agreement, the Agent shall have the right to adjust such computations.
"Borrowing Base Certificate" means a certificate duly completed and
executed by the chief accounting or financial Authorized Officer of the
Borrower, substantially in the form of Exhibit F hereto, together with such
changes thereto as the Agent may from time to time reasonably request for the
purpose of monitoring the Borrower's compliance therewith.
"Borrowing Request" means a loan request and certificate duly executed by
an Authorized Officer of the Borrower, substantially in the form of Exhibit C-1
in the case of any Borrowing of Revolving Credit Loans and Exhibit C-2 in the
case of any Acquisition Loans.
"Business Acquisition" means (a) any Investment in the capital stock or
partnership interests of any Person or (b) any acquisition of the assets of any
Person pursuant to a transaction not in the ordinary course of such Person's
business (it being understood that acquisitions of equipment or raw materials in
bulk pursuant to salvage or similar transactions is in the ordinary course of
the Obligors' business).
"Business Day" means
(a) any day which is neither a Saturday or Sunday nor a legal
holiday on which banks are authorized or required to be closed in New
York, New York; and
(b) relative to the making, continuing, prepaying or repaying of any
LIBO Rate Loan, any day which is a Business Day described in clause (a)
above and which is also a day on which dealings in Dollars are carried on
in the interbank eurodollar market of the Agent's LIBOR Office.
"Capital Expenditures" means, for any period, without duplication, the sum
of
(a) the aggregate amount of all expenditures of the Borrower and its
Subsidiaries for fixed or capital assets (including tooling costs) made
during such period which, in accordance with GAAP, would be classified as
capital expenditures, excluding expenditures for the replacement of fixed
assets to the extent fully financed by the proceeds of any insurance
policy described in Section 7.1.4; and
(b) the aggregate amount of all Capitalized Lease Liabilities
incurred during such period.
"Capitalized Lease Liabilities" means all monetary obligations of the
Borrower or any of its Subsidiaries
-4-
<PAGE> 6
under any leasing or similar arrangement which, in accordance with GAAP, would
be classified as capitalized leases, and, for purposes of this Agreement and
each other Loan Document, the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with GAAP, and the stated
maturity thereof shall be the date of the last payment of rent or any other
amount due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty.
"Cash Equivalent Investment" means, at any time:
(a) any evidence of Indebtedness, maturing not more than one year
after the date of purchase thereof, issued or guaranteed by the United
States Government or any agency thereof (so long as such Indebtedness is
backed by the full faith and credit of the United States of America);
(b) commercial paper, maturing not more than three months from the
date of purchase thereof and rated at least A-1 by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc., or P-1 by
Moody's Investors Service, Inc. and other evidence of Indebtedness,
maturing not more than one year after the purchase thereof and rated at
least A by Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., or A2 by Moody's Investors Service, Inc.,
which is issued by
(i) a corporation (other than an Affiliate of any Obligor)
organized under the laws of any state of the United States or of the
District of Columbia, or
(ii) any Lender or any Affiliate thereof;
(c) any certificate of deposit or bankers acceptance, maturing not
more than one year after such time, which is issued by (i) a Lender or
(ii) a commercial banking institution that (A) is a member of the Federal
Reserve System, (B) has a combined capital and surplus and undivided
profits of not less than $500,000,000 and (C) has outstanding short-term
debt securities which are rated at least A-1 by Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc., or P-1 by Moody's
Investors Service, Inc.;
(d) any repurchase agreement entered into with any Lender (or other
commercial banking institution of the stature referred to in clause (c))
secured by a fully perfected Lien in any obligation thereunder of the type
described in any of clauses (a) through (c), having a market value at the
time such repurchase agreement is entered into of not less than 100% of
the repurchase obligation thereunder of such Lender or other commercial
banking institution; or
(e) any money market mutual fund with a daily right of redemption
and a policy of maintaining a net asset value of $1.00 per share
substantially all the assets of which are comprised of investments of the
types described in the preceding clauses (a) through (d).
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
"CERCLIS" means the Comprehensive Environmental Response Compensation
Liability Information System List.
"Change in Control" means
(a) the failure of John S. Dyson and Dyson Family Members and/or
other Permitted Holders at any time to own, either directly or indirectly,
beneficially free and clear of all Liens at all times, at least 51% of the
issued and outstanding ownership interests of the Parent or the Borrower
(both voting and non-voting), on a fully diluted basis;
-5-
<PAGE> 7
(b) the direct or indirect acquisition by any Person or a group (as
such term is defined in Section 13(d)(3) of the Securities Exchange Act of
1934, as amended), other than any Permitted Holder, of beneficial
ownership (as such term is defined in Rule 13D-3 promulgated under the
Securities Exchange Act of 1934, as amended) of 35% or more of the
ownership interests of the Parent or the Borrower;
(c) the failure of Millbrook Capital Management, Inc., any of its
Affiliates or Clay B. Lifflander to control the day-to-day management of
the Obligors;
(d) the failure of the Borrower at any time to own, beneficially and
of record, all of the issued and outstanding capital stock of each
Guarantor, in each case free and clear of all Liens (other than Liens in
favor of the Agent arising pursuant to the Pledge Agreement), on a fully
diluted basis; or
(e) any other event constituting a "Change of Control" under the
Indenture governing the Senior Notes (unless the holders of the Senior
Notes waive any right to require redemption of the Senior Notes arising as
a result of such event).
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time. References to sections of the Code also
refer to any successor sections.
"Collateral" means any assets of the Borrower or any of its Subsidiaries
or of any other Obligor subject to a Lien pursuant to any Loan Document.
"Commitment" means, as the context may require, a Lender's Revolving Loan
Commitment, Acquisition Loan Commitment or Letter of Credit Commitment.
"Commitment Amount" means, as the context may require, either the
Revolving Loan Commitment Amount, the Acquisition Loan Commitment Amount or the
Letter of Credit Commitment Amount.
"Commitment Termination Event" means
(a) the occurrence of any Default described in clauses (b) through
(d) of Section 8.1.9; or
(b) the occurrence and continuance of any other Event of Default and
either
(i) the declaration of the Loans to be due and payable
pursuant to Section 8.3, or
(ii) the giving of notice by the Agent, acting at the
direction of the Required Lenders, to the Borrower that the
Commitments have been terminated.
"Compliance Capital" has the meaning given to that term in the definition
of "EBITDA" in this Section 1.1.
"Compliance Certificate" means a certificate duly executed by the chief
accounting or financial Authorized Officer of the Borrower, substantially in the
form of Exhibit G hereto, together with such changes thereto as the Agent may
from time to time reasonably request for the purpose of monitoring the
Borrower's compliance with the financial covenants contained herein.
"Contingent Liability" means any agreement, undertaking or arrangement by
which any Person guarantees, endorses or otherwise becomes or is contingently
liable upon (by direct or indirect agreement, contingent or otherwise, to
provide funds for payment, to supply funds to, or otherwise to invest in, a
debtor, or otherwise to assure a creditor against loss) any indebtedness,
obligation or other liability of any other Person (other than by endorsements of
instruments in the course of collection), or guarantees the payment of dividends
or other distributions upon the shares of any other Person. The principal amount
of any Person's obligation under any Contingent Liability shall (subject to any
limitation set forth therein) be deemed to be the outstanding principal
-6-
<PAGE> 8
amount (or maximum principal amount, if larger) of the debt, obligation or other
liability guaranteed thereby.
"Continuation/Conversion Notice" means a notice duly executed by an
Authorized Officer of the Borrower, substantially in the form of Exhibit D
hereto.
"Controlled Group" means all members of a controlled group of corporations
and all members of a controlled group of trades or businesses (whether or not
incorporated) under common control which, together with the Borrower or any
Subsidiary, are treated as a single employer under Section 414(b) or 414(c) of
the Code or Section 4001 of ERISA.
"Consolidated Coverage Ratio" has the meaning given to that term in the
Indenture for the Senior Notes as originally in effect, and without giving
effect to any amendments, modifications or waivers thereto.
"Credit Extension" means, as the context may require,
(a) the making of a Loan by a Lender; or
(b) the issuance of any Letter of Credit, the extension of any
Stated Expiry Date of any existing Letter of Credit or the increase in the
Stated Amount of any existing Letter of Credit, in each case by an Issuer.
"Credit Extension Request" means, as the context may require, any
Borrowing Request or Issuance Request.
"Default" means any Event of Default or any condition, occurrence or event
which, after notice or lapse of time or both, would constitute an Event of
Default.
"Disbursement" is defined in Section 2.7.2.
"Disbursement Date" is defined in Section 2.7.2.
"Disclosure Schedule" means the Disclosure Schedule attached hereto as
Schedule I, as it may be amended, supplemented or otherwise modified from time
to time by the Borrower with the written consent of the Agent and the Required
Lenders.
"Dollar" and the symbol "$" mean lawful money of the United States.
"Domestic Office" means, relative to any Lender, the office of such Lender
designated as such on Schedule III hereto or designated in a Lender Assignment
Agreement, or such other office of a Lender (or any successor or assign of such
Lender) within the United States as may be designated from time to time by
notice from such Lender to each other Person party hereto.
"Dyson Family Member" means any of (a) John S. Dyson's wife, (b) his
issue, (c) the respective executors, administrators, committees, conservators,
guardians or custodians or donees of powers during the minority of or with
respect to any of the individuals referred to in clauses (a) and (b) of this
definition; or (d) the trustee or trustees of any inter vivos trust or
testamentary trust created for the benefit of John S. Dyson or any of the
individuals referred to in clauses (a) and (b) of this definition.
"EBIT" means, for any period, the sum, without duplication, of
(a) Net Income for such period;
plus
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<PAGE> 9
(b) the amounts deducted, in determining Net Income for such period,
for
(i) provision for taxes based on the income or profits of the
Borrower and its Subsidiaries,
plus
(ii) all distributions paid by the Borrower to the Parent to
permit the Parent's shareholders to pay income taxes attributable to
their ownership of capital stock of the Parent, subject to Section
7.2.6,
plus
(iii) Interest Expense,
plus
(iv) Management Fees.
"EBITDA" means, for any Rolling Period, the sum, without duplication, for
such Rolling Period, of
(a) EBIT;
plus
(b) the amount deducted, in determining Net Income for such Rolling
Period, for amortization and depreciation of assets of the Borrower and
its Subsidiaries during such Rolling Period (as determined in accordance
with GAAP);
plus (or minus)
(c) any other non-cash expense (or income) deducted (or added) in
determining Net Income for such Rolling Period;
plus
(d) with respect to each Permitted Acquisition consummated:
(i) in the fourth Fiscal Quarter of such Rolling Period, an
amount equal to the Net Cost Savings with respect to such Permitted
Acquisition;
(ii) in the third Fiscal Quarter of such Rolling Period, an
amount equal to 75% of the Net Cost Savings with respect to such
Permitted Acquisition;
(iii) in the second Fiscal Quarter of such Rolling Period, an
amount equal to 50% of the Net Cost Savings with respect to such
Permitted Acquisition;
(iv) in the first Fiscal Quarter of such Rolling Period, an
amount equal to 25% of the Net Cost Savings with respect to such
Permitted Acquisition; and
(v) an amount, calculated as provided in clauses (a), (b) and
(c) of this definition, with respect to the business acquired in
such Permitted Acquisition, for the period commencing on the date
which is the first day of the period for which "EBITDA" is being
calculated and ending immediately prior to the date such Permitted
Acquisition is consummated;
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<PAGE> 10
provided that the amounts provided for this clause (d) shall not be
included in calculating "EBITDA" for purposes of the definition of "Excess
Cash Flow";
plus
(e) the aggregate amount of cash contributions made to the common
equity capital of the Borrower ("Compliance Capital") during the Fiscal
Quarter immediately following the end of such Rolling Period so long as
(x) each of the Lenders is given prior notice of the making of such
capital contribution (including the amount thereof and the date on which
it will occur) and (y) such notice identifies the contribution as being
made to cure a default under Section 7.2.4 (as contemplated in Section
8.1.3);
plus
(f) any non-recurring cash expense deducted in determining Net
Income for such Rolling Period up to a maximum amount not to exceed, (x)
in Fiscal Year 1998, $6,000,000 and (y) in each Fiscal Year thereafter,
$1,000,000.
"Effective Date" means the date this Agreement becomes effective pursuant
to Section 11.8.
"Eligible Account" means, at any time of determination thereof, any
Account of any Obligor as to which each of the following requirements has been
fulfilled to the reasonable satisfaction of the Agent:
(a) such Obligor has lawful and absolute title to such Account, free
and clear of all Liens other than the Liens in favor of the Agent for the
benefit of the Lenders;
(b) the Agent for the benefit of the Lenders has a security interest
in such Account, which security interest is legal, valid, binding,
perfected and first priority under the U.C.C.; provided, however, that
(i) no Account as to which any United States federal or state
governmental agency or instrumentality ("Government Receivables") is
the Account Debtor may be an Eligible Account, except to the extent
that
(x) the aggregate amount of all such Accounts of the
Obligors does not exceed 15% (or, if for the previous three
consecutive months Government Receivables exceeded 10% of all
Accounts then payable to the Obligors, 10%) of the amount of
all Eligible Accounts of the Obligors at such time, or
(y) the Account Debtor with respect to such Accounts is
the United States of America (or any agency thereof) and the
Agent's Lien on such Account for the benefit of the Lenders is
duly perfected under the Assignment of Claims Act of 1940, as
amended; and
(ii) no Account as to which any other government or agency of
such government (including any foreign governmental authority or
agency) is the Account Debtor may be an Eligible Account, except for
(x) Accounts owing by the government of Canada or any
agency of Her Majesty in Right of Canada in an aggregate
amount not exceeding the greater of (x) 5% of the amount of
all Eligible Accounts of the Obligors at such time and (y)
$500,000, and
(y) Accounts to the extent supported by an irrevocable
letter of credit issued by a Lender or another bank reasonably
acceptable to the Agent;
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<PAGE> 11
(c) such Obligor has the full and unqualified right to assign and
grant a Lien in such Account to the Agent for the benefit of the Lenders;
(d) such Account is payable in Dollars and is a legal, valid,
binding and enforceable obligation of the Person who is obligated under
such Account (the "Account Debtor");
(e) if such Account is subject to any dispute, setoff, counterclaim
or other claim or defense on the part of the Account Debtor denying
liability under such Account (other than unasserted claims arising as a
matter of law), the portion of such Account so subject shall be excluded
from Eligible Accounts;
(f) such Account is evidenced by an invoice or marketer's sales
report rendered to the Account Debtor and evidences monetary obligations;
(g) such Account is a bona fide Account which arose in the ordinary
course of business, and with respect to which,
(i) in the case of an Account arising from the sale of goods,
such goods have been shipped or delivered to and not rejected by the
Account Debtor, such Account was created as a result of a sale on an
absolute basis and not on a consignment, approval or sale-and-return
basis and all other actions necessary to create a binding obligation
on the part of the Account Debtor for such Account have been taken,
and
(ii) in the case of an Account relating to the sale of
services, such services have been performed or completed and not
rejected by the Account Debtor and all other actions necessary to
create a binding obligation on the part of the Account Debtor have
been taken;
(h) with respect to such Account, the Account Debtor is not
(i) an Affiliate of the Borrower or any of its Subsidiaries,
(ii) organized or located in a jurisdiction other than the
United States, except to the extent that the amount of all such
Accounts of the Obligors does not exceed 10% of the amount of all
Eligible Accounts of the Obligors at such time, or
(iii) the subject of any reorganization, bankruptcy,
receivership, custodianship or insolvency or any other condition of
the type described in clauses (b) through (d) of Section 8.1.9;
(i) such Account is not outstanding more than 90 days past the due
date with respect thereto (or such longer period, not to exceed 120 days,
as the Agent may agree with respect to any particular Account);
(j) such Account is not owing from an Account Debtor as to which
more than 20% of the aggregate amount of the Accounts owing from such
Account Debtor are more than 90 days past due;
(k) unless the Agent shall otherwise agree, such Account is not
owing from an Account Debtor as to which all Accounts owing from such
Account Debtor and its affiliates exceed 15% (or, if for the previous
three consecutive months the Accounts owing from such Account Debtor and
its affiliates exceeded 10% of all Accounts then payable to the Obligors,
10%) of all Accounts then payable to the Obligors (provided that the
portion of such Accounts that does not exceed such 15% (or 10%) shall be
included as Eligible Receivables);
(l) no payment with respect to such Account made by check has been
returned for insufficient funds;
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<PAGE> 12
(m) such Account has not been placed with a lawyer or other agent
for collection;
(n) if the Borrower or any of its Subsidiaries is indebted to such
Account Debtor, unless the Borrower or the relevant Subsidiary (as the
case may be), on the one hand, and such Account Debtor, on the other hand,
have entered into an agreement whereby such Account Debtor is prohibited
from exercising any right of setoff with respect to the Accounts of the
Borrower and its Subsidiaries, Eligible Accounts shall exclude an amount
equal to the amount of such indebtedness; and
(o) such Account has such other characteristics or criteria as the
Agent, in its reasonable discretion, may specify in writing to the
Borrower from time to time.
"Eligible Cash Equivalents" means, at any time of determination thereof,
any Cash Equivalent Investments of any Obligor as to which each of the following
requirements has been fulfilled to the reasonable satisfaction of the Agent:
(a) such Obligor has lawful and absolute title to such Cash
Equivalent Investment, free and clear of all Liens other than Liens in
favor of the Agent for the benefit of the Lenders;
(b) the Agent has a security interest for the benefit of the Lenders
in such Cash Equivalent Investment, which security interest is legal,
valid, perfected and first priority under the U.C.C.;
(c) such Obligor has the full and unqualified right to assign and
grant a Lien in such Cash Equivalent Investment to the Agent for the
benefit of the Lenders; and
(d) such Cash Equivalent Investment is payable in Dollars.
"Eligible Inventory" means, at any time of determination thereof, any
Inventory of any Obligor arising in the ordinary course of business and as to
which each of the following requirements has been fulfilled to the reasonable
satisfaction of the Agent:
(a) such Inventory is located in the United States;
(b) such Obligor has the full and unqualified right to assign and
grant a Lien in such Inventory to the Agent for the benefit of the
Lenders;
(c) such Obligor has full and lawful title to such Inventory, free
and clear of all Liens, other than any Liens in favor of the Agent for the
benefit of the Lenders;
(d) the Agent for the benefit of the Lenders has a security interest
in such Inventory, which security interest is legal, valid, binding,
perfected and first priority under the U.C.C.;
(e) none of such Inventory shall consist of (i) items in the custody
of third parties for processing or manufacture, (ii) items in such
Obligor's possession but intended by such Obligor for return to the
suppliers thereof, (iii) items belonging to third parties that have been
consigned to such Obligor or are otherwise in such Obligor's custody or
possession or (iv) items in such Obligor's custody and possession on a
sale-on-approval or sale-or-return basis or subject to any other
repurchase or return agreement; and
(f) none of such Inventory is obsolete, unsalable, damaged or
otherwise unfit for sale or further processing in the ordinary course of
business.
"Environmental Laws" means all applicable federal, state, county or local
statutes, laws, treaties, ordinances, decrees, directives, codes, rules,
regulations and guidelines (including consent decrees and administrative orders)
relating to public health and safety and protection of the environment.
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"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time.
References to sections of ERISA also refer to any successor sections.
"Estimation Period" means the period for which a Taxpayer is required to
estimate for Federal income tax purposes his allocation of taxable income from
the Borrower during a calendar year in connection with determining his estimated
federal income tax liability for such period.
"Event of Default" is defined in Section 8.1.
"Excess Cash Flow" means, for any Fiscal Year (other than the 1998 Fiscal
Year) the excess for such Fiscal Year of
(a) EBITDA for such Fiscal Year;
over
(b) the sum, determined for such Fiscal Year, of
(i) Capital Expenditures permitted by Section 7.2.7, and all
other expenditures in respect of plant, property and equipment, made
or incurred by the Borrower and its Subsidiaries during such Fiscal
Year, other than Capital Expenditures financed with the proceeds of
(A) Indebtedness, (B) Net Disposition Proceeds, (C) Net Equity
Proceeds or (D) Excess Insurance Proceeds;
plus
(ii) all prepayments and repayments of Acquisition Loans made
during such Fiscal Year pursuant to Section 3.1.1 or 3.1.2 (other
than pursuant to Section 3.1.2(c)(B)) and all mandatory redemptions
of Senior Notes and all repayments of Indebtedness permitted under
Section 7.2.2(c) or (d) made during such Fiscal Year);
plus
(iii) all Permitted Quarterly Tax Distributions made by the
Borrower during such Fiscal Year;
plus
(iv) the portion of the amount of provision for taxes based on
the income or profits of the Borrower and its Subsidiaries that has
been accrued to be paid in respect of such Fiscal Year;
plus
(v) the amount of the net increase in Working Capital (and
minus the amount of any net decrease in Working Capital) of the
Borrower and its Subsidiaries from the last day of the preceding
Fiscal Year;
plus
(vi) the portion of Interest Expense accrued to be paid in
respect of such Fiscal Year.
"Excess Insurance Proceeds" is defined in clause (d) of Section 7.1.4.
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"Federal Funds Rate" means, for any period, a fluctuating interest rate
per annum equal for each day during such period to
(a) the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by
federal funds brokers, as published for such day (or, if such day is not a
Business Day, for the next preceding Business Day) by the Federal Reserve
Bank of New York; or
(b) if such rate is not so published for any day which is a Business
Day, the average of the quotations for such day on such transactions
received by SG from three federal funds brokers of recognized standing
selected by it.
"Fee Letter" means the confidential fee letter, dated May 5, 1998, from
SG, addressed to, and agreed to and accepted by, the Borrower.
"Fiscal Quarter" means any quarter of a Fiscal Year.
"Fiscal Year" means any period of twelve consecutive calendar months
ending on the 31st day of each December. References to a Fiscal Year with a
number corresponding to any calendar year (e.g., "Fiscal Year 1998") refer to
the Fiscal Year ending for such calendar year.
"Fixed Charge Coverage Ratio" means, as of the last day of any Fiscal
Quarter, the ratio of:
(a) sum of
(i) EBITDA for the Rolling Period ending on such day;
minus
(ii) Capital Expenditures made or incurred by the Borrower and
its Subsidiaries during such Rolling Period;
minus
(iii) the portion of Permitted Quarterly Tax Distributions
that has been accrued to be paid by the Borrower in respect of such
Rolling Period;
minus
(iv) the portion of the amount of provision for taxes based on
the income or profits of the Borrower and its Subsidiaries that has
been accrued to be paid in respect of such Rolling Period;
to
(b) the sum of
(i) the portion of Interest Expense accrued to be paid in
respect of such Rolling Period;
plus
(ii) all scheduled repayments of the Acquisition Loans made
pursuant to Section 3.1.2 (b) during such Rolling Period.
"F.R.S. Board" means the Board of Governors of the Federal Reserve System
or any successor thereto.
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<PAGE> 15
"Funded Debt" means, as of any date of determination, any Indebtedness of
the Borrower and its Subsidiaries of a type described in clause (a), (b) or (c)
of the definition of Indebtedness, or any Contingent Liability of the Borrower
or any of its Subsidiaries in respect of any such type of Indebtedness, which
(a) is in respect of the Acquisition Loans;
(b) matures more than one year from such date of determination;
(c) matures within one year from such date of determination but is
renewable or extendible, at the option of the Borrower or any such
Subsidiary, as the case may be, to a date more than one year from such
date; or
(d) arises under a revolving credit or similar agreement which
obligates the lender or lenders thereof to extend such Indebtedness during
a period of more than one year from such date.
"Funded Debt to EBITDA Ratio" means, as of the last day of any Rolling
Period, the ratio of:
(a) Funded Debt as at the last day of such Rolling Period (less the
aggregate amount of Compliance Capital made during the Fiscal Quarter
immediately following such Rolling Period to the extent used to prepay
principal of Loans);
to
(b) EBITDA for such Rolling Period.
"GAAP" is defined in Section 1.4.
"Guaranteed Obligations" is defined in Section 9.1.
"Guarantor Security Agreement" means each Guarantor Security Agreement
executed and delivered pursuant to Section 5.1.9, substantially in the form of
Exhibit I-2 hereto, as amended, supplemented, restated or otherwise modified
from time to time.
"Hazardous Material" means
(a) any "hazardous substance", as defined by CERCLA;
(b) any "hazardous waste", as defined by the Resource Conservation
and Recovery Act, as amended;
(c) any oil or petroleum product;
(d) asbestos in any form that is or could become friable; or
(e) any pollutant or contaminant or hazardous, dangerous or toxic
chemical, material or substance within the meaning of any other applicable
federal, state or local law, regulation, ordinance or requirement
(including consent decrees and administrative orders) relating to or
imposing liability or standards of conduct concerning any hazardous, toxic
or dangerous waste, substance or material, all as amended or hereafter
amended.
"Hedging Obligations" means, with respect to any Person, all liabilities
of such Person under Rate Protection Agreements.
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<PAGE> 16
"herein", "hereof", "hereto", "hereunder" and similar terms contained in
this Agreement or any other Loan Document refer to this Agreement or such other
Loan Document, as the case may be, as a whole and not to any particular section,
paragraph or provision of this Agreement or such other Loan Document.
"Impermissible Qualification" means, relative to the opinion or
certification of any independent public accountant as to any financial statement
of any Obligor, any qualification or exception to such opinion or certification
(a) which is of a "going concern" or similar nature;
(b) which relates to the limited scope of examination of matters
relevant to such financial statement; or
(c) which relates to the treatment or classification of any item in
such financial statement and which, as a condition to its removal, would
require an adjustment to such item the effect of which would be to cause
such Obligor to be in default of any of its obligations under Section
7.2.4.
"including" means including without limiting the generality of any
description preceding such term, and, for purposes of this Agreement and each
other Loan Document, the parties hereto agree that the rule of contract
interpretation to the effect that where general words are followed by a specific
listing of items, the general words shall not be given their widest meaning,
shall not be applicable to limit a general statement, which is followed by or
referable to an enumeration of specific matters, to matters similar to the
matters specifically mentioned.
"Indebtedness" of any Person means, without duplication:
(a) all obligations of such Person for borrowed money, all
obligations of such Person evidenced by bonds, debentures, notes,
subordinated debt or other similar instruments and all capital stock which
has redemption provisions exercisable at the option of the holder thereof
in whole or in part prior to the Stated Maturity Date, for cash;
(b) all obligations, contingent or otherwise, relative to the face
amount of all letters of credit, whether or not drawn, and banker's
acceptances issued for the account or upon the application of such Person;
(c) all obligations of such Person as lessee under leases which have
been or should be, in accordance with GAAP, recorded as Capitalized Lease
Liabilities;
(d) net liabilities of such Person with respect to each Hedging
Obligation;
(e) whether or not so included as liabilities in accordance with
GAAP, all obligations of such Person to pay the deferred purchase price of
property or services, other than trade accounts payable incurred in the
ordinary course of business;
(f) indebtedness (excluding prepaid interest thereon) secured by a
Lien on property owned or being purchased by such Person (including
indebtedness arising under conditional sales or other title retention
agreements), whether or not such indebtedness shall have been assumed by
such Person or is limited in recourse; and
(g) all Contingent Liabilities of such Person in respect of any of
the foregoing.
For all purposes of this Agreement, the Indebtedness of any Person shall (x)
include the Indebtedness of any partnership or joint venture in which such
Person is a general partner thereof or has direct liability in the nature of a
general partner and (y) exclude any accrued and unpaid Management Fees.
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<PAGE> 17
"Indemnified Liabilities" is defined in Section 11.4.
"Indemnified Parties" is defined in Section 11.4.
"Intellectual Property Collateral" has the meaning provided for such term
in the Borrower Security Agreement.
"Interest Coverage Ratio" means, as of the last day of any Fiscal Quarter,
the ratio of:
(a) EBITDA for the Rolling Period ending on such day
to
(b) the portion of Interest Expense accrued to be paid in respect of
such Rolling Period.
"Interest Expense" means, for any period, (a) the aggregate consolidated
interest expense of the Borrower and its Subsidiaries for such period, as
determined in accordance with GAAP, including, without duplication, net
obligations of the Borrower and its Subsidiaries (including fees) in respect of
Rate Protection Agreements and the portion of any Capitalized Lease Liabilities
of the Borrower and its Subsidiaries allocable to interest expense, and (b) all
commitment fees, agency fees, letter of credit fees and other ongoing fees in
respect of Indebtedness of the Borrower and its Subsidiaries, in each case
payable for such period.
"Interest Period" means, relative to any LIBO Rate Loan, the period
beginning on (and including) the date on which such LIBO Rate Loan is made or
continued as, or converted into, a LIBO Rate Loan pursuant to Section 2.4 or 2.5
and ending on (but excluding) the day which is one, three or six months
thereafter (or, if such month has no numerically corresponding day, on the last
Business Day of such month), as the Borrower may select in its relevant notice
pursuant to Section 2.4 or 2.5; provided, however, that
(a) the Borrower shall not be permitted to select Interest Periods
to be in effect at any one time which have expiration dates occurring on
more than five different dates;
(b) if such Interest Period would otherwise end on a day which is
not a Business Day, such Interest Period shall end on the next following
Business Day (unless such next following Business Day is the first
Business Day of a month, in which case such Interest Period shall end on
the Business Day next preceding the day on which such Interest Period
would otherwise end); and
(c) the Borrower shall not be permitted to select, and there shall
not be applicable, any Interest Period that would be broken by reason of a
mandatory payment of Acquisition Loans required pursuant to clause (b),
(c) or (d) of Section 3.1.2 or any Interest Period for any Loan which
would end later than the Stated Maturity Date for such Loan.
"Inventory" means any "inventory" (as defined in Section 9-109(4) of the
U.C.C.) of any Person.
"Investment" means, relative to any Person,
(a) any loan or advance made by such Person to any other Person
(excluding commission, reasonable travel, relocation and similar advances
to officers and employees made in the ordinary course of business); and
(b) any ownership or similar interest held by such Person in any
other Person.
The amount of any Investment shall be the original principal or capital amount
thereof less all returns of principal or equity thereon (and without adjustment
by reason of the financial condition of such other Person) and shall, if made
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<PAGE> 18
by the transfer or exchange of property other than cash, be deemed to have been
made in an original principal or capital amount equal to the fair market value
of such property.
"Issuance Request" means a Letter of Credit request and certificate duly
executed by an Authorized Officer of the Borrower, substantially in the form of
Exhibit E hereto.
"Issuer" means SG in its capacity as issuer of the Letters of Credit. At
the request of SG, another Lender or an Affiliate of SG may issue one or more
Letters of Credit hereunder, in which case the term "Issuer" as used herein
shall refer to each of SG, any such Lender and any such Affiliate of SG.
"Lender" is defined in the preamble.
"Lender Assignment Agreement" means a lender assignment agreement in
substantially the form of Exhibit L hereto.
"Letter of Credit" is defined in clause (a) of Section 2.1.2.
"Letter of Credit Commitment" means, with respect to any Issuer, such
Issuer's obligation to issue Letters of Credit pursuant to Section 2.7 and, with
respect to each of the other Lenders, the obligations of each such Lender to
participate in such Letters of Credit pursuant to Section 2.7.1.
"Letter of Credit Commitment Amount" means, on any date, $5,000,000, as
such amount may be permanently reduced from time to time pursuant to Section
2.3.
"Letter of Credit Outstandings" means, on any date, an amount equal to the
sum of
(a) the then aggregate amount which is undrawn and available under
all issued and outstanding Letters of Credit;
plus
(b) the then aggregate amount of all unpaid and outstanding
Reimbursement Obligations.
"LIBO Rate" is defined in Section 3.2.1.
"LIBO Rate Loan" means a Loan bearing interest, at all times during an
Interest Period applicable to such Loan, at a fixed rate of interest determined
by reference to the LIBO Rate (Reserve Adjusted).
"LIBO Rate (Reserve Adjusted)" is defined in Section 3.2.1.
"LIBOR Office" means, relative to any Lender, the office of such Lender
designated as such on Schedule III hereto or designated in a Lender Assignment
Agreement, or such other office of a Lender as designated from time to time by
notice from such Lender to the Borrower and the Agent, whether or not outside
the United States, which shall be making or maintaining LIBO Rate Loans of such
Lender hereunder.
"LIBOR Reserve Percentage" is defined in Section 3.2.1.
"Lien" means any security interest, mortgage, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or otherwise),
charge against or interest in property to secure payment of a debt or
performance of an obligation or other priority or preferential arrangement of
any kind or nature whatsoever.
"Loan" means, as the context may require, a Revolving Loan or an
Acquisition Loan.
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"Loan Document" means this Agreement, the Notes, the Letters of Credit,
the Fee Letter, the Borrower Security Agreement, each Guarantor Security
Agreement, the Pledge Agreement, the Mortgages, each Rate Protection Agreement
with a Lender, each Lender Assignment Agreement and each other agreement,
instrument or document executed and delivered pursuant to or in connection with
this Agreement and the other Loan Documents (including the agreements executed
from time to time by Subsidiaries of the Borrower pursuant to Section 7.1.8).
"Management Agreement" means the Management Agreement, dated May 28, 1998,
between the Parent, certain of its Subsidiaries and Millbrook Capital
Management, Inc., as it may be amended, modified, supplement or restated from
time to time.
"Management Fees" means those certain fees (excluding reimbursements of
out-of-pocket expenses) payable under the Management Agreement.
"Mortgages" is defined in Section 7.1.13, together with any and all
mortgages, deeds of trust and other real estate security instruments securing
the payment of the Obligations.
"Net Debt Proceeds" means, in the case of the issuance, incurrence,
placement or sale of any Indebtedness (other than Indebtedness in respect of the
Notes and Indebtedness in respect of the Senior Notes or any refinancing of the
Senior Notes permitted pursuant to Section 7.2.2(g)) of the type referred to in
clause (a) of the definition thereof (whether pursuant to a public or private
offering), permitted to be outstanding pursuant to Section 7.2.2 or otherwise
permitted with the prior consent of the Required Lenders from and after the
Effective Date, the excess of
(a) the gross cash proceeds received by the Borrower or any of its
Subsidiaries from such issuance, incurrence, placement or sale of
permitted Indebtedness (including any cash payments received by way of
deferred payment of principal pursuant to a permitted promissory note or
installment receivable or otherwise, but only as and when received);
over
(b) in connection with the issuance, incurrence, placement or sale
of permitted Indebtedness, (i) all reasonable and customary fees and
expenses actually paid by the Borrower or its Subsidiaries and (ii)
underwriters' discounts and commissions not payable to the Borrower, any
of its Subsidiaries or any of their Affiliates.
"Net Disposition Proceeds" means the excess of
(a) the gross cash proceeds (other than proceeds from any sale of
Inventory of the Borrower or any of its Subsidiaries in the ordinary
course of their business and other than any consideration received in the
form of assumption by the acquiring Person of Indebtedness in connection
with any Permitted Acquisition) received by the Borrower or any of its
Subsidiaries from any Permitted Disposition made after the Effective Date,
including any cash payments received by way of a deferred payment of
principal pursuant to a permitted note or installment receivable or
otherwise, but only when and as received;
over
(b) (i) all legal, investment banking, brokerage, accounting,
financial advisory, title, recording, and other professional fees and
expenses actually incurred by the Borrower and its Subsidiaries in
connection with such Permitted Disposition, (ii) all taxes actually paid
or estimated by the Borrower (in good faith) to be payable in cash in
connection with such Permitted Disposition; provided, however, that if,
after the payment of all taxes with respect to such Permitted Disposition,
the amount of estimated taxes, if any, pursuant to clause (ii) above
exceeded the amount of taxes actually paid in cash in respect of such
Permitted Disposition, the aggregate amount of such excess shall be
immediately payable, pursuant to clause (c) of Section 3.1.2, as Net
Disposition Proceeds, (iii) the amount of income taxes payable (assuming
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the Taxpayer is subject to taxation at the highest applicable marginal
rate and determined without regard to any other tax items of the Borrower
or the Taxpayer) by the Taxpayers arising from such Permitted Disposition
(provided that a certificate is delivered to the Agent, satisfactory in
form and substance to the Agent, by Price Waterhouse Coopers LLC (or other
independent public accountants of nationally recognized standing, with the
prior written approval of the Agent) at the time of such Permitted
Disposition setting forth in detail the calculation of such amount, (iv)
if permitted hereunder or otherwise by the Required Lenders, the aggregate
amount of any Indebtedness of the type referred to in clause (a) or (c) of
the definition thereof which is secured by such asset and required to be
repaid from such gross cash proceeds and (v) the amount of any reserve or
escrow established in respect of any claims or liabilities of or payable
by the Borrower or its Subsidiaries in respect of such Permitted
Disposition.
"Net Equity Proceeds" means, in the case of the issuance, placement or
sale of equity securities or other ownership interests (whether pursuant to a
public or private offering, but excluding any issuance of securities or other
ownership interests to employees of the Borrower or any of its Subsidiaries
(including any issuance upon the exercise of options held by any such employee)
so long as the aggregate amount received by the Borrower or any of its
Subsidiaries in connection with all such issuances does not exceed $2,000,000)
from and after the Effective Date (other than any such issuance, placement or
sale the proceeds of which are used to finance a Permitted Acquisition), the
excess of
(a) the gross cash proceeds received by the Borrower or any of its
Subsidiaries or any corporation of which the Borrower is a Subsidiary from
such issuance, placement or sale of equity securities or other ownership
interests (including any cash payments received by way of deferred payment
of principal pursuant to a permitted promissory note or installment
receivable or otherwise, but only as and when received);
over
(b) in connection with such issuance, placement or sale of such
equity securities, all (i) legal, investment banking, brokerage,
accounting, financial advisory, title, recording, and other professional
fees and expenses actually paid by the Borrower or its Subsidiaries or any
corporation of which the Borrower is a Subsidiary and (ii) underwriters'
discounts and commissions not payable to the Borrower, any of its
Subsidiaries or any of their Affiliates.
"Net Income" means, for any period, all amounts (exclusive of all amounts
in respect of any extraordinary gains or losses) which, in accordance with GAAP,
would be included as net income on a consolidated statement of income of the
Borrower and its Subsidiaries for such period.
"Note" means, as the context may require, either a Revolving Note or an
Acquisition Note.
"Obligations" means all obligations (monetary or otherwise) of the
Borrower and each other Obligor arising under or in connection with this
Agreement, the Notes and each other Loan Document.
"Obligor" is defined in the Preamble.
"Organic Document" means, relative to any Obligor, its articles or
certificate of incorporation, its operating agreement, its by-laws, its
certificate of partnership, its certificate of organization and all shareholder
agreements, partnership agreements, voting trusts and similar arrangements
applicable to any of its authorized shares of capital stock or other ownership
interests.
"Parent" means Key Components, Inc.
"Participant" is defined in Section 11.11.2.
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"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Pension Plan" means a "pension plan", as such term is defined in Section
3(2) of ERISA, which is subject to Title IV of ERISA (other than a multiemployer
plan as defined in Section 4001(a)(3) of ERISA), and to which either the
Borrower or any of its Subsidiaries or any corporation, trade or business that
is, along with the Borrower or any of its Subsidiaries, a member of a Controlled
Group, may have liability, including any liability by reason of having been a
substantial employer within the meaning of Section 4063 of ERISA at any time
during the preceding five years, or by reason of being deemed to be a
contributing sponsor under Section 4069 of ERISA.
"Percentage" means, relative to any Lender, the percentage set forth
opposite the name of such Lender on Schedule II hereto or set forth in a duly
executed Lender Assignment Agreement, as such percentage may be adjusted from
time to time pursuant to Lender Assignment Agreement(s) executed by such Lender
and its Assignee Lender(s) and delivered pursuant to Section 11.11.
"Permitted Acquisition" means any acquisition by the Borrower of all of
the capital stock of, or all or substantially all of the assets of, any Person
(or of all of a line of business or business segment of any Person) that was,
immediately prior to such acquisition, in a Permitted Business.
"Permitted Business" means the business of the Borrower and its
Subsidiaries on the Effective Date or any business related, ancillary or
complementary thereto, or which is an extension thereof, or which involves the
light manufacturing of component products being sold in the original equipment
manufacturing markets.
"Permitted Disposition" means any sale, lease, transfer or other
disposition of assets of the Borrower or any of its Subsidiaries to the extent
that
(a) the Borrower and such Subsidiary shall have received fair value
therefor (as determined by the Board of Directors of the Borrower or such
Subsidiary); and
(b) at the time of each such disposition, no Default shall have
occurred and be continuing.
"Permitted Holder" means (a) John S. Dyson, (b) any Dyson Family Member,
(c) any trustee of any voting or "blind" trust established with respect to
investments of or assets held by John S. Dyson or any Dyson Family Member as a
consequence of or during the period of service by John S. Dyson as an appointed
or elected public official, of which Clay B. Lifflander (or, following his death
or disability, another member of the management of the Parent or the Borrower),
either individually or with one or more additional trustees, is a trustee and
(d) Clay B. Lifflander.
"Permitted Quarterly Tax Distributions" means quarterly distributions of
Tax Amounts determined on the basis of the annualized estimated taxable income
of the Borrower and its consolidated Subsidiaries for the related Estimation
Period, but not less than the minimum amount, based upon the prior tax year's
tax liability (taking into account only tax items attributable to the Borrower)
required to avoid any underpayment penalties or interest, provided, however,
that (A) prior to any distributions of Tax Amounts the Borrower shall deliver an
officers' certificate certifying that the Tax Amounts to be distributed were
determined pursuant to the terms of this Agreement and stating to the effect
that the Borrower is disregarded or is treated as a pass-through entity for
Federal income tax purposes and whether or not the Parent is a pass-through
entity for the relevant period and (B) at the time of such distributions, the
most recent audited financial statements of the Borrower reflect that the
Borrower was disregarded or treated as a pass-through entity for Federal income
tax purposes for the period covered by such financial statements.
"Person" means any natural person, corporation, partnership, firm, limited
liability company, association, trust, government, governmental agency or any
other entity, whether acting in an individual, fiduciary or other capacity.
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"Plan" means any Pension Plan or Welfare Plan.
"Pledge Agreement" means the Pledge Agreement executed and delivered
pursuant to clause (a) of Section 5.1.7, substantially in the form of Exhibit H
hereto, as the same may be amended, supplemented, restated or otherwise modified
from time to time.
"Quarterly Payment Date" means the last day of each March, June, September
and December or, if any such day is not a Business Day, the next succeeding
Business Day.
"Rate Protection Agreement" means any interest rate swap agreement,
interest rate cap agreement, interest rate collar agreement, currency swap or
exchange agreement or any similar arrangement designed to protect a Person
against fluctuations in interest rates or currency fluctuations and entered
into, from time to time, by the Borrower or any of its Subsidiaries.
"Realty" means all right, title and interest of the Borrower and its
respective Subsidiaries in any land, buildings, improvements, fixtures, other
interests in real estate and any leasehold interest in any of the foregoing.
"Reimbursement Obligation" is defined in Section 2.7.3.
"Release" means any spilling, leaking, pumping, pouring emitting,
emptying, discharging, injecting, escaping, leaching, dumping or disposing of
any Hazardous Material or pollutant or contaminant into the environment
(including the abandonment or discarding of barrels, containers, and other
closed receptacles containing any Hazardous Material or pollutant or
contaminant).
"Required Lenders" means, at the time any determination thereof is to be
made, Lenders holding more than 50% of the then aggregate unpaid principal
amount of the Loans or, if no Loans are outstanding, Lenders having an aggregate
Percentage of more than 50%.
"Resource Conservation and Recovery Act" means the Resource Conservation
and Recovery Act, 42 U.S.C. Section 6901, et seq., as in effect from time to
time.
"Revolving Loan" is defined in Section 2.1.1.
"Revolving Loan Commitment" is defined in Section 2.1.1.
"Revolving Loan Commitment Amount" means, on any date, $15,000,000, as
such amount is reduced from time to time pursuant to Section 2.3.
"Revolving Loan Commitment Termination Date" means the earliest of
(a) July 27, 2004;
(b) the date on which the Revolving Loan Commitment Amount is
terminated in full or reduced to zero pursuant to Section 2.3; and
(c) the date on which any Commitment Termination Event occurs.
Upon the occurrence of any event described above, the Revolving Loan Commitments
shall terminate automatically and without any further action.
"Revolving Note" means a promissory note of the Borrower payable to any
Lender, in the form of Exhibit A hereto (as such promissory note may be amended,
endorsed or otherwise modified from time to time), evidencing the aggregate
Indebtedness of the Borrower to such Lender resulting from outstanding Revolving
Loans,
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and also means all other promissory notes accepted from time to time in
substitution therefor or renewal thereof.
"Rolling Period" means, as of any date of calculation, the immediately
preceding four full Fiscal Quarters.
"Security Agreements" means, as the context may require, the Borrower
Security Agreement and each Guarantor Security Agreement.
"Senior Notes" means the $80,000,000 10 1/2% Senior Notes Due 2008 of the
Borrower, together with any senior notes issued in exchange for such Senior
Notes pursuant to a Registration Statement filed with the Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended (the
"Exchange Notes"), in each case as such Senior Notes and such Exchange Notes may
be amended and restated or otherwise modified from time to time in accordance
with Section 7.2.12.
"SG" is defined in the preamble.
"SG Base Rate" means, on any date and with respect to all Base Rate Loans,
a fluctuating rate of interest per annum (rounded upward, if necessary, to the
next highest 1/16 of 1%) equal to the higher of
(a) the SG Rate in effect on such day; and
(b) the Federal Funds Rate in effect on such day plus 1/2 of 1%.
The SG Base Rate is not necessarily intended to be the lowest rate of interest
determined by SG in connection with extensions of credit. Changes in the rate of
interest on that portion of any Loans maintained as Base Rate Loans will take
effect simultaneously with each change in the SG Base Rate. The Agent will give
notice promptly to the Borrower and the Lenders of changes in the SG Base Rate.
"SG Rate" means, at any time, the rate of interest then most recently
established by SG in New York, New York as its base rate for Dollars loaned in
the United States.
"Specified Acquisition" means any Permitted Acquisition that meets the
following conditions:
(a) if at the time of such Permitted Acquisition, or after giving
effect thereto, the ratio of (x) the aggregate principal amount of all
Funded Debt of the Borrower and its Subsidiaries (other than the Senior
Notes) to (y) EBITDA for the period of four consecutive Fiscal Quarters
most recently ended prior to the date of such Permitted Acquisition:
(i) exceeds 2.00 to 1, such Permitted Acquisition satisfies
the conditions to a borrowing of Acquisition Loans set forth in
Section 5.3, or
(ii) is equal to or less than 2.00 to 1, such Permitted
Acquisition satisfies the conditions to a borrowing of Acquisition
Loans set forth in Section 5.3, other than the conditions set forth
in Sections 5.3.3 and 5.3.4;
(b) the aggregate consideration payable in connection with such
Permitted Acquisition (including indebtedness assumed) does not exceed (i)
if such Permitted Acquisition is to be financed in whole or in part with
any Net Disposition Proceeds, $15,000,000 and (ii) in any other
circumstance, $25,000,000; and
(c) after giving effect thereto, no Default shall be continuing.
"State" means the several states of the United States of America,
including the District of Columbia, and their political subdivisions.
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"Stated Amount" of each Letter of Credit means the total amount available
to be drawn under such Letter of Credit upon the issuance thereof.
"Stated Expiry Date" is defined in Section 2.7.
"Stated Maturity Date" means (a) with respect to Revolving Loans, the
Revolving Loan Commitment Termination Date, and (b) with respect to Acquisition
Loans, June 30, 2004.
"Subsidiary" means, with respect to any Person, (a) any corporation of
which more than 50% of the outstanding capital stock having ordinary voting
power to elect the board of directors of such corporation (irrespective of
whether at the time capital stock of any other class or classes of such
corporation shall or might have voting power upon the occurrence of any
contingency) is at the time directly or indirectly owned or controlled by such
Person, by such Person and one or more Subsidiaries of such Person, or by one or
more other Subsidiaries of such Person, or (b) any partnership, joint venture,
limited liability company or other entity as to which such Person, such Person
and one or more of its Subsidiaries or one or more Subsidiaries of such Person
owns more than a 50% ownership, equity or similar interest or has power to
direct or cause the direction of management and policies, or the power to elect
the managing partner (or the equivalent), of such partnership, joint venture,
limited liability company or other entity, as the case may be.
"Supermajority Lenders" means, at the time any determination thereof is to
be made, Lenders holding more than 66 2/3% of the then aggregate unpaid
principal amount of the Loans or, if no Loans are outstanding, Lenders having an
aggregate Percentage of more than 66 2/3%.
"Tax Amounts" means, with respect to any taxable period, an amount equal
to (A) the product of (x) the taxable income of the Borrower and its
consolidated Subsidiaries for such period as determined by the Tax Amounts CPA
and (y) the Tax Percentage reduced by (B) to the extent not previously taken
into account, any income tax benefit attributable to the tax items of the
Borrower and its consolidated Subsidiaries which could legally be realized
(without regard to the actual realization) by the Taxpayers with respect to tax
items of the Borrower and its consolidated Subsidiaries in the current or any
prior taxable year, or portion thereof, commencing on or after the Closing Date
(including any tax losses or tax credits up to the aggregate amount of income
tax benefits previously legally realizable by the Taxpayers), computed at the
applicable Tax Percentage for the year that such benefit is taken into account
for purposes of this computation.
"Tax Amounts CPA" means a nationally recognized certified public
accounting firm.
"Taxes" is defined in Section 4.6.
"Taxpayer(s)" means, (i) for any period when Parent is a pass through
entity for federal income tax purposes, the stockholders of Parent and (ii) for
any period when the Parent is not a pass through entity for federal income tax
purposes, the Parent.
"Tax Percentage" means, for a particular taxable year, the highest
effective marginal combined rate of Federal, state and local income tax, imposed
on any Taxpayer, as certified by the Tax Amounts CPA in a certificate filed with
the Agent. The rate of "state income tax" to be taken into account for purposes
of determining the Tax Percentage for a particular taxable year shall be deemed
to be the highest state marginal tax rate applicable to any Taxpayer.
"Total Commitment Amount" means the sum, without duplication, of the
Revolving Loan Commitment Amount and the Acquisition Loan Commitment Amount.
"type" means, relative to any Loan, that part of such Loan being
maintained as a Base Rate Loan or a LIBO Rate Loan.
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"True-up Amount" means, in respect of a particular taxable year, an amount
determined by the Tax Amounts CPA equal to the difference between (i) the
aggregate Permitted Quarterly Tax Distributions actually distributed in respect
of such taxable year and (ii) the actual Tax Amounts for such year. For purposes
of this Agreement, the amount equal to the excess, if any, of the amount
described in clause (i) over the amount described in clause (ii) above shall be
referred to as the "True-up Amount due to the Borrower" and the excess, if any,
of the amount described in clause (ii) over the amount described in clause (i)
above shall be referred to as the "True-up Amount due to the Taxpayers."
"U.C.C." means the Uniform Commercial Code as from time to time in effect
in the State of New York.
"United States" or "U.S." means the United States of America, its fifty
States and the District of Columbia.
"Welfare Plan" means a "welfare plan" (as such term is defined in Section
3(1) of ERISA), maintained by the Borrower or for which the Borrower or any of
its Subsidiaries has any contractual liability.
"Working Capital" means, at any time of determination, the excess of
(a) the consolidated current assets of the Borrower and its
Subsidiaries at such time (other than cash and cash equivalents held by
the Borrower and its Subsidiaries)
over
(b) the consolidated current liabilities of the Borrower and its
Subsidiaries at such time (other than the current portion of outstanding
Acquisition Loans and the current portion of the Senior Notes).
SECTION 1.2. Use of Defined Terms. Unless otherwise defined or the context
otherwise requires, terms for which meanings are provided in this Agreement
shall have such meanings when used in the Disclosure Schedule and each other
Loan Document.
SECTION 1.3. Cross-References. Unless otherwise specified, references in
this Agreement and in each other Loan Document to any Article or Section are
references to such Article or Section of this Agreement or such other Loan
Document, as the case may be, and, unless otherwise specified, references in any
Article, Section or definition to any clause are references to such clause of
such Article, Section or definition.
SECTION 1.4. Accounting and Financial Determinations. (a) Unless otherwise
specified, all accounting terms used herein or in any other Loan Document shall
be interpreted, all accounting determinations and computations hereunder or
thereunder (including under Section 7.2.4) shall be made, and all financial
statements required to be delivered hereunder or thereunder shall be prepared,
in accordance with those generally accepted accounting principles ("GAAP")
applied in the preparation of the financial statements referred to in Section
6.5.
(b) For purposes of making accounting determinations and computations
(including under Section 7.2.4), for all periods, and for all dates, prior to
May 28, 1998 each reference to the Borrower shall be deemed to be a reference to
the Parent.
ARTICLE II
COMMITMENTS, BORROWING PROCEDURES,
LETTERS OF CREDIT AND NOTES
SECTION 2.1. Commitments. On the terms and subject to the conditions of
this Agreement (including Article V), each Lender severally agrees to make Loans
pursuant to the Commitments described in this Section 2.1.
SECTION 2.1.1. Revolving Loan Commitment. From time to time on any
Business Day occurring prior to
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the Revolving Loan Commitment Termination Date, each Lender agrees to make loans
(relative to such Lender, its "Revolving Loans") to the Borrower equal to such
Lender's Percentage of the aggregate amount of the Borrowing of Revolving Loans
requested by the Borrower to be made on such day. The Commitment of each Lender
described in this Section is herein referred to as its "Revolving Loan
Commitment". On the terms and subject to the conditions hereof, the Borrower may
from time to time borrow, prepay and reborrow the Revolving Loans.
SECTION 2.1.2. Letter of Credit Commitment. From time to time on any
Business Day occurring prior to the Revolving Loan Commitment Termination Date,
the applicable Issuer will
(a) issue one or more standby letters of credit (relative to such
Issuer, its "Letter of Credit") for the account of the Borrower in respect
of obligations of the Borrower in Stated Amounts requested by the Borrower
on such day with a Stated Expiry Date not later than one year from such
requested date of issuance; or
(b) extend the Stated Expiry Date of an existing Letter of Credit
previously issued hereunder to a date not later than the earlier of (i)
the Revolving Loan Commitment Termination Date and (ii) one year from the
date of such extension.
SECTION 2.1.3. Acquisition Loan Commitment. On any Business Day on or
prior to the Acquisition Loan Commitment Termination Date, each Lender agrees to
make one or more loans (relative to such Lender, its "Acquisition Loans") to the
Borrower equal to such Lender's Percentage of the aggregate amount of each
Borrowing of Acquisition Loans requested by the Borrower to be made on such day.
The Commitment of each Lender described in this Section is herein referred to as
its "Acquisition Loan Commitment". No amounts paid or prepaid with respect to
Acquisition Loans may be reborrowed.
SECTION 2.2. Lenders Not Permitted or Required To Make Credit Extensions.
No Lender shall be permitted or required to make any Loan, and no Issuer shall
be obligated to issue or extend any Letter of Credit, under any circumstance
described below in this Section.
SECTION 2.2.1. Revolving Loans. No Borrowing of Revolving Loans shall be
made if, after giving effect thereto, the aggregate outstanding principal amount
of all the Revolving Loans, together with the aggregate amount of all Letter of
Credit Outstandings, (a) of all the Lenders would exceed the lesser of the
Revolving Loan Commitment Amount or the then existing Borrowing Base Amount, or
(b) of such Lender would exceed the lesser of such Lender's Percentage of the
Revolving Loan Commitment Amount or such Lender's Percentage of the then
existing Borrowing Base Amount.
SECTION 2.2.2. Letters of Credit. No issuance or extension of a Letter of
Credit shall be made if, after giving effect thereto, (a) the aggregate amount
of all Letter of Credit Outstandings would exceed the Letter of Credit
Commitment Amount or (b) the aggregate amount of all Letter of Credit
Outstandings together with the aggregate outstanding principal amount of all
Revolving Loans, would exceed the lesser of the Revolving Loan Commitment Amount
or the then existing Borrowing Base Amount.
SECTION 2.2.3. Acquisition Loans. No Borrowing of Acquisition Loans shall
be made if, after giving effect thereto, the aggregate principal amount of all
the Acquisition Loans (a) of all Lenders would exceed the Acquisition Loan
Commitment Amount or (b) of such Lender would exceed such Lender's Percentage of
the Acquisition Loan Commitment Amount.
SECTION 2.3. Optional Reduction of the Commitment Amounts. The Borrower
may, from time to time on any Business Day occurring after the time of the
initial Credit Extension hereunder, voluntarily reduce the unused amount of the
Revolving Loan Commitment Amount and the unused amount of the Acquisition Loan
Commitment Amount; provided, however, that all such reductions shall require at
least one Business Day's prior notice to the Agent and be permanent, and any
partial reduction of the unused amount of the Revolving Loan Commitment Amount
or the Acquisition Loan Commitment Amount shall be in a minimum amount of
$1,000,000 and in an
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integral multiple of $500,000.
SECTION 2.4. Borrowing Procedure. By delivering a Borrowing Request to the
Agent on or before 10:00 a.m. (New York City time) on a Business Day, the
Borrower may from time to time irrevocably request that Base Rate Loans be made
on such Business Day or on another Business Day within five Business Days of
such Business Day, or that LIBO Rate Loans be made on any Business Day not less
than three nor more than five Business Days thereafter. All Loans shall be made
in a minimum aggregate amount of $100,000 and an aggregate integral multiple of
$50,000 or, if less, in the unused amount of the applicable Commitment, and the
proceeds of all Loans shall be used solely for the purposes described in Section
4.10. On the terms and subject to the conditions of this Agreement, each
Borrowing shall be made on the Business Day specified in such Borrowing Request.
On or before 11:00 a.m. (New York City time) on such Business Day, each Lender
shall deposit with the Agent same day funds in an amount equal to such Lender's
Percentage of the requested Borrowing. Such deposit will be made to an account
which the Agent shall specify from time to time by notice to the Lenders. To the
extent funds are received from the Lenders, the Agent shall make such funds
available to the Borrower by wire transfer to the accounts the Borrower shall
have specified in its Borrowing Request. No Lender's obligation to make any Loan
shall be affected by any other Lender's failure to make any Loan.
SECTION 2.5. Continuation and Conversion Elections. By delivering a
Continuation/Conversion Notice to the Agent on or before 11:00 a.m. (New York
City time) on a Business Day, the Borrower may from time to time irrevocably
elect, on not less than one Business Day's notice in the case of conversions to
Base Rate Loans, or three Business Days' notice in the case of conversions to or
continuations of LIBO Rate Loans, and in either case not more than five Business
Days' notice, that all, or any portion in a minimum aggregate amount of $100,000
and an aggregate integral multiple of $50,000 be, in the case of Base Rate Loans
converted into LIBO Rate Loans or be, in the case of LIBO Rate Loans converted
into Base Rate Loans or continued as LIBO Rate Loans (in the absence of delivery
of a Continuation/Conversion Notice with respect to any LIBO Rate Loan at least
three Business Days (but not more than five Business Days) before the last day
of the then current Interest Period with respect thereto, such LIBO Rate Loan
shall, on such last day, automatically convert to a Base Rate Loan); provided,
however, that (a) each such conversion or continuation shall be prorated among
the applicable outstanding Revolving Loans of all Lenders and (b) no portion of
the outstanding principal amount of any Loans may be continued as, or be
converted into, LIBO Rate Loans when any Default has occurred and is continuing
(unless the Required Lenders otherwise agree in writing).
SECTION 2.6. Funding. Each Lender may, if it so elects, fulfill its
obligation to make, continue or convert LIBO Rate Loans hereunder by causing one
of its foreign branches or Affiliates (or an international banking facility
created by such Lender) to make or maintain such LIBO Rate Loan; provided,
however, that such LIBO Rate Loan shall nonetheless be deemed to have been made
and to be held by such Lender, and the obligation of the Borrower to repay such
LIBO Rate Loan shall nevertheless be to such Lender for the account of such
foreign branch, Affiliate or international banking facility. In addition, the
Borrower hereby consents and agrees that, for purposes of any determination to
be made for purposes of Sections 4.1 through 4.5, it shall be conclusively
assumed that each Lender elected to fund all LIBO Rate Loans by purchasing
Dollar deposits in its LIBOR Office's interbank eurodollar market.
SECTION 2.7. Issuance Procedures. By delivering to the Agent an Issuance
Request on or before 11:00 a.m., New York City time, on a Business Day, the
Borrower may, from time to time irrevocably request, on not less than three nor
more than 5 Business Days' notice, that the applicable Issuer issue, increase
the Stated Amount of, or extend the Stated Expiry Date of, as the case may be, a
Letter of Credit in such form as may be requested by the Borrower and approved
by such Issuer, such Letter of Credit to be used solely for the purposes
described in Section 4.10. Each Letter of Credit shall by its terms be stated to
expire on a date (its "Stated Expiry Date") no later than the earlier of (a) one
year from the date of issuance (subject to extensions for additional one-year
periods) and (b) the Revolving Loan Commitment Termination Date. The applicable
Issuer will make available to the beneficiary thereof the original of each
Letter of Credit which it issues hereunder. Unless notified in writing by the
Required Lenders before it issues a Letter of Credit that a Default exists, the
applicable Issuer may issue the requested Letter of Credit in accordance with
such Issuer's customary practices.
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SECTION 2.7.1. Other Lenders' Participation. Upon the issuance of each
Letter of Credit issued by an Issuer pursuant hereto, and without further
action, each Lender (other than such Issuer) shall be deemed to have irrevocably
and unconditionally purchased (without recourse, representation or warranty), to
the extent of its Percentage, a participation interest in such Letter of Credit
(including the Contingent Liability and any Reimbursement Obligation with
respect thereto), and such Lender shall, to the extent of its applicable
Percentage, be responsible for reimbursing promptly (and in any event within one
Business Day together with interest at the Federal Funds Rate (rounded upward,
if necessary, to the next highest 1/16 of 1%) for each day until reimbursement
is made) the Issuer for Reimbursement Obligations which have not been reimbursed
by the Borrower in accordance with Section 2.7.3 or which have been reimbursed
by the Borrower but have been required to be returned or disgorged by such
Issuer. In addition, such Lender shall, to the extent of its Percentage and so
long as it shall have complied with its obligations under this Section and
Section 2.7.3, be entitled to receive a ratable portion of the Letter of Credit
fees payable pursuant to Section 3.3.3 with respect to each Letter of Credit and
of interest payable pursuant to Section 3.2 with respect to any Reimbursement
Obligation.
SECTION 2.7.2. Disbursements. The applicable Issuer will notify the
Borrower and the Agent promptly of the presentment for payment of any Letter of
Credit issued by such Issuer, together with notice of the date (the
"Disbursement Date") such payment shall be made (each such payment, a
"Disbursement"). Subject to the terms and provisions of such Letter of Credit
and this Agreement, such Issuer shall make such payment to the beneficiary (or
its designee) of such Letter of Credit. Prior to 11:00 a.m. (New York City time)
on the first Business Day following the Disbursement Date, the Borrower will
reimburse the Agent, for the account of such Issuer, for all amounts which such
Issuer has disbursed under such Letter of Credit, together with interest thereon
at a rate per annum equal to the highest rate per annum then in effect pursuant
to Section 3.2 for the period from the Disbursement Date through the date of
such reimbursement.
SECTION 2.7.3. Reimbursement. The obligation (a "Reimbursement
Obligation") of the Borrower under Section 2.7.2 to reimburse the applicable
Issuer with respect to each Disbursement (including interest thereon), and, upon
the failure of the Borrower to reimburse such Issuer (or if any reimbursement by
the Borrower must be returned or disgorged by such Issuer for any reason), each
Lender's obligation under Section 2.7.1 to reimburse such Issuer, shall be
absolute and unconditional under any and all circumstances and irrespective of
any setoff, counterclaim or defense to payment which the Borrower or such
Lender, as the case may be, may have or have had against such Issuer or any
Lender, including any defense based upon the failure of any Disbursement to
conform to the terms of the applicable Letter of Credit or any non-application
or misapplication by the beneficiary of the proceeds of such Letter of Credit;
provided, however, that after paying in full its Reimbursement Obligation
hereunder, nothing herein shall adversely affect the right of the Borrower or
such Lender, as the case may be, to commence any proceeding against such Issuer
for any wrongful Disbursement made by such Issuer under a Letter of Credit as a
result of acts or omissions constituting gross negligence or wilful misconduct
on the part of such Issuer.
SECTION 2.7.4. Deemed Disbursements. Upon the occurrence and during the
continuation of any Default of the type described in Section 8.1.9 or, with
notice from the Agent, upon the occurrence and during the continuation of any
other Event of Default
(a) an amount equal to that portion of all Letter of Credit
Outstandings attributable to the then aggregate amount which is undrawn
and available under all Letters of Credit issued and outstanding for the
account of the Borrower shall, without demand upon or notice to the
Borrower, be deemed to have been paid or disbursed by the applicable
Issuer under such Letters of Credit (notwithstanding that such amount may
not in fact have been so paid or disbursed); and
(b) upon notification by the Agent to the Borrower of its
obligations under this Section, the Borrower shall be immediately
obligated to reimburse the applicable Issuer for the amount deemed to have
been so paid or disbursed by such Issuer.
Any amounts so payable by the Borrower pursuant to this Section shall be
deposited in cash in an account under the sole control of the Agent and
otherwise on terms satisfactory to the Agent and held as collateral security for
the
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<PAGE> 29
Obligations in connection with the Letters of Credit issued by the Issuers. In
the case of any such deemed disbursement resulting from the occurrence of a
Default, if such Default has been cured or waived, the Agent shall return to the
Borrower all amounts then on deposit with the Agent pursuant to this Section
which have not been applied to the partial satisfaction of such Obligations.
SECTION 2.7.5. Nature of Reimbursement Obligations. The Borrower shall
assume all risks of, and each Lender's Obligations under this Section 2.7 shall
not be affected by, the acts, omissions or misuse of any Letter of Credit by the
beneficiary thereof. Neither the applicable Issuer nor any Lender shall be
responsible for:
(a) the form, validity, sufficiency, accuracy, genuineness or legal
effect of any Letter of Credit or any document submitted by any party in
connection with the application for and issuance of a Letter of Credit,
even if it should in fact prove to be in any or all respects invalid,
insufficient, inaccurate, fraudulent or forged (except to the extent of
such Issuer's gross negligence or wilful misconduct);
(b) the form, validity, sufficiency, accuracy, genuineness or legal
effect of any instrument transferring or assigning or purporting to
transfer or assign a Letter of Credit or the rights or benefits thereunder
or the proceeds thereof in whole or in part, which may prove to be invalid
or ineffective for any reason;
(c) failure of the applicable beneficiary to comply fully with
conditions required in order to demand payment under a Letter of Credit
(except for a failure by such Issuer to honor a demand for payment that
strictly complies with the terms of such Letter of Credit);
(d) errors, omissions, interruptions or delays in transmission or
delivery of any messages, by mail, cable, telegraph, telex, telecopy or
otherwise; or
(e) any loss or delay in the transmission or otherwise of any
document or draft required in order to make a Disbursement under a Letter
of Credit.
None of the foregoing shall affect, impair or prevent the vesting of any of the
rights or powers granted to any Issuer or any Lender hereunder. In furtherance
and extension and not in limitation or derogation of any of the foregoing, any
action taken or omitted to be taken by an Issuer in good faith shall be binding
upon the Borrower and each Lender, and shall not put the Issuer or any Lender
under any resulting liability to either the Borrower or any Lender, as the case
may be.
SECTION 2.8. Notes. Each Lender's Loans under a Commitment shall be
evidenced by a Note payable to the order of such Lender in a maximum principal
amount equal to such Lender's Percentage of the original applicable Commitment
Amount. The Borrower hereby irrevocably authorizes each Lender to make (or cause
to be made) appropriate notations on the grid attached to such Lender's Notes
(or on any continuation of such grid), which notations, if made, shall evidence,
inter alia, the date of, the outstanding principal of, and the interest rate
applicable to, the Loans evidenced thereby. Such notations shall be rebuttable
presumptive evidence of the matters evidenced thereby; provided, however, that
the failure of any Lender to make any such notations shall not limit or
otherwise affect any Obligations of the Borrower or any other Obligor.
ARTICLE III
REPAYMENTS, PREPAYMENTS, INTEREST AND FEES
SECTION 3.1. Repayments and Prepayments. The Borrower shall repay in full
the unpaid principal amount of each Loan made to it upon the Stated Maturity
Date therefor and pursuant to Section 8.2 and Section 8.3. Prior thereto,
repayments and prepayments of Loans shall be made as set forth in this Section
3.1.
SECTION 3.1.1. Voluntary Prepayments. Prior to the Stated Maturity Date,
the Borrower may, from time
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to time on any Business Day, make a voluntary prepayment, in whole or in part,
of the outstanding principal amount of Revolving Loans or Acquisition Loans;
provided, however, that
(a) any such prepayments shall be applied to the Loans that the
Borrower directs, provided that if any payment is to be applied to Loans
other than the Revolving Loans, such payment shall be applied pro rata
among the Acquisition Loans of the Borrower of the same type and, if
applicable, having the same Interest Period;
(b) all such voluntary prepayments shall require at least one but no
more than five Business Days' prior written notice to the Agent; and
(c) all such voluntary partial prepayments shall be in an aggregate
minimum amount of $500,000 and an integral multiple of $100,000, except in
the case of Revolving Loans, which shall be in an aggregate minimum amount
of $100,000 and an integral multiple of $50,000.
Each voluntary prepayment of any Acquisition Loans made pursuant to this Section
shall be applied, to the extent of such prepayment, in the inverse order of the
scheduled repayments of such Loans set forth in clause (b) of Section 3.1.2 and
shall be applied first to any Base Rate Loans outstanding prior to being applied
to any LIBO Rate Loans outstanding. Each prepayment of any Loans made pursuant
to this Section shall be without premium or penalty but subject to Section 4.4.
SECTION 3.1.2. Mandatory Prepayments. Prior to the Stated Maturity Date,
(a) the Borrower agrees that it shall, on each date when the sum of
(x) the aggregate outstanding principal amount of all Revolving Loans and
(y) Letter of Credit Outstandings exceeds the lesser of the Revolving Loan
Commitment Amount (as it may be reduced from time to time) and the then
existing Borrowing Base Amount, make a mandatory prepayment of all
Revolving Loans in an amount equal to such excess (or, to the extent that
the aggregate outstanding amount of Revolving Loans is less than such
excess, deposit cash in an amount equal to such shortfall in an account as
contemplated by the penultimate sentence of Section 2.7.4);
(b) the Borrower shall, on each date set forth below, make a
scheduled repayment of the aggregate outstanding principal amount of
Acquisition Loans on the Acquisition Loan Commitment Termination Date in
an amount equal to the percentage set forth opposite each such date of
such aggregate principal amount:
<TABLE>
<CAPTION>
Percentage of Principal
Amount Outstanding on
Acquisition Loan Commitment
Repayment Date Termination Date
-------------- ----------------
<S> <C>
September 30, 2000 2.50%
December 31, 2000 2.50%
March 31, 2001 2.50%
June 30, 2001 2.50%
September 30, 2001 5.00%
December 31, 2001 5.00%
March 31, 2002 5.00%
June 30, 2002 5.00%
September 30, 2002 7.50%
December 31, 2002 7.50%
March 31, 2003 7.50%
June 30, 2003 7.50%
September 30, 2003 10.00%
</TABLE>
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<PAGE> 31
<TABLE>
<S> <C>
December 31, 2003 10.00%
March 31, 2004 10.00%
June 30, 2004 10.00%;
</TABLE>
(c) the Borrower shall,
(i) on the date of receipt by it or any of its Subsidiaries of
any Net Disposition Proceeds, Net Equity Proceeds or Net Debt
Proceeds (but only if any Acquisition Loans are outstanding on such
date),
(ii) on the fifth Business Day following the receipt by it or
any of its Subsidiaries of any Excess Insurance Proceeds (but only
if any Acquisition Loans are outstanding on such date), and
(iii) on the date of delivery of the audited financial
statements pursuant to clause (b) of Section 7.1.1 for each Fiscal
Year, commencing with the Fiscal Year ending December 31, 1998 (but
not later than the date such financial statements are required to be
furnished to the Lenders), in the case of Excess Cash Flow (but only
if any Acquisition Loans are outstanding on such date),
apply (A) 100% of all such Net Disposition Proceeds (but only to the
extent that the aggregate amount of all Net Disposition Proceeds exceeds
$3,000,000) , Net Equity Proceeds, Excess Insurance Proceeds and Net Debt
Proceeds (but only to the extent that the aggregate amount of all Net Debt
Proceeds exceeds $5,000,000), as the case may be, and (B) 50% of all such
Excess Cash Flow, to make a mandatory prepayment of the Acquisition Loans
on a pro rata basis to be applied to the installments thereof in the
inverse order of the scheduled repayments of such Acquisition Loans;
provided, however, that no prepayment shall be required pursuant to this
subparagraph (c) if such Net Disposition Proceeds, Net Equity Proceeds or
Net Debt Proceeds are reinvested by the Borrower or any of its
Subsidiaries in a Specified Acquisition or in other assets no later than
180 days (or, in the case of Net Disposition Proceeds, no later than 365
days) after their receipt; and
(d) the Borrower shall, immediately upon any acceleration of the
Stated Maturity Date of any Loans pursuant to Section 8.2 or Section 8.3,
repay all (or if only a portion of the Loans are accelerated thereunder,
such portion of) the Loans.
Each prepayment of any Loans made pursuant to this Section shall be made without
premium or penalty, except as specified herein.
SECTION 3.2. Interest Provisions. Interest on the outstanding principal
amount of Loans shall accrue and be payable in accordance with this Section 3.2.
SECTION 3.2.1. Rates. Subject to Sections 2.4 and 2.5, the Borrower may
elect, pursuant to an appropriately delivered Borrowing Request or
Continuation/Conversion Notice, that Loans comprising a Borrowing accrue
interest at a rate per annum:
(a) on that portion of the Revolving Loans maintained from time to
time as Base Rate Loans, equal to the sum of the SG Base Rate from time to
time in effect plus the Applicable Margin;
(b) on that portion of Revolving Loans maintained as a LIBO Rate
Loan, during each Interest Period applicable thereto, equal to the sum of
the LIBO Rate (Reserve Adjusted) for such Interest Period plus the
Applicable Margin;
(c) on that portion of the Acquisition Loans maintained from time to
time as Base Rate Loans, equal to the sum of the SG Base Rate from time to
time in effect plus the Applicable Margin; and
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(d) on that portion of Acquisition Loans maintained as a LIBO Rate
Loan, during each Interest Period applicable thereto, equal to the sum of
the LIBO Rate (Reserve Adjusted) for such Interest Period plus the
Applicable Margin.
"LIBO Rate (Reserve Adjusted)" means, relative to any Loan to be made,
continued or maintained as, or converted into, a LIBO Rate Loan for any Interest
Period, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of
1%) determined pursuant to the following formula:
LIBO Rate = LIBO Rate
(Reserve Adjusted) -------------------------------
1.00 - LIBOR Reserve Percentage
The LIBO Rate (Reserve Adjusted) for any Interest Period for LIBO Rate Loans
will be determined by the Agent on the basis of the LIBOR Reserve Percentage in
effect on, and the applicable rates furnished to and received by the Agent from
SG, two Business Days before the first day of such Interest Period.
"LIBO Rate" means, relative to any Interest Period for LIBO Rate Loans,
the rate of interest equal to the average (rounded upwards, if necessary, to the
nearest 1/16 of 1%) of the rates per annum at which Dollar deposits in
immediately available funds are offered to SG's LIBOR Office in the London,
England interbank market at or about 11:00 a.m. (London, England time) two
Business Days prior to the beginning of such Interest Period for delivery on the
first day of such Interest Period, and in an amount approximately equal to the
amount of SG's LIBO Rate Loan and for a period approximately equal to such
Interest Period.
"LIBOR Reserve Percentage" means, relative to any Interest Period for LIBO
Rate Loans, the reserve requirements (expressed as a decimal) equal to the
maximum aggregate reserve requirements (including all basic, emergency,
supplemental, marginal and other reserves and taking into account any
transitional adjustments or other scheduled changes in reserve requirements)
specified under regulations issued from time to time by the F.R.S. Board and
then applicable to assets or liabilities consisting of or including
"Eurocurrency Liabilities", as currently defined in Regulation D of the F.R.S.
Board, having a term approximately equal or comparable to such Interest Period.
All LIBO Rate Loans shall bear interest from and including the first day
of the applicable Interest Period to (but not including) the last day of such
Interest Period at the interest rate determined as applicable to such LIBO Rate
Loan.
SECTION 3.2.2. Post-Default Rates. After the date any principal amount of
any Loan is due and payable (whether on the Stated Maturity Date, upon
acceleration or otherwise), and after the Borrower has defaulted in the payment
of any other monetary Obligation which has become due and payable, and for so
long as any such amount continues to be due and payable, the Borrower shall pay
interest (after as well as before judgment) on all amounts payable hereunder at
a rate per annum equal to the otherwise applicable rate plus an additional
margin of 2%.
SECTION 3.2.3. Payment Dates. Interest accrued on each Loan shall be
payable, without duplication:
(a) on the Stated Maturity Date therefor;
(b) on the date of any payment or prepayment, in whole or in part,
of principal outstanding on such Loan on the principal amount so paid or
prepaid;
(c) with respect to Base Rate Loans, on each Quarterly Payment Date
occurring after the Effective Date;
(d) with respect to LIBO Rate Loans, on the last day of each
applicable Interest Period (and, if such Interest Period shall exceed 90
days, on the 90th day of such Interest Period);
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(e) with respect to any Base Rate Loans converted into LIBO Rate
Loans on a day when interest would not otherwise have been payable
pursuant to clause (c), on the date of such conversion; and
(f) on that portion of any Loans the Stated Maturity Date of which
is accelerated pursuant to Section 8.2 or Section 8.3, immediately upon
such acceleration.
Interest accrued on Loans or other monetary Obligations arising under this
Agreement or any other Loan Document after the date such amount is due and
payable (whether on the Stated Maturity Date therefor, upon acceleration or
otherwise) shall be payable upon demand.
SECTION 3.3. Fees. The Borrower agrees to pay the fees set forth in this
Section 3.3. All such fees shall be non-refundable.
SECTION 3.3.1. Revolver Commitment Fee. The Borrower agrees to pay to the
Agent, for the pro rata account of each Lender, for the period (including any
portion thereof when the Revolving Loan Commitments are suspended by reason of
the Borrower's inability to satisfy any condition of Article V) commencing on
the Effective Date and continuing through the Revolving Loan Commitment
Termination Date, a commitment fee at the rate of 1/2 of 1% per annum on such
Lender's Percentage of the sum of the average daily undrawn and unused portion
of the Revolving Loan Commitment Amount. Such commitment fees shall be payable
by the Borrower in arrears on each Quarterly Payment Date, commencing with the
first Quarterly Payment Date following the Effective Date, and on the Revolving
Loan Commitment Termination Date.
SECTION 3.3.2. Acquisition Loan Commitment Fee. The Borrower agrees to pay
to the Agent, for the pro rata account of each Lender, for the period (including
any portion thereof when the Acquisition Loan Commitments are suspended by
reason of the Borrower's inability to satisfy any condition of Article V)
commencing on the Effective Date and continuing through the Acquisition Loan
Commitment Termination Date, a commitment fee at the rate of 1/2 of 1% per annum
on such Lender's Percentage of the sum of the average daily undrawn and unused
portion of the Acquisition Loan Commitment Amount. Such commitment fees shall be
payable by the Borrower in arrears on each Quarterly Payment Date, commencing
with the first Quarterly Payment Date following the Effective Date, and on the
Acquisition Loan Commitment Termination Date.
SECTION 3.3.3. Letter of Credit Fee. The Borrower agrees to pay to the
Agent, for the pro rata account of the Issuer and each other Lender of Revolving
Loans, a Letter of Credit fee in an amount equal to the then Applicable Margin
for LIBO Rate Revolving Loans multiplied by the Stated Amount of all Letters of
Credit outstanding, such fee to be paid quarterly in arrears on each Quarterly
Payment Date and on the Revolving Loan Commitment Termination Date. The Borrower
further agrees to pay to each Issuer (a) on the date of (x) the issuance of each
Letter of Credit, (y) each increase in the Stated Amount thereof and (z) each
extension (automatic or otherwise) of the Stated Expiry Date thereof, an
issuance fee in an amount equal to the greater of (i) $500 and (ii) 1/4 of 1% of
the Stated Amount thereof (or increase in such Stated Amount) and (b) all
reasonable costs and expenses incurred by such Issuer in connection with such
Letter of Credit.
SECTION 3.3.4. Agent's Fees, etc. The Borrower agrees to pay to the Agent
for its own account, fees and/or other consideration in the amounts, on the
dates and in the manner set forth in the Fee Letter.
ARTICLE IV
CERTAIN LIBO RATE AND OTHER PROVISIONS
SECTION 4.1. LIBO Rate Lending Unlawful. If any Lender shall determine
(which determination shall, upon notice thereof to the Borrower and the Agent,
be conclusive and binding on the Borrower) that the introduction of or any
change in or in the interpretation of any law makes it unlawful, or any central
bank or other governmental authority asserts that it is unlawful, for such
Lender to make, continue or maintain any Loan as, or to convert any Loan into, a
LIBO Rate Loan, the obligations of such Lender to make, continue, maintain or
convert any such LIBO
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<PAGE> 34
Rate Loan shall, upon such determination, forthwith be suspended until such
Lender shall notify the Agent that the circumstances causing such suspension no
longer exist, and all outstanding LIBO Rate Loans of such Lender shall
automatically convert into Base Rate Loans at the end of the then current
Interest Periods with respect thereto or sooner, if required by such law or
assertion.
SECTION 4.2. Deposits Unavailable. If the Agent shall have determined that
(a) Dollar deposits in the relevant amount and for the relevant
Interest Period are not available to SG in its relevant market; or
(b) by reason of circumstances affecting SG's relevant market,
adequate means do not exist for ascertaining the interest rate applicable
hereunder to LIBO Rate Loans,
then, upon notice from the Agent to the Borrower and the Lenders, the
obligations of all Lenders under Section 2.4 and Section 2.5 to make or continue
any Loans as, or to convert any Loans into, LIBO Rate Loans shall forthwith be
suspended until the Agent shall notify the Borrower and the Lenders that the
circumstances causing such suspension no longer exist.
SECTION 4.3. Increased Costs, etc. (a) The Borrower agrees to reimburse
each Lender for any increase in the cost to such Lender of, or any reduction in
the amount of any sum receivable by such Lender in respect of, making,
continuing or maintaining (or of its obligation to make, continue or maintain)
any Loans as, or of converting (or of its obligation to convert) any Loans into,
LIBO Rate Loans (including but not limited to any imposition or effectiveness of
reserve requirements not already included in the LIBO Rate Reserve Percentage)
that arise in connection with any change in, or the introduction, adoption,
effectiveness, interpretation, reinterpretation or phase-in, after the Effective
Date, of, any law or regulation, directive, guideline, decision or request
(whether or not having the force of law) of any court, central bank, regulator
or other governmental authority. Such Lender shall promptly notify the Agent and
the Borrower in writing of the occurrence of any such event as provided in
clause (c) below, such notice to state, in reasonable detail, the reasons
therefor and the additional amount required fully to compensate such Lender for
such increased cost or reduced amount. Such additional amounts shall be paid by
the Borrower directly to such Lender promptly (and, in any event, within 15
Business Days of receipt of such notice), and such notice shall, in the absence
of manifest error, be conclusive and binding on the Borrower.
(b) If at any time the introduction or effectiveness of or any change in
any applicable law, rule or regulation (including without limitation those
announced or published prior to the date of this Agreement), or in the
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof, or compliance by any Lender
with any request or directive issued by any such authority (whether or not
having the force of law) shall either (i) impose, modify or make applicable any
reserve, deposit, capital adequacy or similar requirement against letters of
credit issued, or participated in, by any Issuer or Lender, or (ii) impose on
any Issuer or Lender any other conditions affecting this Agreement or any Letter
of Credit; and the result of any of the foregoing is to increase the cost to any
Issuer or Lender of issuing, maintaining or participating in any Letter of
Credit, or reduce the amount of any sum received or receivable by any Issuer or
Lender hereunder with respect to Letters of Credit, then, within ten days of the
receipt of the notice referred to below (which notice shall be given by the
respective Issuer or Lender promptly after it determines such increased cost or
reduction is applicable to Letters of Credit or its participation therein) to
the Borrower by the respective Issuer or Lender (a copy of which notice shall be
sent by such Issuer or Lender to the Agent), the Borrower shall pay to such
Issuer or Lender such additional amount or amounts as will compensate such
Issuer or Lender for such increased cost or reduction. A notice submitted to the
Borrower by such Issuer or Lender, setting forth the basis for the calculation
of such additional amount or amounts necessary to compensate such Issuer or
Lender as aforesaid shall be conclusive and binding on the Borrower absent
manifest error.
(c) Each Lender shall notify the Borrower of any event occurring after the
date of this Agreement entitling such Lender to compensation under paragraph (a)
or (b) of this Section 4.3 as promptly as practicable, but in any event within
30 days after such Lender obtains actual knowledge thereof, provided that if any
Lender fails to
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<PAGE> 35
give such notice within 30 days after it obtains actual knowledge of such an
event, such Lender shall, with respect to compensation payable pursuant to this
Section 4.3 in respect of any costs resulting from such event, only be entitled
to payment under this Section 4.3 for costs incurred from and after the date 30
days prior to the date that such Lender does give such notice.
(d) Provided that no Default shall have occurred and be continuing, the
Borrower may, at any time, replace any Lender as to which the Borrower is
obligated to make payments under this Section 4.3 (or under Section 4.6), by
giving not less than ten Business Days' prior notice to the Agent (who shall
promptly notify such Lender), that it intends to replace such Lender with one or
more lenders (including but not limited to one or more Lenders under this
Agreement) selected by the Borrower that (i) have agreed to replace such Lender
as provided in this paragraph and (ii) are reasonably acceptable to the Agent.
Upon the effective date of any replacement under this paragraph and as a
condition to such replacement, the replacement lender or lenders shall pay to
the Lender being replaced the principal of the Loans held by such Lender and the
Borrower shall pay to such Lender, upon delivery to the Borrower of the Notes
evidencing the Loans made by such Lender, all accrued interest on such Loans and
all other amounts owing to such Lender hereunder (including any amounts payable
under Section 4.4 as if such Loans were being prepaid by the Borrower) whereupon
each such replacement lender (if not already a Lender) shall become a "Lender"
for all purposes of this Agreement.
SECTION 4.4. Funding Losses. In the event any Lender shall incur any loss
or expense (including any loss or expense incurred by reason of the liquidation
or reemployment of deposits or other funds acquired by such Lender to make,
continue or maintain any portion of the principal amount of any Loan as, or to
convert any portion of the principal amount of any Loan into, a LIBO Rate Loan)
as a result of
(a) any conversion or repayment or prepayment of the principal
amount of any LIBO Rate Loans on a date other than the scheduled last day
of the Interest Period applicable thereto, whether pursuant to Section 3.1
or otherwise;
(b) any Loans not being made as LIBO Rate Loans in accordance with
the Borrowing Request therefor as a result of the conditions precedent to
such Loans not being satisfied or as a result of the Borrower attempting
to revoke such Borrowing Request; or
(c) any Loans not being continued as, or converted into LIBO Rate
Loans in accordance with the Continuation/Conversion Notice therefor,
then, upon the written notice of such Lender to the Borrower (with a copy to the
Agent), the Borrower shall promptly (and, in any event, within 5 Business Days
of receipt of such notice) pay directly to such Lender such amount as will (in
the determination of such Lender) reimburse such Lender for such loss or
expense. Such written notice (which shall include calculations in reasonable
detail) shall, in the absence of manifest error, be conclusive and binding on
the Borrower.
SECTION 4.5. Increased Capital Costs. If any change in, or the
introduction, adoption, effectiveness, interpretation, reinterpretation or
phase-in of, any law or regulation, directive, guideline, decision or request
(whether or not having the force of law) of any court, central bank, regulator
or other governmental authority affects or would affect the amount of capital
required or expected to be maintained by any Lender or Issuer or any Person
controlling such Lender or Issuer, and such Lender or Issuer determines (in its
sole and absolute discretion) that the rate of return on its or such controlling
Person's capital as a consequence of its Commitments or the Loans made by such
Lender or (to the extent, if any, not covered by Section 4.3(b)) Letters of
Credit issued or participated in by such Lender or Issuer is reduced to a level
below that which such Lender, Issuer or such controlling Person (to the extent,
if any, not covered by Section 4.3(b)) could have achieved but for the
occurrence of any such circumstance, then, in any such case upon notice from
time to time by such Lender or Issuer to the Borrower, the Borrower shall
immediately pay directly to such Lender or Issuer additional amounts sufficient
to compensate such Lender or Issuer or such controlling Person for such
reduction in rate of return. A statement of such Lender or Issuer as to any such
additional amount or amounts (including calculations thereof in reasonable
detail) shall, in the absence of manifest
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error, be conclusive and binding on the Borrower. In determining such amount,
such Lender or Issuer may use any method of averaging and attribution that it
(in its sole and absolute discretion) shall deem applicable.
SECTION 4.6. Taxes. All payments by the Borrower of principal of, and
interest on, the Loans and all other amounts payable hereunder (including
Reimbursement Obligations and fees) shall be made free and clear of and without
deduction for any present or future income, excise, stamp or franchise taxes and
other taxes, fees, duties, withholdings or other charges of any nature
whatsoever imposed by any taxing authority, but excluding franchise taxes and
taxes imposed on or measured by any Lender's net income or receipts (such
non-excluded items being called "Taxes"). In the event that any withholding or
deduction from any payment to be made by the Borrower hereunder is required in
respect of any Taxes pursuant to any applicable law, rule or regulation, then
the Borrower will
(a) pay directly to the relevant authority the full amount required
to be so withheld or deducted;
(b) promptly forward to the Agent an official receipt or other
documentation satisfactory to the Agent evidencing such payment to such
authority; and
(c) pay to the Agent for the account of the Lenders such additional
amount or amounts as is necessary to ensure that the net amount actually
received by each Lender will equal the full amount such Lender would have
received had no such withholding or deduction been required.
Moreover, if any Taxes are directly asserted against the Agent or any Lender
with respect to any payment received by the Agent or such Lender hereunder, the
Agent or such Lender may pay such Taxes and the Borrower will promptly pay such
additional amounts (including any penalties, interest or expenses) as is
necessary in order that the net amount received by such Person after the payment
of such Taxes (including any Taxes on such additional amount) shall equal the
amount such Person would have received had no such Taxes been asserted.
If the Borrower fails to pay any Taxes when due to the appropriate taxing
authority or fails to remit to the Agent, for the account of the respective
Lenders, the required receipts or other required documentary evidence, the
Borrower shall indemnify the Lenders for any incremental Taxes, interest or
penalties that may become payable by any Lender as a result of any such failure.
For purposes of this Section 4.6, a distribution hereunder by the Agent or any
Lender to or for the account of any Lender shall be deemed a payment by the
Borrower.
Upon the request of the Borrower or the Agent, each Lender that is
organized under the laws of a jurisdiction other than the United States or any
State thereof shall, prior to the due date of any payments under the Notes,
execute and deliver to the Borrower and the Agent, on or about the first
scheduled payment date in each Fiscal Year, one or more (as the Borrower or the
Agent may reasonably request) United States Internal Revenue Service Forms 4224
or Forms 1001 or such other forms or documents (or successor forms or
documents), appropriately completed, as may be applicable to establish the
extent, if any, to which a payment to such Lender is exempt from withholding or
deduction of Taxes.
SECTION 4.7. Payments, Computations, etc. Unless otherwise expressly
provided, all payments by the Borrower pursuant to or in respect of this
Agreement, the Notes, each Letter of Credit or any other Loan Document shall be
made by the Borrower to the Agent for the pro rata account of the Lenders
entitled to receive such payment. All such payments required to be made to the
Agent shall be made, without setoff, deduction or counterclaim, not later than
11:00 a.m. (New York City time), on the date due, in same day or immediately
available funds, to such account as the Agent shall specify from time to time by
notice to the Borrower. Funds received after that time shall be deemed to have
been received by the Agent on the next succeeding Business Day. The Agent shall
promptly remit in same day funds to each Lender its share, if any, of such
payments received by the Agent for the account of such Lender. All interest and
fees (including any Post-Default Rate interest payments made pursuant to Section
3.2.2) shall be computed on the basis of the actual number of days (including
the first day but excluding the last day) occurring during the period for which
such interest or fee is payable over a year comprised of 360 days (or, in the
case of interest on Base Rate Loans, 365 days or, if appropriate, 366 days).
Whenever any payment to be made shall
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otherwise be due on a day which is not a Business Day, such payment shall
(except as otherwise required by clause (b) of the definition of the term
"Interest Period" with respect to LIBO Rate Loans) be made on the next
succeeding Business Day and such extension of time shall be included in
computing interest and fees, if any, in connection with such payment. The Agent
is authorized to charge any account maintained by the Borrower with it for any
Obligations owing to it or any of the Lenders.
SECTION 4.8. Sharing of Payments. If any Lender shall obtain any payment
or other recovery (whether voluntary, involuntary, by application of setoff or
otherwise) on account of any Loan (other than pursuant to the terms of Sections
4.3, 4.4, 4.5 and 4.6) in excess of its pro rata share of payments pursuant to
Section 4.7, then or therewith obtained by all Lenders, such Lender shall
purchase from the other Lenders such participations in Credit Extensions made by
them (without recourse, representation or warranty) as shall be necessary to
cause such purchasing Lender to share the excess payment or other recovery
ratably with each of them; provided, however, that if all or any portion of the
excess payment or other recovery is thereafter recovered from such purchasing
Lender, the purchase shall be rescinded and each Lender which has sold a
participation to the purchasing Lender shall repay to the purchasing Lender the
purchase price to the ratable extent of such recovery together with an amount
equal to such selling Lender's ratable share (according to the proportion of (a)
the amount of such selling Lender's required repayment to the purchasing Lender
to (b) the total amount so recovered from the purchasing Lender) of any interest
or other amount paid or payable by the purchasing Lender in respect of the total
amount so recovered. The Borrower agrees that any Lender so purchasing a
participation from another Lender pursuant to this Section may, to the fullest
extent permitted by law, exercise all its rights of payment (including pursuant
to Section 4.9) with respect to such participation as fully as if such Lender
were the direct creditor of the Borrower in the amount of such participation. If
under any applicable bankruptcy, insolvency or other similar law, any Lender
receives a secured claim in lieu of a setoff to which this Section applies, such
Lender shall, to the extent practicable, exercise its rights in respect of such
secured claim in a manner consistent with the rights of the Lenders entitled
under this Section to share in the benefits of any recovery on such secured
claim.
SECTION 4.9. Setoff. Each Lender shall, upon the occurrence of any Event
of Default and with the consent of the Required Lenders, to the extent permitted
under applicable law, appropriate and apply to the payment of the Obligations
owing to it (whether or not then due), and (as security for such Obligations)
the Borrower hereby grants to each Lender a continuing security interest in, any
and all balances, credits, deposits, accounts or moneys of the Borrower then or
thereafter maintained with such Lender; provided, however, that any such
appropriation and application shall be subject to the provisions of Section 4.8
and each application shall be in accordance with the application provided for in
the Security Agreements (each Lender agreeing promptly to notify the Borrower
and the Agent after any such setoff and application made by such Lender; but the
failure to give such notice shall not affect the validity of such setoff and
application). The rights of each Lender under this Section are in addition to
other rights and remedies (including other rights of setoff under applicable law
or otherwise) which such Lender may have.
SECTION 4.10. Use of Proceeds. The proceeds from the Credit Extensions
shall be applied:
(a) in the case of Revolving Loans and Letters of Credit, for
working capital and general corporate purposes of the Borrower (including
to make Permitted Quarterly Tax Distributions, to pay Management Fees, and
to finance Permitted Acquisitions), provided that no proceeds of any
Revolving Loan may be used to finance any Permitted Acquisition unless,
after giving effect thereto, the sum of (x) the lesser of the Revolving
Loan Commitment Amount as then in effect and the Borrowing Base as then in
effect, minus (y) the aggregate outstanding amount of Revolving Loans and
Letters of Credit Outstandings is greater than $2,000,000; and
(b) in the case of Acquisition Loans, to finance Permitted
Acquisitions.
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ARTICLE V
CONDITIONS TO CREDIT EXTENSIONS
SECTION 5.1. Initial Credit Extension. The obligations of the Lenders and,
if applicable, the applicable Issuer to fund the initial Credit Extension shall
be subject to the prior or concurrent fulfillment of each of the conditions
precedent set forth in this Section 5.1 to the satisfaction of the Agent.
SECTION 5.1.1. Corporate and Partnership Documents, etc. The Agent shall
have received
(a) from each Obligor, a certificate, dated the date of the initial
Credit Extension, of its Secretary or Assistant Secretary as to
(i) resolutions of its Board of Directors then in full force
and effect authorizing the execution, delivery and performance of
this Agreement, the Notes and each other Loan Document to be
executed by it;
(ii) each Organic Document of such Obligor; and
(iii) the incumbency and signatures of the officers of such
Obligor authorized to act with respect to this Agreement, the Notes
and each other Loan Document to be executed by it,
upon which certificates the Agent and each Lender may conclusively rely
until it shall have received a further certificate of the Secretary or
Assistant Secretary of such Obligor canceling or amending such prior
certificate.
SECTION 5.1.2. Agreement. The Agent shall have received, with counterparts
for each Lender identified on the signature pages hereto, this Agreement duly
executed by each such Lender, the Agent and an Authorized Officer of each of the
Obligors.
SECTION 5.1.3. Delivery of Notes. The Agent shall have received, for the
account of each Lender entitled thereto, its Revolving Note and Acquisition
Note, each dated the date of the initial Credit Extension, and duly executed and
delivered by an Authorized Officer of the Borrower.
SECTION 5.1.4. Required Consents and Approvals. All required consents and
approvals required to be obtained prior to the Effective Date shall have been
obtained and be in full force and effect with respect to the transactions
contemplated hereby and the Acquisition from (a) all relevant governmental
authorities and regulatory bodies and (b) any other Person whose consent or
approval the Agent deems necessary or appropriate to effect the transactions
contemplated hereby and by the Acquisition.
SECTION 5.1.5. Financial Information, etc. The Agent shall have received
prior to the Effective Date, with counterparts for each Lender,
(a) audited financial statements for the Parent for the fiscal year
ended December 31, 1997, prepared in accordance with GAAP consistently
applied and free of any Impermissible Qualification; and
(b) unaudited financial statements for the Parent for the
three-month period ended March 31, 1998, certified by the chief financial
Authorized Officer of the Borrower, prepared in accordance with GAAP
consistently applied (subject to normal year-end audit adjustments and
lack of footnote disclosure).
SECTION 5.1.6. Pledged Property. The Agent shall have received:
(a) the Pledge Agreement, dated as of the date of the initial Credit
Extension, duly executed by the Borrower; and
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(b) the original certificates evidencing all of the issued and
outstanding shares of capital stock required to be pledged pursuant to the
terms of the Pledge Agreement, which certificates shall be accompanied by
undated stock powers duly executed in blank by each relevant Pledgor.
SECTION 5.1.7. Security Agreements, Filings, etc. The Agent shall have
received executed counterparts of the Borrower Security Agreement and each
Guarantor Security Agreement, each dated as of the date of the initial Credit
Extension duly executed by the Borrower and the relevant Guarantor, as
appropriate, together with executed copies of U.C.C. financing statements naming
the Borrower and the relevant Guarantor, as appropriate, as the debtor, and the
Agent for the benefit of the Lenders, as the secured party, filed or to be filed
under the U.C.C. in all jurisdictions as may be necessary or, in the opinion of
the Agent, desirable to perfect the first priority security interest of the
Agent pursuant to the Security Agreements, together with evidence satisfactory
to the Agent of the filing (or delivery for filing) of an appropriate trademark
security agreement supplement.
SECTION 5.1.8. Solvency Certificates. The Agent shall have received, with
copies for each Lender, a solvency certificate, duly executed by the chief
executive officer or chief financial Authorized Officer of the Borrower and each
Guarantor, as the case may be, in substantially the form of Exhibits K-1 and
K-2, respectively, attached hereto.
SECTION 5.1.9. Closing Date Certificates. The Agent shall have received,
with copies for each Lender, a closing date certificate in substantially the
form of Exhibit J attached hereto, duly executed by the chief financial or
executive Authorized Officer of each Borrower and the Guarantors, and dated the
date of the initial Credit Extension, in which certificate the Borrower and the
Guarantors shall agree and acknowledge that the statements made therein shall be
true and correct representations and warranties of the Borrower and the
Guarantors as of such date. All documents and agreements appended to such
Closing Date Certificate shall be in form and substance satisfactory to the
Agent and the Lenders.
SECTION 5.1.10. Evidence of Insurance. The Agent shall have received
evidence of the insurance coverage required to be maintained pursuant to Section
7.1.4 as of the Closing Date.
SECTION 5.1.11. Opinions of Counsel. The Agent shall have received an
opinion, dated the date of the initial Credit Extension and addressed to the
Agent and all the Lenders, from Rubin Baum Levin Constant & Friedman, counsel to
the Borrower and the Guarantors, substantially in the form of Exhibit M hereto.
SECTION 5.1.12. Agent's Closing Fees, Expenses, etc. The Agent shall have
received for its own account, and for the account of each Lender, as the case
may be, all fees, costs and expenses due and payable pursuant to Sections 3.3
and, if then invoiced, 11.3.
SECTION 5.1.13. Borrowing Base Certificate. The Agent shall have received,
with counterparts for each Lender, an initial Borrowing Base Certificate from
the Borrower, dated the date of the initial Credit Extension and calculated as
of a recent date satisfactory to the Agent, duly executed and delivered by an
Authorized Officer of the Borrower.
SECTION 5.1.14. Satisfactory Legal Form, etc. All documents executed or
submitted pursuant hereto on or prior to the Effective Date by or on behalf of
the Borrower or any of its Subsidiaries or any other Obligors shall be
reasonably satisfactory in form and substance to the Agent, the Lenders and
their counsel; the Agent, the Lenders and their counsel shall have received all
information, approvals, opinions, documents or instruments as the Agent, the
Lenders or their counsel may reasonably request.
SECTION 5.2. All Credit Extensions. The obligation of each Lender and
Issuer to make any Credit Extension (including the initial Credit Extension)
shall be subject to the fulfillment of each of the conditions precedent set
forth in this Section 5.2 to the satisfaction of the Agent:
SECTION 5.2.1. Compliance with Warranties, No Default, etc. Both before
and after giving effect to any
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Credit Extension, the following statements shall be true and correct:
(a) the representations and warranties set forth in Article VI
(excluding, however, those contained in Section 6.7, and such
representations and warranties as are modified to the extent disclosed to
the Agent and the Lenders solely as a result of a Permitted Acquisition or
Permitted Disposition made in accordance with the terms of this Agreement)
and those set forth in the other Loan Documents shall be true and correct
in all material respects with the same effect as if then made (unless
stated to relate solely to an earlier date, in which case such
representations and warranties shall be true and correct as of such
earlier date);
(b) except as disclosed by the Borrower to the Agent and the Lenders
pursuant to Section 6.7,
(i) no labor controversy, litigation, arbitration or
governmental investigation or proceeding shall be pending or, to the
knowledge (after due inquiry) of the Borrower, threatened against
the Borrower or any of its Subsidiaries which might materially
adversely affect the Borrower's consolidated business, operations,
assets, revenues, properties or prospects, which purports to affect
the legality, validity or enforceability of this Agreement, the
Notes or any other Loan Document or, in the case of the initial
Credit Extension, seeks to restrain, enjoin or otherwise prevent the
consummation of, or to recover damages or obtain relief as a result
of, the transactions contemplated by or in connection with this
Agreement or the other Loan Documents; and
(ii) no development shall have occurred in any labor
controversy, litigation, arbitration or governmental investigation
or proceeding disclosed pursuant to Section 6.7 which might
materially adversely affect the consolidated businesses, operations,
assets, revenues, properties or prospects of the Borrower and its
Subsidiaries taken as a whole;
(c) the sum of the (i) aggregate outstanding principal amount of all
Revolving Loans and (ii) aggregate amount of Letter of Credit Outstandings
shall not exceed the lesser of the Revolving Loan Commitment Amount (as
such amount may be reduced from time to time) and the Borrowing Base
Amount in effect at such time (as demonstrated by a Borrowing Base
Certificate dated as of the most recent month-end); and
(d) no Default shall have then occurred and be continuing and the
Borrower shall not be in material violation of any law or governmental
regulation or court decree.
SECTION 5.2.2. Credit Extension Request, etc. The Agent shall have
received a Borrowing Request if Loans are being requested or an Issuance Request
if a Letter of Credit is being requested or extended. Each of the delivery of a
Borrowing Request or Issuance Request and the acceptance by the Borrower of the
proceeds of such Credit Extension shall constitute a representation and warranty
by the Borrower that on the date of such Credit Extension (both immediately
before and after giving effect to such Credit Extension and the application of
the proceeds thereof) the statements made in Section 5.2.1 are true and correct.
SECTION 5.3. Acquisition Loans. The obligation of each Lender to make any
Acquisition Loan shall be subject to the fulfillment of each of the conditions
precedent set forth in this Section 5.3 to the satisfaction of the Agent:
SECTION 5.3.1. Permitted Acquisition. At least ten Business Days prior to
the proposed Borrowing of Acquisition Loans, the Borrower shall have furnished
the Agent with the following:
(a) a description (in detail reasonably satisfactory to the Agent)
of the Permitted Acquisition to which the proceeds of such Acquisition
Loans are to be applied to finance;
(b) a certificate of the chief financial officer of the Borrower
demonstrating compliance with the conditions in Sections 5.3.3 (except in
the circumstances described in the definition of "Specified
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Acquisition" in Section 1.1), 5.3.4 (except in the circumstances described
in the definition of "Specified Acquisition" Section 1.1), 5.3.5 and
5.3.6;
(c) a true and complete copy of a fully executed purchase agreement
(or the execution form of the purchase agreement) relating to the proposed
Permitted Acquisition, which purchase agreement shall be in form and
substance reasonably satisfactory to the Agent; and
(d) such other information relating to the proposed Permitted
Acquisition as the Agent or any Lender may reasonably request (including
audited financial information for the prior three fiscal years regarding
the business to be acquired or, if no audited financial statements are
available, financial statements certified by a senior financial officer of
the relevant entity).
SECTION 5.3.2. Guaranty; Collateral; Etc. If such Permitted Acquisition
consists in whole or in part of a stock acquisition or other acquisition of
equity interests, after giving effect to such Permitted Acquisition, the
Borrower shall be in compliance with the provisions of Sections 7.1.8 and 7.1.9.
In the case of any Permitted Acquisition, after giving effect thereto, the
Borrower shall be in compliance with its obligations under Section 7.1.12.
SECTION 5.3.3. Minimum Interest Coverage. The Pro Forma Interest Coverage
Ratio after giving effect to the Permitted Acquisition to be financed with the
proceeds of such Acquisition Loans shall be at least 1.75 to 1.00. For purposes
of this Section 5.3.3, "Pro Forma Interest Coverage Ratio" means, with respect
to any Permitted Acquisition, the ratio of:
(a) the average of (x) EBITDA for the most recently ended Fiscal Year and
(y) EBITDA for the most recently ended period of four Fiscal Quarters, where
EBITDA is calculated (in each such case):
(i) as if the business to be acquired in such Permitted Acquisition
had been owned by the Borrower for such Fiscal Year or period of four
Fiscal Quarters (as the case may be), but without giving effect to any
cost-savings associated with such Permitted Acquisition, and
(ii) by adding back to EBITDA (in each such case) an amount equal to
75% of the cost savings reasonably estimated by the Borrower to be
obtained during the 12-month period following such Permitted Acquisition,
as a result of such Permitted Acquisition (the "Net Cost Savings"), where
(A) such costs savings include only the "hard" cost savings
(such as from the planned reduction of overhead and by planned
reductions in the number of employees) of such Permitted
Acquisition, and
(B) such cost savings are calculated net of expenses
associated with such cost savings (such as plant closure costs and
severance expenses), provided that the amount of such expenses shall
be reduced by the amount of any contributions to the common equity
capital of the Borrower that were used to partially finance such
Permitted Acquisition;
to
(b) the amount of Interest Expense reasonably estimated by the Borrower
for the 12-month period immediately following such Permitted Acquisition.
SECTION 5.3.4. Maximum Funded Debt to EBITDA. The Pro Forma Funded Debt to
EBITDA Ratio after giving effect to the Permitted Acquisition to be financed
with the proceeds of such Acquisition Loans shall be no greater than 5.20 to 1.
For purposes of this Section 5.3.4, "Pro Forma Funded Debt to EBITDA Ratio"
means, with respect to any Permitted Acquisition, the ratio of:
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(a) Funded Debt as of the date of such Permitted Acquisition,
to
(b) the average of (x) EBITDA for the most recently ended Fiscal
Year and (y) EBITDA for the most recently ended period of four Fiscal
Quarters, where EBITDA is calculated (in each such case):
(i) as if the business to be acquired in such Permitted
Acquisition had been owned by the Borrower for such Fiscal Year or
period of four Fiscal Quarters (as the case may be), but without
giving effect to any cost-savings associated with such Permitted
Acquisition, and
(ii) by adding back to EBITDA (in each such case) an amount
equal to 75% of the cost savings reasonably estimated by the
Borrower to be obtained during the 12-month period following such
Permitted Acquisition, as a result of such Permitted Acquisition
(the "Net Cost Savings"), where
(A) such costs savings include only the "hard" cost
savings (such as from the planned reduction of overhead and by
planned reductions in the number of employees) of such
Permitted Acquisition, and
(B) such cost savings are calculated net of expenses
associated with such cost savings (such as plant closure costs
and severance expenses), provided that the amount of such
expenses shall be reduced by the amount of any contributions
to the common equity capital of the Borrower that were used to
partially finance such Permitted Acquisition.
SECTION 5.3.5. Timing of Permitted Acquisitions. After giving effect to
the Permitted Acquisition to be financed with such Acquisition Loans, no more
than four Permitted Acquisitions shall have been consummated during the
immediately preceding 180-day period.
SECTION 5.3.6. Size of Permitted Acquisitions. After giving effect to the
Permitted Acquisition to be financed with such Acquisition Loans, the aggregate
consideration paid or to be paid by the Obligors, together with the aggregate
amount of all Indebtedness assumed in connection therewith, with respect to all
Permitted Acquisitions consummated during the immediately preceding 180-day
period shall not exceed $25,000,000.
SECTION 5.3.7. Due Diligence Report. If the aggregate consideration
payable by the Obligors in connection with such Permitted Acquisition (including
the amount of any Indebtedness assumed in connection therewith) exceeds
$15,000,000, each of the Lenders shall have received a due diligence report with
respect to such Permitted Acquisition (in scope and form reasonably acceptable
to the Agent) from an accounting firm reasonably acceptable to the Agent. If the
aggregate consideration payable by the Obligors in connection with such
Permitted Acquisition (including the amount of any Indebtedness assumed in
connection therewith) is equal to or less than $15,000,000 and a due diligence
report is nevertheless obtained by the Borrower, each of the Lenders shall have
received such due diligence report with respect to such Permitted Acquisition.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
In order to induce the Lenders, each Issuer and the Agent to enter into
this Agreement and to make Credit Extensions hereunder, each Borrower and the
Guarantors jointly and severally represents and warrants to the Agent, each
Issuer and each Lender as set forth in this Article VI.
SECTION 6.1. Organization, etc. The Borrower and each of its Subsidiaries
and each other Obligor (i) is a corporation or limited liability company validly
organized and existing and in good standing under the laws of the
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jurisdiction of its incorporation or formation and (ii) is duly qualified to do
business and is in good standing as a foreign corporation or limited liability
company in each jurisdiction where the nature of its business requires such
qualification, and has full power and authority and holds all requisite
governmental licenses, permits and other approvals to enter into and perform its
Obligations under this Agreement, the Notes and each other Loan Document to
which it is a party and to own and hold under lease its property and to conduct
its business substantially as currently conducted by it, other than any such
qualifications, the absence of which, could not reasonably be expected to have a
material adverse effect on the Borrower and its Subsidiaries, taken as a whole.
SECTION 6.2. Due Authorization, Non-Contravention, etc. The execution,
delivery and performance by the Borrower of this Agreement, the Notes and each
other Loan Document executed or to be executed by it, and the execution,
delivery and performance by each other Obligor of each Loan Document executed or
to be executed by it, are within the Borrower's and each such Obligor's
corporate or limited liability company powers, have been duly authorized by all
necessary corporate action or limited liability company action, as the case may
be, and do not
(a) contravene or result in a default under the Borrower's or any
such Obligor's Organic Documents;
(b) contravene or result in a default under any law or governmental
regulation, court decree, order or material contractual restriction
binding on the Borrower or any such Obligor; or
(c) result in, or require the creation or imposition of, any Lien on
any of any Obligor's properties other than the Liens created under the
Loan Documents in favor of the Agent for the benefit of the Lenders.
SECTION 6.3. Government Approval, Regulation, Compliance with Law, etc. No
authorization or approval or other action by, and no notice to or filing with,
any governmental authority or regulatory body or other Person is required for
(a) the due execution, delivery or performance by the Borrower or any other
Obligor of this Agreement, the Notes or any other Loan Document to which it is a
party, (b) the grant by the Borrower and each applicable Obligor of the security
interests, pledges and Liens granted by the Loan Documents, or (c) the
perfection of or the exercise by the Agent or any Lender of its rights and
remedies under this Agreement or any other Loan Document, other than, in the
case of (b) and (c) above, compliance with the Assignment of Claims Act of 1940.
SECTION 6.4. Validity, etc. This Agreement and each of the Notes has been
duly executed and delivered, and each other Loan Document executed by the
Borrower will, on the due execution and delivery thereof, constitute, the legal,
valid and binding obligations of the Borrower enforceable in accordance with
their respective terms; and each Loan Document executed pursuant hereto by each
other Obligor will, on the due execution and delivery thereof by such Obligor,
be the legal, valid and binding obligation of such Obligor enforceable in
accordance with its terms, subject in each case to the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium or similar law affecting
creditors' rights generally, and subject to the effect of general principles of
equity (regardless of whether considered in a proceeding in equity or at law).
Each of the Loan Documents which purports to create a security interest creates
a valid first priority security interest in the Collateral subject thereto,
subject only to Liens permitted by Section 7.2.3, securing the payment of the
Obligations.
SECTION 6.5. Financial Information. The financial statements delivered
pursuant to Sections 5.1.6(a) and (b) have been prepared in accordance with GAAP
consistently applied (including application of Financial Accounting Statement
No. 106), except that in the case of financial statements for interim periods
such statements do not have footnotes and are subject to customary year-end
audit adjustments) and such financial statements present fairly the financial
condition of the corporations or other entities covered thereby as at the dates
thereof and the results of their operations for the periods then ended. The
Borrower and its Subsidiaries have no material liabilities, including as to
contingencies and unusual or forward commitments, that are not disclosed in the
foregoing financial statements or the footnotes thereto or set forth in Item 6.5
("Certain Material Liabilities") of the Disclosure Schedule.
SECTION 6.6. No Material Adverse Change. Since the date of the financial
statements described in clause
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(a) of Section 5.1.6, there has been no material adverse change in the financial
condition, operations, assets, business, properties, revenues or prospects of
the Borrower and its Subsidiaries, taken as a whole.
SECTION 6.7. Litigation, Labor Controversies, etc. There is no pending or,
to the knowledge of either the Borrower or any Guarantor, any litigation
threatened in writing, action, proceeding, or labor controversy affecting the
Borrower or any of its Subsidiaries or any other Obligor, or any of their
respective properties, businesses, assets or revenues, which could reasonably be
expected to materially adversely affect the financial condition, operations,
assets, business, properties, revenues or prospects of the Borrower and its
Subsidiaries taken as a whole, except as disclosed in Item 6.7 ("Litigation") of
the Disclosure Schedule, or which purports to affect the legality, validity or
enforceability of this Agreement, the Notes or any other Loan Document.
SECTION 6.8. Subsidiaries. The Borrower has no Subsidiaries except the
Guarantors and those Subsidiaries which it may acquire or create after the date
of the initial Credit Extension with the prior written consent of the Required
Lenders. None of the Guarantors has any Subsidiaries.
SECTION 6.9. Ownership of Properties. Except as set forth in Item 6.9
("Ownership of Properties") of the Disclosure Schedule, the Borrower and each of
its Subsidiaries, own good and marketable title to all of their properties and
assets, have valid fee or leasehold interests in all property, as the case may
be, real and personal, tangible and intangible, of any nature whatsoever
(including patents, trademarks, trade names, service marks and copyrights), free
and clear of all Liens, charges or claims (including infringement claims with
respect to patents, trademarks, copyrights and the like) other than the Liens
permitted pursuant to Section 7.2.3. Neither the Borrower nor any of its
Subsidiaries owns any real property in fee other than as set forth in Item 6.9
of the Disclosure Schedule. There are no copyrights or patents owned by the
Borrower.
SECTION 6.10. Taxes. The Borrower is a limited liability company and each
of its Subsidiaries are Subchapter S corporations (other than Key Components
Finance Corp.) for purposes of all federal, state and local income tax purposes.
The Borrower and each of its Subsidiaries have filed (a) all returns and reports
required by law to have been filed by or with respect to it in connection with
federal, state and local income taxes (including any predecessor entity or
entities (including, without limitation, any withholding taxes of any nature
whatsoever)) and (b) all other returns and reports with respect to Taxes
required by law to have been filed. All federal, state and local income taxes
(as described above) that are shown as due on any tax return have been paid in
full and all other Taxes and governmental charges that are owing have been paid
in full, except such taxes or charges which are being diligently contested in
good faith by appropriate proceedings and for which adequate reserves in
accordance with GAAP shall have been set aside on its books.
SECTION 6.11. Pension and Welfare Plans. During the twelve-consecutive-
month period prior to the date of the execution and delivery of this Agreement
and prior to the date of any Credit Extension hereunder, no steps have been
taken to terminate any Pension Plan, and no contribution failure has occurred
with respect to any Pension Plan sufficient to give rise to a Lien under Section
302(f) of ERISA. No condition exists or event or transaction has occurred with
respect to any Pension Plan which might result in the incurrence by the Borrower
or any member of the Controlled Group of any material liability, fine or
penalty. Except as disclosed in Item 6.11 ("Employee Benefit Plans") of the
Disclosure Schedule, neither the Borrower nor any member of the Controlled Group
or any other Obligor has any contingent liability with respect to any
post-retirement benefit under a Welfare Plan, other than liability for
continuation coverage described in Part 6 of Title I of ERISA.
SECTION 6.12. Environmental Warranties. Except as set forth in Item 6.12
("Environmental Matters") of the Disclosure Schedule, and except to the extent
that the same could not reasonably be expected to have a material adverse effect
on the financial condition of any Obligor:
(a) all facilities and property (including underlying groundwater)
owned or leased by the Borrower or any of its Subsidiaries have been, and
continue to be, owned or leased by the Borrower and such Subsidiaries in
compliance with all Environmental Laws;
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(b) there have been no past, and there are no pending or threatened,
(i) claims, complaints, notices or requests for information
received by the Borrower or any of its Subsidiaries with respect to
any alleged violation of any Environmental Law, or
(ii) complaints, notices or inquiries to the Borrower or any
of its Subsidiaries regarding potential liability under any
Environmental Law or, with regard to contamination, any common or
civil law;
(c) there is no claim, complaint, notice, request for information or
inquiry that has been received by or made to the Borrower or any of its
Subsidiaries with respect to any alleged violation of any Environmental
Law or regarding potential liability under any Environmental Law or, with
regard to contamination, any common or civil law;
(d) there have been no Releases of Hazardous Materials at, on or
under any property now or previously owned or leased by the Borrower or
any of its Subsidiaries;
(e) the Borrower and its Subsidiaries have been issued and are in
compliance in all material respects with all permits, certificates,
approvals, licenses and other authorizations relating to environmental
matters and necessary for their businesses;
(f) no property now or previously owned or leased by the Borrower or
any of its Subsidiaries is listed or proposed for listing (with respect to
owned property only) on the National Priorities List pursuant to CERCLA,
on the CERCLIS or on any similar state list of sites requiring
investigation or clean-up;
(g) there are no underground storage tanks (including petroleum
storage tanks) that are abandoned or that have been inactive for greater
than one year on or under any property now or previously owned or leased
by the Borrower or any of its Subsidiaries;
(h) there are no underground storage tanks, active or abandoned,
including petroleum storage tanks, on or under any property now or
previously owned or leased by the Borrower or any of its Subsidiaries that
do not have leak detection systems as required by and in compliance with
all Environmental Laws;
(i) there are no underground storage tanks, active or abandoned,
including petroleum storage tanks, on or under any property now or
previously owned or leased by the Borrower or any of its Subsidiaries that
have Released or suffered Release(s) of Hazardous Materials;
(j) there are no fuel pumps, underground storage tanks, or above
ground storage tanks, including petroleum storage tanks, on or under any
property now owned or leased by the Borrower or any of its Subsidiaries
that may reasonably be expected to have a material adverse effect on the
financial condition of any Obligor;
(k) neither the Borrower nor any of its Subsidiaries has, to the
best of its knowledge, directly transported or directly arranged for the
transportation of any Hazardous Material to any location which is listed
or proposed for listing on the National Priorities List pursuant to
CERCLA, on the CERCLIS or on any similar state list or which is the
subject of federal, state or local enforcement actions or other
investigations which may lead to material claims against the Borrower or
such Subsidiary thereof for any remedial work, damage to natural resources
or personal injury, including claims under CERCLA;
(l) there are no polychlorinated biphenyls or friable asbestos
present at any property now or previously owned or leased by the Borrower
or any of its Subsidiaries; and
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(m) no conditions (other than those covered in the preceding clauses
(a) through (l)) exist at, on or under any property now or previously
owned or leased by the Borrower or any of its Subsidiaries which, with the
passage of time, or the giving of notice or both, would give rise to any
material liability under any Environmental Law.
SECTION 6.13. Accuracy of Information. (a) All factual information
heretofore or contemporaneously furnished by or on behalf of the Borrower or any
Guarantor in writing to the Agent or any Lender for purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all other
such factual information hereafter furnished by or on behalf of the Borrower or
such Guarantor to the Agent or any Lender, will be, when taken as a whole true
and accurate in every material respect on the date as of which such information
is dated or certified and, as to information delivered before the Effective
Date, as of the date of execution and delivery of this Agreement by the Agent
and such Lender, and such information is not, or shall not be, as the case may
be, incomplete by omitting to state any material fact necessary to make such
information not misleading.
(b) All written information prepared by any consultant or professional
advisor on behalf of the Borrower or any of its Subsidiaries which was furnished
to the Agent or any Lender in connection with the preparation, execution and
delivery of this Agreement has been reviewed by the Borrower, and nothing has
come to the attention of the Borrower in the context of such review which would
lead them to believe that such information (or the assumptions on which such
information is based) is not, taken as a whole, true and correct in all material
respects or that such information, taken as a whole, omits to state any material
fact necessary to make such information not misleading in any material respect.
(c) Insofar as any of the information described above includes
assumptions, estimates, projections or opinions, each of the Borrower and the
Guarantors has reviewed such matters and nothing has come to the attention of
the Borrower in the context of such review which would lead it to believe that
(subject to qualitative variances therein to reflect differing scenarios) such
assumptions, estimates, projections or opinions omit to state any material fact
necessary to make such assumptions, estimates, projections or opinions not
reasonable or not misleading in any material respect. All projections and
estimates have been prepared in good faith on the basis of reasonable
assumptions and represent the best estimate of future performance by the party
supplying the same.
SECTION 6.14. Intellectual Property Collateral. With respect to any
Intellectual Property Collateral the loss, impairment or infringement of which
might have a material adverse effect on the financial condition, operations,
assets, business, properties, revenues or prospects of the Borrower and its
Subsidiaries, taken as a whole:
(a) such Intellectual Property Collateral is subsisting and has not
been adjudged invalid or unenforceable, in whole or in part;
(b) such Intellectual Property Collateral is valid and enforceable;
(c) the Borrower and its Subsidiaries have made all necessary
filings and recordations to protect their respective interests in such
Intellectual Property Collateral, including without limitation,
recordations of all such interests in the Intellectual Property Collateral
in the United States Patent and Trademark Office; and
(d) the Borrower and its Subsidiaries are the exclusive owners of
the entire and unencumbered right, title and interest in and to such
Intellectual Property Collateral (except for Liens created under the Loan
Documents) and no claim has been made that the use of such Intellectual
Property Collateral does or may violate the asserted rights of any third
party.
SECTION 6.15. Ownership of Equity Interests. The Borrower owns free and
clear of all Liens (other than any Lien pursuant to the Pledge Agreement), all
of the issued and outstanding capital stock of each of the Guarantors. There are
no outstanding options, warrants or convertible securities with respect to the
capital stock of the Borrower.
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SECTION 6.16. Absence of Default. Neither the Borrower nor any of its
Subsidiaries is (i) in default as of the Effective Date in the payment of (or in
the performance of any obligation applicable to) any Indebtedness, except as
disclosed in Item 6.17 ("Absence of Default") in the Disclosure Schedule or (ii)
in violation of any law or governmental regulation or court decree or order, in
any respect.
SECTION 6.17. Regulations G, U and X. Neither the Borrower nor any of its
Subsidiaries is engaged principally, or as one of its important activities, in
the business of extending credit for the purpose of purchasing or carrying
"margin stock". None of the proceeds of any Loan or any Letter of Credit will be
used for the purpose of, or be made available by the Borrower in any manner to
any other Person to enable or assist such Person in, directly or indirectly
purchasing or carrying "margin stock". Terms for which meanings are provided in
F.R.S. Board Regulation G, U or X or any regulations substituted therefor, as
from time to time in effect, are used in this Section with such meanings.
SECTION 6.18. Government Regulation. Neither the Borrower nor any of its
Subsidiaries is an "investment company" or a "company controlled by an
investment company" within the meaning of the Investment Company Act of 1940, as
amended, or a "holding company," or a "subsidiary company" of a "holding
company," or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company," within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
SECTION 6.19. Burdensome Agreements. Neither the Borrower nor any of its
Subsidiaries is or will be a party to any instrument which could have a
materially adverse effect on the financial condition, operations, assets,
business, properties, revenues or prospects of the Borrower and its
Subsidiaries, taken as a whole.
SECTION 6.20. Year 2000. Any reprogramming required to permit the proper
functioning, in and following the year 2000, of (a) the computer systems of the
Borrower and its Subsidiaries and (b) equipment containing embedded microchips
(including systems and equipment supplied by others or with which the systems of
the Borrower and its Subsidiaries interface) and the testing of all such systems
and equipment, as so reprogrammed, will be completed by December 31, 1999,
except to the extent such reprogramming and testing would not be reasonably
expected to have a material adverse effect on the business of the Borrower and
its Subsidiaries, taken as a whole. The currently anticipated cost to the
Borrower and its Subsidiaries of such reprogramming and testing and of the
reasonably foreseeable consequence of year 2000 compliance to the Borrower and
its Subsidiaries would not reasonably be expected to have a material adverse
effect on the Borrower and its Subsidiaries, taken as a whole.
ARTICLE VII
COVENANTS
SECTION 7.1. Affirmative Covenants. The Borrower agrees with the Agent,
each Issuer and each Lender that, until all Commitments have terminated and all
Obligations have been paid and performed in full, the Borrower will perform the
obligations set forth in this Section 7.1.
SECTION 7.1.1. Financial Information, Reports, Notices, etc. The Borrower
will furnish, or will cause to be furnished, to each Lender and the Agent copies
of the following financial statements, reports, notices and information:
(a) as soon as available and in any event within 30 days after the
end of each month of each Fiscal Year of the Borrower, a monthly
consolidated financial report for such month and a consolidated balance
sheet of the Borrower as of the end of such month and a consolidated
statement of earnings of the Borrower for such month and for the period
commencing at the end of the previous Fiscal Year and ending with the end
of such month, setting forth in each case in comparative form the figures
(x) for the corresponding date and periods of the previous Fiscal Year
(adjusted to give pro forma effect to consummated acquisitions) and (y)
from the applicable budget referred to in Section 7.1.1(i), certified by
the chief financial Authorized Officer of the Borrower in a manner
acceptable to the Agent;
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(b) (i) as soon as available and in any event within 90 days after
the end of each Fiscal Year of the Borrower (or, with respect to the
first, second and third such Fiscal Year ending after the date of this
Agreement, 120 days), a copy of the annual audit report for such Fiscal
Year for the Borrower and its Subsidiaries, including therein consolidated
and consolidating balance sheets of the Borrower and its Subsidiaries as
of the end of such Fiscal Year and consolidated and consolidating
statements of earnings and consolidated statements of cash flow of the
Borrower and its Subsidiaries for such Fiscal Year, in each case certified
(without any Impermissible Qualification) by Price Waterhouse Coopers LLP
or other independent public accountants of nationally recognized standing
as fairly presenting, in accordance with GAAP consistently applied, the
financial condition, results of operations and cash flows of the Borrower
and its Subsidiaries at the end of such Fiscal Year and for the Fiscal
Year then ended, together with a certificate, executed by the chief
financial Authorized Officer of the Borrower, (x) showing (in reasonable
detail and with appropriate calculations and computations in all respects
satisfactory to the Agent) the calculation of Excess Cash Flow, (y)
setting forth in comparative form the corresponding consolidated and
consolidating figures from the applicable budget referred to in Section
7.1.1(i), and (z) a Compliance Certificate, executed by the chief
financial Authorized Officer of the Borrower, showing (in reasonable
detail and with appropriate calculations and computations in all respects
satisfactory to the Agent) compliance with the financial covenants set
forth in Section 7.2.4 and (ii) as soon as available and in any event
within 120 days after the end of each Fiscal Year of the Borrower, all
management letters and internal control and similar memoranda prepared by
the accountants certifying the financial statements of the Borrower for
such Fiscal Year;
(c) as soon as available and in any event within 45 days after the
end of each Fiscal Quarter of each Fiscal Year of the Borrower, (i) a
quarterly financial report and consolidated and consolidating balance
sheets of the Borrower and its Subsidiaries as of the end of such Fiscal
Quarter and consolidated and consolidating statements of earnings and
consolidated and consolidating statements of cash flow of the Borrower and
its Subsidiaries for such Fiscal Quarter and for the period commencing at
the end of the previous Fiscal Year and ending with the end of such Fiscal
Quarter, setting forth in each case in comparative form (x) the
consolidated and consolidating figures for the corresponding date and
periods of the previous Fiscal Year (giving pro forma effect to any
consummated acquisitions) and (y) the corresponding consolidated and
consolidating figures from the applicable budget referred to in Section
7.1.1(i) certified by the chief financial Authorized Officer of the
Borrower in a manner acceptable to the Agent, and (ii) a Compliance
Certificate, executed by the chief financial Authorized Officer of the
Borrower, showing (in reasonable detail and with appropriate calculations
and computations in all respects satisfactory to the Agent) compliance
with the financial covenants set forth in Section 7.2.4;
(d) as soon as available and in any event within 15 days after the
end of each calendar month (if any Revolving Loans are then outstanding),
a Borrowing Base Certificate calculated as of the last day of such month;
(e) as soon as possible and in any event within three Business Days
after knowledge of an Authorized Officer of the occurrence of any Default,
a statement of the chief financial Authorized Officer of the Borrower
setting forth details of such Default and the action which the Borrower
has taken and proposes to take with respect thereto;
(f) as soon as possible and in any event within three Business Days
after (x) the occurrence of any materially adverse development with
respect to any litigation, action, proceeding, or labor controversy
described in Section 6.7 or (y) the commencement of any labor controversy,
litigation, action or proceeding of the type described in Section 6.7,
notice thereof and, at the Agent's request, copies of all documentation
relating thereto;
(g) promptly after the sending or filing thereof, copies of all
reports which the Borrower sends to any class of its security holders
generally, in their capacities as such, and all reports and registration
statements which the Borrower or any of its Subsidiaries files with the
Securities and Exchange
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Commission or any securities exchange;
(h) immediately upon becoming aware of the institution of any steps
by the Borrower or any other Person to terminate any Pension Plan, or the
failure to make a required contribution to any Pension Plan if such
failure is sufficient to give rise to a Lien under Section 302(f) of
ERISA, or the taking of any action with respect to a Pension Plan which
could result in the requirement that the Borrower furnish a bond or other
security to the PBGC or such Pension Plan, or the occurrence of any event
with respect to any Pension Plan which could result in the incurrence by
the Borrower of any material liability, fine or penalty, or any material
increase in the contingent liability of the Borrower with respect to any
post-retirement Welfare Plan benefit, notice thereof and copies of all
documentation relating thereto;
(i) promptly when available and, in any event, (x) at least 30 days
prior to the last day of each Fiscal Year, a preliminary budget in form
and scope satisfactory to the Agent for the next succeeding Fiscal Year,
and (y) within 60 days after the beginning of each Fiscal Year, a
definitive budget in form and scope satisfactory to the Agent for such
Fiscal Year, in each case in reasonable detail for the relevant Fiscal
Year, prepared on a consolidated and consolidating basis, and setting
forth the principal assumptions upon which such budget is based;
(j) if, as a result of any material change in accounting principles
and policies from those used in the preparation of the Financial
Statements referred to in Section 6.5, the financial statements delivered
pursuant to clause (a), (b) or (c) of this Section 7.1.1 will differ in
any material respect from the financial statements that would have been
delivered pursuant to such clauses had no such change in accounting
principles and policies been made, then, at the reasonable request of the
Required Lenders, consolidated financial statements of the Borrower and
its Subsidiaries for (i) the then current Fiscal Year to the effective
date of such change and (ii) the one full Fiscal Year immediately
preceding the Fiscal Year in which such change is made, in each case
prepared on a pro forma basis as if such change had been in effect during
such periods, and a written statement of the chief accounting Authorized
Officer or chief financial Authorized Officer of the Borrower setting
forth the differences which would have resulted if such financial
statements had been prepared without giving effect to such change; and
(k) such other information respecting the condition or operations,
financial or otherwise, of the Borrower or any of its Subsidiaries as any
Lender through the Agent may from time to time reasonably request,
including in respect of establishing the eligibility of the Accounts and
Inventory comprising the Eligible Accounts and Eligible Inventory included
in each Borrowing Base Certificate delivered pursuant to this Agreement.
SECTION 7.1.2. Compliance with Laws, etc. The Borrower will, and will
cause each of its Subsidiaries to:
(a) comply in all material respects with all governmental rules and
regulations and all other material applicable laws, rules, regulations and
orders, such compliance to include the maintenance and preservation of its
corporate, limited liability company or other organizational existence and
qualification as a foreign corporation or limited liability company in any
jurisdiction where the Borrower or its Subsidiaries have assets or conduct
business; and
(b) comply in all material respects with all governmental rules and
regulations and all other material applicable laws, rules, regulations and
orders relating to taxation, including the payment, before the same become
delinquent, of (i) all federal, state and local income taxes and (ii) all
other taxes, assessments and governmental charges except in each such case
to the extent being diligently contested in good faith by appropriate
proceedings and for which adequate reserves in accordance with GAAP shall
have been set aside on its books.
SECTION 7.1.3. Maintenance of Properties. The Borrower will, and will
cause each of its Subsidiaries to,
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maintain, preserve, protect and keep their respective properties in good repair,
working order and condition, subject to ordinary wear and tear, and make
necessary and proper repairs, renewals (including lease payments on leasehold
properties) and replacements so that the business carried on in connection
therewith may be conducted as it is on the date of this Agreement.
SECTION 7.1.4. Insurance. (a) The Borrower shall maintain, and shall cause
each of its Subsidiaries to maintain, with responsible and reputable insurance
carriers licensed to write insurance, insurance with respect to all their
property, business and assets against such casualties and contingencies and of
such types and in such amounts as is customary in the case of similar businesses
(including key-man life insurance on the lives of George Scherer and Michael
Colecchi, in the amounts of $3,000,000 and $2,000,000, respectively, which shall
be collaterally assigned to the Agent for the benefit of the Lenders).
(b) All premiums on insurance policies required under this Section shall
be paid by the Borrower and its Subsidiaries. Each policy for property insurance
maintained by the Borrower and its Subsidiaries shall (i) name the Agent (as
Agent for the Lenders) as loss payee under a lenders loss payable clause, (ii)
provide that no cancellation, reduction in amount or material change in coverage
thereof or any portion thereof shall be effective until at least 30 days after
receipt by the Agent of written notice thereof, (iii) provide that any notice
under such policies relating to cancellation, reduction or material change in
coverage or the occurrence of any loss in excess of $250,000 shall be
simultaneously delivered to the Agent and (iv) be reasonably satisfactory in all
other respects to the Agent. Each policy for liability insurance maintained by
the Borrower and its Subsidiaries shall (i) name the Agent (as Agent for the
Lenders) as an additional insured, (ii) provide that no cancellation, reduction
in amount or material change in coverage thereof or any portion thereof shall
occur by reason of any breach of any representation or warranty, nor shall any
thereof be effective, until at least 30 days after receipt by the Agent of
written notice thereof, (iii) provide that any notice under such policies
relating to cancellation, reduction or material change in coverage or the
occurrence of any loss in excess of $250,000 shall be simultaneously delivered
to the Agent and (iv) be reasonably satisfactory in all other respects to the
Agent.
(c) The Borrower will deliver, and will cause its Subsidiaries to deliver,
to the Agent, promptly upon request, (i) the originals of all policies
evidencing all insurance required to be maintained under clause (a) or
certificates thereof by the insurers together with a counterpart of each policy,
(ii) a satisfactory insurance broker's letter as to the adequacy of the
insurance being maintained by the Borrower and its Subsidiaries and as to the
compliance of the same with the requirements of this Section and (iii) evidence
as to the payment of all premiums then due thereon (or with respect to any
insurance policies providing for payment other than by a single lump sum, all
installments for the current year due thereon to such date), provided that
neither the Agent nor any Lender shall be deemed by reason of its custody of
such policies to have knowledge of the contents thereof. The Borrower will also
deliver, and will cause its Subsidiaries to deliver, to the Agent not later than
five days prior to the expiration of any policy a binder or certificate of the
insurer evidencing the replacement thereof.
(d) If a Default has not occurred and is not continuing, all proceeds of
property insurance (other than any proceeds of business interruption insurance
and proceeds which reimburse the Borrower or any applicable Subsidiary for
environmental liabilities or remediation costs previously paid by the Borrower
or such Subsidiary) paid on account of the loss of or damage to any property or
asset of the Borrower or any of its Subsidiaries shall be paid to the Borrower
or applicable Subsidiary, and the Borrower or such Subsidiary shall use such
proceeds within 365 days thereafter to repair, restore or replace such property
or asset. With respect to any casualty or other covered occurrence in which the
aggregate proceeds of property insurance receivable by the Borrower or any
applicable Subsidiary (other than any proceeds of business interruption
insurance and proceeds which reimburse the Borrower or such Subsidiary for
environmental liabilities or remediation costs previously paid by the Borrower
or such Subsidiary) exceeds $1,000,000, to the extent the Borrower or such
Subsidiary elects not to apply such insurance proceeds for the repair,
replacement or restoration of such property or asset, or such insurance proceeds
are not in fact so applied within 365 days, all of such unutilized insurance
proceeds shall be delivered by the Borrower or such Subsidiary (and the Borrower
shall cause such Subsidiary to so deliver) to the Agent and shall constitute
"Excess Insurance Proceeds", to be applied as a mandatory prepayment of the
Acquisition Loans pursuant to clause (c) of Section 3.1.2. Notwithstanding any
provision to the contrary in this Agreement or any other Loan Document, if a
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Default has occurred and is continuing, all proceeds of property insurance
(including business interruption insurance) shall be payable directly to the
Agent and the Agent in its sole discretion may treat such proceeds as "Excess
Insurance Proceeds" or, subject to the consent of the Required Lenders, permit
the use of such proceeds to repair, restore or replace the property or asset
which suffered the loss for which such proceeds are being paid.
SECTION 7.1.5. Books and Records. (a) The Borrower will, and will cause
each of their respective Subsidiaries to, keep books and records which
accurately reflect all of their respective business affairs and transactions.
(b) The Borrower will, and will cause each of its Subsidiaries to, permit
the Agent and each Lender or any of their representatives, at reasonable times
and intervals and upon reasonable notice, to visit all of their respective
offices, to discuss their respective financial matters with their respective
officers and independent public accountant and consultants (and the Borrower
hereby authorizes such independent public accountant and consultants to discuss
such financial matters with each Lender or its representatives whether or not
any representative of the Borrower is present) and to examine (and, at the
expense of the Borrower, copy extracts from) any of their respective books or
other business records (including computer records).
(c) The Borrower shall pay any reasonable fees of such independent public
accountant and consultants incurred in connection with the Agent's or any
Lender's exercise of its rights pursuant to this Section. The Agent, in its sole
discretion and at the sole expense of the Borrower, may conduct such audits and
examinations of the books and records of the Borrower and its Subsidiaries as
the Agent reasonably deems necessary or advisable.
SECTION 7.1.6. Environmental Covenant. The Borrower will, and will cause
each of its Subsidiaries to,
(a) use and operate all of their respective facilities and
properties in compliance in all material respects with all Environmental
Laws, keep (and, when applicable, obtain in a timely manner) all necessary
material permits, approvals, certificates, licenses and other
authorizations relating to environmental matters in effect and remain in
compliance in all material respects therewith, and handle all Hazardous
Materials (including the disposition and storing thereof) in compliance in
all material respects with all applicable Environmental Laws;
(b) respond to all Releases upon or from the Realty in accordance
with law and in a manner that assures and will assure that, to the maximum
extent possible, State funds pay for the response to Releases;
(c) promptly notify the Agent and provide copies upon receipt of all
written claims, complaints, notices or inquiries relating to the condition
of its facilities and properties or compliance with Environmental Laws;
(d) comply in all material respects with all governmental
requirements regarding notification and reporting of spills and releases
of Hazardous Materials and provide to the Agent promptly after the receipt
thereof, a copy of all required notices and reports in the event of any
spill or release of Hazardous Material upon or from the Realty;
(e) promptly notify the Agent of any notice of violation, order or
other enforcement action under the Environmental Laws or any request for
information or notification that the Borrower or any of its Subsidiaries
is a potentially responsible party at any site, or request or requirement
for corrective or response action which comes to the attention of the
Borrower or any of its Subsidiaries in connection with any Environmental
Laws, and the Borrower will, and will cause each of its Subsidiaries to,
notify the Agent of any action or proceeding, which to its knowledge is
threatened or pending, of any claim relating to the existence in, on or
under the Realty or any property adjoining the Realty of, or the spilling,
discharge or emission on or from the Realty or any such adjoining property
of, any Hazardous Material; and
(f) provide such information and certifications which the Agent may
reasonably request from time
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<PAGE> 52
to time to evidence compliance with this Section.
SECTION 7.1.7. As to Intellectual Property Collateral. (a) The Borrower
shall not, and shall not permit any of its Subsidiaries to, unless the Borrower
or such Subsidiary shall reasonably and in good faith determine (and notice of
such determination shall have been delivered to the Agent) that any of its
Intellectual Property Collateral is not of material economic value to it, do any
act, or omit to do any act, whereby any of such Intellectual Property Collateral
may lapse or become abandoned or dedicated to the public or unenforceable.
(b) The Borrower shall notify the Agent immediately if it knows, or has
reason to know, that any application or registration relating to any material
item of the Intellectual Property Collateral may become abandoned or dedicated
to the public or placed in the public domain or invalid or unenforceable (except
for any Intellectual Property Collateral that terminates or expires in
accordance with its terms or the term of its original patent), or of any
material adverse determination or development (including the institution of, or
any such determination or development in, any proceeding in the United States
Patent and Trademark Office, the United States Copyright Office or any foreign
counterpart thereof or any court) regarding the ownership of the Borrower or any
of its Subsidiaries of any material item of the Intellectual Property Collateral
or the Borrower's or such Subsidiary's right to register the same or to keep and
maintain and enforce the same.
(c) In no event shall the Borrower or any of its Subsidiaries, or any of
their respective agents, employees, designees or licensees, file an application
for the registration of any Intellectual Property Collateral with the United
States Patent and Trademark Office, the United States Copyright Office or any
similar office or agency in any other country or any political subdivision
thereof, unless it promptly informs the Agent, and upon request of the Agent,
executes and delivers any and all agreements, instruments, documents and papers
as the Agent may reasonably request to evidence the Agent's security interest
for the benefit of the Lenders in such Intellectual Property Collateral and the
goodwill and general intangibles of the Borrower or such Subsidiary relating
thereto or represented thereby.
(d) The Borrower shall take, and shall cause its Subsidiaries to take, all
reasonably necessary steps, including in any proceeding before the United States
Patent and Trademark Office or the United States Copyright Office, to maintain
and pursue any application (and to obtain the relevant registration) filed with
respect to, and to maintain any registration of, any material item of the
Intellectual Property Collateral (other than any common law intellectual
property that cannot be so registered), including the filing of applications for
renewal, affidavits of use, affidavits of incontestability and opposition,
interference and cancellation proceedings and the payment of fees and taxes
(except to the extent that dedication, abandonment or invalidation is permitted
under the foregoing clauses (a), (b) and (c)).
SECTION 7.1.8. Future Subsidiaries. Without limiting the effect of any
provision contained herein (including Section 7.2.5), upon any Person becoming,
after the Effective Date, either a direct or indirect Subsidiary of the
Borrower, or upon the Borrower acquiring additional capital stock or other
ownership interests of any existing Subsidiary having voting rights or
contingent voting rights
(a) such Person shall become a party to (x) a guaranty in
substantially the form of the provisions of the guaranty of the Guarantors
contained in Article IX hereto, and (y) a security agreement in
substantially the form of the Guarantor Security Agreement, if not already
a party to any of the foregoing, with such modifications as the Agent may
reasonably request, in a manner satisfactory to the Agent;
(b) the Borrower and the applicable Subsidiary shall, pursuant to
the Pledge Agreement or another pledge agreement substantially in the form
of the Pledge Agreement, pledge to the Agent for the benefit of the
Lenders all of the outstanding shares of such capital stock or other
ownership interests of such Subsidiary owned directly by it, along with
undated stock powers for such certificates, executed in blank (or, if any
such shares of capital stock or other ownership interests are
uncertificated, confirmation and evidence satisfactory to the Agent that
the security interest in such uncertificated securities has been perfected
by the Agent in accordance with Section 8-313 and Section 8-321 of the
U.C.C. or any similar
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<PAGE> 53
law which may be applicable); and
(c) the Agent shall have received from each such Subsidiary
certified copies of Uniform Commercial Code Requests for Information or
Copies (Form UCC-11), or a similar search report certified by a party
acceptable to the Agent, dated a date reasonably near (but prior to) the
date of any such Person becoming a direct or indirect Subsidiary of the
Borrower, listing all effective financing statements, tax liens and
judgment liens which name such Person as the debtor and which are filed in
the jurisdictions in which filings are to be made pursuant to this
Agreement and the other Loan Documents, and in such other jurisdictions as
the Agent may reasonably request, together with copies of such financing
statements (none of which (other than financing statements (i) filed
pursuant to the terms hereof in favor of the Agent for the benefit of the
Lenders, if such Form UCC-11 or search report, as the case may be, is
current enough to list such financing statements, (ii) being terminated
pursuant to termination statements that are to be delivered on or prior to
the date such Person becomes such Subsidiary or (iii) in respect of
protective filings or Liens permitted under Section 7.2.3) shall cover any
of the Collateral); and
(d) the Agent shall have received from each such Subsidiary executed
copies of U.C.C. financing statements naming each such Subsidiary as the
debtor and the Agent for the benefit of the Lenders as the secured party,
suitable for filing under the U.C.C. of all jurisdictions as may be
necessary or, in the reasonable opinion of the Agent, desirable to perfect
the first priority security interest of the Agent for the benefit of the
Lenders pursuant to the security agreement entered into by such
Subsidiary, together with evidence satisfactory to the Agent of the filing
(or delivery for filing) of appropriate trademark, copyright and patent
security supplements,
together, in each case, with such opinions of legal counsel for the Borrower
relating thereto, which legal opinions shall be in form and substance reasonably
satisfactory to the Agent.
SECTION 7.1.9. Future Real Estate Properties. Within 30 days after the
acquisition by the Borrower of any real property owned in fee, the Borrower
shall take all steps necessary, at its own cost and expense, to (a) grant the
Agent for the benefit of the Lenders a first priority mortgage Lien on such real
property and buildings and improvements thereon and (b) obtain title insurance
coverage on such property in an amount, containing such terms and exceptions and
issued by an insurance company acceptable to the Agent in the Agent's reasonable
discretion (together with such favorable legal opinions with respect thereto as
the Agent may reasonably request).
SECTION 7.1.10. Board Monitoring. The Borrower and the Guarantors hereby
agree to permit the Agent's counsel or any other Person designated by the Agent
from time to time, to attend and monitor at the Borrower's expense all meetings
of the Borrower's or the Guarantors' Board of Directors, and to receive copies
of all board minutes, and other materials or documents provided by the Borrower
and the Guarantors to their shareholders.
SECTION 7.1.11. Separate Corporate Existence. Each of the Borrower and the
Guarantors shall (a) do all things necessary to maintain its corporate existence
separate and apart from each other, including, without limitation, holding
regular meetings of its shareholders and Board of Directors, and maintain
appropriate business books and records (including a current minute book), (b)
not suffer any limitation on the authority of its own directors and officers to
conduct its business and affairs in accordance with their independent business
judgment (except for any limitations imposed by applicable law), or authorize
any Person other than its own officers and directors to act on their own behalf
with respect to matters, and (c) shall (i) maintain capitalization adequate for
the conduct of its business, (ii) account for and manage all of its liabilities
separately from those of any other Person, including, without limitation,
payment by it of all payroll and other administrative expenses and taxes from
its own assets, and (iii) segregate and identify separately all of its assets
from those of any other Person.
SECTION 7.1.12. Further Assurances. The Borrower agrees that from time to
time, at the expense of the Borrower, the Borrower will, and will cause each of
its Subsidiaries to, promptly execute and deliver all further instruments and
documents, and take all further action, that may be necessary or desirable, or
that the Agent may
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<PAGE> 54
request, in order to perfect and protect the assignments, security interests and
Liens granted or purported to be granted under the Loan Documents or to enable
the Agent or any Lender to exercise and enforce its rights and remedies under
this Agreement or any other Loan Document with respect to any Collateral.
Without limiting the generality of the foregoing, the Borrower will, and will
cause each of its Subsidiaries to
(a) execute and file such financing or continuation statements, or
amendments thereto, and such other instruments or notices, as may be
necessary or desirable, or as the Agent may request, in order to perfect
and preserve the assignments, security interests and Liens granted or
purported to be granted under the Loan Documents;
(b) furnish to the Agent, from time to time at the Agent's request,
statements and schedules further identifying and describing the Collateral
and such other reports in connection with the Collateral as the Agent may
reasonably request, all in reasonable detail.
With respect to the foregoing and the grant of the security interest under
the Loan Documents, the Borrower and each of its Subsidiaries hereby authorize
the Agent to file one or more financing or continuation statements, and
amendments thereto, relative to all or any part of the Collateral without the
signature of the Borrower or any such Subsidiary where permitted by law. A
carbon, photographic or other reproduction of this Agreement or any financing
statement covering the Collateral or any part thereof shall be sufficient as a
financing statement where permitted by law.
SECTION 7.1.13. Real Estate Mortgages. The Borrower and the Guarantors
agree that, no later than 60 days after the Effective Date, they shall deliver
to the Agent counterparts of the real estate mortgages, which shall be in form
and substance reasonably satisfactory to the Agent (as amended, supplemented,
restated or otherwise modified from time to time, the "Mortgages"), duly
executed by the Borrower and the Guarantors, together with
(a) evidence of the completion (or satisfactory arrangements for the
completion) of all recordings and filings of the Mortgages (and related
fixture filings) as may be necessary or, in the opinion of the Agent,
desirable to effectively create a valid first priority mortgage Lien
against all of the Realty owned by the Borrower; and
(b) such other approvals, opinions or documents in connection
therewith as the Agent may reasonably request.
SECTION 7.1.14. Title Insurance. The Borrower agrees that, no later than
60 days after the Effective Date, it shall furnish to the Agent a mortgagee's
title insurance policy satisfactory to it and from an independent title insurer
satisfactory to it (the "Title Insurer"), with respect to the Realty owned by
the Borrower and its Subsidiaries, insuring that title to such Realty is
marketable and that the interests created by each Mortgage constitute valid
Liens thereon free and clear of all defects and encumbrances, and such other
matters reasonably approved by the Agent, and such policy shall also include a
revolving credit endorsement, comprehensive endorsement, variable rate
endorsement, access and utilities endorsements, a mechanic's lien endorsement
and such other endorsements as the Agent shall reasonably request. All premiums,
title examination, survey, departmental violations, judgment and U.C.C. search
charges, mortgage recording taxes and fees, and other taxes, charges and fees
shall be paid in full or provided for in a manner satisfactory to the Title
Insurer and the Agent, and the Agent shall have been furnished satisfactory
evidence of such payment or provision.
SECTION 7.1.15. Realty Survey. The Borrower agrees that, no later than 60
days after the Effective Date (and to the extent necessary to obtain the title
insurance required pursuant to Section 7.1.15), it shall furnish to the Agent a
current survey of the Realty owned by the Borrower and its Subsidiaries and the
improvements thereon prepared in accordance with the current Minimum Standard
Detail Requirements for Land Title Surveys as adopted by the American Land Title
Association and the American Congress on Surveying and Mapping, prepared and
certified to the Agent and the Title Insurer by a licensed surveyor or engineer,
which surveyor and survey shall be reasonably satisfactory in all respects to
the Agent and to the Title Insurer and which certification shall include,
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<PAGE> 55
among other things, a statement to the effect that all portions of such Realty
that lie within any flood areas designated on any maps entitled "Flood Insurance
Rate Map", "Flood Hazard Floodway Boundary Map", "Flood Hazard Boundary Map", or
"Flood Boundary and Floodway Map" published by the Federal Emergency Management
Agency or on any Flood Hazard Boundary Map published by the U.S. Department of
Housing and Urban Development have been outlined and labeled on the survey.
SECTION 7.2. Negative Covenants. The Borrower agrees with the Agent, each
Issuer and each Lender that, until all Commitments have terminated and all
Obligations have been paid and performed in full, the Borrower will perform the
obligations set forth in this Section 7.2.
SECTION 7.2.1. Business Activities. The Borrower will not, and will not
permit any of its Subsidiaries to, engage in any business activity, except
Permitted Businesses.
SECTION 7.2.2. Indebtedness. The Borrower will not, and will not permit
any of its Subsidiaries to, create, incur, assume or suffer to exist or
otherwise become or be liable in respect of any Indebtedness, other than the
following:
(a) Indebtedness in respect of the Credit Extensions and other
Obligations;
(b) until the date of the initial Credit Extension, Indebtedness
identified in Item 7.2.2(b) ("Indebtedness to be Paid") of the Disclosure
Schedule;
(c) Indebtedness existing as of the Effective Date which is
identified in Item 7.2.2(c) ("Ongoing Indebtedness") of the Disclosure
Schedule;
(d) Indebtedness (other than Indebtedness described in the
immediately preceding clause (c)) in an aggregate principal amount not to
exceed $5,000,000 at any time outstanding in respect of (i) purchase money
Indebtedness which is incurred by the Borrower or any of its Subsidiaries
to a vendor to finance its acquisition of any assets permitted to be
acquired pursuant to Section 7.2.7 and (ii) Capitalized Lease Liabilities
to the extent permitted by Section 7.2.7;
(e) unsecured Indebtedness incurred in the ordinary course of
business (including open accounts extended by suppliers on normal trade
terms in connection with purchases of goods and services, but excluding
all Indebtedness incurred through the borrowing of money and all
Contingent Liabilities);
(f) Indebtedness in respect of Rate Protection Agreements with a
Lender and entered into solely with respect to the Credit Extensions;
(g) Indebtedness consisting of the Senior Notes (and any refinancing
thereof on terms that are, in all material respects, at least as favorable
to the Borrower as the terms of the Senior Notes), provided that the
aggregate principal amount thereof shall not exceed $80,000,000; and
(h) Indebtedness of the Borrower to any Guarantor, and Indebtedness
of any Guarantor to the Borrower or any other Guarantor;
provided, however, that no Indebtedness pursuant to clause (d) may be incurred
if, after giving effect to the incurrence thereof, any Default shall have
occurred and be continuing.
Notwithstanding anything to the contrary contained in this Agreement, the
Borrower will not make any voluntary or optional prepayment, voluntary
redemption or repurchase (including, but not limited to, any payment of interest
in cash if such cash payment is not required) in respect of any Indebtedness
other than the Loans and the Reimbursement Obligations, except that, so long as
no Default is continuing or would exist after giving effect thereto, the
Borrower may make (i) prepayments, redemptions or repurchases in an aggregate
amount in any Fiscal
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<PAGE> 56
Year not to exceed the amount that the Acquisition Loans were prepaid in such
Fiscal Year pursuant to Section 3.1.2(c)(B), (ii) prepayments, redemptions or
repurchases of Indebtedness permitted pursuant to Sections 7.2.2(c) and 7.2.2(d)
and (iii) the refinancing of the Senior Notes as permitted by Section 7.2.2(g).
SECTION 7.2.3. Liens. The Borrower will not, and will not permit any of
its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any
of its property, revenues or assets, whether now owned or hereafter acquired,
except:
(a) Liens securing payment of the Obligations granted pursuant to
any Loan Document;
(b) Liens granted to secure payment of the Indebtedness of the type
permitted and described in clause (d) of Section 7.2.2 and covering only
those assets acquired with the proceeds of such Indebtedness and Liens
identified in Item 7.2.3 ("Existing Liens") of the Disclosure Schedule;
(c) Liens for taxes, assessments or other governmental charges or
levies not at the time delinquent or thereafter payable without penalty or
being diligently contested in good faith by appropriate proceedings and
for which adequate reserves in accordance with GAAP shall have been set
aside on its books;
(d) Liens of carriers, warehousemen, mechanics, materialmen and
landlords incurred in the ordinary course of business for sums not overdue
or being diligently contested in good faith by appropriate proceedings and
for which adequate reserves in accordance with GAAP shall have been set
aside on its books;
(e) Liens incurred in the ordinary course of business in connection
with worker's compensation, unemployment insurance or other forms of
governmental insurance or benefits (excluding any Liens in favor of a
Pension Plan or PBGC), or to secure performance of tenders, statutory
obligations, leases and contracts (other than for borrowed money) entered
into in the ordinary course of business or to secure obligations on surety
or appeal bonds;
(f) judgment Liens in existence less than 30 days after the entry
thereof or with respect to which execution has been stayed or the payment
of which is covered in full (subject to a customary deductible) by
insurance maintained with responsible insurance companies;
(g) easements, rights-of-way, zoning and similar restrictions and
other similar encumbrances or title defects which, in the aggregate, are
not substantial in amount, and which do not in any case materially detract
from the value of the property subject thereto or interfere with the
ordinary conduct of the business of the Borrower or its Subsidiaries; and
(h) Liens arising out of leases or subleases granted by the Borrower
to others in the ordinary course of business of the Borrower and its
Subsidiaries.
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<PAGE> 57
SECTION 7.2.4. Financial Condition. The Borrower will not permit:
(a) the Interest Coverage Ratio, as of the last day of each Fiscal
Quarter set forth below, to be less than the ratio set forth opposite such
Fiscal Quarter:
<TABLE>
<CAPTION>
Fiscal Quarters ending Minimum Interest
in the following periods Coverage Ratio
------------------------ --------------
<S> <C>
Effective Date through
December 30, 2000 1.50 to 1
December 31, 2000 through
December 30, 2001 1.75 to 1
December 31, 2001 through
December 30, 2002 2.00 to 1
December 31, 2002 through
December 30, 2003 2.15 to 1
December 31, 2003 and
thereafter 2.25 to 1
</TABLE>
(b) the Fixed Charge Coverage Ratio at all times to be less than
1.25 to 1.
(c) the Funded Debt to EBITDA Ratio, as of the last day of each
Fiscal Quarter set forth below, to be greater than the ratio set forth
opposite such Fiscal Quarter:
<TABLE>
<CAPTION>
Fiscal Quarters ending Maximum Funded Debt to
in the following periods EBITDA Ratio
------------------------ ------------
<S> <C>
Effective Date through 5.75 to 1
December 30, 2000
December 31, 2000 through 5.25 to 1
December 30, 2001
December 31, 2001 through 4.75 to 1
December 30, 2002
December 31, 2002 through 4.50 to 1
December 30, 2003
December 31, 2003 and
thereafter 4.00 to 1
</TABLE>
SECTION 7.2.5. Investments. The Borrower will not, and will not permit any
of its Subsidiaries to, make, incur, assume or suffer to exist any Investment in
any other Person, except:
(a) Investments of the Borrower existing on the Effective Date and
identified in Item 7.2.5(a) ("Existing Investments") of the Disclosure
Schedule;
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(b) Investments of the Borrower in any Guarantor and any Investment
of any Guarantor in the Borrower or any other Guarantors;
(c) Cash Equivalent Investments;
(d) without duplication, Investments permitted as Capital
Expenditures pursuant to Section 7.2.7;
(e) Investments made after the Effective Date in Subsidiaries to the
extent such Subsidiary has complied with the requirements of Section
7.1.8;
(f) Investments in accounts and chattel paper (as defined in the
U.C.C.), and notes receivable acquired in the ordinary course of business;
(g) Investments consisting of stock, obligations or securities
received in settlement of debts created in the ordinary course of business
or in satisfaction of judgments;
(h) Investments consisting of Permitted Acquisitions made in
compliance with Section 7.2.10;
(i) loans or advances to employees in an aggregate amount not to
exceed $750,000 at any one time outstanding; and
(j) any other Investments in an aggregate amount at any one time not
to exceed $500,000;
provided, however, that
(i) any Investment which when made complies with the
requirements of the definition of the term "Cash Equivalent
Investment" may continue to be held notwithstanding that such
Investment if made thereafter would not comply with such
requirements; and
(ii) no Investment otherwise permitted by clause (i) shall be
permitted to be made if, immediately before or after giving effect
thereto, any Default shall have occurred and be continuing.
SECTION 7.2.6. Restricted Payments, etc.
(a) On and at all times after the Effective Date, the Borrower
(i) will not declare, pay or make any dividend or distribution (in
cash, property or obligations) on any shares of any class of capital stock
or other ownership interests (now or hereafter outstanding) ("Equity") in
the Borrower or on any warrants, options or other rights with respect to
any Equity (now or hereafter outstanding) in the Borrower (other than
dividends or distributions payable in shares of its common stock or
warrants to purchase shares of its common stock or split-ups or
reclassifications of its common stock into additional or other shares of
its common stock) or apply, or permit any of its Subsidiaries to apply,
any of its funds, property or assets to the purchase, redemption, sinking
fund or other retirement of, or agree or permit any of its Subsidiaries to
purchase or redeem, any Equity (now or hereafter outstanding) in the
Borrower, or warrants, options or other rights with respect to any Equity
(now or hereafter outstanding) in the Borrower; provided, however, that
(A) during the period that the Borrower is disregarded or is
treated as a pass through entity for U.S. federal income tax
purposes and after such period to the extent relating to liability
for such period, the Borrower may make cash distributions to the
Parent for the benefit of the Taxpayers, in respect of each
Estimation Period, in an aggregate amount not to exceed the
Permitted Quarterly Tax Distribution; provided, that the amount of
distributions made pursuant to
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this clause (A) will be excluded in the calculation of the amount of
distributions pursuant to clause (B) below. Within ten days
following the Parent's filing of its required federal income tax
return for the immediately preceding taxable year, the Tax Amounts
CPA shall file with the Agent a written statement indicating in
reasonable detail the calculation of the True-up Amount. In the case
of a True-up Amount due to the Taxpayers, the Permitted Quarterly
Tax Distribution payable in respect of such Estimation Period shall
be increased by such True-up Amount. In the case of a True-up Amount
due to the Company, the Permitted Quarterly Tax Distribution payable
in respect of the immediately following Estimation Period shall be
reduced by such True-up Amount and the excess, if any, of the
True-up Amount over such Permitted Quarterly Tax Distribution shall
be applied to reduce the immediately following Permitted Quarterly
Tax Distributions until such True-up Amount is entirely offset;
(B) if no Acquisition Loans are then outstanding, the Borrower
may:
(x) make additional distributions to its members in an
aggregate amount, together with all other distributions
theretofore made pursuant to this clause (B), not to exceed
50% of Net Income for the period commencing on April 1, 1998
and ending the last day of the Fiscal Quarter immediately
preceding the Fiscal Quarter in which such distribution is
made (treated as a single accounting period), so long as at
the time of such distribution and after giving effect thereto,
no Default is continuing, and
(y) make additional distributions to the Parent for the
purpose of any repurchase, redemption or other acquisition or
retirement for value of any capital stock of the Parent held
by any member of the management of the Parent, the Borrower or
any of its Subsidiaries pursuant to employee benefit plans or
employment option, warrant or other agreements; provided that
(x) the aggregate amount of distributions to be used for such
repurchases shall not exceed $400,000 in any fiscal year prior
to 2001 and $750,000 in any fiscal year thereafter; (y) the
Borrower may not make distributions in respect of this clause
(a)(i)(B)(y) after January 1, 2001 unless the Consolidated
Coverage Ratio as of the date of distribution shall be equal
to or greater than 2.25 to 1 and (z) at the time of such
distribution and after giving effect thereto, no Default is
continuing; and
(C) if any Acquisition Loans are then outstanding, the
Borrower may make additional distributions in an aggregate amount
not to exceed $1,000,000 per annum (which amount shall include any
amounts paid in such year pursuant to the foregoing clause (B)), so
long as (i) at the time of such distribution and after giving effect
thereto, no Default shall be continuing, (ii) after giving effect to
such distribution, the ratio of the aggregate outstanding principal
amount of all Funded Debt of the Borrower and its Subsidiaries on
the date of such distribution (other than Senior Notes) to EBITDA
for the period of four consecutive Fiscal Quarters ending most
recently prior to the date of such distribution does not exceed 2.00
to 1; and
(ii) will not, and will not permit any of its Subsidiaries to, make
any deposit for any of the purposes described in the preceding clause
(a)(i).
(b) The Borrower will not, nor will it permit any of its Subsidiaries to,
do any of the following if any Acquisition Loans are then outstanding:
(i) make any voluntary prepayment or voluntary redemption of
principal of any Indebtedness evidenced by the Senior Notes (except for a
refinancing permitted under Section 7.2.2(g)); or
(ii) defease, purchase or otherwise acquire any Indebtedness
evidenced by the Senior Notes; and
(iii) will not, and will not permit any of its Subsidiaries to, make
any deposit for any of the
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<PAGE> 60
purposes described in the preceding clause (b)(i) or (ii);
provided, that the Borrower may make (x) voluntary prepayments or redemptions of
principal of the Senior Notes in any year in an aggregate amount not to exceed
the aggregate amount of prepayments of Acquisition Loans made by the Borrower in
such year pursuant to Section 3.1.2(c)(B) and (y) mandatory prepayments or
redemptions of the Senior Notes so long as no Loans are then outstanding.
SECTION 7.2.7. Capital Expenditures, etc. The Borrower will not, and will
not permit any of its Subsidiaries to, make or, commit to make, without
duplication, Capital Expenditures in any Fiscal Year, in excess of the sum of
the following
(a) the following amounts for the following Fiscal Years:
<TABLE>
<CAPTION>
Fiscal Year Additional CapEx
----------- ----------------
<S> <C>
1998 $2,100,000
1999 $2,000,000
2000 $1,500,000
2001 $1,500,000
2002 $1,500,000
2003 $1,500,000
2004 $1,505,000
</TABLE>
plus
(b) any amount permitted to be expended in respect of Capital
Expenditures in the immediately preceding Fiscal Year pursuant to clause
(a) above but not so expended.
SECTION 7.2.8. Rental Obligations. The Borrower will not, and will not
permit any of its Subsidiaries to, enter into at any time any arrangement which
does not create a Capitalized Lease Liability and which involves the leasing by
the Borrower or any of its Subsidiaries from any lessor of any real or personal
property (or any interest therein), except arrangements which, together with all
other such arrangements which shall then be in effect, will not require the
payment of an aggregate amount of rentals by the Borrower and such Subsidiaries
in excess of (excluding escalations resulting from a rise in the consumer price
or similar index) $600,000 for any Fiscal Year; provided, however, that any
calculation made for purposes of this Section shall exclude any amounts required
to be expended for maintenance and repairs, insurance, taxes, assessments, and
other similar charges.
SECTION 7.2.9. Take or Pay Contracts. The Borrower will not, and will not
permit any of its Subsidiaries to, enter into or be a party to any arrangement
for the purchase of materials, supplies, other property or services if such
arrangement by its express terms requires that payment be made by the Borrower
or any such Subsidiary regardless of whether such materials, supplies, other
property or services are delivered or furnished to it.
SECTION 7.2.10. Consolidation, Merger, etc. The Borrower will not, and
will not permit any of its Subsidiaries to, liquidate or dissolve, consolidate
or amalgamate with, or merge into or with, any other Person, or purchase or
otherwise acquire all or any substantial part of the assets or stock of any
Person (or of any division thereof); provided, however, that:
(a) any future Subsidiaries of the Borrower may merge with and into
the Borrower with the Borrower being the survivor of such merger or a
wholly-owned Subsidiary of the Borrower may merge with and into another
wholly-owned Subsidiary of the Borrower with the prior written consent of
the Agent, and
(b) the Borrower or any of its Subsidiaries may make Permitted
Acquisitions so long as either (x) such Permitted Acquisition is financed
with Acquisition Loans in accordance with Section 5.3 or (y) such
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Permitted Acquisition is a Specified Acquisition.
SECTION 7.2.11. Asset Dispositions, etc. The Borrower will not, and will
not permit any of its Subsidiaries to, sell, transfer, lease, contribute or
otherwise convey or dispose of, or grant options, warrants or other rights with
respect to, all or any part of its assets (including accounts receivable and
capital stock of Subsidiaries) to any Person, except
(a) if such sale, transfer, lease, contribution or conveyance is of
Inventory in the ordinary course of its business;
(b) if such disposition is a Permitted Disposition (subject to
compliance with Section 3.1.2(c)); or
(c) if such assets are worn or obsolete and the net book value of
such assets, together with the net book value of all other assets sold,
transferred, leased, contributed or conveyed by the Borrower or any of its
Subsidiaries pursuant to this clause (c) during the Fiscal Year in which
such assets are to be sold, transferred, leased, contributed or conveyed,
does not exceed $100,000 in the aggregate.
SECTION 7.2.12. Modification of Certain Agreements. Neither the Borrower
nor the Guarantors will consent to any amendment, supplement or other
modification of any of the terms or provisions contained in, or applicable to,
any Organic Document or the Senior Notes, other than any such amendment,
supplement or other modification which is immaterial and which could not
materially adversely affect the Agent or any Lender.
SECTION 7.2.13. Transactions with Affiliates. The Borrower will not, and
will not permit any of its Subsidiaries to, enter into, or cause, suffer or
permit to exist any arrangement or contract with, any of its other Affiliates
unless such arrangement or contract is on fair and reasonable terms, is an
arrangement or contract of the kind which would be entered into by a prudent
Person in the position of the Borrower or such Subsidiary with a Person which is
not one of its Affiliates.
SECTION 7.2.14. Negative Pledges, Restrictive Agreements, etc. The
Borrower will not, and will not permit any of its Subsidiaries to, enter into
any agreement (excluding this Agreement and any other Loan Document)
prohibiting:
(a) the creation or assumption of any Lien upon its properties,
revenues or assets, whether now owned or hereafter acquired, or the
ability of the Borrower or any other Obligor to amend or otherwise modify
this Agreement or any other Loan Document; or
(b) the ability of any Subsidiary of the Borrower to make any
payments, directly or indirectly, to the Borrower by way of dividends,
advances, repayments of loans or advances, reimbursements of management
and other intercompany charges, expenses and accruals or other returns on
investments, or any other agreement or arrangement which restricts the
ability of any such Subsidiary to make any payment, directly or
indirectly, to the Borrower.
SECTION 7.2.15. Management and Director Fees, Expenses, etc. The Borrower
will not, and will not permit any of its Subsidiaries to pay management,
advisory, consulting or other similar fees, other than, so long as no Default
shall have occurred and be continuing, payments in respect of the Management Fee
in an amount not to exceed $500,000 (the "Base Fee") in any Fiscal Year, plus an
annual additional payment (the "Additional Fee") in respect of any Fiscal Year,
which Additional Fee shall be payable on the later of March 31 of the following
year or the date of the completion of the Borrower's audited financial
statements for such year, and which Additional Fee shall not exceed $300,000
with respect to Fiscal Year 1998 or Fiscal Year 1999, provided, however, that at
the time of payment of the Additional Fee the Interest Coverage Ratio shall be
equal to or greater than (i) 2.0 to 1 for Fiscal Years ended on or prior to
December 31, 1999 and (ii) 2.25 to 1 for Fiscal Years ended after December 31,
1999 after giving effect to such payment, provided, further, that the Base Fee,
the Additional Fee, or any portion thereof, may be deferred until such time as
payment is permitted pursuant to the preceding clause; plus, in any case,
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reasonable out of pocket expenses incurred in connection with services performed
under the Management Agreement. For each fiscal year, beginning in Fiscal Year
2000, the Additional Fee may be increased by up to 15% of the aggregate amount
of the Base Fee and the then current amount of the Additional Fee; provided,
however, that the percentage increase to the aggregate amount of the Management
Fees payable under the Management Agreement in any Fiscal Year compared to the
prior Fiscal Year shall not exceed the percentage increase in EBITDA for such
fiscal year as compared to the prior fiscal year. Notwithstanding the foregoing,
the aggregate amount of all increases to the Additional Fee shall not exceed
$400,000.
SECTION 7.2.16. Environmental Liens. The Borrower will not, and will not
permit any of its Subsidiaries to, allow any Lien imposed pursuant to any law,
rule, regulation or order relating to any Hazardous Material (including the
disposal thereof) to be imposed or to remain on any real property owned or
operated by the Borrower or any of its Subsidiaries, except as contested in good
faith by appropriate proceedings for which adequate reserves have been
established and are being maintained on its books.
SECTION 7.2.17. Fiscal Year End. Neither the Borrower nor any Guarantor
shall not change its fiscal year to end on any date other than on the 31st day
of December.
ARTICLE VIII
EVENTS OF DEFAULT
SECTION 8.1. Listing of Events of Default. Each of the following events or
occurrences described in this Section 8.1 shall constitute an "Event of
Default".
SECTION 8.1.1. Non-Payment of Obligations. The Borrower shall default
(a) in the payment or prepayment when due of any principal of any
Loan;
(b) in the payment when due of any interest on any Loan and such
default shall remain unremedied for a period in excess of two Business
Days;
(c) in the payment when due of any fees and such default shall
remain unremedied for a period in excess of three Business Days; or
(d) in the payment when due of any other Obligation and such default
shall continue unremedied for a period of 10 Business Days.
SECTION 8.1.2. Breach of Warranty. Any representation or warranty other
Obligor made or deemed to be made hereunder or in any other Loan Document
executed by it or any other writing or certificate furnished by or on behalf
other Obligor to the Agent or any Lender pursuant to this Agreement or any such
other Loan Document (including any certificates delivered pursuant to Article V)
is or shall be incorrect when made, deemed made or furnished in any material
respect.
SECTION 8.1.3. Non-Performance of Certain Covenants and Obligations. The
Borrower shall default in the due performance and observance of any of their
obligations under clause (e) of Section 7.1.1, Section 7.1.7, Section 7.1.8 or
Section 7.2 or any other Obligor shall default in the performance of any of its
obligations in respect of such Sections as such Sections are incorporated by
reference or otherwise in any Loan Document to which such Obligor is a party
(provided that any default under Section 7.2.4 shall be deemed to be cured if
(x) subsequent to the date of such default (that is, the date as of which the
applicable financial test is determined) Loans have been prepaid (as
contemplated by clause (a) of the definition of "Funded Debt to EBITDA Ratio")
and/or EBITDA has been increased (as contemplated by clause (e) of the
definition of EBITDA), in each case in an amount such that, if such prepayment
or increase in EBITDA had occurred immediately prior to the date of such default
such default would not have occurred and (y) the Agent shall have received a
certificate from the chief financial officer of the Borrower
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demonstrating the foregoing to the satisfaction of the Agent).
SECTION 8.1.4. Non-Performance of Other Covenants and Obligations. Any
Obligor shall default in the due performance and observance of (a) any agreement
contained in Section 7.1.1 not covered in Section 8.1.3 and such default shall
continue unremedied for a period of 10 days, or (b) any other agreement
contained herein or in any other Loan Document (other than items covered by
Section 8.1.3) executed by it, and such default shall continue unremedied for a
period of 30 days after any officer of such Obligor has actual knowledge thereof
or notice thereof shall have been given to any such Obligor by the Agent or any
Lender.
SECTION 8.1.5. Default on Other Indebtedness. A default shall occur in the
payment when due, whether by acceleration or otherwise, of any Indebtedness
(other than Indebtedness described in Section 8.1.1) of its Subsidiaries or any
other Obligor having a principal amount, individually or in the aggregate, in
excess of $2,000,000; or a default shall occur in the performance or observance
of any obligation or condition with respect to such Indebtedness if the effect
of such default in performance or observance is to accelerate the maturity of
any such Indebtedness or such default in performance or observance shall
continue unremedied for any applicable period of time sufficient to permit the
holder or holders of such Indebtedness, or any trustee or agent for such
holders, to cause such Indebtedness to become due and payable prior to its
expressed maturity.
SECTION 8.1.6. Judgments. Any judgment or order for the payment of money
in excess of $2,000,000 shall be rendered against the Borrower or any of its
Subsidiaries or any other Obligor and either
(a) enforcement proceedings shall have been commenced by any
creditor upon such judgment or order; or
(b) there shall be any period of 30 consecutive days during which a
stay of enforcement of such judgment or order, by reason of a pending
appeal, bond or otherwise, shall not be in effect.
SECTION 8.1.7. Pension Plans. Any of the following events shall occur with
respect to any Pension Plan
(a) the institution of any steps by the Borrower or any member of
its Controlled Group, any other Obligor, or any other Person to terminate
a Pension Plan if, as a result of such termination, the Borrower or any
such member could be required to make a contribution to such Pension Plan,
or could reasonably expect to incur a liability or obligation to such
Pension Plan, in excess of $250,000; or
(b) a contribution failure occurs with respect to any Pension Plan
sufficient to give rise to a Lien on property of its Controlled Group
under Section 302(f) of ERISA.
SECTION 8.1.8. Change in Control. Any Change in Control shall occur.
SECTION 8.1.9. Bankruptcy, Insolvency, etc. The Borrower or any of its
Subsidiaries or any other Obligor shall
(a) generally fail to pay debts as they become due, or admit in
writing its inability to pay debts as they become due;
(b) apply for, consent to, or acquiesce in, the appointment of a
trustee, receiver, sequestrator, or other custodian for the Borrower or
any of its Subsidiaries or any other Obligor or any property of any
thereof, or make a general assignment for the benefit of creditors;
(c) in the absence of such application, consent or acquiescence,
permit or suffer to exist the involuntary appointment of a trustee,
receiver, sequestrator or other custodian for the Borrower or any of its
Subsidiaries or any other Obligor or for a substantial part of the
property of any thereof, and such trustee, receiver, sequestrator or other
custodian shall not be discharged within 60 days;
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(d) permit or suffer to exist the involuntary commencement of, or
voluntarily commence, any bankruptcy, reorganization, debt arrangement, or
other case or proceeding under any bankruptcy or insolvency laws, or
permit or suffer to exist the involuntary commencement of, or voluntarily
commence, any dissolution, winding up or liquidation proceeding, in each
case, by or against the Borrower or any of its Subsidiaries or any other
Obligor, provided that, if not commenced by the Borrower or such
Subsidiary or any other Obligor, such proceeding shall be consented to or
acquiesced in by the Borrower or such Subsidiary or any other Obligor, or
shall result in the entry of an order for relief or shall remain for 60
days undismissed; or
(e) take any corporate or partnership action authorizing, or in
furtherance of, any of the foregoing.
SECTION 8.1.10. Impairment of Security, etc. Without the consent of the
Lenders, any Loan Document, or any Lien granted thereunder, shall (except in
accordance with its terms), in whole or in part, terminate, cease to be
effective or cease to be the legally valid, binding and enforceable obligation
of the Borrower or any other Obligor party thereto; the Borrower, any other
Obligor or any other party shall, directly or indirectly, contest in any manner
such effectiveness, validity, binding nature or enforceability; or any Lien
securing any Obligation shall, in whole or in part, cease to be a perfected
first priority Lien.
SECTION 8.2. Action if Bankruptcy. If any Event of Default described in
clauses (b) through (d) of Section 8.1.9 shall occur, the Commitments (if not
theretofore terminated) shall automatically terminate and the outstanding
principal amount of all outstanding Loans and all other Obligations shall
automatically be and become immediately due and payable, without presentment,
notice or demand.
SECTION 8.3. Action if Other Event of Default. If any Event of Default
(other than any Event of Default described in clauses (b) through (d) of Section
8.1.9) shall occur for any reason, whether voluntary or involuntary, and be
continuing, the Agent, upon the direction of the Required Lenders, shall by
notice to the Borrower declare all or any portion of the outstanding principal
amount of the Loans and other Obligations to be due and payable and/or the
Commitments (if not theretofore terminated) to be terminated, whereupon the full
unpaid amount of such Loans and other Obligations which shall be so declared due
and payable shall be and become immediately due and payable, without further
notice, demand or presentment, and/or, as the case may be, the Commitments shall
terminate.
ARTICLE IX
GUARANTY
SECTION 9.1. The Guaranty. Each of the Guarantors hereby jointly and
severally, absolutely, unconditionally and irrevocably guarantees the full and
prompt payment when due, whether at stated maturity, by acceleration or
otherwise (including all amounts which would have become due but for the
operation of the automatic stay under Section 362(a) of the Federal Bankruptcy
Code, 11 U.S.C. ss.362(a), and the operation of Sections 502(b) and 506(b) of
the Federal Bankruptcy Code, 11 U.S.C. ss. 502(b) and ss. 506(b)), of the
following (collectively, the "Guaranteed Obligations"),
(a) all Obligations of each other Guarantor and each other Obligor
to the Agent and each of the Lenders now or hereafter existing under this
Agreement and each other Loan Document, whether for principal, interest,
fees, expenses or otherwise; and
(b) all other Obligations to the Agent and each of the Lenders now
or hereafter existing under any of the Loan Documents, whether for
principal, interest, fees, expenses or otherwise.
The obligations of each Guarantor under this Article IX constitute a guaranty of
payment when due and not of collection, and each Guarantor specifically agrees
that it shall not be necessary or required that the Agent, any Lender or any
holder of any Note exercise any right, assert any claim or demand or enforce any
remedy whatsoever against the Borrower or any other Obligor (or any other
Person) before or as a condition to the obligations of the
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Guarantors under this Article IX.
SECTION 9.2. Guaranty Unconditional. The obligations of each Guarantor
under this Article IX shall be construed as a continuing, absolute,
unconditional and irrevocable guaranty of payment and shall remain in full force
and effect until all the Guaranteed Obligations have been indefeasibly paid in
full in cash and all Commitments shall have permanently terminated. Each
Guarantor guarantees that the Guaranteed Obligations will be paid strictly in
accordance with the terms of the agreement, instrument or document under which
they arise, regardless of any law, regulation or order now or hereafter in
effect in any jurisdiction affecting any of such terms or the rights of the
Agent or any of the Lenders with respect thereto. The liability of the
Guarantors hereunder shall be absolute, irrevocable and unconditional
irrespective of:
(a) any lack of validity, legality or enforceability of this
Agreement, the Notes, any Rate Protection Agreement with a Lender or any
other Loan Document or any other agreement or instrument relating to any
thereof;
(b) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Guaranteed Obligations, or any
compromise, renewal, extension, acceleration or release with respect
thereto, or any other amendment or waiver of or any consent to departure
from this Agreement, the Notes, any Rate Protection Agreement with a
Lender or any other Loan Document;
(c) any addition, exchange, release, impairment or non-perfection of
any collateral, or any release or amendment or waiver of or consent to
departure from any other guaranty, for all or any of the Guaranteed
Obligations;
(d) the failure of the Agent or any Lender
(i) to assert any claim or demand or to enforce any right or
remedy against the Borrower, any other Obligor or any other Person
(including any other guarantor) under the provisions of this
Agreement, any Note, any Rate Protection Agreement with a Lender or
any other Loan Document or otherwise, or
(ii) to exercise any right or remedy against any other
guarantor of, or collateral securing, any of the Guaranteed
Obligations;
(e) any amendment to, rescission, waiver, or other modification of,
or any consent to departure from, any of the terms of this Agreement, any
Note, any Rate Protection Agreement with a Lender or any other Loan
Document;
(f) any defense, set-off or counter-claim which may at any time be
available to or be asserted by the Borrower or any other Obligor against
the Agent or any Lender;
(g) any reduction, limitation, impairment or termination of the
Guaranteed Obligations for any reason, including any claim of waiver,
release, surrender, alteration or compromise, and shall not be subject to
(and each Guarantor hereby waives any right to or claim of) any defense or
setoff, counterclaim, recoupment or termination whatsoever by reason of
the invalidity, illegality, nongenuineness, irregularity, compromise or
unenforceability of, or any other event or occurrence affecting, the
Guaranteed Obligations or otherwise; or
(h) any other circumstance which might otherwise constitute a
defense available to, or a legal or equitable discharge of, the Borrower,
any other Obligor or any surety or guarantor.
SECTION 9.3. Reinstatement in Certain Circumstances. If at any time any
payment in whole or in part of any of the Guaranteed Obligations is rescinded or
must be otherwise restored or returned upon the insolvency,
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bankruptcy or reorganization of the Borrower, any other Obligor or otherwise,
each Guarantor's obligations under this Article IX with respect to such payment
shall be reinstated as though such payment had been due but not made at such
time.
SECTION 9.4. Waiver by the Guarantors. Each Guarantor irrevocably waives
promptness, diligence, notice of acceptance hereof, presentment, demand, protest
and any other notice with respect to any of the Guaranteed Obligations, as well
as any requirement that at any time any action be taken by any Person against
the Borrower or any other Person.
SECTION 9.5. Postponement of Subrogation, etc. The Guarantors will not
exercise any rights which they may acquire by way of rights of subrogation by
any payment made hereunder or otherwise, until the prior payment, in full and in
cash, of all Guaranteed Obligations. Any amount paid to the Guarantors on
account of any such subrogation rights prior to the payment in full of all
Guaranteed Obligations shall be held in trust for the benefit of the Lenders and
each holder of a Note and shall immediately be paid to the Agent and credited
and applied against the Guaranteed Obligations, whether matured or unmatured, in
accordance with the terms of this Agreement; provided, however, that if
(a) the Guarantors have made payment to the Lenders and each holder
of a Note of all or any part of the Guaranteed Obligations, and
(b) all Guaranteed Obligations have been paid in full and all
Commitments have been permanently terminated,
each Lender and each holder of a Note agrees that, at each Guarantor's request,
the Agent, on behalf of the Lenders and the holders of the Notes, will execute
and deliver to each Guarantor appropriate documents (without recourse and
without representation or warranty) necessary to evidence the transfer by
subrogation to each Guarantor of an interest in the Guaranteed Obligations
resulting from such payment by each Guarantor. In furtherance of the foregoing,
for so long as any Guaranteed Obligations or Commitments remain outstanding,
each Guarantor shall refrain from taking any action or commencing any proceeding
against the Borrower (or its successors or assigns, whether in connection with a
bankruptcy proceeding or otherwise) to recover any amounts in respect of
payments to any Lender or any holder of a Note.
SECTION 9.6. Stay of Acceleration. If acceleration of the time for payment
of any amount payable by the Borrower under this Agreement or any Note is stayed
upon the occurrence of any event referred to in Section 8.1.9 with respect to
the Borrower, all such amounts otherwise subject to acceleration under the terms
of this Agreement shall nonetheless be payable by the Guarantors hereunder
forthwith.
SECTION 9.7. Limitation on Liability. Any term or provision of this
Agreement or any other Loan Document to the contrary notwithstanding, the
obligations of each Guarantor in respect of the Guaranteed Obligations are
limited to the maximum amount as will result in the obligation of such Guarantor
in respect of the Guaranteed Obligations not constituting a fraudulent
conveyance or fraudulent transfer under federal or state law.
ARTICLE X
THE AGENT
SECTION 10.1. Actions. Each Lender hereby appoints SG as Agent under and
for purposes of this Agreement, the Notes and each other Loan Document. Each
Lender authorizes the Agent to act on behalf of such Lender under this
Agreement, the Notes and each other Loan Document and, in the absence of other
written instructions from the Required Lenders received from time to time by the
Agent (with respect to which the Agent agrees that it will comply, except as
otherwise provided in this Section or as otherwise advised by counsel), to
exercise such powers hereunder and thereunder as are specifically delegated to
or required of the Agent by the terms hereof and thereof, together with such
powers as may be reasonably incidental thereto. Without limiting the effect
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of the preceding sentences of this Section 10.1, each Lender authorizes the
Agent to act as collateral agent and to hold and accept title to all liens and
security interests granted to the Agent by the Borrower or any other Obligor for
the ratable benefit of the Agent and the Lenders, in order to exercise remedies
on behalf of the Lenders in connection with the enforcement of such liens and
security interests in accordance with the provisions of the Loan Documents. Each
Lender hereby indemnifies (which indemnity shall survive any termination of this
Agreement) the Agent, pro rata according to such Lender's Percentage, from and
against any and all liabilities, obligations, losses, damages, claims, costs or
expenses of any kind or nature whatsoever which may at any time be imposed on,
incurred by, or asserted against, the Agent in any way relating to or arising
out of this Agreement, the Notes and any other Loan Document, including
reasonable attorneys' fees, and as to which the Agent is not reimbursed by the
Borrower or any other Obligor; provided, however, that no Lender shall be liable
for the payment of any portion of such liabilities, obligations, losses,
damages, claims, costs or expenses which are determined by a court of competent
jurisdiction in a final proceeding to have resulted solely from the gross
negligence or wilful misconduct of the Agent. The Agent shall not be required to
take any action hereunder, under the Notes or under any other Loan Document, or
to prosecute or defend any suit in respect of this Agreement, the Notes or any
other Loan Document, unless it is indemnified hereunder to its satisfaction. If
any indemnity in favor of the Agent shall be or become, in the determination of
the Agent, inadequate, the Agent may call for additional indemnification from
the Lenders and cease to do the acts indemnified against hereunder until such
additional indemnity is given.
SECTION 10.2. Funding Reliance, etc. Unless the Agent shall have been
notified by telephone, confirmed in writing, by any Lender by 5:00 p.m. (New
York City time), on the day prior to a Borrowing that such Lender will not make
available the amount which would constitute its Percentage of such Borrowing on
the date specified therefor, the Agent may assume that such Lender has made such
amount available to the Agent and, in reliance upon such assumption, make
available to the Borrower a corresponding amount. If and to the extent that such
Lender shall not have made such amount available to the Agent, such Lender and
the Borrower severally agree to repay the Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the date
the Agent made such amount available to the Borrower to the date such amount is
repaid to the Agent at the interest rate applicable at the time to Loans
comprising such Borrowing.
SECTION 10.3. Exculpation. Neither the Agent nor any of its directors,
officers, employees or agents shall be liable to any Lender for any action taken
or omitted to be taken by it under this Agreement or any other Loan Document, or
in connection herewith or therewith, except for its own wilful misconduct or
gross negligence, nor responsible for any recitals or warranties herein or
therein, nor for the effectiveness, enforceability, validity or due execution of
this Agreement or any other Loan Document, nor for the creation, perfection or
priority of any Liens purported to be created by any of the Loan Documents, or
the validity, genuineness, enforceability, existence, value or sufficiency of
any collateral security, nor to make any inquiry respecting the performance by
the Borrower of its obligations hereunder or under any other Loan Document. Any
such inquiry which may be made by the Agent shall not obligate it to make any
further inquiry or to take any action. The Agent shall be entitled to rely upon
advice of counsel concerning legal matters and upon any notice, consent,
certificate, statement or writing which the Agent believes to be genuine and to
have been presented by a proper Person.
SECTION 10.4. Successor. The Agent may resign as such at any time upon at
least 30 days' prior notice to the Borrower and all Lenders. If no successor
Agent shall have been appointed by the Required Lenders, and shall have accepted
such appointment, within 30 days after the retiring Agent's giving notice of
resignation, then the retiring Agent may, on behalf of the Lenders, appoint a
successor Agent, which shall be one of the Lenders or a commercial banking
institution organized under the laws of the U.S. (or any State thereof) or a
U.S. branch or agency of a commercial banking institution, and having a combined
capital and surplus of at least $500,000,000. Upon the acceptance of any
appointment as Agent hereunder by a successor Agent, such successor Agent shall
be entitled to receive from the retiring Agent such documents of transfer and
assignment as such successor Agent may reasonably request, and shall thereupon
succeed to and become vested with all rights, powers, privileges and duties of
the retiring Agent, and the retiring Agent shall be discharged from its duties
and obligations under this Agreement. After any retiring Agent's resignation
hereunder as the Agent, the provisions of
(a) this Article X shall inure to its benefit as to any actions
taken or omitted to be taken by it while
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it was the Agent under this Agreement; and
(b) Section 11.3 and Section 11.4 shall continue to inure to its
benefit.
SECTION 10.5. Credit Extensions by SG. SG shall have the same rights and
powers with respect to (x) the Loans made by it or any of its Affiliates, and
(y) the Notes held by it or any of its Affiliates as any other Lender and may
exercise the same as if it were not the Agent. SG and each of its Affiliates may
accept deposits from, lend money to, and generally engage in any kind of
business with, the Borrower or any Subsidiary or Affiliate of the Borrower as if
it were not the Agent hereunder.
SECTION 10.6. Credit Decisions. Each Lender acknowledges that it has,
independently of the Agent and each other Lender, and based on such Lender's
review of the financial information of the Borrower, this Agreement, the other
Loan Documents (the terms and provisions of which being satisfactory to such
Lender) and such other documents, information and investigations as such Lender
has deemed appropriate, made its own credit decision to extend its Commitments.
Each Lender also acknowledges that it will, independently of the Agent and each
other Lender, and based on such other documents, information and investigations
as it shall deem appropriate at any time, continue to make its own credit
decisions as to exercising or not exercising from time to time any rights and
privileges available to it under this Agreement or any other Loan Document.
SECTION 10.7. Loan Documents, etc. Each Lender hereby authorizes the Agent
to enter into the applicable Loan Documents and to take all action contemplated
thereby. Each Lender agrees that no Lender shall have any right individually to
seek to realize upon the security granted by any Loan Document, it being
understood and agreed that such rights and remedies may be exercised solely by
the Agent for the benefit of the Lenders and the Agent upon the terms of the
Loan Documents. Subject to the provisions of the Security Agreements and the
Pledge Agreement, the Agent shall determine (after consultation with the
Required Lenders) the manner in which proceeds of Collateral will be applied to
the Obligations (after the payment of fees and expenses as set forth in the Loan
Documents).
SECTION 10.8. Copies, etc. The Agent shall give prompt notice to each
Lender of each notice or request given to the Agent by the Borrower and required
to be delivered to the Lenders pursuant to the terms of this Agreement (unless
concurrently delivered to the Lenders by the Borrower). The Agent will
distribute to each Lender each document or instrument received for its account
and copies of all other communications received by the Agent from the Borrower
for distribution to the Lenders by the Agent in accordance with the terms of
this Agreement.
ARTICLE XI
MISCELLANEOUS PROVISIONS
SECTION 11.1. Waivers, Amendments, etc. The provisions of this Agreement
and of each other Loan Document may from time to time be amended, modified or
waived, if such amendment, modification or waiver is in writing and consented to
by the Borrower and the Agent (acting only at the direction or with the
authority of the Required Lenders); provided, however, that no such amendment,
modification or waiver which would:
(a) modify any requirement hereunder that any particular action be
taken by all the Lenders or by the Required Lenders shall be effective
unless consented to by each Lender;
(b) modify this Section 11.1, change the definition of "Required
Lenders" or "Supermajority Lenders", increase any Commitment Amount or the
Percentage of any Lender, reduce any fees described in Article III, change
the time for payment of fees to the Lenders described in Article III,
release or subordinate all or any substantial part of the Collateral,
except as otherwise specifically provided in any Loan Document, or release
any Obligor from its obligations hereunder, shall be made without the
consent of each Lender affected thereby;
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(c) extend the due date for, or reduce the amount of, any scheduled
repayment under clauses (a), (b), (c) or (d) of Section 3.1.2 of principal
of, or interest on, any Loan or Reimbursement Obligation (or reduce the
principal amount of or rate of interest on any Loan or Reimbursement
Obligation) or extend any Revolving Loan Commitment Termination Date or
Acquisition Loan Commitment Termination Date without the consent of the
holder of that Note evidencing such Loan;
(d) increase the Stated Amount of any Letter of Credit unless
consented to by the Issuer thereof; or
(e) affect adversely the interests, rights or obligations of the
Agent in its capacity as Agent or the Issuer in its capacity as Issuer,
without the consent of the Agent or the Issuer, as the case may be; and
further provided, that no such amendment, modification or waiver which would
modify any of the provisions of Section 5.3 shall be effective unless consented
to by Supermajority Lenders.
No failure or delay on the part of the Agent, any Lender or the holder of
any Note in exercising any power or right under this Agreement or any other Loan
Document shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power or right preclude any other or further exercise
thereof or the exercise of any other power or right. No notice to or demand on
the Borrower in any case shall entitle it to any notice or demand in similar or
other circumstances. No waiver or approval by the Agent, any Lender or the
holder of any Note under this Agreement or any other Loan Document shall, except
as may be otherwise stated in such waiver or approval, be applicable to
subsequent transactions. No waiver or approval hereunder shall require any
similar or dissimilar waiver or approval thereafter to be granted hereunder. The
remedies provided in this Agreement are cumulative and not exclusive of remedies
provided by law.
SECTION 11.2. Notices. All notices and other communications provided to
any party hereto under this Agreement or any other Loan Document shall be in
writing and addressed, delivered or transmitted to such party at its address or
telecopier number set forth on Schedule III hereto (or set forth in a Lender
Assignment Agreement) or at such other address or telecopier number as may be
designated by such party in a notice to the other parties given in accordance
with this Section. Any notice, if mailed and properly addressed and sent return
receipt requested with postage prepaid, shall be deemed given three Business
Days after posting; any notice, if sent by prepaid overnight express shall be
deemed delivered on the next Business Day; any notice, if transmitted by
telecopier, shall be deemed given when sent, with confirmation of receipt; and
any notice, if transmitted by hand, shall be deemed received when delivered.
SECTION 11.3. Payment of Costs and Expenses. The Borrower agrees to pay on
demand all expenses of the Agent (including the reasonable fees and
out-of-pocket expenses of counsel to the Agent, including any legal counsel and
consultants, if any, who may be retained in connection with the transactions
contemplated hereby by the Agent and including those fees and/or other
consideration described in the Fee Letter) in connection with
(a) the negotiation, preparation, execution and delivery of this
Agreement and of each other Loan Document, including schedules and
exhibits, and any amendments, waivers, consents, supplements or other
modifications to this Agreement or any other Loan Document as may from
time to time hereafter be required, and the Lenders' and the Agent's
consideration of their rights and remedies hereunder or in connection
herewith from time to time whether or not the transactions contemplated
hereby or thereby are consummated;
(b) the filing, recording, refiling or rerecording of the Pledge
Agreement, the Mortgages, the Security Agreements (and any supplements
thereto) and any other security instruments executed in connection with
the transactions contemplated hereby and/or U.C.C. financing statements
relating thereto and all amendments, supplements and modifications to any
thereof and any and all other documents or instruments of further
assurance required to be filed or recorded or refiled or rerecorded by the
terms hereof or of the Pledge Agreement, the Mortgages or the Security
Agreements or such other documents; and
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(c) the preparation and review of the form of any document or
instrument relevant to this Agreement or any other Loan Document.
The Borrower further agrees to pay, and to save the Agent and the Lenders
harmless from all liability for, any stamp or other taxes which may be payable
in connection with the execution or delivery of this Agreement, the Borrowings
and other Credit Extensions hereunder, or the issuance of the Notes or any other
Loan Documents. The Borrower also agrees to reimburse the Agent and each Lender
upon demand for all out-of-pocket expenses (including attorneys' fees and legal
expenses, including allocated fees and expenses of internal counsel) incurred by
the Agent or such Lender in connection with (x) the negotiation of any
restructuring or "work-out", whether or not consummated, of any Obligations and
(y) the enforcement of any Obligations (including the Obligations of the
Guarantors under Article IX). The Borrower also agrees to reimburse the Agent on
demand for all administration, audit and monitoring expenses incurred in
connection with the Borrowing Base Amount and determinations in respect thereof.
The Borrower further agrees to reimburse the Agent on demand for all other
administration, audit and monitoring expenses incurred after the occurrence of
an Event of Default in connection with this Agreement and the other Loan
Documents.
SECTION 11.4. Indemnification. In consideration of the execution and
delivery of this Agreement by each Lender and the extension of the Commitments,
the Borrower hereby indemnifies, exonerates and holds free and harmless the
Agent and each Lender and each of their respective Affiliates and each of their
respective officers, directors, employees and agents (collectively, the
"Indemnified Parties") from and against any and all actions, causes of action,
suits, losses, costs, liabilities and damages, and expenses incurred in
connection therewith (irrespective of whether any such Indemnified Party is a
party to the action for which indemnification hereunder is sought), including
reasonable attorneys' fees and disbursements (including allocated fees and
expenses of internal counsel) (collectively, the "Indemnified Liabilities"),
incurred by the Indemnified Parties or any of them as a result of, or arising
out of, or relating to
(a) any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of any Loan or with any Letter
of Credit;
(b) the entering into and performance of this Agreement and any
other Loan Document by any of the Indemnified Parties (including any
action brought by or on behalf of the Borrower as the result of any
determination by the Required Lenders pursuant to Article V not to fund
any Borrowing);
(c) any investigation, litigation or proceeding related to any
acquisition or proposed acquisition by the Borrower or any of its
Subsidiaries of all or any portion of the stock, partnership interests or
assets of any Person, whether or not the Agent or such Lender is party
thereto;
(d) any investigation, litigation or proceeding related to any
environmental cleanup, audit, compliance or other matter relating to the
protection of the environment or the Release by the Borrower or any of its
Subsidiaries of any Hazardous Material;
(e) the presence on or under, or the escape, seepage, leakage,
spillage, discharge, emission, discharging or releases from, any real
property owned or operated by the Borrower or any of its Subsidiaries of
any Hazardous Material (including, without limitation, any losses,
liabilities, damages, injuries, costs, expenses or claims asserted or
arising under any Environmental Law, the costs of defending and/or
counterclaiming or claiming over against third parties in respect of any
action or matter, and any cost, liability or damage arising out of a
settlement of any action entered into by the Agent), regardless of whether
caused by, or within the control of, the Borrower or any such Subsidiary;
(f) Environmental Laws relating to the Borrower or any of its
Subsidiaries, including the assertion of any lien thereunder;
(g) any order, consent, decree, settlement, judgment or verdict
arising from the deposit, storage,
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disposal, burial, dumping, injection, spilling, leaking, or other
placement or release in, on or from the Realty of any Hazardous Material
(including without limitation any order under the Environmental Laws to
clean up or decommission), whether or not such deposit, storage, disposal,
burial, dumping, injecting, spillage, leaking or other placement or
release in, on or from the Realty of any Hazardous Material:
(i) results by, through or under the Borrower or any of its
Subsidiaries;
(ii) occurred with the knowledge and consent of the Borrower
or any of its Subsidiaries; or
(iii) occurred before or after the Effective Date, whether
with or without the knowledge of Borrower or any of its
Subsidiaries; or
(h) the failure to maintain insurance coverage required by Section
7.1.4;
except for any such Indemnified Liabilities arising for the account of a
particular Indemnified Party by reason of the relevant Indemnified Party's gross
negligence or wilful misconduct. If and to the extent that the foregoing
undertaking may be unenforceable for any reason, the Borrower hereby agrees to
make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under applicable law.
SECTION 11.5. Survival. The obligations of the Borrower under Sections
4.3, 4.4, 4.5, 4.6, 11.3 and 11.4, and the obligations of the Lenders under
Section 10.1, shall in each case survive any termination of this Agreement, the
payment in full of all the Obligations and the termination of all the
Commitments. The representations and warranties made by each Obligor in this
Agreement and in each other Loan Document shall survive the execution and
delivery of this Agreement and each such other Loan Document.
SECTION 11.6. Severability. Any provision of this Agreement or any other
Loan Document which is prohibited or unenforceable in any jurisdiction shall, as
to such provision and such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions of
this Agreement or such other Loan Document or affecting the validity or
enforceability of such provision in any other jurisdiction.
SECTION 11.7. Headings. The various headings of this Agreement and of each
other Loan Document are inserted for convenience only and shall not affect the
meaning or interpretation of this Agreement or such other Loan Document or any
provisions hereof or thereof.
SECTION 11.8. Execution in Counterparts, Effectiveness, etc. This
Agreement may be executed by the parties hereto in several counterparts, each of
which shall be an original and all of which shall constitute together but one
and the same agreement. This Agreement shall become effective when counterparts
hereof executed on behalf of the Borrower and each initial Lender (or notice
thereof satisfactory to the Agent) shall have been received by the Agent and
notice thereof shall have been given by the Agent to the Borrower and each
Lender.
SECTION 11.9. Governing Law; Entire Agreement. THIS AGREEMENT AND THE
NOTES SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS
OF THE STATE OF NEW YORK. This Agreement, the Notes and the other Loan Documents
constitute the entire understanding among the parties hereto with respect to the
subject matter hereof and supersede any prior agreements, written or oral, with
respect thereto.
SECTION 11.10. Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that:
(a) neither the Borrower nor any Guarantor may assign or transfer
its rights or obligations hereunder without the prior written consent of
the Agent and all Lenders; and
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(b) the rights of sale, assignment and transfer of the Lenders are
subject to Section 11.11.
SECTION 11.11. Sale and Transfer of Loans and Notes; Participations in
Loans and Notes. Each Lender may assign, or sell participations in, its Loans
and Commitments to one or more other Persons in accordance with this Section
11.11.
SECTION 11.11.1. Assignments. (a) Any Lender, upon notice to the Borrower
and with the written consent of the Borrower and the Agent (which consents shall
not be unreasonably withheld or delayed), may at any time assign and delegate
all or any fraction of such Lender's Loans, Commitments and Letter of Credit
participations to one or more commercial banks or other financial institutions
(each Person to whom such assignment and delegation is to be made being
hereinafter referred to as an "Assignee Lender"), all or any fraction of such
Lender's total Loans, Commitments and Letter of Credit participations in a
minimum aggregate amount of $2,500,000 (or, if less, the total of such Lender's
Commitment Amount); provided, however, that the Borrower, each other Obligor and
the Agent shall be entitled to continue to deal solely and directly with such
Lender in connection with the interests so assigned and delegated to an Assignee
Lender until
(i) written notice of such assignment and delegation, together with
payment instructions, addresses and related information with respect to
such Assignee Lender, shall have been given to the Borrower and the Agent
by such Lender and such Assignee Lender;
(ii) such Assignee Lender shall have executed and delivered to the
Borrower and the Agent a Lender Assignment Agreement, accepted by the
Agent; and
(iii) the processing fees described below shall have been paid.
From and after the date that the Agent accepts such Lender Assignment Agreement,
(x) the Assignee Lender thereunder shall be deemed automatically to have become
a party hereto and to the extent that rights and obligations hereunder have been
assigned and delegated to such Assignee Lender in connection with such Lender
Assignment Agreement, shall have the rights and obligations of a Lender
hereunder and under the other Loan Documents, and (y) the assignor Lender, to
the extent that rights and obligations hereunder have been assigned and
delegated by it in connection with such Lender Assignment Agreement, shall be
released from its obligations hereunder and under the other Loan Documents.
Within five Business Days after its receipt of notice that the Agent has
received an executed Lender Assignment Agreement, the Borrower shall execute and
deliver to the Agent (for delivery to the relevant Assignee Lender) new Notes
evidencing such Assignee Lender's assigned Loans and Commitments and, if the
assignor Lender has retained Loans and Commitments hereunder, replacement Notes
in the principal amount of the Loans and Commitments retained by the assignor
Lender hereunder (such Notes to be in exchange for, but not in payment of, those
Notes then held by such assignor Lender). Each such Note shall be dated the date
of the predecessor Notes. The assignor Lender shall mark the predecessor Notes
"exchanged" and deliver them to the Borrower. Accrued interest on that part of
the predecessor Notes evidenced by the new Notes, and accrued fees, shall be
paid as provided in the Lender Assignment Agreement. Accrued interest on that
part of the predecessor Notes evidenced by the replacement Notes shall be paid
to the assignor Lender. Accrued interest and accrued fees shall be paid at the
same time or times provided in the predecessor Notes and in this Agreement. Such
assignor Lender or such Assignee Lender must also pay a processing fee to the
Agent upon delivery of any Lender Assignment Agreement in the amount of $2,500.
Any attempted assignment and delegation not made in accordance with this Section
11.11.1 shall be null and void.
(b) Notwithstanding clause (a), any Lender may assign and pledge all or
any portion of its Loans and Notes and other rights to a Federal Reserve Bank as
collateral security; provided, however, that no such assignment under this
clause (b) shall release the assignor Lender from any of its obligations
hereunder.
SECTION 11.11.2. Participations. (a) Any Lender may at any time without
the consent of the Borrower or the Agent (but with prior written notice to the
Borrower and the Agent) sell to one or more commercial banks or other Persons
(each of such commercial banks and other Persons being herein called a
"Participant") participating
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interests in any of the Loans, Commitments, or other interests of such Lender
hereunder; provided, however, that
(i) no participation contemplated in this Section 11.11.2 shall
relieve such Lender from its Commitments or its other obligations
hereunder or under any other Loan Document;
(ii) such Lender shall remain solely responsible for the performance
of its Commitments and such other obligations;
(iii) the Borrower and each other Obligor and the Agent shall
continue to deal solely and directly with such Lender in connection with
such Lender's rights and obligations under this Agreement and each of the
other Loan Documents;
(iv) no Participant, unless such Participant is an Affiliate of such
Lender, or is itself a Lender, shall be entitled to require such Lender to
take or refrain from taking any action hereunder or under any other Loan
Document, except that such Lender may agree with any Participant that such
Lender will not, without such Participant's consent, take any actions of
the type described in clause (b) or (c) of Section 11.1; and
(v) the Borrower shall not be required to pay any amount under
clause (b) of this Section that is greater than the amount which it would
have been required to pay had no participating interest been sold.
(b) Each Borrower acknowledges and agrees that each Participant, for
purposes of Sections 4.3, 4.4, 4.5, 4.6, 11.3 and 11.4, shall be considered a
Lender, subject to clause (v) above.
SECTION 11.11.3. Certain Other Provisions. (a) The Borrower authorizes
each Lender to disclose to any participant or assignee (each, a "Transferee")
and any prospective Transferee, any and all financial and other information in
such Lender's possession concerning the Borrower or any of its Subsidiaries
which has been delivered to such Lender by any such Person pursuant to or in
connection with this Agreement or which has been delivered to such Lender by any
such Person in connection with such Lender's credit evaluation of the Borrower
or any of its Subsidiaries prior to entering into this Agreement.
(b) If, pursuant to this Section, any interest in this Agreement or any
Loan or Note is transferred to any Transferee which is organized under the laws
of any jurisdiction other than the United States or any State thereof, the
transferor Lender shall cause such Transferee (other than any Participant), and
may cause any Participant, concurrently with the effectiveness of such transfer,
(i) to represent to the transferor Lender (for the benefit of the transferor
Lender, the Agent and the Borrower) that under applicable law and treaties, no
taxes will be required to be withheld by the Agent, the Borrower or the
transferor Lender with respect to any payments to be made to such Transferee in
respect of the Loans, (ii) to furnish to the transferor Lender, the Agent and
the Borrower either U.S. Internal Revenue Service Form 4224 or U.S. Internal
Revenue Service Form 1001 (wherein such Transferee claims entitlement to whole
or partial exemption from U.S. Federal withholding tax on all interest payments
hereunder) and (iii) to agree (for the benefit of the transferor Lender, the
Agent and the Borrower) to provide the transferor Lender, the Agent and the
Borrower a new Form 4224 or Form 1001 upon the obsolescence of any previously
delivered form and comparable statements in accordance with applicable U.S. laws
and regulations and amendments duly executed and completed by such Transferee,
and to comply from time to time with all applicable U.S. laws and regulations
with regard to such withholding tax exemption.
SECTION 11.12. Other Transactions. Nothing contained herein shall preclude
either the Agent or any other Lender from engaging in any transaction, in
addition to those contemplated by this Agreement or any other Loan Document,
with the Borrower or any of its Affiliates in which the Borrower or such
Affiliate is not restricted hereby from engaging with any other Person.
SECTION 11.13. Certain Collateral and Other Matters. (a) The Agent is
authorized on behalf of all the Lenders, without the necessity of any notice to
or further consent from the Lenders, from time to time to take any
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action with respect to any Collateral or the Loan Documents which may be
necessary to perfect and maintain perfected the security interest in and Liens
upon the Collateral granted pursuant to the Loan Documents.
(b) The Lenders irrevocably authorize the Agent, at its option and in its
discretion, to release any security interest or Lien granted to or held by the
Agent upon any Collateral (i) upon termination of the Commitments and Letters of
Credit and payment in full in cash of all principal of and interest on the
Loans, all fees payable pursuant to Sections 3.3 and 11.3, all Reimbursement
Obligations (including interest thereon) and all other fees, costs and expenses
that are payable under this Agreement or under any other Loan Document and have
been invoiced (in which case the Lenders hereby authorize the Agent to execute,
and the Agent agrees to execute, reasonable releases in connection with this
Agreement (other than, in any event, as to items stated to survive the
termination of this Agreement)); (ii) constituting property sold or to be sold
or disposed of as part of or in connection with any disposition permitted
hereunder; (iii) constituting property in which neither the Borrower nor any of
its Subsidiaries owned any interest at the time the security interest and/or
Lien was granted or at any time thereafter; (iv) constituting property leased to
the Borrower or any Subsidiary of the Borrower 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 the Borrower or such
Subsidiary to be, renewed or extended; (v) consisting of an instrument
evidencing Indebtedness or other debt instrument, if the Indebtedness evidenced
thereby has been paid in full; or (vi) if approved, authorized or ratified in
writing by the Required Lenders or, if required by Section 11.1, each Lender.
Upon request by the Agent at any time, the Lenders will confirm in writing the
Agent's authority to release particular types or items of collateral pursuant to
this Section.
SECTION 11.14. Confidential Information. The Agent and each Lender agree
to hold all non-public information (which has been identified as such by the
Borrower to the Agent and each Lender) obtained pursuant to this Agreement and
the other Loan Documents in accordance with its customary procedures for
handling confidential information, provided that disclosure of such confidential
information may be made (a) to the Affiliates, examiners, directors,
shareholders, accountants, auditors, counsel and other professional advisors of
the Agent and each Lender, (b) in connection with any assignment or
participation to an Assignee Lender or Participant, as the case may be, so long
as such Assignee Lender or Participant has previously agreed to these
confidentiality provisions, (c) as required or requested by any governmental
agency, authority or representative, or pursuant to any court order, legal
process or applicable law, rule or regulation, (d) in connection with any
litigation to which one or more of the Lenders or the Agent is a party, (e) if
such information subsequently becomes public or (f) if such information is
disclosed by a Person other than the Agent or such Lender that is not known by
the Agent or such Lender to be bound by an obligation of confidentiality or
secrecy to any Obligor.
SECTION 11.15. Forum Selection and Consent to Jurisdiction. TO THE FULLEST
EXTENT PERMITTED UNDER APPLICABLE LAW, ANY LITIGATION BASED HEREON, OR ARISING
OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT,
OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR
WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS, THE BORROWER MAY BE BROUGHT AND
MAINTAINED IN ANY UNITED STATES FEDERAL OR NEW YORK STATE COURTS SITTING IN THE
CITY OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST
ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE
COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND.
THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY
UNITED STATES FEDERAL OR NEW YORK STATE COURTS SITTING IN THE CITY OF NEW YORK
FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES
TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION.
THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY
REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE
STATE OF NEW YORK. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER
MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT
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REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE
ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY LEGAL PROCESS (WHETHER
THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF
EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, TO THE FULLEST
EXTENT PERMITTED UNDER APPLICABLE LAW, THE BORROWER HEREBY IRREVOCABLY WAIVES
SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER
LOAN DOCUMENTS.
SECTION 11.16. Waiver of Jury Trial, etc. THE AGENT, THE LENDERS AND THE
BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY
MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR
ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL
OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE BORROWER. THE BORROWER
ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION
FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO
WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE
AGENT AND THE LENDERS ENTERING INTO THIS AGREEMENT AND EACH SUCH OTHER LOAN
DOCUMENT. IN NO EVENT SHALL ANY LENDER OR THE AGENT BE LIABLE FOR ANY
CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED IN CONNECTION HEREWITH OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
BORROWER:
KEY COMPONENTS, LLP,
as the Borrower
By: /s/ Illegible
-----------------------------------------
Title:
GUARANTORS:
B.W. ELLIOTT MANUFACTURING CO., INC.,
as a Guarantor
By: /s/ Illegible
-----------------------------------------
Title:
HUDSON LOCK, INC.,
as a Guarantor
By: /s/ Illegible
-----------------------------------------
Title:
KEY COMPONENTS FINANCE CORP.
as a Guarantor
By: /s/ Illegible
-----------------------------------------
Title:
ESP LOCK PRODUCTS, INC.
as a Guarantor
By: /s/ Illegible
-----------------------------------------
Title:
<PAGE> 77
AGENT:
SOCIETE GENERALE,
as Agent
By: /s/ Illegible
-----------------------------------------
Title:
<PAGE> 78
LENDERS:
SOCIETE GENERALE
By: /s/ Illegible
-----------------------------------------
Title:
THE BANK OF NEW YORK
By: /s/ Illegible
-----------------------------------------
Title:
BSB BANK & TRUST CO.
By: /s/ Illegible
-----------------------------------------
Title:
FIRST SOURCE FINANCIAL LLP
By First Source Financial, Inc., its
agent/manager
By: /s/ Illegible
-----------------------------------------
Title:
STATE STREET BANK & TRUST CO.
By: /s/ Illegible
-----------------------------------------
Title:
<PAGE> 79
IBJ SCHRODER BANK & TRUST COMPANY
By: /s/ Illegible
-----------------------------------------
Title:
<PAGE> 80
SCHEDULE I
DISCLOSURE SCHEDULE
ITEM 6.5 Certain Material Liabilities.
See attached.
ITEM 6.7 Litigation.
See attached.
ITEM 6.9 Ownership of Properties.
See attached.
ITEM 6.11 Employee Benefit Plans.
See attached.
ITEM 6.12 Environmental Matters.
See attached.
ITEM 6.17 Absence of Defaults.
See attached.
ITEM 7.2.2(b) Indebtedness to be Paid.
See attached.
ITEM 7.2.2(c) Ongoing Indebtedness.
See attached.
ITEM 7.2.3 Existing Liens.
See attached.
ITEM 7.2.5(a) Existing Investments.
See attached.
<PAGE> 81
SCHEDULE II
PERCENTAGES
<TABLE>
<CAPTION>
Revolving
Loan Acquisition Loan
Lender Commitment Commitment
- ------ ---------- ----------
<S> <C> <C>
SOCIETE
GENERALE 16 2/3% 16 2/3%
THE BANK OF
NEW YORK 16 2/3% 16 2/3%
BSB BANK &
TRUST CO. 16 2/3% 16 2/3%
FIRST SOURCE
FINANCIAL LLP 16 2/3% 16 2/3%
STATE STREET
BANK & TRUST
CO. 16 2/3% 16 2/3%
IBJ SCHRODER
BANK & TRUST
CO. 16 2/3% 16 2/3%
TOTAL 100.00% 100.00%
======= =======
</TABLE>
<PAGE> 82
SCHEDULE III
ADMINISTRATIVE INFORMATION
Borrower:
KEY COMPONENTS, LLC
c/o Millbrook Capital Management Inc.
152 West 57th Street
New York, New York 10019
Guarantors:
B.W. ELLIOTT MANUFACTURING CO., INC.
37 Milford Street
Binghamton, New York 13902
HUDSON LOCK, INC.
81 Apsley Street
Hudson, Massachusetts 01749
KEY COMPONENTS FINANCE CORP.
c/o Millbrook Capital Management Inc.
152 West 57th Street
New York, New York 10019
ESP LOCK PRODUCTS INC.
375 Harvard Street
Leominster, Massachusetts 01453
Agent:
SOCIETE GENERALE
1221 Avenue of Americas
New York, New York 10020
Loan Notices:
Attention: Anna Romano
Telecopier No.: 212-278-6178
Telephone No.: 212-278-6732
Letter of Credit Notices:
Attention: Jeff Green
Telecopier No.: 212-278-7428
Telephone No.: 212-278-6727
<PAGE> 83
Lenders:
SOCIETE GENERALE
Domestic, LIBOR and
Notice Office:
1221 Avenue of Americas
New York, New York 10020
Attention: Anna Romano
Telecopier No.: 212-278-6178
Telephone No.: 212-278-6732
THE BANK OF NEW YORK
10 Mason Street
Greenwich, Connecticut 06830
Attention: Geraldine Turkington
Telecopier No.: 203-863-2610
Telephone No.: 203-863-2697
BSB BANK & TRUST CO.
P.O. Box 1056
58-68 Exchange Street
Binghamton, New York 13902
Attention: Mr. Edward P. Bahrenburg
Telecopier No.: 607-772-6287
Telephone No.: 607-779-2394
FIRST SOURCE FINANCIAL LLP
2850 West Golf Road
Rolling Meadows, Illinois 60008
Attention: Ms. Janice Faulkner
Telecopier No.: 847-734-7910
Telephone No.: 847-734-2044
STATE STREET BANK & TRUST CO.
225 Franklin Street, 2nd Floor
Boston, Massachusetts 02110
Attention: Mr. Shailesh Patel
Telecopier No.: 617-664-4176
Telephone No.: 617-664-4086
IBJ SCHRODER BANK & TRUST CO.
1 State Street, 9th Floor
New York, New York 10004
Attention: Mr. Andrew Krivine
Telecopier No.: 212-858-2768
Telephone No.: 212-858-2685
-2-
<PAGE> 84
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
1.1. Defined Terms.......................................................2
1.2. Use of Defined Terms...............................................24
1.3. Cross-References...................................................24
1.4. Accounting and Financial Determinations............................24
ARTICLE II
COMMITMENTS, BORROWING PROCEDURES,
LETTERS OF CREDIT AND NOTES
2.1. Commitments........................................................25
2.1.1. Revolving Loan Commitment..........................................25
2.1.2. Letter of Credit Commitment........................................25
2.1.3. Acquisition Loan Commitment........................................25
2.2. Lenders Not Permitted or Required To Make Credit Extensions........25
2.2.1. Revolving Loans....................................................25
2.2.2. Letters of Credit..................................................26
2.2.3. Acquisition Loans..................................................26
2.3. Optional Reduction of the Commitment Amounts.......................26
2.4. Borrowing Procedure................................................26
2.5. Continuation and Conversion Elections..............................26
2.6. Funding............................................................26
2.7. Issuance Procedures................................................27
2.7.1. Other Lenders' Participation.......................................27
2.7.2. Disbursements......................................................27
2.7.3. Reimbursement......................................................27
2.7.4. Deemed Disbursements...............................................28
2.7.5. Nature of Reimbursement Obligations................................28
2.8. Notes..............................................................29
ARTICLE III
REPAYMENTS, PREPAYMENTS, INTEREST AND FEES
3.1. Repayments and Prepayments.........................................29
3.1.1. Voluntary Prepayments..............................................29
3.1.2. Mandatory Prepayments..............................................29
3.2. Interest Provisions................................................31
3.2.1. Rates..............................................................31
3.2.2. Post-Default Rates.................................................32
3.2.3. Payment Dates......................................................32
3.3. Fees...............................................................32
3.3.1. Revolver Commitment Fee............................................32
3.3.2. Acquisition Loan Commitment Fee....................................32
3.3.3. Letter of Credit Fee...............................................32
3.3.4. Agent's Fees, etc..................................................33
ARTICLE IV
CERTAIN LIBO RATE AND OTHER PROVISIONS
4.1. LIBO Rate Lending Unlawful.........................................33
4.2. Deposits Unavailable...............................................33
4.3. Increased Costs, etc...............................................33
4.4. Funding Losses.....................................................34
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TABLE OF CONTENTS
(continued)
Section Page
- ------- ----
4.5. Increased Capital Costs............................................35
4.6. Taxes..............................................................35
4.7. Payments, Computations, etc........................................36
4.8. Sharing of Payments................................................36
4.9. Setoff.............................................................36
4.10. Use of Proceeds....................................................37
ARTICLE V
CONDITIONS TO CREDIT EXTENSIONS
5.1. Initial Credit Extension...........................................37
5.1.1. Corporate and Partnership Documents, etc...........................37
5.1.2. Agreement..........................................................37
5.1.3. Delivery of Notes..................................................37
5.1.4. Required Consents and Approvals....................................37
5.1.5. Financial Information, etc.........................................38
5.1.6. Pledged Property...................................................38
5.1.7. Security Agreements, Filings, etc..................................38
5.1.8. Solvency Certificates..............................................38
5.1.9. Closing Date Certificates..........................................38
5.1.10. Evidence of Insurance..............................................38
5.1.11. Opinions of Counsel................................................38
5.1.12. Agent's Closing Fees, Expenses, etc................................39
5.1.13. Borrowing Base Certificate.........................................39
5.1.14. Satisfactory Legal Form, etc.......................................39
5.2. All Credit Extensions..............................................39
5.2.1. Compliance with Warranties, No Default, etc........................39
5.2.2. Credit Extension Request, etc......................................40
5.3. Acquisition Loans..................................................40
5.3.1. Permitted Acquisition..............................................40
5.3.2. Guaranty; Collateral; Etc..........................................40
5.3.3. Minimum Interest Coverage..........................................40
5.3.4. Maximum Funded Debt to EBITDA......................................41
5.3.5. Timing of Permitted Acquisitions...................................41
5.3.6. Size of Permitted Acquisitions.....................................41
5.3.7. Due Diligence Report...............................................42
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
6.1. Organization, etc..................................................42
6.2. Due Authorization, Non-Contravention, etc..........................42
6.3. Government Approval, Regulation, Compliance with Law, etc..........42
6.4. Validity, etc......................................................42
6.5. Financial Information..............................................43
6.6. No Material Adverse Change.........................................43
6.7. Litigation, Labor Controversies, etc...............................43
6.8. Subsidiaries.......................................................43
6.9. Ownership of Properties............................................43
6.10. Taxes..............................................................43
6.11. Pension and Welfare Plans..........................................44
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<PAGE> 86
TABLE OF CONTENTS
(continued)
Section Page
- ------- ----
6.12. Environmental Warranties...........................................44
6.13. Accuracy of Information............................................45
6.14. Intellectual Property Collateral...................................45
6.15. Ownership of Equity Interests......................................46
6.16. Absence of Default.................................................46
6.17. Regulations G, U and X.............................................46
6.18. Government Regulation..............................................46
6.19. Burdensome Agreements..............................................46
6.20. Year 2000..........................................................46
ARTICLE VII
COVENANTS
7.1. Affirmative Covenants..............................................47
7.1.1. Financial Information, Reports, Notices, etc.......................47
7.1.2. Compliance with Laws, etc..........................................49
7.1.3. Maintenance of Properties..........................................49
7.1.4. Insurance..........................................................49
7.1.5. Books and Records..................................................50
7.1.6. Environmental Covenant.............................................50
7.1.7. As to Intellectual Property Collateral.............................51
7.1.8. Future Subsidiaries................................................52
7.1.9. Future Real Estate Properties......................................52
7.1.10. Board Monitoring...................................................53
7.1.11. Separate Corporate Existence.......................................53
7.1.12. Further Assurances.................................................53
7.1.13. Real Estate Mortgages..............................................53
7.1.14. Title Insurance....................................................54
7.1.15. Realty Survey......................................................54
7.2. Negative Covenants.................................................54
7.2.1. Business Activities................................................54
7.2.2. Indebtedness.......................................................54
7.2.3. Liens..............................................................55
7.2.4. Financial Condition................................................56
7.2.5. Investments........................................................57
7.2.6. Restricted Payments, etc...........................................58
7.2.7. Capital Expenditures, etc..........................................59
7.2.8. Rental Obligations.................................................60
7.2.9. Take or Pay Contracts..............................................60
7.2.10. Consolidation, Merger, etc.........................................60
7.2.11. Asset Dispositions, etc............................................60
7.2.12. Modification of Certain Agreements.................................60
7.2.13. Transactions with Affiliates.......................................60
7.2.14. Negative Pledges, Restrictive Agreements, etc......................61
7.2.15. Management and Director Fees, Expenses, etc........................61
7.2.16. Environmental Liens................................................61
7.2.17. Fiscal Year End....................................................61
-iii-
<PAGE> 87
TABLE OF CONTENTS
(continued)
Section Page
- ------- ----
ARTICLE VIII
EVENTS OF DEFAULT
8.1. Listing of Events of Default.......................................61
8.1.1. Non-Payment of Obligations.........................................61
8.1.2. Breach of Warranty.................................................62
8.1.3. Non-Performance of Certain Covenants and Obligations...............62
8.1.4. Non-Performance of Other Covenants and Obligations.................62
8.1.5. Default on Other Indebtedness......................................62
8.1.6. Judgments..........................................................62
8.1.7. Pension Plans......................................................62
8.1.8. Change in Control..................................................63
8.1.9. Bankruptcy, Insolvency, etc........................................63
8.1.10. Impairment of Security, etc........................................63
8.2. Action if Bankruptcy...............................................63
8.3. Action if Other Event of Default...................................63
ARTICLE IX
GUARANTY
9.1. The Guaranty.......................................................64
9.2. Guaranty Unconditional.............................................64
9.3. Reinstatement in Certain Circumstances.............................65
9.4. Waiver by the Guarantors...........................................65
9.5. Postponement of Subrogation, etc...................................65
9.6. Stay of Acceleration...............................................66
9.7. Limitation on Liability............................................66
ARTICLE X
THE AGENT
10.1. Actions............................................................66
10.2. Funding Reliance, etc..............................................66
10.3. Exculpation........................................................67
10.4. Successor..........................................................67
10.5. Credit Extensions by SG............................................67
10.6. Credit Decisions...................................................67
10.7. Loan Documents, etc................................................67
10.8. Copies, etc........................................................68
ARTICLE XI
MISCELLANEOUS PROVISIONS
11.1. Waivers, Amendments, etc...........................................68
11.2. Notices............................................................68
11.3. Payment of Costs and Expenses......................................69
11.4. Indemnification....................................................69
11.5. Survival...........................................................70
11.6. Severability.......................................................71
11.7. Headings...........................................................71
11.8. Execution in Counterparts, Effectiveness, etc......................71
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<PAGE> 88
TABLE OF CONTENTS
(continued)
Section Page
- ------- ----
11.9. Governing Law; Entire Agreement....................................71
11.10. Successors and Assigns.............................................71
11.11. Sale and Transfer of Loans and Notes; Participations in Loans
and Notes .........................................................71
11.11.1. Assignments........................................................71
11.11.2. Participations.....................................................72
11.11.3. Certain Other Provisions...........................................73
11.12. Other Transactions.................................................73
11.13. Certain Collateral and Other Matters...............................73
11.14. Confidential Information...........................................73
11.15. Forum Selection and Consent to Jurisdiction........................74
11.16. Waiver of Jury Trial, etc..........................................74
-v-
<PAGE> 89
SCHEDULES AND EXHIBITS
SCHEDULE I - Disclosure Schedule
SCHEDULE II - Percentages
SCHEDULE III - Administrative Information
EXHIBIT A - Form of Revolving Note
EXHIBIT B - Form of Acquisition Note
EXHIBIT C-1 - Form of Borrowing Request for Revolver Loans
EXHIBIT C-2 - Form of Borrowing Request for Acquisition Loans
EXHIBIT D - Form of Continuation/Conversion Notice
EXHIBIT E - Form of Issuance Request
EXHIBIT F - Form of Borrowing Base Certificate
EXHIBIT G - Form of Compliance Certificate
EXHIBIT H - Form of Pledge Agreement
EXHIBIT I-1 - Form of Borrower Security Agreement
EXHIBIT I-2 - Form of Guarantor Security Agreement
EXHIBIT J - Form of Closing Date Certificate
EXHIBIT K-1 - Form of Borrower Solvency Certificate
EXHIBIT K-2 - Form of Guarantor Solvency Certificates
EXHIBIT L - Form of Lender Assignment Agreement
EXHIBIT M - Form of Opinion of Counsel to the Obligors
-vi-
<PAGE> 1
Exhibit 10.15
EXHIBIT I-2
GUARANTOR SECURITY AGREEMENT
THIS SECURITY AGREEMENT (as amended, supplemented, restated or otherwise
modified from time to time, the "Security Agreement"), dated as of July 27,
1998, made by B.W. Elliott Manufacturing Co., Inc., a New York corporation,
Hudson Lock, Inc., a Delaware corporation, Key Components Finance Corp., a
Delaware corporation, and ESP Lock Products Inc., a Delaware corporation (each a
"Grantor" and, collectively, the "Grantors"), in favor of Societe Generale, as
agent (together with any successor(s) thereto in such capacity, the "Agent") for
each of the Lender Parties (as defined below).
W I T N E S S E T H:
WHEREAS, pursuant to a Credit and Guaranty Agreement, dated as of the date
hereof (together with all amendments, supplements, restatements and other
modifications, if any, from time to time thereafter made thereto, the "Credit
Agreement"), among Key Components, LLC, a Delaware limited liability company
(the "Borrower"), the Grantors, as Guarantors, the various financial
institutions as are, or may from time to time become, parties thereto
(collectively, the "Lenders") and the Agent, the Lenders have extended
Commitments to make Credit Extensions to the Borrower; and
WHEREAS, as a condition precedent to the making of the initial Credit
Extensions under the Credit Agreement, each Grantor is required to execute and
deliver this Security Agreement;
WHEREAS, each Grantor is a wholly-owned Subsidiary of the Borrower;
WHEREAS, each Grantor has duly authorized the execution, delivery and
performance of this Security Agreement; and
WHEREAS, it is in the best interests of each Grantor to execute this
Security Agreement inasmuch as each Grantor will derive substantial direct and
indirect benefits from the Credit Extensions made from time to time to the
Borrower by the Lenders pursuant to the Credit Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in order to induce the Lenders
to make Credit Extensions (including the initial Credit Extensions) to the
Borrower pursuant to the Credit Agreement, each Grantor agrees, for the benefit
of each Lender Party, as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Certain Terms. The following terms (whether or not
underscored) when used in this Security Agreement, including its preamble and
recitals, shall have the following meanings (such definitions to be equally
applicable to the singular and plural forms thereof):
"Acquisitions" means (i) the acquisition by Key Components, Inc. ("Key")
of all of the issued and outstanding capital stock of Hudson Lock, Inc. pursuant
to an Agreement for the Purchase and Sale of Stock dated as of May 15, 1997
among Key and Jordan Industries, Inc. and (ii) the acquisition by Key of all of
the issued and outstanding stock of ESP Lock Products, Inc. ("ESP") pursuant to
an agreement dated as of December 10, 1997 among Key and certain of ESP's
shareholders.
<PAGE> 2
"Agent" is defined in the preamble.
"Borrower" is defined in the first recital.
"Collateral" is defined in Section 2.1.
"Collateral Account" is defined in Section 4.1.2(c).
"Computer Hardware and Software Collateral" means:
(a) all computer and other electronic data processing hardware,
integrated computer systems, central processing units, memory units,
display terminals, printers, features, computer elements, card readers,
tape drives, hard and soft disk drives, cables, electrical supply
hardware, generators, power equalizers, accessories, peripheral devices
and other related computer hardware now owned or hereafter acquired by the
Grantors;
(b) all software programs (including both source code, object code
and all related applications and data files), whether now owned, licensed
or leased or hereafter acquired by any Grantor, designed for use on the
computers and electronic data processing hardware described in clause (a)
above;
(c) all firmware associated therewith now owned or hereafter
acquired by the Grantors;
(d) all documentation (including flow charts, logic diagrams,
manuals, guides and specifications) with respect to such hardware,
software and firmware described in the preceding clauses (a) through (c)
above; and
(e) all rights of the Grantors with respect to all of the foregoing,
including, without limitation, any and all copyrights, licenses, options,
warranties, service contracts, program services, test rights, maintenance
rights, support rights, improvement rights, renewal rights and
indemnifications and any substitutions, replacements, additions or model
conversions of any of the foregoing.
"Copyright Collateral" means all copyrights and all semi-conductor chip
product mask works of any Grantor, whether statutory or common law, registered
or unregistered, now or hereafter in force throughout the world including,
without limitation, all of such Grantor's right, title and interest in and to
all copyrights and mask works registered in the United States Copyright Office
or anywhere else in the world and also including, without limitation, the
copyrights and mask works referred to in Item A of Schedule IV attached hereto,
and all applications for registration thereof, whether pending or in
preparation, all copyright and mask work licenses, including each copyright and
mask work license referred to in Item B of Schedule IV attached hereto, the
right to sue for past, present and future infringements of any thereof, all
rights corresponding thereto throughout the world, all extensions and renewals
of any thereof and all proceeds of the foregoing, including, without limitation,
licenses, royalties, income, payments, claims, damages and proceeds of suit.
"Credit Agreement" is defined in the first recital.
"Equipment" is defined in clause (a) of Section 2.1.
"Formation" means the formation of Key Components Finance Corp. and the
Borrower in April, 1998 and the transfer by Key to the Borrower of all of Key's
ownership interests in the Grantor.
"Grantor" and "Grantors" are defined in the preamble.
"Intellectual Property Collateral" means, collectively, the Computer
Hardware and Software Collateral, the Copyright Collateral, the Patent
Collateral, the Trademark Collateral and the Trade Secrets Collateral.
"Inventory" is defined in clause (b) of Section 2.1
2
<PAGE> 3
"Lender" and "Lenders" are defined in the first recital.
"Lender Party" means, as the context may require, any Lender or the Agent
and each of its respective successors, transferees and assigns.
"Patent Collateral" means:
(a) all letters patent and applications for letters patent
throughout the world of the Grantors, including all patent applications in
preparation for filing anywhere in the world of the Grantors and including
each patent and patent application referred to in Item A of Schedule II
attached hereto;
(b) all patent licenses in favor of each Grantor, including each
patent license referred to in Item B of Schedule II attached hereto;
(c) all reissues, divisions, continuations, continuations-in-part,
extensions, renewals and reexaminations of any of the items described in
clauses (a) and (b) above; and
(d) all proceeds of, and rights associated with, the foregoing
(including license royalties and proceeds of infringement suits), the
right of each Grantor to sue third parties for past, present or future
infringements of any patent or patent application, including any patent or
patent application referred to in Item A of Schedule II attached hereto,
and for breach or enforcement of any patent license, including any patent
license referred to in Item B of Schedule II attached hereto, and all
rights corresponding thereto throughout the world.
"Receivables" is defined in clause (c) of Section 2.1.
"Related Contracts" is defined in clause (c) of Section 2.1.
"Rolling Stock" means all railcars, barges and other water carrier
equipment, and all accessions, appurtenances and parts installed on and
additions thereto and replacements thereof hereafter acquired by any Grantor.
"Secured Obligations" is defined in Section 2.2.
"Security Agreement" is defined in the preamble.
"Trademark Collateral" means:
(a) all trademarks, trade names, corporate names, company names,
business names, fictitious business names, trade styles, service marks,
certification marks, collective marks, logos, other source of business
identifiers, prints and labels on which any of the foregoing have appeared
or appear, designs and general intangibles of a like nature of each
Grantor (all of the foregoing items in this clause (a) being collectively
called a "Trademark"), now existing anywhere in the world or hereafter
adopted or acquired, whether currently in use or not, all registrations
and recordings thereof and all applications in connection therewith,
whether pending or in preparation for filing, including registrations,
recordings and applications of each Grantor in the United States Patent
and Trademark Office or in any office or agency of the United States of
America or any state thereof or any foreign country, including those
referred to in Item A of Schedule III attached hereto;
(b) all Trademark licenses in favor of each Grantor, including each
Trademark license referred to in Item B of Schedule III attached hereto;
(c) all reissues, extensions or renewals of any of the items
described in clauses (a) and (b) above;
3
<PAGE> 4
(d) all of the goodwill of the business connected with the use of,
and symbolized by the items described in, clauses (a) and (b) above; and
(e) all proceeds of, and rights associated with, the foregoing,
including any claim by any Grantor against third parties for past, present
or future infringement or dilution of any Trademark, Trademark
registration or Trademark license of each Grantor, including any
Trademark, Trademark registration or Trademark license referred to in Item
A or Item B of Schedule III attached hereto, or for any injury to the
goodwill associated with the use of any such Trademark or for breach or
enforcement of any Trademark license.
"Trade Secrets Collateral" means common law and statutory trade secrets
and all other confidential or proprietary or useful information of each Grantor
and all know-how obtained by each Grantor or used by each Grantor in the
business of any Grantor (all of the foregoing being collectively called a "Trade
Secret"), whether or not such Trade Secret has been reduced to a writing or
other tangible form, including all documents and things embodying, incorporating
or referring in any way to such Trade Secret, all Trade Secret licenses,
including each Trade Secret license referred to in Schedule V attached hereto,
and including the right of each Grantor to sue for and to enjoin and to collect
damages for the actual or threatened misappropriation of any Trade Secret and
for the breach or enforcement of any such Trade Secret license.
"U.C.C." means the Uniform Commercial Code, as in effect in the State of
New York.
SECTION 1.2. Credit Agreement Definitions. Unless otherwise defined herein
or the context otherwise requires, terms used in this Security Agreement,
including its preamble and recitals, have the meanings provided in the Credit
Agreement.
SECTION 1.3. U.C.C. Definitions. Unless otherwise defined herein or in the
Credit Agreement or unless the context otherwise requires, terms for which
meanings are provided in the U.C.C. are used in this Security Agreement,
including its preamble and recitals, with such meanings.
ARTICLE II
SECURITY INTEREST
SECTION 2.1. Grant of Security. Each Grantor hereby assigns and pledges to
the Agent for its benefit and the ratable benefit of each of the Lender Parties,
and hereby grants to the Agent for its benefit and the ratable benefit of each
of the Lender Parties a security interest in, all of such Grantor's right, title
and interest in, to and under the following property, whether now or hereafter
existing or acquired (the "Collateral"):
(a) all equipment in all of its forms of such Grantor, wherever
located, including Rolling Stock (but excluding all motor vehicles, trucks
and trailers), and all parts thereof and all accessions, additions,
attachments, improvements, substitutions and replacements thereto and
therefor (any and all of the foregoing being the "Equipment");
(b) all inventory in all of its forms of such Grantor, wherever
located, including
(i) all merchandise, goods and other personal property which
are held for sale or lease, all raw materials and work in process
therefor (including, without limitation, tobacco and tobacco related
products), finished goods thereof, and materials used or consumed in
the manufacture or production thereof,
(ii) all goods in which such Grantor has an interest in mass
or a joint or other interest or right of any kind (including goods
in which such Grantor has an interest or right as consignee), and
4
<PAGE> 5
(iii) all goods which are returned to or repossessed by such
Grantor,
and all accessions thereto, products thereof and documents therefor (any
and all such inventory, materials, goods, accessions, products and
documents being the "Inventory");
(c) all accounts, contracts, contract rights, chattel paper,
documents, instruments, and general intangibles of such Grantor, whether
or not arising out of or in connection with the sale or lease of goods or
the rendering of services, and all rights of such Grantor now or hereafter
existing in and to all security agreements, guaranties, leases and other
contracts securing or otherwise relating to any such accounts, contracts,
contract rights, chattel paper, documents, instruments, and general
intangibles (any and all such accounts, contracts, contract rights,
chattel paper, documents, instruments, and general intangibles being the
"Receivables", and any and all such security agreements, guaranties,
leases and other contracts being the "Related Contracts");
(d) all Intellectual Property Collateral of such Grantor;
(e) all books, records, writings, data bases, information and other
property of each Grantor relating to, used or useful in connection with,
evidencing, embodying, incorporating or referring to any of the foregoing
in this Section 2.1;
(f) all of such Grantor's other property and rights of every kind
and description and interests therein; and
(g) all products, offspring, rents, issues, profits, returns, income
and proceeds of and from any and all of the foregoing Collateral
(including proceeds which constitute property of the types described in
clauses (a), (b), (c), (d), (e) and (f) above, proceeds deposited from
time to time in the Collateral Account and in any lockboxes of such
Grantor, and, to the extent not otherwise included, all payments under
insurance (whether or not the Agent is the loss payee thereof), or any
indemnity, warranty or guaranty, payable by reason of loss or damage to or
otherwise with respect to any of the foregoing Collateral).
SECTION 2.2. Security for Secured Obligations. This Security Agreement
secures the prompt payment in full of all amounts payable by the Borrower and
each other Obligor under or in connection with the Credit Agreement, the Notes,
each Rate Protection Agreement with a Lender Party and each other Loan Document,
whether for principal, interest, costs, fees, expenses, indemnities or otherwise
and whether now or hereafter existing (all of such obligations being the
"Secured Obligations").
SECTION 2.3. Continuing Security Interest; Transfer of Notes. This
Security Agreement shall create a continuing security interest in the Collateral
and shall
(a) remain in full force and effect until the indefeasible payment
in full in cash of all Secured Obligations and the expiration or
termination of all Commitments,
(b) be binding upon each Grantor, its successors, transferees and
assigns, and
(c) inure, together with the rights and remedies of the Agent
hereunder, to the benefit of the Agent and each other Lender Party.
Without limiting the generality of the foregoing clause (c), any Lender may, to
the extent permitted pursuant to Section 11.11.1 of the Credit Agreement, assign
or otherwise transfer (in whole or in part) any Note or Loan held by it to any
other Person or entity, and such other Person or entity shall thereupon become
vested with all the rights and benefits in respect thereof granted to such
Lender under any Loan Document (including this Security Agreement) or otherwise,
subject, however, to any contrary provisions in such assignment or transfer, and
to the provisions of Section 11.11 and Article X of the Credit Agreement. Upon
the indefeasible payment in cash in full of all Secured Obligations and the
termination of all Commitments, the security interest granted herein shall
terminate and all rights to the Collateral shall revert to the Grantors. Upon
any such termination of Collateral, the Agent will, at each
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Grantor's sole expense, deliver to such Grantor, without any representations,
warranties or recourse of any kind whatsoever, such documents as such Grantor
shall reasonably request to evidence such termination.
SECTION 2.4. Grantor Remains Liable. Anything herein to the contrary
notwithstanding
(a) each Grantor shall remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein, and
shall perform all of its duties and obligations under such contracts and
agreements to the same extent as if this Security Agreement had not been
executed,
(b) the exercise by the Agent of any of its rights hereunder shall
not release any Grantor from any of its duties or obligations under any
such contracts or agreements included in the Collateral, and
(c) neither the Agent nor any other Lender Party shall have any
obligation or liability under any such contracts or agreements included in
the Collateral by reason of this Security Agreement, nor shall the Agent
or any other Lender Party be obligated to perform any of the obligations
or duties of any Grantor thereunder or to take any action to collect or
enforce any claim for payment assigned hereunder.
SECTION 2.5. Security Interest Absolute. All rights of the Agent and the
security interests granted to the Agent hereunder, and all obligations of each
Grantor hereunder, shall be absolute and unconditional, irrespective of
(a) any lack of validity or enforceability of the Credit Agreement,
any Note or any other Loan Document;
(b) the failure of any Lender Party or any holder of any Note
(i) to assert any claim or demand or to enforce any right or
remedy against the Borrower, any other Obligor or any other Person
under the provisions of the Credit Agreement, any Note, any other
Loan Document or otherwise, or
(ii) to exercise any right or remedy against any other
guarantor of, or collateral securing, any Obligations of the
Borrower or any other Obligor;
(c) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Secured Obligations or any other
extension, compromise or renewal of any Secured Obligation;
(d) any reduction, limitation, impairment or termination of any
Secured Obligation for any reason, including any claim of waiver, release,
surrender, alteration or compromise, and shall not be subject to (and each
Grantor hereby waives any right to or claim of) any defense or setoff,
counterclaim, recoupment or termination whatsoever by reason of the
invalidity, illegality, nongenuineness, irregularity, compromise, or
unenforceability of, or any other event or occurrence affecting, any
Secured Obligation or otherwise;
(e) any amendment to, rescission, waiver, or other modification of,
or any consent to departure from, any of the terms of the Credit
Agreement, any Note or any other Loan Document;
(f) any addition, exchange, release, surrender, impairment or
non-perfection of any collateral (including the Collateral), or any
amendment to or waiver or release of or addition to or consent to
departure from any guaranty, for any of the Secured Obligations; or
(g) any other circumstances which might otherwise constitute a
defense available to, or a legal or equitable discharge of, the Borrower,
any other Obligor, any surety or any guarantor.
SECTION 2.6. Postponement of Subrogation, etc. None of the Grantors will
exercise any rights which it may acquire by way of rights of subrogation under
this Security Agreement, by any payment made hereunder or otherwise, until the
prior payment, in full and in cash, of all Secured Obligations. Any amount paid
to any Grantor on account of any such subrogation rights prior to the payment in
full of all Secured Obligations shall be held in trust
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for the benefit of the Lender Parties and each holder of a Note and shall
immediately be paid to the Agent and credited and applied against the Secured
Obligations, whether matured or unmatured, in accordance with the terms of the
Credit Agreement; provided, however, that if
(a) any Grantor has made payment to the Lender Parties and each
holder of a Note of all or any part of the Secured Obligations, and
(b) all Secured Obligations have been indefeasibly paid in full and
all Commitments have been permanently terminated,
each Lender Party and each holder of a Note agrees that, at such Grantor's
request, the Agent, on behalf of the Lender Parties and the holders of the
Notes, will execute and deliver to such Grantor appropriate documents (without
recourse and without representation or warranty) necessary to evidence the
transfer by subrogation to such Grantor of an interest in the Secured
Obligations resulting from such payment by such Grantor. In furtherance of the
foregoing, for so long as any Secured Obligations or Commitments remain
outstanding, each Grantor shall refrain from taking any action or commencing any
proceeding against the Borrower (or its successors or assigns, whether in
connection with a bankruptcy proceeding or otherwise) to recover any amounts in
respect of payments made under this Security Agreement to any Lender Party or
any holder of a Note.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Representations and Warranties. Each Grantor represents and
warrants unto each Lender Party as set forth in this Article.
SECTION 3.1.1. Location of Collateral, etc. All of the Equipment and
Inventory of each Grantor are located at the places specified in Item A, Item B
and Item C, respectively, of Schedule I hereto. None of the Equipment and
Inventory has, within the four months preceding the date of this Security
Agreement, been located at any place other than the places specified in Item A
and Item B, respectively, of Schedule I hereto. The principal place of business
and chief executive office of each Grantor are located at the address as set
forth in Schedule III of the Credit Agreement. The offices where each Grantor
keeps its records concerning the Receivables, and all originals of all chattel
paper which evidence Receivables, are located at the address as set forth in
Schedule III of the Credit Agreement. None of the Grantors has trade names. None
of the Grantors has been known by any legal name different from the one set
forth on the signature page hereto, nor has any Grantor been the subject of any
merger or other corporate reorganization except the Acquisitions and the
Formation. If the Collateral includes any Inventory located in the State of
California, none of the Grantors is a "retail merchant" within the meaning of
Section 9102 of the Uniform Commercial Code - Secured Transactions of the State
of California. None of the Receivables is evidenced by a promissory note or
other instrument.
SECTION 3.1.2. Ownership, No Liens, etc. Each Grantor owns the Collateral
free and clear of any Lien, security interest, charge or encumbrance except for
the security interest created by this Security Agreement and except as permitted
by the Credit Agreement. No effective financing statement or other similar
instrument in effect covering all or any part of the Collateral is on file in
any recording office, except such as may have been filed in favor of the Agent
relating to this Security Agreement.
SECTION 3.1.3. Possession and Control. Each Grantor has exclusive
possession and control of the Equipment and Inventory.
SECTION 3.1.4. Negotiable Documents, Instruments and Chattel Paper. Each
Grantor has, contemporaneously herewith, delivered to the Agent possession of
all originals of all negotiable documents, instruments and chattel paper
currently owned or held by such Grantor (duly endorsed in blank, if requested by
the Agent).
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SECTION 3.1.5. [Intentionally omitted]
SECTION 3.1.6. Validity, etc. The Liens intended to be created by this
Security Agreement constitute valid first priority security interests in the
Collateral, securing the payment of the Secured Obligations, and all filings and
other actions necessary or desirable to perfect and protect such security
interest have been duly taken.
SECTION 3.1.7. Authorization, Approval, etc. No authorization, approval or
other action by, and no notice to or filing with, any governmental authority or
regulatory body (other than UCC Filings) is required either
(a) for the grant by any Grantor of the security interest granted
hereby or for the execution, delivery and performance of this Security
Agreement by such Grantor, or
(b) for the perfection of or the exercise by the Agent of its rights
and remedies hereunder.
SECTION 3.1.8. Compliance with Laws. Each Grantor is in compliance with
the requirements of all applicable laws (including, without limitation, the
provisions of the Fair Labor Standards Act), rules, regulations and orders of
every governmental authority, the non-compliance with which would reasonably be
expected to materially adversely affect the business, properties, assets,
operations, condition (financial or otherwise) or prospects of such Grantor.
SECTION 3.1.9. Due Execution, Validity, Etc. The execution, delivery and
performance by each Grantor of this Security Agreement does not contravene or
result in a default under such Grantor's Organic Documents or contravene or
result in a default under any material contractual restriction, material Lien or
governmental regulation or court decree or order binding on such Grantor. This
Security Agreement has been duly executed and delivered on behalf of each
Grantor and constitutes the legal, valid and binding obligation of such Grantor
enforceable in accordance with its terms, subject to the effect of any
applicable bankruptcy, insolvency, reorganization, moratorium or similar law
affecting creditor's right generally, and subject to the effect of general
principles of equity (regardless of whether considered in a proceeding in equity
or at law). In addition, each representation and warranty of each Grantor
contained in each Loan Document to which it is a party is true and correct in
all material respects.
ARTICLE IV
COVENANTS
SECTION 4.1. Certain Covenants. Each Grantor covenants and agrees that, so
long as any portion of the Secured Obligations shall remain unpaid or any Lender
shall have any outstanding Commitment, such Grantor will, unless the Required
Lenders shall otherwise consent in writing, perform the obligations set forth in
this Section.
SECTION 4.1.1. As to Equipment and Inventory. Each Grantor hereby agrees
that it shall
(a) keep all the material Equipment and Inventory (other than
Inventory sold in the ordinary course of business) at the places therefor
specified in Section 3.1.1 or, upon 30 days' prior written notice to the
Agent, at such other places in a jurisdiction where all representations
and warranties set forth in Article III shall be true and correct in all
material respects, and all action required pursuant to the first sentence
of Section 4.1.7 shall have been taken with respect to the material
Equipment and Inventory;
(b) cause all material Equipment to be maintained and preserved in
good condition, repair and working order, ordinary wear and tear excepted,
and make or cause to be made all material repairs, replacements, and other
improvements in connection therewith which are reasonably necessary or
desirable to such end; and promptly furnish to the Agent a statement
respecting any loss or damage to any of the material Equipment; and
(c) pay, before the same shall become delinquent, all property and
other taxes, assessments and governmental charges or levies imposed upon,
and all material claims (including claims for labor, materials
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and supplies) against, the Equipment and Inventory, except to the extent
the validity thereof is being contested in good faith by appropriate
proceedings and for which adequate reserves in accordance with GAAP have
been set aside.
SECTION 4.1.2. As to Receivables. (a) Each Grantor shall keep its place(s)
of business and chief executive office at the address as set forth on Schedule
III of the Credit Agreement; shall keep the office(s) where it keeps its records
concerning the Receivables, and all originals of all chattel paper which
evidence Receivables, located at the address as set forth on Schedule III of the
Credit Agreement or, in each case, upon 30 days' prior written notice to the
Agent, at such other locations in a jurisdiction where all representatives and
warranties set forth in Article IV are true and correct and all material actions
required by the first sentence of Section 4.1.7 shall have been taken with
respect to the Receivables; not change its name except upon 30 days' prior
written notice to the Agent; hold and preserve such records and chattel paper;
and permit representatives of the Agent at any time upon reasonable advance
notice and during normal business hours to inspect and make abstracts from such
records and chattel paper.
(b) Each Grantor will direct all obligors under any Receivables to make
all payments to one or more bank accounts. Each such bank account will be
maintained only if the relevant bank has agreed (by no later than 30 days after
the Effective Date) in writing to remit the balance from time to time in the
account to the Agent upon notice from the Agent that any Default is continuing.
No funds, other than proceeds of Collateral, will be paid to any such bank
account. None of the Grantors will open any new bank accounts or terminate any
existing bank accounts, except upon 10 days' prior written notice to the Agent.
(c) All proceeds of Collateral received by any Grantor shall be delivered
in kind to the Agent for deposit to a deposit account (the "Collateral Account")
of such Grantor maintained with the Agent, and such Grantor shall not commingle
any such proceeds, and shall hold separate and apart from all other property,
all such proceeds in express trust for the benefit of the Agent and the other
Lender Parties until delivery thereof is made to the Agent. No funds, other than
proceeds of Collateral, will be deposited in the Collateral Account.
(d) The Agent shall have the right to apply any amount in the Collateral
Account to the payment of any Secured Obligations which are due and payable or
payable upon demand, or to the payment of any Secured Obligations at any time
that an Event of Default shall exist. Subject to the rights of the Agent, each
Grantor shall have the right, with respect to and to the extent of collected
funds in the Collateral Account, (i) as long as there shall be no Default, to
require the Agent to transfer to such Grantor's general demand deposit account
at the Agent any or all of such collected funds and (ii) as long as there shall
be a Default and after giving effect to any exercise by the Agent of its rights,
(A) to require the Agent to transfer to such Grantor's general demand deposit
account at the Agent amounts required to cover checks drawn against that account
which shall have been presented for payment at the Agent as of the preceding
business day and all wire transfers which such Grantor has directed to be made
on the current business day, to the extent such checks and wire transfers are
for any purpose which does not violate any provision of any Loan Document and
(B) to require the Agent to purchase any Cash Equivalent Investment, provided
that, in the case of certificated securities, the Agent will retain possession
thereof as Collateral and, in the case of uncertificated securities, the Agent
will take such actions, including registration of such securities in its name,
as it shall determine is necessary to perfect its security interest therein. The
Agent may at any time transfer to any Grantor's general demand deposit account
at the Agent any or all of the collected funds in the Collateral Account;
provided, however, that any such transfer shall not be deemed to be a waiver or
modification of any of the Agent's rights under this Section 4.1.2(d).
SECTION 4.1.3. As to Collateral. (a) Until such time (during the
continuance of an Event of Default) as the Agent shall notify any Grantor of the
revocation of the power and authority granted by this Section 4.1.3(a), such
Grantor (i) may in the ordinary course of its business, at its own expense,
sell, lease or furnish under the contracts of service any of the Inventory
normally held by such Grantor for such purpose, and use and consume, in the
ordinary course of its business, any raw materials, work in process or materials
normally held by such Grantor for such purpose, (ii) will, at its own expense,
endeavor to collect, as and when due, all amounts due with respect to any of the
Collateral, including the taking of such action with respect to such collection
as the Agent may reasonably request or, in the absence of such request, as such
Grantor may deem advisable, and (iii) may grant, in the ordinary course of
business, to any party obligated on any of the Collateral, any rebate, refund or
allowance to which such
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party may be lawfully entitled, and may accept, in connection therewith, the
return of goods, the sale or lease of which shall have given rise to such
Collateral. The Agent, however, may (subject to Section 7.2.6 of the Credit
Agreement), at any time during the continuance of an Event of Default, whether
before or after any revocation of such power and authority or the maturity of
any of the Secured Obligations, notify any parties obligated on any of the
Collateral to make payment to the Agent of any amounts due or to become due
thereunder and enforce collection of any of the Collateral by suit or otherwise
and surrender, release, or exchange all or any part thereof, or compromise or
extend or renew for any period (whether or not longer than the original period)
any indebtedness thereunder or evidenced thereby. Upon request of the Agent,
each Grantor will (subject to Section 7.2.6 of the Credit Agreement), at its own
expense, notify any parties obligated on any of the Collateral to make payment
to the Agent of any amounts due or to become due thereunder.
(b) The Agent is authorized, during the Continuation of an Event of
Default, to endorse, in the name of any Grantor, any item, howsoever received by
the Agent, representing any payment on or other proceeds of any of the
Collateral.
(c) None of the Grantors will change its Federal Employer Identification
Number unless such Grantor notifies Agent of any change in writing at least 30
days prior to the date of such change and executes such additional security
agreements and financing statements as may be reasonably requested by the Agent.
SECTION 4.1.4. As to Intellectual Property Collateral. (a) None of the
Grantors shall, unless such Grantor shall reasonably and in good faith determine
(and notice of such determination shall have been delivered to the Agent) that
any of the Patent Collateral is not of material economic value to such Grantor,
do any act, or omit to do any act, whereby any of the Patent Collateral may
lapse or become abandoned or dedicated to the public or unenforceable.
(b) None of the Grantors shall permit any of its licensees to, unless such
Grantor shall reasonably and in good faith determine (and notice of such
determination shall have been delivered to the Agent) that any of the Trademark
Collateral is not of material economic value to such Grantor,
(i) fail to continue to use any of the Trademark Collateral in order
to maintain all of the material Trademark Collateral in full force free
from any claim of abandonment for non-use,
(ii) fail to maintain as in the past, in all material respects, the
quality of products and services offered under all of the Trademark
Collateral,
(iii) fail to employ all of the material Trademark Collateral
registered with any Federal or state or foreign authority with an
appropriate notice of such registration,
(iv) adopt or use any other Trademark which is confusingly similar
or a colorable imitation of any of the material Trademark Collateral,
(v) use any of the Trademark Collateral registered with any Federal
or state or foreign authority except for the uses for which registration
or application for registration of all of the material Trademark
Collateral has been made, and
(vi) do or permit any act or knowingly omit to do any act whereby
any of the material Trademark Collateral would reasonably be expected to
lapse or become invalid or unenforceable.
(c) None of the Grantors shall, unless such Grantor shall reasonably and
in good faith determine (and notice of such determination shall have been
delivered to the Agent) that any of the Copyright Collateral or any of the Trade
Secrets Collateral is not of material economic value to such Grantor, do or
permit any act or knowingly omit to do any act whereby any of the Copyright
Collateral or any of the Trade Secrets Collateral would reasonably be expected
to lapse or become invalid or unenforceable or placed in the public domain
except upon expiration of the end of an unrenewable term of a registration
thereof.
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(d) Each Grantor shall notify the Agent immediately if it knows, or has
reason to know, that any application or registration relating to any material
item of the Intellectual Property Collateral would reasonably be expected to
become abandoned or dedicated to the public or placed in the public domain or
invalid or unenforceable, or of any material adverse determination or
development (including the institution of, or any such determination or
development in, any proceeding in the United States Patent and Trademark Office,
the United States Copyright Office or any foreign counterpart thereof or any
court) regarding such Grantor's ownership of any of the material Intellectual
Property Collateral, its right to register the same or to keep and maintain and
enforce the same.
(e) In no event shall any Grantor or any of its agents, employees,
designees or licensees file an application for the registration of any
Intellectual Property Collateral with the United States Patent and Trademark
Office, the United States Copyright Office or any similar office or agency in
any other country or any political subdivision thereof, unless it promptly
informs the Agent, and upon request of the Agent, executes and delivers any and
all agreements, instruments, documents and papers as the Agent may reasonably
request to evidence the Agent's security interest for the benefit of the Lenders
in such Intellectual Property Collateral and the goodwill and general
intangibles of such Grantor relating thereto or represented thereby.
(f) Each Grantor shall take all commercially reasonable steps, including
in any proceeding before the United States Patent and Trademark Office, the
United States Copyright Office or any similar office or agency in any other
country or any political subdivision thereof, to maintain and pursue any
application (and to obtain the relevant registration) filed with respect to, and
to maintain any registration of, any material Intellectual Property Collateral,
including the filing of applications for renewal, affidavits of use, affidavits
of incontestability and opposition, interference and cancellation proceedings
and the payment of fees and taxes (except to the extent that dedication,
abandonment or invalidation is permitted under the foregoing clauses (a), (b)
and (c)).
SECTION 4.1.5. Insurance. Each Grantor will maintain or cause to be
maintained with responsible and reputable insurance carriers licensed to write
insurance, insurance with respect to the Equipment and Inventory against such
casualties and contingencies and of such types and in such amounts as is
customary in the case of similar businesses and will, upon the request of the
Agent, furnish a certificate of a reputable insurance broker setting forth the
nature and extent of all insurance maintained by such Grantor in accordance with
this Section. Without limiting the foregoing, each Grantor further agrees as
follows:
(a) Each policy for property insurance shall show the Agent as loss
payee.
(b) Each policy for liability insurance shall show the Agent as an
additional insured.
(c) With respect to each life insurance policy, each Grantor shall
execute and deliver to the Agent a collateral assignment, notice of which
has been acknowledged in writing by the insurer.
(d) Each insurance policy shall provide that at least 30 days' prior
written notice of cancellation or of lapse shall be given to the Agent by
the insured.
(e) Each Grantor shall, if so requested by the Agent, deliver to the
Agent a copy of each insurance policy.
(f) All payments in respect of property insurance and life insurance
shall be paid to each Grantor.
SECTION 4.1.6. Transfers and Other Liens. None of the Grantors shall:
(a) sell, assign (by operation of law or otherwise) or otherwise
dispose of any of the Collateral, except Inventory in the ordinary course
of business or as permitted by the Credit Agreement; or
(b) create or suffer to exist any Lien or other charge or
encumbrance upon or with respect to any of the Collateral to secure
Indebtedness of any Person or entity, except for the security interest
created by this Security Agreement and except as permitted by the Credit
Agreement.
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SECTION 4.1.7. Further Assurances, etc. Each Grantor agrees that, from
time to time at its own expense, such Grantor will promptly execute and deliver
all further instruments and documents, and take all further action, that may be
necessary or desirable, or that the Agent may request, in order to perfect,
preserve and protect any security interest granted or purported to be granted
hereby or to enable the Agent to exercise and enforce its rights and remedies
hereunder with respect to any Collateral. Without limiting the generality of the
foregoing, each Grantor will
(a) mark conspicuously each document included in the Inventory, each
chattel paper included in the Receivables and each Related Contract and,
at the request of the Agent, each of its records pertaining to the
Collateral with a legend, in form and substance satisfactory to the Agent,
indicating that such document, chattel paper, Related Contract or
Collateral is subject to the security interest granted hereby;
(b) if any Receivable shall be evidenced by a promissory note or
other instrument, negotiable document or chattel paper, deliver and pledge
to the Agent hereunder such promissory note, instrument, negotiable
document or chattel paper duly endorsed and accompanied by duly executed
instruments of transfer or assignment, all in form and substance
satisfactory to the Agent;
(c) execute and file such financing or continuation statements, or
amendments thereto, and such other instruments or notices (including,
without limitation, any assignment of claim form under or pursuant to the
federal assignment of claims statute, 31 U.S.C. ss. 3726, any successor or
amended version thereof or any regulation promulgated under or pursuant to
any version thereof), as may be necessary or desirable, or as the Agent
may request, in order to perfect and preserve the security interests and
other rights granted or purported to be granted to the Agent hereby; and
(d) furnish to the Agent, from time to time at the Agent's request,
statements and schedules further identifying and describing the Collateral
and such other reports in connection with the Collateral as the Agent may
reasonably request, all in reasonable detail.
With respect to the foregoing and the grant of the security interest hereunder,
each Grantor hereby authorizes the Agent to file one or more financing or
continuation statements, and amendments thereto, relative to all or any part of
the Collateral without the signature of such Grantor where permitted by law. A
carbon, photographic or other reproduction of this Security Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law.
ARTICLE V
THE AGENT
SECTION 5.1. Agent Appointed Attorney-in-Fact. Each Grantor hereby
irrevocably appoints the Agent such Grantor's attorney-in-fact, with full
authority in the place and stead of such Grantor and in the name of such Grantor
or otherwise, from time to time in the Agent's discretion, to take any action
and to execute any instrument which the Agent may deem necessary or advisable to
accomplish the purposes of this Security Agreement, including, without
limitation:
(a) to ask, demand, collect, sue for, recover, compromise, receive
and give acquittance and receipts for moneys due and to become due under
or in respect of any of the Collateral;
(b) to receive, endorse, and collect any drafts or other
instruments, documents and chattel paper, in connection with clause (a)
above;
(c) to file any claims or take any action or institute any
proceedings which the Agent may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights of
the Agent with respect to any of the Collateral; and
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(d) to perform the affirmative obligations of such Grantor hereunder
(including all obligations of such Grantor pursuant to Section 4.1.7).
Each Grantor hereby acknowledges, consents and agrees that the power of attorney
granted pursuant to this Section is irrevocable and coupled with an interest.
SECTION 5.2. Agent May Perform. If any Grantor fails to perform any
agreement contained herein, the Agent may itself perform, or cause performance
of, such agreement, and the expenses of the Agent incurred in connection
therewith shall be payable by such Grantor pursuant to Section 6.2.
SECTION 5.3. Agent Has No Duty. In addition to, and not in limitation of,
Section 2.5, the powers conferred on the Agent hereunder are solely to protect
its interest (on behalf of the Lender Parties) in the Collateral and shall not
impose any duty on it to exercise any such powers. Except for reasonable care of
any Collateral in its possession and the accounting for moneys actually received
by it hereunder, the Agent shall have no duty as to any Collateral or as to the
taking of any necessary steps to preserve rights against prior parties or any
other rights pertaining to any Collateral.
SECTION 5.4. Reasonable Care. The Agent is required to exercise reasonable
care in the custody and preservation of any of the Collateral in its possession;
provided, however, that the Agent shall be deemed to have exercised reasonable
care in the custody and preservation of any of the Collateral, if it takes such
action for that purpose as any Grantor reasonably requests in writing at times
other than upon the occurrence and during the continuance of any Event of
Default, but failure of the Agent to comply with any such request at any time
shall not in itself be deemed a failure to exercise reasonable care.
ARTICLE VI
REMEDIES
SECTION 6.1. Certain Remedies. If any Event of Default shall have occurred
and be continuing:
(a) The Agent may exercise in respect of the Collateral, in addition
to other rights and remedies provided for herein or otherwise available to
it, all the rights and remedies of a secured party on default under the
U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and
also may
(i) require each Grantor to, and each Grantor hereby agrees
that it will, at its expense and upon request of the Agent
forthwith, assemble all or part of the Collateral as directed by the
Agent and make it available to the Agent at a place to be designated
by the Agent which is reasonably convenient to both parties; and
(ii) without notice except as specified below, sell the
Collateral or any part thereof in one or more parcels at public or
private sale, at any of the Agent's offices or elsewhere, for cash,
on credit or for future delivery (without assumption of any credit
risk), and upon such other terms as the Agent may deem commercially
reasonable. Each Grantor agrees that, to the extent notice of sale
shall be required by law, at least ten days' prior notice to such
Grantor of the time and place of any public sale or the time after
which any private sale is to be made shall constitute reasonable
notification. The Agent shall not be obligated to make any sale of
Collateral regardless of notice of sale having been given. The Agent
may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale
may, without further notice, be made at the time and place to which
it was so adjourned.
(b) All cash proceeds received by the Agent in respect of any sale
of, collection from, or other realization upon all or any part of the
Collateral may, in the discretion of the Agent, be held by the Agent as
collateral for, and/or then or at any time thereafter applied (after
payment of any amounts payable to the
13
<PAGE> 14
Agent pursuant to Section 6.2) in whole or in part by the Agent for the
ratable benefit of the Lender Parties against, all or any part of the
Secured Obligations in the following order:
(i) first, to payment of the expenses of such sale or other
realization including reasonable compensation to the Agent and its
agents and counsel, and all expenses, liabilities and advances
incurred or made by the Agent in connection therewith, and any other
unreimbursed expenses for which the Agent is to be reimbursed
pursuant to Section 11.3 of the Credit Agreement or Section 6.2
hereof and unpaid fees owing to the Agent under the Credit
Agreement;
(ii) second, to the ratable payment of accrued but unpaid
interest under the Credit Agreement, the Acquisition Loans and the
Revolving Loans;
(iii) third, to the ratable payment of unpaid principal of the
Acquisition Loans under the Credit Agreement;
(iv) fourth, to the ratable payment of the unpaid principal
amount of the Revolving Loans and all other amounts payable by the
Obligors under the Credit Agreement; and
(v) fifth, to the ratable payment of all other Secured
Obligations, until all Secured Obligations shall have been paid in
full.
The Agent may make distributions hereunder in cash or in kind or, on a ratable
basis, in any combination thereof. Any surplus of such cash or cash proceeds
held by the Agent and remaining after payment in full of all the Secured
Obligations shall be paid over to each Grantor or to whomsoever may be lawfully
entitled to receive such surplus.
SECTION 6.2. Indemnity and Expenses. (a) Each Grantor agrees to indemnify
the Agent and the other Lender Parties from and against any and all claims,
losses and liabilities arising out of or resulting from this Security Agreement
(including, without limitation, enforcement of this Security Agreement), except
claims, losses or liabilities resulting from the Agent's gross negligence or
wilful misconduct.
(b) Each Grantor will upon demand pay to the Agent the amount of any and
all reasonable expenses, including the reasonable fees and disbursements of its
counsel and of any experts and agents, which the Agent may incur in connection
with
(i) the administration of this Security Agreement,
(ii) the custody, preservation, use or operation of, or the sale of,
collection from, or other realization upon, any of the Collateral,
(iii) the exercise or enforcement of any of the rights of the Agent
or the other Lender Parties hereunder, or
(iv) the failure by any Grantor to perform or observe any of the
provisions hereof.
ARTICLE VII
MISCELLANEOUS PROVISIONS
SECTION 7.1. Loan Document. This Security Agreement is a Loan Document
executed pursuant to the Credit Agreement and shall (unless otherwise expressly
indicated herein) be construed, administered and applied in accordance with the
terms and provisions thereof.
SECTION 7.2. Amendments; etc. No amendment to or waiver of any provision
of this Security Agreement nor consent to any departure by any Grantor herefrom,
shall in any event be effective unless the same shall be in
14
<PAGE> 15
writing and signed by the Agent (acting with the requisite consent of the
Lenders as provided in the Credit Agreement) and each Grantor, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.
SECTION 7.3. Addresses for Notices. All notices and other communications
provided for hereunder shall be in writing (including telecopier communication)
and, if to any Grantor, mailed, telecopied or delivered to it, addressed to it
at the address as set forth on Schedule III of the Credit Agreement, if to the
Agent, mailed or delivered to it, addressed to it at the address of the Agent as
specified in the Credit Agreement, or as to either party at such other address
as shall be designated by such party in a written notice to each other party
complying as to delivery with the terms of this Section. Any notice, if mailed
and properly addressed and sent return receipt requested with postage prepaid,
shall be deemed given three Business Days after posting; any notice, if sent by
prepaid overnight express shall be deemed delivered on the next Business Day;
any notice, if transmitted by telecopier, shall be deemed given when sent, with
confirmation of receipt; and any notice, if transmitted by hand, shall be deemed
received when delivered.
SECTION 7.4. Section Captions. Section captions used in this Security
Agreement are for convenience of reference only, and shall not affect the
construction of this Security Agreement.
SECTION 7.5. Severability. Wherever possible each provision of this
Security Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Security Agreement
shall be prohibited by or invalid under such law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Security Agreement.
SECTION 7.6. Governing Law, Entire Agreement, etc. THIS SECURITY AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE
STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE
SECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY
PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE
STATE OF NEW YORK. THIS SECURITY AGREEMENT AND THE OTHER LOAN DOCUMENTS
CONSTITUTE THE ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE
SUBJECT MATTER HEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH
RESPECT THERETO.
SECTION 7.7. Forum Selection and Consent to Jurisdiction. ANY LITIGATION
BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS SECURITY
AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF THE LENDER PARTIES OR EACH GRANTOR MAY BE
BROUGHT AND MAINTAINED IN ANY UNITED STATES FEDERAL OR NEW YORK STATE COURTS
SITTING IN THE CITY OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING
ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE
AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER
PROPERTY MAY BE FOUND. EACH GRANTOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO
THE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE COURTS SITTING
IN THE CITY OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH
ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN
CONNECTION WITH SUCH LITIGATION. EACH GRANTOR FURTHER IRREVOCABLY CONSENTS TO
THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL
SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. EACH GRANTOR HEREBY EXPRESSLY
AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION
WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH
LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY
SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT
ANY GRANTOR HAS OR HEREAFTER MAY
15
<PAGE> 16
ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS
(WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN
AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, SUCH
GRANTOR HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS
UNDER THIS SECURITY AGREEMENT.
SECTION 7.8. Waiver of Jury Trial. THE LENDER PARTIES AND EACH GRANTOR
HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH, THIS SECURITY AGREEMENT, OR ANY COURSE OF CONDUCT,
COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE
LENDER PARTIES OR SUCH GRANTOR. EACH GRANTOR ACKNOWLEDGES AND AGREES THAT IT HAS
RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER
PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS
PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDERS ENTERING INTO THE CREDIT
AGREEMENT AND EACH SUCH OTHER LOAN DOCUMENT. IN NO EVENT SHALL ANY LENDER PARTY
BE LIABLE FOR ANY CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED IN CONNECTION
HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY.
16
<PAGE> 17
IN WITNESS WHEREOF, each Grantor has caused this Security Agreement to be
duly executed and delivered by its officer thereunto duly authorized as of the
date first above written.
B.W. ELLIOTT MANUFACTURING CO., INC.
By: /s/ Illegible
--------------------------------
Title:
HUDSON LOCK, INC.
By: /s/ Illegible
--------------------------------
Title:
KEY COMPONENTS FINANCE CORP.
By: /s/ Illegible
--------------------------------
Title:
ESP LOCK PRODUCTS INC.
By: /s/ Illegible
--------------------------------
Title:
SOCIETE GENERALE,
as Agent
By: /s/ Illegible
--------------------------------
Title:
17
<PAGE> 18
SCHEDULE I
to
Security Agreement
Item A. Location of Equipment
B.W. Elliott Manufacturing Co., Inc.
49-51 Griswald Street, Binghamton, NY 13902
11 Beckwidth Avenue, Binghamton, NY 13902
Hudson Lock, Inc.
81 Apsley Street, Hudson, Massachusetts 01749
[ ], Grand Rapids, Michigan
Key Components Finance Corp.
[ ]
ESP Lock Products, Inc.
Item B. Location of Inventory
Item C. Location of Bank Account
<TABLE>
<CAPTION>
Bank Name and Address Account Number Contact Person
--------------------- -------------- --------------
<S> <C> <C>
[ ]
</TABLE>
<PAGE> 19
SCHEDULE II
to
Security Agreement
Item A. Patents
Issued Patents
<TABLE>
<CAPTION>
Country Patent No. Patent Date Inventor(s) Title
- ------- ---------- ----------- ----------- -----
<S> <C> <C> <C> <C>
</TABLE>
Pending Patent Applications
<TABLE>
<CAPTION>
Country Serial No. Filing Date Inventor(s) Title
- ------- ---------- ----------- ----------- -----
<S> <C> <C> <C> <C>
</TABLE>
Patent Applications in Preparation
<TABLE>
<CAPTION>
Expected
Country Docket No. Filing Date Inventor(s) Title
- ------- ---------- ----------- ----------- -----
<S> <C> <C> <C> <C>
</TABLE>
Item B. Patent Licenses
<TABLE>
<CAPTION>
Country or Effective Expiration Subject
Territory Licensor Licensee Date Date Matter
- --------- -------- -------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
</TABLE>
<PAGE> 20
SCHEDULE III
to
Security Agreement
Item A. Trademarks
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Registration No. Registration Date Serial Number Filing Date
---------------- ----------------- ------------- -----------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
</TABLE>
Item B. Trademark Licenses
[None]
<PAGE> 21
SCHEDULE IV
to
Security Agreement
Item A. Copyrights/Mask Works
[None]
Item B. Copyright/Mask Work Licenses
[None]
<PAGE> 1
SCHEDULE V
to
Security Agreement
Trade Secret or Know-How Licenses
---------------------------------
[None]
<PAGE> 2
Exhibit 10.16
BORROWER SECURITY AGREEMENT
THIS SECURITY AGREEMENT (as amended, supplemented, restated or otherwise
modified from time to time, the "Security Agreement"), dated as of July 27,
1998, made by Key Components, LLC, a Delaware limited liability company (the
"Grantor"), in favor of Societe Generale, as agent for the Lenders (together
with any successor(s) thereto in such capacity, the "Agent") for each of the
Lender Parties (as defined below).
W I T N E S S E T H:
WHEREAS, pursuant to a Credit and Guaranty Agreement, dated as of the date
hereof (together with all amendments, supplements, restatements and other
modifications, if any, from time to time thereafter made thereto, the "Credit
Agreement"), among the Grantor, as Borrower, its Subsidiaries, as Guarantors
(the "Guarantors"), the various financial institutions (individually a "Lender"
and collectively the "Lenders") as are, or may from time to time become, parties
thereto and the Agent, the Lenders have extended Commitments to make Credit
Extensions to the Grantor;
WHEREAS, as a condition precedent to the making of the initial Credit
Extensions under the Credit Agreement, the Grantor is required to execute and
deliver this Security Agreement;
WHEREAS, each Guarantor is a wholly-owned Subsidiary of the Grantor; and
WHEREAS, the Grantor has duly authorized the execution, delivery and
performance of this Security Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in order to induce the Lenders
to make Credit Extensions (including the initial Credit Extensions) to the
Grantor pursuant to the Credit Agreement, the Grantor agrees, for the benefit of
each Lender Party, as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Certain Terms. The following terms (whether or not
underscored) when used in this Security Agreement, including its preamble and
recitals, shall have the following meanings (such definitions to be equally
applicable to the singular and plural forms thereof):
"Agent" is defined in the preamble.
"Collateral" is defined in Section 2.1.
"Collateral Account" is defined in Section 4.1.2(c).
"Computer Hardware and Software Collateral" means:
(a) all computer and other electronic data processing hardware,
integrated computer systems, central processing units, memory units,
display terminals, printers, features, computer elements, card readers,
tape drives, hard and soft disk drives, cables, electrical supply
hardware, generators, power equalizers, accessories, all peripheral
devices and other related computer hardware now owned or hereafter
acquired by the Grantor;
<PAGE> 3
(b) all software programs (including both source code, object code
and all related applications and data files), whether now owned, licensed
or leased or hereafter acquired by the Grantor, designed for use on the
computers and electronic data processing hardware described in clause (a)
above;
(c) all firmware associated therewith now owned or hereafter
acquired by the Grantor;
(d) all documentation (including flow charts, logic diagrams,
manuals, guides and specifications) with respect to such hardware,
software and firmware described in the preceding clauses (a) through (c)
above; and
(e) all rights of the Grantor with respect to all of the foregoing,
including, without limitation, any and all copyrights, licenses, options,
warranties, service contracts, program services, test rights, maintenance
rights, support rights, improvement rights, renewal rights and
indemnifications and any substitutions, replacements, additions or model
conversions of any of the foregoing.
"Copyright Collateral" means all copyrights and all semi-conductor chip
product mask works of the Grantor, whether statutory or common law, registered
or unregistered, now or hereafter in force throughout the world including,
without limitation, all of the Grantor's right, title and interest in and to all
copyrights and mask works registered in the United States Copyright Office or
anywhere else in the world and also including, without limitation, the
copyrights and mask works referred to in Item A of Schedule IV attached hereto,
and all applications for registration thereof, whether pending or in
preparation, all copyright and mask work licenses, including each copyright and
mask work license referred to in Item B of Schedule IV attached hereto, the
right to sue for past, present and future infringements of any thereof, all
rights corresponding thereto throughout the world, all extensions and renewals
of any thereof and all proceeds of the foregoing, including, without limitation,
licenses, royalties, income, payments, claims, damages and proceeds of suit.
"Credit Agreement" is defined in the first recital.
"Equipment" is defined in clause (a) of Section 2.1.
"Grantor" is defined in the preamble.
"Intellectual Property Collateral" means, collectively, the Computer
Hardware and Software Collateral, the Copyright Collateral, the Patent
Collateral, the Trademark Collateral and the Trade Secrets Collateral.
"Inventory" is defined in clause (b) of Section 2.1.
"Lender" and "Lenders" are defined in the first recital.
"Lender Party" means, as the context may require, any Lender or the Agent
and each of its respective successors, transferees and assigns.
"Patent Collateral" means:
(a) all letters patent and applications for letters patent
throughout the world of the Grantor, including all patent applications of
the Grantor in preparation for filing anywhere in the world and including
each patent and patent application referred to in Item A of Schedule II
attached hereto;
(b) all patent licenses in favor of the Grantor, including each
patent license in favor of the Grantor referred to in Item B of Schedule
II attached hereto;
(c) all reissues, divisions, continuations, continuations-in-part,
extensions, renewals and reexaminations of any of the items described in
clauses (a) and (b) above; and
2
<PAGE> 4
(d) all proceeds of, and rights associated with, the foregoing
(including license royalties and proceeds of infringement suits), the
right of the Grantor to sue third parties for past, present or future
infringements of any patent or patent application, including any patent or
patent application referred to in Item A of Schedule II attached hereto,
and for breach or enforcement of any patent license, including any patent
license referred to in Item B of Schedule II attached hereto, and all
rights corresponding thereto throughout the world.
"Receivables" is defined in clause (c) of Section 2.1.
"Related Contracts" is defined in clause (c) of Section 2.1.
"Rolling Stock" means all railcars, barges and other water carrier
equipment, and all accessions, appurtenances and parts installed on and
additions thereto and replacements thereof hereafter acquired by the Grantor.
"Secured Obligations" is defined in Section 2.2.
"Security Agreement" is defined in the preamble.
"Trademark Collateral" means:
(a) all trademarks, trade names, corporate names, company names,
business names, fictitious business names, trade styles, service marks,
certification marks, collective marks, logos, other source of business
identifiers, prints and labels on which any of the foregoing have appeared
or appear, designs and general intangibles of a like nature of the Grantor
(all of the foregoing items in this clause (a) being collectively called a
"Trademark"), now existing anywhere in the world or hereafter adopted or
acquired, whether currently in use or not, all registrations and
recordings thereof and all applications in connection therewith, whether
pending or in preparation for filing, including registrations, recordings
and applications of the Grantor in the United States Patent and Trademark
Office or in any office or agency of the United States of America or any
state thereof or any foreign country, including those referred to in Item
A of Schedule III attached hereto;
(b) all Trademark licenses in favor of the Grantor, including each
Trademark license referred to in Item B of Schedule III attached hereto;
(c) all reissues, extensions or renewals of any of the items
described in clauses (a) and (b) above;
(d) all of the goodwill of the business of the Grantor connected
with the use of, and symbolized by the items described in, clauses (a) and
(b) above; and
(e) all proceeds of, and rights associated with, the foregoing,
including any claim by the Grantor against third parties for past, present
or future infringement or dilution of any Trademark, Trademark
registration or Trademark license of the Grantor, including any Trademark,
Trademark registration or Trademark license referred to in Item A or Item
B of Schedule III attached hereto, or for any injury to the goodwill
associated with the use of any such Trademark or for breach or enforcement
of any Trademark license.
"Trade Secrets Collateral" means common law and statutory trade secrets
and all other confidential or proprietary or useful information of the Grantor
and all know-how obtained by the Grantor or used by the Grantor in the business
of the Grantor (all of the foregoing being collectively called a "Trade
Secret"), whether or not such Trade Secret has been reduced to a writing or
other tangible form, including all documents and things embodying, incorporating
or referring in any way to such Trade Secret, all Trade Secret licenses,
including each Trade Secret license referred to in Schedule V attached hereto,
and including the right of the Grantor to sue for and to enjoin and to collect
damages for the actual or threatened misappropriation of any Trade Secret and
for the breach or enforcement of any such Trade Secret license.
3
<PAGE> 5
"U.C.C." means the Uniform Commercial Code, as in effect in the State of
New York.
SECTION 1.2. Credit Agreement Definitions. Unless otherwise defined herein
or the context otherwise requires, terms used in this Security Agreement,
including its preamble and recitals, have the meanings provided in the Credit
Agreement.
SECTION 1.3. U.C.C. Definitions. Unless otherwise defined herein or in the
Credit Agreement or unless the context otherwise requires, terms for which
meanings are provided in the U.C.C. are used in this Security Agreement,
including its preamble and recitals, with such meanings.
ARTICLE II
SECURITY INTEREST
SECTION 2.1. Grant of Security. The Grantor hereby assigns and pledges to
the Agent for its benefit and the ratable benefit of each of the Lender Parties,
and hereby grants to the Agent for its benefit and the ratable benefit of each
of the Lender Parties a security interest in, all of the Grantor's right, title
and interest in, to and under the following property, whether now or hereafter
existing or acquired (the "Collateral"):
(a) all equipment in all of its forms of the Grantor, wherever
located, including Rolling Stock (but excluding motor vehicles, trucks and
trailers), and all parts thereof and all accessions, additions,
attachments, improvements, substitutions and replacements thereto and
therefor (any and all of the foregoing being the "Equipment");
(b) all inventory in all of its forms of the Grantor, wherever
located, including
(i) all merchandise, goods and other personal property which
are held for sale or lease, all raw materials and work in process
therefor (including, without limitation, tobacco and tobacco related
products), finished goods thereof, and materials used or consumed in
the manufacture or production thereof,
(ii) all goods in which the Grantor has an interest in mass or
a joint or other interest or right of any kind (including goods in
which the Grantor has an interest or right as consignee), and
(iii) all goods which are returned to or repossessed by the
Grantor,
and all accessions thereto, products thereof and documents therefor (any
and all such inventory, materials, goods, accessions, products and
documents being the "Inventory");
(c) all accounts, contracts, contract rights, chattel paper,
documents, instruments, and general intangibles of the Grantor, including
ownership rights of the inventory owned by the Grantor, whether or not
arising out of or in connection with the sale or lease of goods or the
rendering of services, and all rights of the Grantor now or hereafter
existing in and to all security agreements, guaranties, leases and other
contracts securing or otherwise relating to any such accounts, contracts,
contract rights, chattel paper, documents, instruments, and general
intangibles (any and all such accounts, contracts, contract rights,
chattel paper, documents, instruments, and general intangibles being the
"Receivables", and any and all such security agreements, guaranties,
leases and other contracts being the "Related Contracts");
(d) all Intellectual Property Collateral of the Grantor;
(e) all books, records, writings, data bases, information and other
property of the Grantor relating to, used or useful in connection with,
evidencing, embodying, incorporating or referring to any of the foregoing
in this Section 2.1;
4
<PAGE> 6
(f) all of the Grantor's other property and rights of every kind and
description and interests therein; and
(g) all products, offspring, rents, issues, profits, returns, income
and proceeds of and from any and all of the foregoing Collateral
(including proceeds which constitute property of the types described in
clauses (a), (b), (c), (d), (e) and (f) above, proceeds deposited from
time to time in the Collateral Account and in any lock boxes of the
Grantor, and, to the extent not otherwise included, all payments under
insurance (whether or not the Agent is the loss payee thereof), or any
indemnity, warranty or guaranty, payable by reason of loss or damage to or
otherwise with respect to any of the foregoing Collateral).
SECTION 2.2. Security for Secured Obligations. This Security Agreement
secures the prompt payment in full of all amounts payable by the Grantor and
each other Obligor under or in connection with the Credit Agreement, the Notes,
each Rate Protection Agreement with a Lender Party and each other Loan Document,
whether for principal, interest, costs, fees, expenses, indemnities or otherwise
and whether now or hereafter existing (all of such obligations being the
"Secured Obligations").
SECTION 2.3. Continuing Security Interest; Transfer of Notes. This
Security Agreement shall create a continuing security interest in the Collateral
and shall
(a) remain in full force and effect until the indefeasible payment
in full in cash of all Secured Obligations and the expiration or
termination of all Commitments,
(b) be binding upon the Grantor, its successors, transferees and
assigns, and
(c) inure, together with the rights and remedies of the Agent
hereunder, to the benefit of the Agent and each other Lender Party.
Without limiting the generality of the foregoing clause (c), any Lender may, to
the extent permitted pursuant to Section 11.11.1 of the Credit Agreement, assign
or otherwise transfer (in whole or in part) any Note or Loan held by it to any
other Person or entity, and such other Person or entity shall thereupon become
vested with all the rights and benefits in respect thereof granted to such
Lender under any Loan Document (including this Security Agreement) or otherwise,
subject, however, to any contrary provisions in such assignment or transfer, and
to the provisions of Section 11.11 and Article X of the Credit Agreement.
SECTION 2.4. Release and Termination.
(a) Upon any sale, lease, transfer or other disposition of any item of
Collateral permitted under the terms of the Loan Documents (other than sales of
Inventory in the ordinary course of business), the Agent will, at the Grantor's
expense, execute and deliver such documents and instruments as the Grantor shall
reasonably request to evidence the release of such Collateral from the security
interest granted hereunder and shall deliver such Collateral held by the Agent
to the Grantor; provided, however, that the proceeds of any such sale, lease
transfer or other disposition are applied in accordance with Section 3.1.2 of
the Credit Agreement, to the extent applicable. Upon any such release, the
security interest granted herein shall terminate as to such Collateral, and all
rights to such Collateral shall revert to the Grantor.
(b) Upon the indefeasible payment in cash in full of all Secured
Obligations and the expiration or termination of all Commitments, the security
interest granted herein shall terminate and all rights to the Collateral shall
revert to the Grantor. Upon any such termination, the Agent will, at the
Grantor's sole expense, deliver to the Grantor, without any representations,
warranties or recourse of any kind whatsoever, such documents as the Grantor
shall reasonably request to evidence such termination.
5
<PAGE> 7
SECTION 2.5. Grantor Remains Liable. Anything herein to the contrary
notwithstanding
(a) the Grantor shall remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein, and
shall perform all of its duties and obligations under such contracts and
agreements to the same extent as if this Security Agreement had not been
executed,
(b) the exercise by the Agent of any of its rights hereunder shall
not release the Grantor from any of its duties or obligations under any
such contracts or agreements included in the Collateral, and
(c) neither the Agent nor any other Lender Party shall have any
obligation or liability under any such contracts or agreements included in
the Collateral by reason of this Security Agreement, nor shall the Agent
or any other Lender Party be obligated to perform any of the obligations
or duties of the Grantor thereunder or to take any action to collect or
enforce any claim for payment assigned hereunder.
SECTION 2.6. Security Interest Absolute. All rights of the Agent and the
security interests granted to the Agent hereunder, and all obligations of the
Grantor hereunder, shall be absolute and unconditional, irrespective of
(a) any lack of validity or enforceability of the Credit Agreement,
any Note, any Rate Protection Agreement with a Lender or any other Loan
Document;
(b) the failure of any Lender Party or any holder of any Note;
(i) to assert any claim or demand or to enforce any right or
remedy against the Grantor, any Obligor or any other Person under
the provisions of the Credit Agreement, any Note, any Rate
Protection Agreement with a Lender, any other Loan Document or
otherwise, or
(ii) to exercise any right or remedy against any other
guarantor of, or collateral securing, any Secured Obligation;
(c) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Secured Obligations or any other
extension, compromise or renewal of any Secured Obligation;
(d) any reduction, limitation, impairment or termination of any
Secured Obligation for any reason (other than repayment in full of the
Secured Obligations), including any claim of waiver, release, surrender,
alteration or compromise, and shall not be subject to (and the Grantor
hereby waives any right to or claim of) any defense or setoff,
counterclaim, recoupment or termination whatsoever by reason of the
invalidity, illegality, nongenuineness, irregularity, compromise or
unenforceability of, or any other event or occurrence affecting, any
Secured Obligation or otherwise;
(e) any amendment to, rescission, waiver, or other modification of,
or any consent to departure from, any of the terms of the Credit
Agreement, any Note, any Rate Protection Agreement with a Lender or any
other Loan Document;
(f) any addition, exchange, release, surrender, impairment or
non-perfection of any collateral (including the Collateral), or any
amendment to or waiver or release of or addition to or consent to
departure from any guaranty, for any of the Secured Obligations; or
(g) any other circumstances which might otherwise constitute a
defense available to, or a legal or equitable discharge of, the Grantor,
any other Obligor or otherwise.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Representations and Warranties. The Grantor represents and
warrants unto each Lender Party as set forth in this Article.
SECTION 3.1.1. Location of Collateral, etc. All of the Equipment,
Inventory and lock boxes of the Grantor are located at the places specified in
Item A, Item B and Item C, respectively, of Schedule I hereto. None of the
Equipment and Inventory has, within the four months preceding the date of this
Security Agreement, been located at any place other than the places specified in
Item A and Item B, respectively, of Schedule I hereto. The principal place of
business and chief executive office of the Grantor is set forth on the signature
page hereto. The Grantor keeps its records concerning the Receivables, and all
originals of all chattel paper which evidence Receivables, at the addresses as
set forth on the signature page hereto. The Grantor does not have any trade
names. The Grantor has not been known by any legal name different from those set
forth on the signature page hereto, nor has the Grantor been the subject of any
merger or other corporate reorganization. If the Collateral includes any
Inventory located in the State of California, the Grantor is not a "retail
merchant" within the meaning of Section 9102 of the Uniform Commercial Code -
Secured Transactions of the State of California. None of the Receivables is
evidenced by a promissory note or other instrument.
SECTION 3.1.2. Ownership, No Liens, etc. The Grantor owns the Collateral
free and clear of any Lien, security interest, charge or encumbrance except for
the security interest created by this Security Agreement and except as permitted
by the Credit Agreement. No effective financing statement or other similar
instrument in effect covering all or any part of the Collateral is on file in
any recording office, except such as may have been filed in favor of the Agent
relating to this Security Agreement.
SECTION 3.1.3. Possession and Control. The Grantor has exclusive
possession and control of the Equipment and Inventory.
SECTION 3.1.4. Negotiable Documents, Instruments and Chattel Paper. The
Grantor has, contemporaneously herewith, delivered to the Agent possession of
all originals of all negotiable documents, instruments and chattel paper
currently owned or held by the Grantor (duly endorsed in blank, if requested by
the Agent).
SECTION 3.1.5. [Intentionally omitted]
SECTION 3.1.6. Validity, etc. The Liens intended to be created by this
Security Agreement constitute valid first priority security interests in the
Collateral securing the payment of the Secured Obligations, and all filings and
other actions necessary or desirable to perfect and protect such security
interest have been duly taken.
SECTION 3.1.7. Authorization, Approval, etc. No authorization, approval or
other action by, and no notice to or filing with, any governmental authority or
regulatory body (other than UCC filings) is required either
(a) for the grant by the Grantor of the security interest granted
hereby or for the execution, delivery and performance of this Security
Agreement by the Grantor, or
(b) for the perfection of or the exercise by the Agent of its rights
and remedies hereunder.
SECTION 3.1.8. Compliance with Laws. The Grantor is in compliance with the
requirements of all applicable laws (including, without limitation, the
provisions of the Fair Labor Standards Act), rules, regulations and orders of
every governmental authority, the non-compliance with which would reasonably be
expected to materially adversely affect the business, properties, assets,
operations, condition (financial or otherwise) or prospects of the Grantor.
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SECTION 3.1.9. Due Execution, Validity, Etc. The execution, delivery and
performance by the Grantor of this Security Agreement does not contravene or
result in a default under the Grantor's Organic Documents or contravene or
result in a default under any material contractual restriction, Lien or
governmental regulation or court decree or order binding on the Grantor. This
Security Agreement has been duly executed and delivered on behalf of the Grantor
and constitutes the legal, valid and binding obligation of the Grantor
enforceable in accordance with its terms, subject to the effect of any
applicable bankruptcy, insolvency, reorganization, moratorium or similar law
affecting creditor's right generally, and subject to the effect of general
principles of equity (regardless of whether considered in a proceeding in equity
or at law). In addition, each representation and warranty of the Grantor
contained in each Loan Document to which it is a party is true and correct in
all material respects.
ARTICLE IV
COVENANTS
SECTION 4.1. Certain Covenants. The Grantor covenants and agrees that, so
long as any portion of the Secured Obligations shall remain unpaid or any Lender
shall have any outstanding Commitment, the Grantor will, unless the Required
Lenders shall otherwise consent in writing, perform the obligations set forth in
this Section.
SECTION 4.1.1. As to Equipment and Inventory. The Grantor hereby agrees
that it shall
(a) keep all material Equipment and Inventory (other than Inventory
sold in the ordinary course of business) at the places therefor specified
in Section 3.1.1 or, upon 30 days' prior written notice to the Agent, at
such other places in a jurisdiction where all representations and
warranties set forth in Article III shall be true and correct in all
material respects, and all action required pursuant to the first sentence
of Section 4.1.7 shall have been taken with respect to the material
Equipment and Inventory;
(b) cause all material Equipment to be maintained and preserved in
good condition, repair and working order, ordinary wear and tear excepted;
and make or cause to be made all material repairs, replacements, and other
improvements in connection therewith which are reasonably necessary or
desirable to such end; and promptly furnish to the Agent a statement
respecting any loss or damage to any of the material Equipment; and
(c) pay, before the same shall become delinquent, promptly when due
all property and other taxes, assessments and governmental charges or
levies imposed upon, and all material claims (including claims for labor,
materials and supplies) against, the Equipment and Inventory, except to
the extent the validity thereof is being contested in good faith by
appropriate proceedings and for which adequate reserves in accordance with
GAAP have been set aside.
SECTION 4.1.2. As to Receivables.
(a) The Grantor shall keep its place(s) of business and chief
executive office at the offices set forth on Schedule III of the Credit
Agreement and shall keep the offices where it keeps its records concerning
the Receivables, and all originals of all chattel paper which evidence
Receivables, located at the addresses set forth on Schedule III of the
Credit Agreement or, upon 30 days' prior written notice to the Agent, at
such other locations in a jurisdiction where all representations and
warranties set forth in Article III shall be true and correct, and all
actions required by the first sentence of Section 4.1.7 shall have been
taken with respect to the Receivables; not change its name except upon 30
days' prior written notice to the Agent; hold and preserve such records
and chattel paper; and permit representatives of the Agent at any time
upon reasonable advance notice and during normal business hours to inspect
and make abstracts from such records and chattel paper.
(b) The Grantor will direct all obligors under any Receivables to
make all payments to one or more bank accounts. Each such bank account
will be maintained only if the relevant bank has agreed (by no later than
30 days after the Effective Date) in writing to remit the balance from
time to time in the account to the
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Agent upon notice from the Agent that any Default is continuing. No funds,
other than proceeds of Collateral, will be paid to any such bank account.
The Grantor will not open any new bank accounts, or terminate any existing
bank accounts, except upon 10 days' prior written notice to the Agent.
(c) All proceeds of Collateral received by the Grantor shall, upon
the request of the Agent during the continuance of an Event of Default, be
delivered in kind to the Agent for deposit to a deposit account (the
"Collateral Account") of the Grantor maintained with the Agent, and the
Grantor shall not commingle any such proceeds, and shall hold separate and
apart from all other property, all such proceeds in express trust for the
benefit of the Agent and the other Lender Parties until delivery thereof
is made to the Agent. No funds, other than proceeds of Collateral, will be
deposited in the Collateral Account.
(d) The Agent shall have the right to apply any amount in the
Collateral Account to the payment of any Secured Obligations which are due
and payable or payable upon demand, or to the payment of any Secured
Obligations at any time that an Event of Default shall exist. Subject to
the rights of the Agent, the Grantor shall have the right, with respect to
and to the extent of collected funds in the Collateral Account, (i) as
long as there shall be no Default, to require the Agent to transfer to the
Grantor's general demand deposit account at the Agent any or all of such
collected funds and (ii) as long as there shall be a Default and after
giving effect to any exercise by the Agent of its rights, (A) to require
the Agent to transfer to the Grantor's general demand deposit account at
the Agent amounts required to cover checks drawn against that account
which shall have been presented for payment at the Agent as of the
preceding business day and all wire transfers which the Grantor has
directed to be made on the current business day, to the extent such checks
and wire transfers are for any purpose which does not violate any
provision of any Loan Document and (B) to require the Agent to purchase
any Cash Equivalent Investment, provided that, in the case of certificated
securities, the Agent will retain possession thereof as Collateral and, in
the case of uncertificated securities, the Agent will take such actions,
including registration of such securities in its name, as it shall
determine is necessary to perfect its security interest therein. The Agent
may at any time transfer to the Grantor's general demand deposit account
at the Agent any or all of the collected funds in the Collateral Account;
provided, however, that any such transfer shall not be deemed to be a
waiver or modification of any of the Agent's rights under this Section
4.1.2(d).
SECTION 4.1.3. As to Collateral.
(a) Until such time (during the continuance of an Event of Default)
as the Agent shall notify the Grantor of the revocation of the power and
authority granted by this Section 4.1.3(a), the Grantor (i) may in the
ordinary course of its business, at its own expense, sell, lease or
furnish under the contracts of service any of the Inventory normally held
by the Grantor for such purpose, and use and consume, in the ordinary
course of its business, any raw materials, work in process or materials
normally held by the Grantor for such purpose, (ii) will, at its own
expense, endeavor to collect, as and when due, all amounts due with
respect to any of the Collateral, including the taking of such action with
respect to such collection as the Agent may reasonably request or, in the
absence of such request, as the Grantor may deem advisable, and (iii) may
grant, in the ordinary course of business, to any party obligated on any
of the Collateral, any rebate, refund or allowance to which such party may
be lawfully entitled, and may accept, in connection therewith, the return
of goods, the sale or lease of which shall have given rise to such
Collateral. The Agent, however, may [(subject to Section 7.2.6 of the
Credit Agreement)], at any time during the continuance of an Event of
Default, whether before or after any revocation of such power and
authority or the maturity of any of the Secured Obligations, notify any
parties obligated on any of the Collateral to make payment to the Agent of
any amounts due or to become due thereunder and enforce collection of any
of the Collateral by suit or otherwise and surrender, release, or exchange
all or any part thereof, or compromise or extend or renew for any period
(whether or not longer than the original period) any indebtedness
thereunder or evidenced thereby. Upon request of the Agent, the Grantor
will [(subject to Section 7.2.6 of the Credit Agreement)], at its own
expense, notify any parties obligated on any of the Collateral to make
payment to the Agent of any amounts due or to become due thereunder.
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(b) The Agent is authorized, during the continuation of an Event of
Default, to endorse, in the name of the Grantor, any item, howsoever
received by the Agent, representing any payment on or other proceeds of
any of the Collateral.
(c) The Grantor will not change its Federal Employer Identification
Number unless the Grantor notifies the Agent of any change in writing at
least 30 days prior to the date of such change and executes such
additional security agreements and financing statements as may be
reasonably requested by the Agent.
SECTION 4.1.4. As to Intellectual Property Collateral.
(a) The Grantor shall not, unless the Grantor shall reasonably and
in good faith determine (and notice of such determination shall have been
delivered to the Agent) that any of the Patent Collateral is not of
material economic value to the Grantor, do any act, or omit to do any act,
whereby any of the Patent Collateral may lapse or become abandoned or
dedicated to the public or unenforceable.
(b) The Grantor shall not, and shall not permit any of its licensees
to, unless the Grantor shall reasonably and in good faith determine (and
notice of such determination shall have been delivered to the Agent) that
any of the Trademark Collateral is not of material economic value to the
Grantor,
(i) fail to continue to use any of the Trademark Collateral in
order to maintain all of the material Trademark Collateral in full
force free from any claim of abandonment for non-use,
(ii) fail to maintain as in the past, in all material
respects, the quality of products and services offered under all of
the Trademark Collateral,
(iii) fail to employ all of the material Trademark Collateral
registered with any Federal or state or foreign authority with an
appropriate notice of such registration,
(iv) adopt or use any other Trademark which is confusingly
similar or a colorable imitation of any of the material Trademark
Collateral,
(v) use any of the material Trademark Collateral registered
with any Federal or state or foreign authority except for the uses
for which registration or application for registration of all of the
Trademark Collateral has been made, and
(vi) do or permit any act or knowingly omit to do any act
whereby any of the material Trademark Collateral would reasonably be
expected to lapse or become invalid or unenforceable.
(c) The Grantor shall not, unless the Grantor shall reasonably and
in good faith determine (and notice of such determination shall have been
delivered to the Agent) that any of the Copyright Collateral or any of the
Trade Secrets Collateral is not of material economic value to the Grantor,
do or permit any act or knowingly omit to do any act whereby any of the
Copyright Collateral or any of the Trade Secrets Collateral would
reasonably be expected to lapse or become invalid or unenforceable or
placed in the public domain except upon expiration of the end of an
unrenewable term of a registration thereof.
(d) The Grantor shall notify the Agent immediately if it knows, or
has reason to know, that any application or registration relating to any
material item of the Intellectual Property Collateral would reasonably be
expected to become abandoned or dedicated to the public or placed in the
public domain or invalid or unenforceable, or of any material adverse
determination or development (including the institution of, or any such
determination or development in, any proceeding in the United States
Patent and Trademark Office, the United States Copyright Office or any
foreign counterpart thereof or any court) regarding the Grantor's
ownership of any of the material Intellectual Property Collateral, its
right to register the same or to keep and maintain and enforce the same.
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(e) In no event shall the Grantor or any of its agents, employees,
designees or licensees file an application for the registration of any
Intellectual Property Collateral with the United States Patent and
Trademark Office, the United States Copyright Office or any similar office
or agency in any other country or any political subdivision thereof,
unless it promptly informs the Agent, and upon request of the Agent,
executes and delivers any and all agreements, instruments, documents and
papers as the Agent may reasonably request to evidence the Agent's
security interest for the benefit of the Lender Parties in such
Intellectual Property Collateral and the goodwill and general intangibles
of the Grantor relating thereto or represented thereby.
(f) The Grantor shall take all commercially reasonable steps,
including in any proceeding before the United States Patent and Trademark
Office, the United States Copyright Office or any similar office or agency
in any other country or any political subdivision thereof, to maintain and
pursue any application (and to obtain the relevant registration) filed
with respect to, and to maintain any registration of, any material
Intellectual Property Collateral, including the filing of applications for
renewal, affidavits of use, affidavits of incontestability and opposition,
interference and cancellation proceedings and the payment of fees and
taxes (except to the extent that dedication, abandonment or invalidation
is permitted under the foregoing clauses (a), (b) and (c)).
SECTION 4.1.5. Insurance. The Grantor will maintain or cause to be
maintained with responsible and reputable insurance carriers licensed to
write insurance, insurance with respect to the Equipment and Inventory
against such casualties and contingencies and of such types and in such
amounts as is customary in the case of similar businesses and will, upon
the request of the Agent, furnish a certificate of a reputable insurance
broker setting forth the nature and extent of all insurance maintained by
the Grantor in accordance with this Section. Without limiting the
foregoing, the Grantor further agrees as follows:
(a) Each policy for property insurance shall show the Agent as loss
payee.
(b) Each policy for liability insurance shall show the Agent as an
additional insured.
(c) With respect to each life insurance policy, the Grantor shall
execute and deliver to the Agent a collateral assignment, notice of which
has been acknowledged in writing by the insurer.
(d) Each insurance policy shall provide that at least 30 days' prior
written notice of cancellation or of lapse shall be given to the Agent by
the insured.
(e) The Grantor shall, if so requested by the Agent, deliver to the
Agent a copy of each insurance policy.
(f) All payments in respect of property insurance and life insurance
shall be paid to the Grantor.
SECTION 4.1.6. Transfers and Other Liens. The Grantor shall not:
(a) sell, assign (by operation of law or otherwise) or otherwise
dispose of any of the Collateral, except Inventory in the ordinary course
of business or as permitted by the Credit Agreement; or
(b) create or suffer to exist any Lien or other charge or
encumbrance upon or with respect to any of the Collateral to secure
Indebtedness of any Person or entity, except for the security interest
created by this Security Agreement and except as permitted by the Credit
Agreement.
SECTION 4.1.7. Further Assurances, etc. The Grantor agrees that, from time
to time at its own expense, the Grantor will promptly execute and deliver all
further instruments and documents, and take all further action, that may be
necessary or desirable, or that the Agent may request, in order to perfect,
preserve and protect any security interest granted or purported to be granted
hereby or to enable the Agent to exercise and enforce its rights and remedies
hereunder with respect to any Collateral. Without limiting the generality of the
foregoing, the Grantor will
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(a) mark conspicuously each document included in the Inventory, each
chattel paper included in the Receivables and each Related Contract and,
at the request of the Agent, each of its records pertaining to the
Collateral with a legend, in form and substance satisfactory to the Agent,
indicating that such document, chattel paper, Related Contract or
Collateral is subject to the security interest granted hereby;
(b) if any Receivable shall be evidenced by a promissory note or
other instrument, negotiable document or chattel paper, deliver and pledge
to the Agent hereunder such promissory note, instrument, negotiable
document or chattel paper duly endorsed and accompanied by duly executed
instruments of transfer or assignment, all in form and substance
satisfactory to the Agent;
(c) execute and file such financing or continuation statements, or
amendments thereto, and such other instruments or notices (including,
without limitation, any assignment of claim form under or pursuant to the
federal assignment of claims statute, 31 U.S.C. ss. 3726, any successor or
amended version thereof or any regulation promulgated under or pursuant to
any version thereof), as may be necessary or desirable, or as the Agent
may request, in order to perfect and preserve the security interests and
other rights granted or purported to be granted to the Agent hereby; and
(d) furnish to the Agent, from time to time at the Agent's request,
statements and schedules further identifying and describing the Collateral
and such other reports in connection with the Collateral as the Agent may
reasonably request, all in reasonable detail.
With respect to the foregoing and the grant of the security interest hereunder,
the Grantor hereby authorizes the Agent to file one or more financing or
continuation statements, and amendments thereto, relative to all or any part of
the Collateral without the signature of the Grantor where permitted by law. A
carbon, photographic or other reproduction of this Security Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law.
ARTICLE V
THE AGENT
SECTION 5.1. Agent Appointed Attorney-in-Fact. The Grantor hereby
irrevocably appoints the Agent the Grantor's attorney-in-fact, with full
authority in the place and stead of the Grantor and in the name of the Grantor
or otherwise, from time to time in the Agent's discretion, to take any action
and to execute any instrument which the Agent may deem necessary or advisable to
accomplish the purposes of this Security Agreement, including, without
limitation:
(a) to ask, demand, collect, sue for, recover, compromise, receive
and give acquittance and receipts for moneys due and to become due under
or in respect of any of the Collateral;
(b) to receive, endorse, and collect any drafts or other
instruments, documents and chattel paper, in connection with clause (a)
above;
(c) to file any claims or take any action or institute any
proceedings which the Agent may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights of
the Agent with respect to any of the Collateral; and
(d) to perform the affirmative obligations of the Grantor hereunder
(including all obligations of the Grantor pursuant to Section 4.1.7).
The Grantor hereby acknowledges, consents and agrees that the power of attorney
granted pursuant to this Section is irrevocable and coupled with an interest.
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SECTION 5.2. Agent May Perform. If the Grantor fails to perform any
agreement contained herein, the Agent may itself perform, or cause performance
of, such agreement, and the expenses of the Agent incurred in connection
therewith shall be payable by the Grantor pursuant to Section 6.2.
SECTION 5.3. Agent Has No Duty. In addition to, and not in limitation of,
Section 2.5, the powers conferred on the Agent hereunder are solely to protect
its interest (on behalf of the Lender Parties) in the Collateral and shall not
impose any duty on it to exercise any such powers. Except for reasonable care of
any Collateral in its possession and the accounting for moneys actually received
by it hereunder, the Agent shall have no duty as to any Collateral or as to the
taking of any necessary steps to preserve rights against prior parties or any
other rights pertaining to any Collateral.
SECTION 5.4. Reasonable Care. The Agent is required to exercise reasonable
care in the custody and preservation of any of the Collateral in its possession;
provided, however, that the Agent shall be deemed to have exercised reasonable
care in the custody and preservation of any of the Collateral, if it takes such
action for that purpose as the Grantor reasonably requests in writing at times
other than upon the occurrence and during the continuance of any Event of
Default, but failure of the Agent to comply with any such request at any time
shall not in itself be deemed a failure to exercise reasonable care.
ARTICLE VI
REMEDIES
SECTION 6.1. Certain Remedies. If any Event of Default shall have occurred
and be continuing:
(a) The Agent may exercise in respect of the Collateral, in addition
to other rights and remedies provided for herein or otherwise available to
it, all the rights and remedies of a secured party on default under the
U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and
also may
(i) require the Grantor to, and the Grantor hereby agrees that
it will, at its expense and upon request of the Agent forthwith,
assemble all or part of the Collateral as directed by the Agent and
make it available to the Agent at a place to be designated by the
Agent which is reasonably convenient to both parties; and
(ii) without notice except as specified below, sell the
Collateral or any part thereof in one or more parcels at public or
private sale, at any of the Agent's offices or elsewhere, for cash,
on credit or for future delivery (without assumption of any credit
risk), and upon such other terms as the Agent may deem commercially
reasonable. The Grantor agrees that, to the extent notice of sale
shall be required by law, at least ten days' prior notice to the
Grantor of the time and place of any public sale or the time after
which any private sale is to be made shall constitute reasonable
notification. The Agent shall not be obligated to make any sale of
Collateral regardless of notice of sale having been given. The Agent
may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale
may, without further notice, be made at the time and place to which
it was so adjourned.
(b) All cash proceeds received by the Agent in respect of any sale
of, collection from, or other realization upon all or any part of the
Collateral may, in the discretion of the Agent, be held by the Agent as
collateral for, and/or then or at any time thereafter applied (after
payment of any amounts payable to the Agent pursuant to Section 6.2) in
whole or in part by the Agent for the ratable benefit of the Lender
Parties against, all or any part of the Secured Obligations in the
following order:
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(i) first, to payment of the expenses of such sale or other
realization including reasonable compensation to the Agent and its
agents and counsel, and all expenses, liabilities and advances
incurred or made by the Agent in connection therewith, and any other
unreimbursed expenses for which the Agent is to be reimbursed
pursuant to Section 11.3 of the Credit Agreement or Section 6.2
hereof and unpaid fees owing to the Agent under the Credit
Agreement;
(ii) second, to the ratable payment of accrued but unpaid
interest on the Acquisition Loans and the Revolving Loans under the
Credit Agreement;
(iii) third, to the ratable payment of unpaid principal of the
Acquisition Loans under the Credit Agreement;
(iv) fourth, to the ratable payment of the unpaid principal
amount of the Revolving Loans and all other amounts payable by the
Obligors under the Credit Agreement; and
(v) fifth, to the ratable payment of all other Secured
Obligations, until all Secured Obligations shall have been paid in
full.
The Agent may make distributions hereunder in cash or in kind or, on a ratable
basis, in any combination thereof. Any surplus of such cash or cash proceeds
held by the Agent and remaining after payment in full of all the Secured
Obligations shall be paid over to the Grantor or to whomsoever may be lawfully
entitled to receive such surplus.
SECTION 6.2. Indemnity and Expenses.
(a) The Grantor agrees to indemnify the Agent and the other Lender
Parties from and against any and all claims, losses and liabilities
arising out of or resulting from this Security Agreement (including,
without limitation, enforcement of this Security Agreement), except
claims, losses or liabilities resulting from the Agent's gross negligence
or wilful misconduct.
(b) The Grantor will upon demand pay to the Agent the amount of any
and all reasonable expenses, including the reasonable fees and
disbursements of its counsel and of any experts and agents, which the
Agent may incur in connection with
(i) the administration of this Security Agreement,
(ii) the custody, preservation, use or operation of, or the
sale of, collection from, or other realization upon, any of the
Collateral,
(iii) the exercise or enforcement of any of the rights of the
Agent or the other Lender Parties hereunder, or
(iv) the failure by the Grantor to perform or observe any of
the provisions hereof.
ARTICLE VII
MISCELLANEOUS PROVISIONS
SECTION 7.1. Loan Document. This Security Agreement is a Loan Document
executed pursuant to the Credit Agreement and shall (unless otherwise expressly
indicated herein) be construed, administered and applied in accordance with the
terms and provisions thereof.
SECTION 7.2. Amendments; etc. No amendment to or waiver of any provision
of this Security Agreement nor consent to any departure by the Grantor herefrom,
shall in any event be effective unless the same shall be in writing and signed
by the Agent (acting with the requisite consent of the Lenders as provided in
the Credit
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Agreement) and the Grantor, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
SECTION 7.3. Addresses for Notices. All notices and other communications
provided for hereunder shall be in writing (including telecopier communication)
and, if to the Grantor, mailed, telecopied or delivered to it, addressed to it
at the address as set forth on Schedule III of the Credit Agreement, if to the
Agent, mailed, telecopied or delivered to it, addressed to it at the address of
the Agent as specified in the Credit Agreement, or as to either party at such
other address as shall be designated by such party in a written notice to each
other party complying as to delivery with the terms of this Section. Any notice,
if mailed and properly addressed and sent return receipt requested with postage
prepaid, shall be deemed given three Business Days after posting; any notice, if
sent by prepaid overnight express shall be deemed delivered on the next Business
Day; any notice, if transmitted by telecopier, shall be deemed given when sent,
with confirmation of receipt; and any notice, if transmitted by hand, shall be
deemed received when delivered.
SECTION 7.4. Section Captions. Section captions used in this Security
Agreement are for convenience of reference only, and shall not affect the
construction of this Security Agreement.
SECTION 7.5. Severability. Wherever possible each provision of this
Security Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Security Agreement
shall be prohibited by or invalid under such law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Security Agreement.
SECTION 7.6. Governing Law, Entire Agreement, etc. THIS SECURITY AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE
STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE
SECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY
PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE
STATE OF NEW YORK. THIS SECURITY AGREEMENT AND THE OTHER LOAN DOCUMENTS
CONSTITUTE THE ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE
SUBJECT MATTER HEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH
RESPECT THERETO.
SECTION 7.7. Forum Selection and Consent to Jurisdiction. ANY LITIGATION
BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS SECURITY
AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL
OR WRITTEN) OR ACTIONS OF THE LENDER PARTIES OR THE GRANTOR MAY BE BROUGHT AND
MAINTAINED IN ANY UNITED STATES FEDERAL OR NEW YORK STATE COURTS SITTING IN THE
CITY OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST
ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE
COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND.
THE GRANTOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY
UNITED STATES FEDERAL OR NEW YORK STATE COURTS SITTING IN THE CITY OF NEW YORK
FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES
TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION.
THE GRANTOR FURTHER IRREVOCABLY CONSENTS TO SERVICE OF PROCESS BY REGISTERED
MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW
YORK. THE GRANTOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE
LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO
ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT
FORUM. TO THE EXTENT THAT THE GRANTOR HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY
FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL
15
<PAGE> 17
PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT,
ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS
PROPERTY, THE GRANTOR HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS
OBLIGATIONS UNDER THIS SECURITY AGREEMENT.
SECTION 7.8. Waiver of Jury Trial. THE LENDER PARTIES AND THE GRANTOR
HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH, THIS SECURITY AGREEMENT, OR ANY COURSE OF CONDUCT,
COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE LENDER
PARTIES OR THE GRANTOR. THE GRANTOR ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED
FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION
OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A
MATERIAL INDUCEMENT FOR THE LENDERS ENTERING INTO THE CREDIT AGREEMENT AND EACH
SUCH OTHER LOAN DOCUMENT. IN NO EVENT SHALL ANY LENDER PARTY BE LIABLE FOR ANY
CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED IN CONNECTION HEREWITH OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
16
<PAGE> 18
IN WITNESS WHEREOF, the Grantor has caused this Security Agreement to be
duly executed and delivered by its officer thereunto duly authorized as of the
date first above written.
KEY COMPONENTS, LLC
By: /s/ Illegible
_____________________
Title:
Address: c/o Millbrook Capital Management Inc.
152 West 57th Street
New York, New York 10019
SOCIETE GENERALE,
as Agent
By: /s/ Illegible
_____________________
Title:
Address: 1221 Avenue of Americas
New York, New York 10020
Attention: Steven Pischel
Telecopier No.: 212-278-6418
Telephone No.: 212-278-7143
17
<PAGE> 19
SCHEDULE I
to
Security Agreement
Item A. Location of Equipment
Item B. Location of Inventory
Item C. Location of Bank Account
<TABLE>
<CAPTION>
Contact
Bank Name and Address Account Number Person
--------------------- -------------- ------
<S> <C> <C>
</TABLE>
<PAGE> 20
SCHEDULE II
to
Security Agreement
Item A. Patents
Issued Patents
<TABLE>
<CAPTION>
Country Patent No. Patent Date Inventor(s) Title
- ------- ---------- ----------- ----------- -----
<S> <C> <C> <C> <C>
</TABLE>
Pending Patent Applications
<TABLE>
<CAPTION>
Country Serial No. Filing Date Inventor(s) Title
- ------- ---------- ----------- ----------- -----
<S> <C> <C> <C> <C>
</TABLE>
Patent Applications in Preparation
<TABLE>
<CAPTION>
Expected
Country Docket No. Filing Date Inventor(s) Title
- ------- ---------- ----------- ----------- -----
<S> <C> <C> <C> <C>
</TABLE>
Item B. Patent Licenses
<TABLE>
<CAPTION>
Country or Effective Expiration Subject
Territory Licensor Licensee Date Date Matter
- --------- -------- -------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
</TABLE>
<PAGE> 21
SCHEDULE III
to
Security Agreement
Item A. Trademarks
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Registration No. Registration Date Serial Number Filing Date
- ---------------- ----------------- ------------- -----------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
</TABLE>
Item B. Trademark Licenses
<PAGE> 22
SCHEDULE IV
to
Security Agreement
Item A. Copyrights/Mask Works
Item B. Copyright/Mask Work Licenses
<PAGE> 23
SCHEDULE V
to
Security Agreement
Trade Secret or Know-How Licenses
<TABLE>
<CAPTION>
Country or
Subject Effective Expiration
Territory Licensor Licensee Date Date Matter
--------- -------- -------- --------- ---------- ------
<S> <C> <C> <C> <C> <C>
</TABLE>
<PAGE> 1
Exhibit 10.17
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (as amended, supplemented, restated or otherwise
modified from time to time, this "Pledge Agreement"), dated as of July 27, 1998,
made by Key Components, LLC, a Delaware limited liability company (the
"Pledgor"), in favor of Societe Generale, as agent (together with any
successor(s) thereto in such capacity, the "Agent") for each of the Lender
Parties and for each of the Noteholders (such capitalized terms and all other
capitalized terms not otherwise defined herein shall have the meanings provided
for in Article I).
W I T N E S S E T H:
WHEREAS, pursuant to a Credit and Guaranty Agreement, dated as of July 27,
1998 (together with all amendments, supplements, restatements and other
modifications, if any, from time to time thereafter made thereto, the "Credit
Agreement"), among the Pledgor, as Borrower, its Subsidiaries, as Guarantors
(the "Guarantors"), the various financial institutions as are, or may from time
to time become, parties thereto (collectively, the "Lenders") and the Agent, the
Lenders have extended Commitments to make Credit Extensions to the Pledgor; and
WHEREAS, each Guarantor is a wholly-owned Subsidiary of the Pledgor;
WHEREAS, as a condition precedent to the making of the initial Credit
Extension under the Credit Agreement, the Pledgor is required to execute and
deliver this Pledge Agreement;
WHEREAS, the Pledgor has duly authorized the execution, delivery and
performance of this Pledge Agreement; and
WHEREAS, it is in the best interests of the Pledgor to execute this Pledge
Agreement inasmuch as the Pledgor will derive substantial direct and indirect
benefits from the Credit Extensions made from time to time to the Pledgor by the
Lenders pursuant to the Credit Agreement;
NOW, THEREFORE, for good and valuable consideration the receipt of which
is hereby acknowledged, and in order to induce the Lenders to make Credit
Extensions (including the initial Credit Extension) to the Pledgor pursuant to
the Credit Agreement, the Pledgor agrees, for the benefit of each Lender Party,
as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Certain Terms. The following terms (whether or not
underscored) when used in this Pledge Agreement, including its preamble and
recitals, shall have the following meanings (such definitions to be equally
applicable to the singular and plural forms thereof):
"Agent" is defined in the preamble.
"Collateral" is defined in Section 2.1.
<PAGE> 2
"Credit Agreement" is defined in the first recital.
"Distributions" means all stock dividends, liquidating dividends, shares
of stock resulting from (or in connection with the exercise of) stock splits,
reclassifications, warrants, options, non-cash dividends, mergers and
consolidations, and all other distributions (whether similar or dissimilar to
the foregoing) on or with respect to any Pledged Interests or other shares of
capital stock constituting Collateral, but shall not include Dividends.
"Dividends" means cash dividends and cash distributions with respect to
any Pledged Interests or other Pledged Property made in the ordinary course of
business or otherwise permitted under the Credit Agreement.
"Lender" and "Lenders" are defined in the first recital.
"Lender Party" means, as the context may require, any Lender or the Agent
and each of its respective successors and permitted transferees and assigns.
"Pledge Agreement" is defined in the preamble.
"Pledged Interest Issuers" means each Person identified in Attachment 1
hereto as the issuer of the Pledged Interests identified opposite the name of
such Person and each Person whose ownership, equity or other similar interests,
including shares of capital stock and general and limited partnership interests,
are required to be pledged hereunder and under the Credit Agreement from time to
time.
"Pledged Interests" means all ownership, equity or other similar
interests, including shares of capital stock and general and limited partnership
interests, of any Pledged Interest Issuer which are delivered by the Pledgor to
the Agent as Pledged Property hereunder.
"Pledged Property" means all Pledged Interests, and all other instruments
and securities, in each case which are now being delivered by the Pledgor to the
Agent or may from time to time hereafter be delivered or be required to be
delivered by the Pledgor to the Agent for the purpose of pledge under this
Pledge Agreement or any other Loan Document, and all proceeds of any of the
foregoing.
"Pledgor" is defined in the preamble.
"Secured Obligations" is defined in Section 2.2.
"Securities Act" is defined in Section 6.2(a).
"U.C.C." means the Uniform Commercial Code as in effect in the State of
New York.
SECTION 1.2. Credit Agreement Definitions. Unless otherwise defined herein
or the context otherwise requires, terms used in this Pledge Agreement,
including its preamble and recitals, have the meanings provided in the Credit
Agreement.
SECTION 1.3. U.C.C. Definitions. Unless otherwise defined herein or the
context otherwise requires, terms for which meanings are provided in the U.C.C.
are used in this Pledge Agreement, including its preamble and recitals, with
such meanings.
2
<PAGE> 3
ARTICLE II
PLEDGE
SECTION 2.1. Grant of Security Interest. The Pledgor hereby pledges,
hypothecates, assigns, charges, mortgages, delivers, and transfers to the Agent,
for its benefit and the ratable benefit of each of the Lender Parties, and
hereby grants to the Agent, for its benefit and the ratable benefit of the
Lender Parties, a continuing security interest in, all of the Pledgor's right,
title and interest in, to and under the following property (the "Collateral"):
(a) all Pledged Interests of each Pledged Interest Issuer identified
in Attachment 1 hereto, issued from time to time (the "Stock Collateral");
(b) all other Pledged Property, whether now or hereafter delivered
to the Agent in connection with this Agreement;
(c) all right, title and interest of such Pledgor, whether now
existing or hereafter arising or acquired, in, to and under any
partnership, joint venture or similar agreement which governs the rights
and obligations of the holders of ownership, equity or similar interests
in a Pledged Interest Issuer;
(d) all Dividends, Distributions, interest, and other payments and
rights with respect to any Pledged Property; and
(e) all proceeds of any of the foregoing.
SECTION 2.2. Security for Obligations. This Pledge Agreement secures the
payment in full of all amounts payable by the Pledgor and each other Obligor
under or in connection with the Credit Agreement, the Notes, each Rate
Protection Agreement with a Lender and each other Loan Document (including this
Pledge Agreement), whether for principal, interest, costs, fees, expenses,
indemnities or otherwise and whether now or hereafter existing (all of such
obligations being the "Secured Obligations").
SECTION 2.3. Delivery and Transfer of Pledged Property. All certificates
or instruments representing or evidencing any Collateral, including all Pledged
Interests, shall be delivered to and held by or on behalf of the Agent pursuant
hereto, shall be in suitable form for delivery, and shall be accompanied by all
necessary undated instruments of transfer or assignment, duly executed in blank
or, if any securities pledged pursuant to this Agreement are uncertificated
securities, confirmation and evidence satisfactory to the Agent that the
security interests in such uncertificated securities have been transferred to
and perfected by the Agent for the benefit of the Lenders in accordance with
Sections 8-313 and 8-321 of the U.C.C.
SECTION 2.4. Dividends on Pledged Interests. In the event that any
Dividend is to be paid on any Pledged Interests, such Dividend may be paid
directly to the Pledgor. If any Default of the nature set forth in Section 8.1.9
of the Credit Agreement or Event of Default has occurred and is continuing, then
any such Dividend shall be paid directly to the Agent other than as permitted by
clauses (a) and (b) of Section 7.2.6 of the Credit Agreement.
SECTION 2.5. Continuing Security Interest; Transfer of Note. This Pledge
Agreement shall create a continuing security interest in the Collateral and
shall
(a) remain in full force and effect until payment in full in cash of
all Secured Obligations and the expiration or termination of all
Commitments,
3
<PAGE> 4
(b) be binding upon the Pledgor and its successors, transferees and
assigns, provided that the Pledgor shall not assign any of its rights or
obligations under this Agreement without the consent of all the Lenders,
and
(c) inure, together with the rights and remedies of the Agent
hereunder, to the benefit of the Agent and each other Lender Party.
Without limiting the foregoing clause (c), any Lender may, to the extent
permitted under the Credit Agreement, assign or otherwise transfer (in whole or
in part) any Note or Credit Extension held by it, to any other Person or entity,
and such other Person or entity shall thereupon become vested with all the
rights and benefits in respect thereof granted to such Lender under any Loan
Document (including this Pledge Agreement) or otherwise, subject, however, to
any contrary provisions in such assignment or transfer, and to the provisions of
Section 11.11 and Article X of the Credit Agreement. Upon the payment in full in
cash of all Secured Obligations and the expiration or termination of all
Commitments, the security interest granted herein shall terminate and all rights
to the Collateral shall revert to the Pledgor. Upon any such termination or
release, the Agent will, at the Pledgor's sole expense, deliver to the Pledgor,
without any representations, warranties or recourse of any kind whatsoever, (i)
in the case of such termination, all certificates and instruments representing
or evidencing all Pledged Interests, together with all other Collateral held by
the Agent hereunder, and (ii) in the case of any such release, all Collateral
held by the Agent for which the security interest granted hereunder is so
released, and in each case, execute and deliver to the Pledgor such documents as
the Pledgor shall reasonably request to evidence such termination or release.
SECTION 2.6. Security Interest Absolute. All rights of the Agent and the
security interests granted to the Agent hereunder, and all obligations of the
Pledgor hereunder, shall, to the fullest extent permitted by applicable law be
absolute and unconditional, irrespective of
(a) any lack of validity or enforceability of the Credit Agreement,
any Note, any Rate Protection Agreement with a Lender or any other Loan
Document,
(b) the failure of any Lender Party or any holder of any Note
(i) to assert any claim or demand or to enforce any right or
remedy against the Pledgor, any other Obligor or any other Person
under the provisions of the Credit Agreement, any Note, any Rate
Protection Agreement with a Lender, any other Loan Document or
otherwise, or
(ii) to exercise any right or remedy against any other
guarantor of, or collateral securing, any Secured Obligation of the
Pledgor or any other Obligor,
(c) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Secured Obligations or any other
extension, compromise or renewal of any Obligation of the Pledgor or any
other Obligor,
(d) any reduction, limitation, impairment or termination of any
Secured Obligation of the Pledgor or any other Obligor for any reason
(other than the repayment in full of all Secured Obligations), including
any claim of waiver, release, surrender, alteration or compromise, and
shall not be subject to (and the Pledgor hereby waives any right to or
claim of) any defense or setoff, counterclaim, recoupment or termination
whatsoever by reason of the invalidity, illegality, nongenuineness,
irregularity, compromise, unenforceability of, or any other event or
occurrence affecting, any Secured Obligation of the Pledgor, any other
Obligor or otherwise,
(e) any amendment to, rescission, waiver, or other modification of,
or any consent to departure from, any of the terms of the Credit
Agreement, any Note, any Rate Protection Agreement or any other Loan
Document,
4
<PAGE> 5
(f) any addition, exchange, release, surrender or non-perfection of
any collateral (including the Collateral), or any amendment to or waiver
or release of or addition to or consent to departure from any guaranty,
for any of the Secured Obligations, or
(g) any other circumstances which might otherwise constitute a
defense available to, or a legal or equitable discharge of, the Pledgor,
any other Obligor, any surety or any guarantor.
SECTION 2.7. Postponement of Subrogation, etc. The Pledgor will not
exercise any rights which it may acquire by way of rights of subrogation under
this Pledge Agreement or otherwise, until the prior payment, in full and in
cash, of all Secured Obligations. Any amount paid to the Pledgor on account of
any such subrogation rights prior to the payment in full of all Secured
Obligations shall be held in trust for the benefit of the Lender Parties and
each holder of a Note and shall immediately be paid to the Agent and credited
and applied against the Secured Obligations, whether matured or unmatured, in
accordance with the terms of the Credit Agreement; provided, however, that if
(a) the Pledgor has made payment to the Lender Parties and each
holder of a Note of all or any part of the Secured Obligations, and
(b) all Secured Obligations have been paid in full and all
Commitments have been permanently terminated,
each Lender Party and each holder of a Note agrees that, at the Pledgor's
request, the Agent, on behalf of the Lender Parties and the holders of the
Notes, will execute and deliver to the Pledgor appropriate documents (without
recourse and without representation or warranty) necessary to evidence the
transfer by subrogation to the Pledgor of an interest in the Secured Obligations
resulting from such payment by the Pledgor. In furtherance of the foregoing, for
so long as any Secured Obligations or Commitments remain outstanding, the
Pledgor shall refrain from taking any action or commencing any proceeding
against the Guarantors (or their respective successors or assigns, whether in
connection with a bankruptcy proceeding or otherwise) to recover any amounts in
respect of proceeds of any Collateral received by any Lender Party or any holder
of a Note.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Warranties, etc. The Pledgor represents and warrants unto
each Lender Party, as at the date of each pledge and delivery hereunder
(including each pledge and delivery of Pledged Interests) by the Pledgor to the
Agent of any Collateral, as set forth in this Article.
SECTION 3.1.1. Incorporation of Credit Agreement Representations and
Warranties. The representations and warranties contained in Article VI of the
Credit Agreement are hereby confirmed and restated, insofar as the
representations and warranties contained therein by their terms are applicable
to the Pledgor or its properties or assets, each such representation and
warranty (insofar as applicable as aforesaid), together with all related
definitions and ancillary provisions, being hereby incorporated into this Pledge
Agreement by reference as though specifically set forth in this Section.
SECTION 3.1.2. Ownership, No Liens, etc. The Pledgor is the legal and
beneficial owner of, and has good and marketable title to (and has full right
and authority to pledge and assign) the Collateral, free and clear of all Liens,
except any lien or security interest granted pursuant hereto in favor of the
Agent and any other Liens permitted under the Credit Agreement.
5
<PAGE> 6
SECTION 3.1.3. Valid Security Interest. The delivery or transfer of the
Stock Collateral to the Agent pursuant to Section 2.3 is effective to create a
valid, perfected, first priority security interest in the Stock Collateral and
all proceeds thereof, securing the Secured Obligations.
SECTION 3.1.4. As to Pledged Interests. In the case of any Pledged
Interests constituting the Collateral, all of such Pledged Interests are duly
authorized and validly issued, fully paid, and non-assessable, and constitute
all of the issued and outstanding shares of capital stock and other ownership
interests of each Pledged Interest Issuer. The Pledgor has no Subsidiaries other
than the Pledged Interest Issuers.
SECTION 3.1.5. Authorization, Approval, etc. No authorization, approval,
or other action by, and no notice to or filing with, any governmental authority,
regulatory body or any other Person is required (other than UCC filings) either
(a) for the pledge by the Pledgor of any Collateral pursuant to this
Pledge Agreement or for the execution, delivery, and performance of this
Pledge Agreement by the Pledgor, or
(b) for the exercise by the Agent of the voting or other rights
provided for in this Pledge Agreement, or, except with respect to the
Pledged Interests, as may be required in connection with a disposition of
such Pledged Interests by laws affecting the offering and sale of
securities generally, the remedies in respect of the Collateral pursuant
to this Pledge Agreement.
SECTION 3.1.6. Compliance with Contracts, Laws, etc. The Pledgor is in
compliance with the requirements of all applicable laws (including, without
limitation, the provisions of the Fair Labor Standards Act), contracts to which
it is a party, rules, regulations and orders of every governmental authority,
the non-compliance with which might reasonably be expected to materially
adversely affect the business, properties, assets, operations, condition
(financial or otherwise) or prospects of the Pledgor and its Subsidiaries (taken
as a whole) or the value of the Collateral or the worth of the Collateral as
collateral security.
ARTICLE IV
COVENANTS
SECTION 4.1. Protect Collateral; Further Assurances, etc. The Pledgor will
not sell, assign, transfer, pledge, or encumber in any other manner the
Collateral (except in favor of the Agent hereunder), except for a Permitted
Disposition thereof. In the event of a Permitted Disposition of Collateral
hereunder which is effected in compliance with the terms of the Credit
Agreement, the Agent shall release its lien and security interest in respect of
the Collateral so disposed of upon request therefor made by the Pledgor. The
Pledgor will warrant and defend the right and title herein granted unto the
Agent in and to the Collateral (and all right, title, and interest represented
by the Collateral) against the claims and demands of all Persons whomsoever. The
Pledgor agrees that at any time, and from time to time, at the expense of the
Pledgor, the Pledgor will promptly execute and deliver all further instruments,
and take all further action, that may be necessary or desirable, or that the
Agent may reasonably request, in order to perfect and protect any security
interest granted or purported to be granted hereby or to enable the Agent to
exercise and enforce its rights and remedies hereunder with respect to any
Collateral. The Pledgor will not permit any Pledged Interest Issuer to issue any
capital stock or other ownership interests unless the same is immediately
delivered in pledge to the Agent hereunder.
SECTION 4.2. Stock Powers, etc. The Pledgor agrees that all Pledged
Interests (and all other shares of capital stock, partnership interests and
other ownership interests constituting Collateral) delivered by the Pledgor
pursuant to this Pledge Agreement will be accompanied by duly executed undated
blank stock powers, or other equivalent instruments of transfer acceptable to
the Agent. The Pledgor will, from time to time upon the request of the Agent,
promptly deliver to the Agent such stock powers, instruments, and similar
documents, satisfactory in form and substance to the Agent, with respect to the
Collateral as the Agent may reasonably request and will, from
6
<PAGE> 7
time to time upon the request of the Agent after the occurrence and during the
continuation of any Event of Default, promptly transfer any Pledged Interests or
other shares of common stock or other ownership interests constituting
Collateral into the name of any nominee designated by the Agent.
SECTION 4.3. Continuous Pledge. Subject to Section 2.4, the Pledgor will,
at all times, keep pledged to the Agent pursuant hereto all Pledged Interests
and all other shares of capital stock constituting Collateral, all Dividends
(other than Dividends actually paid in cash in accordance with the terms of the
Credit Agreement) and Distributions with respect thereto, and all other
Collateral and other securities, instruments, proceeds, and rights from time to
time received by or distributable to the Pledgor in respect of any Collateral.
SECTION 4.4. Voting Rights; Dividends, etc. The Pledgor agrees:
(a) after any Default of the nature set forth in Section 8.1.9 of
the Credit Agreement or Event of Default shall have occurred and be
continuing, promptly upon receipt thereof by the Pledgor and without any
request therefor by the Agent, to deliver (properly endorsed where
required hereby or requested by the Agent) to the Agent all Dividends, all
Distributions, all interest, all principal, all other cash payments, and
all proceeds of the Collateral (in each case other than as permitted by
clauses (a) and (b) of Section 7.2.6 of the Credit Agreement), all of
which shall be held by the Agent as additional Collateral for use in
accordance with Section 6.4; and
(b) after any Event of Default shall have occurred and be continuing
and the Agent has notified the Pledgor of the Agent's intention to
exercise its voting power under this Section 4.4(b)
(i) the Agent may exercise (to the exclusion of the Pledgor)
the voting power and all other incidental rights of ownership with
respect to any Pledged Interests or other shares of capital stock or
other ownership interests constituting Collateral and the Pledgor
hereby grants the Agent an irrevocable proxy, exercisable under such
circumstances, to vote the Pledged Interests and such other
Collateral; and
(ii) promptly to deliver to the Agent such additional proxies
and other documents as may be reasonably necessary to allow the
Agent to exercise such voting power.
All Dividends, Distributions, interest, principal, cash payments, and proceeds
which may at any time and from time to time be held by the Pledgor but which the
Pledgor is then obligated to deliver to the Agent, shall, until delivery to the
Agent, be held by the Pledgor separate and apart from its other property in
trust for the Agent for the benefit of the Lenders. The Agent agrees that unless
an Event of Default shall have occurred and be continuing and the Agent shall
have given the notice referred to in Section 4.4(b), the Pledgor shall have the
exclusive voting power with respect to any shares of capital stock or other
ownership interests (including any of the Pledged Interests) constituting
Collateral and the Agent shall, upon the written request of the Pledgor,
promptly deliver such proxies and other documents, if any, as shall be
reasonably requested by the Pledgor which are necessary to allow the Pledgor to
exercise voting power with respect to any such share of capital stock or other
ownership interests (including any of the Pledged Interests) constituting
Collateral; provided, however, that no vote shall be cast, or consent, waiver,
or ratification given, or action taken by the Pledgor that would materially
impair any Collateral or be materially inconsistent with or violate any
provision of the Credit Agreement or any other Loan Document (including this
Pledge Agreement).
7
<PAGE> 8
ARTICLE V
THE AGENT
SECTION 5.1. Agent Appointed Attorney-in-Fact. The Pledgor hereby
irrevocably appoints the Agent the Pledgor's attorney-in-fact, with full
authority in the place and stead of the Pledgor and in the name of the Pledgor
or otherwise, from time to time in the Agent's discretion, to take any action
and to execute any instrument which the Agent may deem necessary or advisable to
accomplish the purposes of this Pledge Agreement, including without limitation:
(a) to ask, demand, collect, sue for, recover, compromise, receive
and give acquittance and receipts for moneys due and to become due under
or in respect of any of the Collateral;
(b) to receive, endorse, and collect any drafts or other
instruments, documents and chattel paper, in connection with clause (a)
above; and
(c) to file any claims or take any action or institute any
proceedings which the Agent may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights of
the Agent with respect to any of the Collateral.
The Pledgor hereby acknowledges, consents and agrees that the power of attorney
granted pursuant to this Section is irrevocable and coupled with an interest.
SECTION 5.2. Agent May Perform. If the Pledgor fails to perform any
agreement contained herein, the Agent may itself perform, or cause performance
of, such agreement, and the expenses of the Agent incurred in connection
therewith shall be payable by the Pledgor pursuant to Section 6.5.
SECTION 5.3. Agent Has No Duty. The powers conferred on the Agent
hereunder are solely to protect its interest (on behalf of the Lender Parties)
in the Collateral and shall not impose any duty on it to exercise any such
powers. Except for reasonable care of any Collateral in its possession and the
accounting for moneys actually received by it hereunder, the Agent shall have no
duty as to any Collateral or responsibility for
(a) ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relative to
any Pledged Property, whether or not the Agent has or is deemed to have
knowledge of such matters, or
(b) taking any necessary steps to preserve rights against prior
parties or any other rights pertaining to any Collateral.
SECTION 5.4. Reasonable Care. The Agent is required to exercise reasonable
care in the custody and preservation of any of the Collateral in its possession;
provided, however, the Agent shall be deemed to have exercised reasonable care
in the custody and preservation of any of the Collateral if it takes such action
for that purpose as the Pledgor reasonably requests in writing at times other
than upon the occurrence and during the continuance of any Event of Default, but
failure of the Agent to comply with any such request at any time shall not in
itself be deemed a failure to exercise reasonable care.
ARTICLE VI
REMEDIES
SECTION 6.1. Certain Remedies. If any Event of Default shall have occurred
and be continuing:
8
<PAGE> 9
(a) The Agent may exercise in respect of the Collateral, in addition
to other rights and remedies provided for herein or otherwise available to
it, all the rights and remedies of a secured party on default under the
U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and
also may, without notice except as specified below, sell the Collateral or
any part thereof in one or more parcels at public or private sale, at any
of the Agent's offices or elsewhere, for cash, on credit or for future
delivery (without assumption of any credit risk), and upon such other
terms as the Agent may deem commercially reasonable in accordance with
applicable laws. The Pledgor agrees that, to the extent notice of sale
shall be required by law, at least ten days' prior notice to the Pledgor
of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification. The
Agent shall not be obligated to make any sale of Collateral regardless of
notice of sale having been given. The Agent may adjourn any public or
private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time
and place to which it was so adjourned.
(b) The Agent may
(i) transfer all or any part of the Collateral into the name
of the Agent or its nominee, with or without disclosing that such
Collateral is subject to the lien and security interest hereunder,
(ii) notify the parties obligated on any of the Collateral to
make payment to the Agent of any amount due or to become due
thereunder,
(iii) enforce collection of any of the Collateral by suit or
otherwise, and surrender, release or exchange all or any part
thereof, or compromise or extend or renew for any period (whether or
not longer than the original period) any obligations of any nature
of any party with respect thereto,
(iv) endorse any checks, drafts, or other writings in the
Pledgor's name to allow collection of the Collateral,
(v) take control of any proceeds of the Collateral, and
(vi) execute (in the name, place and stead of the Pledgor)
endorsements, assignments, stock powers and other instruments of
conveyance or transfer with respect to all or any of the Collateral.
SECTION 6.2. [Intentionally Omitted]
SECTION 6.3. Securities Laws. The Pledgor agrees that in any sale of any
of the Collateral whenever an Event of Default shall have occurred and be
continuing, the Agent is hereby authorized to comply with any limitation or
restriction in connection with such sale as it may be advised by counsel is
necessary in order to avoid any violation of applicable law (including
compliance with such procedures as may restrict the number of prospective
bidders and purchasers, require that such prospective bidders and purchaser have
certain qualifications, and restrict such prospective bidders and purchasers to
persons who will represent and agree that they are purchasing for their own
account for investment and not with a view to the distribution or resale of such
Collateral), or in order to obtain any required approval of the sale or of the
purchaser by any governmental regulatory authority or official, and the Pledgor
further agrees that such compliance shall not result in such sale being
considered or deemed not to have been made in a commercially reasonable manner,
nor shall the Agent or any other Lender Party be liable or accountable to the
Pledgor for any discount allowed by reason of the fact that such Collateral is
sold in compliance with any such limitation or restriction.
SECTION 6.4. Application of Proceeds. All cash proceeds received by the
Agent in respect of any sale of, collection from, or other realization upon, all
or any part of the Collateral may, in the discretion of the Agent, be held, to
the extent permitted under applicable law, by the Agent as additional collateral
security for, or then or at any
9
<PAGE> 10
time thereafter be applied (after payment of any amounts payable to the Agent
pursuant to Section 11.3 of the Credit Agreement and Section 6.5 below) in whole
or in part by the Agent against, all or any part of the Secured Obligations in
the following order:
(a) first, to payment of the expenses of such sale or other
realization including reasonable compensation to the Agent and its agents
and counsel, and all expenses, liabilities and advances incurred or made
by the Agent in connection therewith, and any other unreimbursed expenses
for which the Agent is to be reimbursed pursuant to Section 11.3 of the
Credit Agreement or Section 6.5 hereof and unpaid fees owing to the Agent
under the Credit Agreement;
(b) second, to the ratable payment of accrued but unpaid interest on
the Loans;
(c) third, to the ratable payment of unpaid principal of the Loans
under the Credit Agreement;
(d) fourth, to the ratable payment of all other amounts payable by
the Obligors under the Credit Agreement; and
(e) fifth, to the ratable payment of all other Secured Obligations
owing under any Loan Document, until all Secured Obligations shall have
been paid in full.
The Agent may make distributions hereunder in cash or in kind or, on a ratable
basis, in any combination thereof. Any surplus of such cash or cash proceeds
held by the Agent and remaining after payment in full of all the Secured
Obligations, and the termination of all Commitments, shall be paid over to the
Pledgor or to whomsoever may be lawfully entitled to receive such surplus.
SECTION 6.5. Indemnity and Expenses. The Pledgor hereby indemnifies and
holds harmless the Agent and the other Lender Parties from and against any and
all claims, losses, and liabilities arising out of or resulting from this Pledge
Agreement (including enforcement of this Pledge Agreement), except claims,
losses, or liabilities resulting from the Agent's gross negligence or wilful
misconduct. Upon demand, the Pledgor will pay to the Agent the amount of any and
all reasonable expenses, including the reasonable fees and disbursements of its
counsel and of any experts and agents, which the Agent or, in the case of clause
(c) below, any other Lender Party may incur in connection with:
(a) the administration of this Pledge Agreement, the Credit
Agreement and each other Loan Document;
(b) the custody, preservation, use, or operation of, or the sale of,
collection from, or other realization upon, any of the Collateral;
(c) the exercise or enforcement of any of the rights of the Agent
hereunder; or
(d) the failure by the Pledgor to perform or observe any of the
provisions hereof.
ARTICLE VII
MISCELLANEOUS PROVISIONS
SECTION 7.1. Loan Document. This Pledge Agreement is a Loan Document
executed pursuant to the Credit Agreement and shall (unless otherwise expressly
indicated herein) be construed, administered and applied in accordance with the
terms and provisions thereof.
10
<PAGE> 11
SECTION 7.2. Amendments, etc. No amendment to or waiver of any provision
of this Pledge Agreement nor consent to any departure by the Pledgor herefrom
shall in any event be effective unless the same shall be in writing and signed
by the Agent (acting with the requisite consent of the Lenders as provided in
the Credit Agreement), and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which it is given.
SECTION 7.3. Protection of Collateral. The Agent may from time to time, at
its option and at the expense of the Pledgor, perform any act which the Pledgor
agrees hereunder to perform and which the Pledgor shall fail to perform after
being requested in writing so to perform (it being understood that no such
request need be given after the occurrence and during the continuance of any
Event of Default) and the Agent may from time to time take any other action
which the Agent reasonably deems necessary for the maintenance, preservation or
protection of any of the Collateral or of its security interest therein for the
benefit of the Lender Parties.
SECTION 7.4. Addresses for Notices. All notices and other communications
provided for hereunder shall be in writing or by facsimile transmission and, if
to the Pledgor, at the address of the Pledgor provided for in the Credit
Agreement and, if to the Agent, at its address set forth in the Credit
Agreement, or as to either party at such other address as shall be designated by
such party in a written notice to each other party complying as to delivery with
the terms of this Section. All such notices and other communications, if mailed
and properly addressed with postage prepaid, shall be deemed given three
Business Days after posting; any notice sent by prepaid overnight express mail
shall be deemed delivered on the next following Business Day; and any notice
transmitted by facsimile shall be deemed given upon receipt of electronic
confirmation of transmission by the sender thereof.
SECTION 7.5. Section Captions. Section captions used in this Pledge
Agreement are for convenience of reference only, and shall not affect the
construction of this Pledge Agreement.
SECTION 7.6. Severability. Wherever possible each provision of this Pledge
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Pledge Agreement shall be
prohibited by or invalid under such law, such provision shall be ineffective to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Pledge Agreement.
SECTION 7.7. Governing Law, Entire Agreement, etc. THIS PLEDGE AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE
STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE
SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR
COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF
NEW YORK. THIS PLEDGE AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE
ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER
HEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT
THERETO.
SECTION 7.8. Forum Selection and Consent to Jurisdiction. TO THE FULLEST
EXTENT PERMITTED UNDER APPLICABLE LAW, ANY LITIGATION BASED HEREON, OR ARISING
OUT OF, UNDER, OR IN CONNECTION WITH, THIS PLEDGE AGREEMENT, OR ANY COURSE OF
CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF
ANY LENDER PARTY MAY BE BROUGHT AND MAINTAINED IN ANY UNITED STATES FEDERAL OR
NEW YORK STATE COURTS SITTING IN THE CITY OF NEW YORK; PROVIDED, HOWEVER, THAT
ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE
BROUGHT, AT THE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH
COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE PLEDGOR HEREBY EXPRESSLY AND
IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF ANY UNITED STATES
FEDERAL OR NEW YORK STATE COURTS SITTING IN THE CITY OF NEW YORK FOR THE PURPOSE
OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND
11
<PAGE> 12
IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION
WITH SUCH LITIGATION. THE PLEDGOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF
PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR
WITHOUT THE STATE OF NEW YORK. THE PLEDGOR HEREBY EXPRESSLY AND IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE
OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN
ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE PLEDGOR HAS OR
HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY
LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT,
ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS
PROPERTY, TO THE FULLEST EXTENT PERMITTED UNDER APPLICABLE LAW, THE PLEDGOR
HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS
PLEDGE AGREEMENT.
SECTION 7.9. Waiver of Jury Trial, etc. EACH LENDER PARTY AND THE PLEDGOR
HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH, THIS PLEDGE AGREEMENT OR ANY COURSE OF CONDUCT,
COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE
PLEDGOR. THE PLEDGOR ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND
SUFFICIENT CONSIDERATION FOR THIS PROVISION AND THAT THIS PROVISION IS A
MATERIAL INDUCEMENT FOR THE AGENT ENTERING INTO THIS PLEDGE AGREEMENT. IN NO
EVENT SHALL ANY LENDER PARTY BE LIABLE FOR ANY CONSEQUENTIAL DAMAGES WHICH MAY
BE ALLEGED IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY.
12
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement
to be duly executed and delivered by their respective authorized officers
thereunto duly authorized as of the day and year first above written.
KEY COMPONENTS, LLC
By: /s/ Illegible
----------------------------------------
Title:
SOCIETE GENERALE,
as Agent
By: /s/ Illegible
----------------------------------------
Title:
13
<PAGE> 14
ATTACHMENT 1
Pledged Interests:
<TABLE>
<CAPTION>
Common Stock
----------------------------------------------
Pledged Authorized Outstanding % of Shares
Interest Issuer Shares Shares Pledged
- ------------------------------- ----------------------------------------------
<S> <C> <C> <C>
B.W. Elliott Manufacturing,
Co., Inc. [ ] [ ] 100%
- ------------------------------- ----------------------------------------------
Hudson Lock, Inc. [ ] [ ] 100%
- ------------------------------- ----------------------------------------------
Key Components Finance Corp. [ ] [ ] 100%
- ------------------------------- ----------------------------------------------
ESP Lock Products, Inc. [ ] [ ] 100%
- ------------------------------- ----------------------------------------------
</TABLE>
<PAGE> 1
Ex. 12.1
KEY COMPONENTS INC.
FIXED CHARGE COVERAGE RATIO
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL KCI
-------------------------------------------------------------
1ST HALF 1ST HALF
CATEGORY 1993 1994 1995 1996 1997 1997 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FIXED CHARGES:
Rental Expense 290 311 316 333 253 112 236
-------------------------------------------------------------
Interest Component(1/3) 97 104 105 111 84 37 79
Interest 405 457 427 254 3,007 645 3,294
Amortization Debt Issue Cost: 0 0 0 0 174 21 110
-------------------------------------------------------------
Total 502 561 532 365 3,265 682 3,483
=============================================================
EARNINGS:
Pre-Tax Income/(Loss) 1,576 1,447 1,971 198 2,139 1,542 3,711
Fixed Charges 502 561 532 365 3,265 682 3,483
-------------------------------------------------------------
Total 2,078 2,008 2,503 563 5,404 2,224 7,194
=============================================================
RATIO 4.1 3.6 4.7 1.5 1.7 3.3 2.1
=============================================================
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
-------------------------------------
1ST HALF LTM
CATEGORY 1997 1998 06/30/98
- ------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED CHARGES:
Rental Expense 511 236 506
-------------------------------------
Interest Component(1/3) 170 79 169
Interest 8,683 4,363 8,712
Amortization Debt Issue Costs: 463 196 463
-------------------------------------
Total 9,316 4,638 9,344
=====================================
EARNINGS:
Pre-Tax Income/(Loss) 754 2,555 4,860
Fixed Charges 9,316 4,638 9,344
-------------------------------------
Total 10,070 7,193 14,204
=====================================
RATIO 1.08094 1.55088 1.52012
=====================================
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to Registration Statement on Form S-4 of Key Components, LLC,
Key Components Finance Corp., B.W. Elliott Manufacturing Co., Inc., Hudson Lock,
Inc. and ESP Lock Products, Inc. of our report dated February 20, 1998 relating
to the financial statements of Key Components, Inc., of our report dated
February 20, 1998 relating to the financial statements of Hudson Lock, Inc. and
of our report dated January 16, 1998 relating to the financial statements of ESP
Lock Products, Inc., which appear in such Prospectus. We also consent to the
references to us under the heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
Syracuse, New York
August 26, 1998
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Key Components, Inc.
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-4 of Key Components,
LLC, Key Components Finance Corp., B.W. Elliott Manufacturing Co., Inc., Hudson
Lock, Inc. and ESP Lock Products, Inc. of our report dated February 9, 1996
(except for Note 8 and Note 4, which is as of February 21, 1997) relating to the
financial statements of B.W. Elliott Manufacturing Co., Inc., which appears in
such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Fulgieri & Randall, LLP
Binghamton, New York
August 26, 1998
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in the Prospectus constituting part of this Amendment No.
1 to the Registration Statement on Form S-4 of Key Components, LLC, Key
Components Finance Corp., B.W. Elliott Manufacturing Co., Inc., Hudson Lock,
Inc. and ESP Lock Products, Inc. of our report dated July 9, 1997 relating to
the financial statements of RAD Lock, Inc., which appears in such Prospectus.
We also consent to the reference made to us under the heading "Experts" in such
Prospectus.
/s/ Greenberg, Rosenblatt, Kull & Bitsoli, P.C.
GREENBERG, ROSENBLATT, KULL & BITSOLI, P.C.
Worcester, Massachusetts
August 26, 1998
<PAGE> 1
Exhibit 23.4
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Key Components, LLC
Key Components Finance Corp.
B.W. Elliott Manufacturing Co., Inc.
Hudson Lock, Inc.
ESP Lock Products, Inc.
We hereby consent to the use in the Prospectus constituting a part
of this Amendment No. 1 to the Registration Statement of our report dated
February 7, 1997, relating to the financial statements of ESP Lock Products,
Inc. as of December 31, 1996 and 1995 and for the years then ended, which is
contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
/s/ BDO Seidman, LLP
Gardner, Massachusetts
August 26, 1998
<PAGE> 1
Exhibit 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
--------------------------
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) _______
--------------------------
UNITED STATES TRUST COMPANY OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-3818954
(Jurisdiction of incorporation (I. R. S. Employer
if not a U. S. national bank) Identification No.)
114 West 47th Street 10036
New York, New York (Zip Code)
(Address of principal
executive offices)
--------------------------
Key Components, LLC
(Exact name of obligor as specified in its charter)
Delaware 04-3425424
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
Wing Road RR1, Box 176D 12545
Millbrook, New York (Zip code)
(Address of principal executive offices)
--------------------------
<PAGE> 2
- 2 -
--------------------------
Key Components Finance Corp.
(Exact name of obligor as specified in its charter)
Delaware 14-1805946
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
Wing Road RR1, Box 176D 12545
Millbrook, New York (Zip code)
(Address of principal executive offices)
--------------------------
10 1/2% Senior Notes due 2008
(Title of the indenture securities)
================================================================================
<PAGE> 3
- 3 -
GENERAL
1. General Information
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Federal Reserve Bank of New York (2nd District), New York, New York
(Board of Governors of the Federal Reserve System).
Federal Deposit Insurance Corporation, Washington, D. C. New York
State Banking Department, Albany, New York
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
2. Affiliations with the Obligor
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
3,4,5,6,7,8,9,10,11,12,13,14 and 15.
Key Components, LLC and Key Components Finance Corp. are currently not in
default under any of their outstanding securities for which United States
Trust Company of New York is Trustee. Accordingly, responses to Items 3,
4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15 of Form T-1 are not required
under General Instruction B.
16. List of Exhibits
T-1.1 -- Organization Certificate, as amended, issued by the State of
New York Banking Department to transact business as a Trust
Company, is incorporated by reference to Exhibit T-1.1 to
Form T-1 filed on September 15, 1995 with the Commission
pursuant to the Trust Indenture Act of 1939, as amended by
the Trust Indenture Reform Act of 1990 (Registration No.
33-97056).
<PAGE> 4
- 4 -
16. List of Exhibits
(cont'd)
T-1.2 -- Included in Exhibit T-1.1.
T-1.3 -- Included in Exhibit T-1.1.
T-1.4 -- The By-Laws of United States Trust Company of New York, as
amended, is incorporated by reference to Exhibit T-1.4 to
Form T-1 filed on September 15, 1995 with the Commission
pursuant to the Trust Indenture Act of 1939, as amended by
the Trust Indenture Reform Act of 1990 (Registration No.
33-97056).
T-1.6 -- The consent of the trustee required by Section 321(b) of the
Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990.
T-1.7 -- A copy of the latest report of condition of the trustee
pursuant to law or the requirements of its supervising or
examining authority.
NOTE
As of July 29, 1998, the trustee had 2,999,020 shares of Common Stock
outstanding, all of which are owned by its parent company, U. S. Trust
Corporation. The term "trustee" in Item 2, refers to each of United States
Trust Company of New York and its parent company, U. S. Trust Corporation.
In answering Item 2 in this statement of eligibility, as to matters
peculiarly within the knowledge of the obligor or its directors, the
trustee has relied upon information furnished to it by the obligor and
will rely on information to be furnished by the obligor and the trustee
disclaims responsibility for the accuracy or completeness of such
information.
----------------
<PAGE> 5
- 5 -
Pursuant to the requirements of the Trust Indenture Act of 1939, the
trustee, United States Trust Company of New York, a corporation organized
and existing under the laws of the State of New York, has duly caused this
statement of eligibility to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of New York, and State of New
York, on the 29th day of July, 1998.
UNITED STATES TRUST COMPANY OF
NEW YORK, Trustee
By: /s/ Christine C. Collins
---------------------------------------
Christine C. Collins
Assistant Vice President
<PAGE> 6
Exhibit T-1.6
The consent of the trustee required by Section 321(b) of the Act.
United States Trust Company of New York
114 West 47th Street
New York, NY 10036
September 1, 1995
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Gentlemen:
Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939,
as amended by the Trust Indenture Reform Act of 1990, and subject to the
limitations set forth therein, United States Trust Company of New York ("U.S.
Trust") hereby consents that reports of examinations of U.S. Trust by Federal,
State, Territorial or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefor.
Very truly yours,
UNITED STATES TRUST COMPANY
OF NEW YORK
By: /s/ Gerard F. Ganey
---------------------------------------
Senior Vice President
<PAGE> 7
EXHIBIT T-1.7
UNITED STATES TRUST COMPANY OF NEW YORK
CONSOLIDATED STATEMENT OF CONDITION
MARCH 31, 1998
--------------
($ IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and Due from Banks $ 303,692
Short-Term Investments 325,044
Securities, Available for Sale 650,954
Loans 1,717,101
Less: Allowance for Credit Losses 16,546
----------
Net Loans 1,700,555
Premises and Equipment 58,868
Other Assets 120,865
----------
Total Assets $3,159,978
==========
LIABILITIES
Deposits:
Non-Interest Bearing $ 602,769
Interest Bearing 1,955,571
----------
Total Deposits 2,558,340
Short-Term Credit Facilities 293,185
Accounts Payable and Accrued Liabilities 136,396
----------
Total Liabilities $2,987,921
==========
STOCKHOLDER'S EQUITY
Common Stock 14,995
Capital Surplus 49,541
Retained Earnings 105,214
Unrealized Gains on Securities
Available for Sale (Net of Taxes) 2,307
----------
Total Stockholder's Equity 172,057
----------
Total Liabilities and
Stockholder's Equity $3,159,978
==========
</TABLE>
I, Richard E. Brinkmann, Senior Vice President & Comptroller of the named bank
do hereby declare that this Statement of Condition has been prepared in
conformance with the instructions issued by the appropriate regulatory authority
and is true to the best of my knowledge and belief.
Richard E. Brinkmann, SVP & Controller
May 6, 1998
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
OFFER TO EXCHANGE
10 1/2% SENIOR NOTES DUE 2008
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OF ITS OUTSTANDING
10 1/2% SENIOR NOTES DUE 2008
OF
KEY COMPONENTS, LLC
AND
KEY COMPONENTS FINANCE CORP.
PURSUANT TO THE PROSPECTUS DATED , 1998
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<S> <C> <C>
By Facsimile: By Mail or Overnight By Hand Delivery
Delivery: before 4:30 p.m.:
United States Trust Company United States Trust Company United States Trust Company
of New York of New York of New York
Attn: Customer Service P.O. Box 843 Cooper Station 111 Broadway
(212) 780-0592 New York, New York 10276 New York, New York 10006
To Confirm Receipt: (800) Attn: Corporate Trust Attn: Lower Level
548-6565 Services Corporate Trust Window
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR
TRANSMISSION VIA FACSIMILE TO A NUMBER, OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE VALID DELIVERY.
As set forth in the Prospectus dated , 1998 (as it may be
supplemented and amended from time to time, the "Prospectus") of Key Components,
LLC, a Delaware limited liability company (the "Company") and Key Components
Finance Corp., a Delaware corporation (together with the Company, the "Issuers")
under "The Exchange Offer -- Guaranteed Delivery Procedures," and in the
Instructions to the related Letter of Transmittal (the "Letter of Transmittal"),
this form, or one substantially equivalent hereto, or an Agent's Message (as
defined in the Prospectus) relating to the guaranteed delivery procedures, must
be used to accept the Issuers' offer (the "Exchange Offer") to exchange any and
all of their outstanding 10 1/2% Senior Notes due 2008 (the "Old Senior Notes"),
for 10 1/2% Senior Notes due 2008 (the "New Notes,"), if time will not permit
such Letter of Transmittal, certificates representing such Old Notes and other
required documents to reach the Exchange Agent, or the procedures for book-entry
transfer cannot be completed, on or prior to the Expiration Date (as defined).
This form must be delivered by or through an Eligible Institution (as
defined herein), by mail or hand delivery or transmitted via facsimile to the
Exchange Agent as set forth above. If a signature on the Letter of Transmittal
is required to be guaranteed by a Medallion Signature Guarantor under the
instructions thereto, such signature guarantee must appear in the applicable
space provided in the Letter of Transmittal. This form is not to be used to
guarantee signatures.
Questions and requests for assistance and requests for additional copies of
the Prospectus may be directed to the Exchange Agent at the address above.
Holders may also contact their broker, dealer, commercial bank, trust company,
or other nominee for assistance concerning the Exchange Offer.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON , 1998, UNLESS EXTENDED ("THE EXPIRATION DATE").
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tender(s) to the Issuers, upon the terms and subject
to the conditions set forth in the Prospectus and the related Letter of
Transmittal (receipt of which is hereby acknowledged), the principal amount of
the Old Notes specified below pursuant to the guaranteed delivery procedures set
forth in the Prospectus under "The Exchange Offer -- Guaranteed Delivery
Procedures" and in Instruction 2 to the related Letter of Transmittal. The
undersigned hereby authorizes the Exchange Agent to deliver this Notice of
Guaranteed Delivery to the Issuers with respect to the Old Notes tendered
pursuant to the Exchange Offer.
The undersigned understands that Old Notes will be exchanged only after
timely receipt by the Exchange Agent of (i) such Old Notes, or a Book-Entry
Confirmation, and (ii) one or more Letter(s) of Transmittal (or manually signed
facsimile(s) thereof), including by means of an Agent's Message, of the transfer
of such Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility with respect to such Old Notes, properly completed and duly executed,
with any signature guarantees and any other documents required by such Letter of
Transmittal, within three New York Stock Exchange, Inc. trading days after the
execution hereof. The undersigned also understands that the method of delivery
of this Notice of Guaranteed Delivery and any other required documents to the
Exchange Agent is at the election and sole risk of the holder, and that delivery
will be deemed made only when actually received by the Exchange Agent.
THE UNDERSIGNED UNDERSTANDS THAT TENDERS OF OLD NOTES WILL BE ACCEPTED ONLY
IN PRINCIPAL AMOUNTS EQUAL TO $1,000 OR INTEGRAL MULTIPLES THEREOF. THE
UNDERSIGNED ALSO UNDERSTANDS THAT TENDERS OF OLD NOTES MAY BE WITHDRAWN AT ANY
TIME PRIOR TO THE EXPIRATION DATE.
All authority conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall not be affected by, and shall survive, the death or
incapacity of the undersigned, and every obligation of the undersigned under
this Notice of Guaranteed Delivery shall be binding upon the heirs, executors,
administrators, trustees in bankruptcy, personal and legal representatives,
successors and assigns of the undersigned.
All capitalized terms used herein but not defined herein shall have the
meanings ascribed to them in the Prospectus.
2
<PAGE> 3
PLEASE SIGN AND COMPLETE
Signature(s) of Registered Holder(s) or
Authorized Signatory:
-----------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Names(s) of Registered Holder(s):
-----------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Amount of Old Notes
Tendered: $
---------------------------------------------------------------------
Certificate No.(s) of Old Notes
(if available):
-----------------------------------------------------------------
Date:
---------------------------------------------------------------------------
Address:
------------------------------------------------------------------------
Area Code and Telephone No.:
----------------------------------------------------
If Old Notes will be delivered by book-entry transfer, check book-entry transfer
facility below:
[ ] The Depository Trust Company
Depository
Account No.:
--------------------------------------------------------------------
This Notice of Guaranteed Delivery must be signed by the Holder(s) exactly
as their name(s) appear(s) on certificate(s) for Old Notes or on a security
position listing as the owner of Old Notes, or by person(s) authorized to become
Holder(s) by endorsements and documents transmitted with this Notice of
Guaranteed Delivery without alteration, enlargement or any change whatsoever. If
signature is by a trustee, executor, administrator, guardian, attorney-in-fact,
officer or other person acting in a fiduciary or representative capacity, such
person must provide the following information.
Please print name(s) and address(es)
Name(s):
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Capacity:
-----------------------------------------------------------------------
Address(es):
--------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DO NOT SEND NOTES WITH THIS FORM. NOTES SHOULD BE SENT TO THE EXCHANGE
AGENT TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF
TRANSMITTAL.
3
<PAGE> 4
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member of the Securities Transfer Agents Medallion
Program, the Stock Exchange Medallion Program or the New York Stock Exchange,
Inc. Medallion Signature Program (each, an "Eligible Institution"), hereby (i)
represents that the above-named persons are deemed to own the Old Notes tendered
hereby within the meaning of Rule 14e-4 promulgated under the Securities
Exchange Act of 1934, as amended ("Rule 14e-4"), (ii) represents that such
tender of Old Notes complies with Rule 14e-4 and (iii) guarantees that the Old
Notes tendered hereby are in proper form for transfer (pursuant to the
procedures set forth in the Prospectus under "The Exchange Offer -- Guaranteed
Delivery Procedures"), and that the Exchange Agent will receive (a) such Old
Notes, or a Book-Entry Confirmation of the transfer of such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility and (b) one or more
properly completed and duly executed Letter(s) of Transmittal or facsimile
thereof (or Agent's message) with any required signature guarantees and any
other documents required by such Letter(s) of Transmittal within three New York
Stock Exchange, Inc. trading days after the date of execution hereof.
The Eligible Institution that completes this form must communicate the
guarantee to the Exchange Agent and must deliver the applicable Letter(s) of
Transmittal and Old Notes to the Exchange Agent within the time period shown
herein. Failure to do so could result in a financial loss to such Eligible
Institution.
Name of Firm:
- --------------------------------------------------------------------------------
Authorized Signature:
- --------------------------------------------------------------------------------
Title:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
(Zip Code)
Area Code and Telephone Number:
---------------------------------------------------------------------------
Dated:
- ------------------------, 1998
4
<PAGE> 1
EXHIBIT 99.3
INSTRUCTION TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM BENEFICIAL OWNER
OF
KEY COMPONENTS, LLC
AND
KEY COMPONENTS FINANCE CORP.
10 1/2% SENIOR NOTES DUE 2008
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated
, 1998 (as the same may be amended or supplemented from time to time,
the "Prospectus") of Key Components, LLC, a Delaware limited liability company
(the "Company") and Key Components Finance Corp., a Delaware corporation
(together with the Company, the "Issuers"), and the accompanying related Letter
of Transmittal (the "Letter of Transmittal"), that together constitute the
Issuers' exchange offer (the "Exchange Offer") for their 10 1/2% Senior Notes
due 2008 (the "Old Notes"). Capitalized terms used but not defined herein have
the meanings ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, to tender the principal amount of Old Notes indicated
below held by you for the account of the undersigned upon the terms and subject
to the conditions set forth in the Prospectus and the related Letter of
Transmittal.
The aggregate face amount of the Old Notes held by you for the account of
the undersigned is (fill in amount):
$ of the 10 1/2% Senior Notes due 2008.
With respect to the Exchange Offer, the undersigned hereby instructs you
(check appropriate box):
[ ] TO TENDER THE FOLLOWING OLD NOTES HELD BY YOU FOR THE ACCOUNT OF THE
UNDERSIGNED (INSERT PRINCIPAL AMOUNT OF OLD NOTES TO BE TENDERED, IF ANY):
$ OF THE 10 1/2% SENIOR NOTES DUE 2008.
[ ] NOT TO TENDER ANY OLD NOTES HELD BY YOU FOR THE ACCOUNT OF THE UNDERSIGNED.
If the undersigned instructs you to tender the Old Notes held by you for
the account of the undersigned, it is understood that you are authorized (a) to
make, on behalf of the undersigned (and the undersigned, by its signature below,
hereby makes to you), the representations and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including but not limited to the representations that: (i) the
principal residence of the undersigned is in the state of (fill in state),
, (ii) the undersigned is acquiring the 10 1/2% Senior Notes due
2008 (the "New Notes") in the ordinary course of business of the undersigned,
(iii) the undersigned is not an "affiliate," as defined in Rule 405 under the
Securities Act of 1933, as amended (the "Act"), (iv) the undersigned is not
participating, does not intend to participate, and has no arrangement or
understanding with any person to participate in the distribution of the New
Notes, and (v) the undersigned acknowledges and agrees that any person
participating in the Exchange Offer for the purpose of distributing the New
Notes or who is an affiliate must and will comply with the registration and
prospectus delivery requirements of the Act, in connection with any resale of
the New Notes (to the extent applicable) acquired by such person and cannot rely
on the position of the staff of the Securities and Exchange Commission set forth
in no-action letters that are discussed in the section of the Prospectus
entitled "The Exchange Offer-Terms of the Exchange Offer;" (b) to agree, on
behalf of the undersigned, as set forth in the Letter of Transmittal; and (c) to
take such other action as necessary under the
<PAGE> 2
Prospectus or the Letter of Transmittal to effect the valid tender of such Old
Notes. If the undersigned is a broker-dealer that will receive New Notes for its
own account in exchange for Old Notes, it represents that such Old Notes were
acquired as a result of market-making activities or other trading activities,
and it acknowledges that it will deliver a prospectus meeting the requirements
of the Act in connection with any resale of such New Notes. By acknowledging
that it will deliver and by delivering a prospectus meeting the requirements of
the Act in connection with any resale of such New Notes, such broker-dealer is
not deemed to admit that it is an "underwriter" within the meaning of the Act.
[ ] CHECK THIS BOX IF THE BENEFICIAL OWNER OF THE OLD NOTES IS A BROKER-DEALER
AND SUCH BROKER-DEALER ACQUIRED THE OLD NOTES FOR ITS OWN ACCOUNT AS A
RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES. IF THIS BOX
IS CHECKED, A COPY OF THESE INSTRUCTIONS MUST BE RECEIVED WITHIN THREE NEW
YORK STOCK EXCHANGE TRADING DAYS AFTER THE EXPIRATION DATE BY KEY
COMPONENTS, LLC, ATTENTION JAMES D. WILCOX, FACSIMILE (978) 568-3608.
SIGN HERE
Name of beneficial owner(s):
- --------------------------------------------------------------------------------
Signature(s):
- --------------------------------------------------------------------------------
Name (please print):
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
Telephone number:
- --------------------------------------------------------------------------------
Taxpayer Identification or Social Security Number:
- ----------------------------------------------------------
Date:
- --------------------------------------------------------------------------------
2
<PAGE> 1
EXHIBIT 99.4
OFFER TO EXCHANGE
10 1/2% SENIOR NOTES DUE 2008
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OUTSTANDING
10 1/2% SENIOR NOTES DUE 2008
OF
KEY COMPONENTS, LLC
AND
KEY COMPONENTS FINANCE CORP.
To Registered Holders and The Depository Trust Company Participants:
We are enclosing herewith the material listed below relating to the offer
by Key Components, LLC, a Delaware limited liability company (the "Company") and
Key Components Finance Corp., a Delaware corporation (together with the Company,
the "Issuers"), to exchange their 10 1/2% Senior Notes due 2008 (the "New
Notes"), pursuant to an offering registered under the Securities Act of 1933, as
amended (the "Securities Act"), for a like principal amount of their issued and
outstanding 10 1/2% Senior Notes due 2008 (the "Old Notes"), upon the terms and
subject to the conditions set forth in the accompanying Prospectus, dated
, 1998 (the "Prospectus"), and the related Letter of Transmittal
(which together with the Prospectus constitutes the "Exchange Offer").
Capitalized terms used herein without definition shall have the meanings
ascribed thereto in the Prospectus.
Enclosed herewith are copies of the following documents:
1. Prospectus dated , 1998;
2. Letter of Transmittal relating to the 10 1/2% Senior Notes due
2008;
3. Notice of Guaranteed Delivery;
4. Instruction to Registered Holder and/or Book-Entry Transfer
Participant from Beneficial Owner relating to the 10 1/2% Senior Notes due
2008;
6. Letter which may be sent to your clients for whose account you hold
Old Notes registered in your name or in the name of your nominee, to
accompany the instruction forms referred to above, for obtaining such
client's instructions with regard to the Exchange Offer; and
7. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
We urge you to contact your clients promptly. Please note that the Exchange
Offer will expire at 5:00 p.m., New York City time, on , 1998
unless extended.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Issuers as to its principal residence and that: (i) the holder
and the beneficial owner are acquiring the New Notes in the ordinary course of
their business, (ii) neither the holder nor the beneficial owner is an
"affiliate" of the Issuers as defined in Rule 405 under the Securities Act or a
"broker" or "dealer" registered under the Securities Exchange Act of 1934, as
amended, (iv) neither the holder nor the beneficial owner is participating, nor
intends to participate, or has any arrangement or understanding with any person
to participate in, the distribution of the New Notes, and (v) the holder and the
beneficial owner acknowledge and agree that any
<PAGE> 2
person participating in the Exchange Offer for the purpose of distributing the
New Notes or who is an affiliate must and will comply with the registration and
prospectus delivery requirements of the Securities Act, in connection with any
resale of the New Notes (to the extent applicable) acquired by such person. If
the tendering holder is a broker-dealer that will receive New Notes for its own
account in exchange for Old Notes, you will represent on behalf of such
broker-dealer that the Old Notes to be exchanged for the New Notes were acquired
by it as a result of market-making activities or other trading activities, and
acknowledge on behalf of such broker-dealer that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such New Notes. By acknowledging that it will deliver and by delivering a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New Notes, such broker-dealer is not deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. See the discussion in
the Prospectus under "The Exchange Offer -- Terms of the Exchange Offer."
The enclosed Instruction to Registered Holder and/or Book-Entry Transfer
Participant from Beneficial Owner contains an authorization by the beneficial
owners of the Old Notes for you to make the foregoing representations.
The Issuers will not pay any fee or commission to any broker or dealer or
to any other persons (other than the Exchange Agent) in connection with the
solicitation of tenders of Old Notes pursuant to the Exchange Offer. The Company
will pay or cause to be paid any transfer taxes payable on the transfer of Old
Notes to it, except as otherwise provided in Instruction 7 of the enclosed
Letter of Transmittal.
Any inquires you may have with respect to the Exchange Offer may be
addressed to, and additional copies of the enclosed material may be obtained
from the undersigned at the following telephone number: (800) 548-6565.
Very truly yours,
UNITED STATES TRUST COMPANY OF
NEW YORK
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU THE
AGENT OF KEY COMPONENTS, LLC, KEY COMPONENTS FINANCE CORP. OR UNITED STATES
TRUST COMPANY OF NEW YORK OR AUTHORIZE YOU TO USE ANY DOCUMENT OR MAKE ANY
STATEMENT ON THEIR BEHALF IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THE
DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN.
2
<PAGE> 1
EXHIBIT 99.5
OFFER TO EXCHANGE
10 1/2% SENIOR NOTES DUE 2008
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OUTSTANDING
10 1/2% SENIOR NOTES DUE 2008
OF
KEY COMPONENTS, LLC
AND
KEY COMPONENTS FINANCE CORP.
To Our Clients:
We are enclosing herewith a Prospectus, dated , 1998 (the
"Prospectus"), of Key Components, LLC, a Delaware limited liability company (the
"Company") and Key Components Finance Corp., a Delaware corporation (together
with the Company, the "Issuers"), and the related Letter of Transmittal (which
together with the Prospectus constitutes the "Exchange Offer") with the attached
Instruction to Registered Holder and/or Book-Entry Transfer Participant from
Beneficial Owner (the "Instruction") relating to the offer by the Issuers to
exchange their 10 1/2% Senior Notes due 2008 (the "New Notes"), pursuant to an
offering registered under the Securities Act of 1933, as amended (the
"Securities Act"), for any and all of their issued and outstanding 10 1/2 Senior
Notes due 2008 (the "Old Notes"), upon the terms and subject to the conditions
set forth in the Exchange Offer.
Please note that the Exchange Offer will expire at 5:00 p.m., New York City
time, on , 1998, unless extended.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered.
We are the holder of record and/or participant in the book-entry transfer
facility of Old Notes held by us for your account. A tender of such Old Notes
can be made only by us as the record holder and/or participant in the book-entry
transfer facility and pursuant to your instructions. The Letter of Transmittal
is furnished to you for your information only and cannot be used by you to
tender Old Notes held by us for your account.
We request instructions as to whether you wish us to tender any or all of
the Old Notes held by us for your account pursuant to the terms and conditions
of the Exchange Offer. We also request that you confirm that we may on your
behalf make the representations contained in the Letter of Transmittal. You
should forward your instructions and confirmation by completing and executing
the Instruction and returning it to us. Your instructions should be forwarded to
us in ample time to permit us to submit a tender on your behalf by the
Expiration Date.
Pursuant to such Letter of Transmittal, each holder of Old Notes will
represent to the Issuers as to its principal residence and that: (i) the holder
and the beneficial owner is acquiring the New Notes in the ordinary course of
its business, (ii) neither the holder nor the beneficial owner is an
"affiliate," as defined in Rule 405 under the Securities Act, (iv) neither the
holder nor the beneficial owner is participating, nor intends to participate, or
has any arrangement or understanding with any person to participate in, the
distribution of the New Notes, and (v) the holder and the beneficial owner
acknowledge and agree that any person participating in the Exchange Offer for
the purpose of distributing the New Notes or who is an affiliate must and will
comply with the registration and prospectus delivery requirements of the
Securities Act, in connection with any resale of the New Notes (to the extent
applicable) acquired by such person. If the tendering holder is
<PAGE> 2
a broker-dealer that will receive New Notes for its own account in exchange for
Old Notes, we will represent on behalf of such broker-dealer that the Old Notes
to be exchanged for the New Notes were acquired by it as a result of
market-making activities or other trading activities, and acknowledge on behalf
of such broker-dealer that it will deliver a prospectus meeting the requirements
of the Securities Act in connection with any resale of such New Notes. By
acknowledging that it will deliver and by delivering a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes, such broker-dealer is not deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
Very truly yours,
2
