<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-QSB
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the quarterly period ended January 31, 1997
OR
Transaction report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the transition period from____________________to___________________
____________________________
COMMISSION FILE NO. 0-21879
____________________________
STEARNS & LEHMAN, INC.
(Exact Name of Registrant as Specified in its Charter)
OHIO 34-1579817
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
52 SURREY ROAD
MANSFIELD, OHIO 44901
(Address of principal executive offices) (Zip code)
(419) 522-2722
(Registrant's telephone number, including area code)
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
----- ------
As of March 5, 1997, 3,226,755 shares of common stock, no par value, were
outstanding. Transition Small Business Disclosure Format (check one):
Yes No X
----- ------
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
STEARNS & LEHMAN, INC.
<TABLE>
BALANCE SHEET
January 31, 1997 , April 30, 1996 and January 31, 1996
<CAPTION>
ASSETS
JANUARY 31, APRIL 30, JANUARY 31,
1997 1996 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $1,342,449 $123,208 $106,754
Trade accounts receivable, net of allowance for doubtful
accounts of $55,556, $56,000 and $9,225 as of
January 31, 1997, April 30, 1996 and
January 31, 1996, respectively 916,322 584,665 718,332
Inventory 1,323,120 1,132,548 1,242,787
Prepaid and other 63,861 49,508 54,250
Deferred income taxes 117,100
----------- ----------- -----------
Total current assets 3,762,852 1,889,929 2,122,123
----------- ----------- -----------
Property and equipment:
Land 74,653 74,653 74,653
Construction in progress 422,659 99,282 73,721
Machinery and equipment 1,374,221 1,309,007 1,335,938
Office equipment 207,728 193,977 201,615
Building improvements 91,716 91,716 91,716
Buildings 137,734 137,734 137,734
Leasehold improvements 43,003 43,003 43,003
Tooling 37,529 22,254 38,567
Vehicles 35,852 25,332 93,031
----------- ----------- -----------
2,425,095 1,996,958 2,089,978
Less: accumulated depreciation (734,848) (602,297) (614,883)
----------- ----------- -----------
Net property and equipment 1,690,247 1,394,661 1,475,095
----------- ----------- -----------
Goodwill 454,106 543,671 504,487
Cash surrender value of life
insurance 25,103 19,646 8,500
Trademarks and patents 4,734 5,257 5,430
Deferred stock offering costs 50,474 17,851
Other assets 50,115 69,399 72,920
----------- ----------- -----------
Total assets $5,987,157 $3,973,037 $4,206,406
=========== =========== ===========
</TABLE>
Continued
1
<PAGE> 3
STEARNS & LEHMAN, INC.
BALANCE SHEET, CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30, JANUARY 31,
1997 1996 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Lines of credit $350,000 $160,000
Accounts payable 991,882 485,407 717,782
Accrued expenses 199,470 228,045 134,875
Current portion of notes payable 5,380 37,578 46,210
Current portion of capital lease obligations 10,336 16,713 18,634
Subordinated convertible notes 300,000 300,000
----------- ----------- -----------
Total current liabilities 1,507,068 1,417,743 1,077,501
----------- ----------- -----------
Notes payable, net of current portion 28,829 132,416 157,334
Capital lease obligations, net of current portion 4,480 12,084 14,817
Subordinated convertible notes 300,000
----------- ----------- -----------
Total long-term liabilities 33,309 144,500 472,151
----------- ----------- -----------
Total liabilities 1,540,377 1,562,243 1,549,652
----------- ----------- -----------
Shareholders' equity:
Common stock, no par value; 4,000,000 shares
authorized, 3,181,826, 2,827,672 and 2,827,564
issued and 3,178,526, 2,824,372 and 2,810,090
outstanding as of January 31, 1997, April 30, 1996
and January 31, 1996, respectively 3,493 3,118 3,098
Additional paid-in capital 4,827,016 3,178,099 3,162,123
Accumulated deficit (370,529) (757,223) (508,467)
----------- ----------- -----------
4,459,980 2,423,994 2,656,754
Less treasury stock, at cost (3,300 shares) (13,200) (13,200)
----------- ----------- -----------
Total shareholders' equity 4,446,780 2,410,794 2,656,754
----------- ----------- -----------
Total liabilities and shareholders' equity $5,987,157 $3,973,037 $4,206,406
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 4
STEARNS & LEHMAN, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
for three months ended January 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Sales $2,034,609 $1,534,548
Cost of sales 1,475,180 1,268,816
----------- -----------
Gross profit 559,429 265,732
Selling, general and administrative expenses 406,793 480,563
----------- -----------
Income (loss) from operations 152,636 (214,831)
----------- -----------
Other income (expense), net:
Interest expense (11,982) (16,211)
Interest income 3,675
Other, net (1,463) (812)
----------- -----------
(9,770) (17,023)
----------- -----------
Net income (loss) before income tax expense 142,866 (231,854)
Income tax benefit:
Current 2,700
Deferred (71,500)
-----------
Total income tax benefit (68,800)
-----------
Net income (loss) $211,666 ($231,854)
=========== ===========
Earnings (loss) per share $0.07 ($0.08)
=========== ===========
Weighted average shares outstanding 3,123,211 2,807,860
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 5
STEARNS & LEHMAN, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
for nine months ended January 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Sales $5,492,328 $4,307,612
Cost of sales 3,998,929 3,410,743
----------- -----------
Gross profit 1,493,399 896,869
Selling, general and administrative expenses 1,176,369 1,298,980
----------- -----------
Income (loss) from operations 317,030 (402,111)
----------- -----------
Other income (expense), net:
Interest expense (50,839) (42,886)
Interest income 7,469
Other, net 1,034 (3,248)
----------- -----------
(42,336) (46,134)
----------- -----------
Net income (loss) before income tax (benefit) expense 274,694 (448,245)
Income tax (benefit) expense:
Current 5,100
Deferred (117,100) 35,913
----------- -----------
Total income tax (benefit) expense (112,000) 35,913
----------- -----------
Net income (loss) $386,694 ($484,158)
=========== ===========
Earnings (loss) per share $0.13 ($0.17)
=========== ===========
Weighted average shares outstanding 2,924,911 2,773,524
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 6
STEARNS & LEHMAN, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the year ended April 30, 1996 and the nine months ended January 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL SHARE-
COMMON COMMON PAID-IN ACCUMULATED TREASURY HOLDERS'
SHARES STOCK CAPITAL DEFICIT STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1995 2,744,834 $3,098 $2,957,674 ($24,308) ($57,246) $2,879,218
Net loss (732,915) (732,915)
Sale of treasury stock, net 65,256 204,449 57,246 261,695
Repurchase of common stock (3,300) (13,200) (13,200)
Purchase of warrants (36,750) (36,750)
Purchase price adjustment 17,582 20 52,726 52,746
---------- --------- ----------- ----------- -------- ----------
Balance at April 30, 1996 2,824,372 3,118 3,178,099 (757,223) (13,200) 2,410,794
Net income 386,694 386,694
Repurchase of common stock (91) (637) (637)
Retirement of common stock (17) (620) 637
Issuance of common stock 354,245 392 1,649,537 1,649,929
---------- --------- ----------- ----------- -------- ----------
Balance at January 31, 1997 3,178,526 $3,493 $4,827,016 ($370,529) ($13,200) $4,446,780
========== ========= =========== =========== ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 7
STEARNS & LEHMAN, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
for nine months ended January 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $386,694 ($484,158)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Bad debt expense 13,160 19,535
Depreciation and amortization 190,891 205,372
Loss on the sale of property and equipment 86 1,244
Deferred income taxes (117,100) 35,913
Changes in assets and liabilities:
Trade accounts receivable (344,817) (79,334)
Inventory (190,572) (101,597)
Prepaid expenses and other (14,353) 21,682
Accounts payable 188,175 108,199
Accrued expenses (28,575) 15,232
----------- ---------
Net cash provided by (used in) operating activities 83,589 (257,912)
----------- ---------
Cash flows from investing activities:
Purchase of property and equipment (115,137) (610,216)
Sale of property and equipment 3,500 1,500
Cash surrender value of life insurance, net (5,457)
Proceeds from purchase price adjustment 52,746
Purchase of other assets (19,989)
----------- ---------
Net cash used in investing activities (64,348) (628,705)
----------- ---------
Cash flows from financing activities:
Net borrowing under revolving credit agreements 160,000
Principal payments on notes payable and capital leases (499,766) (51,146)
Deferred capital stock offering costs (17,851)
Sale of treasury stock (637) 88,934
Net proceeds from issuance of common stock 1,700,403 172,761
----------- ---------
Net cash provided by financing activities 1,200,000 352,698
----------- ---------
Net increase (decrease) in cash and cash equivalents 1,219,241 (533,919)
Cash and cash equivalents, beginning of year 123,208 640,673
----------- ---------
Cash and cash equivalents, end of period $1,342,449 $106,754
=========== =========
</TABLE>
Continued
6
<PAGE> 8
STEARNS & LEHMAN, INC.
STATEMENT OF CASH FLOWS (UNAUDITED), CONTINUED
for nine months ended January 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Supplemental disclosure of cash flow information:
Progress billings accrued but not paid for:
Construction of manufacturing and office facility $318,300.00
=============
Cash paid during the period for:
Interest $53,673 $43,972
============== =============
Supplemental schedule of noncash financing activities:
Conversion of line of credit to note payable $350,000 $163,000
============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 9
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The financial statements as of and for the three months ended January
31, 1997 and 1996 for Stearns & Lehman, Inc. (the Company) are unaudited
and are presented pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, the financial
statements should be read in conjunction with the audited financial
statements for the years ended April 30, 1996 and April 30, 1995. In the
opinion of management, the accompanying financial statements reflect all
adjustments necessary (which are of a normal recurring nature) to
present fairly the financial position and results of operations and cash
flows for the interim periods presented, but are not necessarily
indicative of the results of operations for a full year.
2. COMMON STOCK TRANSACTIONS:
Between the dates of November 4, 1996 and December 20, 1996, the Company
issued 349,495 shares at $5.50 per share pursuant to the Company's Form
SB-1 registration statement that was declared effective by the
Securities and Exchange Commission on October 22, 1996. On December 31,
1996, the Company repurchased 91 shares of common stock at $7.00 per
share pursuant to a Settlement Agreement between a former Select
Origins, Inc. shareholder (See Note 9), and the Company. On January 27,
1997, the Company issued 3,000 shares of its common stock at $3.00 per
share upon exercise of warrants.
3. LINES OF CREDIT:
On May 5, 1996, the Company converted a $350,000 revolving line of
credit agreement to a five-year term note with monthly principal
payments of $5,833 plus interest at prime plus 1% through May 5, 2001.
On November 6, 1996, the Company completely paid the balance outstanding
on this five year term note payable and the balance outstanding on
another note payable to a bank due on May 5, 2000. The total of these
payments were $422,353. On December 2, 1996, the Company signed a Line
of Credit Agreement with a bank for $400,000 with interest at a rate of
prime plus 0.5%. Also on December 2, 1996, the Company signed a
Construction and Business Loan Agreement with a bank for $750,000 for
the financing of a manufacturing and office building, with a term of 120
monthly payments beginning July 2, 1997 with interest at a rate of prime
plus 0.75%. As of January 31, 1997, there were no outstanding balances
under either of these bank agreements.
8
<PAGE> 10
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
4. NOTES PAYABLE:
Notes payable at January 31, 1997, April 30, 1996 and January 31, 1996 consisted
of:
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30, JANUARY 31,
1997 1996 1996
<S> <C> <C> <C> <C>
Note payable to a bank, collateralized by a vehicle payable in monthly
installments of $354 including interest at a rate of 6.84%, due on
December 10, 997. This note was paid in full during 1996. $ 7,607
Note payable to a bank, collateralized by real estate payable in monthly
installments of $682 including interest at a rate of prime plus 2%
adjusted every three years and subject to a minimum interest rate of 3.5%
and a maximum interest rate of 13.5% with the maximum decrease or
increase in interest rates not to exceed 2% at any one time,
due on February 14, 2002. $ 34,209 $ 37,877 39,043
Note payable to a bank, collateralized by a vehicle,
payable in monthly installments of $512 including
interest at 8.5% due on February 9, 1999. This
note was paid in full during 1996. 16,627
Note payable to a bank, collateralized by accounts receivable, inventory and
equipment, payable in monthly installments of $2,717 plus interest at a
rate of prime (8.25% at April 30, 1996) plus
1.25 % due on May 5, 2000. 132,117 140,267
----------- ----------- -----------
Total notes payable 34,209 169,994 203,544
Less current portion 5,380 37,578 46,201
----------- ----------- -----------
$ 28,829 $ 132,416 $ 157,334
---------- --------- ---------
</TABLE>
9
<PAGE> 11
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
5. LEASE COMMITMENTS:
The Company leases buildings and certain office and production equipment under
noncancelable operating lease agreements expiring through fiscal 2002.
Minimum rental commitments under noncancelable operating leases at January 31,
1997 are as follows:
Year Ending April 30, 1997 $ 28,465
1998 111,568
1999 19,704
2000 6,345
2001 6,345
2002 3,701
---------
$ 176,128
---------
Total rent expense charged to operations for all operating leases was $94,647
and $95,607 for the nine months ended January 31, 1997 and 1996, respectively.
The Company has various capital lease agreements for equipment. The present
value of the minimum lease payments has been capitalized and the related asset
and obligation recorded. Future minimum lease payments under capital leases,
together with the present value of the minimum lease payments as of January 31,
1997, are as follows:
Year Ending April 30, 1997 $ 3,144
1998 10,697
1999 2,301
---------
Total minimum lease payments 16,142
Less amounts representing
interest 1,326
---------
Present value of net minimum
lease payments 14,816
Less current maturities 10,336
------------
$ 4,480
------------
10
<PAGE> 12
STEARNS & LEHMAN, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
6. WARRANTS TO PURCHASE COMMON STOCK:
On June 7, 1996, 1,750 shares of the Company's common stock were issued
at $3.00 per share upon exercise of warrants. On January 27, 1997, 3,000
shares of the Company's common stock were issued at $3.00 per share upon
exercise of warrants. The balance of warrants outstanding at January 31,
1997 was 95,617 with an exercise price per share ranging from $3.00 to
$5.75. All outstanding warrants are exercisable at January 31, 1997.
7. INCOME TAXES:
Effective November 30, 1993, the Company adopted the Statement of
Financial Accounting Standards No. 109. A net deferred tax asset of
$35,913 was reflected on the financial statements as of April 30, 1995.
On July 31, 1995, the Company established a valuation allowance for the
entire net deferred tax asset, as it concluded, at that time that it
would be more likely than not that some portion or all of the net
deferred tax asset would not be realized. On January 31, 1997, the
Company established a net deferred tax asset of $117,100. This net
deferred tax asset represents net operating loss carry-forwards utilized
to the extent of the current year tax obligation as the result of income
for the nine months ended January 31, 1996.
8. MANUFACTURING AND OFFICE BUILDING:
On November 27, 1996, the Company entered into an agreement to construct
a 50,000 square foot manufacturing and office building. As of March 5,
1997, the construction of the building was approximately 27% complete.
9. BUSINESS COMBINATION:
On December 31, 1996, a former Select Origins, Inc. shareholder and the
Company signed a Settlement Agreement, Release of Augmentation Claims
and Authorization of Release of Escrowed Shares ("Agreement"). This
Agreement settled certain escrow and augmentation issues that arose from
the acquisition of Select Origins, Inc. ("Select") by the Company on
April 30, 1994. The former Select Origins, Inc. shareholder, in
consideration of the Company releasing 15,000 shares of common stock,
released the Company from all claims or potential claims arising from
the acquisition of Select by the Company. The Company exercised an
option to repurchase 91 of the 15,000 shares of common stock at the
market value as of the date of the Agreement. The Agreement calls for
the Company to offer the same Settlement Agreement on a pro-rata basis
to the remaining former Select shareholders. The 15,000 shares of common
stock specified in the Agreement with the former Select shareholder
represented 85.315% of the total shares
11
<PAGE> 13
of common stock if all former Select shareholders agreed to the same
Settlement Agreement. As of March 5, 1997, one additional former Select
shareholder, representing an additional 141 shares of common stock, has
signed a Settlement Agreement with the Company.
10. SUBSEQUENT EVENTS:
On February 28, 1997, the Company paid the balance outstanding on a note
payable to a bank, collateralized by real estate, due on February 14,
2002 (See Note 3). The amount of this payment was $33,787.
On February 28, 1997, the holders of $265,000 of the Company's Three
Year Subordinated Convertible Redeemable Promissory Note, maturing March
1, 1997 ("Note"), exercised their right of conversion. The Note
specified a conversion rate of 182 shares of the Company's common stock
for every $1,000 of principal amount. On March 1, 1997, the Company
issued 48,230 shares of common stock to holders of Notes who elected
conversion and paid $35,000 in principal to the remaining holders of
Notes.
12
<PAGE> 14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition
contains forward-looking information that involves risks and uncertainties. The
Company's actual results could differ materially from those anticipated. Factors
that could cause or contribute to such differences include, but are not limited
to, development activity and construction process risks, availability of
financing for development, government regulations, competition, and issues
related to managing rapid growth and business expansion.
GENERAL
Stearns & Lehman, Inc. (the "Company"), is headquartered in Mansfield, Ohio with
manufacturing facilities in Mansfield, Ohio and Kent, Washington. The Company is
engaged in the business of manufacturing and marketing specialty food products,
including coffee and espresso flavorings, syrups, oils and toppings, extracts,
flavorings, sauces, dressings and specialty sugars. The Company sells its
products throughout the United States and Canada and in certain other foreign
countries.
The Company markets its Flavor-Mate(R) and Dolce(R) flavored syrups product
lines through distributors that are focused on the specialty coffee industry and
food service accounts including restaurants, coffee houses, cart operations and
specialty coffee retailers. These distributors take delivery of product by
pallet load and re-distribute case quantities to their customers, adding a
"service oriented" aspect to the marketing of the Company's product.
The Company also has direct marketing and distribution arrangements with a
number of private label customers. The Company does not utilize any distribution
network to service these customers and provides direct shipments in quantities
and method of transportation specified by the customer. The Company believes
that this segment of the business has the greatest short-term potential for
sales.
The Company markets the remaining part of its product lines through general food
distributors. The majority of these distributors are members of the National
Food Distributors Association who distribute the Company's products directly to
retailers, such as supermarket chains and specialty food stores. These
distributors enable the retailer to maximize efficiency and profits by shifting
the responsibility for stocking shelves, pricing product, rotating stock,
providing demonstrations and maintaining inventory to the distributor. These
distributors generally take delivery of the Company's product by pallet load for
re-distribution to the retailers.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 1997 AND 1996
Net Sales for the three months ended January 31, 1997 and 1996 were $2,034,609
and $1,534,548, respectively, a 32.6% increase. For the current three month
period, private label sales increased by 63.4% and Dolce(R) branded products
increased by 8.9%, while the Net Sales of other Company products decreased by
27.8% compared to the same quarter last year. Private
13
<PAGE> 15
label, Dolce(R) branded products, and other Company products represented 73.48%,
13.1%, and 13.5% of Gross Sales, respectively for the current three month
period. The increase in private label sales was the result of significant sales
growth by several of the Company's private label customers and obtaining several
new private label customers including Olive Garden Restaurants. The Company
started shipments to the Olive Garden Restaurants in January 1997. Sales to
Olive Garden Restaurants represented 5.7% of Gross Sales for the current three
month period. Dolce(R) branded products sales increased primarily as a result of
increased sales from Midwest and Eastern United States distributors. The Gross
Sales of other Company products decreased primarily due to a loss of a
Flavor-Mate(R) customer in January 1996. The Company was able to once again
secure the business of this Flavor-Mate(R) customer in January 1997.
The increase in sales volume permitted the Company to continue to better utilize
its manufacturing facilities, resulting in Cost of Sales, as a percentage of Net
Sales, decreasing to 72.5% compared to 82.7% for the third quarter ended January
31, 1997 and 1996, respectively. Cost of Sales increased by $206,364 for the
current quarter compared to the corresponding quarter last year. This increase
primarily was a result of higher sales volume, resulting in increased material,
freight-in and plant supply costs for the current three month period. These
increases were partially offset by a decrease in the cost of product testing
performed by outside services, and a decrease in maintenance costs.
Selling, general and administrative expenses decreased by 15.4% or $73,770 for
the third quarter ended January 31, 1997 compared to the corresponding quarter
last year. This decrease resulted from decreased payroll, employee insurance,
office supply, travel, trade show, advertising and sales promotion expense.
These decreases were partially offset by increased insurance, professional
outside service, bad debt and shareholder relations expense. The increases
associated with insurance and shareholder relations expense are additional costs
associated with the Company becoming a SEC reporting company.
Interest expense for the three months ended January 31, 1997 decreased by $4,229
compared to the three months ended January 31, 1996. The decrease reflects the
reduction in bank borrowings that occurred as a result the use of proceeds from
the Company's stock offering.
The Company recorded a Deferred Income Benefit of $71,500 for the third quarter
ended January 31, 1996. This benefit is a result of the reversal of a previously
recorded valuation allowance due to the anticipated usage of the Company's net
loss carry forwards.
As a result of the foregoing, the Company reported net income of $211,666, or
$0.07 per weighted average number of common stock outstanding, for the third
quarter ended January 31, 1997 compared to a net (loss) of ($231,854), or
($0.08) per weighted average number of common stock outstanding, for the third
quarter ended January 31, 1996. The weighted average number of common stock
outstanding increased to 3,123,211 for the current quarter compared to
2,807,860 for the comparative quarter last year. The increase primarily
reflects increased shares outstanding as a result of the Company's stock
offering, warrants exercised, and treasury stock sold.
14
<PAGE> 16
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JANUARY 31, 1997 AND 1996
Net Sales for the nine months ended January 31, 1997 and 1996 were $5,492,328
and $4,307,612 respectively, a 27.5% increase. For the current ninesix month
period, private label sales increased by 57.1% and Dolce(R) branded products
increased by 16.6%, while the Net Sales of other Company products decreased by
27% compared to the same nine month period last year. Private label, Dolce(R)
branded products, and other Company products represented 69.1%, 15.6%, and 15.3%
of Gross Sales, respectively for the current nine month period. The increase in
private label sales was the result of significant sales growth by several of the
Company's private label customers and obtaining several new private label
customers. Dolce(R) branded products sales increased primarily as a result of
increased sales from Midwest United States distributors. The Net Sales of other
Company products decreased primarily due to a loss of a Flavor-Mate(R) customer
in January, 1996. As stated earlier, the Company was able to once again secure
the business of this Flavor-Mate(R) customer in January 1997.
As a result of the nine month performance of the Dolce(R) branded products, the
Company made changes in its sales staff in February and March of 1997 to
stimulate sales of this product line. In addition, the Company has also begun to
look at the disposition of several low volume product lines to improve
performance in the other products sales category.
The increase in sales volume permitted the Company to better utilize its
manufacturing facilities, resulting in Cost of Sales, as a percentage of Net
Sales, decreasing to 72.8% compared to 79.2% for the nine months ended January
31, 1997 and 1996, respectively. Cost of Sales increased by $588,186 for the
nine month period compared to the corresponding nine month period last year.
This increase primarily was a result of higher sales volume, resulting in
increased material, freight- in, labor, and plant supply costs for the current
nine month period. The increase in Cost of Sales was also the result of
increased depreciation and the decision to increase product testing by Company
personnel. Tooling costs also increased as a result of new private label
customers. These increases were partially offset by decreased costs associated
with improved manufacturing controls resulting in lower scrappage, a decrease in
the cost of product testing performed by outside services, and a decrease in
maintenance costs.
Selling, general and administrative expenses decreased by 9.4% or $122,611 for
the nine month period ended January 31, 1997 compared to the corresponding nine
month period last year. This decrease resulted from decreases in trade show
costs, advertising expenses, outside professional financial consulting services,
travel costs, office supplies, and bad debt expense. These decreases were offset
by increased payroll expenses incurred following the hiring of a Chief Financial
Officer in January 1996, increased sales promotional costs, increased sales
commissions as a result of a revised sales staff compensation program and higher
sales volume, increased retail store product placement ("slotting") fees,
increased personal property and real estate taxes, increased maintenance costs
of the Company's computer system, and increase insurance and shareholder
relations costs associated with the Company becoming a SEC reporting company.
Interest expense for the nine months ended January 31, 1997 increased by $7,953
compared to the nine months ended January 31, 1996. The increase primarily
reflects increased bank
15
<PAGE> 17
borrowings that occurred from October 1, 1995 through April 30, 1996. These bank
borrowings were paid in full on November 6, 1996 with proceeds from the
Company's stock offering.
The Company recorded a Deferred Income Tax Benefit of $117,100 for the nine
month period ended January 31, 1997. This benefit is a result of the reversal of
a previously recorded valuation allowance due to the anticipated usage of the
Company's net loss carry forwards.
As a result of the foregoing, the Company reported net income of $386,694, or
$0.13 per weighted average number of common stock outstanding, for the nine
months ended January 31, 1996 compared to a net (loss) of ($484,158), or ($0.17)
per weighted average number of common stock outstanding, for the nine months
ended January 31, 1996. The weighted average number of common stock outstanding
increased to 2,924,911 for the current nine month period compared to 2,773,524
for the comparative nine month period last year. The increase primarily reflects
increased shares outstanding as a result of the Company's stock offering,
warrants exercised, and treasury stock sold.
LIQUIDITY AND CAPITAL RESOURCES
On January 31, 1997, the Company's working capital was $2,574,084 with a working
capital ratio of 3.17 to 1. The Company's working capital has improved for three
consecutive quarters. The working capital and working capital ratio for the
quarters ended October 31, 1996, July 31, 1996 and April 30, 1996 and July 31,
1996 were $960,628 and 1.57 to 1, $706,323, and 1.54 to 1, and $472,186 and 1.33
to 1, respectively. The increase in working capital for the nine month period
ended January 31, 1997 was primarily a result of the Company's stock offering,
which generated $1,616,597 in net proceeds, the conversion of a $350,000 bank
line of credit to a note payable, operating income for the period, and the
effect of the current deferred tax asset partially offset by the payment in long
term debt of $328,196. On January 31, 1996, the Company's working capital was
$1,044,622 with a working capital ratio of 1.97 to 1. The Company's increase in
working capital for the twelve month period ended January 31, 1997 was primarily
the result of operating losses for the months of February 1995 through June 1996
offset by in the foregoing described increases in working capital for the nine
month period ended January 31, 1997.
The Company's operating activities, for the nine month period ended January 31,
1997, provided net cash of $83,589. The Company used $564,114 to acquire
equipment, invest in life insurance policies, and make principal payments on
notes payable and capital leases. The sale of stock by the Company and the
conversion of stock warrants provided net cash of $1,699,766. Subsequently,
during this period cash and cash equivalents increased $1,219,241. During this
period, the Company received net cash of $1,752,512 from non-recurring sources
and made non-recurring payments on notes payable of $422,353. The Company
expects future operating activities to continue to provide cash for investing
and financing activities. However, this cash may be insufficient to meet the
Company's possible investing and financing activities.
On December 2, 1996, the Company formalized a $750,000 bank
mortgage/construction loan agreement and a $400,000 bank line of credit. The
Company believes that this bank financing
16
<PAGE> 18
together with proceeds from its stock offering and cash from operating
activities will be sufficient to finance the Company's operations, planned
capital expenditures and repayment of debt.
On November 22, 1996, the Company's board of directors authorized the
construction of a new manufacturing and office facility and the Company is
currently constructing this facility, estimated to cost approximately
$1,600,843. In addition, the Company plans to purchase equipment estimated to
cost approximately $445,311 and expects to utilize $68,787 to retire outstanding
mortgage notes payable and subordinated debentures.
On February 28, 1997, the Company paid the balance outstanding on a mortgage
note payable to a bank, collateralized by real estate, due on February 14, 2002.
The amount of this payment was $33,787.
On February 28, 1997, the holders of $265,000 of the Company's Three Year
Subordinated Convertible Redeemable Promissory Note, maturing March 1, 1997
("Note"), exercised their right of conversion. The Note specified a conversion
rate of 182 shares of the Company's common stock for every $1,000 of principal
amount. On March 1, 1997, the Company issued 48,230 shares of common stock to
holders of Notes who elected conversion and paid $35,000 in principal to the
remaining holders of Notes.
The Company during the nine month period ending January 31, 1997 has experienced
an inflationary increase in the cost of one of its principal raw materials. The
Company has raised the selling price of its products to cover this cost
increase.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 31, 1996, a former Select Origins, Inc. shareholder and the Company
signed a Settlement Agreement, Release of Augmentation Claims and Authorization
of Release of Escrowed Shares ("Agreement"). This Agreement settled certain
escrow and augmentation issues that arose from the acquisition of Select
Origins, Inc. ("Select") by the Company on April 30, 1994. The former Select
shareholder, in consideration of the Company releasing 15,000 shares of common
stock, released the Company from all claims or potential claims arising from the
acquisition of Select by the Company. The Company exercised an option to
repurchase 91 of the 15,000 shares of common stock at the market value as of the
date of the Agreement. The Agreement calls for the Company to offer the same
Settlement Agreement on a pro-rata basis to the remaining former Select
shareholders. The 15,000 shares of common stock specified in the Agreement with
the former Select shareholder represented 85.315% of the total shares of common
stock if all former Select shareholders agreed to the same Settlement Agreement.
As of March 5, 1997, one additional former Select shareholder, representing an
additional 141 shares of common stock, has signed a Settlement Agreement with
the Company.
17
<PAGE> 19
ITEM 2. CHANGES IN SECURITIES
(a) None
(b) None
(c) On January 27, 1997, the Company issued 3,000 shares of its common stock
at $3.00 per share upon the exercise of warrants. The Company received
net cash totaling $9,000 as a result of this transaction. These
unregistered securities, in respect to the exercise of warrants, were
issued in reliance upon the exemption in Section 4(2) of the Securities
Act of 1933.
On March 1, 1997, the Company issued 48,230 shares of its common stock as
the result of certain holders of the Company's Three Year Subordinated
Convertible Redeemable Promissory Notes ("Note") exercising their right
to convert every $1,000 in principal amount of the Notes to 182 shares of
common stock. The Notes were due and payable on March 1, 1997. The
Company did not have to pay $265,000 in principal payments as the result
of this transaction. These unregistered securities, in respect to
exercising conversion rights of the Notes, were issued in reliance upon
the exemption in Section 3(a)(9) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit #10(a) - STANDARD FORM OF AGREEMENT BETWEEN OWNER AND
DESIGN/BUILDER dated December 20, 1996
Exhibit #10(b) - PROMISSORY NOTE AND BUSINESS LOAN AGREEMENT ($400,000) dated
December 2, 1996
Exhibit #10(c) - PROMISSORY NOTE AND BUSINESS LOAN AGREEMENT ($750,000) dated
December 2, 1996
18
<PAGE> 20
Exhibit #10(d) - CONSTRUCTION LOAN AGREEMENT dated December 2, 1996
Exhibit #27 - Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized,
Date: March 13, 1997 STEARNS & LEHMAN, INC.
(Registrant)
/ S / William C. Stearns
----------------------------
William C. Stearns
President
/ S / John A. Chuprinko
---------------------------
John A. Chuprinko
Chief Financial Officer
(Principal Accounting Officer)
19
<PAGE> 1
STANDARD FORM OF AGREEMENT BETWEEN OWNER AND DESIGN/BUILDER
AIA Document A191, 1985 Edition
Copyright (C) 1985 by The American Institute of Architects
PART 2 AGREEMENT - FINAL DESIGN AND CONSTRUCTION
AGREEMENT
made as of the 20th day of December in the year of Nineteen Hundred and Ninety
Six (1996)
BETWEEN the Owner: Stearns & Lehman, Inc.
52 Surrey Road
Mansfield, Ohio
and the Design/Builder: Weithman Bros., Inc.
409 Kroft Street
Galion, Ohio
For the following Project: New facility for Stearns & Lehman, Inc.
Paragon Parkway
Mansfield, Ohio
The architectural services described in Article 2 will be provided by the
following person or entity who is lawfully licensed to practice architecture:
Weithman Bros., Inc. & Robert A. Kerst
The Owner and the Design/Builder agree as set forth below.
Terms and Conditions-Part 2 Agreement
ARTICLE 1
---------
GENERAL PROVISIONS
1.1 BASIC DEFINITIONS
1.1.1 The Contract Documents consist of the Design/Builder's Proposal
identified in Article 14, this Part 2, the Construction Documents approved by
the Owner in accordance with subparagraph 2.2.2 below and Modifications issued
after execution of Part 2. A Modification is a Change Order or a written
amendment to Part 2 signed by both parties. These form the Contract, and are
as fully a part of the Contract as if attached to this Part 2 or repeated
herein.
1.1.2 The Project is the total design and construction for which the
Design/Builder is responsible under Part 2 including all professional design
services and all labor, materials and equipment used or incorporated in such
design and construction.
Exhibit #10(a), Page 1 of 19
<PAGE> 2
1.1.3 The Work comprises the completed construction designed under the Project
and includes labor necessary to produce such construction, and materials and
equipment incorporated or to be incorporated in such construction.
1.2 EXECUTION, CORRELATION AND INTENT
1.2.1 This Part 2 shall be signed in not less than duplicate by the Owner and
Design/Builder.
1.2.2 It is the intent of the Owner and Design/Builder that the Contract
Documents include all items necessary for proper execution and completion of
the Work. The Contract Documents are complementary, and what is required by
anyone shall be as binding as if required by all. Work not covered in the
Contract Documents will not be required unless it is consistent with and is
reasonably inferable from the Contract Documents as being necessary to produce
the intended results. Words and abbreviations which have well-known technical
or trade meanings are used in the Contract Documents in accordance with such
recognized meanings.
1.3 OWNERSHIP AND USE OF DOCUMENTS
1.3.1 The drawings, specifications and other documents furnished by the
Design/Builder are instruments of service and shall not become the property of
the Owner whether or not the Project for which they are made is commenced.
Drawings, specifications and other documents furnished by the Design/Builder
shall not be used by the Owner on other projects, unless the Design/Builder is
in default under Part 2, for completion of this Project by others, except by
written agreement relating to use, liability and compensation. Notwithstanding
the foregoing, Owner shall have complete access to the drawings,
specifications and other documents with regard to the maintenance and upkeep
of the building.
1.3.2 Submission or distribution of documents to meet official regulatory
requirements or for other purposes in connection with the Project is not to be
construed as publication in derogation of the Design/Builder's or the
Architect's common law copyrights or other reserved rights. The Owner shall
own neither the documents nor the copyrights.
ARTICLE 2
---------
DESIGN/BUILDER
2.1 SERVICES AND RESPONSIBILITIES
2.1.1 Design services shall be performed by qualified architects, engineers
and other professionals selected and paid by the Design/Builder. The
professional obligations of such persons shall be undertaken and performed in
the interest of the Design/Builder. Construction services shall be performed
by qualified construction contractors and suppliers, selected and paid by the
Design/Builder and acting in the interest of the Design/Builder. Nothing
contained in Part 2 shall create any professional obligation or contractual
relationship between such persons and the Owner.
Exhibit #10(a), Page 2 of 19
<PAGE> 3
2.2 BASIC SERVICES
2.2.1 The Design/Builder's Basic Services are described below and in Article
14.
2.2.2 Based on the Design/Builder's Proposal, the Design/Builder shall submit
Construction Documents for review and approval by the Owner. Construction
Documents shall include technical drawings, schedules, diagrams and
specifications, setting forth in detail the requirements for construction of
the Work, and shall:
2.2.2.1 develop the intent of the Design/Builder's Proposal in
greater detail;
2.2.2.2 provide information customarily necessary for the use
of those in the building trades; and
2.2.2.3 include documents customarily required for regulatory agency
approvals.
2.2.3 The Design/Builder shall assist the Owner in filing documents required
to obtain necessary approvals of governmental authorities having jurisdiction
over the Project.
2.2.4 Unless otherwise provided in the Contract Documents, the Design/Builder
shall provide or cause to be provided and shall pay for design services,
labor, materials, equipment, tools, construction equipment and machinery,
water, heat, utilities, transportation and other facilities and services
necessary for proper execution and completion of the Work, whether temporary
or permanent and whether or not incorporated or to be incorporated in the
Work.
2.2.5 The Design/Builder shall be responsible for and shall coordinate all
construction means, methods, techniques, sequences and procedures.
2.2.6 The Design/Builder shall keep the Owner informed of the progress and
quality of the Work.
2.2.7 If requested in writing by the Owner, the Design/Builder, with
reasonable promptness and in accordance with time limits agreed upon, shall
interpret the requirements of the Contract Documents and initially shall
decide, subject to demand for arbitration, claims, disputes and other matters
in question relating to performance thereunder by both Owner and
Design/Builder. Such interpretations and decisions shall be in writing, shall
not be presumed to be correct and shall be given such weight as the
arbitrator(s) or the court shall determine.
2.2.8 The Design/Builder shall correct Work which does not conform to the
Construction Documents.
2.2.9 The Design/Builder warrants to the Owner that materials and equipment
incorporated in the Work will be new unless otherwise specified, and that the
Work and Design will be of good quality, free from faults and defects, and in
conformance with the Contract Documents. Work not conforming to these
requirements shall be corrected in accordance with Article 9.
2.2.10 The Design/Builder shall pay all sales, consumer, use and similar taxes
which were in
Exhibit #10(a), Page 3 of 19
<PAGE> 4
effect at the time the Design/Builder's Proposal was first submitted to the
Owner, and shall secure and pay for building and other permits and governmental
fees, licenses and inspections necessary for the proper execution and completion
of the Work which are either customarily secured after execution of Part 2 or
are legally required at the time the Design/Builder's Proposal was first
submitted to the Owner.
2.2.11 The Design/Builder shall give notices and comply with laws, ordinances,
rules, regulations and lawful orders of public authorities relating to the
Project.
2.2.12 The Design/Builder shall pay royalties and license fees. The
Design/Builder shall defend suits or claims for infringement of patent rights
and shall save the Owner harmless from loss on account thereof, except that
the Owner shall be responsible for such loss when a particular design, process
or product of a particular manufacturer is required by the Owner. However, if
the Design/Builder has reason to believe the use of a required design, process
or product is an infringement of a patent, the Design/Builder shall be
responsible for such loss unless such information is promptly given to the
Owner.
2.2.13 The Design/Builder shall be responsible to the Owner for acts and
omissions of the Design/Builder's employees and parties in privity of contract
with the Design/Builder to perform a portion of the Work, including their
agents and employees.
2.2.14 The Design/Builder shall keep the premises free from accumulation of
waste materials or rubbish caused by the Design/Builder's operations. At the
completion of the Work, the Design/Builder shall remove from and about the
Project the Design/Builder's tools, construction equipment, machinery, surplus
materials, waste materials and rubbish.
2.2.15 The Design/Builder shall prepare Change Orders for the Owner's approval
and execution in accordance with Part 2 and shall have authority to make minor
changes in the design and construction consistent with the intent of Part 2
not involving an adjustment in the contract sum or an extension of the
contract time. The Design/Builder shall promptly inform the Owner, in writing,
of minor changes in the design and construction.
2.2.16 The Design/Builder shall notify the Owner when the Work or an agreed
upon portion thereof is substantially completed by issuing a Certificate of
Substantial Completion which shall establish the Date of Substantial
Completion, shall state the responsibility of each party for security,
maintenance, heat, utilities, damage to the Work and insurance, shall include
a list of items to be completed or corrected and shall fix the time within
which the Design/Builder shall complete items listed therein. Disputes between
the Owner and Design/Builder regarding the Certificate of Substantial
Completion shall be resolved by arbitration.
2.2.17 The Design/Builder shall maintain in good order at the site one record
copy of the drawings, specifications, product data, samples, shop drawings,
Change Orders and other Modifications, marked currently to record changes made
during construction. These shall be delivered to the Owner upon completion of
the design and construction and prior to final payment.
Exhibit #10(a), Page 4 of 19
<PAGE> 5
ARTICLE 3
---------
OWNER
3.1 The Owner shall designate a representative authorized to act on the
Owner's behalf with respect to the Project. The Owner or such authorized
representative shall examine documents submitted by the Design/Builder and
shall promptly render decisions pertaining thereto to avoid delay in the
orderly progress of the Work.
3.2 The Owner may appoint an on-site project representative to observe the
Work and to have such other responsibilities as the Owner and Design/Builder
agree in writing prior to execution of Part 2.
3.3 The Owner shall cooperate with the Design/Builder in securing building and
other permits, licenses and inspections, and shall pay the fees for such
permits, licenses and inspections if the cost of such fees is not identified
as being included in the Design/Builder's Proposal.
3.4 The Owner shall furnish services by land surveyors, geotechnical engineers
and other consultants for subsoil, air and water conditions, in addition to
those provided under Part 1 when such services are deemed necessary by the
Design/Builder to carry out properly the design services under this Part 2.
3.5 (Paragraph deleted).
3.6 The services, information, surveys and reports required by Paragraphs 3.4
shall be furnished at the Owner's expense, and the Design/Builder shall be
entitled to rely upon their accuracy and completeness.
3.7 If the Owner observes or otherwise becomes aware of a fault or defect in
the Work or nonconformity with the Design or Construction Documents, the Owner
shall give prompt written notice thereof to the Design/Builder.
3.8 The Owner shall furnish required information and services and shall
promptly render decisions pertaining thereto to avoid delay in the orderly
progress of the design and construction.
3.9 The Owner shall, at the request of the Design/Builder and upon execution
of Part 2, provide a certified or notarized statement of funds available for
the Project and their source.
3.10 The Owner shall communicate with contractors only through the
Design/Builder.
ARTICLE 4
---------
TIME
4.1 The Design/Builder shall provide services as expeditiously as is
consistent with reasonable skill and care and the orderly progress of design
and construction.
Exhibit #10(a), Page 5 of 19
<PAGE> 6
4.2 Time limits stated in the Contract Documents are of the essence of Part 2.
The Work to be performed under Part 2 shall commence upon execution of a
notice to proceed unless otherwise agreed and, subject to authorized
Modifications, Substantial Completion shall be achieved as indicated in
Article 14.
4.3 The Date of Substantial Completion of the Work or an agreed upon portion
thereof is the date when construction or an agreed upon portion thereof is
sufficiently complete so the Owner can occupy and utilize the Work or agreed
upon portion thereof for its intended use.
4.4 The schedule provided in the Design/Builder's Proposal shall include a
construction schedule consistent with Paragraph 4.2 above.
4.5 If the Design/Builder is delayed in the progress of the Project by acts or
neglect of the Owner, Owner's employees, separate contractors employed by the
Owner, changes ordered in the Work not caused by the fault of the
Design/Builder, labor disputes, fire, unusual delay in transportation, adverse
weather conditions not reasonably anticipatable, unavoidable casualties, or
other causes beyond the Design/Builder's control, or by delay authorized by
the Owner's pending arbitration or another cause which the Owner and
Design/Builder agree is justifiable, the contract time shall be reasonably
extended by Change Order.
ARTICLE 5
---------
PAYMENTS
5.1 PROGRESS PAYMENTS
5.1.1 The Design/Builder shall deliver to the Owner itemized Applications for
Payment.
5.1.2 Within ten days of the Owner's receipt of a properly submitted and
correct Application for Payment, the Owner shall make payment to the
Design/Builder.
5.1.3 The Application for Payment shall constitute a representation by the
Design/Builder to the Owner that, to the best of the Design/Builder's
knowledge, information and belief, the design and construction have progressed
to the point indicated; the quality of the Work covered by the application is
in accordance with the Contract Documents; and the Design/Builder is entitled
to payment in the amount requested.
5.1.4 The Design/Builder shall pay each contractor, upon receipt of payment
from the Owner, out of the amount paid to the Design/Builder on account of
such contractor's work, the amount to which said contractor is entitled in
accordance with the terms of the Design/Builder's contract with such
contractor. The Design/Builder shall, by appropriate agreement with each
contractor, require each contractor to make payments to subcontractors in
similar manner.
5.1.5 The Owner shall have no obligation to pay or to be responsible in any
way for payment to a contractor of the Design/Builder except as may otherwise
be required by law.
Exhibit #10(a), Page 6 of 19
<PAGE> 7
5.1.6 No progress payment or partial or entire use or occupancy of the Project
by the Owner shall constitute an acceptance of Work not in accordance with the
Contract Documents.
5.1.7 The Design/Builder warrants that: (1) title to Work, materials and
equipment covered by an Application for Payment will pass to the Owner either
by incorporation in construction or upon receipt of payment by the
Design/Builder, whichever occurs first; (2) Work, materials and equipment
covered by previous Applications for Payment are free and clear of liens,
claims, security interests or encumbrances, hereinafter referred to as
"liens"; and (3) no Work, materials or equipment covered by an Application for
Payment will have been acquired by the Design/Builder, or any other person
performing work at the site or furnishing materials or equipment for the
Project, subject to an agreement under which an interest therein or an
encumbrance thereon is retained by the seller or otherwise imposed by the
Design/Builder or such other person.
5.1.8 If the Contract provides for retainage, then at the date of Substantial
Completion or occupancy of the Work or any agreed upon portion thereof by the
Owner, whichever occurs first, the Design/Builder may apply for and the Owner,
if the Design/Builder has satisfied the requirements of Paragraph 5.2.1 and
any other requirements of the Contract relating to retainage, shall pay the
Design/Builder the amount retained, if any, for the Work or for the portion
completed or occupied, less the reasonable value of incorrect or incomplete
Work. Final payment of such withheld sum shall be made upon correction or
completion of such Work.
5.2 FINAL PAYMENT
5.2.1 Neither progress payments, final payment nor amounts retained, if any,
shall become due until the Design/Builder submits to the Owner (1) an
affidavit that payrolls, bills for materials and equipment, and other
indebtedness connected with the Project for which the Owner or Owner's
property might be liable have been paid or otherwise satisfied, (2) consent of
surety, if any, to final payment, (3) a certificate that insurance required by
the Contract Documents is in force following completion of the Work, and (4)
if required by the Owner, other data establishing payment or satisfaction of
obligations, such as receipts, releases and waivers of liens arising out of
Part 2, to the extent and in such form as may be designated by the Owner. If a
contractor refuses to furnish a release or waiver required by the Owner, the
Design/Builder may furnish a bond satisfactory to the Owner to indemnify the
Owner against such lien. If such lien remains unsatisfied after payments are
made, the Design/Builder shall reimburse the Owner for moneys the latter may
be compelled to pay in discharging such lien including all costs and
reasonable attorneys' fees plus interest at 18% until paid.
5.2.2 Final payment constituting the entire unpaid balance due shall be paid
by the Owner to the Design/Builder upon the Owner's receipt of the
Design/Builder's final Application for Payment when the Work has been
completed and the Contract fully performed except for those responsibilities
of the Design/Builder which survive final payment.
5.2.3 (Paragraph deleted).
Exhibit #10(a), Page 7 of 19
<PAGE> 8
5.2.4 Acceptance of final payment shall constitute a waiver of all claims by
the Design/Builder except those previously made in writing and identified by
the Design/Builder as unsettled at the time of final Application for Payment.
5.3 (Paragraph deleted).
5.3.1 (Paragraph deleted).
ARTICLE 6
---------
PROTECTION OF PERSONS AND PROPERTY
6.1 The Design/Builder shall be responsible for initiating, maintaining and
providing supervision of safety precautions and programs in connection with
the Work.
6.2 The Design/Builder shall take reasonable precautions for safety of, and
shall provide reasonable protection to prevent damage, injury or loss to: (1)
employees on the Work and other persons who may be affected thereby; (2) the
Work and materials and equipment to be incorporated therein; and (3) other
property at or adjacent to the site.
6.3 The Design/Builder shall give notices and comply with applicable laws,
ordinances, rules, regulations and orders of public authorities bearing on the
safety of persons and property and their protection from damage, injury or
loss.
6.4 The Design/Builder shall be liable for damage or loss to property at the
site caused in whole or in part by the Design/Builder, a contractor of the
Design/Builder or anyone directly or indirectly employed by either of them, or
by anyone for whose acts they may be liable, except damage or loss
attributable to the acts or omissions of the Owner, the Owner's separate
contractors or anyone directly or indirectly employed by them or by anyone for
whose acts they may be liable and not attributable to the fault or negligence
of the Design/Builder.
ARTICLE 7
---------
INSURANCE AND BONDS
7.1 DESIGN/BUILDER'S LIABILITY INSURANCE
7.1.1 The Design/Builder shall purchase and maintain in a company or companies
authorized to do business in the state in which the Work is located such
insurance as will protect the Design/Builder, with the Owner listed as
additional insured, from claims set forth below which may arise out of or result
from operations under the Contract by the Design/Builder or by a contractor of
the Design/Builder, or by anyone directly or indirectly employed by any of them,
or by anyone for whose acts they may be liable:
7.1.1.1 claims under workers' or workmen's compensation, disability
benefit and other similar employee benefit laws which are
applicable to the Work to be performed;
7.1.1.2 claims for damages because of bodily injury, occupational
sickness or disease, or
Exhibit #10(a), Page 8 of 19
<PAGE> 9
death of the Design/Builder's employees under any applicable
employer's liability law;
7.1.1.3 claims for damages because of bodily injury, sickness or
disease, or death of persons other than the Design/Builder's
employees;
7.1.1.4 claims for damages covered by usual personal injury liability
coverage which are sustained (1) by a person as a result of an
offense directly or indirectly related to employment of such
person by the Design/Builder or (2) by another person;
7.1.1.5 claims for damages, other than to the Work at the site,
because~of injury to or destruction of tangible property,
including loss of use; and
7.1.1.6 claims for damages for bodily injury or death of a person or
property damage arising out of ownership, maintenance or use
of a motor vehicle.
7.1.2 The insurance required by the above Subparagraph 7.1.1 shall be written
for not less than limits of liability as may be reasonably required by Owner.
7.1.3 The Design/Builder's liability insurance shall include contractual
liability insurance applicable to the Design/Builder's obligations under
Paragraph 11.7.
7.1.4 Certificates of Insurance, and copies of policies if requested,
acceptable to the Owner shall be delivered to the Owner prior to commencement
of design and construction. These Certificates as well as insurance policies
required by this Paragraph shall contain a provision that coverage will not be
canceled or allowed to expire until at least thirty days' prior written notice
has been given to the Owner. If any of the foregoing insurance coverages are
required to remain in force after final payment, an additional certificate
evidencing continuation of such coverage shall be submitted along with the
application for final payment.
7.2 OWNER'S LIABILITY INSURANCE
7.2.1 The Owner shall be responsible for purchasing and maintaining, in a
company or companies authorized to do business in the state in which the
principal improvements are to be located, Owner's liability insurance to
protect the Owner against claims which may arise from operations under this
Project.
7.3 PROPERTY INSURANCE
7.3.1 Unless otherwise provided under this Part 2, the Owner shall purchase
and maintain, in a company or companies authorized to do business in the state
in which the principal improvements are to be located, property insurance upon
the Work at the site to the full insurable value thereof. Property insurance
shall include interests of the Owner, the Design/Builder, and their respective
contractors and subcontractors in the Work. It shall insure against perils of
fire and extended coverage and shall include all risk insurance for physical
loss or damage including, without duplication of coverage, theft, vandalism
and malicious mischief.
7.3.2 Unless otherwise provided under this Part 2, the Owner shall purchase
and maintain such boiler and machinery insurance as may be required by the
Contract Documents or by law and
Exhibit #10(a), Page 9 of 19
<PAGE> 10
which shall specifically cover such insured objects during installation and
until final acceptance by the Owner. This insurance shall cover interests of the
Owner, the Design/Builder, and the Design/Builder's contractors and
subcontractors in the Work.
7.3.3 A loss Insured under Owner's property insurance is to be adjusted with
the Owner and made payable to the Owner as trustee for the insureds, as their
interests may appear, subject to requirements of any applicable mortgagee
clause and of Subparagraph 7.3.8. The Design/Builder shall pay contractors
their shares of insurance proceeds received by the Design/Builder, and by
appropriate agreement, written where legally required for validity, shall
require contractors to make payments to their subcontractors in similar
manner.
7.3.4 Before an exposure to loss may occur, the Owner shall file with the
Design/Builder a copy of each policy required by this Paragraph 7.3. Each
policy shall contain only those endorsements specifically related to this
Project. Each policy shall contain a provision that the policy will not be
cancelled or allowed to expire until at least thirty days' prior written
notice has been given the Design/Builder.
7.3.5 If the Design/Builder requests in writing that insurance for risks other
than those described herein or for other special hazards be included in the
property insurance policy, the Owner shall, if possible, obtain such
insurance, and the cost thereof shall be charged to the Design/Builder by
appropriate Change Order.
7.3.6 (Paragraph deleted).
7.3.7 (Paragraph deleted).
7.3.8 (Paragraph deleted).
7.3.9 If the Owner finds it necessary to occupy or use a portion or portions
of the Work before Substantial Completion, such occupancy or use shall not
commence prior to a time agreed to by the Owner and Design/Builder and to
which the insurance company or companies providing property insurance have
consented by endorsement to the policy or policies. The property insurance
shall not lapse or be canceled on account of such partial occupancy or use.
Consent of the Design/Builder and of the insurance company or companies to
such occupancy or use shall not be unreasonably withheld.
7.4 LOSS OF USE INSURANCE
7.4.1 The Owner, at the Owner's option, may purchase and maintain such
insurance as will insure the Owner against loss of use of the Owner's property
due to fire or other hazards, however caused.
7.5 PERFORMANCE BOND AND PAYMENT BOND (See AMENDMENT 1-B.)
7.5.1 The Owner shall have the right to require the Design/Builder to furnish
bonds covering the
Exhibit #10(a), Page 10 of 19
<PAGE> 11
faithful performance of the Contract and the payment of all obligations arising
thereunder if and as required in the Contract Documents or in Article 14.
ARTICLE 8
---------
CHANGES IN THE WORK
8.1 CHANGE ORDERS
8.1.1 A Change Order is a written order signed by the Owner and
Design/Builder, and issued after execution of Part 2, authorizing a change in
the Work or adjustment in the contract sum or contract time. The contract sum
and contract time may be changed only by Change Order.
8.1.2 The Owner, without invalidating Part 2, may order changes in the Work
within the general scope of Part 2 consisting of additions, deletions or other
revisions, and the contract sum and contract time shall be adjusted
accordingly. Such changes in the Work shall be authorized by Change Order, and
shall be performed under applicable conditions of the Contract Documents.
8.1.3 If the Owner requests the Design/Builder to submit a proposal for a
change in the Work and then elects not to proceed with the change, a Change
Order shall be issued to reimburse the Design/Builder for any costs incurred
for Design Services or proposed revisions to the Contract Documents.
8.1.4 Cost or credit to the Owner resulting from a change in the Work shall be
determined in one or more of the following ways:
8.1.4.1 by mutual acceptance of a lump sum properly itemized and
supported by sufficient substantiating data to permit
evaluation;
8.1.4.2 by unit prices stated in the Contract Documents or
subsequently agreed upon;
8.1.4.3 by cost to be determined in a manner agreed upon by the
parties and a mutually acceptable fixed or percentage fee; or
8.1.4.4 by the method provided below.
8.1.5 If none of the methods set forth in Clauses 8.1.4.1, 8.1.4.2 or 8.1.4.3
is agreed upon, the Design/Builder, provided a written order signed by the
Owner is received, shall promptly proceed with the Work involved. The cost of
such Work shall then be determined on the basis of reasonable expenditures and
savings of those performing the Work attributable to the change, including the
expenditures for design services and revisions to the Contract Documents. In
case of an increase in the contract sum, the cost shall include a reasonable
allowance for overhead and profit. In case of the methods set forth in Clauses
8.1.4.3 and 8.1.4.4, the Design/Builder shall keep and present an itemized
accounting together with appropriate supporting data for inclusion in a Change
Order. Unless otherwise provided in the Contract Documents, cost shall be
limited to the following: cost of materials, including sales tax and cost of
delivery; cost of labor, including social security, old age and unemployment
insurance, and fringe benefits required by agreement or custom; workers' or
workmen's compensation insurance; bond premiums; rental value of equipment and
machinery; additional costs of supervision and field office personnel directly
Exhibit #10(a), Page 11 of 19
<PAGE> 12
attributable to the change; and fees paid to architects, engineers and other
professionals. Pending final determination of cost to the Owner, payments on
account shall be made on the Application for Payment. The amount of credit to be
allowed by the Design/Builder to the Owner for deletion or change which results
in a net decrease in the contract sum will be actual net cost. When both
additions and credits covering related Work or substitutions are involved in a
change, the allowance for overhead and profit shall be figured on the basis of
the net increase, if any, with respect to that change.
8.1.6 If unit prices are stated in the Contract Documents or subsequently
agreed upon, and if quantities originally contemplated are so changed in a
proposed Change Order that application of agreed unit prices to quantities
proposed will cause substantial inequity to the Owner or Design/Builder,
applicable unit prices shall be equitably adjusted.
8.2 CONCEALED CONDITIONS
8.2.1 If concealed or unknown conditions of an unusual nature that affect the
performance of the Work and vary from those indicated by the Contract
Documents are encountered below ground or in an existing structure other than
the Work, which conditions are not ordinarily found to exist or which differ
materially from those generally recognized as inherent in work of the
character provided for in this Part 2, notice by the observing party shall be
given promptly to the other party and, if possible, before conditions are
disturbed and in no event later than twenty-one days after first observance of
the conditions. The contract sum shall be equitably adjusted for such
concealed or unknown conditions by Change Order upon claim by either party
made within twenty-one days after the claimant becomes aware of the
conditions.
8.3 REGULATORY CHANGES
8.3.1 The Design/Builder shall be compensated for changes in the Work
necessitated by the enactment or revision of codes, laws or regulations
subsequent to the submission of the Design/Builder's Proposal under Part 1.
ARTICLE 9
---------
CORRECTION OF WORK
9.1 The Design/Builder shall promptly correct Work rejected by the Owner or
known by the Design/Builder to be defective or failing to conform to the
Construction Documents, whether observed before or after Substantial
Completion and whether or not fabricated, installed or completed, and shall
correct Work under this Part 2 found to be defective or nonconforming within a
period of one year from the date of Substantial Completion of the Work or
designated portion thereof, or within such longer period provided by any
applicable special warranty in the Contract Documents.
9.2 Nothing contained in this Article 9 shall be construed to establish a
period of limitation with respect to other obligations of the Design/Builder
under this Part 2. Paragraph 9.1 relates only to the specific obligation of
the Design/Builder to correct the Work, and has no relationship
Exhibit #10(a), Page 12 of 19
<PAGE> 13
to the time within which the obligation to comply with the Contract Documents
may be sought to be enforced, nor to the time within which proceedings may be
commenced to establish the Design/Builder's liability with respect to the
Design/Builder's obligations other than correction of the Work.
9.3 If the Design/Builder fails to correct defective Work as required or
persistently fails to carry out Work in accordance with the Contract
Documents, the Owner, by written order signed personally or by an agent
specifically so empowered by the Owner in writing, may order the
Design/Builder to stop the Work, or any portion thereof, until the cause for
such order has been eliminated; however, the Owner's right to stop the Work
shall not give rise to a duty on the part of the Owner to exercise the right
for benefit of the Design/Builder or other persons or entities.
9.4 If the Design/Builder defaults or neglects to carry out the Work in
accordance with the Contract Documents and fails within seven days after
receipt of written notice from the Owner to commence and continue correction
of such default or neglect with diligence and promptness, the Owner may give a
second written notice to the Design/Builder and, seven days following receipt
by the Design/Builder of that second written notice and without prejudice to
other remedies the Owner may have, correct such deficiencies. In such case an
appropriate Change Order shall be issued deducting from payments then or
thereafter due the Design/Builder costs of correcting such deficiencies. If
the payments then or thereafter due the Design/Builder are not sufficient to
cover the amount of the deduction, the Design/Builder shall pay the difference
to the Owner. Such action by the Owner shall be subject to arbitration.
ARTICLE 10
----------
ARBITRATION
10.1 Claims, disputes and other matters in question between the parties to
this Part 2 arising out of or relating to Part 2 shall be decided by
arbitration in accordance with the Construction Industry Arbitration Rules of
the American Arbitration Association then in effect unless the parties agree
otherwise. No arbitration arising out of or relating to this Part 2 shall
include, by consolidation or joinder or in any other manner, an additional
person not a party to Part 2 except by written consent containing specific
reference to Part 2 and signed by the Owner, Design/Builder and any other
person sought to be joined. Consent to arbitration involving an additional
person or persons shall not constitute consent to arbitration of a dispute not
described or with a person not named therein. This provision shall be
specifically enforceable in any court of competent jurisdiction.
10.2 Notice of demand for arbitration shall be filed in writing with the other
party to this Part 2 and with the American Arbitration Association. The demand
shall be made within a reasonable time after the claim, dispute or other
matter in question has arisen. In no event shall the demand for arbitration be
made after the date when the applicable statute of limitations would bar
institution of a legal or equitable proceeding based on such claim, dispute or
other matter in question.
10.3 The award rendered by arbitrators shall be final, and judgment may be
entered upon it in
Exhibit #10(a), Page 13 of 19
<PAGE> 14
accordance with applicable law in any court having jurisdiction.
10.4 Unless otherwise agreed in writing, the Design/Builder shall carry on the
Work and maintain its progress during any arbitration proceedings, and the
Owner shall continue to make payments to the Design/Builder in accordance with
the Contract Documents.
10.5 This Article 10 shall survive completion or termination of Part 2.
ARTICLE 11
----------
MISCELLANEOUS PROVISIONS
11.1 This Part 2 shall be governed by the law of the place where the Work is
located.
11.2 The table of contents and the headings of articles and paragraphs are for
convenience only and shall not modify rights and obligations created by this
Part 2.
11.3 In case a provision of Part 2 is held to be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not be affected.
11.4 SUBCONTRACTS
11.4.1 The Design/Builder, as soon as practicable after execution of Part 2,
shall furnish to the Owner in writing the names of the persons or entities the
Design/Builder will engage as contractors for the Project.
11.4.2 Nothing contained in the Design/Builder Contract Documents shall create a
professional obligation or contractual relationship between the Owner and any
third party.
11.5 WORK BY OWNER OR OWNER'S CONTRACTORS
11.5.1 The Owner reserves the right to perform work related to, but not part of,
the Project and to award separate contracts in connection with other work at the
site. If the Design/Builder claims that delay or additional cost is involved
because of such action by the Owner, the Design/ Builder shall make such claims
as provided in Subparagraph 11.6.
11.5.2 The Design/Builder shall afford the Owner's separate contractors
reasonable opportunity for introduction and storage of their materials and
equipment for execution of their work. The Design/Builder shall incorporate and
coordinate the Design/Builder's Work with work of the Owner's separate
contractors as required by the Contract Documents.
11.5.3 Costs caused by defective or ill-timed work shall be borne by the party
responsible.
11.6 CLAIMS FOR DAMAGES
11.6.1 Should either party to Part 2 suffer injury or damage to person or
property because of an
Exhibit #10(a), Page 14 of 19
<PAGE> 15
act or omission of the other party, the other party's employees or agents, or
another for whose acts the other party is legally liable, claim shall be made in
writing to the other party within a reasonable time after such injury or damage
is or should have been first observed.
11.7 INDEMNIFICATION
11.7.1 To the fullest extent permitted by law, the Design/Builder shall
indemnify and hold harmless the Owner and the Owner's consultants and separate
contractors, any of their subcontractors, sub-subcontractors, agents and
employees from and against claims, damages, losses and expenses, including but
not limited to attorneys' fees, arising out of or resulting from performance of
the Work.
11.7.2 In claims against the Owner or its consultants and its contractors, any
of their subcontractors, sub-subcontractors, agents or employees by an employee
of the Design/Builder, its contractors, anyone directly or indirectly employed
by them or anyone for whose acts they may be liable, the indemnification
obligation under this Paragraph 11.7 shall not be limited by a limitation on
amount or type of damages, compensation or benefits payable by or for the
Design/Builder, or a Design/Builder's contractor, under workers' or workmen's
compensation acts, disability benefit acts or other employee benefit acts.
11.8 SUCCESSORS AND ASSIGNS
11.8.1 This Part 2 shall be binding on successors, assigns, and legal
representatives of and persons in privity of contract with the Owner or
Design/Builder. Neither party shall assign, sublet or transfer an interest in
Part 2 without the written consent of the other.
11.8.2 This Paragraph 11.8 shall survive completion or termination of Part 2.
11.9 In case of termination of the Architect, the Design/Builder shall provide
the services of another lawfully licensed person or entity against whom the
Owner makes no reasonable objection.
11.10 EXTENT OF AGREEMENT
11.10.1 Part 2 represents the entire agreement between the Owner and
Design/Builder and supersedes Part 1 and prior negotiations, representations
or agreements. Part 2 may be amended only by written instrument signed by both
Owner and Design/Builder.
ARTICLE 12
----------
TERMINATION OF THE AGREEMENT
12.1 TERMINATION BY THE OWNER
12.1.1 (Paragraph deleted).
12.1.2 If the Design/Builder defaults or persistently fails or neglects to
carry out the Work in
Exhibit #10(a), Page 15 of 19
<PAGE> 16
accordance with the Contract Documents or fails to perform the provisions of
Part 2, the Owner may give written notice that the Owner intends to terminate
Part 2. If the Design/Builder fails to correct the defaults, failure or neglect
within seven days after being given notice, the Owner may then give a second
written notice and, after an additional seven days, the Owner may without
prejudice to any other remedy make good such deficiencies and may deduct the
cost thereof from the payment due the Design/Builder or, at the Owner's option,
may terminate the employment of the Design/Builder and take possession of the
site and of all materials, equipment, tools and construction equipment and
machinery thereon owned by the Design/Builder and finish the Work by whatever
method the Owner may deem expedient. If the unpaid balance of the contract sum
exceeds the expense of finishing the Work, the excess shall be paid to the
Design/Builder, but if the expense exceeds the unpaid balance, the
Design/Builder shall pay the difference to the Owner. Delay damages and any
other applicable damages shall be an expense of finishing the Work for purposes
of this paragraph.
12.2 TERMINATION BY THE DESIGN/BUILDER
12.2.1 If the Owner fails to make payment when due, the Design/Builder may
give written notice of the Design/Builder's intention to terminate Part 2. If
the Design/Builder fails to receive payment within seven days after receipt
of such notice by the Owner, the Design/Builder may give a second written
notice and, seven days after receipt of such second written notice by the
Owner, may terminate Part 2 and recover from the Owner payment for Work
executed and for proven losses sustained upon materials, equipment, tools,
and construction equipment and machinery, including reasonable profit and
applicable damages.
ARTICLE 13
----------
BASIS OF COMPENSATION
The Owner shall compensate the Design/Builder in accordance with Article 5,
Payments, and the other provisions of this Part 2 as described below.
13.1 COMPENSATION
13.1.1 FOR BASIC SERVICES, as described in Paragraphs 2.2.2 through 2.2.17, and
for any other services included in Article 14 as part of Basic Services, Basic
Compensation shall be as follows:
CONTRACT PRICE = $1,429,152.00
Notwithstanding anything to the contrary set forth in this agreement,
Owner shall retain 10% of the contract price in an amount equal to
$142,915.20 until all work has been performed under this agreement.
13.2 REIMBURSABLE EXPENSES
Exhibit #10(a), Page 16 of 19
<PAGE> 17
13.2.1 Reimbursable Expenses are in addition to the compensation for Basic
and Additional Services and include actual expenditures made by the
Design/Builder in the interest of the Project for the expenses listed as
follows:
13.2.2 FOR REIMBURSABLE EXPENSES, compensation shall be a multiple of ( )
times the amounts expended.
13.3 INTEREST PAYMENTS
13.3.1 The rate of interest for past due payments shall be as follows: (Usury
laws and requirements under the Federal Truth in Lending Act, similar state
and local consumer credit laws and other regulations at the Owner's and
Design/Builder/s principal places of business, at the location of the Project
and elsewhere may affect the validity of this provision. Specific legal
advice should be obtained with respect to deletion, modification or other
requirements, such as written disclosures or waivers.)
ARTICLE 14
----------
OTHER PROVISIONS
14.1 The Basic Services to be performed shall be commenced on December 23,
1996 and, subject to authorized adjustments and to delays not caused by the
Design/Builder, Substantial Completion shall be achieved by June 15, 1997. In
the event that the project is not substantially complete on or before June
30, 1997, commencing July 1, 1997, the parties agree that Owner shall incur
damages in the amount of $100.00 per day for each day of delay. Commencing
August 1, 1997, the parties agree that Owner shall incur $500.00 per day for
each day of delay. The delay damages shall be deducted from the amount owed
by Owner to Design/Builder. In the event that the damages exceed the amount
owed by Owner to Design/Builder then, Design/Builder shall pay such amount to
Owner upon demand.
14.2 The Basic Services beyond those described in Article 2 are: The design
and construction of the Project shall be accordance with all applicable
professional standards. Design/builder acknowledges that Owner is relying
upon Design/Builder's expertise with regard to the design and construction of
the Project.
14.3 The Design/Builder shall submit an Application for Payment on the 30th
day of each month.
14.4 The Design/Builder's Proposal includes:
(List below: this Part 2, Supplementary and other Conditions, the drawings, the
specifications. and Modifications, showing page or sheet numbers in all cases
and dates where applicable to define the scope of Work.)
Our Proposal dated October 29, 1996
Summary Changes December 18, 1996
Drawings dated December 9, 1996 - Sheets 3 thru 11
Exhibit #10(a), Page 17 of 19
<PAGE> 18
Richland Eng. Drawing December 6, 1996
Richland Eng. Drawing December 12, 1996
This Part 2 entered into as of the day and year first written above.
OWNER DESIGN/BUILDER
Stearns & Lehman, Inc. Weithman Bros., Inc.
52 Surry Road 409 Kroft Street
Mansfield, Ohio 44902 Galion, Ohio 44833
BY /s/ John A. Chuprinko, CFO BY /s/ Raymond A. Weithman, President
Exhibit #10(a), Page 18 of 19
<PAGE> 19
AMENDMENT #1 ATTACHED
A. 7.3 PROPERTY INSURANCE BY DESIGN/BUILDER - CONTRACTOR
B. 7.5 PERFORMING BOND AND PAYMENT BOND.
(NOT INCLUDED IN BASE CONTRACT).
Exhibit #10(a), Page 19 of 19
<PAGE> 1
PROMISSORY NOTE
Borrower: Stearns and Lehman, Inc. Lender: First-Knox National Bank
(TIN: 34-1579817) Lexington Branch
52 Surrey Road 10 Plymouth Street
Mansfield, OH 44901 Lexington, OH 44904
Principal Amount: Initial Rate: Date of Note:
$400,000.00 8.750% December 2, 1996
PROMISE TO PAY. Stearns and Lehman, inc. ("Borrower") promises to pay to
First-Knox National Bank ("Lender"), or order, in lawful money of the United
States of America, the principal amount of Four Hundred Thousand & 00/100
Dollars ($400,000.00) or so much as may be outstanding, together with interest
on the unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on December 2, 1997. In addition, Borrower will
pay regular monthly payments of accrued unpaid interest beginning January 2,
1997, and all subsequent interest payments are due on the same day of each month
after that. Interest on this Note is computed on a 365/360 simple interest
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to any unpaid collection costs and any late
charges, then to any unpaid interest, and any remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an independent index which is the WALL STREET
JOURNAL PRIME (the "Index"). The Index is not necessarily the lowest rate
charged by Lender on its loans. If the Index becomes unavailable during the term
of this loan, Lender may designate a substitute index after notice to Borrower.
Lender will tell Borrower the current Index rate upon Borrower's request.
Borrower understands that Lender may make loans based on other rates as well.
The interest rate change will not occur more often than each day. The index
currently is 8.250% per annum. The interest rate to be applied to the unpaid
principal balance of this Note will be at a rate of 0.500 percentage points over
the index, resulting in an initial rate of 8.750% per annum. NOTICE: Under no
circumstances will the interest rate on this Note be more than the maximum rate
allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges
are earned fully as of the date of the loan and will not be subject to refund
upon early payment (whether voluntary or as a result of default), except as
otherwise required by law. Except for the foregoing, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments of accrued unpaid interest.
Rather, they will
Exhibit 10(b), Page 1 of 13
<PAGE> 2
reduce the principal balance due.
LATE CHARGE. If a payment is 15 days or more late, Borrower will be charged
5.000% of the unpaid portion of the regularly scheduled payment or $50.00,
whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrowers property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is impaired. (I) Lender
in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest Immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 2.500
percentage points over the Index. The Interest rate will not exceed the maximum
rate permitted by applicable law. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will pay Lender that
amount. This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. If not
prohibited by applicable law, Borrower also
Exhibit 10(b), Page 2 of 13
<PAGE> 3
will pay any court costs, in addition to all other sums provided by law. This
Note has been delivered to Lender and accepted by Lender in the State of Ohio.
If there is a lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts of Richland County, the State of Ohio. This Note
shall be governed by and construed in accordance with the laws of the State of
Ohio.
CONFESSION OF JUDGMENT. Borrower hereby irrevocably authorizes and empowers any
attorney-at-law, including an attorney hired by Lender, to appear in any court
of record and to confess judgment against Borrower for the unpaid amount of this
Note as evidenced by an affidavit signed by an officer of Lender setting forth
the amount then due, plus attorneys' fees as provided in this Note, plus costs
of suit, and to release all errors, and waive all RIGHTS of appeal. if a copy of
this Note, verified by an affidavit, shall have been filed in the proceeding, it
will not be necessary to file the original as a warrant of attorney. Borrower
waives the right to any stay of execution and the benefit of all exemption laws
now or hereafter in effect. No single exercise of the foregoing warrant and
power to confess judgment will be deemed to exhaust the power, whether or not
any such exercise shall be held by any court to be invalid, voidable, or void;
but the power will continue undiminished and may be exercised from time to time
as Lender may elect until all amounts owing on this Note have been paid in full.
Borrower waives any conflict of interest that an attorney hired by Lender may
have in acting on behalf of Borrower in confessing judgment against Borrower
while such attorney is retained by Lender. Borrower expressly consents to such
attorney acting for Borrower in confessing judgment.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
COLLATERAL. This Note is secured by a first position on all equipment and
inventory now owned or hereafter acquired, and all accounts receivable now
existing or hereafter arising. A second mortgage on real estate located in the
Township of Mansfield, County of Richland, and State of Ohio, as further
described in mortgage of even date.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note, as well as directions for payment from Borrower's accounts, may be
requested orally or in writing by Borrower or by an authorized person. Lender
may, but need not, require that all oral requests be confirmed in writing. The
following party or parties are authorized to request advances under the line of
credit until Lender receives from Borrower at Lender's address shown above
written notice of revocation of their authority: William Stearns, President; and
Sally Stearns, Secretary. Borrower agrees to be liable for all sums either: (a)
advanced in accordance with the instructions of an authorized person or (b)
credited to any of Borrower's accounts with Lender. The unpaid principal balance
owing on this Note at any time may be evidenced by endorsements on this Note
Exhibit 10(b), Page 3 of 13
<PAGE> 4
or by Lender's internal records, including daily computer print-outs. Lender
will have no obligation to advance funds under this Note if: (a) Borrower or any
guarantor is in default under the terms of this Note or any agreement that
Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Note; (b) Borrower or any guarantor ceases
doing business or is insolvent; (c) any guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such guarantor's guarantee of this Note or
any other loan with Lender; (d) Borrower has applied funds provided pursuant to
this Note for purposes other than those authorized by Lender; or (e) Lender in
good faith deems itself insecure under this Note or any other agreement between
Lender and Borrower.
GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will
not affect the rest of the Note. In particular, this section means (among other
things) that Borrower does not agree or intend to pay, and Lender does not agree
or intend to contract for, charge, collect, take, reserve or receive
(collectively referred to herein as "charge or collect"), any amount in the
nature of interest or in the nature of a fee for this loan, which would in any
way or event (including demand, prepayment, or acceleration) cause Lender to
charge or collect more for this loan than the maximum Lender would be permitted
to charge or collect by federal law or the law of the State of Ohio (as
applicable). Any such excess interest or unauthorized fee shall, instead of
anything stated to the contrary, be applied first to reduce the principal
balance of this loan, and when the principal has been paid in full, be refunded
to Borrower. Lender may delay or forgo enforcing any of its RIGHTS or remedies
under this Note without losing them. Borrower and any other person who signs,
guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
NOTICE: FOR THIS NOTICE "YOU" MEANS THE BORROWER AND "HIS" MEANS LENDER.
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS
Exhibit 10(b), Page 4 of 13
<PAGE> 5
YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS FAULTY GOODS
FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE.
BORROWER:
Stearns and Lehman, Inc.
By: /s/ William Stearns, President By: /s/ Sally Stearns, Secretary
Exhibit 10(b), Page 5 of 13
<PAGE> 6
BUSINESS LOAN AGREEMENT
Borrower: Stearns and Lehman, Inc. Lender: First-Knox National Bank
(TIN: 34-1579817) Lexington Branch
52 Surrey Road 10 Plymouth Street
Mansfield, OH 44901 Lexington, OH 44904
Principal Amount: Initial Rate: Date of Note:
$400,000.00 8.750% December 2, 1996
THIS BUSINESS LOAN AGREEMENT between Stearns and Lehman, Inc. ("Borrower") and
First-Knox National Bank ("Lender") is made and executed on the following terms
and conditions. Borrower has received prior commercial loans from Lender or has
applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of December 2, 1996, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory to Lender
the following documents for the Loan: (a) the Note, (b) Security Agreements
granting to Lender security interests in the Collateral, (c) Financing
Statements perfecting Lender's Security Interests; (d) evidence of insurance as
required below; and (e) any other documents required under this Agreement or by
Lender or its counsel, including without limitation any assignments of life
insurance described below.
Borrower's Authorization. Borrower shall have provided in form and substance
satisfactory to Lender properly certified resolutions, duly authorizing the
execution and delivery of this Agreement, the Note and the Related Documents,
and such other authorizations and other documents and instruments as Lender or
its counsel, in their sole discretion, may require. Payment of Fees and
Expenses. Borrower shall have paid to Lender all fees, charges, and other
expenses which are then due and payable as specified in this Agreement or any
Related
Exhibit 10(b), Page 6 of 13
<PAGE> 7
Document.
Representations and Warranties. The representations and warranties set forth in
this Agreement, in the Related Documents, and In any document or certificate
delivered to Lender under this Agreement are true and correct.
No Event of Default. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the state of Borrower's
incorporation and is validly existing and in good standing in all states in
which Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is presently
engaged or presently proposes to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the failure
to so qualify would have a material adverse effect on its businesses or
financial condition.
Authorization. The execution, delivery, and performance of this Agreement by
Borrower, to the extent to be executed, delivered or performed by Borrower, have
been duly authorized by all necessary action by Borrower; do not require the
consent or approval of any other person, regulatory authority or governmental
body; and do not conflict with, result in a violation of, or constitute a
default under (a) any provision of its articles of incorporation or
organization, or bylaws or code of regulations, or any agreement or other
instrument binding upon Borrower or (b) any law, governmental regulation, court
decree, or order applicable to Borrower.
FINANCIAL information. Each financial statement of Borrower supplied to Lender
truly and completely disclosed Borrower's financial condition as of the date of
the statement, and there has been no material adverse change in Borrower's
financial condition subsequent to the date of the most recent financial
statement supplied to Lender. Borrower has no material contingent obligations
except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against Borrower in
accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes not presently
due and payable, Borrower owns and has good title to all of Borrower's
properties free and clear of all liens and security interests, and has not
executed any security documents or financing statements relating to such
properties. All of Borrower's
Exhibit 10(b), Page 7 of 13
<PAGE> 8
properties are titled in Borrower's legal name, and Borrower has not used, or
filed a financing statement under, any other name for at least the last five (5)
years.
Hazardous Substances. Except as disclosed to Lender in writing, no property of
Borrower ever has been, or ever will be so long as this Agreement remains in
effect, used for the generation, manufacture, storage treatment, disposal,
release or threatened release of any hazardous waste or substance, as those
terms are defined in the "CERCLA," "SARA," applicable state or Federal laws, or
regulations adopted pursuant to any of the foregoing. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous substances.
Borrower hereby (a) releases and waives any future claims against Lender for
Indemnity or contribution in the event Borrower becomes liable for cleanup or
other costs under any such laws, and (b) agrees to indemnify and hold harmless
Lender against any and all claims and losses resulting from a breach of this
provision of this Agreement. This obligation to indemnify shall survive the
payment of the Indebtedness and the satisfaction of this Agreement.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any guarantor of the Loan which could
materially affect the financial condition of Borrower or the financial condition
of any guarantor of the Loan.
Financial Records. Maintain its books and records in accordance with accounting
principles acceptable to Lender, applied on a consistent basis, and permit
Lender to examine and audit Borrower's books and records at all reasonable
times.
Financial Statements. Furnish Lender with, as soon as available, but in no event
later than one hundred twenty (120) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, audited by a
certified public accountant satisfactory to Lender, and, as soon as available,
but in no event later than thirty (30) days after the end of each month,
Borrower's balance sheet and profit and loss statement for the period ended,
prepared and certified as correct to the best knowledge and belief by Borrower's
chief financial officer or other officer or person acceptable to Lender. All
financial reports required to be provided under this Agreement shall be prepared
in accordance with accounting principles acceptable to Lender, applied on a
consistent basis, and certified by Borrower as being true and correct.
Additional information. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables, inventory
schedules, budgets, forecasts, tax returns, and other reports with respect to
Borrower's financial condition and business operations as
Exhibit 10(b), Page 8 of 13
<PAGE> 9
Lender may request from time to time.
Financial Covenants and Ratios. Comply with the following covenants and
ratios:
Tangible Net Worth. Maintain a minimum Tangible Net Worth of not less than
$3,500,000.00.
Working Capital. Maintain Working Capital in excess of $500,000.00.
Current Ratio. Maintain a ratio of Current Assets to Current Liabilities in
excess of 1.45 to 1.00.
Quick Ratio. Maintain a ratio of Liquid Assets to Current Liabilities in
excess of 0.60 to 1.00.
For purposes of this Agreement and to the extent the following terms are
utilized in this Agreement, the term 'Tangible Net Worth" shall mean Borrower's
total assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible items, but
including leaseholds and leasehold improvements) less total Debt. The term
"Debt" shall mean all of Borrower's liabilities excluding Subordinated Debt. The
term "Subordinated Debt" shall mean indebtedness and liabilities of Borrower
which have been subordinated by written agreement to indebtedness owed by
Borrower to Lender in form and substance acceptable to Lender. The term 'Working
Capital" shall mean Borrower's current assets, less Borrower's current
liabilities. The term "Liquid Assets" shall mean Borrower's accounts receivable
plus cash on hand plus Borrower's readily marketable securities. The term "Cash
Flow" shall mean net income after taxes, and exclusive of extraordinary gains
and income, plus depreciation and amortization. Except as provided above, all
computations made to determine compliance with the requirements contained in
this paragraph shall be made in accordance with accounting principles acceptable
to Lender, applied on a consistent basis, and certified by Borrower as being
true and correct.
Life insurance. As soon as practical, obtain and maintain life insurance in form
and with insurance companies reasonably acceptable to Lender on the following
individual in the amount indicated below and, at Lender's option, cause such
insurance coverage to be pledged, made payable to, or assigned to Lender on
Lender's forms. Lender, at its discretion, may apply the proceeds of any
insurance policy to the unpaid balances of any Indebtedness:
Name of insured Amount
--------------- ------
William Stearns, President $1,000,000.00
Loan Fees and Charges. In addition to all other agreed upon fees and charges,
pay the following: $50 + out of pocket.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Performance. Perform and comply with all terms, conditions, and PROVISIONS set
forth in this Agreement and in the Related Documents in a timely manner, and
promptly notify Lender if
Exhibit 10(b), Page 9 of 13
<PAGE> 10
Borrower learns of the occurrence of any event which constitutes an Event of
Default under this Agreement or under any of the Related Documents.
Operations. Maintain executive and management personnel with substantially the
same qualifications and experience as the present executive and management
personnel; provide written notice to Lender of any change in executive and
management personnel; conduct its business affairs in a reasonable and prudent
manner and in compliance with all applicable federal, state and municipal laws,
ordinances, rules and regulations respecting its properties, charters,
businesses and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee benefit
plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records and
to make copies and memoranda of Borrower's books, accounts, and records. If
Borrower now or at any time hereafter maintains any records (including without
limitation computer generated records and computer software programs for the
generation of such records) in the possession of a third party, Borrower, upon
request of Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of any records
it may request, all at Borrower's expense.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the normal course
of business and indebtedness to Lender contemplated by this Agreement, create,
incur or assume indebtedness for borrowed money, including capital leases, (b)
except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge,
lease, grant a security interest in, or encumber any of Borrower's assets, or
(c) sell with recourse any of Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities substantially
different than those in which Borrower is presently engaged, (b) cease
operations, liquidate, merge, transfer, acquire or consolidate with any other
entity, change ownership, change its name, dissolve or transfer or sell
Collateral out of the ordinary course of business, (c) pay any dividends on
Borrower's stock (other than dividends payable in Its stock), provided, however
that notwithstanding the foregoing, but only so long as no Event of Default has
occurred and is continuing or would result from the payment of dividends, if
Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue
Code of 1986, as amended), Borrower may pay cash dividends on its stock to its
shareholders from time to time in amounts necessary to enable the shareholders
to pay income taxes and make estimated income tax payments to satisfy their
liabilities under federal and state law which arise solely from their status as
Shareholders of a Subchapter S Corporation because of their ownership of shares
of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding
shares or alter or amend Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or
assets, (b)
Exhibit 10(b), Page 10 of 13
<PAGE> 11
purchase, create or acquire any interest In any other enterprise or entity, or
(c) incur any obligation as surety or guarantor other than in the ordinary
course of business.
Salaries. Make or permit any withdrawals or pay or contract to pay any salaries,
commissions, bonuses or other compensation for services in excess of the
following annual amount for the person indicated below or to any other person or
persons performing services of a similar nature:
Name Amount
---- ------
None $
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan advances or to disburse Loan proceeds if:
(a) Borrower or any guarantor is in default under the terms of this Agreement or
any other agreement that Borrower or any guarantor has with Lender; (b) Borrower
or any Guarantor becomes insolvent, files a petition in bankruptcy or similar
proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse
change in Borrower's financial condition, in the financial condition of any
guarantor, or in the value of any collateral securing any Loan; (d) any
guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender in
good faith deems itself insecure, even though no Event of Default shall have
occurred.
SALE OF COMMON STOCK. The sale of common stock of the company by William and
Sally Stearns will not exceed that which is allowed under Section 144 of the
Securities Exchange Commission.
CROSS COLLATERALIZATION. This loan is cross collateralized with a loan in the
name of Stearns and Lehman, Inc. dated December 2, 1996, In the amount of
$750,000.
MONTHLY AGING OF ACCOUNTS RECEIVABLE & ACCOUNTS PAYABLE. Monthly aging of
accounts receivable and accounts payable is required from Borrower to Lender.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the Indebtedness against
any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an event of default
("Event of Default") under this Agreement:
Default on indebtedness. Failure of Borrower to make any payment when due on
the Loans.
Exhibit 10(b), Page 11 of 13
<PAGE> 12
Other Defaults. Failure of Borrower to comply with or to perform when due any
other term, obligation, covenant or condition contained In this Agreement.
Default in Favor of Third Parties. Should Borrower default under any loan,
extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay the Loans or
perform Borrower's obligations under this Agreement or any related document.
False Statements. Any warranty, representation or statement made or furnished to
Lender by or on behalf of Borrower is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at any
time thereafter.
Insolvency. The dissolution or termination of Borrower's existence as a going
business, the insolvency of Borrower, the appointment of a receiver for any part
of Borrower's property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower, any creditor of any grantor of
collateral for the Loan. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect to
any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender, and,
in doing so, cure the Event of Default.
Change in Ownership. Any change in ownership of twenty-five percent (25%) or
more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement immediately will terminate
(including any obligation to make Loan Advances or disbursements), and, at
Lender's option, all Indebtedness immediately will become due and payable, all
without notice of any kind to Borrower, except that in the case of an Event of
Default of the type described in the "Insolvency" subsection above, such
acceleration shall be automatic and not optional. In addition, Lender shall have
all the RIGHTS and remedies
Exhibit 10(b), Page 12 of 13
<PAGE> 13
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's RIGHTS and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise Its RIGHTS and remedies.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
DECEMBER 2, 1996.
BORROWER:
Stearns and Lehman, Inc.
By: /s/ William Stearns, President By: /s/ Sally Stearns, Secretary
LENDER:
First-Knox National Bank
By: /s/ James Brinker, Authorized Officer
Exhibit 10(b), Page 13 of 13
<PAGE> 1
PROMISSORY NOTE
Borrower: Stearns and Lehman, Inc. Lender: First-Knox National Bank
(TIN: 34-1579817) Lexington Branch
52 Surrey Road 10 Plymouth Street
Mansfield, OH 44901 Lexington, OH 44904
Principal Amount: Initial Rate: Date of Note:
$750,000.00 9.000% December 2, 1996
PROMISE TO PAY. Stearns and Lehman, inc. ("Borrower") promises to pay to
First-Knox National Bank ("Lender"), or order, in lawful money of the United
States of America, the principal amount of Seven Hundred Fifty Thousand & 00/100
Dollars ($750,000.00) or so much as may be outstanding, together with interest
on the unpaid outstanding principal balance of each advance. interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in accordance with the following payment
schedule:
7 consecutive monthly interest payments, beginning January 2, 1997, with
interest calculated on the unpaid principal balances at an interest rate of
0.750 percentage points over the index described below; and 120 consecutive
monthly principal and interest payments in the initial amount of $9,500.68 each,
beginning August 2,1997, with interest calculated on the unpaid principal
balances at an interest rate of 0.750 percentage points over the index described
below. Borrower's final payment of $9,500.68 will be due on July 2, 2007. This
estimated final payment is based on the assumption that all payments will be
made exactly as scheduled and that the index does not change; the actual final
payment will be for all principal and accrued interest not yet paid, together
with any other unpaid amounts under this Note.
Interest on this Note is computed on a 30/360 simple interest basis; that is,
with the exception of odd days in the first payment period, monthly interest is
calculated by applying the ratio of the annual interest rate over a year of 360
days, multiplied by the outstanding principal balance, multiplied by a month of
30 days. Interest for the odd days is calculated on the basis of the actual days
to the next full month and a 360-day year. Borrower will pay Lender at Lender's
address shown above or at such other place as Lender may designate in writing.
Unless otherwise agreed or required by applicable law, payments will be applied
first to any unpaid collection costs and any late charges, then to any unpaid
interest, and any remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an independent index which is the WALL STREET
JOURNAL PRIME (the "Index"). The Index is not necessarily the lowest rate
charged by Lender on its loans. If the Index becomes unavailable during the term
of this loan, Lender may designate a substitute index after notice to Borrower.
Lender will tell Borrower the current Index rate upon Borrower's request.
Borrower understands that Lender may make loans based on other rates as well.
The interest rate change will not occur more often than each YEAR. The index
currently is 8.250% per annum. The interest rate or rates to be applied to the
unpaid principal balance of this Note
Exhibit 10(c), Page 1 of 13
<PAGE> 2
will be the rate or rates set forth above in the "Payment" section. NOTICE:
Under no circumstances will the interest rate on this Note be more than the
maximum rate allowed by applicable law. Whenever increases occur in the interest
rate, Lender, at its option, may do one or more of the following: (a) increase
Borrower's payments to ensure Borrower's loan will pay off by its original final
maturity date, (b) increase Borrower's payments to cover accruing interest, (C)
increase the number of Borrower's payments, and (d) continue Borrower's payments
at the same amount and increase Borrower's final payment.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges
are earned fully as of the date of the loan and will not be subject to refund
upon early payment (whether voluntary or as a result of default), except as
otherwise required by law. Except for the foregoing, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments under the payment schedule.
Rather, they will reduce the principal balance due and may result in Borrower
making fewer payments.
LATE CHARGE. If a payment is 15 days or more late, Borrower will be charged
5.000% of the unpaid portion of the regularly scheduled payment or $50.00,
whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (C) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading In any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrowers property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is impaired. (I) Lender
in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and
Exhibit 10(c), Page 2 of 13
<PAGE> 3
completes all reasonable and necessary steps sufficient to produce compliance as
soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note by 2.000
percentage points. The interest rate will not exceed the maximum rate permitted
by applicable law. Lender may hire or pay someone else to help collect this Note
if Borrower does not pay. Borrower also will pay Lender that amount. This
includes, subject to any limits under applicable law, Lender's attorneys' fees
and Lender's legal expenses whether or not there is a lawsuit, including
attorneys' fees and legal expenses for bankruptcy proceedings (including efforts
to modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. If not prohibited by applicable
law, Borrower also will pay any court costs, in addition to all other sums
provided by law. This Note has been delivered to Lender and accepted by Lender
in the State of Ohio. if there is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of Richland County, the
State of Ohio. This Note shall be governed by and construed in accordance with
the laws of the State of Ohio.
CONFESSION OF JUDGMENT. Borrower hereby irrevocably authorizes and empowers any
attorney-at-law, including an attorney hired by Lender, to appear in any court
of record and to confess judgment against Borrower for the unpaid amount of this
Note as evidenced by an affidavit signed by an officer of Lender setting forth
the amount then due, plus attorneys' fees as provided in this Note, plus costs
of suit, and to release all errors, and waive all RIGHTS of appeal. if a copy of
this Note, verified by an affidavit, shall have been filed in the proceeding, it
will not be necessary to file the original as a warrant of attorney. Borrower
waives the right to any stay of execution and the benefit of all exemption laws
now or hereafter in effect. No single exercise of the foregoing warrant and
power to confess judgment will be deemed to exhaust the power, whether or not
any such exercise shall be held by any court to be invalid, voidable, or void;
but the power will continue undiminished and may be exercised from time to time
as Lender may elect until all amounts owing on this Note have been paid in full.
Borrower waives any conflict of interest that an attorney hired by Lender may
have in acting on behalf of Borrower in confessing judgment against Borrower
while such attorney is retained by Lender. Borrower expressly consents to such
attorney acting for Borrower in confessing judgment.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
COLLATERAL. This Note is secured by a first mortgage on real estate located in
the Township
Exhibit 10(c), Page 3 of 13
<PAGE> 4
of Mansfield, County of Richland, and State of Ohio, as further described in
mortgage of even date. A second position on all equipment and inventory now
owned or hereafter acquired, and all accounts receivable now existing or
hereafter arising.
LINE OF CREDIT. This Note evidences a straight line of credit. Once the total
amount of principal has been advanced, Borrower is not entitled to further loan
advances. Advances under this Note, as well as directions for payment from
Borrower's accounts, may be requested orally or in writing by Borrower or by an
authorized person. Lender may, but need not, require that all oral requests be
confirmed in writing. Borrower agrees to be liable for all sums either: (a)
advanced in accordance with the instructions of an authorized person or (b)
credited to any of Borrower's accounts with Lender. The unpaid principal balance
owing on this Note at any time may be evidenced by endorsements on this Note or
by Lender's internal records, including daily computer print-outs. Lender will
have no obligation to advance funds under this Note if: (a) Borrower or any
guarantor is in default under the terms of this Note or any agreement that
Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Note; (b) Borrower or any guarantor ceases
doing business or is insolvent; (C) any guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such guarantor's guarantee of this Note or
any other loan with Lender; (d) Borrower has applied funds provided pursuant to
this Note for purposes other than those authorized by Lender; or (e) Lender in
good faith deems itself insecure under this Note or any other agreement between
Lender and Borrower.
GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will
not affect the rest of the Note. In particular, this section means (among other
things) that Borrower does not agree or intend to pay, and Lender does not agree
or intend to contract for, charge, collect, take, reserve or receive
(collectively referred to herein as "charge or collect"), any amount in the
nature of interest or in the nature of a fee for this loan, which would in any
way or event (including demand, prepayment, or acceleration) cause Lender to
charge or collect more for this loan than the maximum Lender would be permitted
to charge or collect by federal law or the law of the State of Ohio (as
applicable). Any such excess interest or unauthorized fee shall, instead of
anything stated to the contrary, be applied first to reduce the principal
balance of this loan, and when the principal has been paid in full, be refunded
to Borrower. Lender may delay or forgo enforcing any of its rights or remedies
under this Note without losing them. Borrower and any other person who signs,
guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE
Exhibit 10(c), Page 4 of 13
<PAGE> 5
AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
NOTICE: FOR THIS NOTICE "YOU" MEANS THE BORROWER AND "HIS" MEANS LENDER.
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS FAULTY GOODS FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR
ANY OTHER CAUSE.
BORROWER:
Stearns and Lehman, Inc.
By: /s/ William Stearns, President By: /s/ Sally Stearns, Secretary
Exhibit 10(c), Page 5 of 13
<PAGE> 6
BUSINESS LOAN AGREEMENT
Borrower: Stearns and Lehman, Inc. Lender: First-Knox National Bank
(TIN: 34-1579817) Lexington Branch
52 Surrey Road 10 Plymouth Street
Mansfield, OH 44901 Lexington, OH 44904
Principal Amount: Initial Rate: Date of Note:
$750,000.00 9.000% December 2, 1996
THIS BUSINESS LOAN AGREEMENT between Stearns and Lehman, Inc. ("Borrower") and
First-Knox National Bank ("Lender") is made and executed on the following terms
and conditions. Borrower has received prior commercial loans from Lender or has
applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of December 2, 1996, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory to Lender
the following documents for the Loan: (a) the Note, (b) Security Agreements
granting to Lender security interests in the Collateral, (c) Financing
Statements perfecting Lender's Security Interests; (d) evidence of insurance as
required below; and (e) any other documents required under this Agreement or by
Lender or its counsel, including without limitation any assignments of life
insurance described below.
Borrower's Authorization. Borrower shall have provided in form and substance
satisfactory to Lender properly certified resolutions, duly authorizing the
execution and delivery of this Agreement, the Note and the Related Documents,
and such other authorizations and other documents and instruments as Lender or
its counsel, in their sole discretion, may require. Payment of Fees and
Expenses. Borrower shall have paid to Lender all fees, charges, and other
expenses which are then due and payable as specified in this Agreement or any
Related Document.
Exhibit 10(c), Page 6 of 13
<PAGE> 7
Representations and Warranties. The representations and warranties set forth in
this Agreement, in the Related Documents, and In any document or certificate
delivered to Lender under this Agreement are true and correct.
No Event of Default. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the state of Borrower's
incorporation and is validly existing and in good standing in all states in
which Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is presently
engaged or presently proposes to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the failure
to so qualify would have a material adverse effect on its businesses or
financial condition.
Authorization. The execution, delivery, and performance of this Agreement by
Borrower, to the extent to be executed, delivered or performed by Borrower, have
been duly authorized by all necessary action by Borrower; do not require the
consent or approval of any other person, regulatory authority or governmental
body; and do not conflict with, result in a violation of, or constitute a
default under (a) any provision of its articles of incorporation or
organization, or bylaws or code of regulations, or any agreement or other
instrument binding upon Borrower or (b) any law, governmental regulation, court
decree, or order applicable to Borrower.
FINANCIAL information. Each financial statement of Borrower supplied to Lender
truly and completely disclosed Borrower's financial condition as of the date of
the statement, and there has been no material adverse change in Borrower's
financial condition subsequent to the date of the most recent financial
statement supplied to Lender. Borrower has no material contingent obligations
except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against Borrower in
accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously disclosed
in Borrower's financial statements or in writing to Lender and as accepted by
Lender, and except for property tax liens for taxes not presently due and
payable, Borrower owns and has good title to all of Borrower's properties free
and clear of all liens and security interests, and has not executed any security
documents or financing statements relating to such properties. All of Borrower's
properties are titled in Borrower's legal name, and Borrower has not used, or
filed a financing statement under, any other name for at least the last five (5)
years.
Exhibit 10(c), Page 7 of 13
<PAGE> 8
Hazardous Substances. Except as disclosed to Lender in writing, no property of
Borrower ever has been, or ever will be so long as this Agreement remains in
effect, used for the generation, manufacture, storage treatment, disposal,
release or threatened release of any hazardous waste or substance, as those
terms are defined in the "CERCLA," "SARA," applicable state or Federal laws, or
regulations adopted pursuant to any of the foregoing. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous substances.
Borrower hereby (a) releases and waives any future claims against Lender for
Indemnity or contribution in the event Borrower becomes liable for cleanup or
other costs under any such laws, and (b) agrees to indemnify and hold harmless
Lender against any and all claims and losses resulting from a breach of this
provision of this Agreement. This obligation to indemnify shall survive the
payment of the Indebtedness and the satisfaction of this Agreement.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any guarantor of the Loan which could
materially affect the financial condition of Borrower or the financial condition
of any guarantor of the Loan.
Financial Records. Maintain its books and records in accordance with accounting
principles acceptable to Lender, applied on a consistent basis, and permit
Lender to examine and audit Borrower's books and records at all reasonable
times.
Financial Statements. Furnish Lender with, as soon as available, but in no event
later than one hundred twenty (120) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, audited by a
certified public accountant satisfactory to Lender, and, as soon as available,
but in no event later than thirty (30) days after the end of each month,
Borrower's balance sheet and profit and loss statement for the period ended,
prepared and certified as correct to the best knowledge and belief by Borrower's
chief financial officer or other officer or person acceptable to Lender. All
financial reports required to be provided under this Agreement shall be prepared
in accordance with accounting principles acceptable to Lender, applied on a
consistent basis, and certified by Borrower as being true and correct.
Additional information. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables, inventory
schedules, budgets, forecasts, tax returns, and other reports with respect to
Borrower's financial condition and business operations as Lender may request
from time to time.
Financial Covenants and Ratios. Comply with the following covenants and ratios:
Exhibit 10(c), Page 8 of 13
<PAGE> 9
Tangible Net Worth. Maintain a minimum Tangible Net Worth of not less than
$3,500,000.00.
Working Capital. Maintain Working Capital in excess of $500,000.00.
Current Ratio. Maintain a ratio of Current Assets to Current Liabilities in
excess of 1.45 to 1.00.
Quick Ratio. Maintain a ratio of Liquid Assets to Current Liabilities in excess
of 0.60 to 1.00.
For purposes of this Agreement and to the extent the following terms are
utilized in this Agreement, the term 'Tangible Net Worth" shall mean Borrower's
total assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible items, but
including leaseholds and leasehold improvements) less total Debt. The term
"Debt" shall mean all of Borrower's liabilities excluding Subordinated Debt. The
term "Subordinated Debt" shall mean indebtedness and liabilities of Borrower
which have been subordinated by written agreement to indebtedness owed by
Borrower to Lender in form and substance acceptable to Lender. The term 'Working
Capital" shall mean Borrower's current assets, less Borrower's current
liabilities. The term "Liquid Assets" shall mean Borrower's accounts receivable
plus cash on hand plus Borrower's readily marketable securities. The term "Cash
Flow" shall mean net income after taxes, and exclusive of extraordinary gains
and income, plus depreciation and amortization. Except as provided above, all
computations made to determine compliance with the requirements contained in
this paragraph shall be made in accordance with accounting principles acceptable
to Lender, applied on a consistent basis, and certified by Borrower as being
true and correct.
Life insurance. As soon as practical, obtain and maintain life insurance in form
and with insurance companies reasonably acceptable to Lender on the following
individual in the amount indicated below and, at Lender's option, cause such
insurance coverage to be pledged, made payable to, or assigned to Lender on
Lender's forms. Lender, at its discretion, may apply the proceeds of any
insurance policy to the unpaid balances of any Indebtedness:
Name of insured Amount
--------------- ------
William Stearns, President $1,000,000.00
Loan Fees and Charges. In addition to all other agreed upon fees and charges,
pay the following: $50 + out of pocket.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations,
unless specifically consented to the contrary by Lender in writing.
Performance. Perform and comply with all terms, conditions, and PROVISIONS set
forth in this Agreement and in the Related Documents in a timely manner, and
promptly notify Lender if Borrower learns of the occurrence of any event which
constitutes an Event of Default under this Agreement or under any of the Related
Documents.
Operations. Maintain executive and management personnel with substantially the
same
Exhibit 10(c), Page 9 of 13
<PAGE> 10
qualifications and experience as the present executive and management personnel;
provide written notice to Lender of any change in executive and management
personnel; conduct its business affairs in a reasonable and prudent manner and
in compliance with all applicable federal, state and municipal laws, ordinances,
rules and regulations respecting its properties, charters, businesses and
operations, including without limitation, compliance with the Americans With
Disabilities Act and with all minimum funding standards and other requirements
of ERISA and other laws applicable to Borrower's employee benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records and
to make copies and memoranda of Borrower's books, accounts, and records. If
Borrower now or at any time hereafter maintains any records (including without
limitation computer generated records and computer software programs for the
generation of such records) in the possession of a third party, Borrower, upon
request of Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of any records
it may request, all at Borrower's expense.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the normal course
of business and indebtedness to Lender contemplated by this Agreement, create,
incur or assume indebtedness for borrowed money, including capital leases, (b)
except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge,
lease, grant a security interest in, or encumber any of Borrower's assets, or
(c) sell with recourse any of Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities substantially
different than those in which Borrower is presently engaged, (b) cease
operations, liquidate, merge, transfer, acquire or consolidate with any other
entity, change ownership, change its name, dissolve or transfer or sell
Collateral out of the ordinary course of business, (c) pay any dividends on
Borrower's stock (other than dividends payable in Its stock), provided, however
that notwithstanding the foregoing, but only so long as no Event of Default has
occurred and is continuing or would result from the payment of dividends, if
Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue
Code of 1986, as amended), Borrower may pay cash dividends on its stock to its
shareholders from time to time in amounts necessary to enable the shareholders
to pay income taxes and make estimated income tax payments to satisfy their
liabilities under federal and state law which arise solely from their status as
Shareholders of a Subchapter S Corporation because of their ownership of shares
of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding
shares or alter or amend Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest In any other enterprise or
entity, or (c) incur any obligation as surety or guarantor other than in the
ordinary course of business.
Salaries. Make or permit any withdrawals or pay or contract to pay any salaries,
commissions,
Exhibit 10(c), Page 10 of 13
<PAGE> 11
bonuses or other compensation for services in excess of the following annual
amount for the person indicated below or to any other person or persons
performing services of a similar nature:
Name Amount
---- ------
None $
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan advances or to disburse Loan proceeds if:
(a) Borrower or any guarantor is in default under the terms of this Agreement or
any other agreement that Borrower or any guarantor has with Lender; (b) Borrower
or any Guarantor becomes insolvent, files a petition in bankruptcy or similar
proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse
change in Borrower's financial condition, in the financial condition of any
guarantor, or in the value of any collateral securing any Loan; (d) any
guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender in
good faith deems itself insecure, even though no Event of Default shall have
occurred.
SALE OF COMMON STOCK. The sale of common stock of the company by William and
Sally Stearns will not exceed that which is allowed under Section 144 of the
Securities Exchange Commission.
CROSS COLLATERALIZATION. This loan is cross collateralized with a loan in the
name of Stearns and Lehman, Inc. dated December 2, 1996, In the amount of
$400,000.
MONTHLY AGING OF ACCOUNTS RECEIVABLE & ACCOUNTS PAYABLE. Monthly aging of
accounts receivable and accounts payable is required from Borrower to Lender.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the Indebtedness against
any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an event of default
("Event of Default") under this Agreement:
Default on indebtedness. Failure of Borrower to make any payment when due on the
Loans.
Other Defaults. Failure of Borrower to comply with or to perform when due any
other term, obligation, covenant or condition contained In this Agreement.
Exhibit 10(c), Page 11 of 13
<PAGE> 12
Default in Favor of Third Parties. Should Borrower default under any loan,
extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay the Loans or
perform Borrower's obligations under this Agreement or any related document.
False Statements. Any warranty, representation or statement made or furnished to
Lender by or on behalf of Borrower is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at any
time thereafter.
Insolvency. The dissolution or termination of Borrower's existence as a going
business, the insolvency of Borrower, the appointment of a receiver for any part
of Borrower's property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower, any creditor of any grantor of
collateral for the Loan. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect to
any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender, and,
in doing so, cure the Event of Default.
Change in Ownership. Any change in ownership of twenty-five percent (25%) or
more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement immediately will terminate
(including any obligation to make Loan Advances or disbursements), and, at
Lender's option, all Indebtedness immediately will become due and payable, all
without notice of any kind to Borrower, except that in the case of an Event of
Default of the type described in the "Insolvency" subsection above, such
acceleration shall be automatic and not optional. In addition, Lender shall have
all the RIGHTS and remedies provided in the Related Documents or available at
law, in equity, or otherwise. Except as may be prohibited by applicable law, all
of Lender's RIGHTS and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
Exhibit 10(c), Page 12 of 13
<PAGE> 13
exclude pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Borrower or of any Grantor shall not
affect Lender's right to declare a default and to exercise Its RIGHTS and
remedies.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
DECEMBER 2, 1996.
BORROWER:
Stearns and Lehman, Inc.
By: /s/ William Stearns, President By: /s/ Sally Stearns, Secretary
LENDER:
First-Knox National Bank
By: /s/ James Brinker, Authorized Officer
Exhibit 10(c), Page 13 of 13
<PAGE> 1
CONSTRUCTION LOAN AGREEMENT
Borrower: Stearns and Lehman, Inc. Lender: First-Knox National Bank
(TIN: 34-1579817) Lexington Branch
52 Surrey Road 10 Plymouth Street
Mansfield, OH 44901 Lexington, OH 44904
Principal Amount: $750,000.00 Date of Note: December 2, 1996
THIS CONSTRUCTION LOAN AGREEMENT between Stearns and Lehman, Inc. ("Borrower")
and First-Knox National Bank ("Lender") is made and executed en the following
terms and conditions. Borrower has applied to Lender for loans In the total
principal amount of U.S. $750,000.00 in order to construct the Improvements on
the Real Property described below. Lender is willing to lend the loan amount to
Borrower solely under the terms and conditions specified in this Agreement and
in the Related Documents, to each of which Borrower agrees. Borrower understands
and agrees that: (a) in granting, renewing, or extending any Loan, Lender is
relying upon Borrower's representations, warranties, and agreements as set forth
In this Agreement, and (b) all such Loans shall be and remain subject to the
terms and conditions of this Agreement.
TERM. This Agreement shall be effective as of December 2, 1996 and shall
continue thereafter until all Indebtedness has been paid in full and all other
obligations of Borrower hereunder have been performed in full and the parties
terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Construction Loan Agreement, as this
Construction Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Construction Loan
Agreement from time to time.
Architecture Contract. The words "Architecture Contract" mean the architect's
contract relating to the Project, if any.
Borrower. The word "Borrower" means each and every person or entity signing the
Note, including without limitation Stearns and Lehman, Inc.
Collateral. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real or
personal property, whether granted directly or indirectly, whether granted now
or in the future, and whether granted in the form of a security interest,
mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust,
factor's lien, equipment trust, conditional sale, trust receipt, lien, charge,
lien or title retention contract, lease or consignment intended as a security
device, or any other security or lien interest
Exhibit 10(d), Page 1 of 14
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whatsoever, whether created by law, contract, or otherwise.
Commencement Date. The words "Commencement Date" mean the date Borrower begins
work on the Project.
Completion Date. The words "Completion Date" mean such date as Lender shall have
established as the date by which Borrower is to have completed the Project as
required in this Agreement.
Construction Contract. The words "Construction Contract" mean and include the
contract between Borrower and the general contractor for the Project, if any,
(General Contractor), and any subcontracts with subcontractors, material men,
laborers, or any other person or entity for performance of work on the Project
or the delivery of materials to the Project.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below In the section titled
"Events of Default."
Grantor. The word "Grantor" means and includes without limitation each and all
of the persons or entities granting a Security interest in any Collateral for
the Indebtedness, including without limitation all Borrowers granting such a
Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation all
guarantors, sureties, and accommodation parties.
Improvements. The word "Improvements" means and includes without limitation all
existing and future buildings, structures, facilities, fixtures, additions, and
similar construction on the Property.
Indebtedness. The word "Indebtedness" means and includes without limitation all
Loans, together with all other obligations, debts and liabilities of Borrower to
Lender, or any one or more of them, as well as all claims by Lender against
Borrower, or any one or more of them; whether now or hereafter existing,
voluntary or involuntary, due or not due, absolute or contingent, liquidated or
unliquidated; whether Borrower may be liable Individually or jointly with
others; whether Borrower may be obligated as a guarantor, surety, or otherwise;
whether recovery upon such Indebtedness may be or hereafter may become barred by
any statute of limitations; and whether such Indebtedness may be or hereafter
may become otherwise unenforceable.
Lender. The word "Lender" means First-Knox National Bank, its successors and
assigns.
Loan. The word "Loan" means the loan made to Borrower under this Agreement and
the Related Documents as described below.
Loan Fund. The words "Loan Fund" mean the undisbursed proceeds of the Loan under
this Agreement together with any equity funds or other deposits required from
Borrower under this Agreement.
Exhibit 10(d), Page 2 of 14
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Note. The word "Note" means the promissory note or credit agreement dated
December 2, 1996, in the original principal amount of $750,000.00 from Borrower
to Lender, together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of, and substitutions for the promissory note or
agreement.
Plans and Specifications. The words "Plans and Specifications" mean the plans
and specifications for the Project which have been submitted to and initialed by
Lender, together with such changes and additions as may be approved by Lender in
writing.
Project. The word "Project" means the construction and completion of all
Improvements contemplated by this Agreement, Including without limitation the
erection of the building or structure, installation of equipment and fixtures,
landscaping, and all other work necessary to make the Property usable and
complete for the intended purposes.
Project Documents. The words "Project Documents" mean the Plans and
Specifications, all studies, data and drawings relating to the Project, whether
prepared by or for Borrower, the Construction Contract, the Architecture
Contract, and all other contracts and agreements relating to the Project or the
construction of the Improvements.
Property. The word "Property" means the Real Property together with all
Improvements, all equipment, fixtures, and other articles of personal property
now or subsequently attached or affixed to the real property, together with all
accessions, parts, and additions to, all replacements of, and all substitutions
for any of such property, and all proceeds (including insurance proceeds and
refunds of premiums) from any sale or other disposition of such property.
Real Property. The words "Real Property" mean the real property located in
Richland County, State of Ohio, and legally described as:
See Attached Exhibit A.
The Real Property or its address is commonly known as Township of Mansfield,
Mansfield, OH 44901.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements, understandings or
other agreements, whether created by law, contract, or otherwise, evidencing,
governing, representing, or creating a Security Interest.
Security Interest. The words "Security Interest" mean and include without
limitation any type of
Exhibit 10(d), Page 3 of 14
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collateral security, whether in the form of a lien, charge, mortgage, deed of
trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien,
equipment trust, conditional sale, trust receipt, lien or title retention
contract, lease or consignment intended as a security device, or any other
security or lien Interest whatsoever, whether created by law, contract, or
otherwise.
Value. The word "Value" means such amount or worth as defined and determined by
Lender in its sole discretion unless agreed to the contrary by Lender In
writing.
LOAN. The Loan shall be in an amount not to exceed the principal sum of U.S.
$750,000.00 and shall bear interest on so much of the principal sum as shall be
advanced pursuant to the terms of this Agreement and the Related Documents. The
Loan shall bear interest on each Advance from the date of the Advance in
accordance with the terms of the Note. Borrower shall use the Loan Funds solely
for the payment of (a) the costs of constructing the Improvements and equipping
the Project in accordance with the Construction Contract; (b) other costs and
expenses incurred or to be incurred in connection with the construction of the
Improvements as Lender in its sole discretion shall approve; and (c) if
permitted by Lender, interest due under the Note, including all expenses and all
loan and commitment fees described in this Agreement. The Loan amount shall be
subject at all times to all maximum limits and conditions set forth in this
Agreement or in any of the Related Documents, including without limitation, any
limits relating to loan to value ratios and acquisition and Project costs.
FEES AND EXPENSES. Whether or not the Project shall be consummated, Borrower
shall assume and pay upon demand all out-of-pocket expenses incurred by Lender
in connection with the preparation of loan documents and the making of the Loan,
including without limitation the following: (a) all closing costs, fees, and
disbursements, including without limitation the loan fees described as follows:
3,750 + out of pocket; (b) all expenses of Lender's legal counsel; and (c) all
title examination fees, title insurance premiums, appraisal fees, survey costs,
required fees, and filing and recording fees.
NO CONSTRUCTION PRIOR TO RECORDING OF SECURITY DOCUMENT. Borrower will not
permit any work or materials to be furnished in connection with the Project
until (a) Borrower has signed the Related Documents; (b) Lender's mortgage or
deed of trust and other Security Interests in the Property have been duly
recorded and perfected; and (c) Lender has been provided evidence, satisfactory
to Lender, that Borrower has obtained all insurance required under this
Agreement or any Related Agreement and that Lender's liens on the Property and
Improvements are valid perfected first liens, subject only to such exceptions,
if any, acceptable to Lender.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Authorization. The execution, delivery, and performance of this Agreement by
Borrower, to the extent to be executed, delivered or performed by Borrower, have
been duly authorized by all
Exhibit 10(d), Page 4 of 14
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necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not conflict
with, result in a violation of, or constitute a default under (a) any provision
of its articles of incorporation or organization, or bylaws or code of
regulations, or any agreement or other instrument binding upon Borrower or (b)
any law, governmental regulation, court decree, or order applicable to Borrower.
Financial information. Each financial statement of Borrower supplied to Lender
truly and completely disclosed Borrower's financial condition as of the date of
the statement, and there has been no material adverse change in Borrower's
financial condition subsequent to the date of the most recent financial
statement supplied to Lender. Borrower has no material contingent obligations
except as disclosed in such financial statements.
Title to Property. Borrower has, or on the date of first disbursement of Loan
proceeds will have, good and marketable title to the Property free and clear of
all defects, liens, and encumbrances, excepting only liens for taxes,
assessments, or governmental charges or levies not yet delinquent or payable
without penalty or interest, and such liens and encumbrances as may be approved
in writing by the Lender.
Hazardous Substances. Borrower represents and warrants that, except as disclosed
to Lender in writing, no property of Borrower ever has been, or ever will be so
long as this Agreement remains in effect, used for the generation, manufacture,
storage, treatment, disposal, release or threatened release of any hazardous
waste or substance, as those terms are defined in the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended, 42
U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and
Reauthorization Act ("SARA"), applicable state or Federal laws, or regulations
adopted pursuant to any of the foregoing. The representations and warranties
contained herein are based on Borrower's due diligence in investigating the
properties for hazardous waste and hazardous substances. Borrower hereby (a)
releases and waives any future claims against Lender for indemnity or
contribution in the event Borrower becomes liable for cleanup or other costs
under any such laws, and (b) agrees to indemnify and hold harmless Lender
against any and all claims and losses resulting from a breach of this provision
of this Agreement. This obligation to indemnify shall survive the payment of the
Indebtedness and the satisfaction of this Agreement.
Project Costs. The Project costs are true and accurate estimates of the costs
necessary to complete the Improvements In a good and workmanlike manner
according to the Plans and Specifications presented by Borrower to Lender, and
Borrower shall take all steps necessary to prevent the actual cost of the
Improvements from exceeding the Project costs.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Advance and each subsequent Advance under this Agreement shall be subject to the
fulfillment to Lender's satisfaction of all of the conditions set forth in this
Agreement.
Approval of Contractors, Subcontractors, and Materialmen. Lender shall have
approved a list of all contractors employed in connection with the construction
of the Improvements, showing the name, address, and telephone number of each
contractor, a general description of the nature of
Exhibit 10(d), Page 5 of 14
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the work to be done, the labor and materials to be supplied, the names of
materialmen, if known, and the approximate dollar value of the labor, work, or
materials with respect to each contractor or materialman. Lender shall have the
right to communicate with any person to verify the facts disclosed by the list
or by any application for any Advance, or for any other purpose.
Plans, Specifications, and Permits. Lender shall have received and accepted a
complete set of Plans and Specifications setting forth all Improvements for the
Project, and Borrower shall have furnished to Lender copies of all permits and
requisite approvals of any governmental body necessary for the construction and
use of the Project.
Architecture and Construction Contracts. Borrower shall have furnished in form
and substance satisfactory to Lender an executed copy of the Architecture
Contract and an executed copy of the Construction Contract.
Budget and Schedule of Estimated Advances. Lender shall have approved detailed
budget and cash flow projections of total Project costs and a schedule of the
estimated amount and time of disbursements of each Advance.
Borrower's Authorization. Borrower shall have provided in form and substance
satisfactory to Lender properly certified resolutions, duly authorizing the
execution and delivery of the Loan documents, and the consummation of the
Project, and such other authorizations and other documents as Lender In its sole
discretion may require.
Bond. If requested by Lender, Borrower shall have furnished a performance and
payment bond in an amount equal to 100% of the amount of the Construction
Contract, as well as a materialmen's and mechanics' payment bond, with such
riders and supplements as Lender may require, each in form and substance
satisfactory to Lender, naming the General Contractor as principal and Lender as
an additional obligee.
Appraisal. If requested by Lender, Borrower shall have furnished to Lender, at
Borrower's expense, an appraisal of the Property prepared by an appraiser
satisfactory to Lender and in form and substance satisfactory to Lender in its
sole discretion.
Plans and Specifications. If requested by Lender, Borrower shall have assigned
to Lender on Lender's forms the Plans and Specifications for the Project.
Environmental Report. If requested by Lender, Borrower shall have furnished to
Lender, at Borrower's expense, an environmental report and certificate on the
Property in form and substance satisfactory to Lender, prepared by an engineer
or other expert satisfactory to Lender stating that the Property complies with
all applicable provisions and requirements of the "Hazardous Substances"
paragraph set forth below.
Soil Report. If requested by Lender, Borrower shall have furnished to Lender, at
Borrower's expenses, a soil report for the Property In form and substance
satisfactory to Lender, prepared by
Exhibit 10(d), Page 6 of 14
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a registered engineer satisfactory to Lender stating that the Property is free
from soil or other geological conditions that would preclude its use or
development as contemplated without extra expense for precautionary, corrective
or remedial measures.
Survey. If requested by Lender, Borrower shall have furnished to Lender a survey
of recent date, prepared and certified by a qualified surveyor and providing
that the Improvements, if constructed in accordance with the Plans and
Specifications, shall lie wholly within the boundaries of the Property without
encroachment or violation of any zoning ordinances, building codes or
regulations, or setback requirements, together with such other information as
Lender in its sole discretion may require.
Zoning. Borrower shall have furnished evidence satisfactory to Lender that the
Property is duly and validly zoned for the construction, maintenance, and
operation of the Project.
Title Insurance. Borrower shall have provided to Lender an ALTA Lender's
extended coverage policy of title insurance with such endorsements as Lender may
require, issued by a title insurance company acceptable to Lender and in a form,
amount, and content satisfactory to Lender, insuring or agreeing to insure that
Lender's Mortgage or Deed of Trust on the Property is or will be upon
recordation a valid first lien on the Property free and clear of all defects,
liens, encumbrances, and exceptions except those as specifically accepted by
Lender in writing. If requested by Lender, Borrower shall provide to Lender, at
Borrower's expense, a foundation endorsement to the title policy upon the
completion of each foundation for the Improvements, showing no encroachments,
and upon completion an endorsement which insures the lien-free completion of the
Improvements.
DISBURSEMENT OF LOAN PROCEEDS. The following provisions relate to the
disbursement of funds from the Loan Fund.
Application for Advances. Each application shall be stated on a standard AIA
payment request form or other form approved by Lender, executed by Borrower, and
supported by such evidence as Lender shall reasonably require. Borrower shall
apply only for disbursement with respect to work actually done by the General
Contractor and for materials and equipment actually incorporated into the
Project. Each application for an Advance shall be deemed a certification of
Borrower that as of the date of such application, all representations and
warranties contained in the Agreement are true and correct, and that Borrower is
in compliance with all of the provisions of this Agreement.
Payments. At the sole option of Lender, Advances may be paid in the joint names
of Borrower and the General Contractor, subcontractor(s), or supplier(s) in
payment of sums due under the Construction Contract. At its sole option, Lender
may directly pay the General Contractor and any subcontractors or other parties
the sums due under the Construction Contract. Borrower appoints Lender as its
attorney-in-fact to make such payments. This power shall be deemed to be coupled
with an interest, shall be irrevocable, and shall survive an Event of Default
under this Agreement.
Projected Cost Overruns. If Lender at any time determines in its sole discretion
that the amount
Exhibit 10(d), Page 7 of 14
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in the Loan Fund is insufficient, or will be insufficient, to usably complete
and to pay for the Project, then within ten (10) days after receipt of a written
request from Lender, Borrower shall deposit in the Loan Fund an amount equal to
the deficiency as determined by Lender. The judgment and determination of Lender
under this section shall be final and conclusive. Any such amounts deposited by
Borrower shall be disbursed prior to any Loan proceeds.
Right to Advance Funds. When any event occurs that Lender determines may
endanger completion of the Project or the fulfillment of any condition or
covenant in this Agreement, Lender may require Borrower to furnish, within ten
(10) days after delivery of a written request, adequate security to eliminate,
reduce, or indemnify Lender against, such danger.
LIMITATION OF RESPONSIBILITY. The making of any Advance by Lender shall not
constitute or be interpreted as either (a) an approval or acceptance by Lender
of the work done through the date of the Advance, or (b) a representation or
indemnity by Lender to any party against any deficiency or defect in the work or
against any breach of any contract. Inspections and approvals of the Plans and
Specifications, the Improvements, the workmanship and materials used in the
Improvements, and the exercise of any other right of inspection, approval, or
inquiry granted to Lender in this Agreement are acknowledged to be solely for
the protection of Lender's interests, and under no circumstances shall they be
construed to Impose any responsibility or liability of any nature whatsoever on
Lender to any party. Neither Borrower nor any contractor, subcontractor,
materialman, laborer, or any other person shall rely, or have any right to rely,
upon Lender's determination of the appropriateness of any Advance. No
disbursement or approval by Lender shall constitute a representation by Lender
as to the nature of the Project, its construction, or its intended use for
Borrower or for any other person, nor shall it constitute an indemnity by Lender
to Borrower or to any other person against any deficiency or defects in the
Project or against any breach of any contract.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Construction of the Project. Cause the Improvements to be constructed and
equipped in a diligent and orderly manner and in strict accordance with the
Plans and Specifications approved by Lender, the Construction Contract, and all
applicable laws, ordinances, codes, regulations, and rights of adjoining or
concurrent property owners.
Life Insurance. As soon as practical, obtain and maintain life insurance in form
and with insurance companies reasonably acceptable to Lender on the following
individual in the amount indicated below and, at Lender's option, cause such
insurance coverage to be pledged, made payable to, or assigned to Lender on
Lender's forms. Lender, at its discretion, may apply the proceeds of any
insurance policy to the unpaid balances of any Indebtedness:
Name of insured Amount
--------------- ------
Exhibit 10(d), Page 8 of 14
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William Stearns, President $1,000,000.00
Loan Proceeds. Use the Loan Funds solely for payment of bills and expenses
directly related to the Project.
Defects. Upon demand of Lender, promptly correct any defect in the Improvements
or any departure from the Plans and Specifications not approved by Lender before
further work shall be done upon the portion of the Improvements affected.
Notice of Commencement. File or cause the filing of a Notice of Commencement or
amended notice pursuant to Section 1311.04 of the Ohio Revised Code. Borrower
agrees to file such notice or cause such notice to be filed promptly after the
filing of the Mortgage that Borrower has granted to Lender and prior to the
beginning of any labor or work or the furnishing of materials for the
improvement of the Real Property. If Borrower shall fail to record or cause the
recordation of such a Notice of Commencement, or any amended notice, Lender may
record such a notice on behalf of Borrower, and Borrower agrees to pay all costs
and expenses incurred by Lender in obtaining information for such notice,
preparing such notice and recording such notice.
Project Claims and Litigation. Promptly inform Lender of (a) all material
adverse changes in the financial condition of the General Contractor; (b) any
litigation and claims, actual or threatened, affecting the Project or the
General Contractor, which could materially affect the successful completion of
the Project or the ability of the General Contractor to complete the Project as
agreed; and (c) any condition or event which constitutes a breach or default
under any of the Related Documents or any contract related to the Project.
GENERAL PROJECT PROVISIONS. The following provisions relate to the construction
and completion of the Project:
Change Orders. All requests for changes in the Plans and Specifications, other
than minor changes not exceeding $5,000.00 cumulative cost, must be in writing,
signed by Borrower and the architect, and delivered to Lender for its approval.
Borrower will not permit the performance of any work pursuant to any change
order or modification of the Construction Contract or any subcontract without
the written approval of Lender. Borrower will obtain any required permits or
authorizations from governmental authorities having jurisdiction before
approving or requesting a new change order.
Purchase of Materials; Conditional Sales Contracts. No materials, equipment,
fixtures, or articles of personal property placed in or incorporated into the
Project shall be purchased or installed under any Security Agreement or other
agreement whereby the seller reserves or purports to reserve title or the right
of removal or repossession, or the right to consider such items as personal
property after their incorporation into the Project, unless otherwise authorized
by Lender in writing.
Exhibit 10(d), Page 9 of 14
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Lender's Right of Entry and Inspection. Lender and its agents shall have at all
times the right of entry and free access to the Property and the right to
inspect all work done, labor performed, and materials furnished with respect to
the Project. Lender shall have unrestricted access to and the right to copy all
records, accounting books, contracts, subcontracts, bills, statements, vouchers,
and supporting documents of Borrower relating in any way to the Project.
Lender's Right to Stop Work. If Lender in good faith determines that any work or
materials do not conform to the approved Plans and Specifications or sound
building practices, or otherwise depart from any of the requirements of this
Agreement, Lender may require the work to be stopped and withhold disbursements
until the matter is corrected. In such event, Borrower will promptly correct the
work to Lender's satisfaction. No such action by Lender will affect Borrower's
obligation to complete the Improvements on or before the Completion Date. Lender
is under no duty to supervise or inspect the construction or examine any books
and records. Any inspection or examination by Lender is for the sole purpose of
protecting Lender's security and preserving Lender's rights under this
Agreement. No default of Borrower will be waived by any inspection by Lender. In
no event will any inspection by Lender be a representation that there has been
or will be compliance with the Plans and Specifications or that the construction
is free from defective materials or workmanship.
Indemnity. Borrower shall indemnify and hold Lender harmless from any and all
claims asserted against Lender or the Property by any person, entity, or
governmental body, or arising out of or in connection with the Property,
Improvements, or Project. Lender shall be entitled to appear in any action or
proceeding to defend itself against such claims, and all costs incurred by
Lender in connection with such defense, including attorneys' fees, shall be paid
by Borrower to Lender. Lender shall, in its sole discretion, be entitled to
settle or compromise any asserted claims against it, and such settlement shall
be binding upon Borrower for purposes of this indemnification. All amounts paid
by Lender under this paragraph shall be secured by Lender's Mortgage or Deed of
Trust, if any, on the Property, shall be deemed an additional principal Advance
under the Loan, payable upon demand, and shall bear interest at the rate
applicable to the Loan.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the Indebtedness against
any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due on the
Loans.
Other Defaults. Failure of Borrower to comply with or to perform when due any
other term,
Exhibit 10(d), Page 10 of 14
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obligation, covenant or condition contained in this Agreement
False Statements. Any warranty, representation or statement made or furnished to
Lender by or on behalf of Borrower is false or misleading In any material
respect at the time made or furnished, or becomes false or misleading at any
time thereafter.
Insolvency. The dissolution or termination of Borrower's existence as a going
business, the insolvency of Borrower, the appointment of a receiver for any part
of Borrower's property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower, any creditor of any Grantor against
any collateral securing the Indebtedness, or by any governmental agency. This
includes a garnishment, attachment, or levy on or of any of Borrower's deposit
accounts with Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect to
any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender, and,
in doing so, cure the Event of Default.
Change In Ownership. Any change in ownership of twenty-five percent (25%) or
more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
Breach of Construction Contract. The Improvements are not constructed in
accordance with the Plans and Specifications or in accordance with the terms of
the Construction Contract.
Cessation of Construction. Prior to the completion of construction of the
Improvements and equipping of the Project, the construction of the Improvements
or the equipping of the Project is abandoned or work thereon ceases for a period
of more than ten (10) days for any reason, or the Improvements are not completed
for purposes of final payment to the General Contractor prior to the completion
date represented by Borrower to Lender, regardless of the reason for the delay.
Transfer of Property. Sale, transfer, hypothecation, assignment, or conveyance
of the Property or the Improvements or any portion thereof or interest therein
by Borrower or any Grantor without Lender's prior written consent.
Exhibit 10(d), Page 11 of 14
<PAGE> 12
Condemnation. All or any material portion of the Property is condemned, seized.
or appropriated without compensation, and Borrower does not within thirty (30)
days after such condemnation, seizure, or appropriation, initiate and diligently
prosecute appropriate action to contest in good faith the validity of such
condemnation, seizure, or appropriation.
EFFECT OF AN EVENT OF DEFAULT; REMEDIES. Upon the occurrence of any Event of
Default and at any time thereafter, Lender may, at its option, but without any
obligation to do so, and in addition to any other right Lender may have, do any
one or more of the following without notice to Borrower: (a) Cancel this
Agreement; (b) institute appropriate proceedings to enforce the performance of
this Agreement; (c) Withhold further disbursement of Loan Funds; (d) Expend
funds necessary to remedy the default; (e) Take possession of the Property and
continue construction of the Project; (f) Accelerate maturity of the Note and/or
Indebtedness and demand payment of all sums due under the Note and/or
Indebtedness; (g) Bring an action on the Note and/or indebtedness; (h) Foreclose
Lender's Mortgage or Deed of Trust, if any, on the Property in any manner
available under law; and (i) Exercise any other right or remedy which it has
under the Note or Related Documents, or which is otherwise available at law or
in equity or by statute.
COMPLETION OF IMPROVEMENTS BY LENDER. If Lender takes possession of the
Property, it may take any and all actions necessary in Its judgment to complete
construction of the Improvements, including but not limited to making changes in
the Plans and Specifications, work, or materials and entering into, modifying or
terminating any contractual arrangements, subject to Lender's right at any time
to discontinue any work without liability. If Lender elects to complete the
Improvements, it will not assume any liability to Borrower or to any other
person for completing the Improvements or for the manner or quality of
construction of the Improvements, and Borrower expressly waives any such
liability. Borrower irrevocably appoints Lender as its attorney-in-fact, with
full power of substitution, to complete the improvements, at Lender's option,
either in Borrower's name or in its own name. In any event, all sums expended by
Lender in completing the construction of the Improvements will be considered to
have been disbursed to Borrower and will be secured by the collateral for the
Loan. Any such sums that cause the principal amount of the Loan to exceed the
face amount of the Note will be considered to be an additional Loan to Borrower,
bearing interest at the Note rate and being secured by the collateral. For these
purposes, Borrower assigns to Lender all of its right, title and interest in and
to the Project Documents; however Lender will not have any obligation under the
Project Documents unless Lender expressly hereafter agrees to assume such
obligations in writing. Lender will have the right to exercise any rights of
Borrower under the Project Documents upon the occurrence of an Event of Default.
All rights, powers, and remedies of Lender under this Agreement are cumulative
and alternative, and are in addition to all rights which Lender may have under
applicable law.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Agency. Nothing in this Agreement shall be construed to constitute the creation
of a partnership or joint venture between Lender and Borrower or any contractor.
Lender is not an agent or representative of Borrower. This Agreement does not
create a contractual relationship with and
Exhibit 10(d), Page 12 of 14
<PAGE> 13
shall not be construed to benefit or bind Lender in any way with or create any
contractual duties by Lender to any contractor, subcontractor, material man,
laborer, or any other person.
Amendments. This Agreement, together with any Related Documents, constitutes the
entire understanding and agreement of the parties as to the matters set forth in
this Agreement. No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties sought to
be charged or bound by the alteration or amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted by
Lender in the State of Ohio. if there Is a lawsuit, Borrower agrees upon
Lender's request to submit to the jurisdiction of the courts of Richland County,
the State of Ohio. This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses,
including without limitation attorneys' fees, incurred in connection with the
preparation, execution, enforcement, modification and collection of this
Agreement or in connection with the Loans made pursuant to this Agreement.
Lender may pay someone else to help collect the Loans and to enforce this
Agreement, and Borrower will pay that amount. This includes, subject to any
limits under applicable law, Lender's attorneys' fees and Lender's legal
expenses, whether or not there is a lawsuit, including attorneys' fees for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection services.
Borrower also will pay any court costs, in addition to all other sums provided
by law.
Survival. All warranties, representations, and covenants made by Borrower in
this Agreement or in any certificate or other instrument delivered by Borrower
to Lender under this Agreement shall be considered to have been relied upon by
Lender and will survive the making of the Loan and delivery to Lender of the
Related Documents, regardless of any investigation made by Lender or on Lender's
behalf.
Time is of the Essence. Time is of the essence in the performance of this
Agreement.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No delay
or omission on the part of Lender in exercising any right shall operate as a
waiver of such right or any other right. A waiver by Lender of a provision of
this Agreement shall not prejudice or constitute a waiver of Lender's right
otherwise to demand strict compliance with that provision or any other provision
of this Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Borrower, or between Lender and any Grantor, shall constitute a
waiver of any of Lender's rights or of any obligations of Borrower or of any
Grantor as to any future transactions. Whenever the consent of Lender is
required under this Agreement, the granting of such consent by Lender In any
Instance shall not constitute continuing consent in subsequent instances where
such consent is required, and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
Exhibit 10(d), Page 13 of 14
<PAGE> 14
CONSTRUCTION LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS
DATED AS OF DECEMBER 2, 1996.
BORROWER:
Stearns and Lehman, Inc.
By: /s/ William Stearns, President By: /s/ John Chuprinko, CFO
LENDER:
First-Knox National Bank
By: /s/ James Brinker, Authorized Officer BORROWER:
Exhibit 10(d), Page 14 of 14
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