<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
[X] THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended Dec. 31, 1998
-------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ ] SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
Commission File Number 1-8912
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SBM INDUSTRIES, INC.
---------------------------------------------
(Name of Small Business Issuer in it Charter)
Delaware 36-1805030
- ---------------------------------------- -------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1865 Palmer Avenue
Larchmont, New York 10538
- ---------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
(914) 833-0649
--------------
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, $1.00 par value American Stock Exchange
- ----------------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
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<PAGE>
Check if disclosure of no delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $13,070,000.
Based on the closing sales price on March 18, 1999, the aggregate market
value of the voting stock held by non-affiliates of the registrant was
approximately $2,690,000.
The number of shares outstanding of the registrant's common stock was
2,025,929 at March 18, 1999.
DOCUMENTS INCORPORATED BY REFERENCE: Part III -Definitive Proxy Statement
relating to May 3, 1999 Annual Meeting of Shareholders. Parts I and II - Annual
Report to Shareholders for the year ended December 31, 1998.
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<PAGE>
PART I
Item I. Description of Business
-----------------------
General
- -------
SBM Industries, Inc. (the "Company") is a holding company whose operating
subsidiary corporation is primarily engaged in the distribution of watch
batteries and related products and sports apparel. The Company's principal
executive offices have been located in Larchmont, New York since 1992.
Star Struck, Inc.
- -----------------
The Company's operating subsidiary is Star Struck, Inc., a Connecticut
corporation ("SSI"), whose principal offices are in Bethel, Connecticut. SSI is
a distributor throughout the United States of watch batteries. SSI also sells
related products, such as alkaline, photo and hearing aid batteries, jewelry
findings, tools, supplies and plastic bags and it manufactures and sells watch
straps and leather accessories.
Since late 1995, SSI has also distributed a line of sports apparel. These
products consist principally of caps and shirts bearing logos of various
professional and college sports teams. These products are manufactured for SSI
by various apparel manufacturers under license from the respective teams whose
logos are being used. In 1998, sales of sports apparel products were
approximately $1.6 million.
SSI sells its watch batteries and related products through direct mail and
telemarketing to jewelry stores, discount store chains and other retail vendors.
SSI sells its sports apparel products directly to customers through direct mail
and print media advertising, and, since early 1999, through its internet site,
www.starstruck.com.
SSI competes in competitive, but highly fragmented, industries.
SSI's business does not depend on the availability of raw materials. SSI
distributes watch batteries for Sony, Eveready, Maxell, Renata, Rayovac and
Varta under the manufacturer's and SSI's private label. SSI sells its watch
straps under the Sahara, Town & Country, "Downing" and "R. C. Manufacturing"
tradenames. SSI sells its sports apparel under the "Star Struck" trade name.
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SSI has approximately 6,600 active customers for its watch batteries and
related products. SSI's two largest customers account for 25% and 5%,
respectively, of its sales.
Governmental regulation is not a specific influence on the business of SSI,
and generally compliance with environmental regulations have not been burdensome
to SSI.
SSI has approximately 60 full-time employees. SSI's 80% owned subsidiary,
RC Manufacturing, Inc., which manufactures and sells leather accessories and
watch straps, has approximately 24 full-time employees
Carlton Press, Inc.
- -------------------
Carlton Press Corp. ("Carlton"), which the Company acquired in December
1993, became the subject of a voluntary bankruptcy proceeding under Chapter 7 of
the Bankruptcy Code on December 3, 1996. Carlton ceased operations on November
14, 1996. Prior to the bankruptcy, Carlton was a subsidy book publisher. The
Company wrote off its entire investment in Carlton in 1996.
Investments
- -----------
The Company generally holds its liquid assets in government securities.
Government securities include only such securities as defined in the Investment
Company Act of 1940, as amended.
General
- -------
The Company does not hold any patents, trademarks, licenses, franchises or
concessions in connection with its business, except as described above.
The Company expended no money on research and development in 1997 or 1998.
-4-
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Item 2. Properties.
----------
The Company leases offices in Larchmont, New York for use as its
executive offices.
SSI owns property located in the Francis J. Clarke Industrial Park at
8 Francis J. Clarke Circle in Bethel, Connecticut. The property consists of
2.344 acres of land and a warehouse/office building. The building comprises
approximately 20,500 square feet. Approximately sixty percent of the building is
used as a warehouse and remaining forty percent is used as offices by SSI. The
warehouse space contains a loading dock. The property is encumbered by two
mortgages. SSI also leases a warehouse facility, comprising approximately 7,000
square feet, in the Francis J. Clarke Industrial Park.
SSI's subsidiary, RC Manufacturing, Inc., leases a manufacturing and
office facility in St. Petersburg, Florida, comprising approximately 5,000
square feet.
In the opinion of management, the properties are adequately covered by
insurance.
Item 3. Legal Proceedings.
-----------------
The Company is not a party to any legal proceeding required to be
described in this Report.
Item 4. Submission of Matters to a Vote of Security
Holders.
-------------------------------------------
None.
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PART II
Item 5. Market for Common Equity and Related
Stockholder Matters.
------------------------------------
The principal United States market in which the Company's common stock
is traded is the American Stock Exchange. See page 14 of the Company's 1998
Annual Report to Shareholders, in the section entitled "Market and Dividend
Information", for information concerning the high and low sales prices for the
Company's common stock for each quarter of 1997 and 1998. That section is
incorporated herein by reference. As of March 18, 1999, the Company had
approximately 550 shareholders of common stock. No dividends were paid by the
Company during the 1997 and 1998 fiscal years.
Item 6. Management's Discussion and Analysis or
Plan of Operation.
---------------------------------------
See pages 12 through 13 of the Company's 1998 Annual Report to
Shareholders. Those pages are incorporated herein by reference.
Item 7. Financial Statements and Supplementary Data.
-------------------------------------------
See pages 2 through 10 of the Company's 1998 Annual Report to
Shareholders. Those pages are incorporated herein by reference.
Item 8. Changes in and Disagreements on Accounting
and Financial Disclosure.
------------------------------------------
None.
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
-------------------------------------------------
See the sections entitled "Nominees for Election as Directors" and
"Executive Officers and Executive Compensation" and "Compliance with Section
16(a) of the Exchange Act" in the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held on May 3, 1999 for information concerning
directors, executive officers, promoters and control persons of the Company.
Those sections are incorporated herein by reference.
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Item 10. Executive Compensation.
----------------------
See the section entitled "Executive Officers and Executive
Compensation" in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 3, 1999 for information concerning executive
compensation. That section is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners
and Management.
-----------------------------------------------
See the sections entitled "Executive Officers and Executive
Compensation --Stock Options," "Security Ownership of Management" and "Other
Principal Holders of Voting Securities" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on May 3, 1999. Those sections are
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
----------------------------------------------
See the section entitled "Nominees for Election as Directors --
Additional Information" in the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held on May 3, 1999. That section is incorporated herein
by reference .
Item 13. Exhibits, Lists and Reports on Form 8-K.
---------------------------------------
(a) Financial Statements.
--------------------
(1) A copy of the Company's Annual Report to Shareholders for the year
ended December 31, 1998 has been furnished as an exhibit to this Annual Report
on Form 10-KSB. Pages 2 through 11 of such Annual Report to Shareholders
contain the Consolidated Balance Sheet as of December 31, 1998, and the
Consolidated Statements of Income, Shareholders' Investment and Cash Flows and
Notes to Consolidated Financial Statements for each of the two years ended
December 31, 1998 and 1997, and the Auditors' Report covering the aforementioned
financial statements. These Financial Statements and the Auditors' Report
thereon are incorporated herein by reference.
Exhibits
--------
*(3) The Articles of Incorporation and Bylaws of the Company, as
amended, filed as Exhibit to a report on Form 8, Amendment No. 1 to the
Company's Form 10-K for the fiscal year ended December 31, 1988 and filed May
26, 1989, are incorporated herein by reference, and Amendment to the Articles of
Incorporation of the Company, changing the name
-7-
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of the Company, filed as an exhibit to the Company's report on 8-K dated
September 15, 1992 and filed September 29, 1992, is incorporated herein by
reference.
*(4) Certificate of Rights, Designations and Preferences relating to the
1992 Series A Preferred Stock, filed as Exhibit (4) to the Company's report on
Form 8-K dated September 15, 1992 and filed September 29, 1992, is incorporated
herein by reference.
(10) Material Contracts.
*(a) Mortgage, Assignment of Lease and Security Agreement, dated July
6, 1995, between Star Struck, Inc., as mortgagor, and First Union
National Bank (formerly First Fidelity Bank), as mortgagee, in
the original amount of $800,000, secured by property known as 8
Francis J. Clarke Circle, Bethel, Connecticut, filed as Exhibit
10(e) to the Company's report on Form 10-KSB for the fiscal year
ended December 31, 1995, filed with Amendment No. 1 thereto on
April 3, 1996, is incorporated herein by reference.
*(b) Consulting Agreement, dated December 6. 1993, between SBM
Acquisition Corp. and Carlton Press, Inc., filed as Exhibit 10(i)
to the Company's report on Form 10-KSB for the year ended
December 31, 1993, filed March 31, 1994.
*(c) Non-Compete Agreement, dated December 6, 1993, among Michael
Sheldon, SBM Press Acquisition Corp. and SBM Industries, Inc.,
filed as Exhibit 10(j) to the Company's report on Form 10-KSB for
the year ended December 31, 1993, filed March 31, 1994.
(d) Loan Agreement, dated as of October 29, 1998, between Star
Struck, Inc. and People's Bank.
(e) Open-End Mortgage Deed, Assignment of Rents and Financing
Statement, dated as of October 29, 1998 from Star Struck,
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<PAGE>
Inc., as mortgagor, to People's Bank, as mortgagee.
(f) Security Agreement, dated as of October 29, 1998 between Star
Struck, Inc. and People's Bank.
(g) Guaranty Agreement, dated as of October 29, 1998 from SBM
Industries, Inc. to People's Bank.
*(11) Statement re: Computation of Per Share Earnings. See page 2 of the
Company's 1998 Annual Report to Shareholders for a description of the
computation of the Company's per share earnings, which description is
incorporated herein by reference.
(13) 1998 SBM Industries, Inc. Annual Report to Shareholders (which,
except for those portions thereof incorporated by reference in this Form 10-KSB
Annual Report, is furnished for the information of the Commission, but is not
deemed to be "filed" as part of this report).
*(21) The Company owns 100% of the outstanding shares of Star Struck,
Inc., a Connecticut corporation, which owns 80% of the outstanding shares of RC
Manufacturing, Inc., a Florida corporation.
___________________________
*Incorporated by reference.
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(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SBM INDUSTRIES INC.
By: s/Peter Nisselson
-----------------------------
Peter Nisselson, President,
Secretary and Chief Executive
Officer, March 30, 1999
By: s/Lawrence J. Goldstein
-----------------------------
Lawrence J. Goldstein,
Vice President and Treasurer
March 30, 1999
Dated: March 30, 1999
In accordance with the Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
s/Peter Nisselson
_____________________________________
Peter Nisselson, March 30, 1999
(Director)
s/Lawrence J. Goldstein
_____________________________________
Lawrence J. Goldstein, March 30, 1999
(Director)
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s/Robert Morris
_____________________________________
Robert Morris, March 30, 1999
(Director)
s/Arthur Salzfass
_____________________________________
Arthur Salzfass, March 30, 1999
(Director)
s/Kenneth Karlan
_____________________________________
Kenneth Karlan, March 30, 1999
(Director)
s/Keith Sessler
_____________________________________
Keith Sessler, March 30, 1999
(Director)
s/Michael Sweedler
_____________________________________
Michael Sweedler, March 30, 1999
(Director)
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<PAGE>
LOAN AGREEMENT
by and between
STAR STRUCK, INC.
("Borrower")
and
PEOPLE'S BANK("Lender")
Dated as of October 29, 1998
<PAGE>
TABLE OF CONTENTS
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Page
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ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS.......................................................................................1
--------------------------------
Section 1.1 Defined Terms.........................................................................................1
-------------
Section 1.2 Terms Generally......................................................................................11
---------------
ARTICLE 2
AMOUNTS AND TERMS OF THE LOANS........................................................................................12
------------------------------
A. THE LOAN.........................................................................................................12
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Section 2.1 Revolving Loan.......................................................................................12
--------------
Section 2.2 Certain Fees and Charges.............................................................................13
------------------------
Section 2.3 Interest Provisions..................................................................................13
-------------------
Section 2.4 Notice and Manner of Borrowing; Conversion or Continuation of
-------------------------------------------------------------
Interest Rate............................................................................................14
-------------
Section 2.5 Excess Advances......................................................................................14
---------------
Section 2.6 Method of Payment....................................................................................14
-----------------
Section 2.7 Collection of Funds..................................................................................15
------------------
B. CERTAIN GENERAL PROVISIONS.......................................................................................15
-------------------------
Section 2.8 Payments Free of Deductions..........................................................................15
----------------------------
Section 2.9 Computations.........................................................................................15
------------
Section 2.10 Additional Payments ................................................................................15
-------------------
Section 2.11 Capital Adequacy....................................................................................16
----------------
Section 2.12 Certificate; Protection.............................................................................17
------------------------
Section 2.13 Obligations Absolute ...............................................................................17
--------------------
C. MISCELLANEOUS....................................................................................................17
------------
Section 2.14 Use of Proceeds.....................................................................................17
---------------
Section 2.15 Termination.........................................................................................18
-----------
Section 2.16 Limitations on Interest ............................................................................18
-----------------------
ARTICLE 3
CONDITIONS PRECEDENT..................................................................................................18
--------------------
Section 3.1 Conditions Precedent to Effectiveness................................................................18
-------------------------------------
Section 3.2 Conditions Precedent to All Advances, Etc............................................................21
-----------------------------------------
ARTICLE 4
REPRESENTATIONS AND WARRANTIES........................................................................................21
------------------------------
Section 4.1 Existence and Due Qualification......................................................................21
-------------------------------
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Section 4.2 Power and Authority.................................................................................21
-------------------
Section 4.3 Legally Enforceable Agreement.......................................................................22
-----------------------------
Section 4.4 Financial Statements and Condition: Full Disclosure.................................................22
---------------------------------------------------
Section 4.5 Other Agreements; No Default........................................................................23
----------------------------
Section 4.6 Litigation..........................................................................................23
----------
Section 4.7 No Defaults on Outstanding Judgments or Orders......................................................23
----------------------------------------------
Section 4.8 Ownership and Liens.................................................................................23
-------------------
Section 4.9 Subsidiaries........................................................................................23
-----------
Section 4.10 Operation of Business...............................................................................23
---------------------
Section 4.11 Taxes...............................................................................................23
-----
Section 4.12 Debt................................................................................................24
----
Section 4.13 Intentionally.......................................................................................24
-------------
Section 4.14 Margin Securities...................................................................................24
------------------
Section 4.15 Fiscal Year.........................................................................................24
-----------
Section 4.16 No Broker's Fees, et................................................................................24
--------------------
Section 4.17 Governmental Consents and Regulatory Approvals......................................................24
----------------------------------------------
Section 4.18 Eligible Accounts Receivable........................................................................24
----------------------------
Section 4.19 Eligible Inventory..................................................................................24
---------------------
Section 4.20 Environmental Compliance............................................................................25
------------------------
Section 4.21 Compliance with Laws................................................................................25
--------------------
Section 4.22 Events of Default...................................................................................25
------------------
Section 4.23 Labor Disputes and Acts of God......................................................................25
------------------------------
Section 4.24 ERISA...............................................................................................25
-----
ARTICLE 5
AFFIRMATIVE COVENANTS..................................................................................................26
----------------------
Section 5.1 Maintenance of Existence............................................................................26
-----------------------
Section 5.2 Maintenance of Records..............................................................................26
----------------------
Section 5.3 Maintenance of Properties...........................................................................26
-------------------------
Section 5.4 Conduct of Business.................................................................................26
-------------------
Section 5.5 Maintenance of Insurance............................................................................26
------------------------
Section 5.6 Compliance With Laws................................................................................26
---------------------
Section 5.7 Right of Inspection.................................................................................27
-------------------
Section 5.8 Reporting Requirements..............................................................................27
----------------------
Section 5.9 Eligible Accounts Receivable; Eligible Inventory....................................................28
------------------------------------------------
Section 5.10 Collateral..........................................................................................29
----------
Section 5.11 Defend Collateral...................................................................................29
-----------------
Section 5.12 Environmental Covenants.............................................................................29
------------------------
Section 5.13 Operating Accounts..................................................................................30
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ii
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ARTICLE 6
NEGATIVE COVENANTS ...................................................................................................30
------------------
Section 6.1 Liens...............................................................................................30
-----
Section 6.2 Debt................................................................................................30
----
Section 6.3 Mergers, Etc........................................................................................31
-------------
Section 6.4 Leases..............................................................................................31
-----
Section 6.5 Sale and Leaseback..................................................................................31
------------------
Section 6.6 Restricted Payments.................................................................................31
-------------------
Section 6.7 Sale of Assets......................................................................................31
--------------
Section 6.8 Investments.........................................................................................31
-----------
Section 6.9 Guaranties, Etc.....................................................................................31
---------------
Section 6.10 Transactions With Affiliates........................................................................32
----------------------------
Section 6.11 Subsidiaries........................................................................................32
------------
Section 6.12 Fiscal Year.........................................................................................32
----------
Section 6.13 Accounting Methods..................................................................................32
------------------
Section 6.14 Inventory Locations.................................................................................32
-------------------
Section 6.15 Fixed Asset Expenditures............................................................................32
------------------------
Section 6.16 Account Balances....................................................................................32
-----------------
ARTICLE 7
FINANCIAL COVENANTS.....................................................................................................32
-------------------
Section 7.1 Current Ratio........................................................................................32
-------------
Leverage Ratio...................................................................................................33
--------------
Section 7.3 Tangible Net Worth...................................................................................33
------------------
Section 7.4 Debt Service Coverage Ratio..........................................................................33
---------------------------
Section 7.5 Certain Financial Terms..............................................................................33
-----------------------
ARTICLE 8
SECURITY..............................................................................................................34
--------
ARTICLE 9
EVENTS OF DEFAULT.....................................................................................................34
-----------------
Section 9.1 Events of Default.....................................................................................34
-----------------
ARTICLE 10
GENERAL PROVISIONS....................................................................................................37
-------------------
Section 10.1 Amendments, Etc ....................................................................................37
---------------
Section 10.2 Notices, Etc........................................................................................37
------------
iii
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Section 10.3 No Waiver; Remedies.................................................................................38
--------------------
Section 10.4 Successors and Assigns/Participants.................................................................38
-----------------------------------
Section 10.5 Costs, Expenses, and Taxes; indemnification.........................................................39
-------------------------------------------
Section 10.6 Right of Setoff.....................................................................................40
----------------
Section 10.7 Governing Law: Jurisdiction.........................................................................40
---------------------------
Section 10.8 Entire Agreement: Severability of Provisions........................................................41
--------------------------------------------
Section 10.9 Estoppel Certificates...............................................................................41
---------------------
Section 10.10 Waiver of Jury Trial and Consequential Damages.....................................................42
----------------------------------------------
Section 10.11 Replacement of the Notes...........................................................................42
------------------------
Section 10.12 Survival of Representations and Warranties.........................................................43
------------------------------------------
Section 10.13 Further Assurances.................................................................................43
-------------------
Section 10.14 Construction.......................................................................................43
------------
Section 10.15 Captions...........................................................................................43
--------
Section 10.16 Opinion Letter.....................................................................................43
--------------
Section 10.17 Examination of Records.............................................................................43
----------------------
Section 10.18 Releases...........................................................................................43
--------
Section 10.19 Counterparts.......................................................................................44
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iv
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<PAGE>
LOAN AGREEMENT
LOAN AGREEMENT ("Agreement"), dated as of October 29, 1998, by and between
STAR STRUCK, INC., a Connecticut corporation with its chief executive office and
principal place of business at 8 Francis J. Clarke Circle, Bethel, Connecticut
06801-0308 (the "Borrower") and PEOPLE'S BANK, a national banking association
with an office at 850 Main Street, Bridgeport, Connecticut 06604-4913
(hereinafter referred to as the "Lender").
WITNESSETH:
Borrower has requested that Lender extend credit in the form of a
$2,000,000.00 revolving credit facility to the Borrower. Lender is willing to
provide such credit, but only on the terms and subject to the conditions
contained in this Agreement.
NOW, THEREFORE, in consideration of these premises and the covenants and
agreements herein contained, Borrower and Lender agree as follows:
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
--------------------------------
Section 1.1 Defined Terms. The following capitalized terms are used in
-------------
this Agreement with the respective meanings set forth in this Section 1.1.
Terms defined in the singular shall have the same meaning when used in the
plural, and vice versa.
"Account Debtor" means any Person who is or may become obligated to
Borrower on or under a Receivable.
"Affiliate" means any Person: (1) that, directly or indirectly, controls,
is controlled by, or is under common control with, Borrower; (2) that is a
shareholder, member, manager, officer, or director of Borrower or of any Person
that, directly or indirectly, controls, is controlled by, or is under common
control with, Borrower, together with, in each case, their respective relatives
(whether by blood or marriage), heirs, executors, administrators, personal
representatives, successors, and assigns; and (3) any trust of which any of the
foregoing Persons is a settlor, trustee, or beneficiary. For the purposes of
this definition, the term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting securities, by
contract, or otherwise; and "controlled" shall have the meaning correlative
thereto.
<PAGE>
"Agreement" means this Loan Agreement, as amended, supplemented, or
modified and in effect from time to time.
"Business Day" means a day other than a Saturday, Sunday, or other day on
which The Federal Reserve is required or authorized by law to be closed.
"Borrowing Base" means, at the relevant time of reference, the amount which
is equal to (i) 80% of Eligible Accounts Receivable, plus (ii) the lesser of (a)
40% of Eligible Inventory or (b) $750,000.00, provided that Lender may, at any
time and from time to time in its discretion, adjust the advance rates set forth
within this definition of "Borrowing Base".
"Borrowing Base Certificate" means that term as defined in Section 5.8(d).
"Borrowing Request" means that term as defined in Section 2.3.
"Capital Lease" means all leases of property (whether real, personal, or
mixed) which have been or should be capitalized on the books of the lessee in
accordance with GAAP.
"Collateral" means all property of Borrower now or hereafter subject to the
Liens granted in the Security Documents.
"Commitment" means Lender's commitment to make Revolving Advances to
Borrower pursuant to Section 2.1 of this Agreement in an outstanding aggregate
principal amount not to exceed at any time $2,000,000.00.
"Contaminant" means any pollutants, hazardous or toxic substances or wastes
or contaminated materials including but not limited to oil and oil products,
asbestos, asbestos containing materials, urea formaldehyde foam insulation,
transformers or other equipment which contain dielectric fluid containing levels
of polychlorinated biphenyls, flammables, explosives, radioactive materials,
laboratory wastes, biohazardous wastes, chemicals, elements, compounds or any
other materials and substances (including materials, substances or things which
are composed of or which have as constituents any of the foregoing substances),
which are or may be subject to regulation under, or the Release of which or
exposure to which is prohibited, limited or regulated under any Environmental
Law.
"Corporate Guarantor" means SBM Industries, Inc.
"Credit Availability" means, at the relevant time of reference, the dollar
amount equal to the lesser of (a) the Borrowing Base and (b) the Commitment,
less, in each case, the sum of the aggregate outstanding principal amount of all
Revolving Advances.
"Current Assets" means that term as defined in Section 7.5(a).
2
<PAGE>
"Current Liabilities" means that term as defined in Section 7.5(b).
"Current Maturities of Long Term Debt" means that term as defined in
Section 7.4(c).
"Debt", as applied to any Person, means: (1) indebtedness or liability of
such Person for borrowed money, or with respect to deposits or advances of any
kind, or for the deferred purchase price of property or services (including
trade obligations); (2) all obligations of such Person evidenced by notes,
bonds, debentures or similar instruments; (3) all obligations of such Person
under conditional sale or other title retention agreements relating to property
or assets purchased by such Person; (4) all obligations of such Person for the
deferred purchase price of property or services (including trade obligations);
(5) all obligations of such Person as lessee under Capital Leases; (6) current
liabilities of such Person in respect of the present value of unfunded vested
benefits under any Plan; (7) obligations of such Person under letters of credit,
bankers acceptances, or comparable arrangements; (8) obligations of such Person
arising under acceptance facilities; (9) guaranties, endorsements (other than
for collection or deposit in the ordinary course of business), and other
contingent obligations of such Person to purchase, to provide funds for payment,
to supply funds to invest in any Persons, or otherwise to assure a creditor
against loss; (10) all obligations of such Person secured by any Lien on any of
such Person's assets or property, whether or not the obligations have been
assumed; and (11) all obligations of such Person in respect of interest rate
protection agreements, foreign currency exchange agreements or other interest or
exchange rate hedging arrangements. The Debt of any Person shall include the
Debt of any partnership in which such person is a general partner.
"Default" means an event or condition the occurrence or existence of which,
with the lapse of time or the giving of a required notice, or both, would become
an Event of Default.
"Default Rate" means that rate of interest that is equal to the greater of
(a) the sum of 4% plus the rate of interest otherwise applicable to the
outstanding principal amounts of the Loans under the terms of this Agreement or
(b) the sum of 4% plus the Prime Rate.
"Drawdown Date" means the date on which any Revolving Advance is made.
"EBITDA" means that term as defined in Section 7.5(d).
"Eligible Accounts Receivable" means, at the time of calculation, bona fide
outstanding Receivables of Borrower, in which the Lender has a first priority
perfected security interest, which satisfy all of the following requirements:
(A) It is owing to Borrower and is subject to a validly perfected security
interest in favor of Lender having priority over any and all other liens or
encumbrances thereon;
(B) It arises from the sale or lease of goods by Borrower or the rendering
of services by Borrower which have been shipped or delivered to an Account
Debtor (i) on an absolute sale basis
3
<PAGE>
and not on consignment, on approval, or on a sale or return basis or subject
to any other repurchase or return agreement, and (ii) on an open receivable
basis, which is not evidenced by chattel paper or an instrument of any kind;
provided that in any case, no material part of the subject goods or services has
been returned, rejected, lost or damaged, and the Account Debtor is not
insolvent or the subject of any bankruptcy or insolvency proceeding of any kind;
(C) If the Account Debtor is located outside the United States, (i) the
subject goods shall have been shipped after receipt, by Borrower from the
Account Debtor, of (a) an irrevocable letter of credit, which letter of credit
shall have been issued or confirmed by a financial institution acceptable to
Lender and shall be in form and substance acceptable to Lender and shall be
transferred, assigned or otherwise made payable to Lender in form and substance
satisfactory to Lender, or (b) credit insurance in form and substance and issued
by an insurer satisfactory to Lender, and (ii) the Receivable shall be payable
in the full amount of the face value of the Receivable in United States dollars;
(D) It is a valid, legally enforceable obligation of the Account Debtor
thereunder and is not and may not become subject to any offset, counterclaim,
right of return, unapplied cash, unapplied credits or, in the opinion of Lender,
contra or other defense on the part of such Account Debtor or to any claim on
the part of such Account Debtor denying liability thereunder;
(E) It is subject to no lien or security interest whatsoever (including
purchase money security interests), except for the security interest of Lender
hereunder and liens or security interests which have been expressly subordinated
to the security interest of Lender in form and substance satisfactory to Lender;
(F) It is evidenced by an invoice or other proof of delivery in form
acceptable to Lender;
(G) Except as specifically approved in writing by Lender, it has not
remained unpaid for a period exceeding the lesser of (i) ninety (90) days after
the date of invoice, or (ii) sixty (60) days after the due date thereof;
(H) It is not owing from an Account Debtor from whom 50% or more of the
amounts owing Borrower have remained unpaid for a period exceeding the lesser of
(i) ninety (90) days from the date of invoice, or (ii) sixty (60) days after the
due date thereof;
(I) It does not arise out of transactions with an employee, officer,
director, Affiliate, or Subsidiary of Borrower;
(J) It does not arise out of a transaction with, and is not owing from, the
United States of America, unless Borrower has complied with the Federal
Assignment of Claims Act, when applicable;
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<PAGE>
(K) It is not owing from an Account Debtor located in any jurisdiction in
which the Borrower has not complied with any laws which might restrict the
ability of the Borrower to collect such Receivables; and
(L) Lender has determined in its sole discretion that it is an Eligible
Account Receivable.
With respect to the Receivables, Borrower warrants and represents to Lender
that, unless otherwise indicated in writing by Borrower: (A) They are genuine,
are in all respects what they purport to be, are not evidenced by a judgment and
are only evidenced by one, if any, executed original instrument, agreement,
contract or document, which has been delivered to Lender; (B) They represent
undisputed, bona fide transactions completed in accordance with the terms and
provisions contained in any documents related thereto; (C) The amounts of the
face value shown on any schedule of accounts or accounts receivable aging report
provided to Lender, and all invoices and statements delivered to Lender with
respect to any Receivable are actually and absolutely owing to Borrower and are
not contingent for any reason; (D) There are no setoffs, counterclaims or
disputes existing or asserted with respect thereto and Borrower has not made any
agreement with any Account Debtor thereunder for any deduction therefrom; (E)
There are no facts, events or occurrences which in any way impair the validity
or enforcement thereof or tend to reduce the amount payable thereunder from the
amount of the invoice face value with respect to any Eligible Accounts
Receivable, and on all contracts, invoices and statements delivered to Lender
with respect thereto; (F) To the best knowledge of Borrower's officers,
directors and key employees (including, without limitation, any sales personnel
dealing with any such Account Debtor), all Account Debtors, under any Eligible
Accounts Receivable, (i) had the capacity to contract at the time any contract
or other document giving rise to the Receivable was executed, (ii) are solvent,
and (iii) are not the subject of a bankruptcy or insolvency proceeding of any
kind; (G) The goods giving rise thereto are not, and were not at the time of the
sale thereof, subject to any lien, claim, encumbrance or security interest,
except those of Lender, those terminated prior to the date hereof or those
subordinate to Lender's security interest; (H) Borrower has no knowledge of any
fact or circumstance which would materially impair the validity or
collectibility thereof; (I) To the best of Borrower's officers, directors and
key employees (including, without limitation, any sales personnel dealing with
any such Account Debtor) knowledge, there are no proceedings or actions which
are threatened or pending against any Account Debtor thereunder which might
result in any material adverse change in the financial condition of such Account
Debtor; and (J) They have not been pledged, assigned or transferred to any other
Person.
In the event of any dispute as to whether a Receivable is or has ceased to
be an Eligible Account Receivable, the decision of Lender shall control.
"Eligible Inventory" means that portion of the inventory of Borrower
consisting of finished goods held for sale by the Borrower, normally and
currently saleable in the ordinary course of the Borrower's business, and which
at all times pertinent hereto is of good and merchantable quality, free from
defects, as to which Lender has a perfected first priority Lien, and which is
located at the locations set forth in the Security Agreement, and as to which
Borrower has satisfied all terms,
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<PAGE>
conditions, warranties and representations of this Agreement and the other Loan
Documents; but Eligible Inventory does not include any of the following: (a)
catalogs and other promotional materials of any kind; (b) used items; (c) any
returned items (unless returned in a salable form and any account receivable
arising from the sale of such returned item has been reversed); (d) any damaged,
defective or recalled items; (e) any obsolete items; (f) any items used as
demonstrators, prototypes or salesmen's samples; (g) any items of inventory
which have been consigned to Borrower or as to which a Person claims a Lien; (h)
any items of inventory which have been consigned by the Borrower to a consignee;
(i) packing and shipping materials; (j) inventory located on premises leased by
the Borrower from a landlord with whom Lender has not entered into a landlord's
waiver and, if applicable, obtained a mortgagee's consent letter on terms
satisfactory to Lender in its reasonable judgment; (k) inventory in transit; (1)
spare parts; and (m) inventory which in the reasonable judgment of Lender is
considered to be slow-moving or otherwise not merchantable. Eligible Inventory
shall be valued at the lower of (a) cost, (b) market value, or (c) the valuation
consistent with that employed in the preparation of the financial statements of
the Borrower referred to in Section 4.4 hereof.
"Enforcement Action" means any action, proceeding or investigation
(administrative or judicial, civil or criminal) instituted or threatened by U.S.
Environmental Protection Agency, or any other federal, state or local
governmental agency related to any alleged or actual violation of any
Environmental Law with respect to any property owned or leased by the Borrower
and/or any business conducted thereon, including, but not limited to, actions
seeking Remediation, the imposition or enforcement of liability pursuant to any
Environmental Law and compliance with any Environmental Law. Enforcement Action
shall also include any similar actual or threatened action by any private party
pursuant to any Environmental Law.
"Environmental Laws" means any and all present and future: federal, state,
and local laws, statutes, ordinances, rules, and regulations, relating to
protection of human health and the environment from Contaminants including but
not limited to the Comprehensive Environmental Response, Compensation and
Liability Act, as amended, (CERCLA), 42 USC (S)9601 et seq.; the Resource
-- ---
Conservation and Recovery Act, as amended, (RCRA), 42 USC (S)6901 et seq. the
-- ---
Clean Air Act, as amended, 42 USC (S)7401 et seq.; the Federal Water Pollution
-- ---
Control Act, as amended (including but not limited to as amended by the Clean
Water Act), 33 USC (S)1251 et seq.; The Toxic Substances Control Act, as
-- ---
amended (TSCA), 15 USC (S)2601 et seq.; the Emergency Planning and Community
-- ---
Right-to-Know Act (also known as SARA Title III), as amended, (EPCRA), 42 USC
(S)11001 et seq.; the Safe Drinking Water Act, as amended, 42 USC (S)300(f) et
-- --- --
seq.; the Federal Insecticide, Fungicide and Rodenticide Act, as amended
- ---
(FIFRA), 7 USC (S)136 et seq.; the Occupational Safety and Health Act, as
-- ---
amended, (OSHA), 29 USC (S)651 et seq.; the Endangered Species Act, as
-- ---
amended, 16 USC (S)1531 et seq.; the National Environmental Policy Act, as
-- ---
amended, (NEPA), 42 USC (S)4321 et seq.; the Rivers and Harbors Act of 1899 33
-- ---
USC (S)401 et seq.; state and local laws,rules and regulations similar to or
-- ---
addressing similar matters as the foregoing federal laws; laws, rules and
regulations governing underground or above-ground storage tanks; laws, rules and
regulations imposing liens for response costs or costs of other Remediation,
whether or not those liens have a higher priority than existing liens; laws,
rules and regulations conditioning
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<PAGE>
transfer of property upon a form of negative declaration or other approval of a
Governmental Authority of the environmental condition of a property; laws, rules
and regulations requiring the disclosure of conditions relating to Contaminants
in connection with transfer of title to or interest in property law; laws, rules
and regulations requiring notifying of any government entity with regard to a
Release of any Contaminant; conditions or requirements imposed in connection
with any permits; government orders and demands and judicial orders pursuant to
any of the foregoing; laws, rules and regulations relating to the Release, use,
treatment, storage, disposal, transportation, transfer, generation, processing,
production, refining, control, management, or handling of Contaminants; any and
all other laws, rules, regulations, guidance, guidelines and common law of any
governmental entity relating to the protection of human health or the
environment from Contaminants. The reference in this paragraph to state laws
specifically includes, but is not limited to, the applicable laws of the State
of Connecticut.
"Equipment" means all "Equipment" as that term is defined in the Uniform
Commercial Code, as in effect in the State of Connecticut as of the date hereof,
of Borrower, whether presently owned or hereafter acquired, and including,
without limitation, machinery, furniture, furnishings, and fixtures, and any and
all goods used or bought for use in or being used for use in the conduct of
Borrower's business and all goods used or bought for use in business which are
not included within the definition of Inventory, and all accessions and
additions thereto, replacements therefor.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations and published interpretations
thereunder.
"ERISA Affiliate" means any trade or business (whether or not incorporated)
which, together with the Borrower, would be treated as a single employer under
Section 4001 of ERISA.
"Event of Default" means any of the events specified in Section 9.1 of this
Agreement.
"GAAP" means (i) when used in general, other than as provided below,
generally accepted accounting principles in the United States as in effect from
time to time, applied on a consistent basis and, (ii) when used in Article 7,
whether directly or indirectly through reference to a capitalized term used or
defined therein, principles that are consistent with the principles promulgated
or adopted by the Financial Accounting Standards Board and its predecessors, in
effect for the fiscal year ended on December 31, 1997.
"Governmental Authority" means any nation or government, any state or other
political subdivision thereof, and any entity exercising executive, legislative,
judicial, regulatory, or administrative functions of or pertaining to
government.
"Guarantee" means collectively the Guaranty Agreements of even date
herewith from Guarantor in favor of Lender.
"Guarantor" means collectively the Individual Guarantors and the Corporate
Guarantor.
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<PAGE>
"Guaranty" means any obligation, contingent or otherwise, of any Person
guaranteeing or having the economic effect of guaranteeing any Debt of any other
Person (the "primary obligor") in any manner, whether directly or indirectly,
and including any obligation of such Person, direct or indirect, (a) to purchase
or pay (or advance or supply funds for the purchase or payment of) such Debt or
to purchase (or to advance or supply funds for the purchase of) any security for
the payment of such Debt, (b) to purchase or lease property, securities or
services for the purpose of assuring the owner of such Debt of the payment of
such Debt, or (c) to maintain working capital, equity capital or any other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Debt; provided, however, that the term
Guaranty shall not include endorsements for collection or deposit in the
ordinary course of business.
"Head Office" means the principal office of the Lender at 850 Main Street,
Bridgeport, Connecticut.
"Individual Guarantors" shall mean collectively, Kenneth Karlan and Keith
Sessler.
"Interest Expense" means that term as defined in Section 7.5(e) of this
Agreement.
"Inventory" means all "Inventory" as that term is defined in the Uniform
Commercial Code, as in effect in the State of Connecticut as of the date hereof,
including, without limitation, any and all goods, merchandise or other personal
property, wheresoever located and whether or not in transit, now owned or
hereafter acquired by Borrower in the normal course of business, which is or may
at any time be held for sale or lease, or furnished or to be furnished under any
contract or service or held as raw materials, work in process, supplies or
materials used or consumed in Borrower's business, and all such property the
sale or other disposition of which has given rise to accounts, chattel paper,
documents, or instruments (as such terms are defined in the Uniform Commercial
Code) and which has been returned to or repossessed or stopped in transit by
Borrower.
"Lender" means People's Bank, or any successors or assigns of all or any
part of the obligations of Borrower.
"Lender Parties" means that term as defined in Section 10.5(b).
"Lien" means any interest in property securing an obligation owed to, or a
claim by, a Person other than the owner of the property, whether such interest
is based on common law, statute, or contract, and including but not limited to
the security interest lien arising from a security agreement, mortgage,
encumbrance, pledge, collateral assignment, conditional sale or trust receipt,
or a lease, consignment, or bailment for security purposes.
"Loans" means collectively, the Revolving Advances made or to be made
pursuant to this Agreement.
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<PAGE>
"Loan Documents" means this Agreement, the Note, the Security Documents and
all other promissory notes, guaranties, mortgages, security documents, deeds to
secure debt, deeds of trust, pledges, assignments, contracts, negative pledges,
powers of attorney, trust account agreements, and written matters, whenever
executed and delivered to Lender, with respect to the transactions contemplated
by this Agreement.
"Lockbox Account" means that term as defined in Section 2.6.
"Lockbox Agreement" means the lockbox agreement of even date herewith
executed by Borrower and Lender.
"Material Adverse Effect" means, with respect to any event, act, condition
or occurrence of whatever nature (including any adverse determination in any
litigation, arbitration, or governmental investigation or proceeding), whether
singly or in conjunction with any other event or events, act or acts, condition
or conditions, occurrence or occurrences, whether or not related, results in a
material adverse change in, or a material adverse effect upon, any of (i) the
condition (financial or otherwise), operations, business, properties or
prospects of the Borrower and its Subsidiaries taken as a whole; (ii) the rights
and remedies of the Lender hereunder or under any of the other Loan Documents,
or the ability of the Borrower to perform its respective Obligations; or (iii)
the legality, validity or enforceability of this Agreement or any of the other
Loan Documents.
"Maturity Date" means October 31, 2001, or earlier as set forth in this
Agreement.
"Mortgage" means that certain Open-End Mortgage Deed, Assignment of Rents
and Financing Statement over the Mortgaged Property of even date herewith
executed by Borrower in favor of Lender.
"Mortgaged Property" means 8 Francis J. Clarke Circle, Bethel,
Connecticut.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate is making or
accruing an obligation to make contributions or has within any of the preceding
five plan years made or accrued an obligation to make contributions.
"Note" means the Revolving Credit Note.
"Obligations" means all present and future indebtedness and other
liabilities of the Borrower owing to the Lender or any of Lender's respective
successors, transferees or assigns, of every type and description, whether or
not evidenced by any note, guaranty or other instrument, arising under or in
connection with this Agreement, the Notes or any other Loan Document, whether or
not for the payment of money, whether direct or indirect (including those
acquired by assignment), absolute or contingent, due or to become due, now
existing or hereafter arising and however acquired. The term includes, without
limitation, all principal, interest, charges, expenses, fees, attorneys' fees
and
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<PAGE>
disbursements and any other sum chargeable to the Borrower under this Agreement
or any other Loan Document.
"Overadvance" means that term as defined in Section 2.1(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Person" means a human being, sole proprietorship, partnership,
corporation, business trust, joint stock company, trust, unincorporated
association, organization, joint venture, institution, Governmental Authority,
or other entity of any nature whatsoever.
"Plan" means any plan established, maintained, or to which contributions
have been made by the Borrower or any ERISA Affiliate for the benefit of any of
their employees.
"Prime Rate" means the variable per annum rate of interest so designated
from time to time by Lender as its prime rate. The Prime Rate is a reference
rate and does not necessarily represent the lowest or best rate being charged to
any customer.
"Prohibited Transaction" means any transaction set forth in Section 406 of
ERISA or Section 4975 of the Internal Revenue Code of 1954, as amended from time
to time.
"Property" means all real property with improvements thereon owned or
leased by the Borrower.
"Receivable" means the right to payment for goods sold or leased or for
services rendered by Borrower.
"Release" means any spilling, leaking, migrating, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping, or
disposing into the environment of any Contaminant.
"Reportable Event" means any of the events set forth in Section 4043 of
ERISA.
"Restricted Payment" means (i) any cash or property dividend, distribution
or payment of any kind, direct or indirect, by the Borrower or any of its
Subsidiaries to any Person who now or in the future may hold an equity interest
in the Borrower or any of its Subsidiaries, whether evidenced by a security or
not, other than stock options or regular compensation or bonuses paid to
employees or directors of the Borrower and its Subsidiaries in the ordinary
course of business and consistent with past practices, (ii) any payment on
account of the purchase, redemption, retirement or other acquisition for value
of any capital stock of the Borrower or its Subsidiaries, or any other payment
or distribution made in respect thereof, either directly or indirectly, and
(iii) any management or similar fees paid or payable by the Borrower or any of
its Subsidiaries to any Person who now or in
10
<PAGE>
the future may, directly or indirectly, hold an equity interest in the Borrower
or any of its Subsidiaries.
"Revolving Advance" or "Revolving Advances" means that term as defined in
Section 2.1(a).
"Revolving Loan" means the Revolving Advance or Revolving Advances made
pursuant to Section 2.1(a).
"Revolving Credit Note" means that term as defined in Section 2.1(c).
"Security Agreement" means the Security Agreement between Lender and
Borrower of even date herewith.
"Security Documents" means the Security Agreement, the Guarantee, the
Mortgage, all assignments of contracts, documents or instruments in favor of the
Lender, all hazardous waste indemnity letters in favor of Lender and all other
documents, contracts, assignments, instruments and the like now or hereafter
securing the Loan.
"Solvent" means, as to any Person, that such Person (a) has capital
sufficient to carry on its business and transactions and all business and
transactions in which it is about to engage; (b) is able to pay its debts as
they mature; and (c) owns property whose fair salable value is greater than the
amount required to pay its debts.
"Subsidiary" means any Person of which the Borrower directly or indirectly
through one or more intermediaries (i) owns shares of stock having ordinary
voting power to elect a majority of the Board of Directors (or equivalent
managing body) of such Person (irrespective of whether at the time stock of any
other class or classes of such Person shall or might have voting power upon the
occurrence of any contingency), or (ii) owns more than 50% of any other equity
or ownership interest in such Person.
"Tangible Net Worth" means that term as defined in Section 7.5(f).
"Total Liabilities" means that term as defined in Section 7.5(g).
Section 1.2 Terms Generally. Whenever the context may require, any pronoun
---------------
shall include the corresponding masculine, feminine and neuter forms. The words
"include", "includes" and "including" shall be deemed to be followed by the
phrase "without limitation". All references herein to Articles, Sections,
Exhibits and Schedules shall be deemed references to Articles and Sections of,
and Exhibits and Schedules to, this Agreement unless the context shall otherwise
require. Except as otherwise expressly provided herein, (a) any reference in
this Agreement to any Loan Document shall mean such document as amended,
restated, supplemented or otherwise modified from time to time, and (b) all
terms of an accounting or financial nature shall be construed in accordance with
GAAP, as in effect from time to time.
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ARTICLE 2
AMOUNTS AND TERMS OF THE LOANS
------------------------------
A. THE LOAN
-------
Section 2.1 Revolving Loan.
--------------
(a) Subject to the terms and conditions set forth in this Agreement and so
long as no Default or Event of Default exists, Lender agrees to make advances
(each a "Revolving Advance" and collectively "Revolving Advances") to Borrower
from time to time during the period from the date of this Agreement up to, but
not including, the Maturity Date; provided, however, that at no time shall the
-------- -------
aggregate outstanding principal balance of all Revolving Advances exceed the
Credit Availability. Subject to the limits of this Agreement, Borrower may
borrow, pay, prepay (pursuant to Section 2.1(d) below), and re-borrow under
this Section 2.1. Any formulas or advance rates contained within or comprising
the Borrowing Base may be increased or decreased at any time and from time to
time by Lender in its discretion.
(b) Notwithstanding the provisions of Section 2.1(a), Lender may, in its
sole discretion and subject to the terms and conditions set forth in this
Agreement or any other conditions which Lender may impose in its sole
discretion, including without limitation the payment of fees, an increased
interest rate, or posting of additional collateral, make temporary advances in
excess of the Borrowing Base to Borrower from time to time (each such temporary
Revolving Advance is referred to herein as an "Overadvance"), provided that in
no event shall the aggregate principal amount of outstanding Overadvances, when
combined with the outstanding principal amount of all other Revolving Advances
exceed the Commitment. To the extent that the Borrowing Base increases at any
time during which an Overadvance is outstanding, the portion of the Overadvance
which, as a result of such increase, would be available for borrowing under
Section 2.1(a) shall be deemed to be prepaid as of the date of such increase
and reborrowed as a Revolving Advance under Section 2.1(a) as of such date. To
the extent that the Borrowing Base decreases at any time, the portion of the
outstanding Revolving Advances which exceeds the Borrowing Base as a result of
such decrease shall be deemed, subject to the provisions of this Agreement, to
be prepaid as of the date of such decrease and reborrowed as an Overadvance
under this Section 2.1(b) as of such date. Nothing contained in this Section
2.1(b) or elsewhere in this Agreement shall constitute or be deemed to
constitute a commitment or agreement by Lender to make any Overadvances, nor
shall the making of an Overadvance at any time or from time to time constitute
or be deemed to constitute a course of dealing by Lender with respect to
Overadvances.
(c) All Revolving Advances shall be evidenced by, and repaid with interest
in accordance with a single promissory note of Borrower in the form of Exhibit A
---------
hereto, duly completed, executed, and delivered to Lender, in the principal
amount of up to U.S. $2,000,000, dated the date of this Agreement, payable to
Lender on the Maturity Date (such promissory note is referred to herein as the
"Revolving Credit Note"). Borrower hereby authorizes Lender to record on the
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<PAGE>
Revolving Credit Note or in its internal computerized records the amount of each
Revolving Advance and of each payment of principal received by Lender on account
of the Revolving Loan, which recordation shall, in the absence of manifest
error, be conclusive as to the outstanding principal balance of the Revolving
Loan and shall be considered correct and binding on Borrower provided, however,
------------------
that the failure to make such recordation with respect to any Revolving Advance
or payment shall not limit or otherwise affect the obligations of Borrower under
this Agreement or the Revolving Credit Note.
(d) Borrower may, upon sixty (60) days written notice to Lender,
irrevocably reduce the Commitment, in whole or in part, together with (i) if a
prepayment accompanies or is required in connection with such reduction, accrued
interest to the date of prepayment on the amount prepaid and (ii) a fee equal to
(1) three percent (3%) of the amount by which the commitment is reduced if the
reduction occurs on or prior to October 30, 1999, (2) two percent (2%) of the
amount by which the commitment is reduced if such reduction occurs on or after
October 31, 1999 and prior to October 31, 2000, and (3) one percent (1%) of the
amount by which the commitment is reduced if such prepayment and reduction
occurs on or after October 31, 2000 but prior to October 31, 2001.
(e) Until Lender exercises its rights to collect the Receivables as
provided for in this Agreement, Borrower may continue its present policies for
returned merchandise and adjustments, but shall promptly notify Lender of any
credits, adjustments or disputes arising about the goods or services represented
by Receivables. In any event, Borrower will immediately pay Lender from its own
funds (and not from the proceeds of Receivables), for application to the
Revolving Loans, an amount equal to any credit or adjustment made to any
Eligible Receivables; provided, however, that so long as Borrower is not in
default hereunder, such payment need not be made if Borrower shall have, after
making such credit or adjustment, sufficient Eligible Receivables to maintain
the aggregate outstanding balance of the Revolving Loans under the Borrowing
Base.
Section 2.2 Certain Fees and Charges. Borrower shall, in addition to all
------------------------
other amounts required hereunder, pay to Lender the following:
(a) a loan servicing charge of $500 per month, payable monthly in arrears
on the first Business Day of each calendar month; and
(b) a one-time commitment fee equal to $10,000, payable on or prior to the
date hereof.
Section 2.3 Interest Provisions.
--------------------
(a) Commencing with the first such date following the date of this
Agreement, Borrower promises to pay interest to Lender on the outstanding and
unpaid principal balance of the Revolving Advances at a rate per annum equal to
the Prime Rate plus one percent (1%), monthly in arrears on the first day of
each calendar month and on the Maturity Date.
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(b) For purposes of the computation of interest, and notwithstanding
anything to the contrary contained in this Agreement, items shall not be deemed
to be collected until two (2) business days after their actual receipt by
Lender.
(c) The interest rate on each Prime Rate Advance shall change when and as
Lender's Prime Rate changes. Any change in the interest rate resulting from a
change in the Prime Rate shall become effective as of the opening of business on
the day on which such change in the Prime Rate shall become effective.
(d) Overdue principal and interest and, upon the occurrence and during
the continuance of an Event of Default, all principal and accrued but unpaid
interest shall bear interest until paid in full, payable on demand, at the
Default Rate.
(e) If the entire amount of any required principal and/or interest is not
paid in full within ten (10) days after the same is due, Borrower shall pay to
the Lender a late fee equal to five percent (5%) of the required payment to
cover the extra expense involved in handling such delinquent payment.
Section 2.4 Notice and Manner of Borrowing; Conversion or Continuation of
-------------------------------------------------------------
Interest Rate. Borrower shall give Lender irrevocable notice by telecopy or
- -------------
otherwise in writing of its request that Lender make a Revolving Advance (each a
"Borrowing Request") not later than 12:00 p.m. Connecticut time on the proposed
Drawdown Date thereof. Notice received by Lender after 12:00 p.m. Connecticut
time shall be loaned against by Lender on the next Business Day after the
proposed Drawdown Date. Subject to the fulfillment of the applicable conditions
set forth in Article 3 hereof, Lender will make the Revolving Advance in
immediately available funds by crediting the amount thereof to Borrower's
account with Lender.
Section 2.5 Excess Advances. Except to the extent that any excess
---------------
constitutes an Overadvance permitted by Section 2.1(b), if at any time the
aggregate outstanding principal amount of the Revolving Loan exceeds the Credit
Availability, Borrower shall immediately pay the amount of such excess to Lender
for application to the Revolving Loan.
Section 2.6 Method of Payment. Borrower shall make each payment due under
-----------------
this Agreement and under the Notes to Lender at its Head Office not later than
12:00 P.M., Connecticut time, on the date when due in lawful money of the United
States in immediately available funds. Borrower hereby authorizes Lender to
charge from time to time (including without limitation any time at which any
amount is due under this Agreement) any amount due under this Agreement or the
Notes, including without limitation principal, interest, fees and charges,
against any account of Borrower with Lender. Whenever any payment to be made
under this Agreement or under the Note shall be stated to be due on a day which
is not a Business Day, such payment shall be made on the next succeeding
Business Day, and such extension of time shall be included in the computation of
the payment of interest.
14
<PAGE>
Section 2.7 Collection of Funds. All proceeds of notes, instruments,
--------------------
Inventory and Receivables of Borrower shall be collected into a lockbox account
established by Borrower with Lender pursuant to the Lockbox Agreement (the
"Lockbox Account"). Promptly after the execution of this Agreement, Borrower
shall direct each of its Account Debtors to make all payments to Borrower
directly into the Lockbox Account. Borrower shall hold in trust for Lender and
immediately remit to Lender by depositing the same into the Lockbox Account all
checks, notes, cash and other proceeds of its Receivables as well as all
proceeds from the sale of inventory, securities (other than securities issued by
Borrower) and other Collateral and other cash receipts of every kind and nature
(other than the proceeds of other borrowings expressly permitted by this
Agreement). Borrower agrees that all payments received in the Lockbox Account
will be the sole and exclusive property of Lender and that the Lockbox Account
will be under the dominion and control of Lender. Lender will on the Business
Day on which any payment is received into the Lockbox Account, and on a
provisional basis until the final receipt of good funds, credit such payments to
the principal amount of the outstanding Revolving Advances as a prepayment of
such Revolving Advances. Any such provisional credit is subject to reversal if
the final collection of a payment is not received by Lender within five (5)
Business Days following the initial receipt of such payment and will thereafter
be credited when such payment is actually received in good funds. If at the time
of any such credit there are no outstanding Revolving Advances such credit shall
(i) if a Default or an Event of Default shall exist, be credited to a cash
collateral account under the sole dominion and control of Lender until such
Default or Event of Default is cured by Borrower or waived by Lender or (ii)
otherwise be made to Borrower's regular account with Lender.
B. CERTAIN GENERAL PROVISIONS
--------------------------
Section 2.8 Payments Free of Deductions. All payments by Borrower hereunder
---------------------------
and under any of the other Loan Documents shall be made without setoff or
counterclaim and free and clear of and without deduction for any taxes, levies,
imposts, duties, charges, fees, deductions, withholdings, compulsory loans,
restrictions or conditions of any nature now or hereafter imposed or levied by
any jurisdiction or any political subdivision thereof or taxing or other
authority therein unless Borrower is compelled by law to make such deduction or
withholding. If any such obligation is imposed upon Borrower with respect to any
amount payable by it hereunder or under any of the other Loan Documents,
Borrower will pay to Lender on the date on which such amount is due and payable
hereunder or under such other Loan Document, such additional amount in dollars
as shall be necessary to enable Lender to receive the same net amount which
Lender would have received on such due date had no such obligation been imposed
upon Borrower. Borrower will deliver promptly to Lender certificates or other
valid vouchers for all taxes or other charges deducted from or paid with respect
to payments made by Borrower hereunder or under such other Loan Document.
Section 2.9 Computations. All computations of interest on the Loans and of
-------------
fees or other charges shall be based on a 360-day year and paid for the actual
number of days elapsed.
Section 2.10 Additional Payments. If any present or future applicable law,
--------------------
statute, rule or regulation thereunder or any interpretation thereof by any
competent court or by any Governmental
15
<PAGE>
Authority charged with the administration or the interpretation thereof, or any
request, directive, instruction or notice at any time or from time to time
hereafter made upon or otherwise issued to Lender by any central bank or other
fiscal, monetary or other authority (whether or not having the force of law),
shall:
(a) subject Lender to any tax, levy, impost, duty, charge, fee, deduction
or withholding of any nature with respect to this Agreement, the other Loan
Documents, the Commitment or the Loan (other than taxes based upon or measured
by the income or profits of Lender), or
(b) materially change the basis of taxation (except for changes in taxes on
income or profits) of payments to Lender of the principal of or the interest on
the Loan or any other amounts payable to Lender under this Agreement or any of
the other Loan Documents, or
(c) impose or increase or render applicable (other than to the extent
specifically provided for elsewhere in this Agreement) any special deposit,
reserve, assessment, liquidity, capital adequacy or other similar requirements
(whether or not having the force of law) against assets held by, or deposits in
or for the account of, or loans by, or letters of credit issued by, or
commitments of an office of Lender, or
(d) impose on Lender any other conditions or requirements with respect to
this Agreement, the other Loan Documents, the Loan, the Commitment or any class
of loans, letters of credit or commitments of which the Commitment forms a part,
and the result of any of the foregoing is
(i) to increase the cost to Lender of making, funding, issuing,
renewing, extending or maintaining the Loan or the Commitment; or
(ii) to reduce the amount of principal, interest, or other amount
payable to Lender hereunder on account of the Loan or the Commitment; or
(iii) to require Lender to make any payment or to forego any interest
or fee or other sum payable hereunder, the amount of which payment of
foregone interest or other sum is calculated by reference to the gross
amount of any sum receivable or deemed received by Lender from Borrower
hereunder,
then, and in each such case, Borrower will, upon demand made by Lender at any
time and from time to time and as often as the occasion therefor may arise, pay
to Lender such additional amounts as will be sufficient to compensate Lender for
such additional cost, reduction, payment, foregone interest or other sum.
Section 2.11 Capital Adequacy. If any present or future law, governmental
-----------------
rule, regulation, policy, guideline or directive (whether or not having the
force of law) or the interpretation thereof by a court or governmental authority
with appropriate jurisdiction affects the amount of capital
16
<PAGE>
required or expected to be maintained by Lender or any corporation controlling
Lender and Lender determines that the amount of capital required to be
maintained by it is increased by or based upon the existence of Lender's
commitment with respect to the Loan, then Lender may notify Borrower of such
fact. To the extent that the costs of such increased capital requirements are
not reflected in the Prime Rate, Borrower and Lender shall thereafter attempt to
negotiate in good faith, within thirty (30) days of the day on which Borrower
receives such notice, an adjustment payable hereunder that will adequately
compensate Lender in light of these circumstances. If Borrower and Lender are
unable to agree to such adjustment within thirty (30) days of the date on which
Borrower receives such notice, then commencing on the date of such notice (but
not earlier than the effective date of any such increased capital requirement),
the amounts payable hereunder shall increase by an amount that will, in Lender's
reasonable determination, provide adequate compensation. Lender shall allocate
such cost increases among its customers in good faith and on an equitable basis.
Section 2.12 Certificate; Protection. A certificate setting forth any
------------------------
additional amounts payable pursuant to Sections 2.10 or 2.11 and a brief
explanation of such amounts which are due, submitted by Lender to the Borrower,
shall be conclusive, absent manifest error, that such amounts are due and owing.
The protection of Sections 2.10 or 2.11 shall be available to Lender regardless
of any possible contention of the invalidity or inapplicability of the law,
rule, regulation, agreement guideline or other change or condition which shall
have been imposed or shall have occurred.
Section 2.13 Obligations Absolute. The obligations of Borrower under this
---------------------
Agreement shall be unconditional and irrevocable, and shall be paid strictly in
accordance with the terms of this Agreement and such other agreement or
instrument under all circumstances, and irrespective of, the following
circumstances:
(a) any lack of validity or enforceability of all or any portion of this
Agreement or any other agreement or any instrument relating hereto;
(b) any change in the time, manner or place of payment of, or in any other
term of, all or any of the obligations of Borrower;
(c) the existence of any claim, setoff, defense or other right that
Borrower may have; or
(d) any amendment or waiver of or consent to departure from any of the Loan
Documents, or all or any of the obligations of Borrower in respect of the Loan
or this Agreement.
C. MISCELLANEOUS
-------------
Section 2.14 Use of Proceeds. The proceeds of the Revolving Loan made
----------------
hereunder shall be used by Borrower for Borrower's short term working capital
requirements. Borrower will not, directly or indirectly, use any part of the
proceeds of any of the Loan for the purpose of purchasing or carrying any margin
stock within the meaning of Regulation U of the Board of Governors of the
17
<PAGE>
Federal Reserve System or to extend credit to any Person for the purpose of
purchasing or carrying any such margin stock.
Section 2.15 Termination. The Commitment shall be automatically terminated
------------
on the Maturity Date.
Section 2.16 Limitations on Interest. All agreements between Borrower and
------------------------
Guarantors and Lender are hereby expressly limited so that in no contingency or
event whatsoever, whether by reason of acceleration of maturity of the
indebtedness evidenced hereby or otherwise, shall the amount paid or agreed to
be paid to Lender for the use or the forbearance of the indebtedness evidenced
hereby exceed the maximum permissible under applicable law. As used herein, the
term "applicable law" shall mean the law in effect as of the date hereof
provided, however, that in the event there is a change in the law which results
in a higher permissible rate of interest, then this Agreement and the Notes
shall be governed by such new law as of its effective date. In this regard, it
is expressly agreed that it is the intent of Borrower and Lender in the
execution, delivery and acceptance of this Agreement and the Notes to contract
in strict compliance with the laws of the State of Connecticut from time to time
in effect. If, under or from any circumstance whatsoever, fulfillment of any
provision hereof or of any of the Loan Documents or the Security Documents at
the time of performance of such provision shall be due, shall involve
transcending the limit of such validity prescribed by applicable law, then the
obligation to be fulfilled shall automatically be reduced to the limits of such
validity, and if under or from circumstances whatsoever Lender should ever
receive as interest an amount which would exceed the highest lawful rate, such
amount which would be excessive interest shall be applied to the reduction of
the principal balance evidenced hereby and not to the payment of interest. This
provision shall control every other provision of all agreements between
Borrower, Guarantors and Lender.
ARTICLE 3
CONDITIONS PRECEDENT
--------------------
Section 3.1 Conditions Precedent to Effectiveness. The effectiveness of
--------------------------------------
this Agreement and the obligations of the Lender to make the Loan shall be
subject to the prior satisfaction of each of the following conditions:
(a) Lender shall have received each of the following, in form and substance
satisfactory to Lender and its counsel:
(1) This Agreement and the Note, duly executed and delivered by
Borrower;
(2) A Security Agreement duly executed and delivered by Borrower
securing the payment and performance of all Obligations together with: (1)
copies of the existing UCC- 1 Financing Statements duly filed under the
Uniform Commercial Code of all jurisdictions necessary or, in the opinion
of the Lender, desirable to perfect the security interest created
18
<PAGE>
by the Security Agreement; (2) UCC-I search reports identifying all of the
financing statements on file with respect to Borrower in all jurisdictions
referred to in clause (1) above, indicating that, no Person other than the
Lender has a Lien on any of the Collateral; and (3) copies of all of the UCC-1
financing statements (and, where applicable, related Form UCC-3s) on file with
respect to Borrower, as of dates acceptable to Lender, in all jurisdictions in
which Collateral is or may be located, indicating that no Person other than the
Lender has a Lien on any of the Collateral, or with respect to any Liens other
than those of Lender, Form UCC-3s in form and substance satisfactory to Lender,
duly executed by the holders of such Liens, terminating all such Liens;
(3) Copies of all corporate action taken by Borrower, including resolutions
of its Board of Directors and, if applicable, its shareholders, authorizing the
execution, delivery, and performance of the Loan Documents and each other
document to be delivered pursuant to this Agreement, certified as of the date of
this Agreement by the Secretary of Borrower;
(4) A certificate, dated as of the date of this Agreement, of the Secretary
of Borrower certifying the names and true signatures of the officers of Borrower
authorized to sign the Loan Documents and the other documents to be delivered by
Borrower under this Agreement;
(5) The Mortgage duly executed by Borrower;
(6) The Guarantee duly executed by the Guarantor;
(7) A favorable opinion of independent counsel for Borrower and Guarantor,
satisfactory to Lender, dated the date of this Agreement;
(8) Such agreements and instruments as Lender may deem necessary in
connection with the grant by Borrower to Lender of a Lien on, and the collateral
assignment of, the deposit accounts of Borrower pursuant to the Security
Agreement;
(9) Certificates of insurance and copies of insurance policies evidencing
compliance with the insurance requirements of this Agreement;
(10) The articles of incorporation (certified by the Secretary of the State
of Connecticut) and bylaws of Borrower;
(11) The articles of incorporation (certified by the Secretary of the State
of Corporate Guarantor's jurisdiction of organization) and bylaws of Corporate
Guarantor;
(12) A Certificate of Existence issued by the Secretary of the State of
Borrower's and Corporate Guarantor's jurisdiction of organization and each state
in which it is qualified
19
<PAGE>
to do business evidencing that Borrower and Corporate Guarantor are domestic or,
as applicable, foreign corporations in good standing or existence in such
jurisdiction;
(13) Due diligence from Borrower in form and substance satisfactory to
Lender;
(14) A hazardous waste indemnity agreement in favor of Lender in form and
substance satisfactory to Lender from Borrower and Corporate Guarantor;
(15) A Certificate by Officers of Borrower in form and substance
satisfactory to Lender;
(16) A Borrowing Base Certificate of Borrower dated the date of this
Agreement;
(17) Satisfactory completion of Lender's customary due diligence, including
but not limited to an independent audit of Borrower's Eligible Accounts
Receivable and Eligible Inventory;
(18) Receipt of any financial information which Lender requires;
(19) An assignment of patents and patent applications in form and substance
satisfactory to Lender duly executed by Borrower;
(20) An assignment of trademarks and trademark applications in form and
substance satisfactory to Lender duly executed by Borrower;
(21) A notice of security interest in copyrights in form and substance
satisfactory to Lender duly executed by Borrower;
(22) The Lender shall have received landlord's waivers and, if applicable,
mortgagee consents and "non-offset" letters with respect to all real property
owned or leased by the Borrower or at which the Borrower maintains inventory;
(23) Evidence of repayment of any debt of Borrower to The Chase Manhattan
Bank;
(24) Receipt of Borrower's December 31, 1997 and September 30, 1998
Financial Statements;
(25) A subordination agreement in form and substance satisfactory to Lender
duly executed by Corporate Guarantor and Borrower; and
(26) All other documents, instruments and agreements that Lender shall
reasonably require in connection with this Agreement.
20
<PAGE>
(b) All representations and warranties contained in this Agreement shall
be true and correct in all material respects.
Section 3.2 Conditions Precedent to All Advances, Etc. The obligation of
------------------------------------------
the Lender to make each Revolving Advance (including the initial Revolving
Advance), in addition, shall be subject to the prior satisfaction of each of the
following additional conditions:
(a) On the Drawdown Date of each Revolving Advance, the following
statements shall be true, and each request by Borrower for a Revolving Advance,
shall be deemed to be a representation and warranty by Borrower that:
(1) The representations and warranties contained in Article 4 of this
Agreement and contained in each of the other Loan Documents containing
representations and warranties are correct on and as of the date of each
Revolving Advance or such issuance, extension or renewal as though made on
and as of such date; and
(2) No Default or Event of Default has occurred and is continuing, or
would result from or after giving effect to such Revolving Advance or such
issuance, extension or renewal; and
(b) At the time of each Revolving Advance or such issuance, extension or
renewal, the sum of the aggregate outstanding principal amount of all Revolving
Advances does not exceed the Credit Availability.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
------------------------------
To induce Lender to enter into this Agreement, Borrower represents and
warrants to Lender that:
Section 4.1 Existence and Due Qualification. Borrower: (a) is a corporation
-------------------------------
duly organized and validly existing under the laws of the State of Connecticut;
(b) has all power and authority necessary to own its properties and to carry on
the business in which it is now engaged or proposed to be engaged; and (c) is
duly qualified and in good standing as a foreign corporation under the laws of
each other jurisdiction in which such qualification is required except where the
failure to so qualify shall not have a Material Adverse Effect.
Section 4.2 Power and Authority. The execution and delivery by Borrower
---------------------
of the Loan Documents and the performance by Borrower of the Loan Documents, and
the borrowings hereunder, are within the powers of Borrower and have been duly
authorized by all necessary corporate and, if required, shareholder action, and
do not and will not (a) violate (i) the articles of organization or other
constitutive documents or bylaws of Borrower, or (ii) any provision of any law,
21
<PAGE>
rule, regulation (including, without limitation, Regulation U of the Board of
Governors of the Federal Reserve System), order, writ, judgment, injunction,
decree, determination, or award presently in effect having applicability to
Borrower, or (b) be in conflict with, result in a breach of or constitute (along
or with notice or lapse of time or both) a default under any indenture or loan
or credit agreement or any other agreement, lease, or instrument to which
Borrower is a party or by which Borrower or its properties may be bound or
affected, or (c) result in the creation or imposition of any Lien upon or with
respect to any property or assets now owned or hereafter acquired by Borrower.
Section 4.3 Legally Enforceable Agreement. This Agreement is, and each of
-----------------------------
the other Loan Documents when executed and delivered will be, legal, valid, and
binding obligations of Borrower, enforceable against Borrower in accordance with
their respective terms, except to the extent that such enforcement may be
limited by applicable bankruptcy, insolvency, and other similar laws affecting
creditors' rights generally.
Section 4.4 Financial Statements and Condition; Full Disclosure.
---------------------------------------------------
(a) Borrower has submitted to Lender various financial statements and
information, including, without limitation, its audited financial statements for
the fiscal year ended December 31, 1997 and its unaudited financial statements
for the period ended September 30, 1998, and Borrower represents that all of
said financial information is true and correct in all material respects; such
financial information fairly presents the financial condition and the results of
operations of Borrower as of the dates thereof and for the periods indicated
therein; that such financial statements disclose all material liabilities,
direct or contingent of the Borrower as of the dates hereof and the periods
indicated; that such financial statements have been prepared in accordance with
generally accepted accounting principles and practices consistently maintained
throughout the periods involved; and that, as of the date of said financial
information submitted, there were no material unrealized or anticipated losses
from any unfavorable commitments of Borrower; and that there has been no
Material Adverse Effect since the date of said financial statements.
(b) Borrower is, and on the Drawdown Date of each Revolving Advance will
be, Solvent.
(c) Except as set forth in Schedule 4.4, upon consummation of the
------------
transactions contemplated under the Loan Documents, Borrower will not have any
outstanding Debt other than the obligations and indebtedness under this
Agreement and trade debt incurred in the ordinary course of business.
(d) Neither this Agreement nor any written information, exhibit, report,
document, or certificate furnished to Lender by or on behalf of the Borrower and
Corporate Guarantor in connection with this Agreement contained or contains any
material misstatement of fact or omitted or omits to state a material fact or
any fact necessary to make the statements contained herein or therein not
misleading. There is no fact known to Borrower that materially adversely affects
or that, insofar as the Borrower can now reasonably foresee, may materially
adversely affect, the condition,
22
<PAGE>
financial or otherwise, operations, properties, or prospects of Borrower or the
ability of Borrower to carry out its obligations under any of the Loan
Documents.
Section 4.5 Other Agreements; No Default. Borrower has no material
----------------------------
contracts, agreements, leases or commitments other than those set forth on
Schedule 4.5. Borrower is not in default in any respect in the performance,
- ------------
observance, or fulfillment of any of the obligations, covenants, or conditions
contained in any contract, agreement, lease or instrument to which Borrower is
a party. Borrower enjoys peaceful and undisturbed possession under all leases to
which it is a party.
Section 4.6 Litigation. Except as set forth in Schedule 4.6, there is no
---------- -------------
pending or, to Borrower's officers', directors', or key employees' knowledge,
threatened action, suit or proceeding before any court, Governmental Authority,
board of arbitration, or arbitrator against Borrower or for or on behalf of
Borrower or in which Borrower or any of its properties or assets is or may
otherwise become involved nor is there any basis therefor. Except as set forth
in Schedule 4.6, Borrower has not received any summons, citation, directive,
------------
letter, or other communication from any Governmental Authority concerning any
intentional or unintentional violation or alleged violation of any Environmental
Laws.
Section 4.7 No Defaults on Outstanding Judgments or Orders. Borrower is not
----------------------------------------------
in default with respect to any judgment, writ, injunction, decree, rule, or
regulation of any Governmental Authority.
Section 4.8 Ownership and Liens. Borrower has good and marketable title to
-------------------
all of its assets and none of its assets is subject to any security interest or
lien except in favor of Lender.
Section 4.9 Subsidiaries. Borrower has no Subsidiaries, except for RC
------------
Manufacturing, Inc.
Section 4.10 Operation of Business. Borrower possesses all licenses,
---------------------
permits, franchises, patents, copyrights, trademarks, trade names, or rights
thereto, and other intellectual property necessary to conduct its business
substantially as now conducted and as presently proposed to be conducted, and
Borrower is not in violation of any rights of others with respect to any of the
foregoing. Nothing has come to the attention of Borrower's officers, members or
key employees to the effect that (i) any product, process, method, substance,
part or other material presently contemplated to be sold by or employed by it in
connection with such business may infringe any patent, trademark, service marks,
trade name, copyright, license or other right owned by any other Person or (ii)
there is pending or threatened any claim or litigation against or affecting it
contesting its right to sell or use any such product, process, method,
substance, part or other material.
Section 4.11 Taxes. Borrower has filed all tax returns (federal, state, and
-----
local) required to be filed and has paid all taxes, assessments, and
governmental charges and levies thereon to be due, including interest and
penalties.
23
<PAGE>
Section 4.12 Debt. Set forth in Schedule 4.4 hereto is a complete and
---- ------------
correct list of all Debt of Borrower. The maximum principal or face amounts of
the obligations set forth, which are outstanding and which can be outstanding,
are correctly stated, and all Liens of any nature given or agreed to be given as
security therefor are correctly described or indicated in such Schedule.
Section 4.13 Intentionally Omitted.
---------------------
Section 4.14 Margin Securities. The Loans will not be used, directly or
-----------------
indirectly, for the purpose of purchasing or carrying any margin security, as
that term is defined in Regulation U of the Board of Governors of the Federal
Reserve system (the "Federal Reserve Board"), or for the purpose of reducing or
retiring any indebtedness which was originally incurred to purchase or carry any
margin security, or for any other purpose which might cause any of such advances
and other financial accommodations under this Agreement to be considered a
"purpose credit" within the meaning of Regulation T, U, or X of the Federal
Reserve Board. None of Borrower's assets and none of the Collateral constitute
margin securities. Borrower will neither take, nor permit any agent acting on
its behalf to take, any action which might cause any transaction or obligation,
or right created by this Agreement, or any document or instrument delivered
pursuant hereto, to violate any regulation of the Federal Reserve Board.
Section 4.15 Fiscal Year. The fiscal year of Borrower for financial
-----------
accounting purposes ends on December 31 of each calendar year.
Section 4.16 No Broker's Fees, etc. Borrower is not obligated to pay any
---------------------
brokerage commissions, finder's fees, appraisal fees, or investment banking fees
in connection with the transactions contemplated by this Agreement.
Section 4.17 Governmental Consents and Regulatory Approvals. Borrower has
----------------------------------------------
obtained all consents, licenses, and other approvals from all governmental
authorities required in connection with the execution, delivery, and performance
by Borrower of the Loan Documents and the transactions contemplated thereby.
Section 4.18 Eligible Accounts Receivable. Each Receivable that Borrower
----------------------------
represents or warrants to Lender to be an Eligible Account Receivable in each
Borrowing Base Certificate or other certification delivered by Borrower to
Lender pursuant to this Agreement will be, as of the date so certified, an
Eligible Account Receivable unless Lender shall in its sole discretion determine
such Receivable to be ineligible.
Section 4.19 Eligible Inventory. All Inventory that Borrower represents or
------------------
warrants to Lender to be Eligible Inventory in each Borrowing Base Certificate
or other certification delivered by Borrower to Lender pursuant to this
Agreement will be, as of the date so certified, Eligible Inventory unless Lender
shall in its sole discretion determine such Inventory to be ineligible.
24
<PAGE>
Section 4.20 Environmental Compliance. The Borrower represents and warrants
------------------------
that except as set forth in the Environmental Report:
(a) the Property and the current and anticipated use thereof materially
comply with all Environmental Laws and all other laws, ordinances or regulations
pertaining to the use and operation of such premises;
(b) no Release of any Contaminants has occurred or is now occurring upon
the Property; and
(c) neither Borrower nor the Property has been, are now or are threatened
to be the subject of any Enforcement Action.
Section 4.21 Compliance with Laws. Borrower is not in violation of any
--------------------
laws, ordinances, rules or regulations applicable to it, of all federal, state
or municipal governmental authorities, instrumentalities or agencies including,
without limitation, ERISA, the United States Occupational Safety and Health Act
of 1970, as amended, all federal, state, county and municipal laws, ordinances,
rules and regulations relating to the environment, as such may be amended.
Section 4.22 Events of Default. No Default or Event of Default has
-----------------
occurred and is continuing.
Section 4.23 Labor Disputes and Acts of God. The business and properties of
------------------------------
Borrower have not been affected by any fire, explosion, accident, strike,
lockout, or other labor dispute, drought, storm, hail, earthquake, embargo, act
of God or of the public enemy, or other casualty (whether or not covered by
insurance).
Section 4.24 ERISA. Borrower is in compliance in all material respects with
-----
all applicable provisions of ERISA. Neither a Reportable Event nor a Prohibited
Transaction has occurred and is continuing with respect to any Plan; no notice
of intent to terminate a Plan has been filed, nor has any plan been terminated;
no circumstances exist which constitute grounds under Section 4042 of ERISA
entitling the PBGC to institute proceedings to terminate, or appoint a trustee
to administrate, a Plan, nor has the PBGC instituted any such proceedings;
neither Borrower nor any ERISA Affiliate has completely or partially withdrawn
under Sections 4201 or 4204 of ERISA from a Multiemployer Plan; Borrower and
each ERISA Affiliate have met their minimum funding requirements under ERISA
with respect to all of its Plans and the present fair market value of all Plan
assets exceeds the present value of all vested benefits under each Plan, as
determined on the most recent valuation date of the Plan and in accordance with
the provisions of ERISA and the regulations thereunder for calculating the
potential liability of Borrower or any ERISA Affiliate to the PBGC or the Plan
under Title IV of ERISA; and neither Borrower, nor any ERISA Affiliate has
incurred any liability to the PBGC under ERISA.
25
<PAGE>
ARTICLE 5
AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that until the Commitment is irrevocably
terminated and payment is made in full of the Loans and all of its other
obligations hereunder are fully performed, Borrower shall, and shall cause its
Subsidiaries to:
Section 5.1 Maintenance of Existence. Preserve and maintain its existence
------------------------
in its current form of organization and good standing in the jurisdiction of its
organization, and qualify and remain qualified as a foreign corporation in each
jurisdiction in which such qualification is required.
Section 5.2 Maintenance of Records. Keep adequate records and books of
----------------------
account, in which complete entries will be made in accordance with GAAP
consistently applied, reflecting all of its financial transactions.
Section 5.3 Maintenance of Properties. Maintain, keep, and preserve all of
-------------------------
its properties necessary or useful in the proper conduct of its business in good
working order and condition, ordinary wear and tear excepted.
Section 5.4 Conduct of Business. Continue to engage in a business of the
-------------------
same general type as conducted and proposed to be conducted by it on the date of
this Agreement.
Section 5.5 Maintenance of Insurance.
------------------------
(a) Keep its properties, including without limitation its Inventory, and
the Property insured against fire, theft and other hazards (so-called "All Risk"
coverage) in amounts and with companies satisfactory to Lender to the same
extent in covering such risks as is customary in the same or a similar business,
but in no event in an amount less than the lesser of (i) the total indebtedness
or (ii) the amount necessary to avoid any co-insurance penalty, which policy
shall name Lender as loss payee as its interest may appear, (b) maintain public
liability coverage against claims for personal injuries, death or property
damage in an amount deemed reasonable by Lender, which policy shall name Lender
as an additional insured, and (c) maintain all worker's compensation, employment
or similar insurance as may be required by applicable law. Such All Risk
property insurance coverage shall provide for a minimum of thirty (30) days'
written cancellation notice to Lender. Borrower agrees to deliver copies of all
of the aforesaid insurance policies to Lender. In the event of any loss or
damage to the Collateral, Borrower shall give prompt written notice to Lender
and to its insurers of such loss or damage and shall properly file its proofs of
loss with said insurers.
Section 5.6 Compliance With Laws. Comply in all material respects with all
--------------------
applicable laws, rules, regulations, and orders of Governmental Authorities,
such compliance to include,
26
<PAGE>
without limitation, paying before the same become delinquent all taxes,
assessments, and governmental charges imposed upon it or upon its property.
Section 5.7 Right of Inspection. At any reasonable time and from time to
-------------------
time, permit Lender or any agent or representative of Lender to examine and make
copies of and abstracts from the records, including without limitation computer
records, and books of account of, and visit the properties of, Borrower and to
discuss the affairs, finances, and accounts of Borrower with any of its or their
officers and directors and its independent accountants (who, by this reference,
are authorized by Borrower to discuss such matters with Lender or any agent or
representative of Lender).
Section 5.8 Reporting Requirements. Furnish or cause to be furnished to
----------------------
Lender:
(a) As soon as available and in any event within ninety (90) days after the
end of each fiscal year, a consolidated and consolidating balance sheet of
Borrower and its consolidated subsidiaries as of the end of such year and the
related statements of income, operations, sources and uses of funds, retained
earnings and cash flows with accompanying footnotes of Borrower and its
consolidated subsidiaries for such fiscal year, setting forth in each case in
comparative form the figures for the previous fiscal year, all in reasonable
detail and accompanied by an unqualified audited report thereon by an
independent certified public accountant acceptable to Lender, which shall state
that such financial statement presents fairly the financial condition as at the
end of such fiscal year, and the combined results of operations and changes in
financial position for such fiscal year, of Borrower and its consolidated
subsidiaries in accordance with GAAP.
(b) Within thirty (30) days after the end of each month internally prepared
consolidated and consolidating financial statements of Borrower and its
consolidated subsidiaries for the period in question and fiscal year to date
together with a balance sheet, income statement and sources and uses of funds.
(c) Within thirty (30) days after the end of each fiscal quarter and each
fiscal year, a financial covenant compliance certificate in form and substance
satisfactory to Lender, containing sufficient detail to verify Borrower's
compliance with the financial covenants contained in Section 7 of this Agreement
and stating either that no Default or Event of Default has occurred and is
continuing or that a Default or Event of Default exists and describing the steps
which have been or are being taken by Borrower to cure such Default or Event of
Default.
(d) On each Business Day, a borrowing base certificate on Lender's then
current form, in each case with supporting verification.
(e) On a monthly basis, (i) a detailed aging of Receivables, (ii) a
detailed aging of accounts payable, and (iii) a detailed inventory report, in
each case in form and substance satisfactory to Lender.
27
<PAGE>
(f) Promptly upon receipt thereof, and in any event simultaneously with the
delivery of the financial statements required by subparagraph 5.8(a) hereof,
copies of any reports and management letters submitted to Borrower by
independent certified public accountants in connection with the examination of
financial statements.
(g) Within fifteen (15) days subsequent to filing with the Internal Revenue
Service and applicable state taxing authorities, copies of federal and state
income tax returns of (i) Borrower and (ii) Guarantors.
(h) Promptly after the commencement thereof, notice of all actions, suits,
and proceedings before any Governmental Authority affecting Borrower, and such
additional information regarding such actions, suits, and proceedings as Lender
may request from time to time.
(i) Immediately upon the occurrence of each Default or Event of Default, a
written notice setting forth the details of such Default or Event of Default and
the action which is being taken or proposed to be taken by Borrower with respect
thereto.
(j) Upon request of Lender, copies of all reports (including annual
reports) and notices which Borrower files with or receives from the PBGC or the
U.S. Department of Labor under ERISA; and as soon as possible but not later than
ten (10) days after Borrower knows or has reason to know that any Reportable
Event or Prohibited Transaction has occurred with respect to any Plan or that
the PBGC or Borrower has instituted or will institute proceedings under Title IV
of ERISA to terminate any Plan, Borrower will deliver to Lender a certificate of
the chief financial officer of Borrower setting forth details as to such
Reportable Event or Prohibited Transaction or Plan termination and the action
Borrower proposes to take with respect thereto.
(k) Promptly after the furnishing thereof, copies of any material statement
or report furnished to any other party pursuant to the terms of any indenture,
loan, credit, or similar agreement and not otherwise required to be furnished
to Lender pursuant to any other clause of this Section.
(l) Not more than thirty (30) days following the end of each fiscal year,
financial projections for the next fiscal year, including consolidated balance
sheets, income statements, sources and uses of funds and other supporting
schedules.
(m) Such other information respecting the condition or operations,
financial or otherwise, of Borrower as Lender may from time to time reasonably
request.
The reports described above shall be in form and detail as shall be satisfactory
to Lender and in the case of the reports described in subparagraphs (b), (c),
(d), (e), (g), (i) and (1), shall be certified on behalf of Borrower by
Borrower's chief financial officer as being true, complete and correct.
Section 5.9 Eligible Accounts Receivable; Eligible Inventory. Promptly
-------------------------------------------------
after receiving notice or otherwise becoming aware thereof, notify Lender in
writing that (i) a Receivable that
28
<PAGE>
Borrower has represented or warranted to Lender to be an Eligible Account
Receivable has ceased to be an Eligible Account Receivable for any reason other
than payment thereof in the ordinary course of business or (ii) any Inventory
that Borrower has represented or warranted to Lender to be Eligible Inventory
has ceased to be Eligible Inventory for any reason.
Section 5.10 Collateral. (a) Preserve the Collateral in good condition and
----------
order and not permit it to be abused or misused, (b) not allow any of the
Collateral to be affixed to real estate unless such real estate is subject to a
Lien in favor of Lender, (c) upon request of Lender, prepare to deliver all
proceeds of the Collateral to Lender immediately upon receipt in the identical
form received without commingling with other property, (d) if a Default or an
Event of Default has occurred and is continuing, if required by Lender, notify
Account Debtors and obligors that their accounts, instruments, documents,
contracts and all of Borrower's rights to receive payments have been assigned to
Lender and shall be paid directly to Lender, (e) take necessary steps to
preserve the liability of Account Debtors, obligors, and secondary parties whose
liabilities are part of the Collateral, (f) take any action required by Lender
with reference to the Federal Assignment of Claims Act, (g) allow Lender to
inspect the Collateral and to inspect and copy all records relating to the
Collateral, (h) immediately upon request by Lender: (A) transfer possession or
permit Lender to take possession of all Collateral; and (B) assign and/or allow
Lender to immediately take possession of all instruments, and documents which
are part of the Collateral, or as to those hereafter acquired, immediately
following acquisition, and (i) notify Lender of any change of location or
material adverse change in the condition of any of the Collateral, or of any
material adverse change in any fact or circumstance warranted or represented by
Borrower herein or furnished to Lender, or if any Event of Default occurs.
Section 5.11 Defend Collateral. Defend the Collateral against all claims
-----------------
and demands of all persons at any time claiming the same or any interest therein
and, in the event Lender's security interest in the Collateral, or any part
thereof, would be impaired by an adverse decision, allow Lender to contest or
defend any such claim or demand in Borrower's name and pay, upon demand,
Lender's reasonable costs, charges and expenses, including, without limitation
reasonable attorneys' fees in connection therewith.
Section 5.12 Environmental Covenants. Provide at the expense of Borrower a
-----------------------
Phase I environmental site assessment of the Property if an Event of Default
shall have occurred and be continuing or Lender shall have reasonable cause to
believe that an actual or threatened violation of an Environmental Law has
occurred, is occurring or is about to occur, in each case prepared by an
independent environmental consulting or engineering firm acceptable to Lender in
its sole discretion and in each case stating conclusions satisfactory to Lender
in its sole discretion, together with such additional environmental studies,
audits, site assessments or remedial or corrective actions as shall be
reasonably required by Lender or recommended by any such Phase I site
assessment. Should Borrower fail to commence any such environmental site
assessment, study, audit or remedial or corrective action within thirty (30)
days of Lender's written request, Lender shall have the right but not the
obligation to retain an environmental consultant to perform the same, at
Borrower's expense,
29
<PAGE>
and all costs and expenses incurred by Lender in connection therewith shall be
payable by Borrower upon demand.
Section 5.13 Operating Accounts. Maintain at all times all of its
------------------
operating accounts, including without limitation its checking accounts, and, if
required by Lender, a blocked account into which proceeds of the Lockbox Account
would be deposited, with Lender.
ARTICLE 6
NEGATIVE COVENANTS
------------------
Borrower covenants and agrees that, without the prior written consent of
Lender, until the Commitment is irrevocably terminated and payment is made in
full of the Loan and all its obligations hereunder are fully performed, Borrower
shall not, and shall cause its Subsidiaries not to:
Section 6.1 Liens. Create, incur, assume, or suffer to exist any Lien upon
-----
or with respect to any of its properties, now owned or hereafter acquired,
except:
(a) Liens in favor of the Lender;
(b) Liens for taxes or assessments or other government charges or levies
not yet due and payable or, if due and payable, Liens for taxes being contested
in good faith by appropriate proceedings and for which appropriate reserves in
accordance with GAAP are maintained; and
(c) Liens imposed by law, such as mechanics, materialmen's, landlords',
warehousemen's, and carriers' Liens, and other similar Liens, securing
obligations incurred in the ordinary course of business which do not exceed in
the aggregate $50,000.00 and which are not past due for more than thirty (30)
days, unless such Liens are being contested in good faith by appropriate
proceedings and appropriate cash reserves have been established therefor.
Section 6.2 Debt. Create, incur, assume, or suffer to exist any recourse or
----
nonrecourse Debt, except:
(a) Debt of the Borrower under this Agreement;
(b) Debt (if any) described in Schedule 4.4, but no increases, renewals,
-------------
extensions, or refinancings thereof; and
(c) Accounts payable to trade creditors for goods or services and current
operating liabilities (other than for borrowed money), in each case incurred in
the ordinary course of business and paid within the required time, unless
contested by the Borrower in good faith and by appropriate proceedings.
30
<PAGE>
Section 6.3 Mergers, Etc. Merge or consolidate with, or sell, assign,
------------
lease, or otherwise dispose of (whether in one transaction or in a series of
transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) to any Person, or acquire all or substantially all of the
assets or the business of any Person.
Section 6.4 Leases. Create, incur, assume, or suffer to exist any
-------
obligation as lessee for the rental or hire of any real or personal property,
except leases existing on the date of this Agreement as set forth in Schedule
--------
6.4 and any extensions or renewals thereof provided however, Borrower may enter
- ----
into Leases in the ordinary course of business, so long as the sum of its annual
lease payments does not exceed $175,000.00 in any fiscal year.
Section 6.5 Sale and Leaseback. Sell, transfer, or otherwise dispose of any
------------------
real or personal property to any Person and thereafter directly or indirectly
lease back the same or similar property.
Section 6.6 Restricted Payments. Pay, make or declare any Restricted
---------------------
Payment.
Section 6.7 Sale of Assets. Sell, lease, assign, transfer, or otherwise
---------------
dispose of any of its now owned or hereafter acquired assets except: (a) for
Inventory disposed of in the ordinary course of business; and (b) the sale or
other disposition of assets no longer used or useful in the conduct of its
business.
Section 6.8 Investments. Make any loan or advance to any Person, or
------------
purchase or otherwise acquire any capital stock, assets, obligations, or other
securities of, make any capital contribution to, or otherwise invest in or
acquire any interest in any Person except: (a) direct obligations of the United
States or any agency thereof with maturities of one year or less from the date
of acquisition; (b) commercial paper of a domestic issuer rated at least "A-1"
by Standard & Poor's Corporation or "P-1" by Moody's Investors Service, Inc.;
(c) certificates of deposit with maturities of one year or less from the date of
acquisition issued by Lender; (d) for stock, obligations, or securities received
in settlement of debts (created in the ordinary course of business) owing to
Borrower; (e) investments in money market funds of which substantially all the
assets are comprised of securities of the types described in clauses (a) through
(c) above and (f) fully collateralized repurchase agreements with a term of not
more than twelve months for securities described in clause (a) above and entered
into with any federally insured lender or primary dealers in U.S. Government
securities.
Section 6.9 Guaranties, Etc. Assume, guaranty, endorse, or otherwise be or
---------------
become directly or contingently responsible or liable (including, but not
limited to, an agreement to purchase any obligation, stock, assets, goods, or
services, or to supply or advance any funds, assets, goods, or services, or to
maintain or cause such Person to maintain a minimum working capital or net
worth, or otherwise to assure the creditors of any Person against loss) for
obligations of any Person, except (i) guaranties by endorsement of negotiable
instruments for deposit or collection or similar
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transactions in the ordinary course of business, and (ii) a guaranty of the
obligations of its wholly-owned subsidiary, RC Manufacturing, Inc. to
NationsBank in an amount not in excess of $225,000.
Section 6.10 Transactions With Affiliates. Enter into any transaction,
---------------------------
including, without limitation, the purchase, sale, or exchange of property or
the rendering of any service, with any Affiliate.
Section 6.11 Subsidiaries. Create or otherwise acquire an interest in any
------------
Subsidiary.
Section 6.12 Fiscal Year. Change its fiscal year.
-----------
Section 6.13 Accounting Methods. Make or consent to a material change (a)
------------------
in the stock ownership or structure of Borrower or in the manner in which
business of the Borrower is conducted or (b) in its method of accounting unless
such change is within the permissible standards of GAAP.
Section 6.14 Inventory Locations. Move Inventory to or otherwise maintain
-------------------
Inventory at a location with respect to which Borrower has not delivered to
Lender, applicable, (1) a lessor's consent and agreement from the lessor thereof
and (2) a subordination and attornment agreement from each mortgagee thereof,
together with such other documents or instruments as Lender shall deem necessary
in its sole discretion in order to create or maintain a first priority perfected
security interest in such Inventory in favor of Lender, in each case in form and
substance satisfactory to Lender in its sole discretion.
Section 6.15 Fixed Asset Expenditures. Incur expenditures with respect to
------------------------
fixed assets in any fiscal year in an amount in excess of the depreciation of
such fixed asset during such fiscal year.
Section 6.16 Account Balances. Maintain a balance in First Union National
----------------
Bank Account No. 2000025014862 or establish any other account in connection with
Borrower's Mortgage with First Union National Bank, in excess of 125% of the
monthly principal and interest payment due on the Borrower's Mortgage with First
Union National Bank.
ARTICLE 7
FINANCIAL COVENANTS
-------------------
Borrower covenants and agrees that until the Commitment is irrevocably
terminated and payment is made in full of the Loan and all its obligations
hereunder are fully performed, Borrower shall (as to Borrower and any of its
Subsidiaries) and on a consolidated basis:
Section 7.1 Current Ratio. Maintain at all times a ratio of (i) Current
-------------
Assets to (ii) Current Liabilities of not less than 1.2:1.0.
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<PAGE>
Section 7.2 Leverage Ratio. Maintain as of the end of each fiscal quarter
---------------
of the Borrower, a ratio of (i) Total Liabilities to (ii) Tangible Net Worth of
not greater than 2.0:1.0 at the end of each fiscal quarter.
Section 7.3 Tangible Net Worth. Maintain at all times a Tangible Net Worth
-------------------
of not less than $2,500,000.
Section 7.4 Debt Service Coverage Ratio. Maintain on a rolling four quarter
----------------------------
basis as of the end of each fiscal quarter of the Borrower a ratio of (i) EBITDA
to (ii) Current Maturities of Long Term Debt plus Interest Expense of not less
----
than 1.2:1.0.
Section 7.5 Certain Financial Terms. For purposes of this Article 7, the
------------------------
following terms shall have the following meanings:
(a) "Current Assets" means the aggregate amount of assets which in
accordance with GAAP may be properly classified as current assets, after
deducting all costs and estimated earnings in excess of amounts billed and all
indebtedness from Affiliates.
(b) "Current Liabilities" means (i) all Debt due on demand or within one
year from the date of determination thereof (including without limitation all
Debt owed to Lender) and (ii) all other items which, in accordance with GAAP,
may be properly classified as current liabilities.
(c) "Current Maturities of Long-Term Debt" means, with respect to all Debt
which, in accordance with GAAP, may be properly classified as long-term debt,
the portion of such Debt which is due within one (1) year from the date of
determination thereof.
(d) "EBITDA" means earnings (or losses) from operations for any period,
after all expenses and other proper charges but before payment or provision for
any depreciation, amortization, income taxes and increased by interest expense
(including non-cash interest expense) and pension expense and option or warrant
related expenses for such period.
(e) "Interest Expense" means, for any period, the aggregate amount of
interest required to be paid or accrued during such period on all Debt
outstanding during all or any part of such period, whether such interest was or
is required to be reflected as an item of expense or capitalized, including
payments consisting of interest in respect of capital leases and including
commitment fees, agency fees, facility fees, balance deficiency fees and similar
fees or expenses in connection with the borrowing of money.
(f) "Tangible Net Worth" means as at any date of determination thereof, (a)
the amount at which common stockholders' equity and preferred stock would be
shown on a balance sheet at such date, minus (b) amounts at which good will and
any other intangibles and amounts owed by and/or invested in Affiliates would be
shown on such balance sheet.
33
<PAGE>
(g) "Total Liabilities" means all Debt and other liabilities which in
accordance with GAAP may be properly classified as liabilities and all other
liabilities, indebtedness or obligation whether or not so classified.
ARTICLE 8
SECURITY
--------
The Loans are secured by and pursuant to the Security Documents and
guaranteed by and pursuant to the Guarantees.
ARTICLE 9
EVENTS OF DEFAULT
-----------------
Section 9.1 Events of Default.
-----------------
(a) Any one or more of the following events (whether voluntary or
involuntary or effected by operation of law or otherwise) shall be an Event of
Default:
(1) Borrower shall fail to pay as and when due the principal of,
premium, if any, or interest on the Notes, or any amount of any fee, or any
other liability or indebtedness owing by Borrower to Lender;
(2) Any representation or warranty made or deemed made by Borrower in
any of the Loan Documents, or which is contained in any certificate,
document, opinion, report, or financial or other statement furnished at any
time under or in connection with any Loan Document, shall have been
incorrect in any material respect on or as of the date made or deemed made;
(3) Borrower shall fail to comply with any of the covenants contained
in Articles 6 and 7 or in Section 5.3, 5.7, 5.8, 5.9, 5.10, 5.12 and 5.13;
(4) Borrower shall fail to perform or observe any term, covenant or
agreement contained herein or in any of the other Loan Documents (other
than those specified elsewhere in this Section 9.1) for thirty (30) days
after written notice of such failure shall have been given to Borrower by
Lender;
(5) Borrower shall (A) fail to pay any indebtedness for borrowed money
(other than the Note), including any interest or premium thereon, when due
(including any applicable grace periods) (whether by scheduled maturity,
required prepayment, acceleration, demand, or otherwise), (B) fail to
perform or observe any term, covenant, or condition on its part to be
performed or observed under any agreement or instrument relating to any
such
34
<PAGE>
indebtedness, when required to be performed or observed (including any
applicable grace periods), if the effect of such failure to perform or observe
is to accelerate, or to permit the acceleration after the giving of notice or
passage of time, or both, of the maturity of such indebtedness, whether or not
such failure to perform or observe shall be waived by the holder of such
indebtedness; or any such indebtedness shall be declared to be due and payable,
or required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof, or (C) be in default under
any other indebtedness of Borrower to Lender;
(6) Borrower (A) shall generally not, or shall be unable to, or shall admit
in writing its inability to pay its debts as such debts become due; or (B) shall
make an assignment for the benefit of creditors, petition or apply to any
tribunal for the appointment of a custodian, receiver, or trustee for it or a
substantial part of its assets; or (C) shall commence any proceeding under any
bankruptcy, reorganization, arrangements, readjustment of debt, dissolution, or
liquidation law or statute of any jurisdiction, whether now or hereafter in
effect; or (D) shall have any such petition or application filed or any such
proceeding commenced against it in which an order for relief is entered or
adjudication or appointment is made and which remains undismissed for a period
of sixty (60) days or more; or (E) by any act or omission shall indicate its
consent to, approval of, or acquiescence in any such petition, application, or
proceeding, or order for relief, or the appointment of a custodian, receiver, or
trustee for all or any substantial part of its properties; or (F) shall suffer
any such custodianship, receivership, or trusteeship to continue undischarged
for a period of sixty (60) days or more;
(7) One or more judgments, decrees, or orders for the payment of money
which in the aggregate exceeds $25,000.00 shall be rendered against Borrower and
such judgments, decrees, or orders shall continue unsatisfied and in effect for
a period of thirty (30) consecutive days without being vacated, discharged,
satisfied, or stayed or bonded pending appeal;
(8) Any Security Document shall at any time after its execution and
delivery and for any reason cease to create a valid and perfected first priority
security interest (or such lesser priority security interest as may be
specifically set forth therein) in and to the property purported to be subject
to such Security Document or otherwise to be in full force and effect, or any
Security Document shall be declared null and void, or the validity or
enforceability thereof shall be contested by Borrower, or Borrower shall deny it
has any further liability or obligation under any Security Document, or Borrower
shall fail to perform any of its obligations under any Security Document subject
to any notice and cure provisions contained in any Security Document;
(9) Any event shall occur or exist with respect to Borrower which could in
the opinion of Lender subject Borrower to any tax, penalty, or other liability
under or in connection with ERISA;
35
<PAGE>
(10) There shall occur any material uninsured damage to or loss,
theft, or destruction of any of the Collateral;
(11) Borrower ceases to conduct its business as currently conducted or
is enjoined, restrained or in any way prevented by court order from
conducting all or any material part of its business affairs;
(12) There shall occur any material adverse change in the condition
(financial or otherwise), operations, properties or business of Borrower,
any Affiliate, or any Subsidiary;
(13) The occurrence of any of the following: (i) the sale or other
transfer of all or substantially all of the assets of the Borrower, and
(ii) any change in the ownership of the capital stock of the Borrower;
(14) A default by Corporate Guarantor or RC Manufacturing, Inc. of any
of its obligations;
(15) Any other failure of Borrower to perform under this Agreement
subject to applicable notice and cure periods; or
(16) Any material adverse change in the financial condition of the
Borrower or the collateral securing the Loans.
(b) Upon and after the occurrence of an Event of Default, Lender may (1)
declare the Commitment to be terminated, whereupon the same shall forthwith
terminate and/or (2) declare all the outstanding indebtedness evidenced by the
Note and all other amounts payable under this Agreement (including, without
limitation, any prepayment fee that Borrower would have been obligated to pay
had it then elected to prepay the Note and terminate the Commitment), to be
forthwith due and payable, whereupon the Commitment shall be terminated and the
Note, all such interest, and all such other amounts shall become and be
forthwith due and payable, without presentment, demand, protest, or further
notice of any kind, all of which are hereby expressly waived by Borrower;
provided, however, that upon the occurrence of any event described in Section
- -------- -------
9.1(a)(6), the Commitment shall terminate and the outstanding Note, all interest
thereon, and all such other amounts payable under this Agreement shall become
automatically due and payable, without presentment, demand, protest, or further
notice of any kind, all of which are hereby expressly waived by Borrower.
(c) The occurrence of an Event of Default under the documents evidencing,
securing or relating to the Loan shall be an Event of Default under this
Agreement.
36
<PAGE>
ARTICLE 10
GENERAL PROVISIONS
------------------
Section 10.1 Amendments, Etc. No amendment, modification, termination, or
----------------
waiver of any provision of any of the Loan Documents to which Borrower is a
party, or consent to any departure by Borrower from any terms of any of the Loan
Documents to which it is a party, shall in any event be effective unless the
same shall be in writing and signed by Lender, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.
Section 10.2 Notices, Etc. All notices, demands, requests, and other
-------------
communications given under this Agreement shall only be effective if they are
(i) in writing, (ii) actually received by the addressee, and (iii) sent by hand
delivery, by facsimile transmission, by reputable express delivery service, or
by first-class mail, postage prepaid:
(a) If to the Lender, to it at:
People's Bank
850 Main Street
Bridgeport, CT 06604-4913
Attn: Peter Coates, Vice President
With a copy to:
Pepe & Hazard LLP
Goodwin Square
Hartford, CT 06103-4302
Attn: James C. Schulwolf, Esq.
(b) If to Borrower, to it at:
Star Struck, Inc.
8 Francis J. Clarke Circle
Bethel, CT 06801-0308
Attn: Kenneth Karlan, President
37
<PAGE>
With a copy to:
Meyers, Breiner & Neufeld LLP
55 Walls Drive, #204
Fairfield, CT 06430
Attn: Alexander Breiner, Esq.
or to such other address (and/or facsimile transmission number) as Borrower or
Lender, as the case may be, shall have specified in a notice sent to the other
in accordance with this Section.
Section 10.3 No Waiver; Remedies. No failure on the part of Lender to
--------------------
exercise, and no delay in exercising, any right, power, or remedy under any of
the Loan Documents shall operate as a waiver of such right, power, or remedy,
nor shall any single or partial exercise of any right, power, or remedy under
any of the Loan Documents preclude any other or further exercise thereof or the
exercise of any other right, power, or remedy. The remedies provided in the Loan
Documents are cumulative and not exclusive of any remedies provided by law.
Section 10.4 Successors and Assigns/Participants. This Agreement shall be
--------------------------------
binding upon and inure to the benefit of Borrower and Lender and their
respective successors and assigns; provided, however, that Borrower shall not
-----------------
(by agreement, operation of law, or otherwise) assign any of their respective
rights, or delegate any of their respective obligations, under any of the Loan
Documents to which Borrower is a party without the prior written consent of
Lender, and any such assignment or delegation made without such consent shall be
null and void. Lender shall have the unrestricted right at any time or from time
to time, and without Borrower's or Guarantor's consent, to assign all or any
portion of its rights and obligations hereunder to one or more banks or other
financial institutions (each, an "Assignee"), and Borrower and Guarantors agree
that they shall execute, or cause to be executed, such documents, including
without limitation, amendments to this Agreement and to any other documents,
instruments and agreements executed in connection herewith as Lender shall deem
necessary to effect the foregoing. In addition, at the request of Lender and any
such Assignee, Borrower shall issue one or more new promissory notes, as
applicable, to any such Assignee and, if Lender has retained any of its rights
and obligations hereunder following such assignment, to Lender, which new
promissory notes shall be issued in replacement of, but not in discharge of, the
liability evidenced by the promissory note held by Lender prior to such
assignment and shall reflect the amount of the respective commitments and loans
held by such Assignee and Lender after giving effect to such assignment. Upon
the execution and delivery of appropriate assignment documentation, amendments
and any other documentation required by Lender in connection with such
assignment, and the payment by Assignee of the purchase price agreed to by
Lender and such Assignee, such Assignee shall be a party to this Agreement and
shall have all of the rights and obligations of Lender hereunder (and under any
and all other guaranties, documents, instruments and agreements executed in
connection herewith) to the extent that such rights and obligations have been
assigned by Lender pursuant to this assignment documentation between Lender and
such Assignee, and Lender shall be released from its obligations hereunder and
thereunder to a corresponding extent. Lender shall have the unrestricted right
at any time and from
38
<PAGE>
time to time, and without the consent of or notice to Borrower or Guarantor, to
grant to one or more banks or other financial institutions (each, a
"Participant") participating interests in Lender's obligations to lend hereunder
and/or any or all of the loans held by Lender hereunder. In the event of any
such grant by Lender of a participating interest to a Participant, whether or
not upon notice to Borrower, Lender shall remain responsible for the performance
of its obligations hereunder and Borrower shall continue to deal solely and
directly with Lender in connection with Lender's rights and obligations
hereunder. Lender may furnish any information concerning Borrower in its
possession from time to time to prospective Assignees and Participants, provided
that Lender shall require any such prospective Assignee or Participant to agree
in writing to maintain the confidentiality of such information.
Section 10.5 Costs, Expenses, and Taxes; Indemnification.
-------------------------------------------
(a) Borrower agrees to pay on demand all reasonable costs and expenses in
connection with the preparation, execution, delivery, filing, recording, and
administration of any of the Loan Documents, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for Lender with respect
thereto and with respect to advising the Lender as to its rights and
responsibilities under any of the Loan Documents including without limitation,
ongoing advice following the effectiveness of this Agreement and all costs and
expenses, if any, in connection with the protection, collection and/or other
enforcement of this Agreement or any of the Loan Documents. In addition,
Borrower shall pay any and all stamp and other taxes and fees payable or
determined to be payable in connection with the execution, delivery, filing, and
recording of any of the Loan Documents and the other documents to be delivered
under any of the Loan Documents, and agrees to hold and save the Lender harmless
from and against any and all liabilities with respect to or resulting from any
delay in paying or failure to pay such taxes and fees.
(b) To the fullest extent permitted by applicable law, Borrower agrees to
defend, indemnify and hold harmless the Lender, any other holder of the Notes
and each of the present and future shareholders, partners, directors, officers,
employees, agents, counsel and successors and assigns of each of them
(collectively with Lender the "Lender Parties") from and against any and all
loss, cost, expense, claim, liability (including strict liability) or asserted
liability incurred from or out of the Loans, the execution, delivery or
performance of this Agreement, or any of the documents or instruments to be
executed and delivered hereunder, or otherwise arising out of the
debtor/creditor relationship between them, Lender or Lender Parties relating to
the Loans, the exercise of any of Lender's rights under the Loans, any
litigation or proceeding instituted or conducted by any Governmental Authority,
any act or omission of Borrower or otherwise, except to the extent (and only to
the extent) that the same arises from the gross negligence or willful misconduct
of Lender.
(c) Without limiting the generality of the preceding subparagraph (b),
Borrower agrees to defend, protect, indemnify and hold harmless Lender Parties
from and against, and to reimburse the Lender Parties on demand with respect to,
any and all matters of any and every kind or character, known or unknown, fixed
or contingent, asserted against or incurred by Lender Parties at any time and
from time to time by reason of or arising out of any violation of any
Environmental Laws, the
39
<PAGE>
presence, disposal, escape, seepage, leakage, spillage, discharge, emission,
release or threatened release of any Contaminant or any action, suit, proceeding
or investigation brought or threatened with respect to any Contaminant
(including, but not limited to, claims with respect to wrongful death, personal
injury or damage to property), in each case, including, without limitation, the
reasonable fees and disbursements of counsel and allocated costs of internal
counsel incurred in connection with any such investigation, litigation or other
proceeding.
(d) The obligations of Borrower described in this Section 10.5 shall
survive the closing of the transactions described in this Agreement, including
the making of any and all Loans and the payment and satisfaction of the Notes.
Section 10.6 Right of Setoff. Borrower hereby grants to Lender a lien,
---------------
security interest and right of setoff as security for all liabilities and
obligations to Lender, whether now existing or hereafter arising, upon and
against all deposits, credits, collateral and property, now or hereafter in the
possession, custody, safekeeping or control of Lender or any entity under the
control of Fleet Financial Group, Inc., or in transit to any of them. At any
time, without demand or notice, Lender may set off the same or any part thereof
and apply the same to any liability or obligation of Borrower even though
unmatured and regardless of the adequacy of any other collateral securing the
Loan. ANY AND ALL RIGHTS TO REQUIRE LENDER TO EXERCISE ITS RIGHTS OR REMEDIES
WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE LOAN, PRIOR TO EXERCISING
ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF
THE BORROWER, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
Section 10.7 Governing Law; Jurisdiction.
---------------------------
(a) This Agreement, the Notes and the other Loan Documents shall be
construed in accordance with and governed by the laws of the State of
Connecticut without regard to its conflict of laws rules.
(b) Borrower hereby irrevocably submits to the jurisdiction of any
Connecticut State or United States Federal court sitting in Connecticut over any
action or proceeding arising out of or relating to this Agreement, the Notes or
the other Loan Documents, and Borrower hereby irrevocably agrees that all claims
in respect to such action or proceeding may be heard and determined in such
Connecticut State or Federal court. Borrower irrevocably consents to the service
of any and all process in any such action or proceeding by the mailing of copies
of such process to Borrower at its address specified in Section 10.2. Borrower
agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law. Borrower further waives any objection to
venue in such state and any objection to an action or proceeding in such State
on the basis of forum non convenience. Borrower further agrees that any action
or proceeding brought against Lender shall be brought only in Connecticut State
or United States Federal courts sitting in Connecticut.
40
<PAGE>
(c) Nothing in this Section 10.7 shall affect the right of Lender to serve
legal process in any other manner permitted by law or affect the right of Lender
to bring any action or proceeding against Borrower or their property in the
courts of any other jurisdiction.
(d) To the extent that Borrower has or hereafter may acquire any immunity
from jurisdiction of any court or from any legal process (whether from service
or notice, attachment prior to judgment, attachment in aid of execution,
execution or otherwise) with respect to themselves or their property, such
Person hereby irrevocably waives such immunity in respect of its obligations
under this Agreement, the Notes and the other Loan Documents.
(e) BORROWER ACKNOWLEDGES AND AGREES THAT THE TRANSACTION OF WHICH THIS
AGREEMENT IS A PART IS A COMMERCIAL TRANSACTION AND NOT A CONSUMER TRANSACTION
AND WAIVE ANY RIGHT TO A NOTICE AND HEARING UNDER CHAPTER 903a OF THE
CONNECTICUT GENERAL STATUTES, AS AMENDED, OR OTHER STATUTE OR STATUTES AFFECTING
PREJUDGMENT REMEDIES AND AUTHORIZE THE LENDER'S ATTORNEY TO ISSUE A WRIT FOR A
PREJUDGMENT REMEDY WITHOUT COURT ORDER, PROVIDED THE COMPLAINT SHALL SET FORTH A
COPY OF THIS WAIVER. FURTHER, TO THE EXTENT ALLOWED UNDER APPLICABLE LAW,
BORROWER HEREBY WAIVES DEMAND, PRESENTMENT FOR PAYMENT, PROTEST, NOTICE OF
PROTEST, NOTICE OF DISHONOR, DILIGENCE IN COLLECTION, NOTICE OF NONPAYMENT OF
THE NOTES AND ANY AND ALL NOTICES OF A LIKE NATURE.
Section 10.8 Entire Agreement; Severability of Provisions.
--------------------------------------------
(a) This Agreement and the other Loan Documents collectively constitute the
entire agreement and understanding between the parties hereto relating to the
transactions contemplated by this Agreement and supersede any and all
contemporaneous and prior agreements, representations, arrangements and
understandings (written or oral, express or implied) relating to the subject
matter hereof.
(b) If any term or provision of any of the Loan Documents or the
application thereof to any circumstance shall, in any jurisdiction and to any
extent, be invalid or unenforceable, such term or provision shall be ineffective
as to such jurisdiction only to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions thereof or the application of such term or provision to
circumstances other than those as to which it is held invalid or unenforceable.
Section 10.9 Estoppel Certificates. Within fifteen (15) days after
---------------------
Lender requests B Borrower to do so, Borrower shall cause its chief financial
officer to duly execute and deliver to Lender a statement certifying (a) that
this Agreement, the Notes, and the other Loan Documents to which Borrower is a
party are in full force and effect and have not been modified except as
described in said statement, (b) the date to which interest on the Notes have
been paid, (c) the unpaid principal
41
<PAGE>
balance of the Notes, (d) whether to Borrower's knowledge an Event of Default
has occurred and is continuing, and if so, describing in reasonable detail each
such Event of Default of which it has knowledge, (e) whether to its knowledge
Borrower has any defense, setoff, or counterclaim to the payment or performance
of any of its obligations in accordance with the respective terms of this
Agreement, the Notes, and the other Loan Documents, as the case may be, and, if
so, describing each defense, setoff, or counterclaim of which it has knowledge
in reasonable detail (including where applicable the amount thereof), and (f) as
to any other matter reasonably requested by Lender.
Section 10.10 Waiver of Jury Trial and Consequential Damages.
-----------------------------------------------
(a) BORROWER AND LENDER MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED
HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THE NOTES OR ANY OTHER LOAN
DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF
CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS
OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR LENDER TO ACCEPT
THE NOTES AND MAKE THE LOANS.
(b) NONE OF LENDER, BORROWER, OR ANY AGENT OR ATTORNEY OF EITHER OF THEM
SHALL BE LIABLE TO ANY OF THE OTHERS FOR CONSEQUENTIAL DAMAGES ARISING FROM ANY
BREACH OF CONTRACT, TORT, OR OTHER WRONG RELATING TO THE ESTABLISHMENT,
ADMINISTRATION, OR COLLECTION OF THE OBLIGATIONS RELATING IN ANY WAY TO THIS
AGREEMENT, THE NOTES, OR ANY OF THE OTHER LOAN DOCUMENTS, OR THE ACTION OR
INACTION OF ANY OF SUCH PERSONS UNDER ANY ONE OR MORE HEREOF OR THEREOF.
(c) IN THE EVENT LENDER SEEKS TO TAKE POSSESSION OF ANY OR ALL OF THE
COLLATERAL BY COURT PROCESS OR OTHER METHOD AVAILABLE UNDER THE LAW, BORROWER
IRREVOCABLY WAIVES ANY BOND AND ANY SURETY OR SECURITY RELATING THERETO REQUIRED
BY ANY STATUTE, COURT RULE OR OTHERWISE AS AN INCIDENT TO SUCH POSSESSION, AND
WAIVES ANY DEMAND FOR POSSESSION PRIOR TO THE COMMENCEMENT OF ANY SUIT OR ACTION
TO RECOVER WITH RESPECT THERETO. BORROWER FURTHER WAIVES THE BENEFIT OF ALL
VALUATION, APPRAISEMENT AND EXEMPTION LAWS.
Section 10.11 Replacement of the Notes. Upon receipt by Borrower of an
------------------------
affidavit of an officer of Lender as to the loss, theft, destruction or
mutilation of the Notes or any other Security Document, and (a) in the case of
loss, theft, or destruction of the Notes or Security Agreement, Borrower will
execute and deliver in lieu thereof replacement Notes or Security Documents or
mutilation of the Notes or any other Security Document of like tenor, or (b) in
the case of mutilation, upon surrender and cancellation thereof, Borrower will
execute and deliver in lieu thereof replacement Notes or Security Documents of
like tenor.
42
<PAGE>
Section 10.12 Survival of Representations and Warranties. All
------------------------------------------
representations, warranties, and covenants made by Borrower in this Agreement or
any of the other Loan Documents or in any certificate or other writing delivered
by it or on its behalf thereunder shall be considered to have been relied upon
by Lender and shall survive the delivery of this Agreement and the other Loan
Documents. All statements in any such certificate or other writing shall
constitute representations and warranties of Borrower hereunder.
Section 10.13 Further Assurances. Borrower from time to time shall execute
------------------
and deliver to Lender such additional documents and will provide such additional
information as Lender may reasonably require to carry out the terms of this
Agreement and to keep Lender informed of the status and affairs of Borrower.
Section 10.14 Construction. Each covenant contained in this Agreement
------------
shall be construed (absent an express contrary provision therein) as being
independent of each other covenant contained herein, and compliance with any one
covenant shall not (absent such an express contrary provision) be deemed to
excuse compliance with any other covenant.
Section 10.15 Captions. Article and Section titles in the Loan Documents
--------
are included for convenience only and do not define, limit, or describe the
scope of the provisions thereof.
Section 10.16 Opinion Letter. The obligation of Lender to make the Loans is
--------------
subject to receipt by it of an opinion of counsel to Borrower dated as of the
closing date as to certain matters specified in this Agreement. Borrower having
consulted with their legal counsel acknowledges that the delivery of the opinion
may create an attorney/client relationship between counsel to Borrower and
Lender and Borrower knowingly waives any resulting conflict of interest, present
or future, arising out of the delivery of the opinion.
Section 10.17 Examination of Records. Lender will have the right to
----------------------
conduct field audits or otherwise make periodic examinations of the books,
records and operations of Borrower and review and verify the Receivables of
Borrower. All costs arising in connection with any exercise of Lender's rights
under this Section 10.17 shall be at the rate of $500 per man day plus out-of-
pocket expenses and shall be for the account of Borrower up to a maximum of
$7,500 per annum unless an Event of Default shall have occurred, in which event
such maximum shall be inapplicable and all such costs shall be for the account
of Borrower.
Section 10.18 Releases. Borrower hereby acknowledges that it has been
--------
represented by competent counsel in connection with this transaction and has
been fully advised by such counsel of the full range of rights and obligations
possessed by them and undertaken or received pursuant to the terms of this
Agreement and, specifically, the provisions of this section of the Agreement.
Borrower hereby knowingly and, after consultation with counsel, freely
acknowledges and agrees that it does not now have nor know of any basis for any
claim in tort, contract or otherwise against the Lender Parties for breach of
any of the terms of the documents evidencing or securing the Loans or which may
have arisen out of the relationship between them and any of Lender Parties
relating
43
<PAGE>
to the Loans up to and through the date of this Agreement. Borrower acknowledges
and agrees that this Agreement was negotiated, executed and delivered freely and
with full and informed knowledge of the consequences of this Agreement and that
it has executed this Agreement without duress and that Lender has proceeded in a
commercially reasonable manner in light of all the facts and circumstances
surrounding the transaction which are the subject of this Agreement.
Section 10.19 Counterparts. This Agreement may be executed and delivered in
any number of counterparts. Each counterpart shall constitute an original, but
all counterparts together shall constitute but one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective officers or partners thereunto duly authorized, as of the
date first above written.
BORROWER:
STAR STRUCK, INC.
By /s/ Kenneth Karlan
---------------------------------
Kenneth Karlan
Its President
Duly Authorized
LENDER:
PEOPLE'S BANK
By /s/ Peter Coates
---------------------------------
Peter Coates
Its Vice President
Duly Authorized
44
<PAGE>
SCHEDULE 4.4
------------
Outstanding debt to First Union National Bank in the approximate amount of
$670,000.00.
<PAGE>
SCHEDULE 4.5
------------
Lease by and between ESAB, LLC, as Lessor, and Star Struck, as Lessee,
dated June 1, 1997, relating to premises located at 23 Francis J. Clarke
Circle, Bethel, Connecticut.
<PAGE>
Schedule 4.6
------------
[DURANT, NICHOLS, HOUSTON, MITCHELL & SHEAHAN, PC. LETTERHEAD]
October 23, 1998
People's Bank
850 Main Street
Bridgeport, CT 06604
Re: Star Struck Inc.
----------------
Ladies and Gentlemen:
Alex Breiner, Attorney for Star Struck Inc. (the "Company"), has
asked us to furnish you with information concerning pending litigation in
which we are defending the Company.
A claim has been filed by a former employee of the Company, Starr
Vilardi, in U.S. District Court charging that she was sexually harassed and
then terminated from employment because of her sex. A motion for summary
judgment challenging the timeliness of her claims and their factual support
is pending.
The information set forth herein is as of the date hereof, except as
otherwise noted, and we disclaim any undertaking to advise you of changes
which may be brought to our attention hereafter.
The information provided herein is solely for your use in connection
with the proposed financing for the Company, and our statements herein are
not to be quoted in whole or in part, summarized, or otherwise referred
to, nor is this letter to be filed with or delivered to any governmental
agency or other person, without our prior written consent.
If you wish to have any further information with respect to the
matter referred to herein, we will be pleased to confer with you and the
Company's representative at a mutually convenient time and place.
Very truly yours,
/s/ Loraine M. Cortese-Costa
Loraine M. Cortese-Costa
cc: Alex Breiner
Jennifer Harrington
<PAGE>
Schedule 6.4
------------
Lease dated June 1, 1997 by and between ESAB, LLC and Star Struck, Inc. for
Units 3A, 3B and 4B at 23 Francis J. Clarke Circle, Bethel, Connecticut.
<PAGE>
OPEN-END MORTGAGE DEED,
-----------------------
ASSIGNMENT OF RENTS AND FINANCING STATEMENT
-------------------------------------------
THIS OPEN-END MORTGAGE DEED, ASSIGNMENT OF RENTS AND FINANCING STATEMENT
(the "Mortgage") is made this 29th day of October, 1998 by STAR STRUCK, INC., a
Connecticut corporation, with a principal place of business at 8 Francis J.
Clarke Circle, P.O. Box 308, Bethel, Connecticut 06801-0308 ("Borrower"), to
PEOPLE'S BANK, a Connecticut banking corporation, with a principal place of
business at 850 Main Street, Bridgeport, Connecticut 06604-4913 ("Lender").
IN CONSIDERATION OF THE MORTGAGE DEBT (hereinafter defined) and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrower does hereby give, grant, bargain, sell and confirm, with
MORTGAGE COVENANTS, unto Lender, Lender's successors and assigns forever, the
following property:
A. LAND: That certain piece or parcel of real property known as 8 Francis
----
J. Clarke Circle, Bethel, Connecticut, more particularly described in Schedule A
attached hereto and made a part hereof, and all permits, approvals, rights,
privileges and easements appurtenant thereto (the "Land").
B. IMPROVEMENTS: All the buildings, structures and improvements now or
------------
hereafter placed on the Land (the "Improvements").
C. SERVICE EQUIPMENT: All fixtures, appliances, machinery and equipment
-----------------
now or hereafter installed upon the Land or the Improvements, including, without
limitation, gas and electric fixtures, radiators, heaters, engines and
machinery, boilers, stoves, ranges, elevators, escalators, incinerators, motors,
dynamos, sinks, disposals, dishwashers, water closets, basins, medicine chests,
pipes, faucets and other plumbing and heating fixtures, ventilating apparatus,
dryers, washing machines, heating, ventilating and air-conditioning equipment
and units, paneling, refrigerating plants, refrigerators, whether mechanical or
otherwise, alarm, fire prevention and extinguishing apparatus, shades, awnings,
screens, blinds, rugs, carpeting, wall cabinets, furniture and furnishings,
trees, shrubbery and other plantings, and such other goods, chattels and
personal property as are now or hereafter attached to, or used or furnished in
connection with the letting or operation of, the Land and/or the Improvements,
or in connection with the activities conducted thereon, and all proceeds,
renewals or replacements thereof or additions thereto or articles of
substitution thereof (the "Service Equipment").
D. CONDEMNATION PROCEEDS: All awards or payments, including interest
---------------------
thereon, which may be made with respect to the Land, the Improvements or the
Service Equipment as a result of the exercise of the right of eminent domain.
<PAGE>
E. LEASES: All right, title and interest of Borrower in and to any and all
------
leases, tenancies or rights of use and occupancy, with amendments, if any, and
any extensions, renewals or guaranties of the tenants' obligations thereunder,
now or hereafter on or affecting the Land and/or the Improvements, whether or
not recorded, with all security therefor and all monies payable thereunder, and
all books and records which reflect payments made under such leases
(collectively, the "Leases").
F. PROPERTY INCOME: All rents, income, profits, security deposits and other
---------------
benefits to which Borrower may now or hereafter be entitled from the Land and/or
Improvements, and/or the business operations conducted thereat or therefrom (the
"Property Income").
G. TAX REFUNDS: All rights of Borrower now or hereafter arising in and to
-----------
any refunds of Taxes (as defined herein), or other charges relating to the Land
and/or the Improvements, or the debt secured hereby.
TO HAVE AND TO HOLD the above granted and bargained premises, with the
privileges and appurtenances thereof (collectively referred to herein as the
"Property"), but subject to those encumbrances, if any, listed upon Schedule B
attached hereto (the "Permitted Encumbrances"), unto Lender, Lender's successors
and assigns forever, to Lender's and their own proper use and behoof.
THE CONDITION OF THIS DEED IS SUCH THAT:
WHEREAS, Lender and Borrower have entered into a Loan Agreement
(hereinafter called the "Loan Agreement") of even date herewith pursuant to
which the aggregate amount of the revolving loan (the "Revolving Loan") therein
authorized outstanding at any one time is $2,000,000.00 (the "Loan"). The Loan
is evidenced by, in addition to the Loan Agreement, the Revolving Promissory
Note attached hereto as Schedule C (the "Note"). Pursuant to the Loan Agreement,
all or part of the Revolving Loan proceeds are permitted to be advanced from
time to time (the "Revolving Loan Advances") and shall be secured by this
Mortgage. The initial Revolving Loan Advance made under the Loan Agreement this
date is $1,007,854.16. The initial Revolving Loan Advance and future Revolving
Loan Advances, if any, may be either evidenced by additional notes or recorded
in an account on the books of Lender as specified in Section 4.1 hereof. Unless
sooner due and payable, the entire principal balance of the Revolving Loan,
together with accrued interest, shall be due and payable on October 31, 2001
(the "Maturity Date"); and
WHEREAS, this Mortgage is also subject to the following additional terms
and conditions:
ARTICLE 1
COVENANTS AND REPRESENTATIONS OF BORROWER
-----------------------------------------
Borrower covenants and represents to Lender as follows:
2
<PAGE>
1.1 PAYMENT AND PERFORMANCE. Borrower shall pay the Loan and all other
-----------------------
indebtedness secured hereby, including without limitation Loan Advances under
the Loan Agreement, in lawful money of the United States and pay and perform all
of its obligations under this Mortgage, the Loan Agreement, the Note, the
commitment letter signed and accepted by Borrower in connection with the Loan
(the "Commitment Letter") and every other instrument now or hereafter securing,
evidencing or relating to the Loan (this Mortgage, the Note, the Loan Agreement,
the Commitment Letter and such other instruments being collectively referred to
herein as the "Loan Documents") at the times and in the manner set forth in such
Loan Documents. All amounts due the Lender under any of the aforesaid
instruments shall be secured by the lien of this Mortgage and shall hereinafter
be referred to as the "Mortgage Debt". If Borrower consists of more than one
party, all of the obligations, covenants and warranties of Borrower contained in
this Mortgage shall be the joint and several obligations of all the parties
constituting Borrower.
1.2 INSURANCE.
---------
A. Borrower shall keep the Property insured against loss by fire,
flood and other hazards, casualties, contingencies and all other "extended
coverage" risks, including builder's risk, rent, business interruption,
liability, indemnity, earthquake, war risk and war damage insurance, if
available, in such amounts and with such deductibles and companies as Lender may
reasonably require. Borrower shall promptly pay when due the premiums on such
insurance policies. Each insurance policy shall contain, in a form reasonably
acceptable to Lender, a provision to the effect that the policy will not be
canceled without at least ten (10) days prior written notice to Lender, the
standard non-contributing mortgagee endorsement (entitling Lender to collect all
proceeds payable under such insurance), the standard waiver of subrogation
endorsement, and any other endorsement reasonably required by Lender. All
liability insurance carried on the Property must show Lender as an additional
insured. Borrower shall deliver copies of all existing policies (or such other
evidence of insurance reasonably acceptable to Lender) to Lender at Lender's
request and shall deliver copies of all additional and renewal policies (or such
other evidence of renewal reasonably acceptable to Lender), with current premium
bills therefor marked "Paid", to Lender at least thirty (30) days before the
expiration of the old policies.
B. After the happening of any casualty to the Property, Borrower
shall give prompt written notice thereof to Lender, and the following provisions
shall apply:
(1) All proceeds of insurance maintained with respect to the
Property (the "Insurance Proceeds") shall be payable to Lender, and Lender is
hereby authorized and empowered by Borrower to make proof of loss on, and to
collect, settle, adjust or compromise, any claims for loss, damage or
destruction under any policy or policies of insurance. Provided, however, that
so long as no Event of Default has then occurred, Lender will consult with
Borrower in connection with the settlement, adjustment or compromise of any such
claim, but such right of consultation shall not affect or diminish the rights of
Lender to make all determinations and decisions in respect of the settlement,
adjustment or compromise of any such claim. Borrower
3
<PAGE>
does hereby indemnify Lender and hold Lender harmless against and from any and
all claims and liabilities asserted against Lender in connection with the
collection, adjustment or compromise of any insured loss. Each insurer is
authorized and directed hereby to make payment under such insurance policies,
including return of unearned premiums, directly to Lender instead of to Borrower
and Lender jointly, and Borrower appoints Lender, irrevocably, as Borrower's
attorney-in-fact to endorse any draft therefor. All such Insurance Proceeds
received by Lender shall be held by Lender and applied and disbursed in
accordance with the provisions of this Section.
(2) If the Insurance Proceeds received by Lender for any single
occurrence of damage to or destruction of the Property ("Damage") is $500,000.00
or more, Lender may in its sole discretion, elect to apply such Insurance
Proceeds to the Mortgage Debt or hold such Insurance Proceeds and apply them to
the repair, restoration, or reconstruction of the Property (the "Restoration")
in accordance with the procedures set forth in subparagraph (3) below.
(3) If the Insurance Proceeds received by Lender for any single
occurrence of Damage is more than $100,000.00, but less than $500,000.00, no
Event of Default has then occurred, and no Leases have been terminated (or the
tenants have waived their right to terminate) as a result of the Damage, Lender
shall hold such Insurance Proceeds and apply them to the Restoration in
accordance with the following: Prior to the commencement of any work and the
disbursement of any funds so held by Lender, Borrower shall provide Lender with
final plans and specifications for the Restoration (the "Plans and
Specifications"), which Plans and Specifications, and the identity of Borrower's
architect and engineer(s) ("Borrower's Consultant"), shall be subject to
Lender's prior written approval. Each request made to Lender for the
disbursement of any portion of the Insurance Proceeds shall be accompanied by a
certificate of Borrower's Consultant (in form reasonably acceptable to Lender)
in respect of that portion of the Restoration for which payment is claimed to be
due. In connection with each such disbursement, Lender also shall receive
evidence satisfactory to it that there are then no outstanding mechanics' or
materialmen's liens against the Property, that the amount of any previous
disbursement has been paid to and received by the party entitled to the same,
and that the funds remaining in Lender's possession shall be sufficient to
complete such repair, restoration or reconstruction. Lender will impose a ten
percent (10%) retainage on all funds advanced. The Restoration shall be
completed in a good and workmanlike manner in accordance with the Plans and
Specifications. Lender shall not be required to make disbursements more
frequently than monthly nor in amounts less than $50,000. In all other respects,
the disbursement of Insurance Proceeds shall be made in accordance with Lender's
customary procedures for the disbursement of construction advances. Upon the
occurrence of an Event of Default, Lender may apply the Insurance Proceeds to
the Mortgage Debt in such manner as it shall determine in its discretion.
(4) If the Insurance Proceeds received by Lender for any single
occurrence of damage to or destruction of the Property is $100,000.00 or less,
and no Event of
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Default has then occurred, such Insurance Proceeds shall be disbursed by Lender
to Borrower for the Restoration.
(5) The balance of any Insurance Proceeds held by Lender after the
completion of the Restoration shall, in Lender's discretion, be paid to Borrower
or applied by Lender to the Mortgage Debt.
(6) Nothing herein contained shall be deemed to excuse Borrower from
repairing or maintaining the Property as provided in Section 1.6 hereof or from
restoring all damage or destruction to the Property, regardless of whether or
not there are Insurance Proceeds available or whether such Insurance Proceeds
are sufficient in amount, nor shall anything provided hereinabove limit Lender's
right to take such actions as it may in its sole discretion choose to take to
protect the security hereof pursuant to Article 3 hereinafter, and the
application or release by Lender of any Insurance Proceeds shall not cure or
waive any default or notice of default under this Mortgage or invalidate any act
done pursuant to such notice.
1.3 TAXES.
-----
A. Borrower shall pay, before the same become delinquent, all taxes,
assessments, and governmental charges and impositions of any kind whatsoever for
which lien rights exist, which may now or hereafter be assessed or levied upon
any part of the Property, or in lieu of or in addition to a tax on the Property
(all such charges and payments collectively referred to herein as the "Taxes").
If Borrower fails to pay any such Taxes as aforesaid, Lender may pay same and
the amount of such payments shall constitute Lender Advances pursuant to Section
3.4 hereof. Borrower shall deliver to Lender, at its request, receipts for the
payment of each item specified above, prior to the date the item will become
delinquent. Borrower shall promptly notify Lender of the delinquency in the
payment of any Taxes due. Notwithstanding the foregoing, Borrower may contest in
good faith, by appropriate proceedings, the payment of Taxes for which Borrower
has either paid such Taxes (or portion thereof) as may be required as a
condition to instituting such a proceeding, or established on its books or by
deposit of cash with Lender, at the option of Lender, a reserve for the payment
thereof in such amount as Lender may require, so long as such contest: operates
to prevent collection, stay any proceedings which may be instituted to enforce
payment of such item, and prevent a sale of the Property to pay such item; is
maintained and prosecuted with due diligence; and shall not have been terminated
or discontinued adversely to Borrower.
B. Upon the request of Lender, Borrower shall pay to Lender, together
with and in addition to the monthly installments of principal and interest
provided in the Loan Agreement, an amount (as estimated from time to time by
Lender in its sole discretion) equal to one-twelfth (1/12th) of the yearly Taxes
assessed against the Property and sufficient funds to pay the insurance premiums
required under Section 1.2 when due. Borrower agrees that any funds deposited
with or paid to Lender pursuant to this subsection B. shall create only an
indebtedness, and not a trust or agency relationship, between Borrower and
Lender, which shall be liquidated
5
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to the extent of Lender's payments as aforesaid. Unless otherwise required by
law, no interest shall be payable on such funds. If the tax escrow payments are
not sufficient to pay the Taxes on the date they become due and payable,
Borrower shall pay to Lender the amount necessary to make up the deficiency on
or before said date. Upon, and any time after, the occurrence of an Event of
Default, Lender may, at its option, apply the accumulated escrow balance
remaining as a credit against the Mortgage Debt.
1.4 CONDEMNATION. Borrower shall give Lender immediate notice of the actual
------------
or (if known to Borrower) threatened commencement of any eminent domain
proceedings affecting any part of the Property, and shall deliver to Lender
copies of all papers served in connection therewith. Borrower hereby appoints
Lender as its attorney-in-fact, coupled with an interest, and authorizes Lender
to collect, receive, and retain, the proceeds of any such award or payment, to
give proper receipts therefor and, if an Event of Default has occurred, to
adjust, compromise and settle the claim therefor. Lender shall have the right to
intervene and participate in any eminent domain proceedings, and Borrower shall
consult with Lender in all matters pertaining to the adjustment, compromise or
settlement of such proceedings and shall not enter into any agreement with
respect to such matters without the prior written consent of Lender, which shall
not be unreasonably withheld. Borrower agrees to execute and deliver upon
request any other instruments deemed necessary by Lender to confirm or assign to
Lender all awards and other compensation to be made for any taking of the
Property. Lender may, in its sole discretion, retain and apply any eminent
domain award or payment toward payment of the Mortgage Debt or pay same over
wholly or in part to Borrower. If a part of the Property shall have been taken
in any eminent domain proceedings and the remaining part of the Property shall
have been sold in foreclosure of this Mortgage prior to the receipt by Lender of
the award or payment, Lender, to the extent permitted by applicable law, shall
have the right to receive the award or payment to the extent of any deficiency
found to be due upon such sale, with legal interest thereon, and including
reasonable counsel fees, costs and disbursements incurred by Lender in
connection with the collection of such award or payment.
1.5 COMPLIANCE WITH LAW, ETC.
-------------------------
A. Borrower presently does, and shall continue to, observe and comply
with all laws, regulations, zoning and subdivision ordinances, building codes,
rules, and orders affecting the Property or the business operations thereon; the
terms of each insurance policy applicable to the Property; and all conditions
and requirements necessary to preserve and maintain all rights, licenses,
permits, privileges, franchises and concessions which are applicable to the
Property or business activities conducted at or from the Property, or which have
been granted to or contracted for by Borrower or by any tenant under the Leases.
Upon receipt, Borrower shall promptly furnish to Lender copies of all notices,
orders, summonses, correspondence and other similar items delivered to or served
upon Borrower pertaining to any of the foregoing.
B. Upon receipt, Borrower shall promptly furnish to Lender, or its
designee, copies of all correspondence from the Connecticut Department of
Environmental Protection (the
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<PAGE>
"DEP"), the Federal Environmental Protection Agency (the "EPA"), the
Occupational Safety and Health Administration, or any similar entity
(individually, a "Regulatory Authority") to Borrower (other than routine mass
informational mailings) and, upon request, shall direct such entity to send
copies of all such correspondence directly to Lender. Borrower shall furnish to
Lender copies of all correspondence, permit applications, and property transfer
related forms and reports from Borrower to any Regulatory Authority, copies of
all periodic reports required by any environmental law or any permit, and
copies of all records, forms and documents which Borrower is required to produce
or maintain pursuant to any environmental law or any permit. If, as a result of
a Spill (as defined below) or a release of hazardous waste, Borrower may be
legally obligated to report to or notify any Regulatory Authority, Borrower
shall promptly notify Lender in writing that such obligation has been triggered.
Failure to comply with this requirement shall constitute an Event of Default
hereunder.
C. Lender may, at any time and from time to time, cause to be
conducted and completed by engineers, consultants and others selected by Lender,
such investigations, studies, sampling and testing of the condition of the
Property and the compliance by Borrower and all occupants of the Property with
applicable environmental laws as Lender, in its sole discretion, shall deem
reasonably appropriate. All such investigations, studies, sampling and testing
shall be at Borrower's expense, provided, however, that Borrower shall not be
required to bear such expense so long as there is no Event of Default hereunder,
and Lender has no cause to believe, in its reasonable judgment, that there has
been a Spill (as defined below) or threatened Spill at the Property or that
Borrower is in violation of any environmental law. Borrower agrees to cooperate
with Lender and all persons retained by Lender to conduct such investigations
and to provide them with access to the Property and the books and records of
Borrower.
D. Borrower shall indemnify Lender and hold Lender harmless from and
against all loss, liability, damage and expense, including attorneys' fees and
diminution in property value, suffered or incurred by Lender, whether as holder
of this Mortgage, as mortgagee in possession or as a successor in interest to
Borrower as owner of the Property by virtue of foreclosure or acceptance of a
deed in lieu of foreclosure under or on account of any remedial or other
environmental or health and safety related obligation imposed by laws such as
Chapter 446K of the Connecticut General Statutes Revision of 1958, as amended
(the "Act") or related regulations, or any similar applicable federal laws or
regulations, including the assertion of any lien thereunder; with respect to any
release, discharge, spillage, uncontrolled loss, seepage or filtration of oil or
petroleum or chemical liquids or solid, liquid or gaseous products or hazardous
waste which, if contained or removed or mitigated by the State of Connecticut,
could give rise to a lien under Connecticut General Laws Section 22a-452a, as
amended (a "Spill") affecting the Property (whether or not the same originates
or emanates from the Property or any contiguous real estate) including any loss
of value of the Property as a result of such Spill; and with respect to any
other matter affecting the Property and governed by the provisions of the Act,
other environmental or health and safety laws, their related regulations, or any
similar applicable federal laws or regulations
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<PAGE>
E. In the event of any Spill or release affecting the Property,
whether or not the same originates or emanates from the Property or any
contiguous real estate, Borrower shall contain, remove or mitigate same in
accordance with applicable laws and regulations and any directives of the State
of Connecticut. If Borrower shall fail to remedy such Spill or otherwise comply
with any of the requirements of the Act or related regulations or any other
environmental law or regulation, Lender may at its election, but without the
obligation to do so, give such notices and/or cause such work to be performed at
the Property and/or take any and all other actions as Lender shall deem
necessary or advisable in order to remedy the Spill or cure such failure of
compliance in order to protect its security in interest in the Property, and any
amounts paid as a result thereof shall be reimbursed by Borrower upon demand by
Lender, shall bear interest at the "Default Rate" provided for in the Loan
Agreement, and shall be secured by the lien of this Mortgage. Borrower shall
provide Lender, its agents and contractors access to the Property for such
remedial work to occur. Borrower hereby indemnifies and holds Lender harmless
from all loss, expense and liability arising out of such remedial activity.
1.6 MAINTENANCE AND REPAIR: INSPECTION
----------------------------------
A. Borrower shall keep and maintain the Property in good condition,
working order and repair; not permit, commit or suffer any waste of the
Property; (i) not permit the Property or any part thereof to become vacant,
deserted or unguarded; (ii) repair, replace, rebuild or restore any part of the
Property which may be damaged or destroyed by any casualty or affected by
eminent domain, whether or not the proceeds of any insurance or eminent domain
proceedings are available therefor; (iii) complete and pay for when due any
construction undertaken on the Property; and (iv) make all other repairs and
replacements to the Property which Lender may reasonably require. All such work
shall be done promptly in good and workmanlike manner.
B. Lender and any person authorized by Lender shall have the right to
enter and inspect the Property at all reasonable times.
1.7 SALE. ENCUMBRANCE AND USE.
--------------------------
A. Borrower shall not, without Lender's prior written consent, which
may be withheld in Lender's sole discretion for any reason whatsoever, initiate
or allow any Transfer (as defined in subsection C. below) of title to all or any
part of the Property; voluntarily create or grant any liens, mortgages or
encumbrances against such title; initiate or allow any change in the nature of
the use and occupancy of the Property, including any such change which
materially increases the possibility of a Spill; or record any Declaration of
Common Interest Community.
B. Borrower shall keep and maintain the Property free from the claim
of all persons supplying labor or materials in connection with the construction
or repair of any Improvements constituting a part of the Property. Borrower
shall furnish, at Lender's request, all waivers and releases of liens or claims
upon or with respect to the Property or any Service Equipment.
8
<PAGE>
C. The term "Transfer" as used in this Section 1.7 shall mean:
(1) any sale, conveyance, transfer, gift or other disposition of
the Property or any interest therein, whether voluntary, involuntary, or by
operation of law, or Borrower's entry into any contract or option agreement to
accomplish same;
(2) if Borrower is a limited liability company, any transfer of
a member's interest, whether caused by the member's death or otherwise, or any
change in the articles of organization or operating agreement of the company, or
any change in a manager of the company, or any termination of the company.
(3) any dissolution or liquidation of, or the filing of a suit
to dissolve or liquidate, a corporate or partnership Borrower;
(4) a lease or leases of the Land, Improvements or Service
Equipment, wherein the proposed tenant or tenants do not intend to occupy the
Property but intend to sell, sublease or assign their interest to effectuate a
long-term lease or sale and leaseback for financing purposes;
(5) any other act by which the economic benefit, entrepreneurial
risk or management responsibility with respect to the Property is shifted to
someone other than Borrower.
D. Borrower shall promptly notify Lender if any lien, attachment or
encumbrance is recorded against the Property without Borrower's consent and will
cause the lien to be canceled and discharged of record within thirty (30) days
after its recording.
E. Any attempted action contrary to the provisions of this Section
1.7 shall be void, but shall constitute an Event of Default hereunder. Borrower
agrees that if the ownership of the Property or any part thereof becomes vested
in a person or entity other than Borrower, Lender may, upon notice to Borrower,
deal in any way with such successor or successors in interest without in any way
impairing or discharging Borrower's liability hereunder, under the 4,5 or the
Mortgage Debt.
1.8 LEASES. Borrower shall not take any action, the effect of which would
------
be to cause any Lease to cease to be in full force and effect, and will not,
except with the prior written consent of Lender, cancel or terminate any Lease,
or consent to any cancellation, termination or surrender thereof, or any
assignment thereof; amend, modify or subordinate any Lease; enter into any new
Lease; waive any default under or breach of any Lease; or consent to any
prepayment or discount of rent or advance rent under any Lease. Lender shall
have the right to review reasonably refuse written consent to any of the above
proposed actions of Borrower based upon the substance of the proposed
transaction, the creditworthiness of Borrower or the tenant, and the financial
condition of the Property.
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<PAGE>
1.9 PROPERTY INCOME. Borrower hereby assigns, transfers and grants a
----------------
security interest to Lender in and to the Property Income to secure the Mortgage
Debt. Borrower shall not otherwise assign, transfer or encumber the Property
Income in any manner. Borrower may, so long as no Event of Default has occurred
hereunder, collect and use the Property Income, as the same becomes due and
payable, but may not collect same more than thirty (30) days in advance of the
date the same becomes due. Upon the occurrence of an Event of Default, the
permission hereby given to Borrower to collect the Property Income shall
terminate. The foregoing provisions hereof shall constitute an absolute and
present assignment of the Property Income, subject, however, to the conditional
permission given to Borrower to collect and use such Property Income as
hereinabove provided. The existence or exercise of such right of Borrower shall
not operate to subordinate this assignment to any subsequent assignment, in
whole or in part, and any such subsequent assignment by Borrower shall be
subject to the rights of Lender hereunder.
1.10 REMOVALS, ALTERATIONS AND DEMOLITION. Improvement or Service
-------------------------------------
Equipment shall be removed, altered, demolished or erected without the prior
written consent of Lender. All such changes, additions and alterations shall
become part of the Property immediately upon installation. Any replacement
equipment shall constitute Service Equipment and be subject to the lien of this
Mortgage.
1.11 PROTECTION OF LIEN AND OTHER EXPENSES. Borrower shall pay, indemnify,
-------------------------------------
defend and hold Lender harmless from: all costs, disbursements, expenses and
reasonable counsel fees incurred by Lender in connection with protecting or
sustaining the lien of this Mortgage; any proceeding, action, suit, hearing,
motion or application in which Lender is a party by reason hereof or in which,
in Lender's opinion, it becomes necessary to defend and uphold the terms or
priority of this Mortgage; the preparation for enforcement of the Loan Documents
after the occurrence of an Event of Default and negotiations with Borrower in
connection with the existence or cure of such an Event of Default; any proposed
refinancing by Lender of the Mortgage Debt; the transfer of the Property in lieu
of foreclosure; the approval by Lender of actions taken or proposed to be taken
by Borrower or others, which approval is required by the terms of this Mortgage
or other Loan Documents; and all damages, reasonable costs and expenses
(including, without limitation, attorney's fees) paid by or imposed upon Lender
in connection with any bodily injury, death or property damage occurring in or
upon, or in the vicinity of, the Property through any cause whatsoever or
asserted against Lender on account of any act performed or omitted to be
performed hereunder (other than such acts or omissions constituting the gross
negligence of Lender) or on account of any transaction arising out of or in any
way connected with the Property, this Mortgage or the Mortgage Debt.
1.12 ESTOPPEL CERTIFICATES: INSTRUMENTS OF FURTHER ASSURANCE. Borrower
--------------------------------------------------------
shall deliver to Lender within ten (10) days after any request a duly
acknowledged certificate setting forth the amount of principal and interest due
and payable on the Loan and whether any offsets or defenses exist with respect
to this Mortgage or the Mortgage Debt. Upon Lender's request, Borrower shall use
its best efforts and due diligence to obtain delivery of the
10
<PAGE>
duly acknowledged certificate of any person having or acquiring an interest in
or encumbrance on all or any part of the Property setting forth the nature and
extent of the interest and stating that the interest is subordinate to this
Mortgage and whether any offsets or defenses exist with respect to this Mortgage
or the Mortgage Debt.
1.13 BOOKS, RECORDS AND ACCOUNTS. Borrower shall keep and maintain
---------------------------
proper and accurate books, records and accounts reflecting all items of income
and expense received or paid by Borrower or any other person in connection with
the Property and all business operations conducted at or from the Property.
Lender shall have the right at any time during normal business hours to examine
and copy any such books, records and accounts wherever located.
1.14 FINANCING STATEMENT AND SECURITY AGREEMENT.
------------------------------------------
A. This Mortgage constitutes a security agreement and is intended to
be effective as a financing statement pursuant to the Connecticut Uniform
Commercial Code. Borrower hereby grants to Lender a security interest in the
Service Equipment, Leases, Property Income and other personal property included
in the Property, and all replacements thereof, substitutions therefor, additions
thereto and proceeds thereof, as well as the personal property described on
Schedule D attached hereto and made a part hereof (collectively, the "Personal
Property") as security for the Mortgage Debt. Lender is the secured party and
Borrower is the debtor with respect to this financing statement and the mailing
addresses of the secured party and the debtor for the purpose of this financing
statement are set forth in Section 4.4 hereof. Upon request, Borrower shall
execute and deliver to Lender any security agreement, financing or continuation
statement or other document Lender deems necessary to protect or perfect its
lien on the Service Equipment, and pay all filing fees and other costs,
disbursements, expenses and reasonable counsel fees incurred by Lender in
connection therewith. Borrower authorizes Lender, to the extent permitted by
applicable law, to sign and file any financing or continuation statement at any
time with respect to the Service Equipment in the absence of any signature by or
on behalf of Borrower.
B. Borrower hereby warrants, represents and covenants as follows:
except for the security interest granted hereby, Borrower is, and as to the
portions of the Personal Property to be acquired after the date hereof will be,
the sole owner of the Personal Property free from any lien, security interest,
encumbrance or claim thereon of any kind whatsoever. Borrower will notify Lender
of, and will defend the Personal Property against, all claims and demands of all
persons at any time claiming the Personal Property or any interest therein;
Borrower will not assign, pledge, encumber, lease, sell, convey or in any manner
transfer the Personal Property or portions thereof without the prior written
consent of Lender, except as otherwise permitted under the Loan Documents, and
all of the Personal Property attached to, incorporated into or to be
incorporated into the Property will be kept free and clear of all chattel
mortgages, liens, conditional vendor's liens, encumbrances and security
interests, except as expressly waived in writing by Lender; the Personal
Property is not and will not be used or acquired for personal, family or
household purposes; the Personal Property will be kept on or at the Property,
and
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Borrower will not remove any portion or item of Personal Property affixed or
attached to the Property without the prior written consent of Lender, except
such portions or items of Personal Property which are consumed or worn out in
ordinary usage, and are promptly replaced by Borrower with new items of equal or
greater quality; and notwithstanding any release of any or all of the Property
which is deemed "real property", any proceedings to foreclose this Mortgage or
the release of this Mortgage of record, the terms hereof shall survive as a
security agreement with respect to the security interest created hereby until
the repayment or satisfaction in full of the Mortgage Debt.
1.15 REQUIRED NOTICES. Borrower shall notify Lender promptly of the
----------------
occurrence of any of the following: (i) an event requiring notice with respect
to the following matters under the following subsections of this Mortgage:
1.2.C. (Loss or Damage to Property)
1.3.B. (Taxes)
1.4.A. (Condemnation)
1.5.B. (Compliance with Law)
1.7.D. (Recordation of Liens)
1.10. (Removal of Improvements and Service Equipment)
1.20B.&D. (Compliance of Construction with Law);
(ii) receipt of notice from any governmental authority relating to the Property;
(iii) receipt of any notice from the holder of any other lien or security
interest in the Property; or (iv) commencement of any judicial or administrative
proceedings by or against or otherwise affecting Borrower, the Property or any
entity controlled by or under common control of Borrower, or any other action by
any creditor thereof as a result of any default under the terms of any loan.
1.16 OTHER DOCUMENTS. Borrower upon request shall deliver to Lender copies
-----------------
or originals of all reports, licenses, permits, approvals, orders, contracts,
agreements, rights, options, franchises and applications relating to or
affecting the Property and all business operations conducted at or from the
Property.
1.17 GENERAL REPRESENTATIONS AND WARRANTIES. Borrower represents and
--------------------------------------
warrants that as of the date of this Mortgage:
A. Borrower is generally paying its debts as such debts become due,
the fair market value of its assets exceeds its liabilities and no bankruptcy or
insolvency proceedings are pending or contemplated by or against Borrower.
B. All reports, statements and other data furnished by Borrower to
Lender in connection with the Loan are true, correct and complete in all
material respects and do not omit any fact or circumstance which would make the
statements contained therein misleading; present fairly the financial position
of Borrower as of the date stated therein, and the results of Borrower's
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operation and changes in financial position for the years then ended and the
statements are prepared in conformity with generally accepted accounting
principles applied on a consistent basis; and that no material adverse change
has occurred in the financial condition of Borrower or the Property since the
date of said financial statement.
C. The Property and all Improvements thereon have not suffered any
damage from fire or other casualty, no part of the Property has been condemned
or taken by eminent domain and no condemnation or other taking of the Property
or any part thereof is threatened or pending, or has been threatened with, any
other title proceedings.
D. To Borrower's best knowledge, there does not now exist on, under
or within the Property (or any contiguous land included in the legal description
of the Property within three years prior to the date hereof) any Spill. To
Borrower's best knowledge, there does not now exist any condition, nor will the
current or proposed operations cause there to exist any condition upon the
Property or said contiguous land which would materially increase the possibility
of the occurrence of a Spill, or a material violation of the Act or any related
regulations or any similar federal laws or regulations.
E. Borrower if a corporation, is a valid corporation in good standing
under the laws of the jurisdiction of incorporation and is authorized to do
business in the State of Connecticut, if a limited liability company, is a valid
limited liability company, legally existing under the laws of the jurisdiction
of its formation, and is authorized to do business in the State of Connecticut,
or if a limited partnership, is a valid limited partnership legally existing
under the laws of the jurisdiction of its formation and is authorized to do
business in the State of Connecticut.
F. Borrower has the legal capacity and is authorized to execute and
deliver all Loan Documents; the Loan Documents are valid and binding obligations
enforceable in accordance with their respective terms, and the execution and
delivery thereof do not contravene any contract or agreement to which Borrower
is a party or by which Borrower or any of its respective properties may be
bound, and do not contravene any law, order, decree, rule or regulation to which
Borrower is subject.
G. There is no action, suit or proceeding pending, or, to the
knowledge of Borrower, threatened against or materially affecting Borrower or
the Property or the business operations conducted at or from the Property or
which involve the possibility of any judgment or liability not fully covered by
insurance or which, in Borrower's opinion, might result in any adverse change in
the business, assets or operations of Borrower which would, in any way,
materially and adversely affect the Property or the validity or enforceability
of the Loan Documents.
H. Borrower is not a party to or bound by any contract, agreement or
other instrument, or subject to any charter or other restriction or any
judgment, order, writ, injunction,
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decree, rule or regulation which now or in the future may materially and
adversely affect the business, operations, properties, assets or condition,
financial or otherwise, of Borrower.
I. Borrower has filed all required federal, state and local tax
returns, and no claims have been asserted and/or unpaid with respect to such
taxes.
J. The Property has frontage on, and direct access for ingress and
egress to, the public street(s) appurtenant thereto.
K. Electric, gas, sewer, septic, water facilities and any other
necessary utilities are or will be, available in sufficient capacity to service
the Property satisfactorily, and any easements necessary to the furnishing of
such utility service by Borrower have been or will be obtained and duly
recorded.
L. Borrower is not in default under the terms of any instrument
evidencing or securing any indebtedness of Borrower and there has occurred no
event which would, if uncured or uncorrected, constitute a default under any
such instrument with the giving of notice, passage of time, or both.
M. Borrower (and the undersigned representative of Borrower, if any)
has full power and authority to subject the Property to this Mortgage and to
execute and deliver the Note, this Mortgage, the Loan Documents and all other
documents and instruments required of it by Lender. No consent of any person or
entity and no consent, approval, or authorization is required by Borrower in
connection with the foregoing.
1.18 PREJUDGMENT REMEDY WAIVER. Borrower hereby represents and agrees
--------------------------
that the transaction of which this Mortgage is a part is a commercial
transaction as defined by the statutes of the State of Connecticut. BORROWER
HEREBY WAIVES ALL RIGHTS TO NOTICE, JUDICIAL HEARING OR PRIOR COURT ORDER UNDER
CONNECTICUT GENERAL STATUTES SECTION 52-278a et seq., AS AMENDED, OR UNDER ANY
OTHER STATE OR FEDERAL LAW WITH RESPECT TO ANY AND ALL PREJUDGMENT REMEDIES
LENDER MAY EMPLOY TO ENFORCE ITS RIGHTS AND REMEDIES HEREUNDER. MORE
SPECIFICALLY, BORROWER ACKNOWLEDGES THAT LENDER'S ATTORNEY MAY, PURSUANT TO
CONNECTICUT GENERAL STATUTES SECTION 52-278f, ISSUE A WRIT FOR A PREJUDGMENT
REMEDY WITHOUT SECURING A COURT ORDER. BORROWER ACKNOWLEDGES AND RESERVES ITS
RIGHT TO NOTICE AND A HEARING SUBSEQUENT TO THE ISSUANCE OF A WRIT FOR
PREJUDGMENT REMEDY BY LENDER'S ATTORNEY, AND LENDER ACKNOWLEDGES BORROWER'S
RIGHT TO SAID HEARING SUBSEQUENT TO THE ISSUANCE OF SAID WRIT. BORROWER FURTHER
HEREBY WAIVES ANY REQUIREMENT OR OBLIGATION OF LENDER TO POST A BOND OR OTHER
SECURITY IN CONNECTION WITH ANY PREJUDGMENT REMEDY OBTAINED BY LENDER BASED ON
ANY OFFSETS, CLAIMS, DEFENSES OR
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<PAGE>
COUNTERCLAIMS OF BORROWER OR ANY OTHER OBLIGATED PARTY TO ANY ACTION BROUGHT BY
LENDER. BORROWER ALSO WAIVES ANY AND ALL OBJECTION WHICH IT MIGHT OTHERWISE
ASSERT, NOW OR IN THE FUTURE, TO THE EXERCISE OR USE BY LENDER OF ANY RIGHT OF
SETOFF, REPOSSESSION OR SELF HELP AS MAY PRESENTLY EXIST UNDER STATUTE OR COMMON
LAW, AND TO THE EXTENT PERMITTED BY LAW, THE BENEFITS OF ALL PRESENT AND FUTURE
VALUATION, APPRAISEMENT, HOMESTEAD, EXEMPTION, STAY, REDEMPTION AND MORATORIUM
LAWS. BORROWER ACKNOWLEDGES AND AGREES THAT ALL OF THE WAIVERS CONTAINED IN THIS
SECTION HAVE BEEN MADE KNOWINGLY, VOLUNTARILY, INTENTIONALLY AND INTELLIGENTLY,
AND WITH THE ADVICE OF ITS COUNSEL.
1.19 WAIVER OF TERMINATION RIGHTS. Borrower hereby waives, for itself and
----------------------------
any of its assigns who assume this Mortgage, any right it or they may have under
Section 49-2(c)(7) of the Connecticut General Statutes, as amended, or
otherwise, to terminate the right of Lender to make "optional future advances"
as defined under said statute, including without limitation, Loan Advances made
by Lender pursuant to this Mortgage, the Loan Agreement and/or any other Loan
Documents.
ARTICLE 2
DEFAULT
-------
2.1 EVENTS OF DEFAULT
-----------------
Any one or more of the following shall constitute an "Event of
Default" hereunder:
A. The failure to pay any portion of the Mortgage Debt in full by the
Maturity Date or the failure to pay any other installment of principal and/or
interest or any other sums due with respect to the Mortgage Debt upon maturity
or on or prior to the date when such installment is otherwise due and payable.
B. The occurrence of an Event of Default (as defined therein) under,
or demand for the payment of, any Loan Documents beyond any grace periods set
forth in said agreements, if any.
C. The breach of any covenant or obligation of Borrower contained in
Sections 1.2, 1.3, 1.7, 1.8, 1.9, or 3.4 hereof.
D. The actual or threatened waste, removal or demolition of, or
material alteration to, any part of the Property without Lender's prior written
consent.
15
<PAGE>
E. The failure to observe or perform any other agreements, covenants
or representations of Borrower contained in this Mortgage for a period of thirty
(30) days after the occurrence of such failure.
F. The occurrence of a default under, or demand for the payment of,
any other note or obligation secured by a mortgage on or security interest in
the Property.
G. The cancellation, revocation, suspension or failure to receive a
grant or renewal of any and all franchises, concessions, licenses and permits
pertaining to or necessary for the construction and operation of the
Improvements on the Property.
H. The taking of all or any part of the Property through condemnation,
or if the value of the Property shall be impaired by condemnation or casualty,
either temporarily for a period in excess of thirty (30) days, or permanently.
I. If Borrower shall be deprived of title, possession or control of
the Property by process or operation of law or order of any court, or if any
foreclosure proceeding shall be instituted with regard to any lien or mortgage
of any kind affecting the Property.
ARTICLE 3
REMEDIES
---------
Whenever an Event of Default shall have occurred, Lender may take any one
or more of the following remedial steps:
3.1 ACCELERATION. Lender may declare, without demand or notice to
------------
Borrower, the outstanding principal amount of the Loan and the interest accrued
thereon, and the Mortgage Debt, to be due and payable immediately, and upon such
declaration such principal and interest and other sums shall immediately become,
and be, due and payable.
3.2 FORECLOSURE. Lender may foreclose this Mortgage and exercise its
-----------
rights as a secured party for all or any portion of the Mortgage Debt which is
then due and payable, subject to the continuing lien of this Mortgage for the
balance not then due and payable. If this Mortgage is foreclosed there shall be
included in the Mortgage Debt, to the extent permitted by law, the costs,
disbursements, and fees paid or incurred by Lender in connection with such
foreclosure.
3.3 POSSESSION OF PROPERTY: APPOINTMENT OF RECEIVER.
-----------------------------------------------
A. Without notice to Borrower, and without regard to the adequacy of
the security for the Mortgage Debt, proof of depreciation of the value of the
Property or the financial condition of Borrower, Lender may, at its option: by
itself or by agent, with or without bringing any action, suit or proceeding,
immediately enter upon and take possession and control of the Property and the
Property Income with those rights and powers more particularly set forth in
16
<PAGE>
subsection 3.3 C. hereof; make application to a court of competent jurisdiction
for and obtain the immediate ex parte appointment of a receiver authorized to
immediately enter upon and take possession and control of the Property and the
Property Income with those rights and powers more particularly set forth in
subsection 3.3 C. hereof; without taking possession and control of the Property,
collect directly all Property Income due to Borrower with full rights and powers
to notify all parties liable to make payments of Property Income to make said
payments directly to Lender or its agents, and Lender or its agents shall have
the further power and authority to sue for or otherwise collect and receive all
Property Income; or (iv) exercise any or all of the remedies available to a
secured party under the Uniform Commercial Code, including, without limitation:
(1) Either personally or by means of a court appointed receiver,
taking possession of all or any of the Service Equipment or any other part of
the Property which is personal property (the "Personal Property") and thereafter
holding, storing, using, operating, maintaining and controlling the Personal
Property, and exercising all rights and powers of Borrower in respect thereof.
If Lender demands or attempts to take possession of the Personal Property,
Borrower shall promptly to turn over and deliver complete possession thereof to
Lender;
(2) Without notice to or demand upon Borrower, making such payments
and doing such acts as Lender may deem necessary to protect its security
interest in the Personal Property;
(3) Requiring Borrower to assemble the Personal Property, or any
portion thereof, and make it available to Lender at a place designated by Lender
and reasonably convenient to both parties. Lender and its agents and
representatives shall have the right to enter upon any or all of Borrower's
property to exercise Lender's rights hereunder; and
(4) Selling, leasing or otherwise disposing of the Personal Property
at public sale, with or without having the Personal Property at the place of
sale, and upon such terms and in such manner as Lender may determine. Lender may
be a purchaser at any such sale. Borrower agrees that sales for cash or on
credit to a wholesaler, retailer, or user of property of the type of the
Personal Property, or at public or private auction, are all commercially
reasonable. Notwithstanding any other notice provision in this Mortgage or the
Loan Documents, unless the Personal Property is perishable or threatens to
decline speedily in value, or is of a type customarily sold on a recognized
market, Lender shall give Borrower reasonable notice of the time and place of
any public sale thereof, or of the time after which any private sale or any
other intended disposition thereof is to be made. The requirements of reasonable
notice shall be met if such notice is mailed to Borrower as provided in Section
4.4 hereof, at least five (5) days before the time of the sale or other
disposition.
B. Borrower hereby waives to the fullest extent permitted by law all
rights to prior notice or court hearing in connection with any action by Lender
of the types set forth in subsections 3.3 A.(1), (2), and (3) above, and
Borrower further waives any requirement that Lender provide any bond, surety, or
other security in connection with any said action.
17
<PAGE>
C. If Lender, Lender's agent and/or a receiver enters upon and takes
possession and control of the Property and/or the Property Income pursuant to
subsections 3.3 A.(1), (2) and/or (3), such person or entity shall have all of
Borrower's rights and powers with respect to the Property and/or the Property
Income in addition to such other rights and powers as may subsequently be
authorized including without limitation the right and power to: hold, store,
use, operate, manage and control the Property and conduct the business which is
or may be conducted therefrom; make all necessary and proper maintenance,
repairs, renewals, replacements, additions, betterments and improvements to the
Property and purchase or otherwise acquire additional fixtures, personalty and
other property; obtain such insurance with respect to the Property and the
business operations conducted therefrom as may be determined necessary; manage
and operate the Property and the business conducted therefrom and exercise all
the rights and powers of Borrower in its name or otherwise with respect to the
same; enter into agreements with others to exercise the powers herein granted,
all as Lender, its agents or a receiver from time to time may determine; collect
and receive all Property Income; enforce all terms of existing Leases at the
Property and all other contracts or agreements pertaining to the Property or the
business operations conducted therefrom; and enter into such new or additional
leases and such other contracts or agreements pertaining to the Property or the
business operations conducted at or from the Property from time to time as
Lender, its agents or the receiver may determine necessary in its sole
discretion.
D. All Property Income collected by Lender, Lender's agent or a
receiver pursuant to subsections 3.3 A.(1), (2) or (3) above, shall be applied
to the following in such order of priority as Lender may determine in its sole
discretion: (i) interest and principal due on the Mortgage Debt; (ii) taxes,
assessments and insurance premiums due with respect to the Property and/or the
business operations conducted from the Property; (iii) all costs and expenses of
constructing the Improvements, operating, maintaining, repairing and improving
the Property and conducting the business operations which are or may be
conducted at the Property; and (iv) the compensation, salaries, expenses and
disbursements of any agents, employees, attorneys or other representatives of
Lender, Lender's agent or the receiver in connection with the possession,
control, construction of the Improvements and/or operation of the Property and
the business operations conducted therefrom, expressly including the payment of
any management agent's fees, and in the event Lender manages the Property itself
with its own employees, Lender shall be entitled to charge and collect a
management fee equal to the customary management agent's fee charged for
performing similar management functions in the area where the Property is
located.
E. Lender, its agents, or any receiver acting pursuant to subsections
3.3 A.(1), (2) or (3) hereof shall in no event be liable or accountable for more
monies than actually are received from the Property during the period during
which Lender, its agent or any receiver actually is in possession and control of
the Property. Neither Lender, its agents nor any receiver shall be liable or
accountable in any manner for the failure to collect Property Income for any
reason whatsoever.
18
<PAGE>
F. All costs, expenses and liabilities of every character incurred by
Lender in managing, operating and maintaining the Property, not paid from
Property Income as hereinabove provided, shall constitute and be treated as
Lender Advances pursuant to Section 3.4 hereof.
G. Borrower shall pay monthly, in advance, to Lender, its agent or
any receiver in possession and control of the Property pursuant to subsections
3.3 A.(1), (2) or (3) above, the fair and reasonable rental value for all or
any part of the Property which is in the use, occupancy and possession of
Borrower.
H. In the event of foreclosure, Lender, its agent or any receiver
acting pursuant to subsections 3.3 A.(1), (2) or (3) above, may remain in
possession of the Property until (i) the foreclosure sale; (ii) the redemption
of the Property; or (iii) the expiration of any redemption period of the United
States of America extending subsequent to the foreclosure sale, if a deficiency
exists. Lender, its agents or the receiver shall incur no liability for, nor
shall Borrower assert any claim or setoff as a result of, any action taken while
Lender, its agent or a receiver is in possession of the Property.
3.4 LENDER ADVANCES
---------------
A. Lender may, without notice or demand, pay any amount which
Borrower has failed to pay, or perform any act which Borrower has failed to
perform hereunder, including, without limitation, (i) the payment of insurance
premiums and/or the furnishing of insurance required under Section 1.2 hereof;
(ii) the payment of Taxes required under Section 1.3 hereof; (iii) the
performance of and the payment for repairs and replacements required under
Section 1.6. hereof; (iv) the cost of discharging any liens or encumbrances
under subsection 1.7.D. hereof; (v) all expenses incurred or other amounts paid
by Lender pursuant to Section 1.11 and 1.14 and Article 3 hereof; (vi) the
payment of costs attendant to Lender's possession as set forth in subsection
3.3.F. hereof; and (vii) the payment of sums for all purposes for which Loan
Advances are otherwise allowed under the Loan Agreement. The costs,
disbursements, expenses and reasonable counsel fees incurred by Lender in
connection with the foregoing, together with interest thereon from the date the
expense is paid or incurred at the highest interest rate allowed under the Loan
Agreement ("Lender Advances"), shall be (x) added to the Mortgage Debt, (y)
payable on demand to Lender, and (z) secured by the lien of this Mortgage, prior
to any right, title, interest, lien or claim attaching or accruing to the
Property subsequent to the lien hereof.
B. Lender, in making any Lender Advances which relate to Taxes
asserted against the Property, may do so according to any bill, statement or
estimate procured from the appropriate public office without inquiry into the
accuracy or validity thereof; insurance premiums, may do so according to any
notice, bill, statement or estimate procured from the appropriate insurer
without inquiry into the accuracy or validity thereof; any apparent or
threatened adverse title, lien or encumbrance, shall be the sole judge of the
legality or validity of same; the expense of repairs or replacement of any
Property, shall be the sole judge of the state of repairs and the necessity for
incurring the expense of any such repairs or replacement; any
19
<PAGE>
other purpose referred to in subsection 3.4.A. above, may do so whenever, in its
sole judgment and discretion, such payment shall seem necessary or desirable to
protect the full security intended to be created by this Mortgage.
3.5 NO MARSHALLING. Lender shall not be compelled to release, or be
--------------
prevented from foreclosing or enforcing this Mortgage upon all or any part of
the Property, unless the entire Mortgage Debt shall be paid; required to accept
any part or parts of the Property, as distinguished from the entire whole
thereof, as payment of or upon the Mortgage Debt to the extent of the value of
such part or parts; compelled to accept or allow any apportionment of the
Mortgage Debt to or among any separate parts of the Property; or prevented from
selling the Property in one or more parcels or as an entirety, and in such
manner and order, as Lender in its sole discretion may elect.
3.6 LENDER'S DISCRETION. Lender, in exercising any remedy provided herein
-------------------
under which it may make payments or perform actions which Borrower has failed to
do or make, may do so in its sole discretion whenever in its opinion such
payment or performance is necessary or desirable to protect the full security
intended by this Mortgage.
3.7 REMEDIES CUMULATIVE. No remedy herein conferred upon or reserved to
-------------------
Lender is intended to be exclusive of any other available remedy or remedies,
but each and every such remedy shall be cumulative and shall be in addition to
every other remedy given under this Mortgage or now or hereafter existing at law
or in equity.
3.8 DELAY OR OMISSION NO WAIVER. No delay or omission on the part of Lender
---------------------------
to exercise any of its rights hereunder or under any of the Loan Documents shall
impair or operate as a waiver of Lender's right to exercise such right or any
other right of Lender hereunder or under the Loan Documents. In order to entitle
Lender to exercise any remedy reserved to it in this Mortgage, it shall not be
necessary to give any notice, other than such notice as may be herein expressly
required. Any waiver, express or implied, of any breach or default hereunder
shall not constitute a waiver of any subsequent or different breach or default.
3.9 POWER OF ATTORNEY. Borrower hereby irrevocably appoints, grants and
-----------------
constitutes Lender its attorney-in-fact, coupled with an interest, to so
execute, deliver and submit all applications, requests, forms or reports of any
kind for all applicable, desirable or necessary licenses, permits, approvals,
authorization, tax credits or abatements or benefits, of any kind relating,
applicable to or affecting the use and enjoyment of, or construction on, or the
business operations conducted at or from the Property; provided, the foregoing
--------
power of attorney shall be exercisable by Lender only after the occurrence of
one or more Events of Default. Any party dealing with Lender shall not be
required to investigate the right of Lender to exercise its authority or to take
any action under or pursuant to this power of attorney nor inquire as to
whether or not any Event of Default exists or has occurred.
20
<PAGE>
3.10 NO MERGER. If Lender shall acquire title to the Property by
---------
conveyance from Borrower or as a result of the foreclosure of any other mortgage
which Lender at any time holds with respect to the Property, this Mortgage shall
not merge in the fee of the Property but shall remain and continue as an
existing and enforceable lien for the Mortgage Debt secured hereby until the
same shall be released of record by Lender in writing.
ARTICLE 4
MISCELLANEOUS PROVISIONS
------------------------
4.1 FUTURE ADVANCES. This is an "Open-End Mortgage" securing a commercial
---------------
revolving loan and the holder hereof shall have all of the rights, powers and
protections to which the holder of any Open-End Mortgage securing a commercial
revolving loan is entitled under Connecticut law. Upon request Lender may, in
its discretion, make future advances to Borrower pursuant to the Loan Agreement.
Any future Revolving Loan Advance, and the interest payable thereon, shall be
secured by this Mortgage, whether or not a promissory note evidences such
Revolving Loan Advance, provided that Lender records such Revolving Loan Advance
in its books and records. At no time shall the principal amount of the Mortgage
Debt exceed the full amount of the Loans authorized in the Loan Agreement, nor
shall the maturity of any future advance secured hereby extend beyond the date
the final principal payment is due on the Loans.
4.2 GOVERNING LAW; BINDING EFFECT. The rights and duties of Borrower and
-----------------------------
Lender under this Mortgage shall be governed by the internal laws of the State
of Connecticut. All covenants, conditions and agreements herein shall run with
the land, and shall bind the heirs, executors, administrators, successors and
assigns of Borrower, and shall inure to the benefit of Lender and its successors
and assigns.
4.3 MODIFICATIONS, ETC. No provision of this Mortgage may be waived,
------------------
modified or discharged, including, without limitation, by conduct, custom or
course of dealing, other than by an express writing signed by the party against
whom enforcement of such waiver, modification or discharge is sought.
4.4 NOTICE. Any notice, report, demand or other written instrument
------
required under Section 1.15 hereof, or otherwise permitted or required to be
given, made, or sent under this Mortgage, shall be in writing, signed by the
party giving or making the same, and shall be sent hand-delivered, effective
upon receipt, sent by United States Express Mail or by overnight courier,
effective upon receipt, or sent by certified mail, postage prepaid, return
receipt requested, deemed effective on the earlier of the day of actual delivery
as shown by the addressee's return receipt or the expiration of three (3)
business days after the date of mailing, addressed to the party intended to
receive the same at the address set forth below:
21
<PAGE>
If to Lender: with a copy to:
- ------------
People's Bank Pepe & Hazard LLP
850 Main Street Goodwin Square
Bridgeport, CT 06604-4913 Hartford, CT 06103-4302
Attn: Peter Coates, Vice President Attn: James C. Schulwolf, Esq.
If to Borrower: with a copy to:
- --------------
Star Struck, Inc. Meyers Breiner & Neufeld LLP
8 Francis J. Clarke Circle 55 Walls Drive
P.O. Box 308 Fairfield, CT 06430
Bethel, CT 06801-0308 Attn: Alexander Breiner, Esq.
Attn: Kenneth Karlan
Any party hereto shall have the right to change the place to which any such
notice shall be sent by a similar notice sent in like manner to all parties
hereto.
4.5 NO AGENCY OR JOINT VENTURE. Nothing contained in this Mortgage shall
--------------------------
be construed to cause Borrower to become the agent for, or a joint venturer
with, Lender for any purpose whatsoever, nor shall Lender be responsible for any
shortage, discrepancy, damage, loss or destruction of any part of the Property
for whatever cause unless same is the direct result of the gross negligence of
Lender. Whether or not Lender elects to employ any or all remedies available to
it upon demand or after the occurrence of an Event of Default under the Loan
Documents, Lender shall not be liable for the payment of any expense incurred in
connection with the exercise of any remedy available to Lender or for the
performance or nonperformance of any other obligation of Borrower.
4.6 SEVERANCE. The invalidity or unenforceability of any one or more
---------
phrases, sentences, clauses or sections contained in this Mortgage shall not
affect the validity or enforceability of the remaining portions of this
Mortgage, or any part thereof.
4.7 INTERPRETATION. In this Mortgage, unless the context otherwise
--------------
requires, (i) the term "Borrower" shall mean and include any guarantor of all or
any part of the Mortgage Debt or any other person directly or indirectly
responsible for the payment of all or any part of the Mortgage Debt; and (ii)
the use of any gender shall include the other genders and either the singular or
the plural shall include the other. This Mortgage shall be interpreted without
regard to any presumption or other rule requiring construction against the party
which drafted this Mortgage.
4.8 CAPITALIZED TERMS. Any capitalized words used in this Mortgage and
-----------------
not herein defined shall have the meanings ascribed to such terms in the Loan
Documents.
22
<PAGE>
NOW, THEREFORE, if all agreements and provisions contained herein are fully
kept and performed by Borrower, and all the Mortgage Debt shall be fully paid in
all respects, then this deed shall be void; otherwise to remain in full force
and effect.
IN WITNESS WHEREOF, Borrower has caused this instrument to be executed and
delivered as of the date first above written.
Signed, sealed and delivered BORROWER:
in the presence of: STAR STRUCK, INC.
/s/ Alexander Breiner /s/ Kenneth Karlan
___________________________ By:________________________
Name: Alexander Breiner Name: Kenneth Karlan
Title: President
/s/ Frank Lucchesi
____________________________
Name: Frank Lucchesi
STATE OF CONNECTICUT )
)ss. Southport
COUNTY OF FAIRFIELD )
On this 29th day of October, 1998, before me, the undersigned officer,
personally appeared Kenneth Karlan, President of STAR STRUCK, INC., signer and
sealer of the foregoing instrument and acknowledged the same to be her/his free
act and deed and the free act and deed of said corporation.
/s/ Alexander Breiner
----------------------------------
Alexander Breiner
Commissioner of the Superior Court
23
<PAGE>
SCHEDULE A
----------
All that certain piece or parcel of land, with improvements thereon, located in
the Town of Bethel, County of Fairfield and State of Connecticut, shown and
designated as Lot No. 28 on a certain map entitled, "Town of Bethel,
Connecticut, Francis J. Clarke Industrial Park, Subdivision Plan, Prepared for
Bethel Economic Development Commission by Lord-Wood, Larson Assoc., Inc.,
Engineers & Planners, Kasper Assoc., Surveyors and Engineers, Dated July 9,
1984, Revised October 9, 1984, Scale 1" - 100'," which map is certified by
Paul F. Varko, L.S. No. 11627 and which map was filed in the Land Records of the
Town of Bethel on October 24, 1984, in Map File No. 18, Map Nos. 172, 173 and
174.
Together with the right to pass and repass for all purposes over the roads
as shown on the above map to and from Route 53.
Said premises are further described as follows:
All that piece or parcel of land as shown on a map entitled, "PLOT PLAN,
LOT NO. 28, FRANCIS J. CLARKE CIRCLE, BETHEL, CONNECTICUT, SCALE 1" - 40', DATED
5/27/87 BY KASPER ASSOCIATES, JAMES J. KENNY CONN. L.S. LIC. #7027."
Commencing at a point said point being the northeasterly corner of the
parcel herein described said point being the northwesterly corner of other lands
of the Town of Bethel said point also being on the southerly street-line of
Francis J. Clarke Circle;
Thence South 30 deg. 19 min. 56 sec. West bounded southeasterly by other
land of the Town of Bethel a distance of 332.98 feet to a point;
Thence North 89 deg. 42 min. 04 sec. West bounded southwesterly by Lot No.
30 a distance of 199.93 feet to a point;
Thence North 09 deg. 49 min. 51 sec. East bounded northwesterly by Lot No.
29 a distance of 455.63 feet to a point;
Thence by a curve to the right along the southerly streetline of Francis J.
Clarke Circle having a radius of 270.00 feet and an arc length of 125-13 feet to
a point of tangency;
Thence South 53 deg. 36 min. 56 sec. East along the southerly streetline of
Francis J. Clarke Circle a distance of 124.12 feet to a point of curvature;
Thence by a curve to the left along the southerly streetline of Francis J.
Clarke Circle having a radius of 290.00 feet and an arc length of 86.60 feet to
the point and place of commencement.
Said above parcel contains 2,344 acres, more or less.
Said premises are also known as 8 Francis J. Clarke Circle, Bethel,
Connecticut.
<PAGE>
SCHEDULE B
----------
1. Real estate taxes to the Town of Bethel on the Grand List of October 1,
1997, third and fourth quarters, not yet due and payable.
2. Rules and Regulations of the Francis J. Clarke Industrial Park dated
January 16, 1985 and recorded in Volume 334 at Page 127 of the Bethel Land
Records.
3. An easement from the Town of Bethel to the Connecticut Light and Power
Company dated March 12, 1986 and recorded in Volume 375 at Page 1 of the Bethel
Land Records.
4. An easement from the Town of Bethel to the Connecticut Light and Power
Company dated March 12, 1986 and recorded in Volume 375 at Page 3 of the Bethel
Land Records.
5. Easements to be granted or restrained for drainage and sloping in
connection with the construction of roads within said Park and for the
installation of utilities, including but not limited to electrical, gas,
telephone, sewer, water and cable tv.
6. Reservation of passageway as contained in Deed recorded in Book 54 at Page
364 of the Danbury Land Records.
7. Reservation of passageway as contained in Deed recorded in Book 54 at Page
422 of the Danbury Land Records.
8. Reservation of water line contained in Deed recorded in Book 6 at Page 221
of the Bethel Land Records.
9. Reservations contained in Deed recorded in Book 6 at Page 292 of the
Bethel Land Records and in Book 60 at Page 192 of the Danbury Land Records.
10. Covenant to maintain fences contained in Deed recorded in Volume 52 at Page
310 of the Danbury Land Records.
11. Rights and provisions contained in Deed recorded in Volume 82 at Page 237
of the Bethel Land Records.
12. Privilege of passing and repassing through lane as Bet forth in Deed
recorded in Volume 22 at Page 145 of the Danbury Land Records.
13. Rights, if any, of others in and to Second Lane and any extension thereof,
Cherry Lane and any extension thereof and the roads and old highway crossing or
abutting the premises.
14. Notations of Map No. 172, File 18 of the Bethel Land Records.
<PAGE>
15. Mortgage, Assignment of Leases and Security Agreement from Star Struck,
Inc. to First Fidelity Bank, dated July 6, 1995, and recorded July 6, 1995 in
Volume 589 at Page 104 of the Bethel Land Records, securing the principal sum of
$800,000.00.
16. UCC-1 financing statement from Star Struck, Inc. to First Fidelity Bank
recorded July 6, 1995 in Volume 589 at Page 120 of the Bethel Land Records.
<PAGE>
Schedule C
----------
REVOLVING PROMISSORY NOTE
-------------------------
Southport, Connecticut
$2,000,000.00 October 29, 1998
FOR VALUE RECEIVED, the undersigned, STAR STRUCK, INC., a Connecticut
corporation with a place of business at 8 Francis J. Clarke Circle, P.O. Box
308, Bethel, Connecticut 06801-0308 (the "Borrower") promises to pay to the
order of PEOPLE'S BANK, a Connecticut banking corporation (the "Lender") at its
office at 850 Main Street, Bridgeport, Connecticut 06604-4913, or at such other
place as the holder of this Note may from time to time designate in writing, the
principal sum of TWO MILLION ($2,000,000.00) DOLLARS, or such lesser amount as
has been advanced and remains outstanding under this Note (the "Principal
Amount") pursuant to that certain Loan Agreement dated as of the date hereof (as
amended and in effect from time to time, the "Loan Agreement"), together with
(i) interest at the rate and in the manner provided herein; (ii) all amounts
which may become due under the Loan Agreement or any of the other Loan
Documents; (iii) any costs and expenses, including reasonable attorneys' and
appraiser's fees incurred in the collection of this Note or the enforcement of
the Loan Agreement or any of the other Loan Documents, foreclosure thereunder or
in any litigation or controversy arising from or connected with this Note, the
Loan Agreement or any of the other Loan Documents; and (iv) all taxes or duties
assessed upon said sum against Lender or upon the debt evidenced hereby other
than income or excise taxes. All amounts owing under this Note and interest
thereon shall be payable in legal tender of the United States of America.
Capitalized terms used herein and not otherwise defined shall have the meanings
given to them in the Loan Agreement.
This Note shall bear interest at an annual rate as selected by Borrower
pursuant to the terms of the Loan Agreement. Interest shall be due and payable
in arrears commencing on November 1, 1998 and continuing on the first day of
each succeeding month thereafter until the outstanding Principal Amount,
together with all interest accrued thereon has been fully paid, except that if
not sooner paid, the Principal Amount, together with all accrued but unpaid
interest thereon, shall be due and payable on October 31, 2001 or such earlier
date as provided in the Loan Agreement (including by reason of an acceleration
upon the occurrence of an Event of Default) (the "Maturity Date").
Interest on the Principal Amount shall be computed on the basis of a 360-
day year for actual days elapsed and shall be payable at the rate and in the
manner as provided herein until all of said Principal Amount has been fully
paid, whether before or after the Maturity Date, by acceleration or otherwise,
and whether or not any judgment is obtained hereon.
In the event that Lender has not received, within ten (10) days of its due
date, any installment of the Principal Amount and interest (excluding any
Principal Amount and interest due upon the Maturity Date), or payment with
respect to any other payment due under this Note, Borrower shall be subject to a
late charge equal to five (5%) percent of such payment.
<PAGE>
Upon the occurrence of default by Borrower in the performance of any of
Borrower's obligations hereunder, or an Event of Default as defined in the Loan
Agreement or in any other Loan Documents, Lender may, at its option, accelerate
Borrower's obligations hereunder and declare the entire unpaid Principal Amount,
together with accrued interest and all other amounts then due which are
evidenced by this Note, to be immediately due and payable, without the necessity
for demand or additional notice. In addition, upon the occurrence of such
default or Event of Default or after the Maturity Date, the interest rate of
this Note shall increase without notice, as provided in the Loan Agreement.
Failure to exercise these options shall not constitute a waiver of the right to
exercise the same in the event of any subsequent default.
Borrower may prepay this Note only in accordance with the terms of the Loan
Agreement.
Notwithstanding any provisions of this Note, it is the understanding and
agreement of Borrower and Lender that the maximum rate of interest to be paid by
Borrower to Lender shall not exceed the highest of the maximum rate of interest
permissible to be charged by Lender under applicable laws. Any amount paid in
excess of such rate shall be deemed to be a payment in reduction of principal
except to the extent that such amount is in excess of the then outstanding
Principal Amount, in which event such excess shall be returned to the Borrower.
This Note shall be governed by and construed in accordance with the laws of
the State of Connecticut. This Note shall bind the successors and assigns of
Borrower, and shall inure to the benefit of Lender and its successors and
assigns. This Note may not be changed or terminated orally, but only by an
agreement in writing signed by the party against whom enforcement of any such
change or termination is sought.
Whenever in this Note words of any gender appear, they shall be deemed to
apply equally to any other gender. Whenever used in this Note, the plural shall
include the singular and the singular shall include the plural, as the context
shall require. In the event that Borrower consists of more than one person or
entity, the obligations hereunder shall be joint and several.
TO INDUCE LENDER TO ENTER INTO THE COMMERCIAL LOAN TRANSACTION EVIDENCED BY
THIS NOTE, THE LOAN AGREEMENT, AND ANY OTHER LOAN DOCUMENTS EVIDENCING OR
SECURING THE SAME, BORROWER AGREES THAT THIS IS A COMMERCIAL TRANSACTION AND NOT
A CONSUMER TRANSACTION, AND WAIVES ANY RIGHT TO NOTICE AND A HEARING UNDER
CHAPTER 903a OF THE CONNECTICUT GENERAL STATUTES, AS AMENDED, OR OTHER STATUTE
OR STATUTES AFFECTING PREJUDGMENT REMEDIES AND AUTHORIZES LENDER'S ATTORNEY TO
ISSUE A WRIT FOR A PREJUDGMENT REMEDY WITHOUT COURT ORDER, PROVIDED THE
COMPLAINT SHALL SET FORTH A COPY OF THIS WAIVER AND WAIVES ANY CLAIM IN TORT,
CONTRACT OR OTHERWISE AGAINST LENDER'S ATTORNEY WHICH MAY ARISE OUT OF SUCH
ISSUANCE OF A WRIT FOR A PREJUDGMENT REMEDY WITHOUT COURT ORDER. BORROWER
ACKNOWLEDGES AND STIPULATES THAT SUCH WAIVER AND AUTHORIZATION GRANTED ABOVE
ARE MADE KNOWINGLY AND FREELY AND AFTER FULL CONSULTATION WITH COUNSEL.
SPECIFICALLY, BORROWER
2
<PAGE>
RECOGNIZES AND UNDERSTANDS THAT THE EXERCISE OF LENDER'S RIGHTS DESCRIBED ABOVE
MAY RESULT IN THE ATTACHMENT OF OR LEVY AGAINST BORROWER'S PROPERTY, AND SUCH
WRIT FOR A PREJUDGMENT REMEDY WILL NOT HAVE THE PRIOR WRITTEN APPROVAL OR
SCRUTINY OF A COURT OF LAW OR OTHER JUDICIAL OFFICER NOR WILL BORROWER HAVE THE
RIGHT TO ANY NOTICE OR PRIOR HEARING WHERE BORROWER MIGHT CONTEST SUCH A
PROCEDURE. THE INTENT OF BORROWER IS TO GRANT TO LENDER FOR GOOD AND VALUABLE
CONSIDERATION THE RIGHT TO OBTAIN SUCH A PREJUDGMENT REMEDY AND TO EXPRESS ITS
BELIEF THAT ANY SUCH PREJUDGMENT REMEDY OBTAINED IS VALID AND CONSTITUTIONAL.
FURTHER, TO THE EXTENT ALLOWED UNDER APPLICABLE LAW, BORROWER HEREBY WAIVES
DEMAND, PRESENTMENT FOR PAYMENT, PROTEST, NOTICE OF PROTEST, NOTICE OF DISHONOR,
DILIGENCE IN COLLECTION, NOTICE OF NONPAYMENT OF THIS NOTE AND ANY AND ALL
NOTICES OF A LIKE NATURE.
STAR STRUCK, INC.
By:_______________________________
Kenneth Karlan
Its President
(Duly Authorized)
3
<PAGE>
SCHEDULE D
Personal Property
A. All inventory, of every type and nature relating to the Property or the
operation thereof or used in connection therewith, wherever located, now owned
or hereafter acquired (and whether by way of substitution, return, replacement
or otherwise) by Borrower, all contract rights with respect thereto, all
documents representing said inventory, all proceeds thereof (including insurance
proceeds with respect thereto and inventory returned or repossessed from sale,
disposition or otherwise), all accessions to said inventory and all products
thereof. The term "inventory" includes all goods held for sale or lease by
Borrower or to be furnished under contract of service, and all raw materials,
goods in process, and all materials used or consumed in Borrower's business; and
all proceeds of the foregoing.
B. All receivables relating to the Property or the operation thereof which
now exist or which hereafter arise, or in which Borrower now has or may
hereafter acquire any rights, which term shall include all accounts, contract
rights, instruments, documents, chattel paper, general intangibles and all other
forms of obligations owing to Borrower, including, but not limited to,
retainages, security deposits and insurance proceeds, and all proceeds of all
such Receivables and all rights to any goods which are represented thereby.
C. All instruments, drafts, acceptances, documents, chattel paper,
contract rights, general intangibles, securities, deposit accounts, certificates
of deposit and notes, relating to the Property or the operation thereof under
which Borrower now has or in the future acquires any rights and all proceeds of
all of the foregoing.
D. All intangible property and rights relating to the Property or the
operation thereof, or used in connection therewith, including but not limited to
all names under or by which the Property or any present or future Improvements
on the Property may at any time be operated or known, and all rights to carry on
business under any such names, or any variant thereof, and all trade names and
trademarks, licenses and franchises relating in any way to the Property, and
good will in any way relating to the Property.
E. All causes of action, claims, compensation and recoveries for any
damage, condemnation or taking of the Property, or for any conveyance in lieu
thereof, whether direct or consequential, or for any damage or injury to the
Property, or for any loss or diminution in value of the Property.
F. All of the right, title and interest of Borrower in and to all refunds
and rebates of taxes and assessments of every kind and nature imposed upon the
Property.
G. All awards or payments, including interest thereon, which may be made
with respect to all or any portion of the above-described personal property,
fixtures or Property as a result of the exercise of the right of eminent domain.
<PAGE>
H. All reserves, deferred payments, deposits, refunds, cost savings and
payments of any kind relating to the construction of any Improvement on the
Property.
I. All plans and specifications prepared for, or governmental permits
issued with respect to, the construction of the Improvements on the Property
and all studies, and drawings related thereto; and also all contracts and
agreements of Borrower relating to the aforesaid plans and specifications or to
the aforesaid studies, data and drawings or to the construction of the
Improvements on the Property.
J. All goods used or to be used in connection with the construction of the
Improvements at the Property, including, without limitation, structural steel,
building materials and supplies, equipment, tools and machinery, in which
Borrower now or hereafter acquires any rights, during all periods of time when
Borrower has acquired rights therein whether or not said goods are incorporated
into the buildings and the Improvements on the Property and expressly including
such periods of time prior to the time when any said goods may be incorporated
into any such Improvements.
The foregoing collateral includes all additions, replacements and
substitutions thereof and thereto and all proceeds of all of the foregoing, as
these terms are used and defined in the Uniform Commercial Code.
Received for record Nov. 2, 1998 11:31 A.M.
---------------------------
Town Clerk /s/ JUDITH A. NOVACHEK
JUDITH A. NOVACHEK
<PAGE>
SECURITY AGREEMENT
------------------
THIS SECURITY AGREEMENT, dated as of October 29, 1998, between STAR STRUCK,
INC., a Connecticut corporation (the "Borrower"), and PEOPLE'S BANK, a
Connecticut banking corporation (the "Lender").
WHEREAS, the Borrower has entered into a Loan Agreement of even date
herewith (as amended and in effect from time to time, the "Loan Agreement") with
the Lender, pursuant to which the Lender, subject to the terms and conditions
contained therein, is to make loans to the Borrower; and
WHEREAS, it is a condition precedent to the Lender's making any loans to
the Borrower under the Loan Agreement that the Borrower execute and deliver to
the Lender a security agreement in substantially the form hereof; and
WHEREAS, the Borrower wishes to grant security interests in favor of the
Lender as herein provided;
NOW, THEREFORE, in consideration of the promises contained herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
Section 1. Definitions. Certain capitalized terms used herein have the
-----------
meaning ascribed to them in Exhibit A hereof. All capitalized terms used herein
but not defined in Exhibit A hereof or elsewhere in Agreement shall have the
respective meanings provided therefor in the Loan Agreement. The rules of
interpretation specified in Section 1.2 of the Loan Agreement shall be
applicable to this Agreement.
Section 2. Grant of Security Interest.
--------------------------
(a) The Borrower hereby grants to the Lender, to secure the payment
and performance in full of all of the Obligations, a security interest in and
so pledges and assigns to the Lender the properties, assets and rights of the
Borrower wherever located, whether now owned or hereafter acquired or arising,
and all proceeds and products thereof (all of the same being hereinafter called
the "Collateral"):
All personal and fixture property of every kind and nature,
including, without limitation, all furniture, fixtures, equipment, raw
materials, inventory, goods, accounts, contract rights, rights to the payment of
money, insurance refund claims all other insurance claims and proceeds, tort
claims, chattel paper, documents, instruments (including certificated
securities), deposit accounts, security entitlements, investment property,
credit card receivables, and all general intangibles, including, without
limitation, all uncertificated securities, tax refund
<PAGE>
claims, license fees, patents, patent applications, trademarks, trademark
applications, trade names, copyrights, copyright applications, rights to sue and
recover for past infringement of patents, trademarks and copyrights, computer
programs, computer software, engineering drawings, service marks, customer
lists, goodwill, and all licenses, permits, agreements of any or nature pursuant
to which the Borrower possesses, uses or has authority to possess or use
property (whether tangible or intangible) of others or others possess, use or
have authority to possess or use property (whether tangible or intangible) of
the Borrower, and all recorded data of any kind or nature, regardless of the
medium of recording, including, without limitation, all software, writings,
plans, specifications and schematics.
(b) Pursuant to the terms hereof, the Borrower has endorsed, assigned
and delivered to the Lender all negotiable or non-negotiable instruments
(including certificated securities) and chattel paper pledged by it hereunder,
together with instruments of transfer or assignment duly executed in blank as
the Lender may have specified. In the event that the Borrower shall, after the
date of this Agreement, acquire any other negotiable or non-negotiable
instruments (including certificated securities) or chattel paper to be pledged
by it hereunder, the Borrower shall forthwith endorse, assign and deliver the
same to the Lender, accompanied by such instruments of transfer or assignment
duly executed in blank as the Lender may from time to time specify. To the
extent that any securities, certificated or uncertificated, are subject to book-
entry transfer procedures, such securities have been or, in the case of book-
entry securities hereafter acquired by the Borrower, will at the time of such
acquisition be, duly transferred to the account of the Lender or one or more
nominees of the Lender with such book-entry facility or other appropriate
financial intermediary, with the Lender having at all times the right to obtain
definitive certificates (in the Lender's name or in the name of one or more
nominees of the Lender) where the issuer customarily or otherwise issues
certificates, all to be held as Collateral hereunder. The Borrower hereby
acknowledges that the Lender may, in its discretion, appoint one or more
financial institutions to act as the Lender's agent in holding in custodial
account instruments in which the Lender is granted a security interest
hereunder, including, without limitation, certificates of deposit and other
instruments evidencing short-term obligations. Notwithstanding anything to the
contrary contained in this Section 2.(b), so long as no Event of Default shall
have occurred and be continuing, the Borrower may retain for collection in the
ordinary course of business any Instruments received by it in the ordinary
course of business.
Section 3. Title to Collateral, Etc. The Borrower is the owner of the
------------------------
Collateral free from any adverse lien, security interest or other encumbrance,
except for this Agreement and other liens permitted by the Loan Agreement. None
of the account debtors in respect of any accounts, chattel paper or general
intangibles and none of the obligors in respect of any instruments included in
the Collateral is a governmental authority subject to the Federal Assignment of
Claims Act.
Section 4. Continuous Perfection. The Borrower's place of business or, if
---------------------
more than one, chief executive office is indicated on the Certificate by
Officers completed by Borrower and delivered to the Lender on the date hereof.
The Borrower will not change the same, or the name, identity or corporate
structure of the Borrower in any manner, without providing at least thirty
2
<PAGE>
(30) days prior written notice to the Lender, and if required by Lender,
delivering an opinion of counsel with respect thereto, in accordance with this
Section 4. In each case, the opinion of counsel required by Section 4 shall be
provided at Borrower's sole cost expense, shall be an opinion of counsel
acceptable to the Lender, shall be satisfactory in form and substance to the
Lender, and shall be to the effect that all financing statements and amendments
or supplements thereto, continuation statements and other documents required to
be recorded or filed in order to perfect and protect Lender's security interest
in the Collateral against all creditors of and purchasers from the Borrower, for
a period specified in such opinion, have been filed in each filing office
necessary for such purpose and that all filing fees and taxes, if any, payable
in connection with such filings have been paid in full.
Section 5. No Liens. Except for the security interest herein granted and
--------
such permitted liens as set forth in Section 4.8 of the Loan Agreement, the
Borrower shall be the owner of the Collateral free from any lien, security
interest or other encumbrance, and the Borrower shall defend the same against
all claims and demands of all persons at any time claiming the same or any
interests therein adverse to the Lender. The Borrower shall not pledge, mortgage
or create, or suffer to exist a security interest in the Collateral in favor of
any person other than the Lender.
Section 6. No Transfers. The Borrower will not sell, offer to sell, lease
------------
or otherwise transfer the Collateral or any interest therein except for (a)
sales and leases of inventory and licenses of general intangibles in the
ordinary course of business and (b) sales or other dispositions of obsolescent
items of equipment in the ordinary course of business consistent with past
practices.
Section 7. Insurance. The Borrower will maintain insurance as required by
---------
Section 5.5 of the Loan Agreement.
Section 8. Accounts.
--------
(a) As of the time when each of its Accounts arises, the Borrower
shall be deemed to have represented and warranted that such Accounts and all
records, papers and documents relating thereto (i) are genuine and in all
respects what they purport to be, (ii) represent the legal, valid and binding
obligation of the related Account Debtor evidencing indebtedness unpaid and owed
by such Account Debtor arising out of the sale or lease (or both) and delivery
of the merchandise listed therein, (iii) will, except for the original or
duplicate original invoice sent to a purchaser evidencing such purchaser's
account, be the only original writings evidencing and embodying such obligation
of the Account Debtor named therein, (d) constitute and evidence true and valid
obligations, enforceable in accordance with their respective terms, not subject
to the fulfillment of any contract or condition whatsoever or to any defenses,
setoffs or counterclaims (except with respect to refunds, returns and allowances
in the ordinary course of business), or stamp or other taxes, and (e) are in all
material respects in compliance and conform with all applicable federal, state
and local laws and applicable laws of any relevant foreign jurisdiction;
3
<PAGE>
(b) The Borrower shall keep and maintain at its own cost expense
satisfactory and complete records of each Account for at least five years (with
the exception of sales slips which shall be retained for at least six months)
from the date on which such Account comes into existence, including records of
all payments received, all credits granted thereon, all merchandise returned and
all other documentation relating thereto, and the Borrower shall make the same
available to the Lender for inspection, at the Borrower's sole cost and expense,
in accordance with [Section 5.7] of the Loan Agreement. Upon the occurrence and
during the continuance of an Event of Default, the Borrower shall, at its own
cost and expense, deliver all tangible evidence of Accounts (including all
documents evidencing Accounts) such books and records to the Lender or to its
representatives (copies of which evidence and books and records may be retained
by the Borrower) at any time upon the Lender's demand. Upon the occurrence and
during the continuance of Event of Default, the Lender may transfer a full and
complete copy of the Borrower's books, records, credit information, reports,
memoranda, and all other writings relating to the Accounts to and for the use by
any person that has acquired or is contemplating acquisition of an interest in
the Accounts or the Lender's security interest therein without the consent of
the Borrower;
(c) The Borrower shall legend, in form and manner satisfactory to the
Lender, the Accounts and other books, records and documents of the Borrower
evidencing or pertaining to the Accounts with an appropriate reference to the
fact that the Accounts have been assigned to the Lender and that the Lender has
a security interest therein.
(d) The Borrower shall use all commercially reasonable efforts to
cause to be collected from its Account Debtors, as when due, any and all amounts
owing under or on account of each Account (including, without limitation,
Accounts which are delinquent, such Accounts to be collected in accordance with
lawful collection procedures) and shall apply forthwith upon receipt thereof all
such amounts as are so collected to the outstanding balance of such Account.
Subject to the rights of the Lender if an Event of Default shall have occurred
and be continuing, the Borrower may in the ordinary course of business (to the
extent consistent with its historical collection practices) allow as adjustments
to amounts owing under its Accounts (i) an extension or renewal of the time or
times of payment, or settlement for less the total unpaid balance, which the
Borrower finds appropriate in accordance with sound business judgment and (ii) a
refund or credit due as a result of returned or damaged merchandise. The costs
and expenses (including, without limitation, attorney's fees) of collection,
whether incurred by the Borrower or the Lender, shall be borne by the Borrower.
(e) If at any time Borrower shall take and perfect a security interest
in any property of an Account Debtor or any other Person to secure payment and
performance of an Account, the Borrower shall promptly assign such security
interest to the Lender. Such Assignment need not be filed of public record
unless necessary to continue the perfected status of the security interest
against creditors of and transference from the Account Debtor or other person
granting the security interest.
4
<PAGE>
Section 9. Equipment. The Borrower shall not permit any Equipment to
---------
become a fixture to real estate or accession to other personal property unless
the Lender shall have a first priority Lien thereon.
Section 10. Maintenance of Collateral; Compliance with Law. The Borrower
----------------------------------------------
will keep the Collateral in good order and repair and not use the same in
violation of law or any policy of insurance thereon. The Lender, or its
designee, may inspect the Collateral at any reasonable time, wherever located.
The Borrower will pay promptly when due all taxes, assessments, governmental
charges and levies upon the Collateral or incurred in connection with the use or
operation of such Collateral or incurred in connection with this Agreement. The
Borrower has at all times operated, and the Borrower will continue to operate,
its business in compliance with all applicable provisions of the federal Fair
Labor Standards, as amended.
Section 11. Collateral Protection Expenses; Preservation of Collateral.
----------------------------------------------------------
(a) In its discretion, the Lender may discharge taxes and other
encumbrances at any time levied or placed on any of the Collateral, make repairs
thereto and pay any necessary filing fees. The Borrower agrees to reimburse the
Lender on demand for any and all expenditures so made. The Lender shall have no
obligation to the Borrower to make any such expenditures, nor shall the making
thereof relieve the Borrower of any default.
(b) Anything herein to the contrary notwithstanding, the Borrower
shall remain liable under each contract or agreement comprised in the Collateral
to be observed or performed by the Borrower thereunder. The Lender shall not
have any obligation or liability under any such contract or agreement by reason
of or arising out of this Agreement or the receipt by the Lender of any payment
relating to any of the Collateral, nor shall the Lender be obligated in any
manner to perform any of the obligations of the Borrower under or pursuant to
any such contract or agreement, to make inquiry as to the nature or sufficiency
of any payment received by the Lender in respect of the Collateral or as to the
sufficiency of any performance by any party under any such contract or
agreement, to present or file any claim, to take any action to enforce any
performance or to collect the payment of any amounts which may have been
assigned to the Lender or to which the Lender may be entitled at any time or
times. The Lender's sole duty with respect to the custody, safe-keeping and
physical preservation of the Collateral in its possession, under (S) 9-207 of
the Uniform Commercial Code of the State of Connecticut or otherwise, shall be
to deal with such Collateral in the same manner as the Lender deals with similar
property for its own account.
Section 12. Securities and Deposits. The Lender may at any time, at its
-----------------------
option, transfer to itself or any nominee any securities constituting
Collateral, receive any income thereon and hold such income as additional
Collateral or apply it on the Obligations. Whether or not Obligations are due,
the Lender may demand, sue for, collect, or make any settlement or compromise it
deems desirable with respect to the Collateral. Regardless of the adequacy of
Collateral or any other security for the Obligations, any deposits or other sums
at any time credited by or due from the Lender to the Borrower may at any time
be applied to or set off against any of the Obligations.
5
<PAGE>
Section 13. Notification to Account Debtors and Other Obligors. If an Event
--------------------------------------------------
of Default shall have occurred and be continuing, the Borrower shall, at the
request of the Lender, notify account debtors on accounts, chattel paper and
general intangibles of the Borrower and obligors on instruments for which the
Borrower is an obligee of the security interest of the Lender in any account,
chattel paper, general intangible or instrument and that payment thereof is to
be made directly to the Lender or to any financial institution designated by the
Lender as the Lender's agent therefor, and the Lender may itself, without notice
to or demand upon the Borrower, so notify account debtors and obligors. After
the making of such a request or the giving of any such notification, the
Borrower shall hold any proceeds of collection of accounts, chattel paper,
general intangibles and instruments received by the Borrower as trustee for
the Lender without commingling the same with other funds of the Borrower and
shall turn the same over to the Lender in the identical form received, together
with any necessary endorsements or assignments. The Lender shall apply the
proceeds of collection of accounts, chattel paper, general intangibles and
instruments received by the Lender to the Obligations, such proceeds to be
immediately entered after final payment in cash or solvent credits of the items
giving rise to them.
Section 14. Further Assurances. The Borrower, at its own expense, shall do,
--------------------
make, execute and deliver all such additional and further acts, things, deeds,
assurances, assignments, documents, agreements and instruments as the Lender may
require more completely to vest in and assure to the Lender its rights hereunder
or in any of the Collateral, including, without limitation (a) executing,
delivering and, where appropriate, filing financing statements and continuation
statements under the Uniform Commercial Code, (b) obtaining governmental and
other third party consents and approvals, (c) obtaining waivers from mortgagees
and landlords, and (d) taking all actions required by Article 8 or "Revised
Article 8", of the Uniform Commercial Code, as applicable in each relevant
jurisdiction, with respect to certificated and uncertificated securities. To the
extent permitted by applicable law, the Borrower hereby authorizes the Lender to
execute and file financing statements or continuation statements without the
Borrower's signature appearing thereon. The Borrower agrees that a carbon,
photographic, photostatic or other reproduction of Agreement or of a financing
statement is sufficient as a financing statement. The Borrower shall pay the
costs of, or incidental to, any recording or filing of any financing or
continuation statements.
Section 15. Power of Attorney.
-----------------
(a) The Borrower hereby irrevocably constitutes and appoints the
Lender and any officer or agent thereof, with full power of substitution, as its
true and lawful attorneys-in-fact with full irrevocable power and authority in
the place and stead of the Borrower or in the Lender's own name, for the purpose
of carrying out the terms of this Agreement, to take any and all appropriate
action and to execute any and all documents and instruments that may be
necessary or desirable to accomplish the purposes of Agreement and, without
limiting the generality of the foregoing, hereby gives said attorneys the power
and right, on behalf of the Borrower, without
6
<PAGE>
notice to or assent by the Borrower upon the occurrence of an Event of Default
or a Default (as defined in the Loan Agreement), to do the following:
(i) to receive, open and dispose of all mail to Borrower, to
notify the Post Office authorities to change the address for
delivery of mail addressed to Borrower to such address as
Lender may designate; to endorse the name of Borrower on any
notes, acceptances, checks, drafts money orders, instruments
or other evidence of payment or proceeds of the Collateral
that may come into Lender's possession; to sign the name of
Borrower on any invoices, bills of lading, documents, drafts
against and notices (which also may direct, among other
things, that payment be made directly to Lender) to Account
Debtors or obligors of Borrower, assignments and requests
for verification of Accounts; to execute proofs of claim and
loss; to execute any endorsements, schedules, assignments,
or other instruments of conveyance or transfer, to adjust
and compromise any claims under insurance policies; to
execute releases;
(ii) upon the occurrence and during the continuance of an Event
of Default, generally to sell, transfer, pledge, make any
agreement with respect to or otherwise deal with any of the
Collateral in such manner as is consistent with the
Uniform Commercial Code of the State of Connecticut and as
fully and completely as though the Lender were the absolute
owner thereof for all purposes, and to do at the Borrower's
expense, at any time, or from time to time, all acts and
things which the Lender deems necessary to protect, preserve
or realize upon the Collateral and the Lender's security
interest therein, in order to effect the intent of this
Agreement, all as fully and effectively as the Borrower
might do, including, without limitation (A) the filing and
prosecuting of registration and transfer applications with
the appropriate federal or local agencies or authorities
with respect to trademarks, copyrights and patentable
inventions and processes, (B) upon written notice to the
Borrower, the exercise of voting rights with respect to
voting securities, which rights may be exercised, if the
Lender so elects, with a view to causing the liquidation in
a commercially reasonable manner of assets of the issuer of
any such securities, and (C) the execution, delivery and
recording, in connection with any sale or other disposition
of any Collateral, the endorsements, assignments or other
instruments of conveyance or transfer with respect to such
Collateral; and
7
<PAGE>
(iii) to file such financing statements with respect hereto, with
or without the Borrower's signature, or a photocopy of this
Agreement in substitution for a financing statement, as the
Lender may deem appropriate to execute in the Borrower's
name such financing statements and continuation statements
which may require the Borrower's signature;
(iv) to do all other acts and things necessary advisable in the
sole discretion of Lender to carry out and enforce this
Agreement.
(b) To the extent permitted by law, the Borrower hereby ratifies all
that said attorneys shall lawfully do or cause to be done by virtue hereof. This
power of attorney is a power coupled with an interest and shall be irrevocable.
(c) The powers conferred on the Lender hereunder are solely to protect
its interests in the Collateral shall not impose any duty upon it to exercise
any such powers. The Lender shall be accountable only for the amounts that it
actually receives as a result of the exercise of such powers and neither it nor
any of its officers, directors, employees or agents shall be responsible to the
Borrower for any act or failure to act, except for the Lender's own gross
negligence or willful misconduct.
Section 16. Remedies.
---------
(a) If an Event of Default shall have occurred and be continuing, the
Lender may, without notice or demand to the Borrower, declare this Agreement to
be in default, and the Lender shall thereafter have in any jurisdiction in which
enforcement hereof is sought, in addition to all other rights and remedies, the
rights and remedies of a secured party under the Uniform Commercial Code,
including, without limitation, the right to take possession of the Collateral,
and for that purpose the Lender may, so far as the Borrower can give authority
therefor, enter upon any premises on which the Collateral may be situated and
remove the same therefrom. The Lender may in its discretion require the Borrower
to assemble all or any part of the Collateral at such location or locations
within the state(s) of the Borrower's principal office(s) or at such other
locations as the Lender may designate. Unless the Collateral is perishable or
threatens to decline speedily in value or is of a type customarily sold on a
recognized market, the Lender shall give to the Borrower at least five (5)
business days prior written notice of the time place of any public sale of
Collateral or of the time after which any private sale or any other intended
disposition is to be made. The Borrower hereby acknowledges that five (5)
business days prior written notice of such sale or sales shall be reasonable
notice. In addition, the Borrower waives any all rights that it may have to
judicial hearing in advance of the enforcement of any of the Lender's rights
hereunder, including, without 1imitation, its right following an Event of
Default to take immediate possession of the Collateral and exercise its rights
with respect thereto.
8
<PAGE>
(b) Without limiting the generality of the foregoing, the Borrower
agrees that the Lender shall have the right, subject to the mandatory
requirements of applicable law, to sell or otherwise dispose of all or any part
of the Collateral, at public or private sale or at any broker's board or on any
securities exchange, for cash, upon credit or for future delivery as the Lender
shall deem appropriate. The Lender shall be authorized at any such sale (if it
deems it advisable to do so) to restrict the prospective bidders or purchasers
to persons who will represent and agree that they are purchasing the Collateral
for their own account for investment and not with a view to the distribution or
sale thereof, and upon consummation of any such sale the Lender shall have the
right to assign, transfer and deliver to the purchaser or purchasers thereof the
Collateral so sold. Each such purchaser at any such sale shall hold the property
sold absolutely free from any claim or right on the part of Borrower, and
Borrower hereby waives (to the fullest extent permitted by applicable law) all
rights of redemption, stay and appraisal that Borrower now has or may at any
time in the future have under any rule of law or statute now existing or
hereafter enacted.
(c) Any public sale shall be held at such time or times within
ordinary business hours and at such place or places as the Lender may fix and
state in the notice (if any) of such sale. At any such sale, the Collateral, or
portion thereof, to be sold may be sold in one lot as an entirety or in separate
parcels, as the Lender may (in its sole and absolute discretion) determine. The
Lender shall not be obligated to make any sale of any Collateral if it shall
determine not to do so, regardless of the fact that notice of sale of such
Collateral shall have been given. The Lender may, without notice or publication,
adjourn any public or private sale or cause the same to be adjourned from time
to time by announcement at the time and place fixed for sale, and such sale may,
without further notice, be made at the time and place to which the same was so
adjourned. In case any sale of all or any part of the Collateral is made on
credit or for future delivery, the Collateral so sold may be retained by the
Lender until the sale price is paid by the purchaser or purchasers thereof, but
the Lender shall not incur any liability in case any such purchaser or
purchasers shall fail to take up and pay for the Collateral so sold and, in case
of any such failure, such Collateral may be sold again upon notice. For purposes
hereof, (a) a written agreement to purchase the Collateral or any portion
thereof shall be treated as a sale thereof, (b) the Lender shall be free to
carry out such sale pursuant to such agreement and (c) no Borrower shall be
entitled to the return of the Collateral or any portion thereof subject thereto,
notwithstanding the fact that after the Lender shall have entered into such an
agreement all Events of Default shall have been remedied and the Obligations
paid in full. As an alternative to exercising the power of sale herein conferred
upon it, the Lender may proceed by a suit or suits at law or in equity to
foreclose upon the Collateral and to sell the Collateral or any portion thereof
pursuant to a judgment or decree of a court or courts having competent
jurisdiction or pursuant to a proceeding by a court appointed receiver. Any sale
pursuant to the provisions of this Section 16 shall be deemed to conform to the
commercially reasonable standards as provided in Section 9-504(3) (or any
successor thereto) of the Uniform Commercial Code as in effect in the State of
Connecticut or its equivalent in other jurisdictions.
Section 17. No Waiver, Etc. The Borrower waives demand, notice, protest,
--------------
notice of acceptance of this Agreement, notice of loans made, credit extended,
Collateral received or
9
<PAGE>
delivered or other action taken in reliance hereon and all other demands and
notices of any description. With respect to both the Obligations and the
Collateral, the Borrower assents to any extension or postponement of the time of
payment or any other indulgence, to any substitution, exchange or release of
Collateral, to the addition or release of any party or person primarily or
secondarily liable, to the acceptance of partial payment thereon and the
settlement, compromising or adjusting of any thereof, all in such manner and at
such time or times as the Lender may deem advisable. The Lender shall have no
duty as to the collection or protection of the Collateral or any income thereon,
nor as to the preservation of rights against prior parties, nor as to the
preservation of any rights pertaining thereto beyond the safe custody thereof.
The Lender shall not be deemed to have waived any of its rights upon or under
the Obligations or the Collateral unless such waiver shall be in writing and
signed by the Lender. No delay or omission on the part of the Lender in
exercising any right shall operate as a waiver of such right or any other right.
A waiver on any one occasion shall not be construed as a bar to or waiver of any
right on any future occasion. All rights and remedies of the Lender with respect
to the Obligations or the Collateral, whether evidenced hereby or by any other
instrument or papers, shall be cumulative and may be exercised singularly,
alternatively, successfully or concurrently at such time or at such times as the
Lender deems expedient.
Section 18. Marshaling. The Lender shall not be required to marshal any
----------
present or future collateral security (including, but not limited to, this
Agreement and the Collateral) for, or other assurances of payment of, the
Obligations or any of them or to resort to such collateral security or other
assurances of payment in any particular order, and all of its rights hereunder
and in respect of such collateral security and other assurances of payment shall
be cumulative and in addition to all other rights, however existing or arising.
To the extent that it lawfully may, the Borrower hereby agrees that it will not
invoke any law relating to the marshaling of collateral which might cause delay
in or impede the enforcement of the Lender's rights under this Agreement or
under any other instrument creating or evidencing any of the Obligations or
under which any of the Obligations is outstanding or by which any of the
Obligations is secured or payment thereof is otherwise assured, and, to the
extent that it lawfully may, the Borrower hereby irrevocably waives the benefits
of all such laws.
Section 19. Proceeds of Dispositions: Expenses. The Borrower shall pay to
----------------------------------
the Lender on demand any and all expenses, including reasonable attorneys' fees
and disbursements, incurred or paid by the Lender in protecting, preserving or
enforcing the Lender's rights under or in respect of any of the Obligations or
any of the Collateral. After deducting all of said expenses, the residue of any
proceeds of collection or sale of the Obligations or Collateral shall, to the
extent actually received in cash, be applied to the payment of the Obligations
in such order or preference as the Lender may determine, proper allowance being
made for any Obligations not then due. Upon the final payment and satisfaction
in full of all of the Obligations and after making any payments required by (S)
9-504(l)(c) (or any successor thereto) of the Uniform Commercial Code of the
State of Connecticut, any excess shall be returned to the Borrower, and the
Borrower shall remain liable for any deficiency in the payment of the
Obligations.
10
<PAGE>
Section 20. Overdue Amounts. Until paid, all amounts due and payable by the
---------------
Borrower hereunder shall be a debt secured by the Collateral and shall bear,
whether before or after judgment, interest at the rate of interest for overdue
principal set forth in the Loan Agreement.
Section 21. Governing Law; Consent to Jurisdiction. THIS AGREEMENT IS
--------------------------------------
INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CONNECTICUT. The Borrower
agrees that any suit for the enforcement of this Agreement may be brought in the
courts of the State of Connecticut or any federal court sitting therein and
consents to the non-exclusive jurisdiction of such court and to service of
process in any such suit being made upon the Borrower by mail at the address
specified in Section 10.2 of the Loan Agreement. The Borrower hereby waives any
objection that it may now or hereafter have to the venue of any such suit or any
such court or that such suit is brought in an inconvenient court.
Section 22. Prejudgment Remedies. THE BORROWER AGREES THAT THIS IS A
--------------------
COMMERCIAL TRANSACTION AND NOT A CONSUMER TRANSACTION, AND WAIVES WITH RESPECT
TO ALL RIGHTS OF CREDITORS TO PROPERTY UNDER CONNECTICUT LAW, ANY RIGHT TO A
NOTICE AND HEARING UNDER CHAPTER 903a OF THE CONNECTICUT GENERAL STATUTES, AS
AMENDED, OR OTHER STATUTE OR STATUTES AFFECTING PREJUDGMENT REMEDIES AND
AUTHORIZES LENDER'S ATTORNEY TO ISSUE A WRIT FOR A PREJUDGMENT REMEDY WITHOUT
COURT ORDER, PROVIDED THE COMPLAINT SHALL SET FORTH A COPY OF THIS WAIVER, AND
WAIVES ANY CLAIM IN TORT, CONTRACT OR OTHERWISE AGAINST LENDER'S ATTORNEY WHICH
MAY ARISE OUT OF SUCH ISSUANCE OF THE WRIT FOR A PREJUDGMENT REMEDY WITHOUT
COURT ORDER. FURTHER, TO THE EXTENT ALLOWED UNDER APPLICABLE LAW, BORROWER
HEREBY WAIVES DEMAND, PRESENTMENT FOR PAYMENT, PROTEST, NOTICE OF PROTEST,
NOTICE OF DISHONOR, DILIGENCE IN COLLECTION, NOTICE OF NONPAYMENT OF THIS
AGREEMENT AND ANY AND ALL NOTICES OF A LIKE NATURE.
Section 23. Waiver of Jury Trial. BORROWER HEREBY EXPRESSLY WAIVES
--------------------
ANY AND ALL RIGHTS IT MAY HAVE TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION, OR
CAUSE OF ACTION (1) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT,
DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (2) IN
ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES
HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT,
DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE
TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND
BORROWER HEREBY AGREES AND CONSENTS THAT
11
<PAGE>
ANY SUCH CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION SHALL BE DECIDED BY COURT
TRIAL WITHOUT A JURY, AND THE LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY
OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF DEBTOR'S CONSENT TO THE
WAIVER OF ITS RIGHT TO TRIAL BY JURY. Except as prohibited by law, the Borrower
waives any right which it may have to claim or recover in any litigation
referred to in the preceding sentence any special, exemplary, punitive or
consequential damages or any damages other than, or in addition to, actual
damages. The Borrower (a) certifies that neither the Lender nor any
representative, agent or attorney of the Lender has represented, expressly or
otherwise, that the Lender would not, in the event of litigation, seek to
enforce the foregoing waivers, and (b) acknowledges that, in entering into the
Loan Agreement and the other Loan Documents to which the Lender is a party, the
Lender is relying upon, among other things, the waivers and certifications
contained in this Section 23.
Section 24. Notices. All communications and notices hereunder shall (except
-------
as otherwise expressly permitted herein) be in writing and given as provided in
[Section 10.2] of the Loan Agreement.
Section 25. Security Interest Absolute. All rights of the Lender hereunder,
--------------------------
the security interest granted herein and all obligations of the Borrower
hereunder shall be absolute and unconditional irrespective of (a) any lack of
validity or enforceability of the Loan Agreement, any other Loan Document, any
agreement with respect to any of the Obligations or any other agreement or
instrument relating to any of the foregoing, (b) any change in the time, manner
or place of payment of, or in any other term of, all or any of the Obligations
or any other amendment or waiver of or any consent to any departure from the
Loan Agreement, any other Loan Document or any other agreement or instrument
relating to the foregoing, (c) any exchange, release or nonperfection of any of
the Collateral or any other collateral, or any release or amendment or waiver of
or consent to or departure from any Guarantee, for all or any of the Obligations
or (d) any other circumstance that might otherwise constitute a defense
available to, or a discharge of Borrower in respect of the Obligations or in
respect of this Agreement (other than the indefeasible payment in full of all of
the Obligations).
Section 26. Miscellaneous. The headings of each section of this Agreement
-------------
are for convenience only and shall not define or limit the provisions thereof.
This Agreement and all rights and obligations hereunder shall be binding upon
the Borrower and its respective successors and assigns, and shall inure to the
benefit of the Lender and its successors and assigns. If any term of this
Agreement shall be held to be invalid, illegal or unenforceable, the validity of
all other terms hereof shall in no way be affected thereby, and this Agreement
shall be construed and be enforceable as if such invalid, illegal or
unenforceable term had not been included herein. The Borrower acknowledges
receipt of a copy of this Agreement.
12
<PAGE>
IN WITNESS WHEREOF, intending to be legally bound, the Borrower has caused
this Agreement to be duly executed as of the date first above written.
STAR STRUCK, INC.
By: /s/ Kenneth Karlan
-------------------------------
Kenneth Karlan
Its President
PEOPLE'S BANK
By: /s/ Peter Coates
--------------------------------
Peter Coates
Its Vice President
13
<PAGE>
SCHEDULE I
COLLATERAL DESCRIPTION
----------------------
References herein to the (i) "Security Agreement" shall mean the Security
Agreement dated as of October 29, 1998 between Star Struck, Inc. ("Debtor") and
People's Bank, (ii) "UCC" shall mean the Uniform Commercial Code as in effect in
the State of Connecticut or its equivalent in other jurisdictions.
All of the Debtor's right, title and interest in and to the following
property, whether now owned or existing or hereafter arising or acquired and
regardless of where located (such property being referred to collectively as the
"Collateral"):
(a) Accounts. All "accounts" (as defined in the UCC) now owned or
--------
hereafter acquired by the Debtor, and all accounts receivable, contract rights,
book debts, notes, drafts, credit card receivables, and other obligations or
indebtedness owing to the Debtor arising from the sale, lease or exchange of
goods or other property by it and/or the performance of services by it
(including, without limitation, any such obligation which might be
characterized as an account, contract right or general intangible under the
Uniform Commercial Code in effect in any jurisdiction) and all of the Debtor's
rights in, to and under all purchase orders for goods, services or other
property represented by any of the foregoing (including returned or repossessed
goods and unpaid sellers' rights of rescission, replevin, reclamation and rights
to stoppage in transit) and all monies due to or to become due to the Debtor
under all contracts for the sale, lease or exchange of goods or other property
and/or the performance of services by it (whether or not yet earned by
performance on the part of the Debtor), in each case whether now in existence or
hereafter arising or acquired including, without limitation, the right to
receive the proceeds of said purchase orders and contracts and all collateral
security and guarantees of any kind given by any Person with respect to any of
the foregoing;
(b) Books and Records. All books and records (including), without
-----------------
limitation, customer lists, credit files, computer programs, printouts and other
computer materials and records) of the Debtor pertaining to any of the
Collateral;
(c) Capital Stock. All of the Debtor's right, title and interest in
-------------
the capital stock of any corporation, now owned or hereafter acquired, by
Debtor, and all income and profits thereon, and all dividends and other payments
and distributions with respect thereto, and all proceeds of the foregoing;
(d) Chattel Paper. All "chattel paper" (as defined in the UCC
-------------
evidencing, representing, arising from or existing in respect of, relating to,
securing or otherwise supporting the payment of, any of the Accounts, including
(but not limited to) promissory notes, drafts, bills of exchange and trade
acceptances, now owned or hereafter acquired by the Debtor;
<PAGE>
(e) Copyrights. All copyrights, whether published or unpublished, all
----------
registrations and recordings thereof, and all applications in connection
therewith, whether in the United States Copyright Office or in any similar
office or agency of the United States, and all renewals thereof;
(f) Documents. All "documents" (as defined in the UCC) or other
---------
receipts covering, evidencing or representing goods, now owned or hereafter
acquired by the Debtor;
(g) Equipment. All "equipment" (as defined in the UCC) now owned or
---------
hereafter acquired by the Debtor (excluding motor vehicles), including without
limitation, all of Debtor's now owned or hereafter acquired machinery,
equipment, furniture, furnishings, fixtures and all tangible personal property
similar to any of the foregoing, including, without limitation, fixtures,
together with tools, machine parts, aircraft and motor vehicles of every kind
and description, all supplies used or consumed in the operation of any of the
above items, and all improvements, accessions or appurtenances thereto, and any
proceeds, including insurance proceeds, thereof;
(h) General Intangibles. All "general intangibles" (as defined in the
-------------------
UCC), now owned or hereafter acquired by the Debtor, including, without
limitation, (i) all obligations or indebtedness owing to the Debtor (other than
Accounts) from whatever source arising, (ii) all licenses, patents, patent
licenses, trademarks, trademark licenses, rights in intellectual property,
goodwill, trade names, service marks, trade secrets, copyrights and permits,
(iii) all rights or claims in respect of refunds for taxes paid and (iv) all
rights in respect of any pension plan or similar arrangement maintained for
employees of Borrower or of any ERISA Affiliate. As used herein, "ERISA
Affiliate" means any trade or business (whether or not incorporated) which is a
member of a group of which Borrower is a member or which is under common control
with the Borrower within the meaning of Section 414 of the Internal Revenue Code
of 1986, as the same may be amended from time to time, and the regulations
promulgated and rulings issued thereunder.
(i) Instruments. All "instruments" or "letters of credit" (each as
-----------
defined in the UCC) evidencing, representing, arising from or existing in
respect of, relating to, securing or otherwise supporting the payment of, any of
the Accounts, including (but not limited to) promissory notes, drafts, bills of
exchange and trade acceptances, now owned or hereafter acquired by the Debtor;
(j) Inventory. All "inventory" (as defined in the UCC), now owned or
---------
hereafter acquired by the Debtor, wherever located, including, without
limitation, all raw materials and other materials and supplies, work-in-process
and finished goods and any products made or processed therefrom and all
substances, if any, commingled therewith or added thereto;
2
<PAGE>
(k) Security Entitlements; Investment Property. All "security
------------------------------------------
entitlements" and all "investment property " (each as defined in the UCC) now
owned or hereafter acquired by the Debtor, wherever located.
(l) Proceeds. All proceeds of, and all other profits, products, rents
--------
or receipts, in whatever form, arising from the collection, sale, lease,
exchange, assignment, licensing or other disposition of, or other realization
upon, Collateral, including without limitation all licenses, permits,
authorizations, and applications, all claims of the Debtor against third parties
for loss of, damage to or destruction of, or for proceeds payable under, or
unearned premiums with respect to, policies of insurance in respect of, any
Collateral, and any condemnation or requisition payments with respect to any
Collateral, in each case whether now existing or hereafter arising;
(m) Trademarks. All of the following: (i) all trademarks, trade names,
------------
corporate names, company names, business names, logos, other source or business
identifiers, designs and general intangibles of like nature, now existing or
hereafter adopted or acquired, all registrations and recordings thereof, and all
applications in connection therewith, including registrations, recordings and
applications in the United States Patent and Trademark Office or in any similar
office or agency of the United States, any State thereof or any other country or
any political subdivision thereof, and (ii) all extensions or renewals thereof;
(n) Trademark License. All written agreements now or hereafter in
-----------------
existence granting to the Debtor any right to use any Trademark.
3
<PAGE>
EXHIBIT A
---------
As used in this Security Agreement, the following terms shall have the
respective meanings ascribed to them below:
"Accounts" means all "accounts" (as defined in the UCC) now owned or
--------
hereafter acquired by the Borrower, and shall also mean and include all accounts
receivable, contract rights, book debts, notes, drafts and other obligations or
indebtedness owing to the Borrower arising from the sale, lease or exchange of
goods or other property by it and/or the performance of services by it
(including, without limitation, any such obligation which might be
characterized as an account, contract right or general intangible under the
Uniform Commercial Code in effect in any jurisdiction) and all of the Borrower's
rights in, to and under all purchase order for goods, services or other property
represented by any of the foregoing (including returned or repossessed goods and
unpaid sellers' rights of rescission, replevin, reclamation and rights to
stoppage in transit) and all monies due to or to become due to the Borrower
under all contracts for the sale, lease or exchange of goods or other property
and/or the performance of services by it (whether or not yet earned by
performance on the part of the Borrower), in each case whether now in existence
or hereafter arising or acquired including, without limitation, the right to
receive the proceeds of said purchase orders and contracts and all collateral
security and guarantees of any kind given by any Person with respect to any of
the foregoing.
"Account Debtor" means, any person who is or who may become obligated to
--------------
Borrower under, with respect to or on an Account.
"Chattel Paper" means all "chattel paper" (as defined in the UCC)
-------------
evidencing, representing, arising from or existing in respect of, relating to,
securing or otherwise supporting the payment of, any of the Accounts, including
(but not limited to) promissory notes, drafts, bills of exchange and trade
acceptances, now owned or hereafter acquired by the Debtor;
"Collateral" has the meaning set forth in Section 2.
----------
"Copyrights" means (a) all copyrights, whether published or unpublished,
----------
all registrations and recordings thereof, and all applications in connection
therewith, whether in the United States Copyright Office or in any similar
office or agency of the United States and (b) all renewals thereof.
"Documents" means all "documents" (as defined in the UCC) or other receipts
---------
covering, evidencing or representing goods, now owned or hereafter acquired by
the Borrower.
"Equipment" means all "equipment" (as defined in the UCC) now owned or
---------
hereafter acquired by the Borrower (excluding motor vehicles), including without
limitation, all of Borrower's now owned or hereafter acquired machinery,
equipment, furniture, furnishings,
<PAGE>
fixtures and all tangible personal property similar to any of the foregoing,
including, without limitation, fixtures, together with tools, machine parts,
aircraft and motor vehicles of every kind and description, all supplies used or
consumed in the operation of any of the above items, and all improvements,
accessions or appurtenances thereto, and any proceeds, including insurance
proceeds, thereof.
"General Intangibles" means all "general intangibles" (as defined in the
-------------------
UCC), now owned or hereafter acquired by the Borrower, including, without
limitation, (i) all obligations or indebtedness owing to the Borrower (other
than Accounts) from whatever source arising, (ii) all licenses, patents, patent
licenses, trademarks, trademark licenses, rights in intellectual property,
goodwill, trade names, service marks, trade secrets, copyrights and permits,
(iii) all rights or claims in respect of refunds for taxes paid and (iv) all
rights in respect of any pension plan or similar arrangement maintained for
employees of any member of the Controlled Group.
"Instruments" means all "instruments", "chattel paper" or "letters of
-----------
credit" (each as defined in the UCC) evidencing, representing, arising from or
existing in respect of, relating to, securing or otherwise supporting the
payment of, any of the Accounts, including (but not limited to) promissory
notes, drafts, bills of exchange and trade acceptances, now owned or hereafter
acquired by the Borrower.
"Inventory" means all "inventory" (as defined in the UCC), now owned or
---------
hereafter acquired by the Borrower, wherever located, and shall also mean and
include, without limitation, all raw materials and other materials and supplies,
work-in-process and finished goods and any products made or processed therefrom
and all substances, if any commingled therewith or added thereto.
"Obligations" means the obligations secured under this Agreement including
-----------
(a) all obligations of the Borrower under or in respect of the Loan Agreement,
including its obligations in respect of principal of and interest on any
Revolving Advance under, or any Notes issued pursuant to, the Loan Agreement,
and all other amounts payable under the Loan Agreement, (b) all other amounts
payable by the Borrower hereunder or under any other Loan Document, (c) all
interest on the Obligations listed in the foregoing clauses (a), and (b) and
(c), including without limitation, any interest which accrues after the
commencement of any case, proceeding or other action relating to the bankruptcy,
insolvency or reorganization of the Borrower or any other Loan Party, or which
would accrue but for the commencement of such case, proceeding or other action,
whether or not allowed or allowable as a claim in any such proceeding and (d)
any renewals or extensions, replacements, modifications, substitutions,
amendments and restatements of any of the foregoing
"Proceeds" means all proceeds of, and all other profits, products, rents or
--------
receipts, in whatever form, arising from the collection, sale, lease, exchange,
assignment, licensing or other disposition of, or other realization upon,
Collateral, including without limitation all licenses, permits, authorizations,
and applications, all claims of the Borrower against third parties for loss
A-2
<PAGE>
of, damage to or destruction of, or for proceeds payable under, or unearned
premiums with respect to, policies of insurance in respect of, any Collateral,
and any condemnation or requisition payments with respect to any Collateral, in
each case whether now existing or hereafter arising.
"Trademarks" means all of the following: (i) all trademarks, trade names,
----------
corporate names, company names, business names, logos, other source or business
identifiers, designs and general intangibles of like nature, now
existing or hereafter adopted or acquired, all registrations and recordings
thereof, and all applications in connection therewith, including registrations,
recordings and applications in the United States Patent and Trademark Office or
in any similar office or agency of the United States, any State thereof or any
other country or any political subdivision thereof, and (ii) all extensions or
renewals thereof.
"Trademark License" means any written agreement now or hereafter in
-----------------
existence granting to the Borrower any right to use any Trademark.
"UCC" means the Uniform Commercial Code as in effect on the date hereof in
---
the State of Connecticut; provided that if by reason of mandatory provisions of
law, the perfection or the effect of perfection or non-perfection of the
Security Interests in any Collateral is governed by the Uniform Commercial Code
as in effect in a jurisdiction other than Connecticut, "UCC" means the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of the
provisions hereof relating to such perfection or effect of perfection or non-
perfection.
A-3
<PAGE>
GUARANTY AGREEMENT
------------------
This GUARANTY AGREEMENT (the "Guaranty") dated October 29, 1998 from the
undersigned, SBM INDUSTRIES, INC., a Connecticut corporation, with an address at
c/o Star Struck, Inc., 8 Francis J. Clarke Circle, P.O. Box 308, Bethel,
Connecticut 06801-0308 (the "Guarantor"), to PEOPLE'S BANK, a Connecticut
banking corporation with a place of business at 850 Main Street, Bridgeport,
Connecticut 06604-4913 ("Lender").
In consideration of and as a material inducement for the Lender having
extended or in the future extending loans, advances or otherwise giving credit
to STAR STRUCK, INC. (the "Borrower"), including, but not limited to, a
revolving loan in the principal amount of Two Million Dollars ($2,000,000.00)
(the "Loan") as evidenced by a Revolving Promissory Note of even date herewith
(the "Note"), the Guarantor does hereby represent, warrant, covenant and agree
as follows:
ARTICLE I
COVENANTS AND AGREEMENTS
Section I.I The Guaranty. The Guarantor hereby absolutely and
------------
unconditionally guarantees to the Lender the full and prompt payment and
performance of all liabilities of the Borrower to the Lender arising in
connection with the Loan. As used herein, "liabilities" means any and all
indebtedness, liabilities and obligations of the Borrower to the Lender of every
kind and description, whether direct or indirect, primary or secondary, absolute
or contingent, due or to become due, now existing or hereafter arising,
including without limitation, those obligations arising under the Note, and all
extensions, renewals and substitutions therefor, and further including without
limitation, all reasonable costs, expenses and attorneys' and other
professionals' fees incurred in the collection of said liabilities and in any
litigation arising from any of the liabilities or this Guaranty or in the
defense, protection, preservation, realization or enforcement of any rights,
hens or remedies against the Borrower in connection with the Loan or in the
defense, protection, preservation, realization and enforcement of any rights,
liens or remedies against the Guarantor under this Guaranty. All payments by the
Guarantor shall be paid in lawful money of the United States of America. Each
and every payment obligation or liability guaranteed hereunder shall give rise
to a separate cause of action, and separate suits may but need not be brought
hereunder as each cause of action arises.
Section 1.2 Unconditional Nature of Guaranty.
--------------------------------
A. The obligations of the Guarantor under this Guaranty shall be
absolute and unconditional and shall remain in full force and effect until every
payment, obligation or liability guaranteed hereunder shall have been fully and
finally paid and performed. The Guarantor further guarantees that all payments
made by the Borrower with respect to any liabilities hereby guaranteed will,
when made, be final and agrees that if any such payment is recovered from or
repaid by the
<PAGE>
Lender in whole or in part in any bankruptcy, insolvency or similar proceeding
instituted by or against the Borrower, this Guaranty shall continue to be fully
applicable to such liabilities to the same extent as though the payment so
recovered or repaid had never been originally made on such liabilities. The
obligations of the Guarantor shall not be affected, modified, released,
discharged or impaired, in whole or in part, upon the happening from time to
time of any event, including without limitation, any of the following, whether
or not with notice to, or consent of, the Guarantor:
(1) The compromise, settlement, release, change or modification
(whether material or otherwise) or termination of any or all of the liabilities;
(2) The failure to give notice to the Guarantor of the occurrence
of a default or an event of default (howsoever defined), or of the occurrence or
existence of an event or condition which would constitute a default or event of
default but for the giving of notice or passage of time, or both, under the
terms and provisions of this Guaranty, the Note, or any other instruments,
agreements or documents evidencing, securing or otherwise relating to any of the
liabilities or securing or otherwise relating to this Guaranty (collectively,
including the Note, and this Guaranty, the "Loan Agreements");
(3) The modification, amendment, rescission or waiver by the
Lender of the payment, performance or observance by the Borrower or the
Guarantor of any of their respective obligations, conditions, covenants or
agreements contained in any of the Loan Agreements;
(4) The extension of time for payment of any principal, interest
or any other amount due and owing under any of the Loan Agreements, or of the
time for performance of any other obligations, covenants or agreements under or
arising out of any of the Loan Agreements, or the extension or the renewal of
any thereof or the Lender's continuing to make advances under the provisions of
the Loan Agreements to the Borrower after default and/or after there is a
material adverse change in the Borrower's financial condition;
(5) The modification or amendment (whether material or otherwise)
of any duty, obligation, covenant or agreement set forth in any of the Loan
Agreements;
(6) The taking or the failure to take any of the actions referred
to in any of the Loan Agreements;
(7) Any failure, omission, delay or lack on the part of the
Lender to enforce, assert or exercise any right, power or remedy conferred on
the Lender in any of the Loan Agreements;
(8) The full or partial discharge of the Borrower or of any of
the Other Guarantors (as defined below), if any, in bankruptcy or similar
proceeding or otherwise;
-2-
<PAGE>
(9) The release or discharge, in whole or in part, or the death,
bankruptcy, liquidation or dissolution of any other person or entity other than
the Guarantor which is primarily or secondarily liable with respect to the
liabilities, including without limitation, any of the Other Guarantors (as
defined below);
(10) The addition, exchange, release or surrender of all or any of
the collateral held by the Lender as security for the liabilities and/or the
Guarantor's liabilities hereunder; or
(11) The default or failure of the Guarantor fully to perform any
of the Guarantor's obligations set forth in this Guaranty.
B. The Guarantor agrees that no delay, act of commission or omission
of any kind or at any time upon the part of the Lender or its successors and
assigns with respect to any matter whatsoever shall in any way impair the right
of the Lender to enforce any right, power or benefit under this Guaranty or
under any of the other Loan Agreements to which the Guarantor is a party or be
construed to be a waiver thereof. Any such right may be exercised from time to
time and as often as may be deemed expedient. No set-off, counterclaim,
reduction, or diminution of any obligation, or any defense of any kind or nature
which the Guarantor has or may have against the Lender, or any assignee or
successor thereof shall be available hereunder to the Guarantor against the
Lender or its successors and assigns.
Section 1.3 Right of the Lender to Proceed Against Guarantor.
-------------------------------------------------
A. Upon any failure in the payment or performance of any of the
liabilities or of any of the obligations of the Guarantor under this Guaranty,
the liability of the Guarantor shall be effective immediately without notice or
demand and shall be payable or performable on demand without any suit or action
against the Borrower.
B. The Lender, in its sole discretion, shall have the right to proceed
first and directly against the Guarantor under this Guaranty without proceeding
against or exhausting any other remedies which it may have against the Borrower
or any other person primarily or secondarily liable for any of the liabilities,
including without limitation, any of the Other Guarantors (as defined below), if
any, and without resorting to any security held by the Lender.
C. This Guaranty is entered into by the Guarantor for the benefit of
the Lender and its successors and assigns, all of whom shall be entitled to
enforce performance and observance of this Guaranty.
-3-
<PAGE>
Section 1.4 Waivers, Payment of Costs and Other Agreements.
----------------------------------------------
A. THE GUARANTOR ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS
GUARANTY IS A PART IS A COMMERCIAL TRANSACTION, AND HEREBY WAIVES THE
GUARANTOR'S RIGHTS TO: (1) NOTICE AND HEARING UNDER CHAPTER 903a OF THE
CONNECTICUT GENERAL STATUTES OR AS OTHERWISE ALLOWED BY ANY STATE OR FEDERAL LAW
WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE LENDER MAY DESIRE TO USE, AND
(2) REQUEST THAT THE LENDER POST A BOND, WITH OR WITHOUT SURETY, TO PROTECT THE
GUARANTOR OR THE BORROWER AGAINST DAMAGES THAT MAY BE CAUSED BY ANY PREJUDGMENT
REMEDY SOUGHT OR OBTAINED BY THE LENDER BY VIRTUE OF ANY DEFAULT OR PROVISION OF
THIS GUARANTY OR ANY SECURITY AGREEMENT OR MORTGAGE SECURING THIS GUARANTY. THE
GUARANTOR HEREBY FURTHER EXPRESSLY WAIVES DILIGENCE, DEMAND, PRESENTMENT,
PROTEST, NOTICE OF NONPAYMENT OR PROTEST, NOTICE OF THE ACCEPTANCE OF THIS
GUARANTY, NOTICE OF ANY RENEWALS OR EXTENSIONS OF THE REVOLVING LOAN NOTE AND OF
ANY LOANS MADE OR EXTENSIONS OR OTHER FINANCIAL ACCOMMODATIONS GRANTED TO THE
BORROWER OR OTHER ACTION TAKEN IN RELIANCE HEREON AND ALL OTHER DEMANDS AND
NOTICES OF ANY DESCRIPTION IN CONNECTION WITH THIS GUARANTY, ANY OF THE
LIABILITIES OR OTHERWISE.
B. THE GUARANTOR HEREBY WAIVES TRIAL BY JURY IN ANY COURT AND IN ANY
SUIT, ACTION OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN ANY
WAY RELATED TO THE FINANCING TRANSACTIONS OF WHICH THIS GUARANTY IS A PART
AND/OR THE ENFORCEMENT OF ANY OF THE LENDER'S RIGHTS AND THIS REMEDIES,
INCLUDING WITHOUT LIMITATION, TORT CLAIMS.
C. THE GUARANTOR EXPRESSLY WAIVES ALL DEFENSES BASED UPON SURETYSHIP
OR IMPAIRMENT OF COLLATERAL.
D. The Guarantor hereby fully subordinates to the liabilities owed to
the Lender any right of subrogation that the Guarantor may have against the
Borrower, including without limitation, any right of subrogation by virtue of
the Guarantor's making payments hereunder, (the "Subordinated Claims"). The
Guarantor will not accept any payment upon any of the Subordinated Claims, and
will not have the right to take action to collect any of the Subordinated
Claims, until the liabilities have been fully and finally paid. The Guarantor
will not claim any set-off or counterclaim against the Borrower with respect to
any liability of the Guarantor to the Borrower. The Guarantor waives any benefit
of and any right to participate in any collateral which may be held by the
Lender.
E. THE GUARANTOR ACKNOWLEDGES THAT THE GUARANTOR MAKES THE WAIVERS
SET FORTH IN SUBSECTIONS (A), (B), (C) AND (D) ABOVE KNOWINGLY, VOLUNTARILY AND
WITHOUT DURESS AND ONLY AFTER CONSIDERATION OF THE RAMIFICATIONS OF THOSE
WAIVERS WITH THE
-4-
<PAGE>
GUARANTOR'S ATTORNEYS.. THE GUARANTOR FURTHER ACKNOWLEDGES THAT THE LENDER HAS
NOT AGREED WITH OR REPRESENTED TO THE GUARANTOR OR ANY OTHER PARTY HERETO THAT
THE PROVISIONS OF SUBSECTIONS (A), (B), (C) AND (D) ABOVE WILL NOT BE FULLY
ENFORCED IN ALL INSTANCES.
F. The Guarantor agrees to pay all reasonable costs and expenses,
including attorneys fees, arising out of or with respect to the validity,
enforcement, realization, protection or preservation of this Guaranty or any of
the liabilities.
G. If, for an reason, the Borrower has no legal existence or is under
no legal obligation to discharge any liabilities or if any liabilities have
become irrecoverable from the Borrower by operation of law or for any other
reason, this Guaranty shall nevertheless be binding on the Guarantor to the same
extent as if the Guarantor at all times had been the principal obligor on all
such liabilities. In the event that acceleration of the time for payment of any
liabilities is stayed upon the insolvency, bankruptcy or reorganization of the
Borrower, or for any other reason, all such amounts otherwise subject to
acceleration under the terms of the Revolving Loan Note, the Loan Agreement or
any of the other Loan Documents shall be immediately due and payable by the
Guarantor, without notice or demand.
Section 1.5 Set-off. The Guarantor hereby gives the Lender a lien and right
-------
of set-off for all the Guarantor's liabilities to the Lender upon and against
all the Guarantor's deposits, credits, collateral and property now or hereafter
in the possession or control of the Lender or in transit to it. The Lender may,
at any time, without notice to the Guarantor, apply or set-off the same, or any
part thereof, to any liability of the Guarantor to the Lender, whether or not
the Lender shall have made demand under this Guaranty and although such
obligations may be contingent or unmatured.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 2.1 Guarantor Representations, Warranties and Covenants. The
---------------------------------------------------
Guarantor hereby represents, warrants and further covenants that:
A. The Guarantor is a corporation duly organized under the laws of its
state of incorporation and has the requisite power to enter into and perform the
obligations under this Guaranty and has taken all of the necessary actions to
authorize the execution, delivery and performance of this Guaranty.
B. Neither the execution and delivery of this Guaranty and the other
Loan Agreements to which the Guarantor is a party, the consummation of the
transactions contemplated hereby nor the fulfillment of or compliance with the
terms and conditions of this Guaranty is prevented or limited by or conflicts
with or results in a breach of the terms, conditions or provisions
-5-
<PAGE>
of any contractual or other restriction on the Guarantor or any agreement or
instrument of whatever nature to which the Guarantor is now a party or by which
the Guarantor or the Guarantor's property is bound or constitutes a default
under any of the foregoing.
C. The Guarantor has received and will receive a direct and material
financial benefit from the accommodations extended by the Lender to the
Borrower.
D. All authorizations, consents and approvals of governmental bodies
or agencies required in connection with the execution and delivery of this
Guaranty and the other Loan Agreements to which the Guarantor is a party, or in
connection with the performance of the Guarantor's obligations hereunder or
thereunder have been obtained as required hereunder or by law.
E. This Guaranty constitutes a valid and legally binding obligation
of the Guarantor, enforceable in accordance with its terms.
F. There is no action or proceeding pending or threatened against the
Guarantor before any court or administrative agency that might adversely affect
the ability of the Guarantor to perform the Guarantor's obligations under this
Guaranty.
G. Failure of the Guarantor to comply with any of the covenants herein
or under any of the other Loan Agreements to which the Guarantor is a party
shall constitute a default of the liabilities, entitling the Lender to exercise
all rights and remedies set forth in any of the Loan Agreements.
H. The Guarantor will provide to the Lender the items Guarantor is
required to provide in Section 5.5 of a certain Loan Agreement dated as of
December 20, 1996 by and between Lender and Guarantor.
ARTICLE III
NOTICE AND SERVICE OF PROCESS,
PLEADINGS AND OTHER PAPERS
Section 3.1 Designation of Agent for Service of Process. Guarantor
-------------------------------------------
represents, warrants and covenants that the Guarantor is subject to service of
process in the State of Connecticut and that Guarantor will remain so subject so
long as any liabilities are outstanding. If for any reason Guarantor should not
be so subject, the Guarantor hereby designates and appoints, without power of
revocation, the Secretary of State of the State of Connecticut as the
Guarantor's agent upon whom may be served all process, pleadings, notices or
other papers which may be served upon the Guarantor as a result of any of the
Guarantor's obligations under this Guaranty.
Section 3.2 Consent to Service of Process. The Guarantor irrevocably (a)
-----------------------------
agrees that any suit, action or other legal proceeding arising out of this
Guaranty may be brought in the courts of
-6-
<PAGE>
record of the State of Connecticut or the courts of the United States located in
such state; (b) consents to the jurisdiction of each such court in any such
suit, action or proceeding; and (c) waives any objection which the Guarantor may
have to the laying of venue of any such suit, action or proceeding in any of
such courts. For such time as any of the liabilities is outstanding, the
Guarantor's agent designated in Section 3.1 hereof shall accept and acknowledge
on the Guarantor's behalf services of any and all process in any such suit,
action or proceeding brought in any such court. The Guarantor agrees and
consents that any such services of process upon such agent and written notice of
such service to the Guarantor by registered mail shall be taken and held to be
valid personal service upon the Guarantor and that any such service of process
shall be of the same force and validity as if services were made upon the
Guarantor according to the laws governing the validity and requirements of such
service in such state, and waives all claim of error by reason of any such
service.
Section 3.3 Notices. All notices or other communications required or
-------
permitted to be given hereunder shall be considered effective and properly given
if sent by a nationally recognized overnight messenger service or mailed first
class United States mail, postage prepaid, registered or certified mail, with
return receipt requested, or by delivery of same to the address beneath the
Guarantor's signature below by prepaid messenger or telegram, whether or not
receipt thereof is acknowledged or is refused by the addressee or any person at
such address, or at such other place as any party hereto may be notified in
writing as a place for service or notice hereunder.
ARTICLE IV
GENERAL
Section 4.1 No Remedy Exclusive; Effect of Waiver. No remedy herein
------------------------------------
conferred upon or reserved to the Lender is intended to be exclusive of any
other available remedy or remedies, but each and every such remedy shall be
cumulative and shall be in addition to every other remedy given under this
Guaranty or now or hereafter existing at law or in equity. In order to entitle
the Lender to exercise any remedy reserved to it in this Guaranty, it shall not
be necessary to give any notice, other than such notice as may be herein
expressly required. No waiver, amendment, release or modification of this
Guaranty shall be established by conduct, custom or course of dealing, but
solely by an instrument in writing duly executed by the parties thereunto duly
authorized. A waiver on one occasion shall not be a bar to or waiver of any
right of any other occasion. The Guarantor acknowledges that this Guaranty
supersedes all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof and is intended as
a final expression and a complete and exclusive statement of the terms of this
Guaranty.
Section 4.2 Severability. The invalidity or unenforceability of any one or
------------
more phrases, sentences, clauses or Sections contained in this Guaranty shall
not affect the validity or enforceability of the remaining portions of this
Guaranty, or any part thereof.
-7-
<PAGE>
Section 4.3 Connecticut Law. This Guaranty shall be governed by the laws of
---------------
the State of Connecticut (but not its conflicts of law provisions).
Section 4.4 Other Guarantors. The Guarantor acknowledges that other
----------------
individuals or entities have or may also from time to time guaranty the
liabilities of the Borrower (including each other guarantor, the "Other
Guarantors") and that the Guarantor is unconditionally delivering this Guaranty
to the Lender. The Guarantor further acknowledges that the failure of any of the
Other Guarantors, if any, to execute and deliver their respective guarantees or
the discharge of any of such Other Guarantors and their respective guarantied
obligations shall not discharge the liability of the Guarantor.
Section 4.5 Cross Default. The occurrence of a default or event of default
-------------
(howsoever defined) under any instrument, agreement or document evidencing,
governing, securing or relating to any other indebtedness, obligation or
liability of the Guarantor to the Lender (the "Other Indebtedness") shall
constitute an event of default hereunder and a default hereunder shall
constitute a default under any of the Other Indebtedness.
IN WITNESS WHEREOF, the Guarantor has executed this Guaranty on the date
first above written.
SBM INDUSTRIES, INC.
By: /s/ Kenneth Karlan
--------------------------------------
Kenneth Karlan
Its Vice President
-8-
<PAGE>
SBM Industries, Inc.
- --------------------------------------------------------------------------------
To Our Shareholders 1
Selected Financial Information 2
Consolidated Statements of Income 3
Consolidated Balance Sheet 4
Consolidated Statements of Shareholders' Investment 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-10
Report of Independent Public Accountants 11
Management's Discussion and Analysis 12-13
Shareholder Information 14
Officers and Directors 15
- --------------------------------------------------------------------------------
<PAGE>
SBM Industries, Inc.
To Our Shareholders
- --------------------------------------------------------------------------------
To Our Shareholders,
Consolidated sales in 1998 were $13,070,000 compared to $13,716,000 in
1997. The loss in 1998 was ($360,000), or (18(cent)) per share versus a loss of
($475,000), or (23(cent)) per share in 1997. The performance of RC
Manufacturing, Inc., Star Struck Inc.'s 80% owned subsidiary, is included in the
above figures. In 1998, RC Manufacturing, Inc.'s sales and loss, excluding
intercompany expenses, were $793,000 and ($319,000), respectively, versus
$1,327,000 and ($248,000), respectively, in 1997. Please see the accompanying
financial statements and notes for details.
Changes have been made at RC Manufacturing, Inc. in both its operating
management and its product focus. Whereas the main product line had been leather
watch straps, the emphasis now is on leather accessories sold through various
outlets. Thus far in 1999, RC Manufacturing, Inc.'s sales and operating
performance are encouraging.
The operating performance of Star Struck, Inc., SBM's wholly owned
subsidiary, which traditionally distributes watch batteries, watch straps and
jewelers' tools and supplies for the replacement market to jewelry and other
retail stores was consistent with that of 1997. Star Struck's catalog and
internet sports apparel business has been the Company's fastest growing segment
since it was started three years ago. It offers a wide variety of merchandise
for all major and minor league professional sports teams and over 100 colleges.
Customers can purchase merchandise by calling our toll free number
1-877-THE-GAME or via Star Struck's secure web site www.starstruck.com.
In December of 1998 Star Struck signed a three year agreement with the
National Association of Professional Baseball Leagues, Inc., (NAPBL), the
governing body for Minor League Baseball, whereby Star Struck has been
designated as the Official Catalog and the Official On-Line Catalog of
"Professional Baseball-The Minor Leagues". Under the terms of its agreement with
the NAPBL, Star Struck has produced a baseball exclusive "Official Catalog" that
will feature officially licensed Minor League Baseball and Major League Baseball
merchandise and collectibles. The NAPBL has also established a link from its web
site to Star Struck's home page designating Star Struck as The Official On-Line
Catalog. The NAPBL will assist Star Struck in distributing the Official Catalog
in more than 100 NAPBL stadiums.
In addition to merchandise, Star Struck's web site, www.starstruck.com,
provides scores and updates for all Major and Minor League Baseball, Major and
Minor League Hockey, NBA, NFL, Major League Soccer and all NCAA basketball and
football games. The web site also gives information and statistics on all
leagues, such as game previews and recaps, prior days final scores, and
statistics ranging from league leaders to team attendance.
Since Star Struck sells its sports apparel line directly to the consumer
where name recognition is important and there is expected to be added emphasis
on caps and jerseys, the shareholders will be asked to vote to change the
Company's name from SBM Industries, Inc. to Star Struck, Ltd. at the annual
meeting in May. If the name change is approved, the trading symbol on the ASE
will change to KAP. Kenneth Karlan, who has served as President of Star Struck,
Inc. and as a Vice President of SBM Industries, Inc., will become President of
Star Struck, Ltd.. I will become Chairman.
Very truly yours,
/s/ Peter Nisselson
Peter Nisselson
President
March 30, 1999
- --------------------------------------------------------------------------------
one
<PAGE>
SBM Industries, Inc.
Selected Financial Information
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------- ------------ ------------ ------------ ------------ ------------
December 31, 1998 1997 1996 1995 1994
- ----------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 13,070,000 $ 13,716,000 $ 15,693,000 $ 14,026,000 $ 11,802,000
Income (loss) from continuing
operations before income
taxes and extraordinary item $ (360,000) $ (475,000) $ 121,000 $ (337,000) $ 596,000
Income (loss) from continuing
operations after taxes $ (360,000) $ (475,000) $ 121,000 $ (343,000) $ 531,000
Net income (loss) $ (360,000) $ (475,000) $ (2,127,000) $ (707,000) $ 1,119,000
Basic and diluted income (loss)
per common share $ (.18) $ (.23) $ (1.05) $ (.35) $ .55
Shareholders' investment $ 3,032,000 $ 3,392,000 $ 3,871,000 $ 6,001,000 $ 6,708,000
per common share $ 1.50 $ 1.67 $ 1.91 $ 2.96 $ 3.31
- ----------------------------------- ------------ ------------ ------------ ------------ ------------
Total assets $ 7,332,000 $ 7,147,000 $ 8,463,000 $ 11,537,000 $ 11,715,000
- ----------------------------------- ------------ ------------ ------------ ------------ ------------
Long-term debt $ 753,000 $ 899,000 $ 1,103,000 $ 1,333,000 $ 1,233,000
- ----------------------------------- ------------ ------------ ------------ ------------ ------------
Cash dividends per share $ .00 $ .00 $ .00 $ .00 $ .00
- ----------------------------------- ------------ ------------ ------------ ------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
two
<PAGE>
SBM Industries, Inc.
Consolidated Statements of Income
- -----------------------------------------------------------------------------
- ------------------------------------------- ------------ ------------
For the years ended December 31, 1998 1997
- ------------------------------------------- ------------ ------------
NET SALES $ 13,070,000 $ 13,716,000
Cost of Sales 7,310,000 8,375,000
- ------------------------------------------- ------------ ------------
Gross Profit on Sales 5,760,000 5,341,000
- ------------------------------------------- ------------ ------------
OPERATING EXPENSES
Selling, General and Administrative 5,551,000 5,295,000
Depreciation and Amortization 345,000 336,000
- ------------------------------------------- ------------ ------------
Total Operating Expenses 5,896,000 5,631,000
- ------------------------------------------- ------------ ------------
Operating Loss (136,000) (290,000)
- ------------------------------------------- ------------ ------------
OTHER INCOME (EXPENSES)
Interest Expense, Net (224,000) (185,000)
- ------------------------------------------- ------------ ------------
- ------------------------------------------- ------------ ------------
Loss Before Income Taxes (360,000) (475,000)
Provision for Income Taxes (Note 6) --- ---
- ------------------------------------------- ------------ ------------
Net Loss $ (360,000) $ (475,000)
- ------------------------------------------- ------------ ------------
LOSS PER COMMON SHARE (Note 1)
Basic and Diluted:
Net Loss per Common Share $ (.18) $ (.23)
- ------------------------------------------- ------------ ------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
Basic and Diluted 2,026,000 2,027,000
- ------------------------------------------- ------------ ------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
three
<PAGE>
SBM Industries, Inc.
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------- ------------
December 31, 1998
- ------------------------------------------------------------------------------------------- ------------
<S> <C>
ASSETS
Current Assets:
Cash $ 21,000
Accounts Receivable, Less Allowance for Doubtful Accounts of $108,000 1,478,000
Inventories (Note 1) 3,261,000
Prepaid Expenses and Other Current Assets 280,000
- ------------------------------------------------------------------------------------------- -----------
Total Current Assets 5,040,000
- ------------------------------------------------------------------------------------------- -----------
Property, plant and equipment, at cost (Note 1):
Land, Building and Improvements 1,235,000
Machinery and Equipment 1,259,000
- ------------------------------------------------------------------------------------------- -----------
2,494,000
Less - Accumulated Depreciation 908,000
- ------------------------------------------------------------------------------------------- -----------
1,586,000
=========================================================================================== ===========
Intangible Assets and Goodwill, Net (Note 1) 706,000
=========================================================================================== ===========
Total Assets $ 7,332,000
=========================================================================================== ===========
LIABILITIES & SHAREHOLDERS' INVESTMENT
Current Liabilities:
Accounts Payable and Accrued Expenses (Note 2) $ 1,555,000
Deferred Income 15,000
Current Portion of Notes Payable (Note 5) 312,000
- ------------------------------------------------------------------------------------------- -----------
Total Current Liabilities 1,882,000
- ------------------------------------------------------------------------------------------- -----------
Other Liabilities:
Borrowings Under Lines of Credit (Note 4) 1,665,000
Notes Payable (Note 5) 753,000
=========================================================================================== ===========
Total Liabilities 4,300,000
=========================================================================================== ===========
Commitments and Contingencies (Notes 9 and 10)
=========================================================================================== ===========
Shareholders' investment:
Preferred Shares, $1 Par Value - 500,000 Shares Authorized; None Issued and Outstanding
-----------
Common Shares, $1 Par Value - 5,000,000 Shares Authorized; 2,025,929 Issued and
Outstanding 2,026,000
Paid in Surplus 4,344,000
Accumulated Deficit (3,338,000)
=========================================================================================== ===========
Total Shareholders' Investment 3,032,000
=========================================================================================== ===========
Total Liabilities and Shareholders' Investment $ 7,332,000
=========================================================================================== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this balance sheet.
- --------------------------------------------------------------------------------
four
<PAGE>
SBM Industries, Inc.
Consolidated Statements of Shareholders' Investment
- --------------------------------------------------------------------------------
- --------------------------------------------- ----------- ------------
For the years ended December 31, 1998 1997
- --------------------------------------------- ----------- ------------
COMMON SHARES
Balance at beginning of year $ 2,026,000 $ 2,027,000
Retirement of common shares -- (1,000)
============================================ =========== ===========
Balance at End of Year $ 2,026,000 $ 2,026,000
============================================ =========== ===========
PAID IN SURPLUS
Balance at beginning of year $ 4,344,000 $ 4,347,000
Retirement of common shares -- (3,000)
============================================ =========== ===========
Balance at End of Year $ 4,344,000 $ 4,344,000
============================================ =========== ===========
ACCUMULATED DEFICIT
Balance at beginning of year $(2,978,000) $(2,503,000)
Net Loss (360,000) (475,000)
============================================ =========== ===========
Balance at End of Year $(3,338,000) $(2,978,000)
============================================ =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
five
<PAGE>
SBM Industries, Inc.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------- --------- ---------
For the years ended December 31, 1998 1997
- --------------------------------------------------------- --------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(360,000) $(475,000)
Adjustments to reconcile net loss
to cash provided by (used in) operating activities:
Depreciation and amortization 345,000 336,000
Changes in operating assets and liabilities:
Accounts receivable (23,000) 977,000
Inventories (247,000) 127,000
Prepaid expenses and other current assets (67,000) (40,000)
Accounts payable and accrued expenses 115,000 (610,000)
Deferred income 15,000 (18,000)
- --------------------------------------------------------- --------- ---------
Total Adjustments 138,000 772,000
- --------------------------------------------------------- --------- ---------
Net Cash Provided By (Used In) Operating Activities (222,000) 297,000
========================================================= ========= =========
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Fixed Assets (234,000) (122,000)
========================================================= ========= =========
Net Cash Used In Investing Activities (234,000) (122,000)
========================================================= ========= =========
CASH FLOWS FROM FINANCING ACTIVITlES
Proceeds from Notes Payable 92,000 --
Proceeds From Lines of Credit 540,000 --
Payment of Deferred Financing Fees (29,000) --
Retirement of Common Shares -- (4,000)
Payment on Notes Payable (217,000) (209,000)
========================================================= ========= =========
Net Cash Provided By (Used In) Financing Activities 386,000 (213,000)
========================================================= ========= =========
Net Decrease in Cash (70,000) (38,000)
========================================================= ========= =========
Cash at Beginning of Year 91,000 129,000
========================================================= ========= =========
Cash at End of Year $ 21,000 $ 91,000
========================================================= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
six
<PAGE>
SBM Industries, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Major Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of SBM Industries,
Inc. (the "Company") and its subsidiaries, Star Struck, Inc. ("SSI") and RCM,
Inc. ("RCM"). SSI is 100% owned by the Company, while RCM is an 80% owned
subsidiary. As a result of the minority shareholders' proportionate share of the
deficiency of RCM, the Company will recognize the first $173,000 of RCM's net
income, if any, before recording any funds due to the minority stockholders. All
intercompany transactions have been eliminated.
Utilization 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. Certain prior year amounts
have been reclassified to conform with the current year presentation.
Inventories
Inventories, with the exception of gold, are stated at the lower of cost
(first-in, first-out) or market. Gold inventory is valued at market. Inventories
consist principally of finished goods.
Property, Plant and Equipment
The Company provides for depreciation generally using the straight-line method
for financial reporting and an accelerated method for income tax purposes.
Estimated useful lives are as follows:
Assets Life
------ ----
Office Equipment 5-7 Years
Machinery and Equippment 7 Years
Building and Improvements 31.5-39 Years
Repair and maintenance costs are expensed as incurred. Renewals and betterments
are capitalized. Upon retirement or other disposition of property, the cost and
related depreciation or amortization are removed from the accounts. Gains and
losses on such retirements are included in income.
Income Taxes
Income taxes have been provided using the liability method in accordance with
Financial Accounting Standards Board ("FASB") Statement No. 109, "Accounting for
Income Taxes."
Advertising Costs
The Company expenses the costs of advertising at the initial time of
advertisement, except for those costs related to direct response advertising
through catalog mailings. Direct response advertising costs, consisting
primarily of catalog preparation, paper and printing, are amortized over the
period following the mailing of the catalog during which the benefits are
expected. Sports apparel catalog expenses are amortized over the five month
period following the mailing, while battery and watch strap expenses are
amortized over three months.
Fair Value of Financial Instruments
The fair value of notes payable outstanding is estimated by discounting the
future cash flows using the current rates offered by lenders for similar
borrowings with similar credit ratings. The carrying amounts of the accounts
receivable and debt approximate their fair value.
Earnings/(Loss) Per Common Share
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." In accordance with SFAS No. 128, net earnings (loss) per common share
amounts ("basic EPS") were computed by dividing net earnings (loss) by the
weighted average number of common shares outstanding and excluded any potential
dilution. Net earnings (loss) per common share amounts assuming dilution
("diluted EPS") were computed by reflecting potential dilution from the exercise
of stock options. SFAS No. 128 requires the presentation of both basic EPS and
diluted EPS on the face of the income statement.
Revenue Recognition
Revenue is recognized upon shipment of merchandise to customers.
Amortization of Intangibles
Goodwill is being amortized on a straight-line basis over fifteen, twenty, or
forty years. Subsequent to its acquisitions, the Company continually evaluates
whether later events and circumstances have occurred that indicate the remaining
estimated useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Company uses an estimate of the
related business segments undiscounted net income over the remaining life of the
goodwill in measuring whether the goodwill is recoverable.
Major components of intangibles are as follows:
- -------------------------------- ------------- -------
Amortization
Amounts in thousands Period (Years) 1998
- -------------------------------- ------------- -------
Non-compete agreements 7-10 $ 981
Other intangibles and goodwill 3-40 404
- -------------------------------- ------------- -------
1,385
Accumulated amortization 679
- -------------------------------- ------------- =======
$ 706
=======
Stock Options
The Company currently follows the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), which
requires compensation expense for the Company's options to be recognized only if
the market price of the underlying stock exceeds the exercise price on the date
of the grant.
The Company has not adopted the measurement requirements of SFAS No. 123,
"Accounting for Stock Based Compensation", for stock option grants to employees
and, accordingly, has made all the required proforma disclosures for the years
ended December 31, 1998 and 1997 in Note 3.
- --------------------------------------------------------------------------------
seven
<PAGE>
SBM Industries, Inc.
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued a new disclosure
standard. Results of operations and financial position will be unaffected by
implementation of this new standard.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"), which supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise",
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by management in
deciding how to allocate resources and in assessing performance.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. The Company adopted this standard during the current year (see Note
7).
2. Accounts Payable and Accrued Expenses
A breakdown of significant accounts payable and accrued expenses at December 31,
1998, is as follows:
- --------------------------------------- -----------
Amounts in thousands 1998
- --------------------------------------- -----------
Accounts payable 1,069
Accrued expenses 486
- --------------------------------------- ===========
1,555
===========
3. Stock Options
The 1992 Incentive Stock Option Plan of SBM Industries, Inc. is a qualified plan
which reserved 100,000 shares of the Company's unissued common stock for
issuance to officers and salaried employees at option prices not less than 100%
of the fair market value on the date of grant. Options are exercisable one year
after the date of grant and expire five years from the date of grant.
After a one year waiting period forty percent of the options granted may be
exercised in the second year and twenty percent in each of the next three years.
The Company accounts for all plans under APB Opinion No. 25. No options were
granted in 1998 and 1997. Had compensation cost for these plans been determined
in accordance with SFAS 123, the Company's proforma net loss and EPS would be
the same as the reported amounts.
Under SFAS 123, the fair value of each option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996: (1) expected life of option of eight years;
(2) dividend yield of 0%; (3) expected volatility of 46%; and (4) risk-free
interest rate of 6.87%.
Because SFAS 123 method of accounting has not been applied to options granted
prior to January 1, 1995, the resulting proforma compensation cost may not be
representative of that to be expected in future years.
Transactions under the Incentive Stock Option Plan during 1998 and 1997 were as
follows:
Year ended December 31, 1998 1997
- ---------------------------------------- ---------------- --------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- ---------------------------------------- ---------------- --------------
Options outstanding at beginning of year 9,150 4.74 13,400 4.64
Granted -- -- -- --
Exercised -- -- -- --
Terminated/Expired (4,000) 3.48 (4,250) 4.45
Options outstanding at end of year 5,150 5.72 9,150 4.74
Exercisable at end of year 3,870 6.08 6,540 4.61
Weighted average fair value of
options granted -- --
- ----------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Options
Outstanding Exercisable
- --------------- ------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exerciseable Average
at Contractual Exercise at Exercise
Excercise Price 12/31/98 Life Price 12/31/98 Price
- --------------- ------------------------------------------------------------
$7.50 1,950 1.00 $7.50 1,950 $7.50
$4.63 3,200 3.00 4.63 1,920 $4.63
5,150 2.24 5.72 3,870 $6.08
- --------------- ------------------------------------------------------------
- --------------------------------------------------------------------------------
eight
<PAGE>
SBM Industries, Inc.
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
4. Borrowings Under Lines of Credit
The Company has $2,225,000 available in line of credit agreements with two of
its banks. These agreements for $2,000,000 and $225,000 extend through October
2001 and January 2000, respectively. Borrowings under the lines bear interest at
the prime rate plus one percent (8.75% at December 31, 1998) and prime rate plus
one and one-half percent (9.25% at December 31, 1998), respectively. The
Company's accounts receivable and a portion of its inventory have been pledged
as collateral for these lines of credit. As of December 31, 1998, the Company
had $1,665,000 outstanding under these lines of credit.
5. Notes Payable
The Company's outstanding long-term debt as of December 31,
1998, is summarized as follows:
- ------------------------------------------------------------------- ----------
1998
- ------------------------------------------------------------------- ----------
Variable rate mortgage payable, due in monthly
installments to 2003; the current annual rate is
8.5%. The Companys building has been pledged
as collateral. $ 663,000
Promissory note payable, due in monthly
installments from 1999 through 2000, net of
$9,000 discount. Interest imputed at 6%. 141,000
Promissory note payable, due in monthly
installments through 1999. Interest imputed at 6%. 103,000
.9% promissory note payable, due in monthly
installments through 2002. 23,000
7.75% promissory note payable, due to related
party in 1999. 72,000
12.24% promissory note payable due in monthly
installments through 2001. 63,000
----------
1,065,000
- ------------------------------------------------------------------- ----------
Less Current Portion 312,000
=================================================================== ==========
$ 753,000
=================================================================== ==========
Scheduled maturities of all long-term debt instruments at December 31, 1998 are
as follows:
1999 $ 312,000
2000 136,000
2001 70,000
2002 44,000
2003 503,000
-----------
$ 1,065,000
-----------
Total interest expense was $293,000 and $261,000 in 1998 and 1997, respectively.
Land, building and improvements include a building with a cost of $674,000,
which has a $663,000 mortgage balance at December 31, 1998.
6. Income Taxes
Deferred income taxes result from timing differences in recording of certain
expenses for financial reporting and tax purposes. The source of these
differences and the tax effects are as follows:
- ------------------------------------------ ------- -------
Amounts in thousands 1998 1997
- ------------------------------------------ ------- -------
Net operating loss carryforward $ 1,465 $ 1,345
Excess of financial amortization over
tax amortization 94 73
Bad debt reserves 32 54
------- -------
$ 1,591 1,472
Valuation Allowance (1,591) (1,472)
------- -------
$ 0 $ 0
- ------------------------------------------ ======= =======
Reconciliations between actual tax expense and the amount computed by applying
the statutory U.S. Federal Income tax rate to income (loss) from continuing
operations are as follows:
1998 1997
- -------------------------------- ----------------- -----------------
%of %of
Pre-Tax Pre-Tax
Amounts in thousands Amount Income Amount Income
- -------------------------------- ----------------- -----------------
Tax at statutory
Federal Income tax rate $ (122) (34.0%) $ (162) (34.0%)
Current year addition
to Net Operating Loss 122 34.0 162 34.0
State and local taxes, and other 0 0 0 0
- -------------------------------- ----------------- -----------------
$ 0 O $ 0 0
At December 31, 1998, for tax reporting purposes, the Company had approximately
$4,310,000 of operating loss carryforwards. The tax operating loss carryforwards
will begin expiring in 2005.
- --------------------------------------------------------------------------------
nine
<PAGE>
SBM Industries, Inc.
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
7. Business Segments
The Company's operations by business segment for the years ended December 31,
1998 and 1997 were as follows:
<TABLE>
Battery &
Watch Strap Sports Apparel Distribution Leather
1998 Distribution Distribution Subtotal Manufacturing Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 10,638,000 $ 1,639,000 $ 12,277,000 $ 793,000 $ 13,070,000
Operating Profit (Loss) $ 167,000 $ (24,000) $ 143,000 $ (279,000) $ (136,000)
Identifiable Assets $ 7,471,000* $ (139,000) $ 7,332,000
Depreciation
& Amortization $ 303,000 $ 42,000 $ 345,000
Capital Expenditures $ 230,000 $ 4,000 $ 234,000
*Includes corporates assets amounting to $38,000
<CAPTION>
Battery &
Watch Strap Sports Apparel Distribution Leather
1997 Distribution Distribution Subtotal Manufacturing Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 11,264,000 $ 1,125,000 $ 12,389,000 $ 1,327,000 $ 13,716,000
Operating Loss $ (67,000) $ (6,000) $ (73,000) $ (217,000) $ (290,000)
Identifiable Assets $ 7,036,000* $ 111,000 $ 7,147,000
Depreciation
& Amortization $ 295,000 $ 41,000 $ 336,000
Capital Expenditures $ 121,000 $ 1,000 $ 122,000
</TABLE>
*Includes corporates assets amounting to $17,000
The majority of the customers in the battery and watch strap distribution
business segment are small retail jewelers nationwide. The sports apparel
distribution line of business sells to consumers nationwide. Leather
manufacturing sales are primarily made to distributors in the United States.
8. Major Customers
During 1998 and 1997, 25% and 21%, respectively, of the the Company's total
sales were made to a single customer in the battery and watch strap distribution
line of business.
9. Commitments
The Company leases certain property and equipment under operating leases
expiring on various dates through 2002. Total rent expense amounted to $188,603
and $164,322 in 1998 and 1997, respectively. Aggregate future minimum rent
payments under the terms of non-cancelable leases as of December 31 are as
follows:
1999 $ 104,000
2000 91,000
2001 75,000
2002 26,000
10. Contingencies
The Company has contingent liabilities with respect to litigation and claims
arising in the ordinary course of business. In the opinion of management,
such contingent liabilities are not likely to result in any loss that would
have a material adverse effect on the Company's operating results or finanial
condition.
- --------------------------------------------------------------------------------
ten
<PAGE>
SBM Industries, Inc.
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders of SBM Industries, Inc.:
We have audited the accompanying consolidated balance sheet of SBM Industries,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998, and the
related consolidated statements of income, shareholders' investment and cash
flows for each of the two 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 SBM Industries, Inc., and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for each of the two years then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 3, 1999
- --------------------------------------------------------------------------------
eleven
<PAGE>
SBM Industries, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1998 Net Sales
- --------------------------------------------------------------------------------
Net Sales By Segment
1998 1997
Segment Sales % of Total Sales % of Total
- ------- ----- ---------- ----- ----------
Battery & Watch Strap
Distribution 10,638,000 81.39% 11,264,000 82.12%
Sports Apparel Distribution 1,639,000 12.54% 1,125,000 8.21%
Leather Manufacturing 793,000 6.07% 1,327,000 9.67%
------- ---------
Total Sales 13,070,000 13,716,000
Battery and watch strap sales in 1998 decreased $626,000, or 5.6%, to
$10,638,000 from $11,264,000 in 1997. Sports apparel sales increased
$514,000, or 45.7%, to $1,639,000 from 1997 sales of $1,125,000.
Total sales for SBM in 1998 decreased 4.7% to $13,070,000 from
$13,716,000 in 1997. These sales, as well as the sales and earnings from
continuing operations for the five years covered by the foregoing
financial statements and selected financial data, are primarily
attributable to SBM's Star Struck, Inc. ("SSI") subsidiary.
Sales for SSI were $12,277,000, down 1% from $12,389,000 in 1997.
Increased sales in the first and fourth quarters of 1998 of $437,000 and
$166,000, respectively, over 1997's sales for the same periods were
offset by decreased sales in the second and third quarters of 1998 of
$234,000 and $481,000, respectively, from 1997's sales for these
periods.
RCM, Inc. ("RCM"), SSI's 80% owned watch strap and small leather goods
manufacturer, had sales of $793,000. This represents a decrease in sales
of $534,000, or 40%, from $1,327,000 in 1997.
- --------------------------------------------------------------------------------
Gross Profit
- --------------------------------------------------------------------------------
Gross profit, as a percentage of sales, increased to 44% in 1998 from
39% in 1997.
SSI's gross profit on sales of 46% was up 5% from 41% in 1997. This
increase can be attributable to increased sports apparel sales which had
a higher gross margin than the other product lines distributed by SSI.
While sports apparel sales accounted for only 10% of SSI's total sales
in 1997, in 1998 they comprised 13% of SSI's total sales.
RCM's gross profit on sales of 10% was down 8% from 18% in 1997. This
gross margin reflects start up costs relative to RCM's efforts to
establish itself in the small leather goods industry.
- --------------------------------------------------------------------------------
Selling, General and Administrative Expenses
- --------------------------------------------------------------------------------
Selling, general and administrative expenses, as a percentage of sales,
increased to 42% in 1998 compared with 39% in 1997 for the Company.
SSI's expenses were 40% of the Company's total sales in 1998 as opposed
to 35% of total sales in 1997, while RCM decreased its expenses from 3%
of total sales in 1997 to 2% of total sales in 1998.
- --------------------------------------------------------------------------------
Operating Income (Loss)
- --------------------------------------------------------------------------------
Operating Income/(Loss) by Segment
1998 1997
Operating Operating
Segment Income/(Loss) Income/(Loss)
- ------- ------------- -------------
Battery & Watch Strap
Distribution 167,000 (67,000)
Sports Apparel Distribution (24,000) (6,000)
Leather Manufacturing (279,000) (217,000)
Total Operating Income/(Loss) (136,000) (290,000)
Operating income in the battery and watch strap segment increased by
$234,000 over 1997's operating loss of $67,000 to show an operating
profit of $167,000 in 1998. The sports apparel operating loss increased
by $18,000 from 1997's operating loss of $6,000 to show an operating
loss of $24,000 in 1998.
Operating loss decreased by $154,000 from 1997's loss of $290,000 to
show a loss of $136,000. Reflected in 1998's operating loss was SSI's
operating profit of $178,000, which was offset by RCM's operating loss
of $279,000 and SBM's corporate loss of $35,000.
- --------------------------------------------------------------------------------
Interest Expense
- --------------------------------------------------------------------------------
Net interest expense was $224,000 in 1998 versus $185,000 in 1997.
Approximately $122,000 in interest expense related to the borrowing on
the Company's lines of credit was recorded in 1998 compared to $98,000
in 1997. Interest on a mortgage totaled approximately $63,000 in 1998.
- --------------------------------------------------------------------------------
Net Income (Loss)
- --------------------------------------------------------------------------------
The Company showed a net loss of $360,000, or $(.18) per share in 1998
compared to a net loss of $475,000, or $(.23) per share in 1997.
- --------------------------------------------------------------------------------
twelve
<PAGE>
SBM Industries, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1997 Net Sales
- --------------------------------------------------------------------------------
Total sales for SBM from continuing operations in 1997 decreased 13% to
$13,716,000 from $15,693,000 in 1996. These sales, as well as the sales
and earnings from continuing operations for the five years covered by
the foregoing financial statements and selected financial data, are
primarily attributable to SBM's Star Struck, Inc. ("SSI") subsidiary.
Sales for SSI were $12,389,000, down 7% from $13,379,000 in 1996.
Increased sales in the second and third quarters of 1997 of $67,000 and
$247,000, respectively, over 1996's sales for the same periods were
offset by decreased sales in the first and fourth quarters of 1997 of
$1,142,000 and $162,000, respectively, from 1996's sales for these
periods.
RCM, Inc. ("RCM"), SSI's 80% owned watch strap and small leather goods
manufacturer, had sales of $1,327,000. This represents a decrease in
sales of $987,000, or 43%, from $2,314,000 in 1996 due to the loss of
business from a major watch strap customer.
- --------------------------------------------------------------------------------
Gross Profit
- --------------------------------------------------------------------------------
Gross profit, as a percentage of sales, did not change from 1996's gross
profit of 39%.
SSI's gross profit on sales of 41% was up 2% from 39% in 1996. This
increase can be attributable to increased sports apparel sales which had
a higher gross margin than the other product lines distributed by SSI.
While sports apparel sales accounted for only 2% of SSI's total sales in
1996, in 1997 they comprised 10% of SSI's total sales.
RCM's gross profit on sales of 18% was down 22% from 40% in 1996. This
gross margin reflects start up costs relative to RCM's efforts to
establish itself in the small leather goods industry.
- --------------------------------------------------------------------------------
Selling, General and Administrative Expenses
- --------------------------------------------------------------------------------
Selling, general and administrative expenses, as a percentage of sales,
increased to 39% in 1997 as compared with 35% in 1996 for the Company.
SSI's expenses were 35% of the Company's total sales in 1997 as opposed
to 30% of total sales in 1996, while RCM decreased its expenses from 5%
of total sales in 1996 to 3% of total sales in 1997.
- --------------------------------------------------------------------------------
Operating Income (Loss)
- --------------------------------------------------------------------------------
Operating income decreased by $597,000 from 1996's profit of $307,000 to
show a loss of $290,000. Reflected in 1997's operating loss were SSI's
and RCM's operating losses of $27,000 and $217,000, respectively, and
SBM's corporate loss of $46,000.
- --------------------------------------------------------------------------------
Interest Expense
- --------------------------------------------------------------------------------
Net interest expense was $185,000 in 1997 versus $186,000 in 1996.
Approximately $98,000 in interest expense related to the borrowings on
the Company's lines of credit was recorded in 1997 compared to $102,000
in 1996. Interest on a mortgage totaled approximately $67,000 in 1997.
- --------------------------------------------------------------------------------
Net Income (Loss)
- --------------------------------------------------------------------------------
The Company showed a net loss of $475,000, or $(.23) per share in 1997
compared to a net loss of $2,127,000, or $(1.05) per share in 1996.
While 1996's net loss reflected a loss from discontinued operations of
$2,248,000, or $(1.11) per share, income from continuing operations
decreased $596,000 in 1997 to show a loss of $475,000.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
The net decrease in cash of $70,000 is attributable to cash provided by
financing activities of $386,000, which was offset by cash used in
operating and investing activities of $222,000 and $234,000,
respectively. The combined accounts receivable of SSI and RCM increased
$23,000, or 1.6%, in 1998 from 1997's combined accounts receivable
balance for the two entities. Inventory levels for SSI and RCM increased
$247,000, or 8.2%, in 1998 from those for 1997. During 1998, the Company
repaid $217,000 of its outstanding debt.
The Company has line of credit agreements with two of its banks. The
Company has $2,225,000 available under the lines, of which $1,665,000
was used at December 31, 1998. The Company believes is has adequate
funds available to conduct and continue its business and to repay the
approximately $312,000 in long-term debt which will mature in 1999.
- --------------------------------------------------------------------------------
Year 2000 Compliance
- --------------------------------------------------------------------------------
The Company has overall addressed and evaluated the year 2000 issue.
Date sensitive computer programs that do not properly recognize the year
2000 could generate incorrect data or cause a system to fail, resulting
in business interruption. Necessary changes to the Company's computer
systems have been identified and are being implemented. Costs incurred,
which were immaterial relative to the year 2000 issue, have been
expensed.
The year 2000 issue is expected to affect the systems of suppliers and
vendors with which the Company interacts. There can be no assurance that
any potential year 2000 noncompliance within the systems of these other
companies will not have a material adverse effect on the Company.
- --------------------------------------------------------------------------------
thirteen
<PAGE>
SBM Industries, Inc.
- --------------------------------------------------------------------------------
Shareholder Information
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Market and Dividend Information
The following table shows the quarterly per share sales price ranges of
the Company's common stock on the American Stock Exchange for 1998 and
1997. No dividends were paid during this period. On March 17, 1999 there
were 2,025,929 shares of common stock outstanding.
------------------ ------------------
1998 1997
High Low High Low
- -------------- ------ ------ ------ ------
First Quarter $3.625 $3.125 $3.875 $3.188
Second Quarter 4.125 3.500 3.313 3.063
Third Quarter 3.250 3.125 3.500 3.063
Fourth Quarter 3.500 3.000 3.250 3.000
Annual Meeting
The Annual Meeting of Shareholders of SBM Industries, Inc. will be held
on May 3, 1999.
Availability of Form 10-KSB
A copy of SBM Industries, Inc's. 1998 Annual Report to the Securities
and Exchange Commission Form 10-KSB will be furnished without charge to
shareholders upon written request to the Corporate Secretary.
Capital Stock Listing
American Stock Exchange
Symbol: SBM
Transfer Agent and Registrar
Harris Trust and Savings Bank, Chicago
Auditors
Arthur Andersen LLP, New York
- --------------------------------------------------------------------------------
fourteen
<PAGE>
SBM Industries, Inc.
- --------------------------------------------------------------------------------
Officers and Directors
Lawrence J. Goldstein
Vice President and Director; General
Partner, Santa Monica Partners
Kenneth Karlan
Vice President and Director
Robert J. Morris
Director; President of Dunhill
Personnel of Manhattan
Peter Nisselson
President and Director
Arthur Salzfass
Director; President, Rutledge Books, Inc.
Keith Sessler
Vice President and Director
Michael J. Sweedler
Director; Partner, Darby and Darby,
P.C.
- --------------------------------------------------------------------------------
fifteen
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SBM
INDUSTRIES, INC'S ANNUAL REPORT TO STOCKHOLDERS FOR THE PERIOD ENDED DECEMBER
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 21,000 0
<SECURITIES> 0 0
<RECEIVABLES> 1,586,000 0
<ALLOWANCES> 108,000 0
<INVENTORY> 3,261,000 0
<CURRENT-ASSETS> 5,040,000 0
<PP&E> 2,494,000 0
<DEPRECIATION> 908,000 0
<TOTAL-ASSETS> 7,332,000 0
<CURRENT-LIABILITIES> 1,882,000 0
<BONDS> 0 0
0 0
0 0
<COMMON> 2,026,000 0
<OTHER-SE> 1,006,000 0
<TOTAL-LIABILITY-AND-EQUITY> 7,332,000 0
<SALES> 13,070,000 13,716,000
<TOTAL-REVENUES> 13,070,000 13,716,000
<CGS> 7,310,000 8,375,000
<TOTAL-COSTS> 5,896,000 5,631,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 224,000 185,000
<INCOME-PRETAX> (360,000) (475,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (360,000) (475,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (360,000) (475,000)
<EPS-PRIMARY> (.18) (.23)
<EPS-DILUTED> (.18) (.23)
</TABLE>
