U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______________ to __________________.
Commission file number: 0-20436
U.S. AUTOMOTIVE MANUFACTURING, INC.
(Name of small business issuer in its charter)
Delaware 65-0309477
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Route 627, Airport Drive, Tappahannock, VA 22560
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (800) 446-3032
Securities registered under Section 12 (b) of the Exchange Act:
Name of each exchange on
Title of each class: None which registered: Not Applicable
Securities registered under Section 12 (g) of the Act:
Common Stock
------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and 2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ].
The Issuer's revenues for its most recent fiscal year were $6,999,636.
The aggregate market value of the voting stock held by non-affiliates was
approximately $11,846,162 as at the close of business on April 10, 1998.
The number of shares of Common Stock outstanding as at April 10, 1998, was
15,724,893.
Documents incorporated by reference: None
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U.S. Automotive Manufacturing, Inc.
Form 10-KSB
Table of Contents
Part I Page
ITEM 1. Description of Business................................... 3
ITEM 2 Description of Property................................... 8
ITEM 3 Legal Proceedings......................................... 8
ITEM 4 Submission of Matters to a Vote of
Security Holders.......................................... 8
Part II
ITEM 5 Market for Common Equity and Related
Stockholder Matters....................................... 9
ITEM 6 Management's Discussion and Analysis or
Plan of Operation......................................... 10
ITEM 7 Financial Statements...................................... 15
ITEM 8 Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure................................................ 15
Part III
ITEM 9 Directors, Executive Officers, Promoters
and Control Persons; Compliance with Section
16 (a) of the Exchange Act................................ 16
ITEM 10 Executive Compensation.................................... 17
ITEM 11 Security Ownership of Certain Beneficial
Owners and Management..................................... 19
ITEM 12 Certain Relationships and Related
Transactions.............................................. 21
ITEM 13 Exhibits and Reports on Form 8-K.......................... 22
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Part I.
ITEM 1. Description of the Business
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Report
contains statements that are forward-looking, such as statements relating to
plans for future activities. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: the Company's recent losses, the Company's need to obtain additional
financing and the ability to obtain such financing, outstanding indebtedness,
the ability to hire and retain key personnel; successful completion and
integration of prior and any future acquisitions; relationships with and
dependence on third-party equipment manufacturers and suppliers; uncertainties
relating to business and economic conditions in markets in which the Company
operates; uncertainties relating to government and regulatory policies and other
political risks; uncertainties relating to customer plans and commitments; cost
of and availability of component materials and inventories; effect of
governmental export and import policies; the highly competitive environment in
which the Company operates; potential entry of new, well-capitalized competitors
into the Company's markets; and the uncertainty regarding the Company's
continued ability, through sales growth, to absorb the increasing costs incurred
and expected to be incurred in connection with its business activities. The
words "believe", "expect", "anticipate", "intend" and "plan" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date the statement was made.
General
U.S. Automotive Manufacturing, Inc. (formerly RT Industries, Inc.), a Delaware
corporation incorporated on January 16, 1992 ("U.S. Automotive"), together with
its wholly-owned subsidiaries Quality Automotive Company and U.S. Automotive
Friction, Inc. (collectively, the "Company") is engaged in the
manufacture,assembly and distribution of new and rebuilt automotive friction
products. The Company maintains manufacturing and warehouse/distribution
facilities in Tappahannock, Virginia and Sanford, Florida (the "Facilities"),
which Facilities are either owned or leased by the Company or inactive
subsidiaries.
The Company manufactures a full line of friction automotive products, including
brake lining, integrally molded and riveted brake pads and remanufactured brake
shoes. The Company markets various grades of friction lining, asbestos, non
asbestos organic and semi-metallic formulas, suitable for use by the automotive
and light truck after-markets. The Company's products are under the Brakes Worth
Stopping For,(R) Silent Solution,(R) Max Life,(R) Dual Friction,(TM) Ultra
Brake,(TM) Gold Max,(TM) and Quality Automotive(TM) tradenames and various
private label packaging. In 1997, the Company's products were also sold under
the Roinco,(TM) Ultra Brake(TM) and Max Life(TM) tradenames.
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Brake pads, brake shoes or a combination of both are incorporated in all makes
and models of American and imported automobiles. All imported and the majority
of late model domestic automobiles are equipped with integrally molded brake
pads. The Company generally produces the replacement brake under the same
process used to manufacture the vehicle's original equipment.
The Company sells its friction products to other automotive manufacturers and
the automotive after-market. The automotive after-market encompasses the parts
and service sold to the vehicle owners for repair or replacement of original
equipment parts. The Company believes that the market for replacement parts
generally consists of vehicles which are three to twelve years old. Sales of the
Company's products are made to mass merchandisers, automotive distributors,
chain stores and other brake manufacturers. The Company does not market its
products directly to retail customers.
Merger with Quality Automotive Company/Products
On August 29, 1997, a wholly-owned subsidiary of the Company (the "Subsidiary")
acquired, by merger, Quality Automotive Company and its two subsidiaries from
the stockholders of Quality Automotive Company (the "Merger") in exchange for
(i) $3,000,000; (ii) two promissory notes, in the aggregate amount of $4,500,000
(which notes are guaranteed by the Company and secured by the Company's pledge
of all of its shares in the Subsidiary); and (iii) 1,838,731 shares of common
stock, par value of $.001 per share (the "Common Stock"), of the Company. After
the Merger, the Subsidiary changed its name to Quality Automotive Company
(hereinafter, "Quality").
The Merger gave the Company the ability to manufacture and market a full line of
automotive friction brake products, including friction material for sale to
third parties. The Company believes its ability to produce its own friction
material and to manufacture a complete line of friction products gives the
Company a competitive advantage over competitors that are unable to manufacture
a complete product line.
Suppliers/Manufacturing
The Company has developed multiple sources for all raw material used in
production which are purchased pursuant to open purchase orders. Raw material
required for production include: stamped steel backing plates, used brake shoe
core, resins, various fibers and fillers. All of such materials are converted,
packaged and shipped by the Company from its Facilities.
Customers
The Company sells its products to wholesale and retail automotive distributors,
mass merchandisers, chain stores and to other brake manufacturers in the United
States and in twelve foreign countries. Foreign sales (Latin America and the
Caribbean) represented approximately 17% and 30% of total sales in 1997 and
1996, respectively. No customer accounted for more than 10% of the Company's
sales for the fiscal year ended December 31, 1997.
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At December 31, 1997, the Company estimates that it had customers with a
continuing order base of approximately $15,000,000. Since that time the Company
has entered into non-binding business relationships with new customers which
could result in the Company receiving as much as $7,500,000 in additional
revenues over a 12 month period. The Company's business has not traditionally
been subject to firm contract orders and as such, while the Company anticipates
that 1998 sales should exceed $20,000,000, there can be no guarantee that such
level of revenues will be attained or that even if attained that the Company
will be profitable. Should such sales level be attained the Company believes
that more than 10% of revenues for the fiscal year ending December 31, 1998
could be derived from one customer.
Sales and Marketing
The Company markets its products mainly through the efforts of a core group of
Company employed sales personnel, complemented by a nationwide network of
independent sales representatives. Company sales support includes providing
recognized industry standard test results of its friction products, parts
catalogs, promotional material, brake clinics and a strong presence at a variety
of industry trade shows. The Company markets its products under the following
marks: Brakes Worth Stopping For,(R) the Silent Solution,(R) Max Life(R) and
such other retail packaging names as Dual Friction,(TM) Ultra Brake,(TM) Gold
Max,(TM) Quality Automotive(TM) and private labels.
Seasonality
Sales of the Company's products, like those of the replacement brake industry,
are generally lower in the late fall and winter months in those areas of the
country experiencing colder weather. Therefore, demand of the Company's products
are usually strongest in the second and third fiscal quarters.
Inventory and Distribution
At December 31, 1997, the Company had approximately $8,740,000 in inventory,
of which $7,170,000 was attributable to the acquisition of Quality. The Company
is in the process of reducing its inventory levels, which are duplicative and
higher than normal as a result of the Merger. The Company generally maintains an
inventory of raw materials and packaging materials based upon its production
schedule and the general availability of such materials. Finished goods
inventory is based on annual sales as estimated by management, taking into
account minimum production runs necessary to achieve efficient returns on
production.
The Company distributes its products from existing warehouse space located at
its Facilities in Virginia and Florida. Product is transported as appropriate,
by common carrier or through a dedicated fleet of tractor trailers currently
leased by the Company.
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Competition
The automotive replacement parts industry is a highly competitive business, with
market share being determined by such factors as the quality of the service
provided to customers, the price of products, the speed in which orders are
satisfied, and customer convenience. The Company competes in its market area
with other auto parts manufacturers. Some of its competitors have greater
financial resources and/or marketing personnel than the Company. To the extent a
competitor could develop better name recognition or a stronger distribution
network, it might enable such competitors to compete more effectively for the
sale of automotive brake and replacement brake parts. Specifically, competitors
with greater resources than the Company may be able to offer customers larger
discounts or offer better terms on volume purchases than those offered by the
Company. Although the Company believes that it has enhanced its competitive
position as a result of the Merger, there can be no assurance that the Company
will be able to compete successfully against any of its competitors.
Government Regulation
The Company is subject to many laws and governmental regulations and changes in
these laws and regulations, or their interpretation by agencies and the courts,
occur frequently.
The Company's manufacturing operations utilize asbestos and other materials that
are considered "hazardous substances" under applicable federal, state and local
laws and are subject to various current and evolving federal, state and local
laws and regulations relating to the protection of the environment. These laws
govern, among other things, emitting pollutants to air, discharging pollutants
to water, and generating, handling, storing, transporting, treating, and
disposing of a variety of hazardous and non-hazardous substances and wastes.
Federal and state environmental laws and regulations often require manufacturers
to obtain permits for these activities. Failure to comply with environmental
laws or to obtain, or comply with, the necessary state and federal permits can
subject the manufacturer to substantial civil and criminal penalties. The
Company operates two manufacturing facilities, one in Tappahannock, Virginia and
one in Sanford, Florida. The Company believes that these facilities are in
substantial compliance with all necessary permits and applicable material
environmental laws relating to its material business operations. It is
nevertheless possible that the Company faces material environmental liabilities
of which the Company is unaware. Moreover, the costs of compliance with the
various existing or future environmental laws and regulations, including any
penalties which may be assessed for failure to obtain necessary permits, could
be prohibitive. If any such costs exceeded the Company's budgets for such items,
the Company's business could be adversely affected. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and similar state statutes, impose joint and several liability for environmental
damages and cleanup costs on past or current owners and operators of facilities
at which hazardous substances have been released, as well as on persons who
generate, transport or arrange for disposal of hazardous substances at a
particular release site. In addition, the operator of a facility may be subject
to claims by third parties for personal injury, property damage or other costs
resulting from contamination present at or emanating from property on which its
facility is located.
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In addition to the Facilities, the Company or its predecessors have owned and/or
operated other facilities in the past where hazardous substances were handled
and may have liability for remediation of such facilities in the future. There
can be no assurance that the Company will not be subject to liability relating
to facilities owned and/or operated by them currently or in the past. The
Company could be held liable for a release of hazardous substances to the
environment from the Company's current or former properties or from any of its
offsite waste sites owned by others and used by the Company. The Company
currently has no knowledge of the existence of any such liabilities at this
time.
The Company has made, and will continue to make, capital and other expenditures
necessary to monitor and to comply with the foregoing environmental regulations.
For the year ended December 31, 1997, no material expenditures by the Company
were necessary with respect to such matters.
Trademarks, Proprietary Information and Patents
The Company utilizes various trademarks in connection with the sale of its
product, including the following registered trademarks: Brakes Worth Stopping
For,(R) Silent Solution(R) and MaxLife.(R) The Company holds no patents. The
Company has nonetheless developed processes and formulas with respect to the
composition of its friction material and the production and manufacture of its
brake products that it believes are proprietary to it. The Company relies on a
combination of contractual rights, non-disclosure agreements with its employees,
distributors and customers, and technical measures to establish and protect the
ideas, concepts, and documentation of its proprietary technology and know-how.
Such methods, however, may not afford complete protection, and there can be no
assurance that third parties will not independently develop such know-how or
obtain access to the Company's know-how, ideas, concepts, and documentation.
Although the Company believes that its technology has been developed
independently and does not infringe on the proprietary rights of others, there
can be no assurance that the technology does not and will not so infringe or
that third parties will not assert infringement claims against the Company in
the future. In the case of infringement, the Company would, under certain
circumstances, be required to modify its products or obtain a license. There can
be no assurance that the Company will have the financial or other resources
necessary to defend successfully a patent infringement or other proprietary
rights infringement action or that it could modify its products or obtain a
license if it were required to do so. Failure to do any of the foregoing could
have a material adverse effect on the Company. Furthermore, if the Company's
products or technologies are deemed to infringe upon the rights of others, the
Company could become liable for damages, which could have a material adverse
effect on the Company.
Employees
At March 31, 1998, the Company has an aggregate of 267 employees engaged
full-time by the Company. Of these employees, 24 are salaried and 243 are hourly
employees. Twenty (20) of such employees are in general and administrative
positions, 7 are in sales and marketing and 240 are in manufacturing, assembly
and warehousing positions. The Company's employees are not members of any union
and the Company has not experienced any work stoppages and considers its
employee relations to be good.
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ITEM 2 Description of Property
The Facilities are located on three parcels of land in Tappahannock, Virginia
(one parcel) and Sanford, Florida (two parcels).
The Virginia Facility is owned by the Company and is comprised of twelve
buildings on 24 acres of land. There is a total of approximately 246,000 sq. ft.
of production and storage capacity located within the buildings.
The Florida Facilities are comprised of (i) a manufacturing facility (37,000 sq.
ft.) and (ii) a warehouse/distribution facility (49,000 sq. ft.). At December
31, 1997 the Company leased both Florida facilities for approximately $18,000
per month. The Company had an option as at March 31, 1998 to purchase the
manufacturing facility in Florida and has notified the owners of its intent to
exercise such option. It is anticipated that the purchase and sale of the
manufacturing facility will close during the second (2nd) quarter of 1998.
Monthly rent for the warehouse facility is $7,200 for the duration of the lease,
which expires October 31, 1999.
ITEM 3. Legal Proceedings
No legal proceedings are currently pending against the Company. However, in
December 1997, the Company received notice from five former employees of the
Company who claimed that in June 1995 they were granted stock options from the
Company under a stock option plan which allegedly entitled them to purchase
shares of Common Stock and that the Company had not fulfilled certain
obligations with respect to registering the shares of Common Stock issuable upon
exercise of the options for sale under the Securities Act of 1933. These former
employees further claimed that as a result of the Company's failure they have
been damaged collectively in the amount of approximately $1,500,000. Although a
formal action has not commenced, the Company intends to vigorously defend any
action that may be brought by such former employees. In addition, while the
Company is not in a position at this time to evaluate the likelihood of an
unfavorable outcome to the Company in the event that such former employees
commence any such action, nor to estimate the amount or range of potential loss
to the Company, if any, that it could sustain as a result of an unfavorable
outcome, it currently believes, although there can be no assurance, that the
potential loss, if any, from such action would not have a material effect on the
operations of the Company.
ITEM 4. Submissions of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of 1997.
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Part II
ITEM 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock is traded in the over-the counter market on the
NASDAQ SmallCap Market under the symbol USAM. Prior to the fourth quarter of
1997, the Common Stock traded under the symbol RTIC. The following table sets
forth, for the periods indicated, high and low bid prices of the Company's
common stock. The quotations constitute quotations among dealers and do not
reflect retail mark-ups, markdowns, or commissions, and may not represent actual
retail transactions:
Year Ended Dec. 31, 1996 High Low
- ------------------------ ---- ---
First Quarter $ 5.00 $ 2.19
Second Quarter 7.06 3.81
Third Quarter 6.50 4.83
Fourth Quarter 5.50 4.50
Year Ended Dec. 31, 1997
- ------------------------
First Quarter $ 5.75 $ 5.125
Second Quarter 5.75 3.75
Third Quarter 5.00 3.75
Fourth Quarter 5.25 2.25
As of April 10, 1998 there were 15,724,893 shares of Common Stock outstanding
and held of record by approximately 950 stockholders.
The payment of dividends on the Company's common stock is within the discretion
of the Company's Board of Directors. To date, the Company has not paid any
dividends on its common stock, and does not expect to pay any dividends in the
foreseeable future. The Company intends to retain all earnings for use in the
Company's operations.
In February 1997, two unsecured convertible promissory notes, in the aggregate
amount of $300,000 plus interest at 8% due monthly, were converted into an
aggregate of 300,000 shares of the Company's Common Stock pursuant to the
exemption provided by Section 3a(9) of the Act.
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ITEM 6. Management's Discussion and Analysis or Plan of Operation
General
U.S. Automotive (formerly, RT Industries, Inc.), organized as a Delaware
corporation on January 16, 1992, engages in the manufacture, assembly and
distribution of new and rebuilt automotive friction products.
During each of fiscal 1995, 1996 and 1997, the Company posted ever more
significant losses from its continuing operations. In an effort to reverse
declining sales and continuing loss of its customers, the Company embarked upon
a plan to (1) restructure its operations and (2) expand its business through
acquisitions.
Beginning in the later half of fiscal year 1995 and continuing during fiscal
year 1996, the Company consolidated its outstanding indebtedness and reduced
(chiefly through refinancing) its debt service expenses. This process continued
during fiscal year 1997 and, in April 1997, the Company repaid its outstanding
loan facility with Congress Financial Corporation (under which facility the
Company had been in continuous default of certain financial covenants since
fiscal year 1995). In addition, the Company continues to pay down various
outstanding long term indebtedness with respect to trade payables and equipment
creditors.
During fiscal 1997, the Company purchased new machinery and equipment to update
obsolete and out-dated existing machinery and equipment at the Florida Facility
as well as pursued the acquisition of additional manufacturing and distribution
capabilities through the merger with Quality.
On August 29, 1997, the Company acquired, by merger, Quality Automotive Company
(the "Merger"). As a result of the Merger, the Company acquired the capacity to
manufacture friction materials for its own use in the manufacture and
remanufacture of brake products as well as with respect to sales to third
parties and other manufacturers. Following the Merger, the senior management of
Quality Automotive Company became the senior management of the Company. The
Merger was accounted for using the purchase accounting method and the results of
Quality have therefore been included in the Company's results since the date of
the Merger. The Company recorded goodwill, in the approximate amount of
$6,380,000, representing the excess of the purchase price over the value of the
acquired assets and liabilities (in accordance with estimates of fair market
value on the date of the Merger). Goodwill is being amortized over 20 years.
Amortization expense for the year ended December 31, 1997 and accumulated
amortization at December 31, 1997 was $106,332.
The Company believes that the machinery, equipment, dies, molds and tooling
resulting from the integration of Quality and U.S. Automotive enables the
Company to manufacture and market a full line of friction brake products (lining
as well as integrally molded and riveted brake pads and both bonded and riveted
brake shoes.) By manufacturing a complete line, the Company intends to attract
new business and provide better service to existing customers as well as better
control its inventory.
New business, however, requires more working capital than has been generally
available to the Company. Between February and April 10, 1998, the Company
raised approximately $1,200,000 in capital and has entered into financing
arrangements that, if fully funded, or subscribed to, would provide an
additional $1,800,000 in working capital (the "1st Quarter Financing").
Management believes that such financing, in conjunction with the Credit
Facility, is sufficient to meet the Company's on-going working capital needs.
The Company is also attempting to raise funds through the sale of convertible
debt or equity securities. If the Company is successful in raising such
additional funds, it is anticipated that a majority of the proceeds would be
used to retire the 1st Quarter Financing.
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Results of Operations
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Net Sales. Net sales for the year ended December 31, 1997 were $6,999,636 as
compared to net sales of $3,912,237 for the year ended December 31, 1996. The
increase of $3,087,399 or 44% resulted from the addition of 4 months of Quality
sales ($4.3 million), offset by a $1.2 million reduction in sales generated by
the Florida Facility.
Gross Profit (Loss). For the year ended December 31, 1997, the Company had a
gross profit of $1,021,365, representing an increase of $2,500,000 when compared
to the gross loss of ($1,422,790) for the year ended December 31, 1996. The
increase in gross profit was attributed to a 79% increase in sales offset in
part by a 12% increase in the overall cost of sales, each attributable to the
acquisition of Quality. Cost of sales for the year ended December 31, 1997 was
$5,978,271 as compared to $5,335,027 for the year ended December 31, 1996.
Selling, General and Administrative Expenses. Selling, general and
administration expenses for the year ended December 31, 1997 were $10,107,801 as
compared to $2,694,496 for the year ended December 31, 1996, representing an
increase of 275%. The $7,413,305 increase in total operating expense was
comprised of (i) a $600,000 increase in selling and delivery expense (from
$574,939 in fiscal 1996 to $1,179,218 in fiscal 1997) resulting from the Merger
and (ii) a $6,809,026 increase in the general and administrative expenses caused
by the inclusion of the Quality selling, general and administrative expense of
approximately $1,300,000, charges of approximately $3,340,000 relating to
increases in valuation reserves and the writedown of certain assets located at
the Florida Facility, a $350,000 settlement payment to a former officer and
director of the Company, approximately $1,200,000 in aggregate fees and expenses
relating to the Reg S transactions completed during fiscal 1997, and $850,000
relating to fees and expenses incurred in connection with the Merger.
Interest Expense. Other income and expense increased by $1,947,479 from
$2,000,884 in fiscal 1996 to $3,948,363 in fiscal 1997. This increase was
predominately attributable to the increase in interest expense associated with
the $12,000,000 raised through the sale of convertible debentures. In addition,
approximately $215,000 related to the Merger.
Net Income (Loss). The net loss in fiscal 1997 was ($13,034,799) or ($1.22) per
share based on 10,724,780 weighted average common and common equivalent shares
outstanding compared to a net loss of ($6,118,170) or ($.90) per share in fiscal
1996 based on 6,771,801 common and common equivalent shares outstanding. The
increase in net loss of $6,916,629 was primarily the result of the increase in
interest expense and certain non-recurring general and administrative expenses
discussed above.
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Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Net Sales. Net sales for the year ended December 31, 1996 were $3,912,237 as
compared to net sales of $8,369,067 for the year ended December 31, 1995. The
decrease of $4,456,830 or 53% resulted principally from losses in the Company's
customer base and a lack of working capital to service its customers.
Gross Profit (Loss). For the year ended December 31, 1996, the Company had an
operating loss of $4,117,286 as compared to an operating loss of $5,507,865 for
the year ended December 31, 1995. The reduction of $1,390,579 in operating loss
resulted from a reduction of $2,156,512 in total operating expenses from
$4,851,008 in fiscal 1995 to $2,694,496 in fiscal 1996. The full impact of the
reduction in operating expenses was offset by a decrease in net sales from
$8,369,067 to $3,912,237 in 1995 and 1996, respectively. The loss of sales is
attributable to the loss of customers and the impaired ability to attract new
customers as a result of the Company's financial difficulties.
Selling, General and Administrative Expenses. Selling and delivery expenses were
$574,939 and $909,669 in fiscal 1996 and fiscal 1995, respectively. The decrease
of $334,730 was the result of lower sales in 1996. General and administrative
expenses were reduced by $1,495,546 (46.4%) from $3,220,897 in fiscal 1995 to
$1,725,351 in fiscal 1996. This reduction was the result of the Company's
continuing restructuring efforts. Bad debt expense was $394,206 and $720,442 in
1996 and 1995. respectively. Lower sales and improved collection efforts
accounted for this reduction.
Interest Expense. Interest expense increased from $460,832 in the year ended
December 31, 1995 to $2,027,746 for the year ended December 31, 1996. The
increased interest expense of $1,566,914 was due to an interest charge of
$1,214,583 for the value of the conversion discount off the fair market value of
the Company's common stock available to the holders of convertible debentures
issued by the Company during fiscal 1996 at the date of issuance.
Net Income (Loss). The net loss in fiscal 1996 was ($6,118,170) or $(.90) per
share based on 6,771,801 weighted average common and common equivalent shares
outstanding compared to a net loss of ($4,179,642) or ($1.46) per share in
fiscal 1995 based on 2,864,101 common and common equivalent shares outstanding.
The increase in net loss of $1,938,528 or 46.4% was the result of approximately
$1.2 million of interest expense recorded pursuant to conversion of convertible
debentures, together with the absence of debt forgiveness benefit recorded in
fiscal 1995 by the Company in the amount of $1 million.
In 1995, the Company had an income tax benefit of $772,999, that resulted from
the reversal of the deferred tax liability on the balance sheet as of December
31, 1994. No income tax benefit was recorded in 1996 as a result of the change
in the valuation allowance on the deferred income tax asset. The net loss before
extraordinary gain was $6,118,170 and $5,195,698 for 1996 and 1995,
respectively. The extraordinary gain from forgiveness of debt, net of income
taxes was $1,016,056 in 1995. The net loss was $6,118,170 and $4,179,642 in 1996
and 1995, respectively.
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Liquidity and Capital Resources
During the year ended December 31, 1997, the Company financed its operations
primarily through net proceeds from the Company's private sales of equity and
debt securities, borrowings from its lending institution and cash generated by
operations.
At December 31, 1997, the Company had consolidated cash and short-term
investments totalling $1,001,843 and working capital of $2,897,284. At December
31, 1996, the Company had consolidated cash and short-term investments totalling
$956,548 and working capital of $3,473,422. This decrease in working capital was
due primarily to accrued liabilities attributable to the Merger.
Net cash provided by financing activities for fiscal 1997 was $8,901,333
consisting primarily of the proceeds of the private offerings of Convertible
Debentures aggregating $10.5 million (the "Reg S Debentures") issued by the
Company in transactions exempt from registration pursuant to Regulation S
promulgated by the Securities Exchange Commission under the Securities Act
(collectively, the "Reg S Offerings"). Proceeds from such Reg S Offerings were
used to fund the Merger and to replace cash depleted through losses by the
Company.
Prior to April 1997, the Company had a $7.5 million secured line of credit with
Congress Financial Corporation. Such line of credit matured in April
1997, at which time the Company did not renew the credit line.
After the Merger, a principal source of capital for the Company's operations was
the line of credit (the "Credit Facility") between Quality and LaSalle Business
Credit, Inc. ("LaSalle"), which consisted of the following, all of which matured
on March 31, 1998:
(i) a secured revolving credit facility of up to $7.5 million. Advances
are made by formula on the Company's accounts receivable and
inventory. At December 31, 1997, the revolving credit had
approximately $4.8 million of a possible $5.3 million outstanding.
Interest is calculated at the prime rate plus 1% (9.5% at December 31,
1997)
(ii) a secured loan covering machinery equipment, property and plant having
an original loan amount of approximately $3,500,000 of which $900,000
was outstanding at December 31, 1997. Monthly installments of $50,000
are due until maturity, at which time any balance owing is due.
Interest is calculated at the prime are plus 1% (9.5% at December 31,
1997)
(iii) a secured loan covering machinery and equipment put into service
under a capital expenditure facility of 1995. The original amount
outstanding was approximately $1,000,000. At December 31, 1997, the
balance outstanding was approximately $600,000. The loan calls for
monthly payments of $31,000 with any balance being due at the maturity
date. Interest is calculated at the prime rate plus 1% (9.5% at
December 31, 1997)
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Quality's obligation to pay the principal of, interest on, premium, if any, and
all other amounts payable on account of the Credit Facility, which is secured by
substantially all of the assets of Quality as well as the pledge of all of the
Company's ownership interest in Quality. Upon the occurrence of an event of
default specified in the Credit Facility (including failure to satisfy certain
financial covenants), the maturity of the outstanding principal amounts of the
revolving credit loans and the equipment loans may be accelerated by LaSalle who
may also foreclose on the secured assets of Quality.
The Credit Facility had a maturity date of March 31, 1998. Quality has requested
that LaSalle extend the Credit Facility for one year as well as grant a new $2.0
million capital expenditure finance facility (carrying an 85% advance rate
against new equipment purchased (acquired after June 1997), with interest and
maturity date consistent with other fixed asset financing, except that there
will be no amortization of principal during 1998). LaSalle has advised the
Company of its willingness to grant such request, subject to satisfactory
documentation. The Company believes that such arrangement will be finalized
during the second quarter of 1998. Until such time as documentation of the loan
extension and additional loan is executed, all of the Company's indebtedness to
LaSalle is due on demand.
In addition to the Line of Credit, the Company obtained additional financing
during the year ended December 31, 1997 through the private sale of convertible
debentures. For the year ended December 31, 1997, the Company issued a total of
$10,500,000 of convertible debentures. Such convertible debentures enabled their
holder to convert such convertible debentures into the Company's common stock at
the lesser (i) of 75% or 80% of the average market value of the Company's common
stock for the five trading days preceding the date of conversion (depending on
the specific terms of the convertible debentures) or (ii) 110% of the average
market value of the Company's common stock for the five trading days preceding
the date of the convertible debentures was issued. All of the convertible
debentures (principal plus accrued interest) were converted during fiscal 1997,
resulting in an issuance of an aggregate of 5,263,391 shares of the Company's
Common Stock. For the year ended December 31, 1997, $3,500,000 of interest
expense has been recorded for the difference between the conversion prices of
the convertible debentures and the fair market value of the Company's common
stock at the time of conversion.
In addition, the Company obtained short-term financing from one of its principal
stockholders in June, 1997 for use in connection with a settlement entered into
with a former officer and director of the Company and certain affiliated
entities. The loan, in the amount of $350,000, was evidenced by a promissory
note, bearing interest at the annualized rate of 8.5%, which note was repaid in
full in August, 1997. In connection with the loan, the Company issued to such
principal stockholder five year warrants to purchase up to 10,000 shares of the
Company's common stock, with an exercise price of $3.75 per share.
Recent Accounting Pronouncements
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The impact on the Company's financial statements compared to information
presently available is not expected to
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be significant. Also in June 1997, the FASB issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
requires public companies to report financial and descriptive information about
operating segments. The statement intends to align reportable segments and
certain disclosures with how the operations are managed internally. The impact
of this statement on the Company's disclosure is not expected to significant. In
February 1998, the FASB issued Statement No. 132, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits," which adds disclosure requirements
on changes in the benefit obligations and fair values of plan assets, and
eliminates certain disclosures that are no longer useful. These statements will
be adopted by the Company in fiscal year 1998.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
Impact of the Year 2000
Many computer systems experience problems handling dates beyond the year 1999.
In 1997 the Company purchased new manufacturing and financial software from a
recognized leader in its field. During 1997, the Company's computer hardware was
upgraded to the AS400. The new system, which fully contemplates the potential
computer related problems with the new millennium, is in the final stages of
testing in the Tappahannock, Virginia facility. The Company's new system
accommodates remote locations and the Sandford, Florida facility is expected to
be placed on-line in Summer 1998.
In addition, the Company is assessing the readiness of third-party suppliers and
customers whose computer systems interact with the Company's systems. There is
no guarantee that these third parties will timely convert their systems or that
their systems will not have an adverse effect on the Company's systems.
ITEM 7 Financial Statements
The Consolidated Financial Statements of the Company appear herein following
Item 13 below.
ITEM 8 Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.
The information required by this item has previously been reported in the
Company's Current Report on Form 8-K for the event dated August 29, 1997 (Item
2) and Amendment No. 1 thereto.
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Part III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16 (a) of the Exchange Act
The table below sets forth the name, age and certain information as to the
Directors and executive officers of the Company.
Name Age Position
---- --- --------
John W. Kohut 51 Chairman of the Board, Director(1)
Martin Chevalier 52 Chief Executive Officer, President
and Director
John W. Kenney(2) 54 Treasurer and Secretary
David Love 63 Director(1)
Mandel Sherman 59 Director(1)
- ------------------
(1) Member, Audit Committee
(2) Mr. Kenney resigned as Treasurer and Secretary, effective March 27, 1998.
John W. Kohut has been a director of the Company since August 1997 and has
served as the Chairman of the Board of the Company since Quality was acquired,
by merger, on August 29, 1997. Mr. Kohut also has served since August, 1997 as
the primary financial officer of the Company. Prior to the Merger, he was a
substantial equity owner in Quality. Since January 1991 Mr. Kohut has served as
President of RamKo Venture Management, Inc. ("RamKo"), an investment banking and
consulting firm. He currently continues to serve in such capacity. The Company
has engaged RamKo as a consultant to the Company since December 1996.
Martin Chevalier has been a director of the Company since August 1997 and has
served as President and Chief Executive Officer of the Company following the
Merger. He also has served as President of Quality since December 1988. Prior to
the Merger, he was also a principal equity owner of Quality.
John W. Kenney served as the Treasurer and Secretary of the Company at year end
December 31, 1997, which position he held from September 2, 1997 until March 27,
1998. He also served as President and Chief Executive Officer of the Company
from November 1995 to September 1997 and Chairman of the Board of the Company
from July 1996 to August 1997. Mr. Kenney had agreed upon the consummation of
the Merger to serve as interim Treasurer through March, 27, 1998 and has
resigned as of that date.
David Love has been a director of the Company since July 1996. He has served as
Chairman of the Audit Committee since August 1997. Over the past five plus
years, Mr. Love has been
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a practicing independent Certified Public Accountant and attorney in the greater
Boston area. In addition, Mr. Love is a practicing arbitrator and mediator. Mr.
Love is currently the Chief Financial Officer of Quality Microwave, Inc., a
private corporation located in Wilmington, MA, which office he has held since
April 1995.
Mandel Sherman has been a director of the Company since July, 1996. Mr. Sherman
has also provided consulting services to the Company through Baroque
Investments, Inc., a consulting firm engaged in December 1995 by the Company,
terminating December 31, 2000. Since 1983, Mr. Sherman has served as an investor
and manager in a variety of privately-held real estate ventures and more
recently, investment firms and companies, including without limitation First
Providence Financial Association Inc., a member of NASD. Since 1996, he has
served as President and principal stockholder of Miss Sloan Capital Ltd., an
investment company and general partner of Elmgrove, which partnership is a
principal stockholder of the Company. In the past, Mr. Sherman served as an
executive officer in both public and private companies engaged in the precious
metals industry. He has also served as President of Westbury Alloys, LLC. and
Manager of Wingate Financial Associates, LLC since 1996.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10 percent of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than 10 percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on the Company's review of the copies of such forms received
by the Company, the Company believes that, during the year ended December 31,
1997, all filing requirements applicable to its officers, directors, and greater
than 10 percent beneficial owners were complied with except that (1) Form 4's,
covering January 1997 and June 1997 were untimely filed by Elmgrove Associates
II, L.P.; (2) Form 4's, covering March 1996, January 1997 and June 1997 relating
to transactions by Elmgrove, were untimely filed by Mr. Mandel Sherman, the
President and principal stockholder of Elmgrove's General Partner; and (3) Form
3, covering July 1996, was untimely filed by Mr. David Love.
ITEM 10. Executive Compensation
Officers Salaries
The following table sets forth for the fiscal years ended December 31, 1997,
1996 and 1995 the compensation of the Company's Chief Executive Officer and any
executive officer of the Company, other than the Chief Executive Officer, whose
aggregate compensation exceeded $100,000 for the fiscal year ended December 31,
1997:
Summary Compensation Table
Other Annual
Name/Position Year Salary Compensation
- ------------- ---- ------ ------------
Martin Chevalier, 1997 $ 75,000 (1) none
President/Chief Executive
Officer
John W. Kohut, 1997 N/A $ 60,000 (2)
Chairman of the Board
John K. Kenney (3) 1997 $ 110,000 $ 36,000
1996 $ 110,000 $ 18,000
1995 $ 22,856 (4) none
================================================================================
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(1) Based on four months employment at an annual rate of $225,000. Mr.
Chevalier was employed by the Company effective August 29, 1997,
following the Merger.
(2) Based on distributions to RamKo, pro-rated over 4 months. The Company
engaged RamKo as a consultant on August 29, 1997, at a rate of $45,000
per quarter. Mr. Kohut is the President of RamKo. He also became
Chairman of the Board of the Company on August 29, 1997. RamKo was
initially engaged in December, 1996.
(3) Mr. Kenney served as President and Chief Executive Officer of the
Company from mid-October, 1995,
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until September 2, 1997, at which time he was employed by the Company
as Treasurer and Secretary. His effective annual salary rate of
$110,000 did not change. Mr. Kenney resigned from his position as
Treasurer and Secretary, effective March 27, 1998.
(4) Based on two and one-half months employment at an annual rate of
$110,000.
Employment and Consulting Agreements
The Company has entered into a three-year employment agreement with Martin
Chevalier, whereby Mr. Chevalier serves as President and Chief Executive Officer
of each of the Company and Quality. The employment agreement provides for an
annual base compensation of $225,000 plus annual bonuses of (i) five percent
(5%) of the first $1,000,000 in audited pre-tax consolidated profits of the
Company and Quality and (ii) ten percent (10%) of audited pre-tax consolidated
profits of the Company and Quality in excess of $1,000,000 but not to exceed
$500,000 in any given year. The employment agreement provides for Mr.
Chevalier's employment on a full-time basis and contains a provision that the
employee will not compete or engage in a business competitive with the current
or anticipated business of the Company during the term of the employment
agreement and for a period of two years thereafter. Mr. Chevalier's employment
under the employment agreement may be terminated for "cause" by the Company or
Quality.
The Company has entered into a three-year consulting agreement, commencing
August 29, 1997, with RamKo, of which Mr. Kohut is the President. pursuant to
which RamKo has agreed to provide general business and financial advice to the
Company. The agreement provides for quarterly payments of $45,000 plus
reasonable and necessary expenses. The agreement also provides that services
rendered by RamKo shall not exceed twenty-five (25) days in any given calendar
quarter (otherwise, the Company is liable to RamKo for an additional charge). In
addition, RamKo and its directors, shareholders, agents, officers and employees
have agreed not to perform services or engage in any business deemed to be in
competition with the Company. The agreement may be terminated for "cause" by the
Company.
The Company has entered into a consulting agreement, terminating December 31,
2000, with Baroque Investments Inc. ("Baroque"), of which Mr. Sherman is the
President, pursuant to which Baroque has agreed to provide overall strategic
advice and planning in connection with the acquisition and/or development of
complementary products and businesses and the finances of the Company. The
agreement provides for an annual rate of $60,000, payable in monthly
installments of $5,000, plus reasonable and necessary expenses.
Committees of the Board of Directors
In August 1997, the Company established an Audit Committee comprised of Messrs.
Love, Kohut and Sherman. The Audit Committee, among other things, makes
recommendations to the Board of Directors with respect to the engagement of the
Company's independent certified public accountants and the review of the scope
and effect of the audit engagement.
Options/SARs
No options/SARs were granted to the Named Executives during the fiscal year
ended December 31, 1997 or were owned by the Named Executives at December 31,
1997.
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Director Fees and Other Remuneration
All directors receive a director's fee of $25,000 per annum in connection with
their participation on the Board of Directors; provided, however, that each
director is deemed to have waived such fee, or portion thereof during that year,
to the extent that during such year such director otherwise receives
compensation from the Company for services rendered in excess of such aggregate
fee. Currently, only Mr. Love receives the $25,000 annual director's fee.
In addition to his director fees, Mr. Love receives an additional $11,000 for
serving as Chairman of the Audit Committee.
Stock Plans
On March 13, 1992, the Company's Board of Directors and stockholders approved
the Company's Employee Stock Option Plan (the "ESO Plan"). Under the ESO Plan,
in the discretion of the Compensation Committee of the Board of Directors,
options may be granted to key employees (including officers) of the Company and
its subsidiaries for the purchase of shares of the Company's common stock.
Options granted may be (a) incentive stock options within the meaning of the
U.S. Internal Revenue Code Section 422(b) or (b) non-qualified options. The ESO
Plan does not limit the number of options which may be granted to an employee or
the number of shares which may be subject to any option, except that (y) the
aggregate fair market value (as determined at the time the option is granted) of
the Company's common stock with respect to which incentive stock options are
exercisable for the first time by any employee during any calendar year may not
exceed $100,000, and (z) no incentive stock options or non-qualified stock
options may be granted to any employee who owns (at the time the option is
granted) stock possessing more than 10% of the total combined voting power of
all classes of stock of his employer corporation or any of its parent
corporations or subsidiary corporations. If any option expires, terminates or is
canceled for any reason without having been exercised in full, the shares which
were reserved for issuance upon its exercise again become available for the
purposes of the ESO Plan. The ESO Plan terminates in March 2002. Each option
under the ESO Plan is granted pursuant to an agreement with the optionee. The
incentive stock options are subject to anti dilution protection. The Company is
authorized to issue up to 60,000 options under the ESO Plan. During the period
of June 12, 1992, through September 30, 1994 options were granted to various
employees of the Company at prices ranging from $3.75 to $17.1875. Such options
become exercisable at various dates and expire at the end of not more than 10
years from the date of the grant or within sixty days of termination of
employment with the Company, which ever is earlier. As of the date hereof, only
1,400 options were outstanding under the ESO Plan.
ITEM 11 Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 31, 1998, the number of shares of
the Company's outstanding Common Stock beneficially owned by (i) each director
of the Company; (ii) each
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person who is known by the Company to beneficially own 5% or more of the
outstanding Common Stock; (iii) each of the persons named in the Summary
Compensation Table (the "Named Executives"); and (iv) all of the Company's
directors and executive officers as a group (based on information furnished by
such persons). Unless otherwise indicated, the beneficial owners exercise sole
voting and/or investment power over their shares.
Amount and
Nature of
Name and Address of Beneficial Beneficial
Owner(1) Ownership(2) Percent
------------------------------- ------------ -------
Elmgrove Associates II., L.P (3)............ 2,027,500(4) 11.9%
Mandel Sherman (5) ......................... 2,027,500(4)(6) 11.9%
John W. Kohut .............................. 736,228(7) 4.6%
Martin Chevalier ........................... 1,102,503(8) 7.0%
David Love (9) ............................. 12,500(10) *
John Kenney (11)............................ 0 *
All executive officers and directors as
a group (5 persons) ........................ 3,878,731(4)(5) 21.8%
(6)(7)
- ------------------
* less than 1%
(1) Unless otherwise indicated, the address of each beneficial owner of more
than 5% of the Common Stock is c/o the Company.
(2) A person is deemed to be the beneficial owner of voting securities that can
be acquired by such person within 60 days from March 31, 1998 upon the
exercise of options, warrants or convertible securities. Each beneficial
owner's percentage ownership is determined by assuming that convertible
securities, options or warrants that are held by such person (but not those
held by any other person) and which are exercisable within 60 days of March
31, 1998 have been exercised. Unless otherwise noted, the Company believes
that all persons named in the table have sole voting and investment power
with respect to all shares of Common Stock beneficially owned by them.
(3) Elmgrove's address is 210 Dartmouth, Pawtucket, RI 02860. Mandel Sherman, a
director of the Company, is President of the General Partner of Elmgrove.
(4) Includes 1,277,500 shares issuable upon exercise of currently exercisable
warrants. 750,000 shares of Common Stock held by Elmgrove are also subject
to a lock-up agreement, dated August 29, 1997, whereby Elmgrove has agreed
to certain volume restrictions and limitations on the sale of these shares
over a 5 year period.
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<PAGE>
(5) Mr. Sherman's address is c/o Elmgrove Associates II, L.P. at 210 Dartmouth,
Pawtucket, RI 02860.
(6) Represents shares beneficially owned by Elmgrove. Mr. Sherman may also be
deemed to be the beneficial owner of the share by virtue of his position as
President of the General Partner of Elmgrove.
(7) All of the shares are subject to a lock-up agreement, dated August 29,
1997, restricting the sale of shares over a 5 year period.
(8) All of the shares are subject to a lock-up agreement, dated August 29,
1997, restricting the sale of shares over a 5 year period.
(9) Mr. Love's address is 68 Hammond Pond Parkway, Chestnut Hill, Massachusetts
02167.
(10) Represents shares issuable upon exercise of currently exercisable warrants.
(11) Mr. Kenney resigned from his position as Treasurer and Secretary, effective
March 27, 1998.
ITEM 12 Certain Relationships and Related Transactions
In March 1997, the Company repaid a Promissory Note, in the principal amount of
$100,000, plus interest at a rate of 12% per annum, evidencing an indebtedness
to Elmgrove, a principal stockholder of the Company, for a loan made by Elmgrove
to the Company in 1996. Mandel Sherman, a director of the Company, is the
President and principal stockholder of Miss Sloan Capital, Inc., the general
partner of Elmgrove.
In connection with the foregoing loan from Elmgrove and an additional loan, in
the amount of $490,000 made by Elmgrove to the Company (which was repaid during
1996), the Company granted Elmgrove 10 year warrants to purchase up to an
aggregate of 1,180,000 shares of the Company's common stock at an exercise price
of $2.28 per share, subject to adjustment, under certain conditions. The Company
also provided Elmgrove with piggyback and demand registration rights with
respect to the shares issuable upon exercise of the warrants, under certain
conditions. The Company may redeem such warrants at a redemption price of $0.05
per warrant.
In 1995, the Company entered into a consulting agreement, terminating December
31, 2000, with Baroque Investments Inc. ("Baroque"), of which Mr. Sherman (a
director of the Company) is the President. Such consulting agreement provides
for Baroque to render overall strategic advice and planning in connection with
the acquisition and/or development of complementary products and businesses and
the finances of the Company. The agreement provides for an annual rate of
$60,000, payable in monthly installments of $5,000, plus reasonable and
necessary expenses.
On May 31, 1997, the Company borrowed from Elmgrove $350,000, evidenced by a
non-negotiable promissory note, bearing interest at a rate of 8% per annum,
which was repaid in August 1997. In connection with the loan, the Company
granted to Elmgrove 10 year warrants to purchase 10,000 shares of the Common
Stock at an exercise price of $3.75 per share.
21
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In connection with the consummation of the Merger with Quality on August 29,
1997, each of Messrs. Chevalier and Kohut, as shareholders of Quality Automotive
Company, received promissory notes from the Company, in the amounts of
$2,697,841.73 and $ 1,802,158.27, respectively, as well as 1,102,503 and 736,228
shares of Common Stock, respectively. Such notes bear interest at a rate of 8%
per annum, payable quarterly commencing August 1, 1998, and are payable in full
on August 29, 1999. Such notes are the direct obligation of Quality and are
guaranteed by U.S. Automotive, which also pledged all of its stock in Quality as
additional collateral. The stock pledge is subordinated to the LaSalle Credit
Facility. Messrs. Chevalier and Kohut currently serve as directors and, in the
case of Chevalier, an officer of the Company.
On August 29, 1997, the Company also entered into a three-year consulting
agreement with RamKo, of which Mr. Kohut (a director and Chairman of the Board
of the Company) is the President. Such consulting agreement provides for
quarterly payments to RamKo of $45,000 plus reasonable and necessary expenses.
The consulting agreement also provides that RamKo and its directors,
shareholders, agents, officers and employees shall not perform services or
engage in any business deemed to be in competition with the Company. The
agreement may be terminated for "cause" by the Company.
On February 27, 1998, the Company sold debt and equity securities to Elmgrove
and David Love, an affiliate and a director of the Company, respectively. The
sale was made pursuant to a private placement consisting of two (2) unsecured
non-negotiable promissory notes in the aggregate principal amount of $400,000,
bearing interest at the rate of 10.5% per annum, and warrants to purchase up to
an aggregate of 100,000 shares of the Common Stock, maturing in February
2003, at a conversion price equal to the greater of $2.00 per share or the last
sales price of the Common Stock as reported on NASDAQ SmallCap Market for the
trading date immediately preceding the exercise date, subject to adjustment in
certain conditions. The net proceeds to the Company were approximately $370,000.
The warrants are redeemable by the Company, upon notice of not less than 30 days
at a price of $0.05 per warrant, provided that the closing bid quotation of the
Common Stock on all 20 trading days ending on the third day prior to the day of
which the Company gives notice of redemption has been at least 150% of the then
effective exercise price of the warrants. The holders of the Warrants shall have
the right to exercise them until the close of business on the date fixed for
redemption. The exercise price and number of shares of Common Stock or other
securities issuable on exercise of the warrants are subject to adjustment in
certain circumstances, including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation of the Company.
ITEM 13. Exhibits, Lists and Reports on Form 8-K
(a) Financial Statements
See list of Financial Statements on F-1.
(b) Reports on Forms 8-K and 8-K/A
The Company filed reports with the Securities and Exchange
Commission on Form 8-K for events dated each of August 29,
1997 (Item 2. Merger with Quality and Item 4. Change of Public
Accountants), as amended by Forms 8-K/A filed on each
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<PAGE>
of September 22, 1997 (Item 4. Prior Accountants Letter) and
December 12, 1997 (Item 2. Pro Forma and Financial
Statements), and Form 8-K filed on December 8, 1997 (Item 5.
Conversion of convertible debentures sold in August 1997
Regulation S Offering).
(c) Exhibits
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 By-laws of the Company (1)
4.1 Form of certificate evidencing Common Stock, $.001 par value, of the
Company, (1)
10.1 Form of Employment Agreement, dated August 29, 1997, of Martin
Chevalier
10.2 Agreement and Plan of Merger dated as of June 6, 1997, by and among
the Company, its subsidiary, Quality Automotive Company and its
stockholders. (2)
10.3 Amended and Restated Promissory Note, dated August 29, 1997, to each
of John W. Kohut and Linda S. Ram
10.4 Amended and Restated Promissory Note, dated August 29, 1997, to each
of Martin and Malvina B. Chevalier
10.5 Guaranty, dated August 29, 1997, from the Company to each of John
Kohut and Linda S. Ram. (2)
10.6 Guaranty, dated August 29, 1997, from the Company to each of
Martin and Malvina B. Chevalier (2)
10.7 Stock Pledge and Security Agreement, dated August 29, 1997, among
the Company, its subsidiary, Quality Automotive Company and its
stockholders (2)
10.8 Registration Rights Agreement, dated August 29, 1997, between the
Company and certain stockholders (2)
10.9 Lock-Up of John W. Kohut, Linda S. Ram. Martin Chevalier and Malvina
B. Chevalier (2)
10.10 Lock-Up of Elmgrove Associates II, L.P. (2)
10.11 Consulting Agreement, dated August 29, 1997, with RamKo Venture
Management, Inc.
10.12 Amended and Restated Revolving Credit, Term Loan and Security
Agreement (the "Credit Agreement") among Quality, the Company, and
LaSalle Business Credit, Inc. f/k/a StanChart Business Credit, Inc.,
dated as of December 30, 1992
10.13 Second Amendment, dated May 26, 1994 to the Credit Agreement
10.14 Third Amendment, dated December 26, 1995 to the Credit Agreement
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10.15 Waiver, Fourth Amendment and Assumption Agreement, dated August 29,
1997 to the Credit Agreement
10.16 Consulting Agreement, dated December 15, 1995, as amended, with
Baroque Investment, Inc.
10.17 Settlement Agreement, dated January 30, 1997, with former officer
and director of the Company and his affiliates (3)
10.18 Form of Promissory Note issued in favor of each of Elmgrove and
David Love
10.19 Form of Warrant issued in favor of each of Elmgrove and David Love
10.20 Form of Registration Rights Agreement issued in favor of each of
Elmgrove and David Love
10.21 Form of $2,000,000 Revolving Credit Agreement, dated March 31, 1998
10.22 Form of Revolver Note in Credit Agreement
10.23 Form of Warrant Certificate in Credit Agreement
10.24 Form of Registration Rights Agreement in Credit Agreement
21 Subsidiaries of the Company.
27 Financial Data Schedule (for SEC use only).
- ----------
(1) Incorporated by reference to the comparable exhibit filed with the
Company's Registration Statement on Form S-18, File No. 33-47037-A.
(2) Incorporated by reference to the comparable exhibit contained in the
Current Report on Form 8-K filed by the Company for the event dated August
29, 1997.
(3) Incorporated by reference to the comparable exhibits contained in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1996
24
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
U.S. Automotive Manufacturing, Inc.
April 10, 1998 By: /S/ JOHN W. KOHUT
------------------------------
John W. Kohut,
Chairman of the Board
and principal financial officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
SIGNATURE DATED
/S/ JOHN W. KOHUT Director, Chairman of April 10, 1998
- --------------------------- the Board, (principal
John W. Kohut financial officer)
/S/ MARTIN CHEVALIER Chief Executive Officer, April 10, 1998
- --------------------------- President, Director
Martin Chevalier (principal executive officer)
/S/ MANDEL SHERMAN
- ---------------------------- Director April 10, 1998
Mandel Sherman
/S/ DAVID LOVE Director, Chairman of April 10, 1998
- --------------------------- Audit Committee
David Love
25
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants F-2
Report of Independent Certified Public Accountants F-3
Consolidated Balance Sheets
As of December 31, 1997 and 1996 F-4
Consolidated Statements of Operations
For the Years Ended December 31, 1997, 1996, and 1995 F-5
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1997, 1996, and 1995 F-6
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996, and 1995 F-7
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
U.S. Automotive Manufacturing, Inc.:
We have audited the accompanying consolidated balance sheet of U.S. Automotive
Manufacturing, Inc. (formerly RT Industries, Inc.) and Subsidiaries as of
December 31, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of U.S. Automotive Manufacturing,
Inc. and Subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 12 and 8 to the
financial statements, the Company has suffered recurring losses from operations
and currently has insufficient working capital and available financing to fund
current operations, which raises substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 12. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ ARTHUR ANDERSEN LLP
Richmond, Virginia
March 6, 1998
F-2
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
RT Industries, Inc.
We have audited the accompanying consolidated balance sheet of RT Industries,
Inc. and Subsidiaries as of December 31, 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RT Industries, Inc.
and Subsidiaries as of December 31, 1996 and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Notes 5 and 11 to the
financial statements, the Company has experienced significant operating losses,
has an accumulated deficit and has been in continuous default on a note payable
to its primary lender throughout the two-year period ended and as of December
31, 1996. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 11. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
Certified Public Accountants
Orlando, Florida
Date: March 7, 1998
F-3
<PAGE>
U.S. Automotive Manufacturing, Inc.
Consolidated Balance Sheets
As of December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 1,001,843 $ 956,548
Accounts receivable, net of allowance of
$136,000 and $460,000, respectively 2,800,755 582,381
Inventories 8,739,028 3,371,647
Prepaid expenses and other 425,781 368,620
------------ ------------
Total current assets 12,967,407 5,279,196
Property, plant, and equipment, net 10,256,556 3,161,293
Other assets:
Goodwill, net 6,273,665 --
Deferred loan costs, net -- 242,458
Other -- 29,432
------------ ------------
Total assets $ 29,497,628 $ 8,712,379
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit $ 4,815,211 $ 758,486
Current portion of long-term debt 1,688,942 436,511
Accounts payable 2,735,688 384,317
Accrued liabilities 830,282 226,460
------------ ------------
Total current liabilities 10,070,123 1,805,774
Long-term liabilities:
Long-term debt, less current portion 242,414 298,874
Notes payable to shareholders 4,500,000 --
Accounts payable to shareholder -- 387,850
Convertible debentures -- 1,800,000
------------ ------------
Total liabilities 14,812,537 4,292,498
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, ($.001 par value, 30,000,000
shares authorized, 15,724,893 and
8,322,771 shares issued and outstanding, respectively) 15,725 8,323
Additional paid-in capital 38,885,545 15,592,938
Accumulated deficit (24,216,179) (11,181,380)
------------ ------------
Total stockholders' equity 14,685,091 4,419,881
------------ ------------
Total liabilities and stockholders' equity $ 29,497,628 $ 8,712,379
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
F-4
<PAGE>
U.S. Automotive Manufacturing, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales (Note 3) $ 6,999,636 $ 3,912,237 $ 8,369,067
Cost of sales 5,978,271 5,335,027 9,025,924
------------ ------------ ------------
Gross profit (loss) 1,021,365 (1,422,790) (656,857)
------------ ------------ ------------
Operating expenses:
Selling and delivery 1,179,218 574,939 909,669
General and administrative 8,928,583 2,119,557 3,941,339
------------ ------------ ------------
Total operating expenses 10,107,801 2,694,496 4,851,008
------------ ------------ ------------
Operating loss (9,086,436) (4,117,286) (5,507,865)
------------ ------------ ------------
Other income (expense):
Interest expense (3,948,363) (2,027,746) (460,832)
Other income -- 26,862 --
------------ ------------ ------------
(3,948,363) (2,000,884) (460,832)
------------ ------------ ------------
Net loss before income tax benefit and extraordinary
gain (13,034,799) (6,118,170) (5,968,697)
Income tax benefit -- -- 772,999
------------ ------------ ------------
Net loss before extraordinary gain (13,034,799) (6,118,170) (5,195,698)
Extraordinary gain from forgiveness of debt, net of
income taxes of $523,000 (Note 8) -- -- 1,016,056
------------ ------------ ------------
Net loss $(13,034,799) $ (6,118,170) $ (4,179,642)
============ ============ ============
Loss per common share (basic and diluted):
Before extraordinary gain $ (1.22) $ (0.90) $ (1.81)
Extraordinary gain -- -- .35
------------ ------------ ------------
Net loss per common share $ (1.22) $ (0.90) $ (1.46)
============ ============ ============
Weighted average common shares outstanding 10,724,780 6,771,801 2,864,101
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
U.S. Automotive Manufacturing, Inc.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Common Stock
------------------------- Additional
Par Paid-in Accumulated
Shares Value Capital Deficit
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 1,241,143 $ 1,241 $ 4,390,342 $ (883,568)
Reclassification of liabilities for stock options
issued as compensation -- -- 122,650 --
Issuance of common stock as payment of consulting
fees and notes payable 1,777,000 1,777 1,752,381 --
Sale of common stock, net of offering costs of
$128,675 2,063,000 2,063 2,281,763 --
Net loss -- -- -- (4,179,642)
------------ ------------ ------------ ------------
Balance, December 31, 1995 5,081,143 5,081 8,547,136 (5,063,210)
Sale of common stock through private placements,
net of offering costs of $231,258 2,496,000 2,496 2,861,247 --
Issuance of common stock as payment of consulting
fees 85,000 85 321,817 --
Conversion of convertible notes payable into
common stock 660,628 661 2,318,555 --
Discount on conversion price of convertible
debentures -- -- 1,214,583 --
Issuance of warrants as payment of loan costs -- -- 329,600 --
Net loss -- -- -- (6,118,170)
------------ ------------ ------------ ------------
Balance, December 31, 1996 8,322,771 8,323 15,592,938 (11,181,380)
Conversion of convertible notes payable into
common stock 300,000 300 299,700 --
Conversion of convertible debentures into common
stock 5,263,391 5,263 11,994,737 --
Discount on conversion price of convertible
debentures -- -- 3,500,009 --
Issuance of common stock in connection with the
merger with Quality Automotive Company 1,838,731 1,839 7,498,161 --
Net loss -- -- -- (13,034,799)
------------ ------------ ------------ ------------
Balance, December 31, 1997 15,724,893 $ 15,725 $ 38,885,545 $(24,216,179)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
U.S. Automotive Manufacturing, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Reconciliation of net loss to net cash used in operating activities:
Net loss $(13,034,799) $ (6,118,170) $ (4,179,642)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 820,612 867,907 626,302
Deferred income taxes -- -- (287,000)
Provision for inventory valuation 1,345,776 -- --
Provision for property, plant, and equipment valuation 1,583,630 -- --
Convertible debenture accrued interest converted to common
stock -- 44,216 --
Issuance of common stock as payment of consulting services -- 207,830 527,000
Issuance of a note payable as payment of consulting services -- -- 477,158
Loss on forgiveness of stockholder note receivable -- -- 90,621
Discount on conversion price of convertible debentures 3,500,009 1,214,583 --
Write-off of deferred loan costs -- 253,750 --
(Increase) decrease in:
Trade receivables 473,850 320,634 1,850,577
Inventories (612,928) 450,180 1,663,681
Prepaid expenses 722,868 65,942 213,831
Increase (decrease) in:
Accounts payable 129,743 (595,262) (1,976,041)
Accrued liabilities 477,164 (224,687) 590,156
Account payable to stockholder (387,850) 163,850 224,000
------------ ------------ ------------
Net cash used in operating activities (4,981,925) (3,349,227) (179,357)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of fixed assets held for sale -- -- 18,038
Purchase of property and equipment (980,570) (85,138) (65,677)
Acquisition of Quality Automotive Company, net of
cash acquired (2,893,543) -- --
Increase in other assets -- 59,074 142,573
Net cash provided by (used in) investing activities (3,874,113) (26,064) 94,934
------------ ------------ ------------
Cash flows from financing activities:
Reduction of line of credit and long-term debt (1,598,667) (2,024,571) (2,314,452)
Payments received from stockholder note receivable -- -- 49,629
Proceeds from issuance of convertible debentures 10,500,000 -- --
Proceeds from issuance of convertible notes payable -- 3,775,000 --
Sale of common stock -- 2,863,743 2,283,826
Deferred loan costs -- (403,750) --
------------ ------------ ------------
Net cash provided by financing activities 8,901,833 4,210,422 19,003
------------ ------------ ------------
Net increase (decrease) in cash 45,295 835,131 (65,420)
Cash, beginning of year 956,548 121,417 186,837
------------ ------------ ------------
Cash, end of year $ 1,001,843 $ 956,548 $ 121,417
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
U.S. Automotive Manufacturing, Inc.
Notes to Consolidated Financial Statements
1. Business Operations and Organization:
U.S. Automotive Manufacturing, Inc., a Delaware corporation formed on January
16, 1992, changed its name from RT Industries, Inc., in 1997. U.S. Automotive
Manufacturing, Inc. and its subsidiaries (collectively the "Company"),
manufacture, assemble and distribute new and rebuilt automotive friction
products (brake pads and remanufactured brake shoes). The Company sells the
friction products to the automotive aftermarket (replacement parts sold for use
on motor vehicles after initial vehicle purchase). Sales of the Company's
products are made to automotive distributors, mass merchandisers and chain
stores located throughout the United States and internationally. The Company
does not market its products directly to retail customers.
The Company's core business is the manufacture, assembly, and distribution of
new replacement brake pads. Brake pads, brake shoes or a combination of both are
incorporated in all makes and models of American and imported automobiles. The
Company manufactures both "integrally molded" and "riveted" brake pads,
utilizing both organic and semimetallic friction material. Integrally molded
brake pads involve a manufacturing process that uses heat and pressure to affix
the friction material to the metal backing plate. All imported and the majority
of late model domestic automobiles are equipped with integrally molded brake
pads. Most older domestic automobiles are equipped with riveted brake pads,
whereby the friction material is affixed to the metal backing plate with metal
rivets.
With the merger with Quality Automotive Company ("Quality") (see Note 3), the
Company acquired technology and capacity to additionally manufacture friction
material linings for brake shoes and to remanufacture both riveted and bonded
brake shoes.
The Company leases its plant facilities and equipment as well as operates its
business through seven subsidiaries (Ultra Brake Corporation ("Ultra Brake"),
Ultratech of South Florida, Inc. ("Ultratech"), Roinco Manufacturing, Inc.
("Roinco"), RT Friction, Inc. ("RT Friction"), and following the merger with
Quality, Quality Automotive Company, U.S. Automotive Friction, Inc. (formerly
U.S. Automotive Manufacturing, Inc.) and Verico, Inc.). As part of the Company's
on-going restructuring efforts, except for Quality and U.S. Automotive Friction,
Inc., such subsidiaries no longer conduct any business operations other than
their existing obligations under various equipment and property leases. Such
business operations have been consolidated or performed by the Company. The
Company intends to dissolve such subsidiaries under the applicable laws of each
such subsidiary's state of incorporation.
F-8
<PAGE>
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of U.S.
Automotive Manufacturing, Inc. and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
Inventories
Inventories are valued at the lower of cost (average cost method) or market.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Expenditures for maintenance
and repairs which do not improve or extend the life of an asset are charged to
expense as incurred, major renewals or betterments are capitalized. Upon
retirement or sale of an asset, its cost and related accumulated depreciation
are removed from property, plant, and equipment, and any gain or loss is
recognized. Property, plant, and equipment are depreciated over the estimated
useful lives of the assets by the straight-line method for financial reporting
and by accelerated methods for income tax purposes. Useful lives are as follows:
Years
-----
Buildings and improvements 3 - 40
Machinery and equipment 2 - 20
Furniture and fixtures 3 - 10
Equipment and automobiles under capital leases 2 - 5
Long-Lived Assets
The carrying value of long-lived assets and certain identifiable intangibles is
reviewed by the Company for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable and an estimate of future undiscounted cash flows is less than the
carrying amount of the asset.
Other Assets
Cost in excess of net assets acquired (goodwill) is amortized over 20 years.
Deferred loan costs are amortized over the contractual terms of the related
loans.
Revenue Recognition
Sales are recognized upon shipment of products to customers. Sales and cost of
sales include the value of steel ("core") used and returned to be reused in the
manufacturing process. Customers may return purchased core within 90 days and
receive credit that can be applied against future purchases. Core returned in
excess of that purchased from the Company is temporarily placed in a "core
bank;" credit for these returns is given if additional brake shoe products are
purchased within defined time limits.
F-9
<PAGE>
Net Loss Per Share
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings per Share" which requires the calculation and
presentation of basic and diluted earnings per share. Basic and diluted net loss
per share is calculated based on the actual weighted average shares outstanding.
Outstanding stock options and warrants are not considered as their effect in
antidilutive; therefore, adoption of SFAS No. 128 resulted in no change to
previously reported net loss per share.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires
recognition of estimated income taxes payable or refundable on income tax
returns for the current year and for the estimated future tax effect
attributable to temporary differences and carryforwards. Measurement of deferred
income tax is based on enacted tax laws including tax rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the year. Actual results
could differ from those estimates.
Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments. Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information available to
management as of December 31, 1997 and 1996.
The respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash, trade
receivables, accounts payable and accrued expenses. Fair values were assumed to
approximate carrying values for these financial instruments since they are short
term in nature and their carrying amounts approximate fair values or they are
receivable or payable on demand. The fair market value of the Company's debt as
of December 31, 1997 approximated its carrying value.
3. Merger with Quality Automotive Company:
On August 29, 1997, Quality was merged (the "Merger") into a wholly owned
subsidiary of the Company (the "Subsidiary"). Under the Merger, Quality's
stockholders received (i) $3,000,000 in cash, (ii) two promissory notes, in the
aggregate amount of $4,500,000, from the Subsidiary, that are guaranteed by the
Company and secured by the Company's pledge of all of its shares in the
Subsidiary, and (iii) an aggregate of 1,838,731 shares of the Company's common
stock. Following the Merger, the Subsidiary changed its name to "Quality
Automotive Company" and will conduct business under such name.
F-10
<PAGE>
The Merger was accounted for by the purchase method of accounting and,
accordingly, the results of operations of Quality from August 29, 1997 are
included in the accompanying consolidated financial statements. Quality's net
sales for the four months ended December 31, 1997, were approximately $4.3
million. Under the purchase method, the purchase price was allocated among the
acquired assets and liabilities in accordance with estimates of fair market
value on the date of the Merger. The Company recorded goodwill representing the
excess of the purchase price over the allocation among the acquired assets and
liabilities in accordance with estimates of fair market value on the date of the
Merger. Goodwill is being amortized over 20 years. Amortization expense for the
year ended December 31, 1997 and accumulated amortization at December 31, 1997
was $106,332.
The unaudited pro forma results of operations which follow assume that the
merger occurred as of the beginning of the periods presented. The pro forma
results are for illustrative purposes only and do not purport to be indicative
of the actual results which occurred, nor are they indicative of future results
of operations.
Years Ended December 31, 1997 1996
------------------------ ---- ----
Net sales $15,566,707 $20,822,351
Net loss (14,198,512) (6,417,543)
Net loss per share (basic and diluted) (1.19) (.74)
4. Inventories:
Inventories are summarized as follows:
1997 1996
---- ----
Raw materials $4,053,517 $ 662,504
Work-in-process 176,519 154,273
Finished goods 4,508,992 2,554,870
---------- ----------
$8,739,028 $3,371,647
========== ==========
All inventory is pledged as collateral (see Note 8).
5. Fixed Assets Held for Sale:
In September 1994, the Company closed its plant in Tennessee and abandoned the
building and certain equipment located at the facility. The land, building and
equipment of the Tennessee facility were constructed and purchased by the
Company with financing provided by the State of Tennessee Department of Economic
Development and the City of Brownsville. In connection with its withdrawal from
the facility, the Company entered into an agreement with the City of Brownsville
whereby the City would use its best efforts to locate a buyer for the facility
and the related equipment. The net book value of the Tennessee facility land,
building and equipment of $771,962 was recorded as assets held for sale on the
Company's balance sheet. The City of Brownsville and the Tennessee Department of
Economic Development agreed to accept payments of interest only under the
outstanding mortgage note related to the building and land
F-11
<PAGE>
(see Note 8) until the facility was sold. During October 1996, the assets held
for sale were sold to a third party. In exchange for the assets, the State of
Tennessee Department of Economic Development agreed to assume the Company's
liability under the related mortgage note. The difference between the recorded
amount of the assets held for sale and the outstanding mortgage note obligation
was materially offset by a reserve recorded in 1995, resulting in no significant
gain or loss being recorded for the year ended December 31, 1996.
6. Property, Plant, and Equipment:
Property, plant, and equipment are summarized as follows:
1997 1996
------------ ------------
Land $ 571,000 $ --
Buildings and improvements 4,477,514 237,641
Machinery and equipment 5,540,781 5,854,151
Furniture and fixtures 455,057 297,506
Automobiles under capital lease 25,076 --
------------ ------------
11,069,428 6,389,298
Less- Accumulated depreciation (812,872) (3,228,005)
------------ ------------
Property, plant, and equipment, net $ 10,256,556 $ 3,161,293
============ ============
Depreciation and amortization expense related to property, plant, and equipment
was $714,280, $631,000, and $626,302 for the years ended December 31, 1997,
1996, and 1995, respectively. All property, plant, and equipment is pledged as
collateral (see Note 8).
During 1997, equipment with a cost of $4,713,043 and accumulated depreciation of
$3,129,413 was determined not to be realizable and was written off.
7. Composition Agreement:
On March 7, 1995, in connection with a restructuring of the Company's debt, a
committee of the Company's unsecured trade creditors (the "Trade Creditors")
entered into an agreement (the "Composition Agreement"), providing for repayment
by the Company of the unsecured trade debt (the "Trade Debt") of the Trade
Creditors electing to participate in the Composition Agreement. Trade Creditors,
representing approximately $2,500,000 of the Trade Debt, elected a lump sum
payment of $0.35 for every $1.00 of the Trade Debt and have been paid. Trade
Creditors, representing $336,000 of the Trade Debt, elected periodic payments
and have received 40 percent of the periodic payments. The next distribution
under the Composition Agreement, payable in March 1998, is for an aggregate
payment of approximately $34,000. Subsequent payments become payable in the
third quarters of 1998 and 1999. Total remaining payments were $203,000 as of
December 31, 1997, and are recorded as accounts payable as of December 31, 1997.
F-12
<PAGE>
The Company successfully negotiated settlements with respect to almost all of
the Trade Debt held by the remaining unsecured trade creditors not electing to
participate in the Composition Agreement, representing approximately $300,000 of
the Trade Debt. The Company has satisfied its obligation to such nonelecting
trade creditors in accordance with such settlement arrangements. In order to
fund the initial payment and as part of the Composition Agreement, the Company
borrowed $750,000 from the then-President and principal shareholder of the
Company through the issuance of a note payable (which was later converted into
750,000 shares of common stock) (see Note 11) and obtained a commitment for a
$200,000 credit line from a bank (see Note 8). In connection with the
Composition Agreement, the Company recorded an extraordinary gain from the
forgiveness of debt, net of related expenses, of $1,539,056 during the year
ended December 31, 1995.
8. Debt:
Line of Credit
At December 31, 1996, the Company had $758,486 of outstanding borrowings under a
$7,500,000 line of credit with Congress Financial Corp. (the "Credit Facility").
The Credit Facility was collateralized by substantially all of the Company's
business assets. Borrowings under the Credit Facility, which expired April 1997,
were limited to a combination of (i) 80 percent of eligible accounts receivable
net of allowances for bad debt, (ii) the lesser of 50 percent of the value of
finished goods inventory plus 30 percent of raw materials inventory or
$3,500,000 minus 70 percent of the amount of any outstanding letters of credit.
Interest at 1.5 percent over prime (9.75 percent at December 31, 1996) was due
monthly. In addition, the loan agreement required the Company to maintain a
specific working capital level. The company failed to meet the required working
capital level during the year ended December 31, 1995, resulting in a default
under the note. The 1995 default continued throughout the two-year period ended
and as of December 31, 1996. The bank was aware of the default but continued to
fund the line of credit. The bank did not formally waive the default and, as
such, could have ceased funding the Credit Facility and demanded payment in full
of the outstanding balance at any time. In February 1997, the Company was
informed that the bank had elected not to renew the Credit Facility. In June
1997, the Company paid off the Credit Facility. As a result of this action, any
security interest held by the bank has been released.
Quality maintains a line of credit with LaSalle Business Credit, Inc. (the
"LaSalle Line of Credit"). The total facility availability is $7,500,000,
subject to certain limitations based on Quality's and its subsidiaries' levels
of inventory and accounts receivable. At December 31, 1997, a total of
$4,815,211 was outstanding under the LaSalle Line of Credit. The amount
available at December 31, 1997, is $500,000. The interest rate for borrowings
under the LaSalle Line of Credit is the lender's reference rate plus 1.0% (9.50%
at December 31, 1997). The LaSalle Line of Credit is collateralized by the
accounts receivable and inventory of Quality. The LaSalle Line of Credit
terminates on March 31, 1998, and the Company is currently negotiating its
renewal. The Company has requested an extension of the maturity date, as well as
the establishment of a new $2.0 million capital expenditure finance facility.
LaSalle Business Credit, subject to the satisfactory documentation, has notified
the Company of its willingness to grant the Company's request. Documentation is
currently in the preparation stage. There can
F-13
<PAGE>
be no assurance that the LaSalle Line of Credit will be renewed on documentary
terms acceptable to the Company or at all.
Under the terms of the LaSalle Line of Credit, Quality and its subsidiaries
must maintain certain financial ratios, such as a current ratio greater than
1.90:1, interest coverage greater than 1.25:1, debt service coverage greater
than 1.25:1, tangible leverage less than 3.0:1, and annual limits on the amounts
of capital expenditures, dividends, and executive compensation, among other
restrictions. At December 31, 1997, Quality and its subsidiaries were not in
compliance with certain terms of the LaSalle Line of Credit. Subject to the
preceding paragraph, as of April 1, 1998, the LaSalle Line of Credit will be on
a demand basis.
Long-term debt and Notes Payable to Shareholders
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Notes payable to LaSalle Business Credit, Inc., bearing interest at 1% over
lender's interest rate (9.5% at December 31, 1997), principal and interest of
$81,068 due monthly through, and final payment due on March 31, 1998,
collateralized by certain equipment. $1,506,666 $ --
Note payable, bearing interest at prime minus 5% (3.50% and 3.25% at December
31, 1997 and 1996, respectively), floored at 2.5% and capped at 6%, principal
and interest of $2,616 due monthly through March 2003, collateralized by
certain Company equipment. 152,011 176,670
Note payable, bearing interest at 7.25%, principal and interest of $2,840
due monthly through July 2001, collateralized by certain Company
equipment. 104,321 253,194
Note payable to bank, bearing interest at 9%, principal and interest of $11,107
due monthly through June 1998, collateralized by certain Company equipment. 65,012 186,753
Capital lease obligations for equipment and automobiles bearing interest from 8% to
8.75% due through December 2001. 103,346 --
Unsecured note payable to a company owned by a director of the Company, bearing
interest at 12%, principal and accrued interest due March 1997. -- 100,000
Three notes payable due in 1997, collateralized by certain equipment. -- 18,768
---------- ----------
1,931,356 735,385
Less- Current maturities 1,688,942 436,511
---------- ----------
Total long-term debt $ 242,414 $ 298,874
---------- ----------
Notes payable to former shareholders of Quality Automotive Company, bearing
interest at 8% payable quarterly, principal due August 29, 1999, secured by
the Company's pledge of all its shares in the Subsidiary. $4,500,000 $ --
========== ==========
</TABLE>
F-14
<PAGE>
The aggregate amount of long-term debt and notes payable to shareholders
maturing in future years is as follows as of December 31, 1997:
1998 $1,688,942
1999 4,601,289
2000 51,091
2001 49,139
2002 30,478
Thereafter 10,417
---------
$6,431,356
==========
Equipment Loans
As of December 31, 1997, the Company was party to five outstanding equipment
loans (included in long-term debt table above), as follows:
o An equipment loan with the City of Brownsville, Tennessee, which was
refinanced in 1995, having an outstanding principal balance of $152,011
plus interest equal to prime minus 5 percent, with a floor of 2.5 percent
and a cap of 6.0 percent. Monthly installments on the note equal $2,616,
with the final installment payment due in March 2003.
o An equipment loan with Concord Financial having an outstanding balance of
$65,012. This loan is currently payable in monthly installments of $11,107,
with the final installment due in June 1998.
o An equipment loan with the First State Bank & Trust Co. of Caruthersville,
Missouri, and the U.S. Small Business Administration in connection with the
Company's former facility in Missouri, having an outstanding principal
balance of $104,321. Monthly installments under the loan are $2,840, with
the final installment due July 2001.
o An equipment loan with LaSalle Business Credit, Inc. in the amount of
$900,000, for equipment located at Quality's location in Virginia. The loan
installments of $50,000 are paid monthly, with the final loan installment
and the balance due March 31, 1998. It is the Company's intention to renew
this loan as part of the negotiations for renewal of the LaSalle Line of
Credit. See further discussion above under Line of Credit.
o An additional equipment loan with LaSalle Business Credit, Inc., in the
amount of $606,666, for equipment located at Quality's location in
Virginia. The loan installments of $31,068 are paid monthly, with the final
loan installment and the balance due March 31, 1998. It is the Company's
intention to renew this loan also in connection with the negotiations for
renewal of the LaSalle Line of Credit. See further discussion above under
Line of Credit.
F-15
<PAGE>
Other
In June 1997, the Company executed a note in the amount of $350,000 to Elmgrove
Associates II, L.P., the proceeds of which were used in connection with a
negotiated settlement agreement (see Note 9) with the former President, CEO, and
Chairman of the Board of Directors of the Company (the "former President"), and
related parties. In connection with the execution of the note, the Company
issued 10,000 common stock warrants with an exercise price of $3.75 per share to
Elmgrove Associates, II, L.P. The Company paid this note in full on August 31,
1997.
During 1996, the Company issued 1,180,000 common stock warrants with an exercise
price of $2.28 per share to a company owned by a director of the Company as
payment of deferred loan costs upon the issuance of certain promissory notes.
The fair market value of the warrants at the date of issuance of $329,600 was
recorded as deferred loan costs.
9. Commitments, Contingencies and Related Party Transactions:
Leases
The Company conducts a portion of its operations from a leased facility in
Florida. The facility is leased from a company controlled by the Company's
former President (the "stockholder lease"). The Company has an option to
purchase the Florida facility as of March 31, 1998 and intends to exercise the
option. The Company also leases certain equipment. These leases are classified
as operating leases and expire on various dates from 1998 through 2001.
As of December 31, 1997, future minimum rental payments required under operating
leases that have initial or remaining noncancelable lease terms in excess of one
year are as follows:
1998 $381,840
1999 109,191
2000 33,542
2001 9,307
--------
Total future minimum lease payments $533,880
========
Rental expense under all operating leases amounted to approximately $682,000,
$307,000, and $386,000 for the years ended December 31, 1997, 1996, and 1995,
respectively. The rental expense includes amounts for the stockholder lease of
approximately $122,000, $114,000, and $112,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
In May 1992 the Company entered into a lease agreement with the City of
Caruthersville, Missouri (the "Missouri Facility"), for a lease of a 25,000
square foot building for use by the Company for manufacturing and distribution.
In 1994, the Company ceased operations at the Missouri Facility. Although, the
City of Caruthersville has attempted to find a tenant for the Missouri Facility,
it has been unsuccessful in finding a long-term tenant for the facility, and, in
the first quarter of 1997, informed the Company that it had only succeeded in
F-16
<PAGE>
subletting the building for 14 of the past 37 months. The Company remains
obligated for lease payments, at a monthly rate of $2,270 per month, with
respect to the 23-month vacancy period. The Company recorded a charge of
$228,807 in 1997 to reduce the net carrying amount of the capital lease asset to
zero. The original lease expires in August 2013. The Company intends to
negotiate with the City of Caruthersville to resolve settlement of future rental
payments under the building lease.
Consulting and Settlement Agreements
In October 1995, the Company entered into an eight-year consulting agreement
with a company controlled by the Company's former President. The agreement
stipulated payment for services of $100,000 per year for the first two years and
$50,000 for each of the next six years. In addition, 100,000 nonplan stock
options to purchase Company common stock for $5 per share through October 2000
were issued under the agreement. Subsequent to December 31, 1995, the consulting
agreement was amended. Under the amendment, the Company agreed to pay total
compensation of $224,000 at a rate of $4,000 and $3,000 per month during the
years ending December 31, 1996 and 1997, respectively, and $2,000 per month
thereafter until the balance is paid in full. The Company determined that no
future services were to be rendered under the agreement and recorded consulting
expense of $224,000 during the year ended December 31, 1995 for the cost of the
amended agreement. During 1996, $44,000 was paid. On January 30, 1997, the
Company entered into a settlement agreement (the "Settlement Agreement") with
the consulting company and other parties owned or controlled by the former
President. For and in consideration of 75,678 shares of common stock, the
consulting company released the Company from all remaining compensation payments
required under the consulting agreement. Additional consulting expense of
$207,850 was accrued at December 31, 1996 representing the difference between
the market value of the shares issued and the remaining balance outstanding
under the amended consulting agreement at the settlement date, resulting in a
total accrual of $387,850 as of December 31, 1996. As part of the Settlement
Agreement, the former President forfeited any and all options that he may have
to acquire shares of the Company's common stock.
In June 1997, the Company reached an agreement (the "Amended Settlement
Agreement") with the former President and related parties (collectively referred
to as the "Settlement Parties") to amend the previously executed Settlement
Agreement. Under the Amended Settlement Agreement, the Company made a payment to
the Settlement Parties of the aggregate sum of $350,000 in full satisfaction of
the obligations of the parties under the Settlement Agreement.
Forgiveness of Receivable from Stockholder
During 1995, the Company's Board of Directors approved the forgiveness of
$90,621 outstanding under a note receivable from the former President.
F-17
<PAGE>
10. Income Taxes:
The components of taxes on income are as follows:
For the Year Ended
December 31,
------------------------------------
1997 1996 1995
---- ---- ----
Deferred:
Federal $-- $-- $(657,393)
State -- -- 115,606
---- ---- ---------
Income tax benefit $-- $-- $(772,999)
==== ==== =========
The components of the deferred income taxes consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Current assets-
Inventory obsolescence reserve $ 473,000 $ 54,000
UNICAP 174,000 143,000
Accrued rent 117,000 --
Allowance for doubtful accounts 52,000 173,000
Compensation 21,000 --
Consulting agreement settlement -- 78,000
Consulting fees -- 68,000
Other 1,000 10,000
----------- -----------
Total current deferred tax assets 838,000 526,000
----------- -----------
Noncurrent assets-
Net operating loss carryforwards 6,790,000 3,849,000
Amortization 56,000 151,000
Interest 45,000 --
Other 20,000 --
----------- -----------
Total noncurrent deferred tax assets 6,911,000 4,000,000
----------- -----------
Gross deferred income tax assets 7,749,000 4,526,000
Less- Valuation allowance (5,042,000) (3,777,000)
----------- -----------
Total deferred income tax assets 2,707,000 749,000
----------- -----------
Deferred income tax liabilities:
Noncurrent liabilities-
Difference in basis of fixed assets (1,507,000) --
Depreciation (1,147,000) (749,000)
Other (53,000) --
----------- -----------
Total deferred income tax liabilities (2,707,000) (749,000)
----------- -----------
Net deferred income tax assets $ -- $ --
=========== ===========
</TABLE>
The change in the valuation allowance for deferred tax assets was an increase of
approximately $1,265,000 and $1,784,000 during 1997 and 1996, respectively. The
tax benefit of the Company's deferred taxes has been offset by a valuation
allowance due to it being more likely than not that the deferred tax assets will
not be realized.
The following summary reconciles differences from taxes at the federal statutory
rate with the effective rate:
Year Ended December 31,
------------------------------
1997 1996 1995
---- ---- ----
Federal income taxes at statutory rate (34.0)% (34.0)% (34.0)%
Losses without tax benefits 34.0 34.0 21.0
----- ----- -----
Income taxes at effective rate -- % -- % (13.0)%
===== ===== =====
Unused net operating losses for income tax purposes, expiring in various amounts
from 2009 through 2012, of approximately $20,000,000 are available at December
31, 1997, for carryforward against future years' taxable income. Under Section
382 of the Internal Revenue Code, the annual utilization of these losses may be
limited due to changes in ownership.
F-18
<PAGE>
11. Stockholders' Equity:
Authorized Common Stock
During 1996, the stockholders approved an increase in the authorized shares of
common stock from 10,000,000 to 30,000,000.
Stock Split
On February 15, 1995, the Company's Board of Directors approved a 1-for-5
reverse stock split with respect to the Company's common stock. The loss per
share calculation and all share information contained in these financial
statements have been retroactively adjusted to give effect to the reverse stock
split.
Private Placements
During 1996, the Company completed a private placement of its securities in the
form of units. Each unit sold in the private placement consisted of one share of
Company common stock and two redeemable common stock purchase warrants. The
common stock purchase warrants enable the holders to purchase one share of the
Company's common stock at a price of $4.20. The warrants are redeemable at the
option of the Company at a redemption price of $.005 per warrant beginning six
months from the private placement closing date. The Company received $2,763,743
of proceeds, net of offering costs of $231,258, for the sale of 2,396,000 units
during the year. In addition, the Company sold 100,000 shares of common stock at
$1 per share in a separate offering not associated with the private placement
described above.
Convertible Debentures
During 1996, the Company issued, pursuant to Offshore Securities Subscription
Agreements, dated each of December 5, 1996, and December 17, 1996 (the "December
1996 Debentures"), $3,775,000 of cumulative convertible debentures payable
bearing interest at 10 percent. Debentures with principal balances of $2,275,000
and $44,216 of related accrued interest were converted into 660,628 share of
Company common stock during 1996. Deferred loan costs of $253,750 associated
with the converted debentures were charged to operations as interest expense.
In February 1997, the remaining principal of $1,500,000 plus accrued interest
were converted into an aggregate of 384,865 shares of the Company's common
stock.
F-19
<PAGE>
In March 1997, the Company entered into an Offshore Securities Subscription
Agreement pursuant to which the Company sold four 10 percent Cumulative
Convertible Debentures (the "March 1997 Debentures"), in the aggregate amount of
$5,500,000. All of the March debentures, including principal and accrued
interest, were converted into an aggregate of 2,012,246 shares of the Company's
common stock, par value $.001 per share.
On August 20, 1997, the Company entered into an Offshore Securities Subscription
Agreement pursuant to which the Company sold five additional 10 percent
Cumulative Convertible Debentures (the "August 1997 Debentures") in the
aggregate amount of $5,000,000. All of the August Debentures, including
principal and interest, were converted into an aggregate of 2,866,280 shares of
common stock in December 1997.
The December 1996, March 1997, and August 1997 Debentures were issued in
reliance upon exemption from the registration provisions of the Securities Act
of 1933, as amended, as provided by Regulation S ("Reg. S") promulgated
thereunder by the Securities and Exchange Commission.
Convertible Notes Payable
Two unsecured convertible notes payable, totaling $300,000 at December 31, 1996,
with interest at 8 percent due monthly and principal due at the demand of the
holder were converted into 300,000 shares of Company common stock in February
1997.
During 1995, the Company issued a note payable of $750,000 to the Company's
former President in connection with the Company entering into the Composition
Agreement (see Note 7). The note payable was converted into 750,000 shares of
Company common stock during 1995.
F-20
<PAGE>
Common Stock Issued as Payment of Consulting Services
During 1995, the Company entered into various consulting service contracts with
third parties. Under the contracts, the Company agreed to issue a total of
527,000 shares of common stock as payment for the consulting services rendered.
The consultants completed their obligations under the contracts during 1996, and
the Company issued the required shares of common stock. In addition, the Company
issued a $500,000 note payable to a consultant for services rendered in 1995.
The Company paid $22,942 under the note, and the remaining balance was converted
into 500,000 shares of the Company's common stock during 1995. Total consulting
expense of $1,004,058 was recorded by the Company in 1995 related to these
consulting arrangements.
During 1996, the Company issued 85,000 shares of common stock as payment of
consulting services. Consulting expense and prepaid consulting fees of $207,830
and $114,072, respectively, were recorded during 1996 related to these stock
issuances.
Stock Warrants
At December 31, 1997, the Company had 5,977,200 common stock warrants
outstanding. Information relating to these warrants is summarized as follows:
Number of Exercise
Expiration Warrants Price
---------- --------- --------
March through August 2001 4,787,200 $4.20
February 2001 980,000 2.28
March 2001 200,000 2.28
May 2002 10,000 3.75
Stock Options
The Company accounts for stock options in accordance with Statement of Financial
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," and,
as provided in the statement, has elected to account for its stock options under
APB Opinion No. 25, under which no compensation expense has been recognized. If
options are granted or extended at exercise prices less than fair market value,
compensation expense is recorded for the difference between the grant price and
the fair market value.
Under the Company's 1992 Stock Option Plan, the Company may grant options to
purchase up to 60,000 shares of the Company's common stock to key employees. In
1995, the Company's Board of Directors, in an action the validity of which is
disputed by the current Board of Directors based upon communication of a member
of the 1995 Board of Directors, reserved 750,000 shares to be granted at the
Board of Directors' discretion. The maximum term of the options is ten years.
SFAS 123 requires the Company to provide pro forma information regarding net
income and earnings per share as if compensation cost for the Company's stock
options had been determined in accordance with the fair value based method
prescribed in SFAS 123. The Company estimated the fair value of each stock
option granted in 1995 (the validity of which is disputed by the Company's
current Board of Directors) by using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants: no dividend yield,
volatility of 60 percent, risk-free interest rates ranging from 5.7 to 6.7
percent and expected lives ranging from one to five years. There were no options
granted in 1997 or 1996.
F-21
<PAGE>
Under the accounting provisions of FASB Statement 123, during 1995 the Company's
net loss and loss per share would have been increased by $1,585,900 and $0.55,
respectively.
Changes in options outstanding (including the options granted in 1995, the
validity of which is disputed by the Company's current Board of Directors) are
summarized as follows:
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average
Exercise Fair Value
Price of Options
Shares Per Share Granted
-------- --------- -----------
<S> <C> <C> <C>
Balance, December 31, 1994 72,740 $ 9.62 $--
Granted- equal to market value 578,622 3.00 2.25
Granted- equal to market value 100,000 5.00 2.84
------- ---- ----
Balance, December 31, 1995 751,362 5.26 --
Forfeited (257,384) 7.33 --
-------- ----
Balance, December 31, 1996 493,978 3.53 --
Forfeited (120,000) 5.00 --
Balance, December 31, 1997 373,978 3.05 --
=======
</TABLE>
The following table summarizes information about granted stock options
(including the options granted in 1995, the validity of which is disputed by the
Company's current Board of Directors) at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------- -----------------------------
Weighted- Number
Number Average Weighted- Exercisable Weighted-
Outstanding at Remaining Average at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1997 Life Price 1997 Price
------ -------------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$ 3.00 372,578 7.5 years $ 3.00 372,578 $ 3.00
17.15 1,400 4.5 years 17.15 540 17.15
------- -------
373,978 373,118
======= =======
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------- -----------------------------
Weighted- Number
Number Average Weighted- Exercisable Weighted-
Outstanding at Remaining Average at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1996 Life Price 1996 Price
------ -------------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
$ 3.00 372,578 8.5 years $ 3.00 372,578 $ 3.00
5.00 120,000 3.3 years 5.00 120,000 5.00
17.15 1,400 5.5 years 17.15 (390) 17.15
------- -------
493,978 492,968
======= =======
</TABLE>
F-23
<PAGE>
Shares Reserved
At December 31, 1997, the Company has reserved common stock for the following
purposes:
Stock option plans 810,000
Stock warrants 5,977,200
---------
6,787,200
=========
12. Management's Plans:
The Company's financial statements are presented on the going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company suffered continuing erosion of its
customer base and recurring losses from operations through the date of its
merger with Quality. The fourth and first quarters of the year are historically
the weakest in both sales and profitability. During such period, the Company has
endeavored to integrate operations at its two facilities. While management
believes the Company is well down the road of successfully integrating product
offering and production capabilities, at December 31, 1997, the Company has
insufficient working capital to fund current operations through the end of the
1998.
Through the merger with Quality, the Company has become a manufacturer of
friction materials for its own use in the manufacture and remanufacture of brake
products as well as for third party sales to other manufacturers. Utilizing its
own friction material, the Company now produces all part numbers it offers for
sale. The advantage of offering a full product line, (integrally molded and
riveted brake pads and both bonded and riveted brake shoes), all produced
internally, is that it allows the Company to be more responsive to its customers
needs while gaining better control of its inventory. Management believes the
Company has reversed the trend of declining sales and has entered into
non-binding business relationships with new customers which could result in the
Company receiving as much as $7,500,000 in additional revenue over a 12 month
period. The Company is negotiating to extend its existing line of credit and
extend and supplement its existing capital expenditure lines. Additionally, the
Company is in the process of attempting to raise additional working capital
through the sale of equity.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets and classification of liabilities
that would result from the inability of the Company to continue as a going
concern.
F-24
<PAGE>
13. Supplemental Cash Flow Information:
For purposes of the statement of cash flows, all highly liquid investments with
a maturity date of three months or less are considered to be cash equivalents.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------- ------------- ------------ ------------
<S> <C> <C> <C>
Cash paid for interest $ 3,922,842 $ 324,772 $ 478,832
Noncash financing and investing activities:
Conversion of convertible debentures payable into common
stock 12,000,000 2,275,000 --
Issuance of common stock warrants as deferred loan costs -- 329,600 --
Sale of Tennessee facility -- 771,962 --
Issuance of common stock for prepaid consulting fees -- 114,072 --
Accrued compensation for stock options reclassified to
additional paid-in capital -- -- 122,650
Notes payable converted into common stock 300,000 -- 1,227,158
Merger with Quality Automotive Company, net of cash acquired:
Working capital, other than cash acquired $ (5,948,624)
Property, plant, and equipment (8,412,603)
Purchase price in excess of the net assets acquired (6,379,997)
Other assets (93,539)
Non-current liabilities 5,941,220
Notes payable to former owners of Quality Automotive Company 4,500,000
Issuance of common stock 7,500,000
------------
Net cash used for business acquisition $ 2,893,543
============
</TABLE>
F-25
<PAGE>
14. 1996 Fourth Quarter Adjustments:
During the fourth quarter of 1996, the Company recorded the following
adjustments:
<TABLE>
<S> <C>
Increase in the allowance for doubtful accounts $ 396,000
Inventory adjusted to lower of cost or market 380,000
Interest expense associated with amortization of deferred loan costs 237,000
Consulting expense for the issuance of common stock for consulting services 74,000
Deferred loan costs associated with the conversion of
debentures recorded as interest expense
253,750
Discount on conversion price of convertible debentures 1,214,583
Accrual of consulting agreement settlement 207,850
----------
$2,763,183
==========
</TABLE>
The accounts receivable write-offs were caused by the ongoing financial
difficulties and quality control issues which culminated in many customers
either not paying their receivables or seeking significant discounts in the
fourth quarter.
The inventory adjustment resulted from excessive production costs in the fourth
quarter, resulting in net realizable value problems.
15. Impact of Recently Issued Accounting Standards:
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The impact on the Company's financial statements compared to information
presently available is not expected to be significant. Also in June 1997, the
FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which requires public companies to report financial and
descriptive information about operating segments. The statement intends to align
reportable segments and certain disclosures with how the operations are managed
internally. The impact of this statement on the Company's disclosure is not
expected to be significant. In February 1998, the FASB issued Statement No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
adds disclosure requirements on changes in the benefit obligations and fair
values of plan assets, and eliminates certain disclosures that are no longer
useful. These statements will be adopted by the Company in fiscal year 1998.
F-26
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of August 29, 1997, by and between RT INDUSTRIES, INC.,
d/b/a US Automotive Manufacturing, a Delaware corporation ("RTI") and QUALITY
AUTOMOTIVE COMPANY, a Delaware corporation and wholly-owned subsidiary of RTI
("Quality") (collectively, the "Companies"), and MARTIN CHEVALIER an individual
residing at 26 Piscataway Drive, Cold Cheer Farm Estates, Tappahannock, Virginia
22560 (the "Executive").
RECITAL:
WHEREAS, the Companies desire to employ the Executive and the Executive
desires to serve the Companies, on the terms and conditions set forth herein and
the Companies and the Executive deem this Agreement to be satisfactory to
establish the terms of the employment relationship.
AGREEMENT:
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Term of Employment. The Companies hereby agree to employ the Executive
as provided for in Section 2 below, and the Executive hereby agrees to accept
such employment by the Companies, for a term commencing on August 29, 1997 (the
"Effective Date") and ending on the third anniversary of the Effective Date,
unless earlier terminated pursuant to Section 4 below (the "Employment Period").
2. Duties and Authority of Executive.
(a) The Companies and the Executive agree that, during the Employment
Period, the Executive shall serve as President and Chief Executive Officer of
each of the Companies, reporting to the Board of Directors of RT (the "Board").
Quality and the Executive further agree that the Executive shall serve, without
further compensation, as a director of Quality.
(b) The Executive agrees that, during the Employment Period, he shall
devote his full business time, energies and skill to his duties as described
herein, and shall perform such duties and exercise his powers hereunder within
the limitations imposed upon him, at all times, faithfully, and to the best of
his ability and experience, and shall refrain from performing his duties or
exercising his powers in any way that would be harmful to the best interests of
the Companies.
<PAGE>
3. Compensation and Related Matters.
(a) As full compensation for all services and duties to be rendered and
performed by the Executive pursuant to this Agreement, the Companies agree:
(i) to pay the Executive, during the Employment Period, an initial
salary at the rate of $225,000.00 per annum (the "Annual Salary"), payable
in equal biweekly or semi-monthly installments, less such deductions or
amounts to be withheld as shall be required by applicable law and
regulations; and
(ii) to pay to the Executive
(1) an annual bonus equal to five percent (5%) of the first
$1,000,000.00 in audited pre-tax consolidated profits of the Companies
for each fiscal year during the Employment Period; and
(2) an additional annual bonus equal to ten percent (10%) of the
audited pre-tax consolidated profits of the Companies in excess of
$1,000,000 for each fiscal year during the Employment Period;
provided, however, that the annual bonus or additional annual bonus
shall not exceed Five Hundred Thousand Dollars ($500,000) for any
given year
(The amounts to be paid under this subsection (3)(a)(ii) shall be referred to
collectively as the Executive's annual bonus (the "Bonus")). Notwithstanding
anything to the contrary contained herein, the Executive shall be entitled to a
minimum Bonus of $100,000 for the 1997 fiscal year in the event that the
consolidated gross sales for the Companies in such year exceed Seventeen Million
Dollars ($17,000,000) and the Executive shall be entitled to a minimum Bonus of
$50,000 for the 1998 fiscal year in the event that the consolidated gross sales
for the Companies in such year also exceed Seventeen Million Dollars
($17,000,000).
(b) The Companies shall reimburse the Executive promptly for all reasonable
business expenses for travel and all reasonable business entertainment and other
expenses actually incurred by him during the Employment Period in the
performance of services of the Companies under this Agreement in accordance with
the reimbursement policies as established from time to time by the Boards, upon
presentation to the Companies of expense statements or vouchers or such other
supporting information as the Companies may reasonably require.
(c) During the Employment Period, the Executive shall be entitled to
participate in all retirement, health, dental, disability, qualified stock
option and other employee benefit plans maintained by the Companies for its
salaried employees generally, to the extent he is eligible under the terms of
such plans.
(d) The Companies shall recognize, among other things, the Executive's past
service with the Companies and its affiliates to the extent such past service
was recognized for similar purposes for purposes of determining the Executive's
benefits, including any retirement benefits, provided that this shall not be
deemed to require the Companies to provide any benefits
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not provided in this Agreement or to apply increases in compensation or benefits
following the Effective Date to service credited in respect of periods prior to
the Closing, and it shall not result in any duplication of benefits in respect
of such service.
4. Termination.
(a) Death. This Agreement shall cease and terminate upon the death of the
Executive, but the amount of any Annual Salary accrued and due and payable to
the Executive hereunder on the date of his death shall be paid to his heirs or
legal representatives. In addition, The Companies shall pay to the Executive's
surviving spouse or if he has no surviving spouse to his heirs or legal
representatives the Executive's Annual Salary, payable bi-weekly or semi-monthly
and all health benefits and insurance for a period of three (3) months following
death. In addition, a portion of the Executive's Bonus for such year, computed
on a pro rata basis from the beginning of such bonus period to the date of the
Executive's death, shall be paid to his heirs or legal representatives within
sixty (60) days of the end of the then current fiscal year.
(b) Disability. If the Executive becomes substantially unable to perform
his duties hereunder as a result of illness or other disability which renders
him unfit or incapable of performing his duties hereunder, and such disability
or incapacity continues for ninety (90) consecutive days or a period of one
hundred eighty (180) days in any twelve-month period, the Boards shall have the
right to terminate this Agreement upon the giving to the Executive of not less
than thirty (30) days prior written notice of the termination date, in which
event this Agreement shall be deemed terminated on the date contained in such
notice. Upon such termination, the Executive shall be paid the amount of any
Annual Salary, benefits or other payments accrued and due and payable to him
hereunder on the date of termination. In addition, a portion of the Executive's
Bonus for such year, computed on a pro rata basis from the beginning of such
bonus period to the termination date, shall be paid to the Executive within
sixty (60) days of the end of the then current fiscal year.
(c) Cause. The employment of the Executive and the obligations of the
Companies under this Agreement may be terminated by the RT Board at any time for
"cause" (as hereinafter defined). Termination for "cause" shall mean termination
for any one or more of the following reasons: (A) misappropriation by the
Executive of corporate funds, (B) conviction of the Executive of a felony, (C)
willful failure by the Executive to devote his full business time to the
Companies, (D) employment of the Executive by any person other than the
Companies except as otherwise permitted herein, (E) willful or grossly negligent
violation by the Executive of directions of the Board, (F) gross and willful
misconduct by the Executive resulting in material damage (monetarily or
otherwise) to the Companies, or (G) material breach of this Agreement.
Notwithstanding anything herein, upon prior approval of the Board, the
Executive may serve on a less than full time basis as a director, officer or
agent of non-profit corporations, or as a director of for-profit corporations,
not engaged in the Business (as hereinafter defined in Section 5), and such
service shall not be deemed "cause". Such approval shall be deemed given if the
Executive provides written notice of intent to serve in any such capacity to the
Board and
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does not receive written directions not to serve from the Board within fourteen
(14) days of such notice of intent to serve.
If the Companies at any time terminate this Agreement for "cause," the
Executive shall be entitled to all compensation, including the Bonus amount
which is accrued and due and payable to him, at the date of termination, and all
incidental benefits from the Companies provided hereunder.
Timely written notice of any actions, acts, omissions, failures or refusals
to act, or events which may or will give rise to the termination of the
Executive for cause shall be provided to the Executive. Thereafter, if the
Companies elect to terminate this Agreement for "cause," it shall do so by
giving written notice thereof to the Executive, which notice shall set forth the
effective date of termination.
(d) Resignation. The Executive may resign from employment by the Companies
at any time upon at least sixty (60) days notice to the Companies. Such notice
shall set forth an effective date for the resignation not less than sixty (60)
days nor more than ninety (90) days after the date of such notice. In such
event, as of the effective date of resignation, all salary, bonus payments and
other compensation and/or benefits to the Executive shall terminate.
(e) Except as otherwise provided herein, upon the expiration or other
termination of this Agreement, all obligations of the Companies to the Executive
under this Agreement shall forthwith terminate.
5. Non-Compete.
(a) The Executive agrees for a period (the "Restricted Period") commencing
on the date hereof and terminating two (2) years after the date when the
Companies cease to pay the Executive his Annual Salary (which in no event shall
decrease below the dollar amount applicable at the time of such termination) and
accrued Bonus amounts, the Executive shall not directly or indirectly, within
the Commonwealth of Virginia and State of Florida or anywhere in the continental
United States where the Companies conduct substantial business activities, (i)
engage in the Business for the Executive's own account; (ii) enter the employ
of, or render any services to, any person engaged in the Business (other than
with the prior approval of the Board); (iii) without the consent of the Board,
serve as an investor, employee, partner, shareholder, officer, director,
principal, agent, trustee or consultant to any such person engaged in the
Business; provided, however, the Executive may own, directly or indirectly,
solely as an investment, any securities of RTI in any amount, and securities of
any other person, traded on any national securities exchange if the Executive is
not a controlling person of, or a member of a group which controls, such person
and does not, directly or indirectly beneficially own two percent (2%) or more
of any class of securities of such person; or (iv) without the consent of the
Board, solicit any of the Companies' existing customers or employee or others
engaged by the Companies at the date of termination of the Executive's
employment. For purposes of this provision, the "Business" shall mean the
manufacture and sale at wholesale of brake linings,
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pads, rotors and shoes, and ignition wires in which the Companies or its
subsidiaries are engaged at the time of termination of this Agreement.
(b) Notwithstanding the above non-compete provisions of paragraph 5(a),
this Section 5 shall be null and void and without force and effect as to the
Executive if (i) the Executive serves as an officer, director or stockholder of
any company which acquires Quality or substantially all of Quality's assets
pursuant to that certain stock pledge and security agreement, as of even date
herewith, of which Quality is a party, or (ii) it is determined by an arbitrator
in accordance with the arbitration provisions of Section 12 hereof that the
Executive was wrongfully terminated.
(c) Neither the Companies or the Executive shall, at any time during or
after the term of this Agreement, directly or indirectly, disparage the
commercial, business or financial reputation of the other party(ies).
6. Confidentiality.
(a) The Companies and the Executive acknowledge that the services to be
performed by the Executive under this Agreement are unique and extraordinary
and, as a result of such employment, the Executive will be in possession of
confidential information relating to the business practices of the Companies.
The term "confidential information" shall mean any and all information (oral and
written) relating to the Companies or any of their affiliates, or any of their
respective activities, other than such information which can be shown by the
Executive to be in the public domain (such information not being deemed to be in
the public domain) merely because it is embraced by more general information
which is in the public domain) other than as the result of breach of the
provisions of this Section (a), including, but not limited to, information
relating to: trade secrets, personnel lists, financial information, research
projects, services used, pricing, customers, customer lists and prospects,
product sourcing, marketing and selling and servicing. The Executive agrees that
he will not, during or for a period of two years after the termination of
employment, directly or indirectly, use, communicate, disclose or disseminate to
any person, firm or corporation any confidential information regarding the
clients, customers or business practices of the Companies acquired by the
Executive, without the prior written consent of the Companies; provided,
however, that the Executive understands that the Executive will be prohibited
from misappropriating any trade secret (as defined for purposes of Virginia law)
at any time during or after the termination of employment.
(b) Upon the termination of the Executive's employment for any reason
whatsoever, all documents, records, notebooks, equipment, price lists,
specifications, programs, customer and prospective customer lists and other
materials which refer or relate to any aspect of the businesses of the Companies
which are in the possession of the Executive, including all companies thereof,
except to the extent necessary to protect or defend his legitimate personal
interests under this Agreement or otherwise against the Companies (the "Retained
Copies"), shall be immediately returned to the Companies or destroyed; provided,
however, that the Executive covenants (i) to provide the Companies with a list,
together with copies, of any and all Retained
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Copies and (ii) not to use such Retained Copies for any purpose inconsistent
with, or in breach of, the provisions of Section 5 (Non-Compete) of this
Agreement.
(c) (i) The Executive agrees that all processes, technologies and
inventions ("Inventions"), including new contributions, improvements, ideas and
discoveries, whether patentable or not, conceived, developed, invented or made
by him during his employment by the Companies shall belong to the Companies,
provided that such Inventions grew out of the Executive's work with the
Companies, are related in any manner to the Business or are conceived or made on
the Companies' time or with the use of the Companies' facilities or materials.
The Executive shall further: (a) promptly disclose such Inventions to the
Companies; (b) assign to the Companies, without additional compensation, all
patent and other rights to such Inventions; (c) sign all papers necessary to
carry out the foregoing; and (d) give testimony in support of his inventorship;
(ii) If any Invention is described in a patent application or is
disclosed to third parties, directly or indirectly, by the Executive within
two years after the termination of his employment by the Companies, it is
to be presumed that the Invention was conceived or made during the period
of the Executive's employment by the Companies; and
(iii) The Executive agrees that he will not assert any rights to any
Invention as having been made or acquired by him prior to the date of this
Agreement, except for Inventions, if any, disclosed to the Companies in
writing prior to the date hereof.
(d) The Companies shall be the sole owners of all products and proceeds of
the Executive's services hereunder, including, but not limited to, all
materials, ideas, concepts, formats, suggestions, developments, arrangements,
packages, programs and other intellectual properties (all of which shall be
deemed works made for hire) that the Executive may acquire, obtain, develop or
create in connection with and during the term of the Executive's employment
hereunder, free and clear of any claims by the Executive (or anyone claiming
under the Executive) of any kind or character whatsoever (other than the
Executive's right to receive payments hereunder). The Executive shall, at the
request of the Companies, execute such assignments, certificates or other
instruments as the Companies may from time to time deem necessary or desirable
to evidence, establish, maintain, perfect, protect, enforce or defend its right,
or title and interest in or to any such properties.
7. Equitable Remedies.
(a) The parties hereto hereby acknowledge and agree that:
(i) the Companies would be irreparably injured in the event of a
breach by the Executive of any of his obligations under Sections 5 and 6;
(ii) monetary damages would not be an adequate remedy for any such
breach; and
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(iii) the Companies shall be entitled to injunctive relief, in
addition to any other remedy which it may have, in the event of any such
breach.
(b) The parties hereto hereby further acknowledge that, in addition to any
other remedies the Companies may have under Sections 5 and 6 hereof, the
Companies shall have the right and remedy to require the Executive to account
for and pay over to the Companies all compensation, profits, monies, accruals,
increments or other benefits (collectively, " Benefits") derived or received by
the Executive as the result of any transactions constituting a breach of any of
the provisions of Sections 5 and 6, and the Executive hereby agrees to account
for any pay over such Benefits to the Companies.
(c) Each of the rights and remedies enumerated in Sections 7(a) and 7(b)
shall be independent of the other, and shall be severally enforceable, and all
of such rights and remedies shall be in addition to, and not in lieu of, any
other rights and remedies available to the Companies under law or in equity.
(d) If any provision contained in Sections 5 and 6 is hereafter construed
to be invalid or unenforceable, the same shall not affect the remainder of the
covenant or covenants, which shall be given full effect, without regard to the
invalid portions.
(e) If any provision contained in Sections 5 and 6 is found to be
unenforceable by reason of the extent, duration or scope thereof, or otherwise,
then the court making such determination shall have the right to reduce such
extent, duration, scope or other provision and in its reduced from any such
restriction shall thereafter be enforceable as contemplated hereby.
(f) It is the intent of the parties hereto that the covenants contained in
Sections 5 and 6 shall be enforced to the fullest extent permissible under the
laws and public policies of each jurisdiction in which enforcement is sought
(the Executive hereby acknowledging that said restrictions are reasonably
necessary for the protection of the Companies). Accordingly, it is hereby agreed
that if any of the provisions of Sections 5 and 6 shall be adjudicated to be
invalid or unenforceable for any reason whatsoever, said provision shall be
(only with respect to the operation thereof in the particular jurisdiction in
which such adjudication is made) construed by limiting and reducing it so as to
be enforceable to the extent permissible, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of said
provision in any other jurisdiction.
8. Waiver. No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, but any such waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
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9. Notices. All notices or other communications provided for hereunder
shall be in writing and shall be delivered by hand or by courier, sent by
telecopy (receipt confirmed) or mailed by first class mail, postage prepaid,
certified mail, return receipt requested, and shall be deemed delivered as of
the earlier of the time of actual receipt or one (1) business day after being
sent by telecopy or three (3) days after mailing in the case of mailing. Such
notices and other communications shall be sent to a party hereto at his address
set forth below, or to such other address as a party may specify by similar
notice to the other party hereto:
If to RTI: RT INDUSTRIES, INC.
d/b/a US Automotive Manufacturing
Route 627, Airport Drive
Post Office Box 1426
Tappahannock, Virginia 22560
Telecopier: _____________________
and
Frankfurt, Garbus, Klein & Selz
Attn: Gary A. Schonwald, Esquire
488 Madison Avenue
New York, New York 10022
Telecopier:
If to Quality: QUALITY AUTOMOTIVE COMPANY
Route 627, Airport Drive
Post Office Box 1426
Tappahannock, Virginia 22560
Attn: President
Telecopier: _____________________
and
Tenzer Greenblatt LLP
Attn: Gary A. Schonwald, Esquire
405 Lexington Avenue
New York, New York 10174
Telecopier: (212) 885-5001
If to the Executive: Martin Chevalier
26 Piscataway Drive
Cold Cheer Farm Estates
Tappahannock, Virginia 22560
Telecopier: _____________________
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10. Assignment. This Agreement and all of the Executive's rights, duties
and obligations hereunder are personal in nature and shall not be assignable or
delegatable by the Executive. Any purported assignment or delegation thereof
shall not be valid or binding on the Companies and their respective assigns and
successors, except that the Executive's rights to compensation up to the date of
his death may be exercised by his executor, beneficiary, conservator or other
similar person upon the death or incompetence of the Executive. This Agreement
shall inure to the benefit of and shall be legally binding upon any successor or
assignee of the Companies.
11. Defense and Indemnity.
(a) In addition to and not in limitation of any other rights to
indemnification which may be provided to the Executive in the respective
Articles of Incorporation, By-Laws or otherwise of each of the Companies, the
Companies agree in the manner hereinafter set forth to indemnify and defend
against any claims or proceedings brought or actions filed against the Executive
by any party other than the Companies, arising out of his employment hereunder,
or in any way connected with or arising out of his business or employment
relationship with the Operating Companies. Notwithstanding the foregoing, the
Companies shall not be required to indemnify the Executive against, and the
Executive shall be required to repay to the Companies, payments made for all
expenses including reasonable attorney fees and costs if it is determined by a
court of competent jurisdiction or the arbitrator as provided in Section 12
hereof that the underlying claim or matter to which such indemnification
relates:
(i) is a claim or matter to which the Executive is not entitled to
indemnification under the law; or
(ii) is a result of the gross negligence or willful misconduct of the
Executive.
In the event that it shall be determined that either of the Companies is to
be repaid pursuant hereto, then the Executive shall also pay or reimburse the
Companies for their reasonable attorneys' fees and share of court and/or
arbitration costs incurred in connection with any such court proceeding or
arbitration.
(b) The obligations and liabilities of the Companies hereunder with respect
to claims resulting from the assertion of liability of the Executive shall be
subject to the following terms and conditions:
(i) The giving of prompt notice by the Executive to the Companies of
any claim which might give rise to a claim by the Executive based on the
agreements contained in this Section, stating the nature and basis of said
claims and the amounts thereof, to the extent known;
(ii) In the event any such action, suit or proceeding is brought
against the Executive with respect to which the Companies may have
liability under this Agreement, the
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action, suit or proceeding shall be defended (including all proceedings on
appeal or for review) by the Companies and their legal counsel. The
Executive shall have the right to appoint counsel of its selection and the
Companies shall pay the reasonable fees and expenses actually billed to the
Executive within thirty (30) days of presentment of the invoice from
counsel for the Executive.
(c) Neither the Companies nor the Executive shall make any settlement of
any claims without the written consent of the other party, which consent shall
not be unreasonably withheld or delayed.
(d) Except as herein expressly provided, the remedies provided in this
Section shall be cumulative and shall not preclude assertion by any party of any
other rights or the seeking of any other rights or remedies against any other
party hereto.
12. Arbitration. In the event of a dispute between the Companies and the
Executive over the terms of this Agreement which is not settled by the parties,
then the Companies and the Executive agree to settle any and all such disputed
issues by arbitration in accordance with the then-existing commercial rules of
the American Arbitration Association ("AAA") in Virginia. The Companies and the
Executive shall jointly appoint one person to act as the arbitrator. In the
event the Companies and the Executive cannot agree to an arbitrator within
thirty (30) days, the arbitrator shall be chosen by the appropriate mechanism,
as set forth in the official AAA rules, to appoint a single arbitrator in the
event of a deadlock among the parties to the arbitration. The decision of the
arbitrator shall be binding upon the parties. The costs of the arbitration,
including the fees and expenses of the arbitrator, shall be borne fifty percent
by the Companies, on the one hand, and fifty percent by the Executive, on the
other, but each party shall pay its own attorneys' fees; provided, however, that
if the arbitrator shall rule for the Executive, the Companies shall pay or
reimburse the Executive's reasonable attorneys' fees and the Executive's share
of the arbitration costs incurred in connection with such arbitration.
13. Entire Agreement. This Agreement constitutes the entire understanding
of the parties and supersedes any and all prior discussions, negotiations,
agreements and understandings, whether oral or written, with respect to the
subject matter hereof. This Agreement can be modified only by written instrument
properly executed by the Executive and the Companies.
14. Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the Commonwealth of Virginia.
15. Section Headings. The section headings contained in this Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
16. Severability. In the event any one or more of the provisions of this
Agreement shall for any reason be held invalid, illegal or unenforceable, the
remaining provisions of this Agreement shall be unimpaired, and the invalid,
illegal or unenforceable provisions shall be
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replaced by mutually acceptable valid, legal and enforceable provisions which
come closest to the intent of the parties.
17. Third Party Rights. Nothing in this Agreement, express or implied, is
intended to confer on any person not a party hereto any rights or remedies by
reason of this Agreement except for such rights and remedies which are conferred
upon (i) the heirs and legal representatives of the Executive pursuant to
Section 4(a) hereof and (ii) the spouse of the Executive pursuant to Section
4(a) hereof.
18. Warranty. Executive hereby warrants and represents as follows:
(a) That the execution of this Agreement and the discharge of Executive's
obligations hereunder will not breach or conflict with any other contract,
agreement, or understanding between Executive and any other party or parties.
(b) Executive has ideas, information and know-how relating to the business
conducted by the Companies and Executive's disclosure of such ideas, information
and know-how to the Companies will not conflict with or violate the rights of
any third party or parties.
19. Counterparts. This Agreement may be executed by the parties in one or
more counterparts, each of which shall be deemed to be an original but all of
which taken together shall constitute one and the same agreement, and shall
become effective when one or more counterparts has been signed by each of the
parties hereto and delivered to each of the other parties hereto.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties
hereto have each executed and delivered this Agreement as of the day and year
first above written.
RT INDUSTRIES, INC.
a Delaware Corporation
By:_______________________________________
, President
QUALITY AUTOMOTIVE COMPANY
a Delaware Corporation
By:_______________________________________
, President
_________________________________________
MARTIN CHEVALIER
11
$1,802,158.27 Tappahannock, Virginia
August 29, 1997
AMENDED AND RESTATED PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, QUALITY AUTOMOTIVE COMPANY, a Delaware
corporation formerly known as QUAC Acquisition Corp. (together with its assigns
or successors, the "Obligor"), hereby promises to pay to JOHN W. KOHUT and LINDA
S. RAM, as tenants by the entirety, without offset, at 45 East 89th Street,
Apartment 21B, New York, New York 10128 (collectively, the "Obligee") or at such
other place in the State of New York designated in writing by the holder of this
Note, on the second anniversary of the date of issuance of this Note (the
"Maturity") (or on such earlier date to which the maturity of this Note may have
been accelerated by reason of the occurrence of a Default (as herein defined) at
which time the unpaid principal balance of this Note and accrued interest is to
be paid in full, as hereinafter provided), the principal sum of One Million
Eight Hundred Two Thousand One Hundred Fifty-Eight and 27/100 Dollars
($1,802,158,27). The principal sum outstanding from time to time hereunder will
bear interest at the rate of eight percent (8%) per annum, which interest shall
be payable on the first business days of August and November 1998 and the first
business days of February and May 1999 prior to Maturity, and at the Maturity
(together with the full unpaid principal sum of this Note). All payments under
this Note shall be made in immediately available funds in money of the United
States of America that is lawful for the payment of public and private debts at
the time such payment is due.
This Note is made and delivered pursuant to that certain Agreement and Plan
of Merger, dated June 6, 1997 (the "Merger Agreement"), among Obligor, Obligee,
RT Industries, Inc. ("Guarantor") and certain other parties and in conjunction
with two other promissory notes also made and delivered pursuant to the Merger
Agreement (such other promissory notes hereinafter referred to as the "Related
Notes").
If prior to the Maturity, Obligor or Guarantor raises net proceeds of $3
million or more through a public offering or private placement of its equity
securities, including, but not limited to, the sale of common or preferred
stock, the exercise of warrants or the sale of debt securities convertible into
common stock (an "Equity Infusion"), then Obligor will be obligated at the
closing of such Equity Infusion, to apply an amount equal to the product of (i)
40.04% multiplied by (ii) one-half of the net proceeds from such Equity
Infusion, if any, in excess of $3 million as a prepayment (partial or whole, as
the case may be) of this Note; provided, however, that in no event will the
aggregate payment to the holder of this Note exceed an
<PAGE>
amount equal to the unpaid principal balance of the Note, together with all
accrued and unpaid interest and any other sums at the time due hereunder.
The unpaid principal balance of this Note may be prepaid in whole at any
time or in part from time to time, without premium or penalty. All payments
hereunder, including prepayments and any prepayment resulting from an Equity
Infusion, shall be applied first to the payment of accrued and unpaid interest
to the date on which any such payment is made, then to late charges and other
sums due hereunder and thereafter to the unpaid principal balance.
Notwithstanding anything to the contrary above, each of the following
events shall constitute an event of default hereunder (each, a "Default") under
this Note:
(i) With respect to this Note and/or any of the Related Notes, the
failure to pay any installment of interest within 15 days after the due
date thereof, the failure to pay principal in full at Maturity or the
failure to make a prepayment at the closing of an Equity Infusion;
provided, however, no Default under this clause (i) (with the exception of
a default with respect to an Equity Infusion) shall be deemed to have
occurred unless not more than 45 days, nor less than 30 days, prior to such
Maturity or due date the Obligee shall notify the Boards of Directors of
the Obligor and the Guarantor of such Maturity or due date to allow said
companies to consider their respective obligations to the Obligee; or
(ii) An voluntary or involuntary case or proceeding is commenced by or
against the Obligor or the Guarantor under the Federal Bankruptcy Code or
any other law relating to bankruptcy, bankruptcy reorganization, insolvency
or the relief of debtors applicable to Obligor or the Guarantor, and in the
event of an involuntary case or proceeding, such case or proceeding is not
dismissed within sixty (60) days from the date on which such case or
proceeding is commenced and provided Obligee provides notice of such
default to the Obligor and Guarantor; or
(iii) Obligor or the Guarantor defaults in the performance or
observance of, or in the compliance with, any of its obligations under this
Note, the Guaranty (as hereinafter defined) or the Pledge Agreement (as
hereinafter defined), other than with respect to the payment of money,
which default shall continue unremedied for a period of 15 consecutive days
after the receipt by Obligor and Guarantor of written notice from the
holder of this Note specifying such default in reasonable detail; or
(iv) The holder of any obligation evidencing indebtedness of the
Obligor or the Guarantor (including a capital
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<PAGE>
lease) (A) to pay indebtedness for borrowed money, (B) representing the
deferred purchase price of a capital asset, or (C) representing an
operating lease of real or personal property, or of any guaranty of the
Guarantor guaranteeing the payment of any such indebtedness of the Obligor,
the amount of which indebtedness is $150,000 or more, shall have duly
accelerated the maturity of such indebtedness or shall have otherwise duly
caused the full amount thereof to have become immediately due and payable
or such obligation shall have matured in accordance with its terms and any
principal balance and other obligations shall not have been paid; provided,
however, that in the case of an acceleration of any such indebtedness, no
acceleration of this Note shall occur unless and until the holder of such
debt obligation shall have commenced or threatened collection proceedings;
and provided further that Obligor shall provide ten (10) days notice prior
to any such acceleration; or
(v) Except for transfers of inventory or equipment among Guarantor and
its subsidiaries made in the ordinary course of business for fair
consideration, and except for transfers consented to by the holders of this
Note and the Related Notes, if Obligor or Guarantor engages in, or causes
to be taken, any act or a series of acts (over a period of 12 months) which
result in the effective transfer to Guarantor of an ownership interest in
the assets of Obligor aggregating five percent (5%) or more of the
Obligor's net worth as of the most recent transfer, which default shall
continue unremedied for a period of 15 consecutive days after the receipt
by Obligor and Guarantor of written notice from the holder of this Note
specifying such default in reasonable detail.
Upon the occurrence of a Default, the holder of this Note may declare the unpaid
principal balance of this Note, together with any accrued unpaid interest
thereon and all other sums due hereunder, to be immediately due and payable,
whereon the same shall be immediately due and payable (without any requirement
to give notice of such declaration to the Obligor), together with interest
thereon at the annual rate of 12% until the amount so declared to be due and
payable is fully paid.
The Obligor shall pay to the Obligee a late charge of five percent (5%) of
any installment of interest not received by the Obligee within ten (10) days of
its due date. The Obligor shall pay any and all reasonable expenses actually
incurred by the holder of this Note in the collection of the indebtedness
evidenced by this Note, including reasonable fees and disbursements of the
holder's legal counsel.
This Note shall be binding upon the Obligor and its successors and
permitted assigns and shall inure to the benefit of the Obligee and any of its
successors and assigns.
-3-
<PAGE>
The Obligor hereby waives presentment, demand and protest, notice of
dishonor and except as otherwise provided herein, notice of nonpayment.
Anything in this Note to the contrary notwithstanding, the holder of this
Note shall not be permitted to charge, take or receive, and the Obligor shall
not be obligated to pay, interest in excess of the maximum rate from time to
time permitted by applicable law.
The payment of this Note is guaranteed by Guarantor pursuant to the terms
of a guaranty dated the date of this Note (the "Guaranty"), which Guaranty is
secured pursuant to the terms of a certain Stock Pledge and Security Agreement
dated the date hereof among Guarantor, as pledgor, the Obligee and certain other
persons, as pledgees, and certain others (the "Pledge Agreement").
No forbearance, indulgence, delay or failure to exercise any right or
remedy with respect to this Note shall operate as a waiver, nor as an
acquiescence in any Default, nor shall any single or partial exercise of any
right or remedy preclude any other or further exercise thereof or the exercise
of any other right or remedy.
This Note is subject to that certain Subordination and Intercreditor
Agreement dated August 29, 1997, among the Obligor, the Obligee and LaSalle
Business Credit, Inc., pursuant to which this Note and the Obligor's obligations
hereunder are subordinated in the manner set forth therein to the prior payment
of certain obligations to the holders of Senior Indebtedness, as defined
therein.
All notices and/or other communications relating to this Agreement shall be
in writing and deemed delivered as of the date delivered, if delivered
personally, or one (1) business day after having been deposited with a courier,
if sent by overnight courier, or after being sent by telecopy, if sent by
telecopy (receipt confirmed), or three (3) business days after having been
mailed, if mailed by registered or certified mail, postage prepaid, return
receipt requested, sent as follows:
if to Obligor, to:
Quality Automotive Company
Route 627, Airport Drive
P.O. Box 1426
Tappahannock, VA 22560
Attn: President
Telecopier: (804) 443-5611
Telephone: (804) 443-5356
- and -
-4-
<PAGE>
RT Industries, Inc.
d/b/a US Automotive Manufacturing, Inc.
Route 627, Airport Drive
P.O. Box 1426
Tappahannock, VA 22560
Attn: President
Telecopier: 804-443-5611
Telephone: 804-443-5356
- and -
to each of the outside directors (or their duly appointed successors),
as follows:
Mandel Sherman David Love
c/o Elmgrove Associates II, L.P. 68 Hammond Pond Parkway
210 Dartmouth Chestnut Hill, MA 02167
Pawtucket, RI 02860 Telecopier: (617)738-1663
Telecopier: (401)724-9707
with a copy to:
Frankfurt, Garbus, Klein & Selz
488 Madison Avenue - 9th floor
New York, New York 10022
Attn: Gary A. Schonwald, Esq.
Telecopier: 212-593-9175
Telephone: 212-826-5583
- and -
LaSalle Business Credit, Inc.
477 Madison Avenue
New York, New York 10022
Attn: Joseph Costanza
Telecopier: 212-371-2966
Telephone: 212-832-6650
with a copy to:
Hahn & Hessen, LLP
350 Fifth Avenue
New York, New York 10022
Attn: Joseph Costanza
Telecopier: 212-371-2966
Telephone: 212-832-6650
-5-
<PAGE>
if to Obligee, to:
John W. Kohut and Linda S. Ram
45 East 89th Street
Apartment 21B
New York, New York 10128
Telecopier: 212-426-4902
Telephone: 212-289-8333
with a copy to:
McSweeney, Burtch & Crump PC
11 South Twelfth Street
Richmond, VA 23212
Attn: Beverley L. Crump, Esq.
Telecopier: 804-782-2130
Telephone: 804-783-6800
or to such other address as either of such parties shall have designated by like
notice to the other party.
This Note shall be governed in all respects, including validity,
interpretation and effect by the laws of the Commonwealth of Virginia. The
Obligor hereby irrevocably and unconditionally consents to submit to the
exclusive jurisdiction of the courts of the Commonwealth of Virginia and of the
United States located in the Commonwealth of Virginia (the "Virginia Courts")
for any litigation arising out of or relating to this Note, waives any objection
to the laying of venue of any such litigation in the Virginia Courts and agrees
not to plead or claim that such litigation brought in any Virginia Courts has
been brought in an inconvenient forum.
IN WITNESS WHEREOF, the Obligor has caused this Amended and Restated Note
to be executed this ____ day of December, 1997.
QUALITY AUTOMOTIVE COMPANY
By:/s/ JOHN K. KENNEY
----------------------------------------
Name: John K. Kenney
Title: Treasurer/Secretary
-6-
$2,697,841.73 Tappahannock, Virginia
August 29, 1997
AMENDED AND RESTATED PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, QUALITY AUTOMOTIVE COMPANY, a Delaware
corporation formerly known as QUAC Acquisition Corp. (together with its assigns
or successors, the "Obligor"), hereby promises to pay to MARTIN CHEVALIER and
MALVINA B. CHEVALIER, as tenants by the entirety, without offset, at 26
Piscataway Drive, Cold Cheer Farm Estates, Tappahannock, VA 22560 (collectively,
the "Obligee") or at such other place in the State of Virginia designated in
writing by the holder of this Note, on the second anniversary of the date of
issuance of this Note (the "Maturity") (or on such earlier date to which the
maturity of this Note may have been accelerated by reason of the occurrence of a
Default (as herein defined), at which time the unpaid principal balance of this
Note and accrued interest is to be paid in full, as hereinafter provided), the
principal sum of Two Million Six Hundred Ninety Seven Thousand Eight Hundred
Forty One Dollars and Seventy-Three Cents ($2,697,841.73). The principal sum
outstanding from time to time hereunder will bear interest at the rate of eight
percent (8%) per annum, which interest shall be payable on the first business
days of August and November 1998 and the first business days of February and May
1999 prior to Maturity, and at the Maturity (together with the full unpaid
principal sum of this Note). All payments under this Note shall be made in
immediately available funds in money of the United States of America that is
lawful for the payment of public and private debts at the time such payment is
due.
This Note is made and delivered pursuant to that certain Agreement and Plan
of Merger, dated June 6, 1997 (the "Merger Agreement"), among Obligor, Obligee,
RT Industries, Inc. ("Guarantor") and certain other parties and in conjunction
with two other promissory notes also made and delivered pursuant to the Merger
Agreement (such other promissory notes hereinafter referred to as the "Related
Notes").
If prior to the Maturity, Obligor or Guarantor raises net proceeds of $3
million or more through a public offering or private placement of its equity
securities, including, but not limited to, the sale of common or preferred
stock, the exercise of warrants or the sale of debt securities convertible into
common stock (an "Equity Infusion"), then Obligor will be obligated at the
closing of such Equity Infusion, to apply an amount equal to the product of (i)
59.96% multiplied by (ii) one-half of the net proceeds from such Equity
Infusion, if any, in excess of $3 million as a prepayment (partial or whole, as
the case may be) of this Note; provided, however, that in no event will the
aggregate payment to the holder of this Note exceed an
<PAGE>
amount equal to the unpaid principal balance of the Note, together with all
accrued and unpaid interest and any other sums at the time due hereunder.
The unpaid principal balance of this Note may be prepaid in whole at any
time or in part from time to time, without premium or penalty. All payments
hereunder, including prepayments and any prepayment resulting from an Equity
Infusion, shall be applied first to the payment of accrued and unpaid interest
to the date on which any such payment is made, then to late charges and other
sums due hereunder and thereafter to the unpaid principal balance.
Notwithstanding anything to the contrary above, each of the following
events shall constitute an event of default hereunder (each, a "Default") under
this Note:
(i) With respect to this Note and/or any of the Related Notes, the
failure to pay any installment of interest within 15 days after the due
date thereof, the failure to pay principal in full at Maturity or the
failure to make a prepayment at the closing of an Equity Infusion;
provided, however, no Default under this clause (i) (with the exception of
a default with respect to an Equity Infusion) shall be deemed to have
occurred unless not more than 45 days, nor less than 30 days, prior to such
Maturity or due date the Obligee shall notify the Boards of Directors of
the Obligor and the Guarantor of such Maturity or due date to allow said
companies to consider their respective obligations to the Obligee; or
(ii) An voluntary or involuntary case or proceeding is commenced by or
against the Obligor or the Guarantor under the Federal Bankruptcy Code or
any other law relating to bankruptcy, bankruptcy reorganization, insolvency
or the relief of debtors applicable to Obligor or the Guarantor, and in the
event of an involuntary case or proceeding, such case or proceeding is not
dismissed within sixty (60) days from the date on which such case or
proceeding is commenced and provided Obligee provides notice of such
default to the Obligor and Guarantor; or
(iii) Obligor or the Guarantor defaults in the performance or
observance of, or in the compliance with, any of its obligations under this
Note, the Guaranty (as hereinafter defined) or the Pledge Agreement (as
hereinafter defined), other than with respect to the payment of money,
which default shall continue unremedied for a period of 15 consecutive days
after the receipt by Obligor and Guarantor of written notice from the
holder of this Note specifying such default in reasonable detail; or
(iv) The holder of any obligation evidencing indebtedness of the
Obligor or the Guarantor (including a capital
-2-
<PAGE>
lease) (A) to pay indebtedness for borrowed money, (B) representing the
deferred purchase price of a capital asset, or (C) representing an
operating lease of real or personal property, or of any guaranty of the
Guarantor guaranteeing the payment of any such indebtedness of the Obligor,
the amount of which indebtedness is $150,000 or more, shall have duly
accelerated the maturity of such indebtedness or shall have otherwise duly
caused the full amount thereof to have become immediately due and payable
or such obligation shall have matured in accordance with its terms and any
principal balance and other obligations shall not have been paid; provided,
however, that in the case of an acceleration of any such indebtedness, no
acceleration of this Note shall occur unless and until the holder of such
debt obligation shall have commenced or threatened collection proceedings;
and provided further that Obligor shall provide ten (10) days notice prior
to any such acceleration; or
(v) Except for transfers of inventory or equipment among Guarantor and
its subsidiaries made in the ordinary course of business for fair
consideration, and except for transfers consented to by the holders of this
Note and the Related Notes, if Obligor or Guarantor engages in, or causes
to be taken, any act or a series of acts (over a period of 12 months),
which result in the effective transfer to Guarantor of an ownership
interest in the assets of Obligor aggregating five percent (5%) or more of
the Obligor's net worth as of the most recent transfer, which default shall
continue unremedied for a period of 15 consecutive days after the receipt
by Obligor and Guarantor of written notice from the holder of this Note
specifying such default in reasonable detail.
Upon the occurrence of a Default, the holder of this Note may declare the unpaid
principal balance of this Note, together with any accrued unpaid interest
thereon and all other sums due hereunder, to be immediately due and payable,
whereon the same shall be immediately due and payable (without any requirement
to give notice of such declaration to the Obligor), together with interest
thereon at the annual rate of 12% until the amount so declared to be due and
payable is fully paid.
The Obligor shall pay to the Obligee a late charge of five percent (5%) of
any installment of interest not received by the Obligee within ten (10) days of
its due date. The Obligor shall pay any and all reasonable expenses actually
incurred by the holder of this Note in the collection of the indebtedness
evidenced by this Note, including reasonable fees and disbursements of the
holder's legal counsel.
This Note shall be binding upon the Obligor and its successors and
permitted assigns and shall inure to the benefit of the Obligee and any of its
successors and assigns.
-3-
<PAGE>
The Obligor hereby waives presentment, demand and protest, notice of
dishonor and except as otherwise provided herein, notice of nonpayment.
Anything in this Note to the contrary notwithstanding, the holder of this
Note shall not be permitted to charge, take or receive, and the Obligor shall
not be obligated to pay, interest in excess of the maximum rate from time to
time permitted by applicable law.
The payment of this Note is guaranteed by Guarantor pursuant to the terms
of a guaranty dated the date of this Note (the "Guaranty"), which Guaranty is
secured pursuant to the terms of a certain Stock Pledge and Security Agreement
dated the date hereof among Guarantor, as pledgor, the Obligee and certain other
persons, as pledgees, and certain others (the "Pledge Agreement").
No forbearance, indulgence, delay or failure to exercise any right or
remedy with respect to this Note shall operate as a waiver, nor as an
acquiescence in any Default, nor shall any single or partial exercise of any
right or remedy preclude any other or further exercise thereof or the exercise
of any other right or remedy.
This Note is subject to that certain Subordination and Intercreditor
Agreement dated August 29, 1997, among the Obligor, the Obligee and LaSalle
Business Credit, Inc., pursuant to which this Note and the Obligor's obligations
hereunder are subordinated in the manner set forth therein to the prior payment
of certain obligations to the holders of Senior Indebtedness, as defined
therein.
All notices and/or other communications relating to this Agreement shall be
in writing and deemed delivered as of the date delivered, if delivered
personally, or one (1) business day after having been deposited with a courier,
if sent by overnight courier, or after being sent by telecopy, if sent by
telecopy (receipt confirmed), or three (3) business days after having been
mailed, if mailed by registered or certified mail, postage prepaid, return
receipt requested, sent as follows:
if to Obligor, to:
Quality Automotive Company
Route 627, Airport Drive
P.O. Box 1426
Tappahannock, VA 22560
Attn: President
Telecopier: 804-443-5611
Telephone: 804-443-5356
- and -
-4-
<PAGE>
US Automotive Manufacturing, Inc.
Route 627, Airport Drive
P.O. Box 1426
Tappahannock, VA 22560
Attn: President
Telecopier: 804-443-5611
Telephone: 804-443-5356
- and -
to each of the outside directors (or their duly appointed successors),
as follows:
Mandel Sherman David Love
c/o Elmgrove Associates II, L.P. 68 Hammond Pond Parkway
210 Dartmouth Chestnut Hill, MA 02167
Pawtucket, RI 02860 Telecopier: (617)738-1663
Telecopier: (401)724-9707
with a copy to:
Frankfurt, Garbus, Klein & Selz
488 Madison Avenue - 9th floor
New York, New York 10022
Attn: Gary A. Schonwald, Esq.
Telecopier: 212-593-9175
Telephone: 212-826-5583
- and -
LaSalle Business Credit, Inc.
477 Madison Avenue
New York, NY 10022
Attn: Joseph Costanza
Telecopier: 212-371-2966
Telephone: 212-832-6650
with a copy to:
Hahn & Hessen, LLP
350 Fifth Avenue
New York, New York 10022
Attn: Joseph Costanza
Telecopier: 212-371-2966
Telephone: 212-832-6650
-5-
<PAGE>
if to Obligee, to:
Martin and Malvina B. Chevalier
26 Piscataway Drive
Cold Cheer Farm Estates
Tappahannock, VA 22560
Telecopier:
with a copy to:
McSweeney, Burtch & Crump PC
11 South Twelfth Street
Richmond, VA 23212
Attn: Beverley L. Crump, Esq.
Telecopier: 804-782-2130
Telephone: 804-783-6800
or to such other address as either of such parties shall have designated by like
notice to the other party.
This Note shall be governed in all respects, including validity,
interpretation and effect by the laws of the Commonwealth of Virginia. The
Obligor hereby irrevocably and unconditionally consents to submit to the
exclusive jurisdiction of the courts of the Commonwealth of Virginia and of the
United States located in the Commonwealth of Virginia (the "Virginia Courts")
for any litigation arising out of or relating to this Note, waives any objection
to the laying of venue of any such litigation in the Virginia Courts and agrees
not to plead or claim that such litigation brought in any Virginia Courts has
been brought in an inconvenient forum.
IN WITNESS WHEREOF, the Obligor has caused this Amended and Restated
Promissory Note to be executed this day of December, 1997.
QUALITY AUTOMOTIVE COMPANY
By: /S/ JOHN K. KENNEY
----------------------------------------
Name: John K. Kenney
Title: Treasurer/Secretary
-6-
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made as of August 29, 1997,
by and between RT INDUSTRIES, INC., d/b/a US Automotive Manufacturing, Inc., a
Delaware corporation ("RTI"), having an office located at Route 627, Airport
Drive, Tappahannock, VA 22560 and RAMKO VENTURE MANAGEMENT, INC., a New York
corporation ("RamKo"), having an address of 711 Fifth Avenue, New York, New York
10022.
R E C I T A L :
WHEREAS, RTI desires to engage RamKo and its employees, to provide
consultation and advice in the areas of business and corporate finance as they
relate to the business operations of RTI, including but not limited to the
services of a skilled professional reasonably requested by the executive
officers of the Company, such services to be substantially similar to those
performed by the principal financial officer (the "Consulting Services") and
RamKo desires to be engaged by RTI to provide the Consulting Services, all on
the terms and conditions hereinafter set forth.
A G R E E M E N T :
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Engagement. RTI hereby engages RamKo, and RamKo hereby accepts such
engagement, to provide the Consulting Services to RTI, at such times as RTI may
reasonably require not to exceed twenty five (25) days per calendar quarter. If
RamKo provides Consulting Services for more than twenty five (25) days per
calendar quarter, RamKo shall be entitled to additional compensation as provided
in Section 8 hereof.
Notwithstanding anything in the foregoing provisions of this Section 1 to
the contrary, in the event RTI's chief executive officer should become disabled,
or die, or leave the employment of RTI during the term of this Agreement, then
RTI may call upon RamKo for considerably more extensive and intensive
consultation services than under ordinary circumstances for periods up to ninety
(90) consecutive days, recognizing, however, that RamKo's employees may be
engaged in other full-time businesses. Unless otherwise agreed between RamKo and
RTI, RamKo shall perform the Consulting Services at an office of RamKo to be
located in the City of New York (the "Office"). RTI agrees that RamKo shall have
ready access to the RTI staff and resources as necessary to perform the
Consulting Services provided for in this Agreement.
2. Term and Termination. This Agreement shall remain in effect for a term
of three (3) years, commencing on the date
<PAGE>
hereof. The employment of RamKo and the obligations of RTI under this Agreement
may be terminated by the Board of Directors of RTI at any time for "cause" (as
hereinafter defined). Termination for "cause" shall mean termination for any one
or more of the following reasons: (A) misappropriation of corporate funds by an
employee, officer, agent or representative of RamKo, (B) conviction of any
officer or assigned consultant of RamKo of a felony, (C) willful or grossly
negligent violation of directions of the Board of Directors of RTI, (D) gross
and willful misconduct by an employee, officer, agent or representative of RamKo
resulting in material damage (monetarily or otherwise) to RTI, (E) material
breach of this Agreement.
If RTI at any time terminates this Agreement for "cause," RamKo shall be
entitled to all compensation, which is accrued and due and payable to it as at
the date of termination, and all incidental benefits from RTI provided
hereunder.
Timely written notice of any actions, acts, omissions, failures or refusals
to act, or events which may or will give rise to the termination of RamKo for
cause shall be provided to RamKo. Thereafter, if RTI elects to terminate this
Agreement for "cause," it shall do so by giving written notice thereof to RamKo,
which notice shall set forth the effective date of termination. Upon any
termination, whether for breach or otherwise, RTI shall be obligated to pay
RamKo the fees required under Section 3 and Section 8 hereof, if applicable,
through the date of termination and any unreimbursed expenses under Section 4
and Section 8 hereof, if applicable. The provisions of this Section and Sections
5 (Confidential and Proprietary Information), 6 (Defense and Indemnity), 10
(Arbitration), and 14 (Applicable Law), of this Agreement shall survive the
termination of this Agreement.
3. Compensation. As compensation for the Consulting Services, RTI hereby
promises to pay to RamKo Forty Five Thousand Dollars ($45,000.00) per calendar
quarter which is to be paid at the rate of $15,000 per month, in advance. No
other compensation or benefit shall be paid or provided to RamKo hereunder,
except for any additional Consulting Services as provided in Section 8 hereof.
4. Expenses. In addition to the compensation received pursuant to Section 3
hereof, during the term of this Agreement, RamKo shall be entitled to receive
prompt reimbursement from RTI for all reasonable and necessary out-of-pocket
expenses incurred by it in performing Consulting Services hereunder. Any item of
such expenses in excess of One Thousand Dollars ($1,000.00), however, shall be
reimbursable hereunder only if such item of expense has been approved by an
executive officer of RTI before it is incurred by RamKo, except for travel and
lodging expenses for RamKo traveling from the Office to any office or facility
of RTI. Reimbursement of any expense under this Section 4 in excess of Fifty
Dollars ($50.00) shall be made by RTI only upon submission by RamKo of itemized
proof (to the extent reasonably available) that
2
<PAGE>
such expense was actually incurred in performing Consulting Services hereunder
and the amount thereof.
5. Confidential and Proprietary Information.
(a) During the term of its engagement hereunder, RamKo, its employees and
other RamKo representatives may have access to, and familiarity with, the
confidential and proprietary information of RTI and its affiliates, including
but not limited to trade secrets, records, client and customer lists, data,
manufacturing and marketing methods (the "Confidential Information"). RamKo, its
employees, officers, agents, representatives and others shall not, whether
during or after RamKo's engagement by RTI, intentionally disclose, directly or
indirectly, the Confidential Information to any person or entity other than RTI
unless RamKo has received the prior written consent of RTI or is compelled to
disclose the Confidential Information by judicial or governmental process. Upon
termination of this Agreement, RamKo shall return to RTI, or destroy, any
material involving any such Confidential Information.
(b) Upon the termination of RamKo's employment for any reason whatsoever,
all documents, records, notebooks, equipment, price lists, specifications,
programs, customer and prospective customer lists and other materials which
refer or relate to any aspect of the businesses of RTI which are in the
possession of RamKo, including all copies thereof, except to the extent
necessary to protect or defend its legitimate business interests under this
Agreement or otherwise against the Company (the "Retained Copies") shall be
immediately returned to RTI or destroyed; provided, however, that RamKo
covenants (i) to provide the Company with a list, together with copies, of any
and all Retained Copies and (ii) not to use such Retained Copies for any
purpose, within the Commonwealth of Virginia and State of Florida or anywhere in
the continental United States where RTI conducts substantial business
activities, in direct or indirect competition to RTI, including without
limitation the solicitation of RTI's customers or suppliers.
(c)(i) RamKo agrees that all processes, technologies and inventions
("Inventions"), including new contributions, improvements, ideas and
discoveries, whether patentable or not, conceived, developed, invented or made
during its engagement by RTI shall belong to RTI, provided that such Inventions
grew out of RamKo's consulting work with RTI, are related in any manner to the
business operations of RTI or are conceived or made with the use of RTI's
facilities or materials. RamKo shall further:
(1) promptly disclose such Inventions to RTI;
(2) assign to RTI, without additional compensation, all patent and
other rights to such Inventions;
3
<PAGE>
(3) sign all papers necessary to carry out the foregoing; and
(4) give testimony in support of its inventorship;
(c)(ii) If any Invention is described in a patent application or is
disclosed to third parties, directly or indirectly, by RamKo within two years
after the termination of this Agreement, it is to be presumed that the Invention
was conceived or made during the period of RamKo's engagement by RTI; and
(c)(iii) RamKo agrees that it will not assert any rights to any Invention
as having been made or acquired by it prior to the date of this Agreement,
except for Inventions, if any, disclosed to RTI in writing prior to the date
hereof.
(d) RTI shall be the sole owners of all products and proceeds of RamKo's
services hereunder, including, but not limited to, all materials, ideas,
concepts, formats, suggestions, developments, arrangements, packages, programs
and other intellectual properties (all of which shall be deemed works made for
hire) that RamKo may acquire, obtain, develop or create in connection with and
during the term of RamKo's engagement hereunder, free and clear of any claims by
RamKo (or anyone claiming under RamKo) of any kind or character whatsoever
(other than RamKo's right to receive payments hereunder). RamKo shall, at the
request of RTI, execute such assignments, certificates or other instruments as
RTI may from time to time deem necessary or desirable to evidence, establish,
maintain, perfect, protect, enforce or defend its right, or title and interest
in or to any such properties.
6. Defense and Indemnity.
(a) In addition to and not in limitation of any other rights to
indemnification which may be provided to RamKo or its employees or
representatives (the "RamKo Group") in RTI's Articles of Incorporation, By-Laws
or otherwise, RTI agrees in the manner hereinafter set forth to indemnify and
defend against any claims or proceedings brought or actions filed against any of
the RamKo Group by any third party other than RTI, because of its engagement
hereunder, or in any way connected with or arising out of its business
relationship with the Operating Companies (defined as RTI or any other direct or
indirect subsidiary, parent of affiliate of RTI). Notwithstanding the foregoing,
RTI shall not be required to indemnify the RamKo Group against, and RamKo shall
be required to repay to RTI, payments made for all expenses including reasonable
attorney fees and costs if it is determined by a court of competent jurisdiction
or the arbitrator, as provided in Section 10 hereof, that the underlying claim
or matter to which such indemnification relates:
(i) is a claim or matter to which RamKo is not entitled to
indemnification under the law; or
4
<PAGE>
(ii) arises out of, or is a result of, the gross negligence or willful
misconduct of RamKo (or its employees, agents, officers and
representatives).
In the event that it shall be determined that RTI is to be repaid pursuant
hereto, then RamKo shall also pay or reimburse RTI for its reasonable attorneys'
fees and share of court and/or arbitration costs incurred in connection with any
court proceeding or arbitration.
(b) The obligations and liabilities of RTI hereunder with respect to claims
resulting from the assertion of liability of RamKo shall be subject to the
following terms and conditions:
(i) The giving of prompt notice by RamKo to RTI of any claim which
might give rise to a claim by RamKo based on the agreements contained in
this Section, stating the nature and basis of said claims and the amounts
thereof, to the extent known.
(ii) In the event any such action, suit or proceeding is brought
against RamKo, with respect to which RTI may have liability under this
Agreement, the action, suit or proceeding shall be defended (including all
proceedings on appeal or for review) by RTI and its legal counsel. RamKo
shall have the right to appoint counsel of its selection and RTI shall pay
the reasonable fees and expenses actually billed to RamKo within 30 days of
presentment of the invoice from counsel for RamKo.
(c) Neither RTI nor RamKo shall make any settlement of any claims without
the written consent of the other party, which consent shall not be unreasonably
withheld or delayed.
(d) Except as herein expressly provided, the remedies provided in this
Section shall be cumulative and shall not preclude assertion by any party of any
other rights or the seeking of any other rights or remedies against any other
party hereto.
7. Restriction.
(a) RamKo shall during the term of this Agreement be deemed to be an
independent contractor. Nothing contained in this Agreement shall constitute or
be deemed to create any relationship between RTI and RamKo other than the
relationship of independent contractor. Except as expressly provided herein,
RamKo shall have no right or authority, express or implied, to make any
representations, warranties or agreements or to act as agent of, or to assume or
create any obligations on behalf of, or in the name of, or to bind, RTI.
(b) RamKo and its directors, shareholders, agents, officers and employees
shall be permitted to engage in any business and perform services for its or
their own accounts provided that such business and services shall not be in
competition with, or be
5
<PAGE>
for a company that is in competition with, RTI or its affiliates or
subsidiaries.
8. Additional Services.
(a) Should the Consulting Services be rendered for a period greater than
twenty five (25) business days in any calendar quarter (the "Additional
Services"), RTI shall pay RamKo an additional Two Thousand Five Hundred Dollars
($2500.00) for each day of such additional Consulting Services, provided that no
Additional Services shall be rendered prior to RamKo notifying RTI in writing
that the initial twenty five (25) day period of Consulting Services has or is
about to expire and RTI shall provide to RamKo written authorization to render a
fixed number of days of Additional Services. Prior to rendering any Additional
Services in excess of the number of days authorized in accordance with the
provisions of this Section, the notification and authorization procedures set
forth above shall be repeated.
(b) Any service, other than the Consulting Services, including but not
limited to investment banking services performed by RamKo for RTI, are not
covered by, nor subject to the terms and provisions of this Agreement, and
compensation for and the conditions for the performance of such services are or
shall be the subject of separate agreements mutually agreeable to the parties
thereto.
9. Quarterly Service Report. RamKo shall provide to RTI prior to ten (10)
days after the end of each calendar quarter, commencing September 30, 1997, the
number of business days that Consulting Services were performed during the
immediately preceding calendar quarter.
10. Arbitration. If there shall occur a dispute between RTI and RamKo over
the terms of this Agreement which dispute is not amicably settled by the
parties, then the RTI and RamKo agree to submit any and all such disputed issues
by arbitration in accordance with the then existing commercial arbitration rules
of the American Arbitration Association ("AAA") in New York. RTI and RamKo shall
jointly appoint one person to act as the arbitrator. In the event RTI and RamKo
cannot agree to an arbitrator within thirty (30) days, the arbitrator shall be
chosen by the appropriate mechanism, as set forth in the official AAA rules, to
appoint a single arbitrator in the event of a deadlock among parties to the
arbitration. The decision of the arbitrator shall be binding upon the parties.
The costs of the arbitration, including the fees and expenses of the arbitrator,
shall be borne fifty percent (50%) by RTI, on the one hand, and fifty percent
(50%) by RamKo, on the other, but each party shall pay its own attorneys' fees;
provided, however, that if the arbitrator shall (i) rule for RamKo and not
otherwise rule as to costs, fees and expenses, RTI shall pay or reimburse
RamKo's reasonable attorneys' fees and RamKo's share of the arbitration costs
incurred in connection with such arbitration
6
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and (ii) rule for RTI and not otherwise rule as to costs, fees and expenses,
RamKo shall pay or reimburse RTI's reasonable attorneys' fees and RTI's share of
the arbitration costs incurred in connection with such arbitration.
11. Injunctive Relief. The parties hereto agree that: (a) both parties
would be irreparably injured in the event of a material breach by either party
of its obligations under this Agreement and
(b) monetary damages would not be an adequate remedy for any such breach.
Either party shall at its sole option be entitled to injunctive relief in
addition to any other remedy which it may have in the event of any such breach.
Accordingly, in the event of a threatened or actual breach of the
provisions of this Agreement, either party hereto in addition to any other
remedies which they may have, shall be entitled to seek temporary injunctive
relief in state or federal court, pending the commencement of any arbitration
which may be commenced in accordance with Section 10 of this Agreement.
12. Effect of Waiver. The waiver by either party of a breach of any
provision of this Agreement shall not operate as or be construed as a waiver of
any subsequent breach thereof.
13. Notices. All notices given to a party in connection with this Agreement
shall be in writing and shall be deemed to have been properly delivered (a) on
the date actually received, if by U.S. mail, and (b) on the date sent, if
delivered either by hand, telefax or reputable express courier service. All such
notices shall be addressed either as follows or in such other manner as a party
may subsequently designate in writing:
If to RTI:
RT INDUSTRIES, INC.
d/b/a US Automotive Manufacturing, Inc.
Route 627, Airport Drive
Post Office Box 1426
Tappahannock, Virginia 22560
Attn: President
Telefax: ___________________
- and -
Frankfurt, Garbus, Klein & Selz
Attn: Gary A. Schonwald, Esquire
488 Madison Avenue
New York, New York 10022
Telefax: ___________________
7
<PAGE>
If to RamKo
RamKo Venture Management, Inc.
Attn: John W. Kohut, President
711 Fifth Avenue
New York, New York 10022
Telefax: (212) 223-2490
14. Applicable Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of New York, without regard to any
conflicts of law provisions thereof to the contrary.
15. Assignment. The rights, benefits and obligations of RTI and RamKo under
this Agreement shall not be assignable or transferable. Notwithstanding anything
herein, the Consulting Services to be provided under this Agreement shall be
performed by John W. Kohut, President of RamKo Venture Management, Inc., or any
other individual authorized by him and reasonably satisfactory to RTI.
16. Prior Agreements. All prior agreements (but not contemporaneous
agreements), whether written or oral, among the parties hereto with respect to
the subject matter of this Agreement have been integrated into, and are
superseded by, the provisions of this Agreement and the other agreements and
instruments executed on even date herewith and in connection herewith.
17. Modification. This Agreement shall not be modified by the parties
unless, and then only to the extent that, a written modification is executed by
all of the parties.
18. Severable Provisions. All provisions in this Agreement are severable
and each valid and enforceable provision shall remain in effect and shall be
binding upon the parties, notwithstanding any determination binding upon the
parties hereto that other provisions of this Agreement are invalid or
unenforceable.
19. Binding Effect. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto.
20. Terms of Convenience. Captions and headings are used in this Agreement
for convenience only and shall not be construed to affect the meaning of this
Agreement. Terms such as "hereof", "herein", "hereto", "hereby", "hereunder" and
similar references shall be deemed to refer to this Agreement in its entirety
and not to any particular provisions of this Agreement.
21. Payment of Expenses. Except as otherwise provided in this Agreement,
RTI agrees to pay for and hold RamKo harmless for all reasonable out-of-pocket
costs and expenses of RamKo (including, without limitation, the reasonable fees
and out-of-
8
<PAGE>
pocket expenses of all counsel retained by RamKo) arising in connection with the
entering into, administration (including without limitation, any waiver,
amendment or modification) or enforcement of , or preservation of rights under,
this Agreement and any of the documents contemplated hereby. RamKo hereby agrees
that the legal fees and out-of-pocket expenses of counsel retained by RamKo in
connection with the entering into preparation and execution of this Agreement
shall not exceed Five Hundred Dollars ($500.00).
22. Counterparts. This Agreement may be executed in counterparts, and any
executed counterparts shall be binding upon the parties and inure to their
benefit as though all parties were signatory to the same counterpart.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
RT INDUSTRIES, INC.
a Delaware corporation
By: /S/ JOHN K. KENNEY
------------------
John K. Kenney, President
RAMKO VENTURE MANAGEMENT, INC.
a New York corporation
By: /s/ JOHN W. KOHUT
------------------
John W. Kohut, President
9
AMENDED AND RESTATED REVOLVING CREDIT,
TERM LOAN AND SECURITY AGREEMENT
THIS AGREEMENT, dated as of the date of acceptance by Lender appearing on
the last page hereof, is entered into between Lender and Borrower.
BACKGROUND
Borrower and Lender are parties to a Revolving Credit, Term Loan and
Security Agreement dated as of March 28, 1990 (as same has been amended,
modified and supplemented from time to time, the "Original Loan Agreement"),
pursuant to which Lender extended certain financial accommodations to Borrower.
Borrower and Lender wish to amend the Original Loan Agreement to increase
the revolving credit line to $7,500,000 and to consolidate and combine the
existing term notes and to amend and restate in its entirety (except as
otherwise provided herein) the Original Loan Agreement on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
herein contained, the parties hereto hereby agree as follows:
ARTICLE A
AMENDMENT AND RESTATEMENT
Section A.01 Existing Obligations. Borrower hereby represents, warrants,
acknowledges and confirms that Borrower, as of December 30, 1992, is indebted to
Lender for loans, advances and other financial accommodations to it under the
Original Loan Agreement in the amount of $7,097,943.74 including all principal,
accrued interest and all costs, expenses and other charges now owed by Borrower
to Lender, all of which is unconditionally owing by Borrower to Lender, without
offset, defense or counterclaim of any kind, nature and description whatsoever.
Section A.02 Amendment and Restatement. Except as otherwise set forth in
this Agreement, as of December 30, 1992, the terms, conditions, covenants,
agreements, representations and warranties contained in the Original Loan
Agreement shall be replaced and superseded in their entirety by the terms,
conditions, covenants, agreements, representations and warranties set forth in
this Agreement, and the Original Loan Agreement shall be of no further force or
effect; provided, however, that nothing contained in this Agreement shall
impair, limit or affect the liens heretofore granted, pledged and/or assigned to
Lender as security for Borrower's obligations under the Original Loan Agreement
or the Mortgage.
The parties agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the following
definitions:
<PAGE>
1.1 The term "Accounts" means and includes all presently existing and
hereafter arising accounts, contract rights, instruments, documents, chattel
paper, and all other forms of obligations owing to Borrower arising out of the
sale or lease of goods or the rendition of services by Borrower, whether or not
earned by performance, and any and all credit insurance, guaranties and other
security therefor, as well as all merchandise returned to or reclaimed by
Borrower and all Borrower's Books (except minute books) relating to any of the
foregoing.
1.2 The term "this Agreement" means and includes this Revolving Credit and
Security Agreement, any concurrent or subsequent written rider to this Revolving
Credit and Security Agreement and any extensions, supplements, amendments or
modifications to this Revolving Credit and Security Agreement and/or to any such
rider.
1.3 The term "AIC" means Automotive Investment Corporation, a Delaware
corporation.
1.4 For all purposes and unless specifically stated to the contrary herein,
the term "Borrower" means and refers to Quality and US Automotive, either
jointly and/or severally, as the case may be, both having their chief executive
offices and principal places of business located at Airport Road, Tappahannock,
Virginia 22560.
1.5 The term "Borrower's Books" means and includes all of Borrower's books
and records including, but not limited to: minute books, ledgers, records
indicating, summarizing or evidencing Borrower's assets, liabilities, the
Accounts and all information relating thereto; records indicating, summarizing
or evidencing Borrower's business operations or financial condition; and all
computer programs, disc or tape files, printouts, runs, and other computer
prepared information and the Equipment containing such information.
1.6 The term "Borrowing Agent" shall mean Quality.
1.7 The term "Capital Expenditure Loan" shall have the meaning set forth in
Section 2.1(c) of this Agreement.
1.8 The term "Capital Expenditure Note" shall have the meaning set forth in
Section 2.1(c) of this Agreement.
1.9 The term "Capital Expenditures" means, for any period, the aggregate of
all expenditures (whether paid in cash or accrued as liabilities and including
expenditures for capitalized lease obligations) by Borrower during such period
that are required by GAAP to be included in or reflected by the property, plant,
or equipment or similar fixed asset accounts in the balance sheet of Borrower.
1.10 The term "CBA" means Calvin B. Andringa.
1.11 The term "the Code" means the Uniform Commercial Code (or any
successor statute) of the State of New York or of any other state the laws of
which are required by Section 9-103 of the Code of the State of New York to be
applied with respect to the perfection of security interests. Any and all terms
used in this Agreement which are defined in the Code shall be construed and
defined in accordance with the meaning and definition ascribed
<PAGE>
to such terms under the Code except to the extent otherwise defined herein.
1.12 The term "Collateral" means and includes each and all of the
following: the Accounts; the Equipment; the General Intangibles; the Real Estate
Collateral; the Negotiable Collateral; the Inventory; any money, deposit
accounts or other assets of Borrower or any guarantor in which Lender receives a
security interest or lien or which hereafter comes into the possession, custody
or control of Lender; and the proceeds of any of the foregoing, including, but
not limited to, proceeds of insurance covering the Collateral and any and all
Accounts, Equipment, General Intangibles, Real Estate Collateral, Negotiable
Collateral, Inventory, money, deposit accounts or other tangible and intangible
property of Borrower or any guarantor resulting from the sale or other
disposition of the Collateral, and the proceeds thereof. It is agreed that the
Collateral, whether owned and/or controlled by either Quality or US Automotive,
shall act as security for the entire obligation of the Borrower under this
Agreement.
1.13 The term "Collateral Documents" means, at any point in time, the
Trademark Assignment, the Mortgage, and all other agreements, documents,
guaranties, instruments or assignments then in effect which pertain to the
Obligations, the Collateral, or any other aspect of the transactions
contemplated by this Agreement.
1.14 The term "Current Assets" means, at any point in time, cash,
marketable securities, receivables, other than receivables from insolvent
purchasers, Inventory, prepaid expenses as determined in accordance with GAAP,
and notes, loans or other instruments with a maturity date of less than one
year.
1.15 The term "Current Liabilities" means accounts payable as determined in
accordance with GAAP, all debts or obligations to banks, creditors, or other
persons with a maturity date of less than one year.
1.16 The term "Current Ratio" means, at any point in time, the proportion
represented by the Current Assets divided by the Current Liabilities.
1.17 The term "Daily Balances" means the amount determined by taking the
amount of the Obligations owed at the beginning of a given day, adding any
additional Obligations advanced or incurred on such date, and subtracting any
Payments or collections which are deemed to be paid in respect of such
Obligations on that date under the provisions of this Agreement.
1.18 The term "Debt Service Coverage Ratio" means with respect to any
period, the ratio of (a) net income after taxes for such period (excluding gains
or losses on asset sales and excluding Borrower's extraordinary gains or
losses), plus depreciation and amortization expenses deducted in determining net
income for such period, minus Capital Expenditures for such period not financed,
and minus any cash distributions, dividends, or withdrawals to officers,
managers, directors, affiliates or stockholders for such periods which were not
calculated in determining net income after taxes, to (b) current maturities of
long term debt, plus regularly scheduled principal payments and any payments or
prepayments of principal on all indebtedness except (i) trade payables not
delinquent, (ii) revolving loans paid or scheduled to be paid during such period
and (iii) the Mandatory Prepayment.
<PAGE>
1.19 The term "Eligible Accounts" means and includes those Accounts which
have been validly assigned to Lender; in which Lender has a valid perfected and
enforceable first priority security interest; which strictly comply with all of
Borrower's warranties and representations to Lender, and which have been
outstanding for ninety (90) days or less after the date of the original
statement. However, Eligible Accounts shall not include the following: (a)
Accounts with respect to which the account debtor is an officer, employee or
agent of Borrower; (b) Accounts with respect to which goods are placed on
consignment, guaranteed sale or other terms by reason of which the payment by
the account debtor may be conditional; (c) Accounts with respect to which the
account debtor is not a resident of the United States; (d) Accounts with respect
to which the account debtor is the United States or any department, agency or
instrumentality of the United States; (e) Accounts with respect to which the
account debtor is any State of the United States or any city, town, municipality
or division thereof; (f) Accounts with respect to which the account debtor is a
subsidiary of, related to, affiliated or has common officers or directors with
Borrower; (g) Accounts with respect to which Borrower is or may become liable to
the account debtor for goods sold or services rendered by the account debtor to
Borrower; (h) that portion of the Accounts owed by any single account debtor
which exceed twenty percent (20%) of all of the Accounts other than Accounts
owed by Autozone, Inc. which may not exceed thirty-five (35%) percent of all of
the Accounts; or (i) Accounts which Lender deems ineligible pursuant to Section
2.4.
1.20 The term "Eligible Equipment" means all Equipment purchased by
Borrower after April 2, 1992 which Lender in its sole and absolute discretion
exercised in good faith, on a case-by-case basis deems eligible for financing
under the Capital Expenditure Loan pursuant to Section 2.1(c).
1.21 The term "Eligible Inventory" means all of Borrower's Inventory which
Lender deems eligible as the basis for advances to Borrower under this
Agreement. The term "Eligible Raw Inventory" shall include raw materials and
other products used by Borrower for Borrower's manufacturing purposes which are
in possession of the Borrower and to which title has passed to the Borrower,
regardless of the location of such supplies, raw materials and products, and
which have not in any way been altered or processed by the Borrower. The term
"Eligible Finished Goods Inventory" shall include all Inventory held for sale in
the normal course of business which requires no further treatment or processing
other than packaging and which is in good and merchantable condition, free of
defects.
The value of all Inventory shall be the lower of fair market value or cost.
Eligible Inventory shall not include any Finished Goods Inventory which has been
custom made for a purchaser which is more than ninety (90) days in arrears with
respect to at least fifty percent (50%) of its Account with the Borrower.
Inventory which is in transit to any location of the Borrower may be included in
Eligible Inventory if acceptable documents of title are in Lender's possession
and Lender has received satisfactory evidence that such Inventory is covered by
insurance as required hereby (but unpaid freight, duty and similar charges shall
be deducted in determining the value of such Inventory).
1.22 The term "Environmental Reserve" means a reserve against availability
in an amount equal to $100,000 for any liability of Borrower arising out of any
clean up or other action necessary to cure any noncompliance by Borrower with
any Federal, State or local law relating to occupational safety and health,
pollution, natural resources or the environment.
<PAGE>
1.23 The term "Equipment" means all of Borrower's present and hereafter
acquired equipment, including without limitation, machinery, motor vehicles,
furniture, fixtures, dies and molds, machine and other tools, jigs, motors,
parts, office equipment and other tangible personal property of Borrower (except
Inventory), and any and all attachments, accessories, accessions, replacements,
substitutions, additions and improvements thereto, wherever located.
1.24 The term "Event of Default" means the occurrence of any one of the
events set forth in Section 7 of this Agreement.
1.25 The term "Expenses" means and includes all: costs or expenses required
to be paid by Borrower under this Agreement which are paid or advanced by
Lender; taxes and insurance premiums of every nature and kind paid by Lender
under this Agreement or arising out of Lender's relationship with Borrower;
filing, recording, publication and search fees paid or incurred by Lender in
connection with Lender's transactions with Borrower; costs and expenses incurred
by Lender in collecting the Accounts (with or without suit), to correct any
default or enforce any provision of this Agreement, or in gaining possession of,
maintaining, handling, preserving and protecting, storing, shipping, appraising,
selling, preparing for sale and/or advertising to sell the Collateral, whether
or not a sale is consummated, a field examination fee in an amount equal to
$12,000 per annum (including all costs and expenses) payable by Borrower to
Lender in quarterly installments of $3,000 on the first day of each January,
April, July and October commencing January 1, 1993; costs and expenses incurred
by Lender in enforcing or defending this Agreement or any portion hereof and in
compromising, pursuing or defending any controversy, action or proceeding which
results, directly or indirectly, from Lender's relationship with Borrower or in
connection with any exercise by Lender of any of its rights under this Agreement
or any of the Collateral Documents, either before or after the Obligations are
paid in full and whether or not under the Federal Bankruptcy Code; and
reasonable attorneys' fees and expenses incurred by Lender in advising,
structuring, drafting, reviewing, amending, terminating, enforcing, defending or
concerning this Agreement, or any portion hereof or any agreement related
hereto, whether or not suit is brought.
1.26 The term "Financial Statement" means any financial statement required
to be given to Lender pursuant to Section 6.10.
1.27 The term "First Amendment Closing Date" means June 17, 1991.
1.28 The term "Fiscal Year" means Borrower's fiscal year for financial
accounting purposes. Borrower's current Fiscal Year will end on December 31,
1990.
1.29 The term "GAAP" means generally accepted accounting principles
consistently applied during each interval and from interval to interval.
1.30 The term "General Intangibles" means and includes all of Borrower's
present and future general intangibles and other personal property (including,
without limitation, any and all choses or things in action, contract rights,
goodwill, customer lists, patents, patent rights, trade names, trade secrets,
trademarks, trade styles, copyrights, copyright rights, works which are the
subject matter of copyright, copyright, patent and trademark applications and
license agreements and rights thereunder and any and all fees, rents, royalties
and proceeds
<PAGE>
therefrom, all extensions, renewals, reissues, divisions, continuations and
continuations-in-part of any of the foregoing, and all rights to sue for past,
present and future infringement of any of the foregoing, inventions, trade
secrets, blueprints, drawings, purchase orders, computer programs, computer
discs, computer tapes, literature, reports, catalogs, deposit accounts and tax
refunds) other than goods and Accounts, as well as all Borrower's Books relating
to or used in connection with any of the foregoing or any other Collateral.
1.31 The term "Initial Term" shall have the meaning set forth in Section
3.1 of this Agreement.
1.32 The term "Insolvency Proceeding" means and includes any proceeding
commenced by or against Borrower, or any other Person, under any provision of
the Federal Bankruptcy Code, as amended, or under any other bankruptcy or
insolvency law, including, but not limited to, assignments for the benefit of
creditors and formal or informal moratoriums, compositions or extensions with
some or all creditors.
1.33 The term "Interest Coverage Ratio" means, with respect to any period,
the ratio of (a) Borrower's net income, after taxes for such period, excluding
gains or losses on sales of assets outside the ordinary course of business and
excluding Borrower's extra-ordinary gains or losses, plus interest, depreciation
and amortization expenses deducted in determining net income for such period,
plus management fees and success fees accrued but not paid, plus payments of
interest "in kind", minus Capital Expenditures for such period not financed and
minus regularly scheduled principal payments and any payments or prepayments of
principal on all indebtedness (except (i) trade payable not delinquent (ii)
revolving loans and (iii) the Mandatory Prepayment) paid or scheduled to be paid
during such period to (b) interest expense on indebtedness deducted in
determining net income for such period.
1.34 The term "Inventory" means and includes all present and future
inventory in which Borrower has any interest, including, but not limited to,
goods held by Borrower for sale or lease or to be furnished under a contract of
service and all of Borrower's present and future raw materials, work in process,
finished goods, and packaging, labelling, and shipping materials, wherever
located, and any documents of title representing any of the above.
1.35 The term "Judicial Officer or Assignee" means and includes any
trustee, receiver, controller, custodian, assignee for the benefit of creditors
or any other Person having powers or duties like or similar to the powers and
duties of a trustee, receiver, controller, custodian or assignee for the benefit
of creditors.
1.36 The term "Lender" means and refers to StanChart Business Credit, Inc.,
a Delaware corporation, with a place of business located at 477 Madison Avenue,
New York, New York 10022.
1.37 The term "Lender's Reference Rate" means the variable rate of
interest, per annum, most recently announced by Standard Chartered Bank, at its
Corporate Headquarters in New York, New York as the "Standard Chartered Bank
Reference Rate"; with the understanding that the "Standard Chartered Bank
Reference Rate" is one of Standard Chartered Bank's index rates and merely
serves as a basis upon which effective rates of interest are calculated for
loans making reference thereto and may not be the lowest or best rate at which
Standard Chartered
<PAGE>
Bank calculates interest or extends credit.
1.38 The term "Mandatory Prepayment" means a mandatory payment of $500,000
under the Term Note from Quality to Lender.
1.39 The term "MC" means Martin Chevalier.
1.40 The term "Mortgage" means all real property mortgages, leasehold
mortgages, assignments of leases, mortgage deeds, deeds of trust, deeds to
secure debt, security agreements, and other similar instruments hereafter
entered into which provide Lender a lien on or other interest in any portion of
the Real Estate Collateral or which relate to any such lien or interest. The
term "Mortgaged Premises" shall refer to the real property and improvements
owned by Quality in Tappahannock, Virginia.
1.41 The term "Negotiable Collateral" shall have the meaning set forth in
Section 4.1 of this Agreement.
1.42 The term "Obligations" means and includes any and all loans, advances,
overdrafts, debts, liabilities (including, without limitation, any and all
amounts charged to Borrower's account pursuant to any agreement authorizing
Lender to charge Borrower's account), obligations, lease payments, guaranties,
covenants and duties owing by Borrower to Lender of any kind and description
(whether advanced pursuant to or evidenced by this Agreement, any note or other
instrument, or any other agreement between Lender and Borrower, and whether or
not for the payment of money), whether direct or indirect, absolute or
contingent, due or to become due, now existing or hereafter arising, and
including, without limitation, (a) any debt, liability or obligation owing from
Borrower to others which Lender may have obtained by assignment or otherwise,
(b) all accrued but unpaid interest and all Expenses which Borrower is required
to pay or reimburse by this Agreement, by law, or otherwise, and (c) all
expenses incurred by the Lender to protect the value of the Collateral and
maximize the recovery of the Collateral in the event of a liquidation.
1.43 The term "Payment Account" means any special bank account (including,
without limitation, any blocked account or account associated with a lock box)
to which proceeds of Collateral, including, without limitation, payments on
Accounts and other payments from sales of Inventory or leases of property, are
credited.
1.44 The term "Pension Plan" means any pension plan as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") which is a multiemployer plan or a single employer plan as defined in
Section 4001 of ERISA and subject to Title IV of ERISA and which is: (a) a plan
maintained by Borrower, or Subsidiary; (b) a plan to which Borrower or
Subsidiary contributes or is required to contribute; (c) a plan to which
Borrower or Subsidiary was required to make contributions at any time during the
five (5) calendar years preceding the date of this Agreement; or (d) any other
plan with respect to which Borrower or Subsidiary has incurred or may incur
liability, including contingent liability, under Title IV of ERISA, either to
such plan or to the Pension Benefit Guaranty Corporation ("PBGC").
1.45 The term "Permitted Liens" means: (a) liens for taxes not yet payable
or
<PAGE>
being contested in good faith and by appropriate proceedings diligently pursued,
provided that the reserve or other appropriate provision, if any, required by
GAAP shall have been made therefor on the applicable Financial Statement and
that a stay of enforcement of any such lien is in effect; (b) deposits or
pledges to secure the payment of workmen's compensation, unemployment insurance,
old age pensions or other social security benefits or obligations; (c) deposits
or pledges to secure the performance of bids, tenders, contracts, leases, public
or statutory obligations, surety or appeal bonds, or other deposits or pledges
for purposes of a like general nature made or given in the ordinary course of
business and not in connection with the borrowing of money; (d) liens in favor
of Lender; (e) liens on the Real Estate Collateral described on Schedule A to
the title insurance commitments described in the definition of "Premises"; and
(f) liens described on Exhibit B.
1.46 The term "Person" means any individual, firm, partnership, corporation
or any other form of public, private or governmental entity or authority.
1.47 The term "Premises" means the land located in Tappahannock, Virginia,
as further described on Schedule A to Commitment for Title Insurance No. 90-30G
of Lawyers Title Insurance Company, together with all buildings, improvements,
and fixtures thereon and all tenements, hereditaments, and appurtenances
belonging or in any way appertaining thereto and which constitutes all of the
real property which Borrower uses or occupies or in which Borrower has any
interests.
1.48 The term "Purchase Documentation" means the Stock Purchase Agreement
of August 4, 1992 by and among Quality, as purchaser, and Calvin B. Andringa and
Patricia P. Andringa, as sellers (the "Sellers") and all other documents,
agreements and instruments executed in connection therewith.
1.49 The term "Pyramid" means Pyramid Ventures, Inc., a Delaware
corporation.
1.50 the term "Quality" means Quality Automotive Company, a Delaware
corporation.
1.51 The term "Rate" shall have the meaning set forth in Section 2.2 of
this Agreement.
1.52 The term "Real Estate Collateral" means all of the present and future
interests of Quality as owner, lessee, or otherwise, in the portion of the
Premises described in clause (a) of the definition of the Premises, including,
without limitation, any interest arising from an option to purchase or lease the
Premises or any portion thereof, if any.
1.53 The term "Restated Note" shall mean that certain Consolidated, Amended
and Restated Secured Promissory Term Note dated as of December 30, 1992 in the
principal amount of $1,795,243.32 from Quality and US Automotive to Lender.
1.54 The term "Settlement Agreement" means that certain Settlement
Agreement dated June 14, 1991 between Borrower, CBA, MC and Pyramid.
1.55 The term "Second Amendment" means that certain Second Amendment to
<PAGE>
Revolving Credit, Term Loan and Security Agreement dated December 3, 1991
between Borrower and Lender.
1.56 The term "Second Amendment Closing Date" means December 3, 1991.
1.57 The term "Subordinated Note" means that certain Subordinated Note
dated June 17, 1991 made by Borrower to CBA in the face amount of $600,000.
1.58 The term "Subsidiary" means any corporation of which more than 50% of
the outstanding stock having by its terms the ordinary voting power to elect a
majority of the board of directors, managers or trustees of such corporation is
at the time, directly or indirectly through one or more intermediaries, owned by
Borrower and/or one or more of its Subsidiaries, irrespective of whether or not,
at the time, stock of any other class or classes of such corporation shall have
or might have voting power by reason of the happening of any contingency. If at
any time, and only for so long as, Borrower has no Subsidiaries, provisions of
this Agreement which refer to Subsidiaries shall be of no force and effect
insofar as they pertain to Subsidiaries although they shall remain in full force
and effect as to all other Persons in question.
1.59 The term "Tangible Leverage" means, at any time, he proportion
represented by (x) the amount of Total Liabilities divided by (y) the Tangible
Net Worth.
1.60 The term "Tangible Net Worth" means, at any date, the total of common
stock, preferred stock, paid-in-cash capital and retained earnings, as increased
by stockholder liabilities subordinated to the Obligations and decreased by the
following: goodwill and organization expenses, and all other assets which
constitute intangible assets as determined in accordance with GAAP.
1.61 The term "Term Loan" means the aggregate Term Loan of $3,840,000 made
by Lender to the Borrower with an outstanding principal amount of $1,795,243.32
as of December 30, 1992.
1.62 The term "Term Note(s)" shall mean the Restated Note.
1.63 The term "Third Amendment Closing Date" means August 4, 1992.
1.64 The term "Total Liabilities" means, at any date, the aggregate amount
of all liabilities of Borrower at that date as determined in accordance with
GAAP, plus all indebtedness of other Persons secured by property of Borrower and
all reserves and deferred credits, minus liabilities subordinated to the
Obligations.
1.65 The term "Trademark Assignment" means the Collateral Assignment of
Trademarks (Security Agreement) dated as of the date of this Agreement between
Borrower and Lender, which further evidences Lender's security interests in
Borrower's trademarks, trademark applications, and goodwill.
1.66 The term "Undrawn Availability" shall have the meaning ascribed
thereto in Section 6.3 (n)(iv) of the Agreement.
<PAGE>
1.67 The term "US Automotive" means US Automotive Manufacturing, Inc., a
Delaware corporation.
2. LOANS AND TERMS OF PAYMENT
2.1 (a) Subject to the terms and provisions of this Agreement, including
without limitation, that no Event of Default has occurred and all other
conditions precedent to lending under Section 5 hereof have been satisfied, upon
the request of the Borrowing Agent, made at any time and from time to time
during the term hereof, Lender shall make revolving loans to Borrower
(hereinafter individually referred to as a "Revolving Loan" and collectively as
"Revolving Loans") so long as the aggregate amount of the Revolving Loans
outstanding at any time does not exceed the lesser of: (a) $7,500,000 and (b)
Revolving Loan Availability. For purposes hereof, "Revolving Loan Availability"
shall mean, at any time, the sum of the following:
(A) eighty-five percent (85%) multiplied by the face amount then
outstanding on existing Eligible Accounts at such time; plus
(B) the lesser of (i) Three Million Five Hundred Thousand Dollars
($3,500,000) and (ii) (x) forty-five percent (45%) of the value of Eligible
Raw Materials Inventory at such time plus (y) sixty percent (60%) of the
value of Eligible Finished Goods Inventory at such time (Inventory shall be
valued at the lower of cost or fair market value, on a FIFO basis, in
accordance with Generally Accepted Accounting Principles);
The amount of Eligible Accounts, Eligible Raw Materials Inventory and
Eligible finished Goods Inventory under this Section 2.1 shall be
determined after deduction of reserves consistent with the definitions of
such terms, and such other reserves, deductions or adjustments deemed
necessary by Lender in its reasonable credit judgment to reflect
out-of-pocket fees and costs and other items reimbursable to Lender under
this Agreement which have been incurred or are anticipated but not yet
paid, any breaches of the warranties, representations or covenants of
Borrower under this Agreement, or any Events of Default; provided that
Lender shall retain all of its other rights and remedies under this
Agreement.
Lender is hereby authorized to make the Revolving Loans provided for in
this Agreement based upon telephonic or other instructions received from
anyone purporting to be (and which Lender in good faith believes to be) an
authorized representative of Borrowing Agent, or at the discretion of
StanChart, if such Revolving Loans are necessary to satisfy any Obligation
of Borrower to Lender.
(b) Upon the satisfaction of the conditions set forth in Section 5, Lender
shall accept the Restated Note in substitution for the various term notes
presently evidencing the Term Loan, a copy of which is attached hereto as
Exhibit A-1. Borrower will repay the principal of and accrued interest on the
Term Loan as stated in the Term Note.
(c) (i) Lender shall make Capital
<PAGE>
Expenditure Loans ("Capital Expenditure Loans") to Borrower in an aggregate
amount not in excess of $500,000.
(ii) The following are conditions precedent to the making of each and
every Capital Expenditure Loan to Borrower:
(a) No Event of Default shall have occurred and be continuing;
(b) Borrowing Agent has provided Lender with five (5) business days'
prior written notice (the "Cap Ex Notice") of each request for a
Capital Expenditure Loan (each such loan, a "Drawdown") The Cap Ex
Notice shall describe in detail the Equipment which is the subject of
the Drawdown and shall be accompanied by all invoices, bills and all
other documentation available to Borrower relating to such Equipment
and Lender shall have determined that such Equipment constitutes
Eligible Equipment;
(c) each Drawdown shall be in an increment of at least $100,000 but
may not exceed an amount equal to 80% of the invoice price (exclusive
of all freight charges, packing costs, servicing fees and all other
associated "soft costs") of the Equipment which is the subject of the
Drawdown;
(d) Borrower shall have executed and delivered to Lender the Capital
Expenditure Note;
(e) All Warranties and Representations contained in Section 6 shall be
true and accurate on the date of and after giving effect to each
Drawdown;
(f) Lender shall have obtained a first priority security interest in
all Eligible Equipment; and
(g) Lender shall have received all third party waivers and consents
which it reasonably requires in connection with financing any Eligible
Equipment.
(iii) The Capital Expenditure Loan shall be evidenced by the Capital
Expenditure Note ("Capital Expenditure Note"), a copy of which is attached
hereto as Exhibit A-2. Each Drawdown shall be repayable by Borrower monthly
on the first day of each month commencing with the first day of the first
month following the day of such Drawdown in equal installments of one
twenty-fourth (1/24) of the amount of each such Drawdown. The outstanding
principal amount of all Drawdowns under the Capital Expenditure Loan shall
be due and payable on the earlier to occur of (a) March 28, 1995 or (b)
upon such earlier date of termination of this Agreement.
2.2 Except as provided below, all Obligations owed by Borrower to Lender
(except those Obligations evidenced by any note, by a rider to this Agreement,
or by any other
<PAGE>
agreement, any of which specifically provides for a rate of interest different
from that provided for herein) shall bear interest, on the Daily Balance owing,
at a rate per annum (the "Rate") of one and one-half (1-1/2%) percentage points
above the Lender's Reference Rate.
All Obligations owed by Borrower to Lender shall bear interest, from and
after the occurrence of an Event of Default under this Agreement and without
constituting a waiver of any such Event of Default, on the Daily Balance owing,
at a rate per annum of one (1%) percentage point above the Rate (the "Default
Rate"). All interest chargeable under this Agreement shall be computed on the
basis of a 360 day year for actual days elapsed.
The Lender's Reference Rate as of the date of this Agreement is six percent
(6%) per annum and accordingly the Rate in effect as of the date of this
Agreement, computed in the manner provided for herein and expressed in simple
interest terms, is seven and one-half percent (7-1/2%) per annum. In the event
that the Lender's Reference Rate is, from time to time hereafter, changed,
adjustment in the Rate shall be made on the effective date of such change in the
Lender's Reference Rate. The Rate, as adjusted, shall apply to all Obligations
owed on the date on which the adjustment is made and shall also apply to all
Obligations owed during the succeeding months until the Lender's Reference Rate
is adjusted again. If the interest collected should exceed the maximum amount
permitted by applicable law, such excess shall be deemed received on account of,
and shall automatically be applied to reduce, the principal balance of the
Obligations in the following order: first, the Obligations other than the
advances; and second, the advances. All interest payable by Borrower pursuant to
this Section 2.2 shall be due and payable on the last business day of each
calendar month during the term of this Agreement and Lender may, at its option,
charge such interest to Borrower's account with Lender as an advance.
In addition, on each of March 31, 1993 and March 31, 1994, Borrower shall
pay to Lender a facility fee of one-half (1/2%) percent of the sum of (i) the
amount of the total facility described in Section 2.1(a) and 2.1(b) hereof and
(ii) the outstanding balance due and owing to Lender under the Term Loan on such
date.
Borrower shall pay to Lender on each of September 25, 1993 and September
25, 1994, an Administrative Fee in the amount of $25,000 per annum.
2.3 Lender or Lender's designee may, at any time: notify customers or
account debtors of Borrower that the Accounts have been assigned to Lender and
that Lender has a security interest therein; collect Accounts directly, and
charge the collection costs and expenses to Borrower's account; but, unless and
until Lender does so or gives Borrower other written instructions, Borrower
shall collect all Accounts for Lender, receive in trust all payments thereon as
Lender's trustee, and immediately deliver such payments to Lender or deposit
them to a Payment Account, as Lender directs, in their original form as received
from the account debtor. The receipt of any check or other item of payment by
Lender or the depositing thereof to a Payment Account shall not be considered a
payment on account until such check or other item of payment is honored when
presented for payment, in which event, said check or other item of payment shall
be deemed to have been paid to Lender two (2) calendar days after the date
Lender actually receives possession of such check or other item of payment or
the date any such check or other item is deposited to a Payment Account.
2.4 If more than fifty percent (50%) of the aggregate amount of any
Accounts of
<PAGE>
an account debtor are not paid within the applicable time periods referred to in
Section 1.12, or if an account debtor disputes liability or makes any claim with
respect thereto to more than fifty percent (50%) of the aggregate amount of any
such Accounts, or if any Insolvency Proceeding is filed by or against an account
debtor, or if an account debtor becomes insolvent, fails or goes out of
business, then Lender may deem ineligible any and all Accounts owing by that
account debtor. Lender shall retain its security interest in all Accounts,
eligible and ineligible, until all Obligations have been fully repaid. Returns
and Allowances, if any, as between Borrower and its customers, will be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at this time. Borrower shall promptly notify Lender of all returns
and recoveries and promptly notify Lender of all disputes and claims. Whenever
an Event of Default exists hereunder, no discount (other than customary
discounts for prompt payment that are reflected on the applicable original
invoice), credit or allowance shall be granted by Borrower to any account debtor
and no return of merchandise shall be accepted by Borrower without Lender's
consent. Lender may, whenever an Event of Default exists, settle or adjust
disputes and claims directly with account debtors of Borrower for amounts and
upon terms which Lender considers advisable, and in such cases, Lender will
credit the account of Borrower with only the net amounts received by Lender in
payment of such disputed Accounts, after deducting all Expenses incurred or
expended in connection therewith.
2.5 Lender shall render monthly statements of the Obligations, including
statements of all principal, interest, and Expenses owing, and such statements
shall be conclusively presumed to be correct and accurate and constitute an
account stated between Borrower and Lender unless, within thirty (30) days after
receipt thereof by Borrower, Borrower shall deliver to Lender, by registered or
certified mail, at Lender's place of business indicated in Section 1.25
hereinabove, written objection thereto specifying the error or errors, if any,
contained in any such statement. If a timely written objection is given, only
the items to which objection is expressly made will be considered disputed by
Borrower.
3. TERM
3.1 The term of this Agreement, as amended, shall expire on March 31, 1995
(the "Term"). Thereafter the term of this Agreement shall be automatically
renewed for successive periods of one year, unless terminated by either Lender
or Borrower prior to its renewal. Notice of such termination shall be
effectuated by the mailing of a registered or certified letter of notice not
less than sixty (60) days prior to the effective date of such termination (which
date may only be the end of the Initial Term or the end of any renewal term),
addressed to the other party at its address set forth herein. Notwithstanding
the foregoing, upon the occurrence of an Event of Default, Lender may terminate
this Agreement without notice.
On the date of termination for any reason, all Obligations owed by Borrower
to Lender shall become immediately due and payable without notice or demand and
shall be repaid to Lender in cash or by a wire transfer of immediately available
funds. Notwithstanding termination, until all Obligations have been fully and
irrevocably repaid, Lender shall retain its security interest in all existing
Collateral and Collateral arising thereafter, and Borrower shall continue to
assign all Accounts to Lender and shall continue to immediately turn over to
Lender, in kind, all collections received respecting the Accounts.
3.2 Notwithstanding Section 3.1, Borrower may (a) at any time after
execution of
<PAGE>
this Agreement, on five (5) business days written notice prior to the end of any
month, prepay and terminate this Agreement by paying to Lender, in cash or by a
wire transfer of immediately available funds, all of the Obligations owed by
Borrower to Lender, together with a prepayment fee equal to:
Period of Prepayment During Percentage of Total Facility
--------------------------- ----------------------------
August 4, 1992 - March 31, 1993 2%
April 1, 1993 - March 31, 1994 1%
April 1, 1994 - March 31, 1995 0%
Notwithstanding the foregoing, in the event Borrower prepays the Restated Note
in whole or in part prior to expiration of the Term but not in conjunction with
any permanent reduction in the facilities described in Sections 2.1(a) and
2.1(b) hereof, no prepayment fee with respect to any such prepayment of the
Restated Note shall be payable to Lender hereunder.
(b) shall on the Second Amendment Closing Date by cash or wire transfer of
immediately available funds, make the Mandatory Prepayment.
3.3 After termination and when Lender has received payment in full of all
Obligations, Lender shall execute appropriate terminations of all security
agreements and security interests given by Borrower to Lender, upon the
execution and delivery of appropriate mutual releases.
4. CREATION OF SECURITY INTEREST.
4.1 Borrower hereby acknowledges and confirms that the Lender has and shall
continue to have a lien and security interest in all Collateral heretofore
granted by Borrower pursuant to the Original Loan Agreement and the Mortgage and
to the extent not otherwise granted thereunder, the Borrower, as collateral
security for the prompt and due payment and performance of the Obligations,
hereby assigns to the Lender and grants to the Lender a continuing lien on and
security interest in all of the property and any interests therein in which the
Borrower now has or may hereafter acquire any interest, whether real or
personal, tangible or intangible, now owned or existing or hereafter arising.
The liens and security interests of Lender in the Collateral shall be deemed to
be continuously perfected from the earliest date of the granting of such liens
and security interests, whether hereunder or under the Mortgage. Lender shall
have all of the rights of a secured party under the Code and any other
applicable law with respect to the Collateral. In the event that any Collateral,
including proceeds, is evidenced by or consists of a letter of credit, advice of
credit, instrument, money, negotiable documents, chattel paper, or similar
property (collectively, "Negotiable Collateral"), Borrower shall, immediately
upon receipt thereof, endorse and assign such Negotiable Collateral over to
Lender and deliver actual physical possession of the Negotiable Collateral to
Lender.
4.2 On a daily basis, Borrower shall provide Lender with schedules
describing all Accounts created or acquired by Borrower and shall execute and
deliver written assignments of such Accounts to Lender, whether or not Lender
makes advances against such Accounts;
<PAGE>
provided, however, that Borrower's failure to execute and deliver such schedules
and/or assignments shall not affect or limit Lender's security interest and
other rights in and to the Accounts. Together with each schedule, Borrower
shall, if requested by Lender, furnish Lender with copies of Borrower's sales
journals or invoices, customers' purchase orders, or the equivalent, credit
memos for returns and allowances, and original shipping or delivery receipts for
all merchandise sold, and Borrower warrants the genuineness thereof. Borrower
shall provide Lender with an aging of Accounts, in such detail as Lender
requests, on a monthly basis and at such other times as Lender requests.
4.3 Upon Lender's request, Borrower will: store the Inventory in a
warehouse in Lender's name, if an Event of Default exists; deliver to Lender
documents of title representing the Inventory; or evidence Lender's security
interests and liens in some other manner acceptable to Lender. Until the
occurrence of an Event of Default by Borrower under this Agreement or a default
under any other agreement between Borrower and Lender, Borrower may, subject to
the provisions hereof and consistent herewith, sell the Inventory, but only in
the ordinary course of Borrower's business. A sale of Inventory in Borrower's
ordinary course of business does not include an exchange or a transfer in
partial or total satisfaction of a debt owing by Borrower, nor does it include
an exchange for less than a present fair consideration.
4.4 Borrower shall keep and maintain all of its Equipment in good operating
condition and repair and make all necessary replacements thereto so that the
value and operating efficiency thereof shall at all times be maintained and
preserved. Borrower shall not permit any items of Equipment to become a fixture
to real estate or accession to other property and all Equipment shall at all
times remain and be personal property.
4.5 Borrower shall execute and deliver to Lender, concurrent with
Borrower's execution of this Agreement, and at any time or times hereafter at
the request of Lender, all financing statements, continuation statements,
fixture filings, security agreements, chattel mortgages, mortgages, assignments,
certificates of title and endorsements thereof or application therefor,
affidavits, reports, notices, schedules of accounts, letters of authority and
all other documents that Lender may reasonably request, in form satisfactory to
Lender, to perfect and maintain perfected Lender's security interests in and
liens on the Collateral and in order to consummate fully all of the transactions
contemplated under this Agreement. Borrower hereby irrevocably makes,
constitutes and appoints Lender (and any of Lender's officers, employees or
agents designated by Lender) as Borrower's true and lawful attorney with power
to sign the name of Borrower on any of the above-described documents or on any
other similar documents which need to be executed, recorded, and/or filed in
order to perfect or continue perfected Lender's security interests in and liens
on the Collateral.
Lender (through any of its officers, employees or agents) shall have the
right, at any time or times hereafter, during Borrower's usual business hours,
or during the usual business hours of any third party having control over the
records of Borrower, to inspect and verify Borrower's Books in order to verify
the amount or condition of, or any other matter relating to, the Collateral and
Borrower's financial condition. In addition, Borrower hereby appoints Lender
(and any of Lender's officers, employees, or agents designated by Lender) as
Borrower's attorneys, with power: to endorse Borrower's name on any checks,
notes, acceptances, money orders, drafts or other forms of payment or security
that may come into Lender's possession; sign Borrower's name on any invoice or
bill of lading relating to any Accounts, on drafts against
<PAGE>
account debtors, on schedules and assignments of Accounts, on verifications of
Accounts and on notices to account debtors; to notify the post office
authorities to change the address for delivery of Borrower's mail to an address
designated by Lender, to receive and open all mail addressed to Borrower, and to
retain all mail relating to the Collateral and forward all other mail to
Borrower; and to send, whether in writing or by telephone, requests for
verification of Accounts and to do all things necessary to carry out this
Agreement. Borrower ratifies and approves all acts of the attorney and neither
Lender nor its attorney will be liable for any acts or omissions or for any
error of judgment or mistake of fact or law made in good faith. The appointment
of Lender as Borrower's attorney, and each and every one of Lender's rights and
powers, being coupled with an interest, are irrevocable so long as any Accounts
in which Lender has a security interest remain unpaid and until all of the
Obligations have been fully repaid.
5. CONDITIONS PRECEDENT
As conditions precedent to the making of the loans and the extension of the
financial accommodations hereunder, and if same are applicable to Borrower, the
following requirements shall have been satisfied:
(a) Borrower shall have executed, or caused to be executed, and
delivered to Lender, in form and substance satisfactory to Lender and its
counsel, the following:
(i) Financing statements (Form UCC-l) in form satisfactory for
filing and recording with the appropriate governmental authorities;
(ii) Certified extracts from the minutes of the meeting of
Borrower's board of directors, authorizing the borrowings and the
granting of the security interests, mortgages and liens provided for
herein and authorizing specific officers to execute and deliver the
agreements provided for herein;
(iii) Certificates of corporate and tax good standing showing
that Borrower is duly incorporated and existing and in good standing
under the laws of the state of its incorporation, and certificates
indicating that Borrower has qualified to transact business and is in
good standing in each other state in which it conducts business;
(iv) The Trademark Assignment in form satisfactory for filing
with the United States Patent and Trademark Office;
(v) A bailee letter to each warehouse, processor, or other Person
other than Borrower who is or may be in possession of any Collateral
in accordance with Section 6.2(e);
(vi) A landlord's agreement with the lessor of any portions of
the Premises leased by Borrower and at which any Collateral is or may
be located, and a mortgagee's agreement with each holder of a mortgage
on such portions of the Premises;
(vii) Certificates of insurance for all policies of insurance
required by Section 6.8 and endorsements for all such policies in the
form required by Section 6.8;
<PAGE>
(viii) UCC-3 Continuation/Assignment Statements and other
instruments, in form satisfactory for filing and recording,
terminating all security interests and liens held by Citicorp in or on
Borrower's property;
(ix) UCC searches, tax lien and litigation searches, fictitious
business statement filings, notices, legal opinions, appraisals,
certificates of its officers, directors and stockholders and all other
documents which Lender may require, and in such form as Lender may
require, in order to reflect, perfect, or protect Lender's first
priority security interests in and liens on the Collateral and in
order to fully consummate all of the transactions contemplated under
this Agreement;
(b) Borrower's counsel shall execute a legal opinion in form satisfactory
to Lender's counsel that Borrower is a validly existing corporation under the
laws of the state of its incorporation, is duly authorized to do business in all
states where Borrower is doing business, is duly authorized to enter into this
Agreement and to execute all related documents and that Lender shall have a
valid perfected lien on all Collateral, except as is otherwise disclosed. The
officers and directors of Borrower shall represent and warrant that there is no
litigation or other conditions of which they have knowledge which may in any way
impair the value of the Collateral to the Lender, except as disclosed therein;
and
(c) All documents, instruments, certificates, corporate proceedings and all
legal matters in connection with the transactions contemplated by this Agreement
shall be satisfactory to Lender and its counsel.
6. WARRANTIES, REPRESENTATIONS AND COVENANTS
6.1 Borrower warrants, represents, covenants and agrees that:
(a) Borrower has good and marketable title to the Collateral; the
Accounts are and will, at all times pertinent hereto, be bona fide existing
obligations created by the sale and delivery of merchandise or the
rendition of services to account debtors in the ordinary course of
business, free of liens, claims, encumbrances and security interests
(except Permitted Liens) and unconditionally owed to Borrower without
defenses, disputes, offsets, counterclaims, or rights of return or
cancellation, and Borrower shall have received no notice of actual or
imminent bankruptcy or insolvency of any account debtor at the time an
Account due from such account debtor is assigned to Lender.
(b) At the time each Eligible Account is assigned to Lender, all
services to have been rendered in connection with such Account and all
property giving rise to such Account shall have been rendered or delivered
to the account debtor or to the agent of the account debtor for immediate
shipment to, and unconditional acceptance by, the account debtor. Borrower
shall deliver to Lender, Lender may from time to time require, delivery
receipts, customer's purchase orders, shipping instructions, bills of
lading and, any other evidence of shipping arrangements. Absent such a
request by Lender, copies of all such documentation shall be held by
Borrower as custodian for Lender.
(c) At the time each Eligible Account is assigned to Lender, all such
<PAGE>
Eligible Accounts will be due and payable in accordance with the terms set
forth in Section 1.12 of this Agreement, or on such other terms approved in
writing by Lender in advance of the creation of such Accounts, and such
terms shall be expressly set forth on the face of all invoices. No account
will be past due at the time it is assigned to Lender.
6.2 Borrower covenants and agrees that it shall keep the Inventory only at
the Premises, except for Inventory in transit to or from the Premises. In
addition, Borrower covenants and agrees that:
(a) All Inventory is now and at all times hereafter shall be of good
and merchantable quality, free from defects, except for Inventory that
Borrower rejects and is returning to the supplier thereof.
(b) On a monthly basis and at such other times as Lender requests,
Borrower shall execute and deliver to Lender designations of Inventory
specifying Borrower's cost and the market value of Borrower's raw
materials, work in process, and finished goods, and further specifying any
other category which Lender may request, as well as such other matters and
information relating to the Inventory as Lender may request. At least
annually, and at such other times as Lender requests because its field
audit, investigation, or other due diligence has produced reasonable
evidence of a significant question about Inventory reporting, Borrower
shall conduct a physical count of the Inventory, at which Lender may be
present, and shall provide promptly to Lender a written report of such
count.
(c) All of the Inventory is and shall remain free from all liens,
claims, encumbrances, and security interests (except Permitted Liens).
(d) Borrower now keeps and hereafter at all times shall keep correct
and accurate records itemizing and describing the kind, type, quality and
quantity of the Inventory, and its cost therefor, all of which records
shall be available upon demand to any of Lender's officers, agents and
employees for inspection and copying.
(e) The Inventory is not now and shall not at any time or times
hereafter be stored with a bailee, warehouseman, processor, or similar
party without Lender's prior written consent, and, in such event and prior
to any such storage, Borrower will: (i) notify such bailee, warehouseman,
processor, or similar party of Lender's security interest in such Inventory
and instruct such Person to hold all such Inventory for Lender's account
subject to Lender's instructions; and (ii) cause any such bailee,
warehouseman, processor, or similar party to issue and deliver to Lender,
in a form acceptable to Lender, warehouse receipts in Lender's name
evidencing the storage of the Inventory.
(f) Lender shall have the right, during Borrower's usual business
hours, to inspect and examine the Inventory and to check and test the same
as to quality, quantity, value and condition.
(g) Borrower has good and indefeasible title to all of its Equipment,
except Equipment leased as shown on Exhibit C.
(h) All Equipment is and will be free and clear of all liens, claims,
<PAGE>
encumbrances, and security interests (except Permitted Liens).
(i) The Equipment shall be kept only at the Premises (except for
vehicles and other mobile Equipment which need not be at such location when
in use, and except for products molds used by manufacturers of Borrower's
Inventory, but only if Borrower has given Lender prior written notice of
such manufacturer's name and location), and Lender shall have the right
upon demand, now and at all times hereafter, during Borrower's usual
business hours, to inspect and examine the Equipment.
(j) If at any time any Collateral is located at any premises leased or
subleased by Borrower, or if the owner or lessor or sublessor of such
premises, or any Person through whom any sublessor derives its rights
thereto, shall change, then Borrower shall obtain written agreements from
such Persons and any holders of mortgages on such premises, in form and
substance satisfactory to Lender, waiving all present and future liens
which such Persons may be entitled to assert against the Collateral,
granting to Lender the right to cure any default or condition which may
affect the Collateral or Borrower's right to occupy such premises, and
containing such other terms as Lender reasonably requests.
(k) All General Intangibles, Negotiable Collateral, and other
Collateral in addition to the Accounts, Inventory, and Equipment is and
will be free and clear of all liens, claims, encumbrances, and security
interests (except Permitted Liens).
(l) Title to the Mortgaged Premises is good and marketable, and there
are no mechanics' liens, environmental liens or any encumbrances of title
with respect to the Mortgaged Premises except for the Safeguard
Technologies and Citicorp deeds of trust and a deed of trust held by
Patrick J. Milmoe and Walter F. Witt for various individuals which is to be
assigned to Lender or discharged at the time of the borrowing hereunder.
Borrower shall maintain the Mortgaged Premises in good repair, free of
encumbrances and liens (other than Permitted Liens) and shall observe all
of the covenants of the Mortgage and any specifications thereof.
6.3 Borrower will not, without Lender's prior written consent:
(a) Other than in the ordinary course of Borrower's business, sell,
lease, or otherwise dispose of, move, relocate, or transfer, whether by
sale or otherwise, any of Borrower's assets;
(b) Change Borrower's name, business structure, or identity or add any
new fictitious name;
(c) Acquire, merge or consolidate with or into any other business
organization;
(d) Enter into any transaction not in the usual course of Borrower's
business;
(e) Guarantee or otherwise become in any way liable with respect to
the obligations of any third party, except by endorsement of instruments or
items of payment for
<PAGE>
deposit to the general account of Borrower or which are transmitted or
turned over to Lender, and except for guarantees in favor of Lender;
(f) Make any change in Borrower's financial structure or in any of its
business objectives, purposes, or operations which could materially
adversely affect the ability of Borrower to repay the Obligations;
(g) Incur any debts outside the ordinary course of Borrower's business
other than the Subordinated Note in form and substance satisfactory to
Lender and its counsel with the principal thereafter to be amortized over
three (3) years, which Subordinated Note shall be subordinate to Borrower's
obligations to Lender.
(h) Make any advance or loan except in the ordinary course of business
as presently conducted. Borrower may, however, lend or advance to any
employee, officer or director an amount up to $10,000. Notwithstanding the
foregoing, Borrower agrees that there shall not at any time during the Term
of this agreement, or any renewal thereof, be outstanding any such loans or
advances in excess of $50,000 in the aggregate;
(i) Prepay any indebtedness owing to any third party, other than up to
an aggregate of $10,000 annually to retire or reduce indebtedness with
respect to Equipment leases shown on Exhibit C;
(j) Pay total compensation, including salaries, withdrawals, fees,
bonuses, commissions, drawing accounts and other payments, whether directly
or indirectly, in money or otherwise, during any Fiscal Year to all of
Borrower's executives, officers, and directors (and any relatives thereof)
in an aggregate amount in excess of 115% of that which was received in the
prior Fiscal Year by any such individual; provided, however, Borrower may
make a $500,000 dividend payment to its shareholders on or after June 1,
1993 provided that at the time of making any such payment no Event of
Default has occurred and is continuing and if (i) at the time of making
such payment and after giving effect to such payment, Undrawn Availability
shall be at least $500,000 and (ii) Borrower has provided Lender with its
audited annual financial statement for Fiscal Year 1992 showing after tax
net income of Borrower of at least $1,000,000.
(k) Make any Capital Expenditures during any Fiscal Year in excess of
(i) $200,000 plus (ii) the amount of its depreciation as reflected in
Borrower's most recent annual financial statements delivered to Lender
pursuant to Section 6.10 of this Agreement ("Depreciation"), provided,
however, the aggregate amount of Capital Expenditures for the Fiscal Year
ending December 31, 1992 may be less than or equal to $750,000;
(l) Suspend or go out of business;
(m) Enforce the indemnity obligations of CBA under Sections 1 and 2 of
the Settlement Agreement by set-off against the Subordinated Note;
(n) make any payments under the Subordinated Note unless each and
every one of the following conditions have been satisfied:
(i) No Event of Default shall have occurred and be continuing
<PAGE>
under the Agreement or any other document executed in connection
therewith at the time of any payment under the Subordinated Note.
(ii) Lender shall have received for the 1990 Fiscal Year audited
financial statements of Borrower on a consolidating and consolidated
basis including, but not limited to, a long-form balance sheet and the
related statements of income, retained earnings and changes in cash
flow as reported on without qualification by independent certified
public accountants acceptable to Lender, all prepared in accordance
with GAAP, which financial statements shall show net income of
Borrower in excess of $1,000,000.
(iii) Prior to each payment under the Subordinated Note, Lender
shall have received the unaudited monthly financial statements of
Borrower, for the month immediately ending forty-five (45) days prior
to each such payment, on a consolidating and consolidated basis
including, but not limited to, a long-form balance sheet and related
statements of income, retained earnings and changes in cash flow.
(iv) At the time of any payment under the Subordinated Note,
"Undrawn Availability" shall be greater than the sum of (i) $250,000
plus (ii) the amount of any such payment. For the purposes of this
Section, "Undrawn Availability" shall mean the amount available to be
loaned to Quality under Section 2.1(a) of the Agreement minus the
aggregate balance of loans or advances outstanding under Section
2.1(a) of the Agreement on such date.
(v) At the time of any payment of principal under the
Subordinated Note, and after giving effect thereto, such payment shall
not be greater than an amount equal to (i) Borrower's net income
before extraordinary items plus (ii) depreciation and other non-cash
charges, minus the sum of (iii) all term debt amortization of Borrower
to Lender or any other financial institution, and (iv) all capital
expenditures of Borrower, and (v) all cash payments made by Borrower
to CBA for the Stock, and (vi) the amount of any such cash principal
payment under the Subordinated Note, and (vii) all payments or
distributions on any shares of Borrower's common stock or preferred
stock and (viii) any net losses sustained by Borrower, each as
reflected on a cumulative basis in the financial statements delivered
to Lender pursuant to Section 6.10 of the Agreement for the shorter of
the following periods: (I) the immediately preceding twenty-four month
period from the date of the most recent financial statements delivered
to Lender pursuant to Section 6.10 of the Agreement or (II) that
period beginning twelve months prior to the date of the most recent
audited year end financial statements delivered to Lender pursuant to
Section 6.10 of the Agreement and ending on the date of the most
recent monthly financial statement delivered to Lender pursuant to
Section 6.10 of the Agreement; provided, however, that Borrower's net
earnings shall be included in the foregoing calculations only to the
extent such net earnings are reflected on financial statements which
have been (a) reviewed by independent certified public accountants
satisfactory to Lender and are accompanied by a complete review report
(without variations from GAAP) issued by such independent certified
public accountants or (b) reported on without qualification by
independent certified public accountants satisfactory to Lender;
(o) Borrower shall not be permitted to pay MC a bonus for the Fiscal
Year ending December 31, 1991 in an amount in excess of the lesser of (a)
the sum of (i) five (5%) percent of net income of Borrower before taxes, as
reflected on Borrower's year end financial statements delivered to Lender
for the Fiscal Year ending December 31, 1991, on net
<PAGE>
income before taxes of $300,000 to $1,000,000 and (ii) ten (10%) percent on
such net income above $1,000,000, and (b) $150,000.
6.4 Borrower warrants, represents and covenants as follows:
(a) The chief executive office and principal place of business of
Borrower is at its address indicated in Section 1.3 hereinabove and
Borrower covenants and agrees that it will not, during the term of this
Agreement, without prior written notification to Lender, relocate its chief
executive office or principal place of business.
(b) Borrower is and at all times hereafter shall be a corporation duly
organized and validly existing and in good standing under the laws of the
state of its incorporation and is and at all times hereafter shall be
qualified and licensed to do business, and in good standing, in each other
state in which it conducts its business.
(c) Borrower has the right and power and is duly authorized to enter
into this Agreement.
(d) The execution by Borrower of this Agreement does not constitute a
breach of any provision contained in Borrower's Certificate or Articles of
Incorporation or By-Laws, nor does it constitute an event of default under
any agreement to which Borrower is now or hereafter becomes a party.
(e) Borrower will not, without Lender's prior written consent, make
any distribution or declare or pay any dividends (in cash or stock) on, or
purchase, acquire, redeem or retire any of its capital stock, of any class,
whether now or hereafter outstanding. In addition, Borrower will not,
without Lender's prior written consent, make a distribution/transfer of any
kind to Borrower's parent, Automotive Holdings, Inc. or to Automotive
Investment, Inc.
(f) Borrower is now, and shall at all times be, in compliance with
each law, statute, regulation, ordinance, judgment, order, and decree
(collectively called "laws") applicable to it, including, without
limitation, securities laws, environmental laws, zoning laws, tax laws,
patent and copyright laws, labor laws, pension benefit laws, health laws,
business corporation laws and all other laws affecting the operation of the
Borrowers business and its credit worthiness.
(g) Borrower has no counterclaims, offsets or defenses with respect to
any of its existing Obligations to Safeguard Technologies, Citicorp or to
any other currently existing mortgagees of the Premises, and the liens of
Safeguard Technologies are valid secured purchase first purchase money
liens on the items of property secured by each lien, and Borrower has not
created any liens or encumbrances on such property superior to the lien
held by Safeguard Technologies.
6.5 Borrower shall promptly notify Lender in writing of its acquisition by
purchase, lease or otherwise of any after- acquired tangible property having
cost to Borrower in excess of $50,000, with the exception of purchases of
Inventory in the ordinary course of business. Borrower shall supply Lender on a
monthly basis with a listing of all acquisitions as aforesaid.
<PAGE>
6.6 All assessments and taxes, whether real, personal or otherwise, due or
payable by, or imposed, levied or assessed against, Borrower or Borrower's
property have been paid, and shall hereafter be paid in full, before
delinquency. Borrower shall make due and timely payment or deposit of all
federal, state and local taxes, assessments or contributions required of it by
law, and will execute and deliver to Lender, on demand, appropriate certificate
attesting to the payment or deposit thereof. Borrower will make timely payment
or deposit of all F.I.C.A. payments and withholding taxes required of it by
applicable law, and will upon request, furnish Lender with proof satisfactory to
it that Borrower has made such payments or deposits. If Borrower fails to pay
any such assessment, tax, contribution, or make such deposit, or furnish the
required proof, Lender may, in its sole and absolute discretion and without
notice to Borrower, (i) make payment of the same or any part thereof, or (il)
set up such reserves in Borrower's account as Lender deems necessary to satisfy
the future liability therefor, or both. Lender may conclusively rely on the
usual statements of the amount owing or other official statements issued by the
appropriate governmental agency. Each amount paid or deposited by Lender shall
constitute Expenses and an advance to Borrower. Nothing herein contained shall
preclude Borrower from contesting, in good faith and by appropriate proceedings
diligently pursued, the imposition of any assessments and taxes and to withhold
payment of such contested amounts pending the resolution of such Proceedings.
6.7 There are no actions or proceedings pending by or against Borrower
before any court or administrative agency and Borrower has no knowledge of any
pending, threatened or imminent litigation, governmental investigations or
claims, complaints, actions or prosecutions involving Borrower, except for
ongoing collection matters. If any of the foregoing arise during the term of
this Agreement, Borrower shall immediately notify Lender in writing.
6.8 Borrower, at its expense, shall keep and maintain all Inventory and
Equipment insured against loss or damage by fire, theft, explosion, sprinklers
and all other hazards and risks ordinarily insured against by other owners who
use such kinds of properties in similar businesses for the full insurable value
thereof. Borrower shall also keep and maintain business interruption insurance
and public liability and property damage insurance relating to Borrower's
ownership and use of the Inventory, Equipment and its other assets. All such
policies of insurance shall be in such form, with such companies, and in such
amounts as may be satisfactory to Lender. Borrower shall deliver to Lender
certified copies of such policies of insurance and evidence of the payments of
all premiums therefor. All such policies of insurance (except those of public
liability and property damage) shall contain an endorsement in a form
satisfactory to Lender showing Lender as a secured party and loss payee thereof,
with a waiver of warranties, and all proceeds payable thereunder shall be
payable to Lender and, upon receipt by Lender, shall be applied on account of
the Obligations owing to Lender. To secure the payment of the Obligations,
Borrower grants Lender a security interest in and to all such polices of
insurance (except those of public liability and property damage) and the
proceeds thereof, and Borrower shall direct all insurers under such polices of
insurance to pay all proceeds thereof directly to Lender. Lender agrees that, if
no Event of Default exists, then, in the case of an insurance claim of less than
$10,000 from one loss or a related series of losses: Borrower may adjust and
settle such claim after prior notice to Lender; and Lender will deliver the
proceeds of such claim, when received, to Borrower for the purpose of replacing
or restoring the property involved in such loss.
<PAGE>
Borrower hereby irrevocably appoints Lender (and any of Lender's officers,
employees or agents designated by Lender) as Borrower's attorney for the purpose
of making, settling or adjusting claims under such polices of insurance,
endorsing the name of Borrower on any check, draft, instrument or other item of
payment for the proceeds of such policies of insurance and for making all
determinations and decisions with respect to such policies of insurance.
Borrower will not cancel any of such policies without Lender's prior written
consent. Each such insurer shall agree by endorsement upon the policy or
policies of insurance issued by it to Borrower as required above, or by
independent instruments furnished to Lender, that it will give Lender at least
thirty (30) days written notice before any such policy or policies of insurance
shall be altered or cancelled, and that no act or default of Borrower, or any
other Person, shall affect the right of Lender to recover under such policy or
policies of insurance required above or to pay any premium in whole or in part
relating thereto. Lender, without waiving or releasing any Obligations or any
Event of Default, may, but shall have no obligation to, obtain and maintain such
policies of insurance and pay such Premiums and take any other action with
respect to such policies which Lender deems advisable. All sums so disbursed by
Lender, as well as reasonable attorneys' fees, court costs, expenses and other
charges relating thereto, shall constitute Expenses and are payable on demand.
6.9 All financial statements and information relating to Borrower which
have been or may hereafter be delivered by Borrower to Lender are true and
correct and have been prepared in accordance with GAAP and there has been no
material present or potential adverse change in the financial condition of
Borrower since the submission of such financial information to Lender.
6.10 Borrower at all times hereafter shall maintain a standard and modern
system of accounting in accordance with GAAP with ledger and account cards
and/or computer tapes, discs, printouts, and records pertaining to the
Collateral which contain information as may from time to time be requested by
Lender. Borrower shall not modify or change its method of accounting or enter
into, modify, or terminate any agreement presently existing, or at any time
hereafter entered into with any third party accounting firm and/or service
bureau for the preparation and/or storage of Borrower's accounting records
without the prior written consent of Lender and without such accounting firm
and/or service bureau agreeing to provide to Lender information regarding the
Collateral and Borrower's financial condition. Borrower agrees to permit Lender
and any of its employees, officers or agents, upon demand, during Borrower's
usual business hours, or the usual business hours of third parties having
control thereof, to have access to and examine all of Borrower's Books relating
to the Collateral, the Obligations, Borrower's financial condition and the
results of Borrower's operations, and, in connection therewith, to permit Lender
or any of its agents, employees or officers to copy and make extracts therefrom.
Borrower agrees to deliver to Lender within thirty (30) days after the end
of each month, unaudited consolidated and consolidating balance sheets and
profit and loss statements covering Borrower's results of operations for such
period and financial condition as at the end thereof, and agrees to deliver to
Lender within one hundred and twenty (120) days after the end of each Fiscal
Year, an audited statement of the consolidated and consolidating financial
condition and results of operations of Borrower for each such Fiscal Year as
certified by independent certified public accountants acceptable to Lender,
including, but not limited to, a long-form balance sheet and profit and loss
statement, all prepared in accordance with GAAP,
<PAGE>
except, in the case of interim Financial Statements only, for year-end audit
adjustments. The annual audited Financial Statements shall be accompanied by the
accountants' management letter addressed to Borrower. Borrower agrees to deliver
any other report reasonably requested by Lender relating to the Collateral and
the financial condition of Borrower. All Financial Statements shall be
accompanied by a certificate signed by the Chief Financial Officer or other
financial officer of Borrower acceptable to Lender, to the effect that: all
reports, statements, computer disc or tape files, printouts, runs, or other
computer-prepared information of any kind or nature relating to the foregoing,
and all documents delivered or caused to be delivered to Lender under this
subsection, are complete, correct, and thoroughly present the financial
condition of Borrower; and there exists on the date of delivery to Lender no
condition or event which constitutes a breach or Event of Default under this
Agreement.
Borrower agrees to deliver to Lender, no sooner than ninety (90) days and
no less than thirty (30) days prior to the beginning of each Fiscal Year,
consolidated and consolidating projected balance sheets, statements of income
and expense, and statements of cash flow for Borrower as at the end of and for
each month of such Fiscal Year.
6.11 Borrower shall promptly supply Lender with such other information
concerning its affairs as Lender may request from time to time hereafter, and
shall promptly notify Lender of any material adverse change in Borrower's
financial condition and of any condition or event which constitutes a breach of,
or an event which constitutes an Event of Default under, this Agreement.
6.12 Borrower is now and shall be at all times hereafter solvent and able
to pay its debts (including trade debts) as they mature.
6.13 Borrower shall maintain at all times on a consolidated basis a
Tangible Net Worth of not less than (a) $4,333,000 minus (b) payments made each
quarter on the Subordinated Note minus (c) for Fiscal Year 1992 $1,050,000 in
connection with payments made under the Purchase Documentation. The minimum
Tangible Net Worth provided for herein shall be increased, effective as of the
close of each fiscal quarter of Borrower beginning with the fiscal quarter
ending March 31, 1992 by an amount equal to ninety percent (90%) of Borrower's
net after tax profit (but not decreased for losses) for the fiscal period then
ending.
6.14 Borrower shall, maintain on a consolidated basis a Tangible Leverage
of not more than (i) 3.0 to 1.0 at all times during Fiscal Year 1992, (ii) 2.75
to 1.0 at all times during Fiscal Year 1993 and (iii) 2.5 to 1.0 at all times
subsequent to December 31, 1993.
6.15 Borrower shall, maintain on a consolidated basis as at the end of each
calendar month a Debt Service Coverage Ratio of not less than 1.25 to 1 which
shall be calculated on a rolling twelve month basis.
6.16 Borrower shall, maintain on a consolidated basis a Current Ratio of
not less than 1.9 to 1 at all times subsequent to December 31, 1991.
6.17 Borrower shall, at all times maintain on a consolidated basis an
Interest Coverage Ratio of not less than 1.25 to 1, which shall be calculated on
a rolling twelve month basis.
<PAGE>
6.18 Intentionally Deleted.
6.19 Should Borrower incur any indebtedness (other than indebtedness
incurred for purchases of equipment, supplies, raw materials, or other similar
items incurred in the ordinary course of business) and after the date of this
Agreement, same must be fully subordinated to that of the Lender. In addition,
any such indebtedness (other than indebtedness incurred for purchases of
equipment, supplies, raw materials, or other similar items incurred in the
ordinary course of business) shall be evidenced by a subordination agreement or
other evidence of subordination in form satisfactory to Lender and its counsel.
6.20 Borrower shall immediately and without demand, reimburse Lender for
all sums expended by Lender which constitute Expenses. Lender may immediately
and without notice charge Borrower's account for Expenses and Borrower hereby
authorizes and approves all advances and payments by Lender for items
constituting Expenses.
6.21 Borrower is not now nor has it ever been a participant in, nor does it
now or in the past has it in any way provided or maintained any deferred
compensation plan for the benefit of Borrower's employees nor is it now or in
the past has it been a participant in a Pension Plan. Borrower does not have any
withdrawal liability, including contingent withdrawal liability, to any Pension
Plan; Borrower does not have any liability to the PBGC other than for required
insurance premiums, which have been paid when due; no Pension Plan has an
"accumulated funding deficiency", as defined in Section 302 of ERISA or in
Section 412 of the Internal Revenue Code; each Pension Plan is in substantial
compliance with ERISA; and Borrower has not received any notice asserting that a
Pension Plan is not in compliance with ERISA. Borrower shall cause each Pension
Plan to be qualified within the meaning of Section 401(a) of the Internal
Revenue Code and to be administered in all respects in compliance with ERISA and
the Internal Revenue Code.
6.22 Other than Vireco, Inc., Borrower has no Subsidiaries at the date
hereof. Borrower will not create any additional Subsidiaries without Lender's
prior written consent. Notwithstanding the foregoing, it is understood that US
Automotive is a wholly owned subsidiary of Quality.
6.23 The Borrower to the best of its knowledge represents, warrants and
covenants that the Premises are and Borrower will use its best efforts to cause
the Premises to remain in full compliance with any and all applicable laws,
rules, regulations or orders of OSHA or the EPA. During the Term and any renewal
thereof, should there be any costs associated with the removal of violations to,
or cleanup of the Premises, then Lender shall establish a full reserve from
those funds available to Borrower hereunder. Borrower must immediately notify
Lender of any problems arising from non-compliance as aforesaid. Failure to
promptly notify Lender of any material problem shall be deemed a material breach
of this Agreement.
6.24 Each warranty, representation and agreement contained in this
Agreement shall be automatically deemed repeated with each advance and shall be
conclusively presumed to have been relied on by Lender regardless of any
investigation made or information possessed by Lender. The warranties,
representations and agreements set forth herein shall be cumulative and in
addition to any and all other warranties, representations and agreements which
Borrower shall
<PAGE>
give, or cause to be given, to Lender, either now or hereafter.
7. EVENTS OF DEFAULT
Any one of the following shall constitute a default by the Borrower under
this Agreement. Should there be no provision hereunder for a cure period, then
such default shall be deemed to be an Event of Default by Borrower under this
Agreement. If Borrower is permitted and allowed a period of time within which to
cure the default, and if after such period having elapsed, the Borrower has
failed to cure, then the default shall immediately be deemed to be an Event of
Default hereunder. If there is a non-monetary default hereunder then the cure
period shall commence to run upon service of a notice of such default by Lender.
7.1 If Borrower fails to pay when due and payable or when declared due and
payable, all or any portion of the Obligations owing to Lender (whether of
principal, interest, reimbursement of Expenses, or otherwise). However, other
than interest payments on the Term Loan, Borrower will be allowed a cure period
of two (2) days;
7.2 If Borrower fails or neglects to perform, keep or observe any term,
provision, condition, covenant, agreement, warranty or representation contained
in this Agreement or any of the Collateral Documents, or any other present or
future agreement to which Borrower and Lender are party. Borrower shall have ten
(10) days to cure such default;
7.3 if any representation, statement, report, or certificate made or
delivered by Borrower or any of its officers, employees or agents, to Lender is
intentionally untrue or incorrect in any material respect. Notwithstanding the
foregoing, should any such action on behalf of Borrower be unintentional, then
Borrower shall have ten (10) days to cure such default;
7.4 If there is a material impairment of the prospect of repayment of all
or any portion of the Obligations owing to Lender or a material impairment of
the value of, or priority of Lender's security interests in and liens on, the
Collateral, Borrower shall have two (2) days to cure such default;
7.5 If all or any of Borrower's assets in excess of $25,000 in the
aggregate in any single fiscal year are attached, seized, subjected to a writ or
distress warrant, or are levied upon, or come into the possession of any
Judicial Officer or Assignee. Borrower shall have thirty (30) days to cure such
default;
7.6 If an Insolvency Proceeding is commenced by Borrower;
7.7 Only if Lender is immediately notified of an Insolvency Proceeding
commenced against Borrower, then Borrower shall have thirty (30) days after
commencement of said proceeding to cure such default;
7.8 If Borrower is enjoined, restrained or in any way prevented by court
order from continuing to conduct all or any material part of its business
affairs. Borrower shall have ten (10) days to cure such default;
7.9 If a notice of lien, levy or assessment is filed of record with respect
to any or
<PAGE>
all of Borrower's assets by the United States Government, or any department,
agency or instrumentality thereof, or by any state, county, municipal or other
governmental agency, or if any taxes or debts owing at any time hereafter to any
one or more of such entities becomes a lien, whether choate or otherwise, upon
any or all of Borrower's assets and the same is not paid on the payment date
thereof, unless such lien, levy or assessment is being contested by Borrower by
appropriate proceedings diligently pursued and enforcement thereof has been
stayed. Should Borrower fail to act as aforesaid, then under such circumstances
Borrower shall have ten (10) days to cure such default;
7.10 If any judgment(s) or other claim(s) (either individually or in the
aggregate exceeding the sum of $50,000 in any single Fiscal Year) becomes a lien
or encumbrance upon any or all of Borrower's assets. Borrower shall have thirty
(30) days to cure such default;
7.11 If there is a default (in excess of $100,000) in any material
agreement to which Borrower is a party with third parties beyond the period of
grace provided therein, resulting in a right by such third parties to accelerate
the maturity of Borrower's indebtedness. Borrower shall have ten (10) days to
cure such default;
7.12 If any material misrepresentation exists now or hereafter in any
warranty or representation made to Lender by any officer of Borrower, or if any
such warranty or representation is withdrawn by any officer. Notwithstanding the
foregoing, should any such action on behalf of Borrower be unintentional, then
Borrower shall have ten (10) days to cure such default;
7.13 If there is a violation (with respect to the Premises) under EPA or
OSHA and same is not cured within thirty (30) days after notification to Lender,
any funds reserved by Lender (under Section 6.23) shall remain in place during
the cure period;
7.14 If an Event of Default under and as defined in the Term Note or the
Capital Expenditure Note shall occur;
7.15 If CBA or MC fails to resolve and settle any damages and costs (the
"Liabilities") resulting from the liabilities of AIC assumed by Quality as a
result of the Mergers (as defined in the Settlement Agreement) within sixty (60)
days of Quality's incurrence of any such Liabilities;
7.16 If a default occurs under the Subordinated Note which default is not
cured or waived within any applicable grace period and for which the holder of
the Subordinated Note is permitted to take action pursuant to the terms thereof;
7.17 If Borrower fails to enter into an amendment to the Agreement, in form
and substance satisfactory to Lender and its counsel, amending the existing
financial covenants contained in Sections 6.13, 6.14, 6.15, 6.16, 6.17 and 6.18
of the Agreement.
8. LENDER'S RIGHTS AND REMEDIES
8.1 Upon the occurrence of any Event of Default by Borrower under this
<PAGE>
Agreement, Lender may, at its election, without notice of its election to and
without demand upon Borrower, do any one or more of the following, all of which
are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement or
otherwise, immediately due and payable;
(b) Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement, or any other agreement to which Borrower and
Lender are party;
(c) Terminate this Agreement as to any future liability or obligation
of Lender, but without affecting Lender's rights, security interests, and
liens in, on and to the Collateral and without affecting the Obligations
owing by Borrower to Lender;
(d) Make such payments and do such acts as Lender considers necessary
or reasonable to protect its security interest in the Collateral. Borrower
agrees to assemble the Collateral if Lender so requires, and to make the
Collateral available to Lender as Lender may designate. Borrower authorizes
Lender to enter the premises where the Collateral is located, take and
maintain possession of the Collateral, or any part of it, and to pay,
purchase, contest or compromise any encumbrance, charge or lien which in
the opinion of Lender appears to be prior or superior to its security
interests and liens and to pay all expenses incurred in connection
therewith;
(e) To the extent, if any, that the same do not constitute Collateral,
Lender is hereby granted a license or other right to use, without charge,
all of Borrower's labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in
completing production of, advertising for sale and selling any Collateral,
and Borrower's rights under all licenses and all franchise agreements shall
inure to Lender's benefit;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale and sell (in the manner provided for herein)
the Collateral;
(g) ell the Collateral at either public or private sales, or both, by
way of one or more contracts or transactions, for cash or on terms, in such
manner and at such places (including the Premises) as is commercially
reasonable in the opinion of Lender. It is not necessary that the
Collateral be present at any such sale;
(h) Lender shall give notice of the disposition of the Collateral as
follows:
(i) Lender shall give Borrower and each holder of a security
interest in the Collateral who has filed with Lender a written request
for notice, a notice in writing of the time and place of public sale,
or, if the sale is a private sale or some other disposition other than
a public sale is to be made of the Collateral, the time on or after
which the private sale or other disposition is to be made;
(ii) The notice shall be personally delivered or mailed, postage
prepaid, to Borrower as provided in Section 11 of this Agreement, at
least five (5) calendar days
<PAGE>
before the date fixed for the sale, or at least five (5) calendar days
before the date on or after which the private sale or other
disposition is be made, unless the Collateral is perishable or
threatens to decline speedily in value. Notice to Persons other than
Borrower claiming an interest in the Collateral shall be sent to such
addresses as they have furnished to Lender;
(iii) If the sale is to be a public sale, Lender shall also give
notice of the time and place by publishing a notice one time at least
five (5) calendar days before the date of the sale in a newspaper of
general circulation in the county in which the sale is to be held;
(i) Lender may bid (by credit bidding, bidding or bidding in any way
permitted by applicable law) and purchase at any public sale;
(j) Borrower shall pay all Expenses incurred in connection with
Lender's enforcement and exercise of any of its rights and remedies as
herein provided, whether or not suit is commenced by Lender; and
(k) Any deficiency which exists after disposition of the Collateral as
provided above will be paid immediately by Borrower. Any excess will be
returned, without interest and subject to the rights of third parties, to
Borrower by Lender.
8.2 Lender's rights and remedies under this Agreement and all other
agreements shall be cumulative. Lender shall have all other rights and remedies
not inconsistent herewith as provided under the Code, by law, or in equity. No
exercise by Lender of one right or remedy shall be deemed an election, and no
waiver by Lender of any default on Borrower's part shall be deemed a continuing
waiver. No delay by Lender shall constitute a waiver, election or acquiescence
by it.
9. EXPENSES REGARDING THE COLLATERAL
If Borrower fails to pay promptly when due to any other Person or entity,
monies which Borrower is required to pay by reason of any provision in this
Agreement, Lender may, but need not, pay the same and charge Borrower's account
therefor, and Borrower shall promptly reimburse Lender. All such sums shall
become additional Obligations owing to Lender, shall bear interest at the Rate
hereinabove provided, and shall be secured by the Collateral. Any payments made
by Lender shall not constitute: (a) an agreement by Lender to make similar
payments in the future, or (b) a waiver by Lender of any Event of Default under
this Agreement. Lender need not inquire as to, or contest the validity of, any
such expense, tax, security interest, encumbrance or lien and the receipt of the
usual official notice for the payment thereof shall be conclusive evidence that
the same was validly due and owing.
10. WAIVERS
10.1 Borrower waives the right to direct the application of any and all
payments at any time or times hereafter received by Lender on account of any
Obligations owed by Borrower to Lender and Borrower agrees that Lender shall
have the continuing exclusive right to apply and reapply such payments in any
manner as Lender may deem advisable, notwithstanding any entry by Lender upon
its books.
<PAGE>
10.2 Borrower waives demand, protest, notice of protest, notice of default
or dishonor, notice of payment and nonpayment, notice of any default, nonpayment
at maturity, release, compromise, settlement, extension or renewal of any or all
Collateral or guarantees at any time held by Lender on which Borrower may in any
way be liable.
10.3 Lender shall not in any way or manner be liable or responsible for:
(a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring
or arising in any manner or fashion from any cause; (c) any diminution in the
value thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency or other Person whomsoever. All risk of loss, damage or
destruction of the Collateral shall be borne by Borrower.
10.4 Borrower waives the right of and the right to assert a confidential
relationship, if any, it may have with any accounting firm and/or service bureau
in connection with any information reasonably requested by Lender pursuant to or
in accordance with this Agreement, and agrees that Lender after reasonable
notice to Borrower, may contact directly any such accounting firm and/or service
bureau in order to obtain such information.
10.5 EACH OF LENDER AND BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY
LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF,
THIS AGREEMENT, THE OTHER COLLATERAL DOCUMENTS, THE OBLIGATIONS OR THE
COLLATERAL, OR ANY INSTRUMENT OR DOCUMENT, DELIVERED PURSUANT HERETO OR THERETO,
OR ANY OTHER CLAIM OR DISPUTE, HOWSOEVER ARISING, BETWEEN BORROWER AND LENDER.
THIS WAIVER IS INFORMED AND FREELY MADE.
11. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement shall be in writing and sent by personal
delivery against receipt therefor or by certified mail, return receipt requested
to the following addresses, or to such other addresses as Borrower or Lender may
from time to time specify to the other in writing:
if to the Borrower: QUALITY AUTOMOTIVE COMPANY
US AUTOMOTIVE MANUFACTURING, INC.
Airport Road
Tappahannock, VA 22560
Attn: Martin Chevalier
with a copy to: THE ASHTON GROUP
Suite 145 Plaza
1025 Thomas Jefferson Street, NW
Washington, DC 20007
Attn: Calvin Andringa, Esq.
and: RAMKO VENTURE MANAGEMENT
200 Madison Avenue, 2d Floor
New York, New York 10016
Attn: John Kohut
<PAGE>
and ELLIOTT, VANASKIE & RILEY
1225 I Street, N.W.
Suite 400
Washington, D.C. 20005
Attn: Michael Paige, Esq.
if to the Lender: STANCHART BUSINESS CREDIT, INC.
477 Madison Avenue
New York, New York 10022
Attn:
with a copy to: HAHN & HESSEN
350 Fifth Avenue
New York, New York 10118
Attn: Daniel J. Krauss, Esq.
12. DESTRUCTION OF BORROWER'S DOCUMENTS
Any documents, schedules, invoices or other papers delivered to Lender, may
be destroyed or otherwise disposed of by Lender six (6) months after they are
delivered to or received by Lender, unless Borrower requests, in writing, the
return of such documents, schedules, invoices or other papers and makes
arrangements, at Borrower's expense, for their return.
13. CHOICE OF LAW AND VENUE
This Agreement and the Collateral Documents (except to the extent, if any,
otherwise provided therein) shall be governed by, construed, applied and
enforced in accordance with the laws of the State of New York, including,
without limitation, the Code, except that no doctrine of choice of law shall be
used to apply any law other than that of New York, and no defense, counterclaim
or right of set-off given or allowed by the laws of any other state or
jurisdiction, or arising out of the enactment, modification or repeal of any
law, regulation, ordinance or decree of any foreign jurisdiction, shall be
interposed in any action hereon. Borrower agrees that, in addition to any other
courts that may have jurisdiction under applicable laws or rules, any action or
proceeding to enforce or arising out of this Agreement or any of the Collateral
Documents may be commenced in the Supreme Court of the State of New York for New
York County, or in the United States District Court for the Southern District of
New York. Borrower consents and submits in advance to such jurisdiction, agrees
that venue will be proper in such courts on any such matter, and waives any
right to assert the doctrine of forum non conveniens or to object to such venue.
Borrower hereby waives personal service of process and agrees that a summons and
complaint commencing an action or proceeding in any such court shall be properly
served and shall confer personal jurisdiction if served by registered or
certified mail to the Borrower, or as otherwise provided by the laws of the
State of New York or the United States. Should Borrower fail to appear or answer
any summons, complaint, process or papers so served within thirty (30) days
after the mailing or other service thereof, it shall be deemed in default and an
order or judgment may be entered against it as demanded or prayed for
<PAGE>
in such summons, complaint, process or papers. The choice of forum set forth in
this section shall not be deemed to preclude the enforcement of any judgment
obtained in such forum, or the taking of any action under this Agreement to
enforce the same in any appropriate jurisdiction.
14. BORROWING AGENCY PROVISIONS.
14.1 Appointment (a) Each Borrower hereby irrevocably designates Borrowing
Agent as its attorney and agent to borrow, sign and endorse notes, and execute
and deliver all instruments, documents, writings and further assurances now or
hereafter required hereunder, on behalf of each Borrower, and does hereby
authorize Lender to pay over or credit all loan proceeds hereunder in accordance
with the advance request made by Borrowing Agent.
(b) It is understood and agreed by each Borrower that the handling of this
credit facility in the manner set forth in this Agreement is solely as an
accommodation to Borrower and at their request, and that Lender shall incur no
liability to either Borrower as a result thereof. To induce Lender to do so and
in consideration thereof, each Borrower hereby agrees to indemnify Lender and to
hold Lender harmless from and against any and all liabilities, expenses, losses,
damages and claims of damage or injury asserted against Lender by any Person
arising from or incurred by reason of Lender's handling of the financing
arrangements of the Borrower with respect to this Section 14.1, reliance by
Lender on any request or instruction from Borrowing Agent or any other action
taken by Lender with respect to this Section 14.1 except due to the gross (not
mere) negligence or willful misconduct by Lender.
(c) Each Borrower represents and warrants to Lender that (i) each Borrower
has one or more common shareholders, directors and officers, (ii) the businesses
and corporate activities of the other Borrower are closely related to, and
substantially benefit, the business and corporate activities of such Borrower,
(iii) the financial and other operations of the Borrowers are performed on a
combined basis as if the Borrowers constituted a consolidated corporate group,
(iv) such Borrower has received substantial economic benefit from entering into
this Agreement and shall receive substantial economic benefit from the
application of all loans hereunder, in each case whether or not such amount is
used directly by such Borrower, and (v) all borrowings hereunder by the
Borrowing Agent are for the exclusive and indivisible benefit of all Borrowers
as though, for purposes of this Agreement, the Term Note and the Capital
Expenditure Note the Borrowers constituted a single entity.
14.2 Joint and Several Obligations. Each Borrower further agrees that all
Obligations shall be joint and several, and that each Borrower shall make
payment upon any of the Obligations upon their maturity by acceleration or
otherwise, and that such obligation and liability on the part of each Borrower
shall in no way be affected by any extensions, renewals and forbearances granted
by Lender to any Borrower, failure of Lender to give any Borrower notice of
borrowing or any other notice, any failure of Lender to pursue or preserve its
rights against the other Borrowers, and that such agreement by each Borrower to
pay upon any notice issued pursuant hereto is unconditional and unaffected by
prior recourse by Lender to the other Borrowers for such Borrowers' Obligations
or the lack thereof.
15. GENERAL PROVISIONS
<PAGE>
15.1 This Agreement shall be binding and deemed effective when executed by
Borrower and accepted and executed by Lender.
15.2 This Agreement shall bind and inure to the benefit of the respective
successors and assigns of each of the parties; provided, however, neither
Borrower or Lender may assign its interest in this Agreement or any rights
hereunder without the prior written consent of the other, and any prohibited
assignment shall be absolutely void. No consent to an assignment by Lender shall
release Borrower from its Obligations to Lender.
15.3 Paragraph headings and paragraph numbers have been set forth herein
for convenience only. Unless the contrary is compelled by the context,
everything contained in each Paragraph applies equally to this entire Agreement.
15.4 Neither this Agreement nor any uncertainty or ambiguity herein shall
be construed or resolved against Lender or Borrower, whether under any rule of
construction or otherwise. On the contrary, this Agreement has been reviewed by
all parties and shall be construed and interpreted according to the ordinary
meaning of the words used so as to fairly accomplish the purposes and intentions
of the parties hereto.
15.5 Each provision of this Agreement shall be severable from every other
provision of this Agreement for the purpose of determining the legal
enforceability of any specific provision.
15.6 The parties intend and agree that their respective rights, duties,
powers, liabilities, obligations and discretions shall be performed, carried
out, discharged and exercised reasonably and in good faith.
15.7 All agreements, representations and warranties contained in this
Agreement or made in writing by or on behalf of Borrower in connection with the
transactions contemplated hereby shall survive the execution and delivery of
this Agreement, notwithstanding any investigation at any time made by Lender.
15.8 The Obligations shall be absolute and unconditional and shall remain
in full force and effect without regard to, and shall not be released,
discharged or in any way affected by: (i) any exercise or non-exercise of any
right, remedy, power or privilege under or in respect of such agreements and
instruments or applicable law, including, without limitation, any failure by
Lender to set off or release in whole or in part any balance of any funds or
credit in favor of Borrower, or any waiver, consent, extension, indulgence or
other action or inaction in respect of any thereof; (ii) any bankruptcy,
insolvency, reorganization, arrangement, readjustment, composition, liquidation
or similar proceeding of, or affecting, Borrower; (iii) any termination of this
Agreement, whether or not pursuant to Section 3.2 hereof; or (iv) any other act
or thing which may or might in any manner or to any extent operate as a
discharge of Borrower as a matter of law.
15.9 Whenever any payment to be made hereunder shall fall due on a day
other than a business day, such payment may be made on the next succeeding
business day, and such extension of time shall be included in computing the
interest due in connection with such payment.
<PAGE>
15.10 This Agreement is intended by Borrower and Lender to be the final,
complete and exclusive expression of the agreement between them. No
modification, rescission, waiver, release or amendment of any provision of this
Agreement shall be made, except by a written agreement signed by Borrower and a
duly authorized officer of Lender.
15.11 This Agreement may be executed in any number of counterparts, and by
Lender and Borrower in separate counterparts, each of which shall be an
original, but all of which shall together constitute one and the same agreement.
15.12 If after receipt of any payment of, or proceeds of Collateral applied
to the payment of, all or any part of the Obligations, Lender is for any reason
compelled to surrender such payment or proceeds, to any Person by order of a
court of competent jurisdiction or in a bankruptcy or insolvency proceeding,
because such payment or proceeds is determined to be void or voidable as a
preference, impermissible set off, or a diversion of trust funds, or based on
any claim of breach of contract, breach of warranty, illegality, invalidity, or
fraud, or for any other reason, then this Agreement and the Obligations intended
to be paid by such surrendered payment or proceeds shall be reinstated, if
necessary, and shall continue in full force and Borrower shall be liable to, and
does hereby indemnify Lender and hold Lender harmless for, the amount of such
payment or proceeds surrendered. The provisions of this Section 15.12 shall be
and remain effective notwithstanding any contrary action which may have been
taken by Lender in reliance upon such payment or proceeds, and any such contrary
action so taken shall be without prejudice to Lender's rights under this
Agreement and shall be deemed to have been conditioned upon such payment or
proceeds having become final and irrevocable. The provisions of this Section
15.12 shall survive the termination of this Agreement.
IN WITNESS WHEREOF, Borrower has executed and delivered this Agreement.
QUALITY AUTOMOTIVE COMPANY,
a Delaware corporation
By:/S/ MARTIN CHEVALIER
--------------------
Title: President
US AUTOMOTIVE MANUFACTURING,
INC.,
a Delaware corporation
By:/S/ MARTIN CHEVALIER
--------------------
Title: President
<PAGE>
Accepted and effective as of this 30st day of December, 1992, at Lender's
place of business in New York, New York.
STANCHART BUSINESS CREDIT,
INC.,
a Delaware corporation
By:/S/ SAM PILCER
---------------
Title: V.P.
<PAGE>
CONSENT OF GUARANTORS
The undersigned as guarantors of the obligations of Quality Automotive
Company and US Automotive Manufacturing, Inc. to StanChart Business Credit, Inc.
hereby consent to the foregoing Amended and Restated Revolving Credit, Term Loan
and Security Agreement and acknowledge that their guaranty agreement dated March
28, 1990 remains in full force and effect.
US AUTOMOTIVE MANUFACTURING, INC.
By:/S/ MARTIN CHEVALIER
--------------------
Its: President
QUALITY AUTOMOTIVE COMPANY
By:/S/ MARTIN CHEVALIER
--------------------
Its: President
CONSENT OF GUARANTOR
The undersigned as a guarantor of the obligations of Quality Automotive
Company and US Automotive Manufacturing, Inc. to StanChart Business Credit, Inc.
hereby consents to the foregoing Amended and Restated Revolving Credit, Term
Loan and Security Agreement and acknowledges that his guaranty agreement dated
June 14, 1991 remains in full force and effect.
/S/ MARTIN CHEVALIER
--------------------
MARTIN CHEVALIER
<PAGE>
EXHIBIT A-l
Restated Note
<PAGE>
EXHIBIT A-2
Capital Expenditure Note
<PAGE>
EXHIBIT B
Year Two:
a) Upon receipt of unqualified and certified FYE statement showing net
earnings not less than $750,000
b) Net availability of not less than $2,000,000 per SCBC records as of
12/31/90
c) No defaults hereunder in existence
Year Three:
a) Upon receipt of unqualified and certified FYE statement showing net
earnings not less than $800,000
b) Net availability of not less than $2,200,000 per SCBC records as of
12/31/90
c) No defaults hereunder in existence
<PAGE>
EXHIBIT C
The following items are leased by Quality Automotive Company:
1) Telephone - Charter Leasing
2) IBM System 36
3) Copier - Pitney Bowes
4) 10 Trailers - Ryder Truck Rental
5) 5 Tractors - Ryder Truck Rental
SECOND AMENDMENT
SECOND AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT, TERM LOAN AND
SECURITY AGREEMENT dated as of May 26, 1994 among LASALLE BUSINESS CREDIT, INC.
f/k/a StanChart Business Credit, Inc. ("Lender"), a Delaware corporation,
QUALITY AUTOMOTIVE COMPANY ("Quality"), a Delaware corporation and US AUTOMOTIVE
MANUFACTURING, INC. ("US Auto"), a Delaware corporation.
BACKGROUND
On December 30, 1992, Lender, Quality and US Auto entered into that certain
Amended and Restated Revolving Credit, Term Loan and Security Agreement, as
amended by a First Amendment dated as of March 9, 1993 (as so amended and
further amended from time to time, the "Loan Agreement") whereby Lender agreed
to make certain financial accommodations to Quality and US Auto. Lender, Quality
and US Auto desire to amend the Loan Agreement upon the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
herein contained, the parties hereto hereby agree as follows:
1. All references in the Loan Agreement and the Collateral Documents to
"STANCHART" or "StanChart" are hereby amended to read "LASALLE" OR "LaSalle",
respectively.
2. Section 1 of the Loan Agreement is hereby amended as follows:
(a) Sections 1.37, 1.53, 1.61 and 1.62 are hereby amended in their entirety
to read as follows:
"1.37. The term "Lender's Reference Rate" means the variable rate of
interest, per annum, most recently announced by LaSalle National Bank,
at its corporate headquarters in Chicago, Illinois as the "Prime Rate"
with the understanding that the "Prime Rate" is one of LaSalle
National Bank's index rates and merely serves as a basis upon which
effective rates of interest are calculated for loans making reference
thereto and may not be the lowest or best rate at which LaSalle
National Bank calculates interest or extends credit."
"1.53. The term "Restated Note" shall mean that certain Second
Consolidated Amended and Restated Secured Promissory Term Note dated
as of May 26, 1994 in the principal amount of $3,000,000 from Borrower
to Lender."
"1.61. The term "Term Loan" means the aggregate term loan of
$3,000,000 made by Lender to Borrower, as consolidated pursuant to
that certain Note Consolidation and Modification Agreement dated as of
May
<PAGE>
26, 1994 between Borrower and Lender, and evidenced by the Term Note."
"1.62. The term "Term Note" shall mean the Restated Note."
(b) Section 1.7. ("Capital Expenditure Loan"), Section 1.8. (Capital
Expenditure Note") and Section 1.20 ("Eligible Equipment") are hereby deleted in
their entirety.
3. Section 2.1(c) of the Loan Agreement is hereby deleted in its
entirety.
4. Section 3 of the Loan Agreement is hereby amended as follows:
(a) Section 3.1 is amended by deleting "March 31, 1995" in the second line
thereof and inserting "March 31, 1997" in its place.
(b) Section 3.2 is amended in its entirety to read as follows:
"3.2 Notwithstanding Section 3.1, Borrower may (a) at any time after
execution of this Agreement, on five (5) business days written notice
prior to the end of any month, prepay and terminate this Agreement by
paying to Lender, in cash or by a wire transfer of immediately
available funds, all of the Obligations owed by Borrower to Lender,
together with a prepayment fee equal to:
Period of Prepayment During Percentage of Total Facility
--------------------------- ----------------------------
April 1, 1994 - March 31, 1996 1%
April 1, 1996 - March 31, 1997 0%
Notwithstanding the foregoing, in the event Borrower prepays the Restated Note
in whole or in part prior to expiration of the Term but not in conjunction with
any permanent reduction in the facilities described in Sections 2.1(a) and
2.1(b) hereof, no prepayment fee with respect to any such prepayment of the
Restated Note shall be payable to Lender hereunder."
5. Section 6 of the Loan Agreement is hereby amended as follows:
(a) Section 6.13 is amended by adding the following at the end of the fifth
line thereof:
"minus (d) the amount paid by Quality for the redemption (the "Redemption")
of its capital stock held by Pyramid Ventures and Ramko Capital Inc., not
to exceed a maximum amount of $2,000,046.79 to be subtracted only at the
time of and upon the consummation of the Redemption."
(b) Section 6.14 is hereby amended in its entirety to read as follows:
"6.14 Borrower shall maintain on a consolidated basis a Tangible Leverage
of not more than (i) 3.75 to 1.0 at all times from May 26, 1994 through
December 31,
<PAGE>
1994, (ii) 3.00 to 1.0 at all times from January 1, 1995 through December
31, 1995 and (iii) 2.5 to 1.0 at all times from January 1, 1996 and
thereafter."
(c) Section 6.16 is hereby amended in its entirety to read as follows:
"6.16 Borrower shall maintain on a consolidated basis a Current Ratio of
not less than (i) 1.75 to 1.0 at all times from May 26, 1994 through
December 31, 1994 and (ii) 1.90 to 1.0 at all times from January 1, 1995
and thereafter."
6. Section 7.14 of the Loan Agreement is hereby amended by deleting the
words "or the Capital Expenditure Note" from the second line thereof.
7. Section 14.1(c) of the Loan Agreement is hereby amended by deleting the
words "and the Capital Expenditures Note" from the fifteenth and sixteenth lines
thereof.
8. Exhibit A-1 is hereby amended in its entirety and replaced by Exhibit
A-1 attached hereto.
9. Exhibit A-2 is hereby deleted in its entirety.
10. Notwithstanding the provisions of Section 2.2 and 6.4(e) respectively
of the Loan Agreement, Lender hereby waives:
(a) Compliance by Borrower with Section 2.2 solely with respect to
Borrower's obligation to pay Lender an Administrative Fee in the
amount of $25,000 on September 25, 1994; and
(b) Compliance by Borrower with Section 6.4(e) solely with respect to
the redemption by Quality of its capital stock held by Pyramid
Ventures, provided the aggregate redemption price is not in excess of
$2,000,000 and that Lender is otherwise satisfied with the terms and
conditions of such purchase.
11. Except as expressly amended hereby, the Loan Agreement remains in full
force and effect and this Second Amendment does not and shall not be deemed to
constitute a waiver, forbearance or release of any claim, demand, action or
cause of action arising under the Loan Agreement or any other instruments,
documents or agreements executed and delivered in connection therewith or
herewith.
12. This Second Amendment shall become effective on the date that each of
the following conditions shall have been satisfied: (i) Lender shall have
received four (4) copies of (a) this Second Amendment duly executed by each
Borrower and each Guarantor, (b) Deed of Trust Modification executed by
Borrower, (c) $1,879,161.28 Term Note (one copy), executed by Borrower, (d) Note
Consolidation and Modification Agreement executed by Borrower and, (e)
$3,000,000.00 Second Consolidated, Amended and Restated Promissory Term Note
(one copy) executed by Borrower; (ii) receipt by Lender of a Second Amendment
accommodation fee of $75,000 from Borrower on the date of this Second Amendment;
and (iii) Borrower shall have Excess Availability of at least $300,000. "Excess
Availability" shall mean the difference
<PAGE>
between (a) the lesser of (x) $7,500,000 and (y) Revolving Loan Availability;
and (b) the aggregate amount of Revolving Loans outstanding at any time. In the
event the foregoing conditions are not satisfied in full by May 27, 1994 this
Second Amendment shall be deemed null and void and of no force or effect.
13. This Second Amendment shall be governed by and construed in accordance
with the laws of the State of New York.
QUALITY AUTOMOTIVE COMPANY
By: /S/ MARTIN CHEVALIER
---------------------
Martin Chevalier, President
US AUTOMOTIVE MANUFACTURING, INC.
By: /S/ MARTIN CHEVALIER
---------------------
Martin Chevalier, President
LASALLE BUSINESS CREDIT, INC.
By: /S/ MARY ELLEN NIXON-MOORE
--------------------------
Name: Mary Ellen Nixon-Moore
Title: V.P.
CONSENT OF GUARANTORS:
US AUTOMOTIVE MANUFACTURING, INC.
By:/S/ MARTIN CHEVALIER
---------------------
Martin Chevalier, President
QUALITY AUTOMOTIVE COMPANY
By:/S/ MARTIN CHEVALIER
---------------------
Martin Chevalier, President
/S/ MARTIN CHEVALIER
---------------------
Martin Chevalier
ier
THIRD AMENDMENT
THIRD AMENDMENT to Amended and Restated Revolving Credit, Term Loan and
Security Agreement dated as of December 26, 1995 among LASALLE BUSINESS CREDIT,
INC. ("Lender"), a Delaware corporation, QUALITY AUTOMOTIVE COMPANY ("Quality"),
a Delaware corporation and US AUTOMOTIVE MANUFACTURING, INC. ("US Auto"), a
Delaware corporation.
BACKGROUND
On December 30, 1992, Lender, Quality and US Auto entered into that certain
Amended and Restated Revolving Credit, Term Loan and Security Agreement, as
amended by a First Amendment dated as of March 9, 1993 and a Second Amendment
dated as of May 26, 1994 (as so amended and further amended, modified, restated
or supplemented from time to time, the "Loan Agreement") whereby Lender agreed
to make certain financial accommodations to Quality and US Auto. Lender, Quality
and US Auto desire to amend the Loan Agreement upon the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
herein contained, the parties hereto hereby agree as follows:
1. The following definitions are hereby added to Section 1 of the Loan
Agreement in their appropriate order:
The term "Capital Expenditure Loan" shall have the meaning set forth in
Section 2.1(c) of this Agreement.
The term "Capital Expenditure Note" shall have the meaning set forth in
Section 2.1(c) of this Agreement.
The term "Eligible Equipment" means all Equipment purchased by Borrower
after September 1, 1994 which Lender in its sole and absolute discretion
exercised in good faith, on a case-by-case basis deems eligible for financing
under the Capital Expenditure Loan pursuant to Section 2.1(c).
2. Section 1.18 ("Debt Service Coverage Ratio") is hereby amended by
deleting "after" in the second and eighth line thereof and inserting "before" in
their place.
3. Section 1.33 ("Interest Coverage Ratio") is hereby amended by deleting
"after" in the third line thereof and inserting "before" in its place.
4. Section 1.53 ("Restated Note") is hereby deleted in its entirety and the
following is inserted in its place:
The term "Restated Note" shall mean that certain Third Consolidated,
Amended and Restated Secured Promissory Term Note dated as of December __, 1995
in the principal amount of $2,150,000 from Borrower to Lender.
<PAGE>
5. Section 2.1 of the Loan Agreement is hereby amended as follows:
(a) by deleting subsection 2.1(a)(B)(i) in its entirety and inserting the
following in its place: "(i) Four Million Dollars ($4,000,000) and".
(b) by inserting the following at the end thereof:
(c) (i) Lender shall make Capital Expenditure Loans ("Capital
Expenditure Loans") to Borrower in an aggregate amount not in excess
of $1,000,000.
(ii) The following are conditions precedent to the making of each and
every Capital Expenditure Loan to Borrower:
(a) No Event of Default shall have occurred and be continuing;
(b) Borrowing Agent has provided Lender with five (5) business
days' prior written notice (the "Cap Ex Notice") of each request
for a Capital Expenditure Loan (each such loan, a "Drawdown") The
Cap Ex Notice shall describe in detail the Equipment which is the
subject of the Drawdown and shall be accompanied by all invoices,
bills and all other documentation available to Borrower relating
to such Equipment and Lender shall have determined that such
Equipment constitutes Eligible Equipment;
(c) each Drawdown shall be in an increment of at least $100,000
but may not exceed an amount equal to 80% of the invoice price
(exclusive of all freight charges, packing costs, servicing fees
and all other associated "soft costs") of the Equipment which is
the subject of the Drawdown;
(d) Borrower shall have executed and delivered to Lender the
Capital Expenditure Note;
(e) All Warranties and Representations contained in Section 6
shall be true and accurate on the date of and after giving effect
to each Drawdown;
(f) Lender shall have obtained a first priority security interest
in all Eligible Equipment; and
(g) Lender shall have received all third party waivers and
consents which it reasonably requires in connection with
financing any Eligible Equipment.
(iii) The Capital Expenditure Loan shall be evidenced by the Capital
<PAGE>
Expenditure Note ("Capital Expenditure Note"), a copy of which is
attached hereto as Exhibit A-2. Each Drawdown shall be repayable by
Borrower monthly on the first day of each month commencing with the
first day of the thirteenth month following the day of such Drawdown
in equal installments of one thirty-sixth (1/36) of the amount of each
such Drawdown. The outstanding principal amount of all Drawdowns under
the Capital Expenditure Loan shall be due and payable on the earlier
to occur of (a) March 28, 1998 or (b) upon such earlier date of
termination of this Agreement.
This Section, including the defined terms herein, shall be deemed effective
as of September 1, 1994.
6. Section 2.2 is hereby amended by deleting "one and one-half (1-1/2%)" in
the seventh line thereof and inserting "one (1%)" in its place.
7. Section 3 of the Loan Agreement is hereby amended as follows:
(a) Section 3.1 is amended by deleting "March 31, 1997" in the second line
thereof and inserting "March 31, 1998" in its place.
(b) Section 3.2 is amended in its entirety to read as follows:
"3.2 Notwithstanding Section 3.1, Borrower may (a) at any time after
execution of this Agreement, on five (5) business days written notice
prior to the end of any month, prepay and terminate this Agreement by
paying to Lender, in cash or by a wire transfer of immediately
available funds, all of the Obligations owed by Borrower to Lender,
together with a prepayment fee equal to:
Period of Prepayment During Percentage of Total Facility
--------------------------- ----------------------------
April 1, 1996 - March 31, 1997 1%
April 1, 1997 - March 31, 1998 0%
Notwithstanding the foregoing, in the event (i) Borrower prepays the Restated
Note in whole or in part prior to expiration of the Term but not in conjunction
with any permanent reduction in the facilities described in Sections 2.1(a) and
2.1(b) hereof or (ii) Borrower prepays the Capital Expenditure Note in whole or
in part prior to expiration of the Term, no prepayment fee with respect to any
such prepayment of the Restated Note or the Capital Expenditure Note shall be
payable to Lender hereunder."
8. Section 7.14 of the Loan Agreement is hereby amended by inserting the
words "or the Capital Expenditure Note" in the second line thereof.
9. Section 14.1(c) of the Loan Agreement is hereby amended by inserting the
words "and the Capital Expenditure Note" in the fifteenth and sixteenth lines
thereof.
<PAGE>
10. Exhibit A-1 is hereby deleted in its entirety and replaced by Exhibit
A-1 attached hereto.
11. Exhibit A-2 is hereby inserted in the Loan Agreement in the form
attached hereto.
12. Except as expressly amended hereby, the Loan Agreement remains in full
force and effect and this Third Amendment does not and shall not be deemed to
constitute a waiver, forbearance or release of any claim, demand, action or
cause of action arising under the Loan Agreement or any other instruments,
documents or agreements executed and delivered in connection therewith or
herewith.
13. This Third Amendment shall become effective when and only when Lender
shall have received (i) four (4) copies of this Third Amendment duly executed by
each Borrower and each Guarantor, (ii) the Capital Expenditure Note duly
executed by each Borrower and (iii) the Third Consolidated, Amended and Restated
Secured Promissory Term Note duly executed by each Borrower.
14. This Third Amendment shall be governed by and construed in accordance
with the laws of the State of New York.
15. This Third Amendment may be executed in counterparts, each of which
shall be deemed an original and all of which taken together shall constitute one
agreement.
QUALITY AUTOMOTIVE COMPANY
By:/S/ MARTIN CHEVALIER
---------------------
Martin Chevalier, President
US AUTOMOTIVE MANUFACTURING, INC.
By:/S/ MARTIN CHEVALIER
---------------------
Martin Chevalier, President
LASALLE BUSINESS CREDIT, INC.
By: /S/ MARY ELLEN NIXON-MOORE
---------------------------
Name:Mary Ellen Nixon-Moore
Title: V.P.
<PAGE>
CONSENT OF GUARANTORS:
US AUTOMOTIVE MANUFACTURING, INC.
By:/S/ MARTIN CHEVALIER
---------------------
Martin Chevalier, President
QUALITY AUTOMOTIVE COMPANY
By:/S/ MARTIN CHEVALIER
---------------------
Martin Chevalier, President
By:/S/ MARTIN CHEVALIER
---------------------
Martin Chevalier, President
WAIVER,FOURTH AMENDMENT
AND ASSUMPTION AGREEMENT
WAIVER, FOURTH AMENDMENT AND ASSUMPTION AGREEMENT ("Fourth Amendment")
dated as of August 29, 1997 to Amended and Restated Revolving Credit, Term Loan
and Security Agreement among LASALLE BUSINESS CREDIT, INC. ("Lender"), a
Delaware corporation, QUALITY AUTOMOTIVE COMPANY (as successor-in-interest to
QUAC Acquisition Corp.) ("Quality"), a Delaware corporation and US AUTOMOTIVE
FRICTION, INC. (f/k/a U.S. Automotive Manufacturing, Inc.) ("US Auto" and
together with Quality, each a "Borrower and jointly and severally, the
"Borrowers"), a Delaware corporation.
BACKGROUND
On December 30, 1992, Lender, Quality and US Auto entered into that certain
Amended and Restated Revolving Credit, Term Loan and Security Agreement, as
amended by a First Amendment dated as of March 9, 1993, a Second Amendment dated
as of May 26, 1994 and a Third Amendment dated as of December 26, 1995 (as so
amended and further amended, modified, restated or supplemented from time to
time, the "Loan Agreement") whereby Lender agreed to make certain financial
accommodations to Quality Automotive Company, predecessor of Quality ("Old
Quality") and US Auto.
Old Quality has entered into an Agreement and Plan of Merger with RT
Industries, Inc. ("RTIC"), QUAC Acquisition Corp. ("QUAC"), and the Subordinated
Lenders (as hereinafter defined) dated as of June 6, 1997 (as amended, modified,
restated or supplemented from time to time, the Merger Agreement") pursuant to
which Old Quality will merge with and into QUAC (the "Merger"), with QUAC being
the surviving corporation and changing its name to "Quality Automotive Company."
Old Quality has requested that Lender consent to the Merger Agreement and Lender
is willing to do so on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
herein contained, the parties hereto hereby agree as follows:
1. Waiver. Subject to satisfaction of the conditions precedent set forth in
Section 15 below, Lender hereby waives the following Events of Default which
have occurred as a result of Borrowers' non-compliance with Sections 6.15, 6.16
and 6.17 of the Loan Agreement on or prior to the date hereof.
2. The following definitions are hereby added to Section 1 of the Loan
Agreement in their appropriate order:
"Junior Participation Agreement" means that certain Agreement of Junior
Participation dated as of August __, 1997 executed by Lender and accepted and
agreed to by each of the Subordinated Lenders.
"Merger" means the merger of Quality Automotive Company with and into QUAC
Acquisition Corp.
<PAGE>
"Permitted Payments" means any mandatory prepayment of any Subordinated
Promissory Note made solely out of the proceeds of an Equity Infusion (as such
term is defined in the Subordinated Promissory Note) in excess of $3,000,000.
"Pledge Agreement" means that certain Pledge Agreement dated August __,
1997 executed by RTIC in favor of Lender, as same may be amended, modified,
supplemented or restated from time to time.
"Subordinated Lenders" means, collectively, each of Martin Chevalier,
Malvina B. Chevalier, John W. Kohut and Linda S. Ram.
"Subordinated Pledge Agreements" shall mean the Pledge Agreements executed
by RTIC in favor of each Subordinated Lender.
"Subordinated Promissory Notes" shall mean, collectively, the Promissory
Notes executed by Quality in favor of the Subordinated Lenders in the aggregate
original principal amount of $4,500,000, each dated as of August __, 1997.
"Subordinated RTIC Note" shall mean the Subordinated Promissory Note
executed by Quality in favor of RTIC in the original principal amount of
$1,000,000 dated as of August __, 1997.
"Pledged Stock" means all of the capital stock of Quality now owned or
hereafter acquired by RTIC.
"RTIC" means RT Industries, Inc., a Delaware corporation, together with its
successors and assigns.
3. Section 1.12 "(Collateral") is hereby amended in its entirety as
follows:
(a) The term "Collateral" means and includes each and all of the
following: the Accounts; the Equipment; the General Intangibles; the
Real Estate Collateral; the Negotiable Collateral; the Inventory; the
Pledged Stock; any money, deposit accounts or other assets of Borrower
or of any guarantor in which Lender receives a security interest or
lien or which hereafter comes into the possession, custody or control
of Lender; and the proceeds of any of the foregoing, including, but
not limited to, proceeds of insurance covering the Collateral and any
and all Accounts, Equipment, General Intangibles, Real Estate
Collateral, Negotiable Collateral, Inventory, Pledged Stock, money,
deposit accounts or other tangible and intangible property of Borrower
or of any guarantor resulting from the sale or other disposition of
the Collateral, and the proceeds thereof. It is agreed that the
Collateral, whether owned and/or controlled by either Quality or US
Auto, shall act as security for the entire obligation of the Borrower
under this Agreement.
4. Section 1.13 ("Collateral Documents") is hereby amended in its entirety
to provide as follows:
<PAGE>
(a) The term "Collateral Documents" means, at any point in time, the
Trademark Assignment, the Mortgage, the Pledge Agreement and all other
agreements, documents, guaranties, instruments or assignments then in
effect which pertain to the Obligations, the Collateral, or any other
aspect of the transactions contemplated by this Agreement.
5. Section 6.3(g) is hereby amended in its entirety to provide as follows:
"(g) Incur any debts outside the ordinary course of Borrower's business
other than (i) the RTIC Subordinated Note in form and substance
satisfactory to Lender; and (ii) the Subordinated Promissory Notes in
form and substance satisfactory to Lender and its counsel, in each
case which notes shall be subordinate to Borrower's obligations to
Lender."
6. A new subsection is hereby added to the end of Section 6.3 of the Loan
Agreement to read as follows:
"(p) make any payments (a) under the Subordinated RTIC Note or (b) under
the Subordinated Promissory Notes (other than any Permitted Payments
so long as an Event of Default has not occurred or would not occur
after giving effect to such payments)."
7. Section 6.4(e) of the Loan Agreement is hereby amended by deleting
"Automotive Holdings, Inc." and inserting "RTIC" in its place and stead.
8. Section 7 of the Loan Agreement is hereby amended by inserting the
following subsection at the end thereof:
"7.18 If a default occurs under the RTIC Subordinated Note, the
Subordinated Promissory Notes or Subordinated Pledge Agreements which
default is not cured or waived within any applicable grace period;
9. Section 7.7 of the Loan Agreement is hereby amended by deleting "thirty
(30) days" and inserting "sixty (60) days" in its place and stead.
10. Subject to the satisfaction of the conditions precedent set forth in
Section 15 of this Fourth Amendment, Lender hereby consents to the Merger and to
the consummation of the transactions contemplated by the Merger Agreement.
11. Quality hereby assumes in full, the payment, discharge, satisfaction
and performance of all obligations of Old Quality under the Loan Agreement and
the Collateral Documents, and Quality hereby adopts all of the provisions, terms
and conditions in the Loan Agreement and the Collateral Documents as if such
agreements had been entered into by Quality.
12. Quality hereby acknowledges that it will from time to time after the
execution hereof, upon request of Lender, execute and deliver to Lender such
further
<PAGE>
instruments, agreements and documents and take such further action as Lender may
request in connection with the transactions contemplated herein.
13. Each Borrower hereby represents and warrants as follows:
(a) This Fourth Amendment and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of such Borrower and are
enforceable against such Borrower in accordance with their respective
terms.
(b) Upon the effectiveness of this Fourth Amendment, each Borrower hereby
ratifies and reaffirms all covenants, representations and warranties made
in the Loan Agreement to the extent the same are not amended hereby
(Sections 6.15, 6.16 and 6.17 of the Loan Agreement being deemed so
amended) and agree that all such covenants, representations and warranties
shall be deemed to have been remade as of the effective date of this Fourth
Amendment as same have been amended pursuant to the Disclosure Schedule
attached hereto as Exhibit A and made a part hereof.
(c) Other than as set forth in Paragraph 1 hereof, no Event of Default has
occurred and is continuing or would exist after giving effect to this
Fourth Amendment.
(d) Such Borrower has no defense, counterclaim or offset with respect to
the Loan Agreement.
14. Except as expressly amended hereby, the Loan Agreement remains in full
force and effect and this Fourth Amendment does not and shall not be deemed to
constitute a waiver (other than as set forth in Paragraph 1 hereof), forbearance
or release of any claim, demand, action or cause of action arising under the
Loan Agreement or any other instruments, documents or agreements executed and
delivered in connection therewith or herewith.
15. This Fourth Amendment shall become effective when and only when each of
the following conditions shall have been satisfied:
(a) Lender shall have received four (4) copies of this Fourth Amendment
duly executed by each Borrower and each Guarantor;
(b) Each document (including, without limitation, any Uniform Commercial
Code financing statement) required by this Fourth Amendment or under
law or reasonably requested by Lender to be filed, registered or
recorded in order to create, in favor of Lender, a perfected security
interest in or lien upon the Collateral owned by Borrowers shall have
been executed by Borrowers for filing, registration or recordation in
each jurisdiction in which the filing, registration or recordation
thereof is so required or requested;
(c) Lender shall have received a copy of the resolutions in form and
substance reasonably satisfactory to Lender, of the Board of Directors
of (x)
<PAGE>
Borrowers authorizing the execution, delivery and performance of this
Fourth Amendment and all documents related thereto, including, without
limitation, a resolution authorizing the granting by Quality of the
Liens upon the Collateral and (y) RTIC authorizing the execution,
delivery and performance of the Pledge Agreement and the Subordination
Agreement, in each case certified by the Secretary or an Assistant
Secretary of Quality, QUAC or RTIC, as the case may be, as of the date
of this Fourth Amendment; and, such certificate shall state that the
resolutions thereby certified and have not been amended, modified,
revoked or rescinded as of the date of such certificate;
(d) Lender shall have received a copy of the Articles or Certificate of
Incorporation of Quality and RTIC, and all amendments thereto,
certified by the Secretary of State or other appropriate official of
its jurisdiction of incorporation together with copies of the By-Laws
of Quality and RTIC;
(e) Lender shall have received good standing certificates for Quality
dated not more than thirty (30) days prior to the date of this Fourth
Amendment, issued by the Secretary of State of the State of Delaware
and each jurisdiction where the conduct of Quality's business
activities or the ownership of its properties necessitates
qualification (other than the State of Virginia which shall be
delivered to Lender within thirty (30) days of the date hereof);
(f) Lender shall have received in form and substance satisfactory to
Lender, a Certificate of Insurance and loss payable endorsements on
Lender's standard form of loss payee endorsement naming Lender as loss
payee on Borrowers' casualty insurance policies, and Evidence of
Insurance naming Lender as a co-insured on Borrowers' liability
insurance policies;
(g) Lender shall have entered into a Junior Participation Agreement with
each of Martin Chevalier, Malvina B. Chevalier, John W. Kohut and
Linda S. Ram and received $1,000,000 in connection therewith which
shall not be loaned to Borrowers but shall be applied by Lender to
reduce Lender's exposure under the Loan Agreement;
(h) RTIC shall have made a $1,000,000 subordinated loan to Borrowers
evidenced by the Subordinated RTIC Note and RTIC shall have executed a
Subordination Agreement with Lender, in form and substance acceptable
to Lender;
(i) Lender shall have received evidence from RTIC which shall indicate
that after giving effect to the transactions contemplated herein
(including the subordinated loan and the payment of the purchase price
in connection with the Merger), RTIC has no less than $2,000,000 in
unrestricted cash for use in the RTIC operations, which evidence shall
be acceptable to Lender in all respects and RTIC shall deliver to
Lender a copy of its 8(K) filing within seventy (70) days of the date
hereof which shall also indicate
<PAGE>
that such requirement has been met;
(j) Lender shall have entered into a Subordination and Intercreditor
Agreement with each of Martin Chevalier, Malvina B. Chevalier, John W.
Kohut and Linda S. Ram, on terms acceptable to Lender in all respects;
(k) Lender shall have received the Pledge Agreement duly executed by RTIC
in form and substance acceptable to Lender together with stock
certificates and duly executed stock powers endorsed in blank;
(l) Lender shall have received payment of an amendment fee of $24,000 (by
their execution below Borrowers hereby authorize Lender to charge
their loan account in order to pay such fee); and
(m) The Merger shall have been duly consummated in accordance with
applicable law; and
(n) Lender shall have received such other certificates, instruments,
documents and agreements as may reasonably be required by Lender or
its counsel, each of which shall be in form and substance satisfactory
to Lender and its counsel.
16. This Fourth Amendment shall be governed by and construed
in accordance with the laws of the State of New York.
17. This Fourth Amendment may be executed in counterparts, each of which
shall be deemed an original and all of which taken together shall constitute one
agreement.
QUALITY AUTOMOTIVE COMPANY
By: /S/ MARTIN CHEVALIER
---------------------
Name: Martin Chevalier
Title: CEO
US AUTOMOTIVE FRICTION, INC.
By:/S/ MARTIN CHEVALIER
---------------------
Name: Martin Chevalier
Title: President
LASALLE BUSINESS CREDIT, INC.
By:/S/ MARY ELLEN NIXON-MOORE
--------------------------
Name: Mary Ellen Nixon-Moore
Title: V.P.
<PAGE>
CONSENT OF GUARANTORS:
US AUTOMOTIVE FRICTION, INC.
By: /S/ MARTIN CHEVALIER
--------------------
Name: Martin Chevalier
Title: President
QUALITY AUTOMOTIVE COMPANY
By:/S/ MARTIN CHEVALIER
---------------------
Name: Martin Chevalier
Title: CEO
/S/ MARTIN CHEVALIER
----------------
Martin Chevalier
$_________ New York, New York
_______, 1998
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, U.S. AUTOMOTIVE MANUFACTURING, INC., a
Delaware Corporation having its principal place of business at 627 Airport Road,
Tappahannock, Virginia 22560 (together with its successors and permitted
assigns, the "Maker"), hereby promises to pay to the order of ________________,
(the "Payee") at_______________ or such other place designated in writing by the
holder of this Note, on _____ , 1999 (the "Maturity Date"), unless earlier
becoming due by reason of a Default (as defined herein), the principal amount of
____________________Dollars ($_______), together with accrued interest thereon
at the rate of ten and one half percent (10.5%) per annum. All payments under
this Note shall be made in money of the United States of America that is lawful
for the payment of public and private debts at the time such payment is due.
The principal of, and interest on, this Note may be prepaid, in whole or in
part, without premium or penalty. All payments hereunder, including prepayments,
shall be applied first to the payment of accrued and unpaid interest to the date
on which any such payment is made, then to the unpaid principal balance.
Notwithstanding anything to the contrary above if any voluntary or
involuntary proceeding shall be commenced by or against the Maker under any
chapter of the Federal Bankruptcy Code, or other law relating to bankruptcy,
bankruptcy reorganization, insolvency or relief of debtors applicable to Maker,
and such petition or proceeding is not dismissed within 90 days from the date on
which it is filed or instituted which default shall continue unremedied for a
period of 15 consecutive days after the receipt by Maker of written notice from
the holder of this Note specifying such default in reasonable detail (each a
"Default") then, in any such case, the principal amount, together with any
accrued and unpaid interest, less any permitted principal amounts previously
paid hereunder, shall become immediately due and payable by the Maker.
This Note shall be binding upon the Maker and its successors and permitted
assigns and shall inure to the benefit of the Payee and any of its successors
and assigns.
The Maker hereby agrees that subject to the terms of this Note, its
obligations hereunder shall be continuing, absolute and unconditional, and
without the benefit of any defense, claim, set-off, recoupment, abatement or
other right, existing or future, which the Maker may have against an Payee, or
<PAGE>
any other entity, and shall remain in full force and effect until all the
obligations of the Maker hereunder have been discharged.
Anything in this Note to the contrary, notwithstanding, the Payee shall not
be permitted to charge, take or receive, and the Maker shall not be obligated to
pay, interest in excess of the maximum rate from time to time permitted by
applicable law.
If this Note is not paid when due and if it is placed with an attorney for
collection, the Maker agrees to pay all costs of collection, including
reasonable attorney's fees, which shall be added to the amount due under this
Note and recoverable with the amount due under this Note.
Except as otherwise permitted herein, Maker hereby waives diligence,
presentment for payment, demand, protest, notice of protest and additional
notice of any kind.
No forbearance, indulgence, delay or failure to exercise any right or
remedy with respect to this Note shall operate as a waiver, nor as an
acquiescence in any default, nor shall any single or partial exercise of any
right or remedy preclude any other or further exercise thereof or the exercise
of any other right or remedy.
This Note may not be modified or discharged orally, but only in writing
duly exxecuted by the holder thereof.
This Note shall be governed in all respects, including validity,
interpretation and effect by the laws of the State of [New York.]
Any notice required or permitted to be given hereunder shall be deemed to
have been duly given when received as follows:
If to the Maker: U.S. Automotive Manufacturing, Inc.
627 Airport Road
Tappahannock, VA 22560
Attention: Martin Chevalier, President
With a copy to: Tenzer Greenblatt LLP.
405 Lexington Avenue
New York, New York 10174
Attention: Russell Bulkeley, Esq.
-2-
<PAGE>
IN WITNESS WHEREOF, the Maker has caused this Note to be executed as of
this day of February, 1998.
U.S. AUTOMOTIVE MANUFACTURING, INC.
By:
Name:
------------------------------
Title:
-3-
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON
EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, FEBRUARY ___, 2003
No. WR- _______ Warrants
U.S. AUTOMOTIVE MANUFACTURING, INC.
WARRANT
This warrant certificate (the "Warrant Certificate") certifies that
____________________ or registered assigns, is the registered holder of warrants
to purchase, at any time from the issuance hereof until 5:00 P.M. New York City
time on February ___, 2003 (the "Expiration Date"), up to _________ fully-paid
and non-assessable shares, subject to adjustment in accordance with Article 5
hereof (the "Warrant Shares"), of the common stock (the "Common Shares"), par
value $.001 par value of U.S. Automotive Manufacturing, Inc., a Delaware
corporation (the "Company"), subject to the terms and conditions set forth
herein. The warrants represented by this Warrant Certificate and any warrants
resulting from a transfer or subdivision of the warrants represented by this
Warrant Certificate shall sometimes hereinafter be referred to,
<PAGE>
individually, as a "Warrant" and, collectively, as the "Warrants."
1. Exercise of Warrants. Each Warrant is initially exercisable to purchase
one Warrant Share at an initial exercise price of $2.75 per Warrant Share,
subject to adjustment as set forth in Article 5 hereof, payable in cash or by
check to the order of the Company, or any combination of cash or check. Upon
surrender of this Warrant Certificate with the annexed Form of Election to
Purchase duly executed, together with payment of the Exercise Price (as
hereinafter defined) for the Warrant Shares purchased, at the Company's
principal offices (presently located at 627 Airport Road, Tappahannock, Virginia
22560, the registered holder of the Warrant Certificate ("Holder" or "Holders")
shall be entitled to receive a certificate or certificates for the Warrant
Shares so purchased. The purchase rights represented by this Warrant Certificate
are exercisable at the option of the Holder hereof, in whole or in part (but not
as to fractional shares). In the case of the purchase of less than all the
Warrant Shares purchasable under this Warrant Certificate, the Company shall
cancel this Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate of like tenor for the balance of the Warrant
Shares purchasable hereunder.
2. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for the Warrant Shares purchased pursuant to such
exercise shall be made forthwith
-2-
<PAGE>
without charge to the Holder thereof including, without limitation, any tax
which may be payable in respect of the issuance thereof, and such certificates
shall (subject to the provisions of Article 3 hereof) be issued in the name of,
or in such names as may be directed by, the Holder thereof; provided, however,
that the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificates in a name other than that of the Holder and the Company shall not
be required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
The Warrant Certificates and, upon exercise of the Warrants, the
certificates representing the Warrant Shares shall be executed on behalf of the
Company by the manual or facsimile signature of those officers required to sign
such certificates under applicable law.
This Warrant Certificate and, upon exercise of the Warrants, in part or in
whole, certificates representing the Warrant Shares shall bear a legend
substantially similar to the following:
"The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("Act"), and may not be
offered or sold except (i) pursuant to an effective registration statement
under the Act, (ii) to the extent applicable, pursuant to Rule 144 under
the Act (or any similar rule under such Act
-3-
<PAGE>
relating to the disposition of securities), or (iii) upon the delivery by
the holder to the Company of an opinion of counsel, reasonably satisfactory
to counsel to the issuer, stating that an exemption from registration under
such Act is available."
3. Restriction on Transfer of Warrants. The Holder of this Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
and the Warrant Shares issuable upon exercise of the Warrants are being acquired
as an investment and not with a view to the distribution thereof and that the
Warrants and the Warrant Shares may not be transferred unless such securities
are either registered under the Act and any applicable state securities law or
an exemption from such registration is available. The Holder of this Warrant
Certificate acknowledges that the Holder is an "accredited investor" within the
meaning of Regulation D promulgated under the Act who has been provided with an
opportunity to ask questions of representatives of the Company concerning the
Company and that all such questions were answered to the satisfaction of the
Holder. In connection with any purchase of Warrant Shares the Holder agrees to
execute any documents which may be reasonably required by counsel to the Company
to comply with the provisions of the Act and applicable state securities laws.
4. Price.
4.1 Initial and Adjusted Exercise Price. The initial exercise price of each
Warrant shall be $2.75 per Warrant Share. The adjusted exercise price shall be
the price which shall result from time to time from any and all adjustments of
the
-4-
<PAGE>
initial exercise price in accordance with the provisions of Article 5
hereof.
4.2 Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
5. Adjustments of Exercise Price and Number of Warrant Shares.
5.1 Subdivision and Combination. In case the Company shall at any time
subdivide or combine the outstanding Common Shares, the Exercise Price shall
forthwith be proportionately decreased in the case of subdivision or increased
in the case of combination.
5.2 Adjustment in Number of Warrant Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Article 5, the number of
Warrant Shares issuable upon the exercise of each Warrant shall be adjusted to
the nearest full Common Share by multiplying a number equal to the Exercise
Price in effect immediately prior to such adjustment by the number of Warrant
Shares issuable upon exercise of the Warrants immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price.
5.3 Reclassification, Consolidation, Merger. etc. In case of any
reclassification or change of the outstanding Common Shares (other than a change
in par value, or from par value to no par value, or from no par value to par
value, or as a result of a
-5-
<PAGE>
subdivision or combination), or in the case of any consolidation of the Company
with, or merger of the Company into, another corporation (other than a
consolidation or merger in which the Company is the surviving corporation and
which does not result in any reclassification or change of the outstanding
Common Shares, except a change as a result of a subdivision or combination of
such shares or a change in nominal value, as aforesaid), or in the case of a
sale or conveyance to another corporation of the property of the Company as an
entirety, the Holder shall thereafter have the right to purchase the kind and
number of shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance as if the
Holder were the owner of the Warrant Shares issuable upon exercise of the
Warrants immediately prior to any such events at a price equal to the product of
(x) the number of Warrant Shares issuable upon exercise of the Warrants and (y)
the Exercise Price in effect immediately prior to the record date for such
reclassification, change, consolidation, merger, sale or conveyance as if such
Holder had exercised the Warrants.
5.4 Determination of Outstanding Shares. The number of Common Shares at any
one time outstanding shall include the aggregate number of shares issued or
issuable upon the exercise of outstanding options, rights, warrants and upon the
conversion or exchange of outstanding convertible or exchangeable securities.
-6-
<PAGE>
6. Exchange and Replacement of Warrant Certificates. This Warrant
Certificate is exchangeable without expense, upon the surrender hereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant of like tenor, in
lieu thereof.
7. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Common Shares and shall not be
required to issue scrip or pay cash in lieu of fractional interests, it being
the intent of the parties that all fractional interests shall be eliminated by
rounding any fraction up to the nearest whole number of Common Shares.
8. Reservation of Shares. The Company covenants and agrees that it will at
all times reserve and keep available out of
-7-
<PAGE>
its authorized share capital, solely for the purpose of issuance upon the
exercise of the Warrants, such number of Common Shares as shall be equal to the
number of Warrant Shares issuable upon the exercise of the Warrants, for
issuance upon such exercise, and that, upon exercise of the Warrants and payment
of the Exercise Price therefor, all Warrant Shares issuable upon such exercise
shall be duly and validly issued, fully paid, nonassessable and not subject to
the preemptive rights of any shareholder.
9. Redemption of Warrants. The Warrants are redeemable by the Company, in
whole or in part, on not less than thirty (30) days' prior written notice at a
redemption price of $.05 per Warrant at any time, provided that the closing
sales price of the Common Shares on all twenty (20) trading days ending on the
third day prior to the day on which the Company gives notice of redemption has
been at least 164% of the then effective Exercise Price of the Warrants (the
"Target Redemption Price"). The redemption notice shall be mailed to the Holders
of the Warrants at the address of such Holders as shown on the books of the
Company. Holders of the Warrants will have exercise rights until the close of
business on the date fixed for redemption
10. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
-8-
<PAGE>
(a) If to a registered Holder of the Warrants, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 1 of this
Agreement or to such other address as the Company may designate by notice
to the Holders.
11. Successors. All the covenants and provisions of this Agreement by or
for the benefit of the Company and the Holders inure to the benefit of their
respective successors and assigns hereunder.
12. Governing Law.
12.1 Choice of Law. This Warrant Certificate is being delivered in New
York. This Agreement shall be deemed to have been made and delivered in the
State of New York and shall be governed as to validity, interpretation,
construction, effect and in all other respects by the internal laws of the State
of New York.
12.2 Jurisdiction and Service of Process. The Company and the Holder each
(a) agrees that any legal suit, action or proceeding arising out of or relating
to this Warrant Certificate, or any other agreement entered into between the
Company and the Holder pursuant to the Offering shall be instituted exclusively
in New York State Supreme Court, County of New York, or in the United States
District Court for the Southern District of New York, (b) waives any objection
which the Company or such Holder
-9-
<PAGE>
may have now or hereafter to the venue of any such suit, action or proceeding,
and (c) irrevocably consents to the jurisdiction of the New York State Supreme
Court, County of New York and the United States District Court for the Southern
District of New York in any such suit, action or proceeding. The Company and the
Holder each further agrees to accept and acknowledge service of any and all
process which may be served in any such suit, action or proceeding in the New
York State Supreme Court, County of New York or in the United States District
Court for the Southern District of New York and agrees that service of process
upon the Company or the Holder mailed by certified mail to their respective
addresses shall be deemed in every respect effective service of process upon the
Company or the Holder, as the case may be, in any suit, action or proceeding.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed, as of the __ day of February 1998.
U.S. AUTOMOTIVE MANUFACTURING, INC.
By: _______________________________
Name:
Title:
-10-
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ________ Warrant Shares and
herewith tenders in payment for such Warrant Shares cash or a check payable to
the order of U.S. Automotive Manufacturing, Inc. in the amount of $_________,
all in accordance with the terms hereof. The undersigned requests that a
certificate for such Warrant Shares be registered in the name of
______________________, whose address is________________________________________
________________________________________________________________________________
________________________________________________________________________________
______________________________________, and that such certificate be delivered
to __________________, whose address is ____________
Dated: Signature:
-------------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
-------------------------------------
-------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED __________________________ hereby sells, assigns and
transfers unto
________________________________________________________________________________
(Please print name and address of transferee) this Warrant Certificate, together
with all right, title and interest therein, and does hereby irrevocably
constitute and appoint _____________________, Attorney, to transfer the within
Warrant Certificate on the books of the within-named Company, with full power of
substitution.
Dated: Signature:
------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate)
- ----------------------------------------
- ----------------------------------------
(Insert Social Security or Other
Identifying Number of Assignee
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of
_________________________, 1998, between U.S. Automotive Manufacturing, Inc., a
Delaware corporation (the "Company"), and the person whose name and address
appear on the signature page of this Agreement (individually, a "Holder" or
collectively with the holders of the Units issued in the Offering, each as
defined below, the "Holders").
RECITALS
WHEREAS, simultaneously with the execution and delivery of this Agreement,
the Company has accepted the subscription of the Holder in connection with the
offering by the Company (the "Offering") of up to ten (10) units (the "Units"),
each Unit consisting of (i) an unsecured non-negotiable promissory note of the
Company in the principal amount of $100,000 and (ii) warrants (the "Warrants")
to purchase up to an aggregate of 25,000 shares (the "Warrant Shares") of common
stock, $.001 par value, of the Company (the "Common Stock"), all upon the terms
set forth in the Company's Confidential Private Offering Memorandum dated
February 28, 1998, as amended or supplemented;
WHEREAS, the Company has agreed to grant to the Holder certain piggyback
registration rights with respect to the Warrants Shares (the "Registrable
Shares"), upon the terms and conditions herein set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Piggyback Registration.
(a) If at any time any time prior to the sixth (6th) year anniversary of
the final closing of the Offering, the Company proposes to prepare and file with
the Securities and Exchange Commission a registration statement covering equity
or debt securities of the Company, or any such securities of the Company held by
its stockholders, other than in connection with a merger, acquisition or
pursuant to a registration statement on Form S-4 or Form S-8 or any successor
form (for purposes of this Section 1, collectively, a "Registration Statement"),
the Company will give written notice of its intention to do so by registered or
certified mail ("Notice"), at least 15 days prior to the filing of each such
Registration Statement, to Holder. Upon the written request of Holder, made
within 10 days after receipt of the Notice, that the Company include any of the
Registrable Shares in the Registration Statement, the Company shall, as to
Holder, use reasonable efforts to effect the registration under the Securities
Act of 1933, as amended (the "Act"), of the Registrable Shares which it has been
so requested to register ("Piggyback Registration"), at the Company's sole cost
and expense and at no cost or expense to Holder (other than any underwriting or
other commissions, discounts or fees of any counsel or advisor to the Holder
which shall be payable by the Holder, as further provided in Section 2(b)
<PAGE>
hereof); provided, however, that if, the Piggyback Registration is in connection
with an underwritten public offering and in the written opinion of the Company's
underwriter or managing underwriter of the underwriting group, if any, for such
offering, the inclusion of all or a portion of the Registrable Shares requested
to be registered, when added to the securities being registered by the Company
or the selling stockholder(s), if any, will exceed the maximum amount of the
Company's securities which can be marketed (i) at a price reasonably related to
their then current market value, or (ii) without otherwise having a material
adverse effect on the entire offering, then the Company may, subject to the
allocation priority set forth in the next paragraph, exclude from such offering
all or a portion of the Registrable Shares which it has been requested to
register. Without limiting the generality of the foregoing, such underwriter or
managing underwriter may condition its consent to the inclusion of all or a
portion of the Registrable Shares requested to be registered upon the
participation by Holder in the underwritten public offering on the terms and
conditions thereof.
(b) If securities are proposed to be offered for sale pursuant to such
Registration Statement by other security holders of the Company and the total
number of the Registrable Shares to be offered by Holder and such other selling
security holders is required to be reduced pursuant to a request from the
underwriter or managing underwriter (which request shall be made only for the
reasons and in the manner set forth above), the aggregate number of Registrable
Shares to be offered by Holder pursuant to such Registration Statement shall
equal the number which bears the same ratio to the maximum number of securities
that the underwriter or managing underwriter believes may be included for all
the selling security holders (including Holder) as the original number of
securities proposed to be sold by Holder bears to the total original number of
securities proposed to be offered by Holder and the other selling
securityholders.
(c) Notwithstanding the preceding provisions of this Section, the Company
shall have the right at any time after it shall have given written notice
pursuant to this Section (irrespective of whether any written request for
inclusion of such securities shall have already been made) to elect not to file
any proposed Registration Statement, or to withdraw the same after the filing
but prior to the effective date thereof.
(d) For purposes of this Agreement, the term "Registrable Shares" shall
mean each of the shares of Common Stock of the Company acquired and beneficially
owned by Holder upon the exercise of the Warrants granted in connection with the
Offering and any securities issued or issuable with respect to such shares of
Common Stock by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise. Once issued, any such securities shall cease to be
Registrable Shares registerable hereunder upon the earlier of (a) the sale of
such securities pursuant to an effective registration statement under the Act,
(b) the distribution thereof to the public pursuant to Rule 144 (or any
successor provision) under the Act, (c) a transfer pursuant to which new
certificates for them not bearing a legend restricting further transfer shall
have been delivered by the Company and subsequent disposition of them shall not
require registration or qualification of them under the Act or any similar state
law then in force, (d) they shall have ceased to be outstanding, or (e) any and
all legends restricting transfer thereof have been removed in accordance with
the provisions of Rule 144(k) (or any successor provision) under the Act.
-2-
<PAGE>
2. Covenants of the Company With Respect to Registration. The Company
hereby covenants and agrees as follows:
(a) Following the effective date of a Registration Statement, the Company
shall, upon the request of Holder, forthwith supply such reasonable number of
copies of the Registration Statement, preliminary prospectus and prospectus
meeting the requirements of the Act, and other documents necessary or incidental
to the public offering of the Registrable Shares as shall be reasonably
requested by Holder to permit Holder to make a public distribution of the
Registrable Shares. The obligations of the Company hereunder with respect to the
Registrable Shares are expressly conditioned on Holder's furnishing to the
Company such appropriate information concerning Holder, the Registrable Shares
and the terms of Holder's offering of such shares as the Company may request.
(b) The Company will pay all costs, fees and expenses in connection with
all Registration Statements filed pursuant to Section 1, including, without
limitation, the Company's legal and accounting fees, printing expenses and blue
sky fees and expenses; provided, however, that Holder shall be solely
responsible for the fees of any counsel or advisor retained by Holder in
connection with such registration and any transfer taxes or underwriting
discounts, selling commissions or selling fees applicable to the Registrable
Shares sold by Holder pursuant thereto.
(c) The Company will use reasonable efforts to qualify or register the
Registrable Shares included in a Registration Statement for offering and sale
under the securities or blue sky laws of such states as are reasonably requested
by Holder, provided that the Company shall not be obligated to execute or file
any general consent to service of process (unless the Company is already then
subject to service in such jurisdiction) or to qualify as a foreign corporation
to do business under the laws of any such jurisdiction.
(d) Notwithstanding anything contained in this Agreement to the contrary,
the Company shall not be obligated to register the Registrable Shares under the
Act or maintain the effectiveness of any registration statement filed under
Section 1 hereof if it receives an opinion of counsel to the Company that any of
the Registrable Shares may be freely traded without registration under the Act,
under Rule 144 of the Act or otherwise. Nothing contained in this Agreement
shall require the Company to undergo an audit, other than in the ordinary course
of business.
3. Covenant of Holder.
(a) Holder, upon receipt of notice from the Company that an event has
occurred which requires a post-effective amendment to the Registration Statement
or a supplement to the prospectus included therein, shall promptly discontinue
the sale of the Registrable Shares until Holder receives a copy of a
supplemented or amended prospectus from the Company, which the Company shall
provide as soon as practicable after such notice.
(b) Holder agrees to fully cooperate with the Company and to furnish to the
Company such information regarding Holder as the Company may from time to time
deem reasonably necessary in connection with the preparation and filing of the
Registration Statement.
-3-
<PAGE>
4. Indemnification.
(a) In the event of any registration of any the Registrable Shares under
the Act, the Company shall indemnify and hold harmless the holder of the
Registrable Shares covered by such registration statement, its directors and
officers, against any losses, claims, damages or liabilities to which such
holder or any such director or officer may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities caused by or
arising out of any untrue statement of a material fact contained in any
registration statement under which such securities were registered under the
Act, any preliminary prospectus, final prospectus or summary prospectus
contained therein, or any amendment or supplement thereto, or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, provided that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage, liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
registration statement, any such preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement in reliance upon and in conformity
with written information furnished or required to be furnished to the Company by
such holder for use in the preparation thereof.
(b) As a condition to including any of the Registrable Shares in any
registration statement filed pursuant to this Agreement, the Holder of the
Registrable Shares, as a prospective seller of the Registrable Shares hereby
agrees to indemnify and hold harmless (in the same manner and to the same extent
as set forth in subdivision (a) of this Section 4) the Company, each director of
the Company, each officer, employee or agent of the Company and each underwriter
of the Registrable Shares and each other person or entity, if any, which
controls the Company or such underwriter within the meaning of the Act, with
respect to any statement or alleged statement in, or omission or alleged
omission from, such registration statement, any preliminary prospectus, final
prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, if such statement or alleged statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by the Holder for use in the preparation of
such registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement. Any such indemnity shall remain in full
force and effect, regardless of any investigation made by or on behalf of the
Company or any such director, officer or controlling person and shall survive
the transfer of such securities by Holder.
(c) Promptly after receipt by an indemnified party of notice of the
commencement of any action or proceeding involving a claim referred to in the
preceding subdivisions of this Section 4, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party, give
written notice to the latter of the commencement of such action, provided that
the failure of any indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under the preceding
subdivisions of this Section 4, except to the extent that the indemnifying party
is actually prejudiced by such failure to give notice. In case any such action
is brought against an indemnified party, unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, the indemnifying party
shall be entitled
-4-
<PAGE>
to participate in and to assume the defense thereof, jointly with any other
indemnifying party similarly notified, to the extent that the indemnifying party
may wish, with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses subsequently
incurred by the latter in connection with the defense thereof other than
reasonable costs of investigation. No indemnifying party shall, without the
consent of the indemnified party, consent to entry of any judgment or enter into
any settlement of any such action which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability, or a covenant not to sue, in respect to such
claim or litigation. No indemnified party shall consent to entry of any judgment
or enter into any settlement of any such action the defense of which has been
assumed by an indemnifying party without the consent of such indemnifying party.
5. Amendments. This Agreement may only be amended by a written instrument
executed by the Company and the Holder.
6. Notices. Except as otherwise provided in this Agreement, all notices,
requests and other communications to any person provided for hereunder shall be
in writing and shall be given to such person (a) in the case of the Holder,
addressed to such party at the address set forth on the signature page of this
Agreement or such other address as the Holder shall specify to the Company in
writing, or (b) in the case of the Company, at the address set forth on the
signature page hereto, to the attention of its President, or at such other
address, or to the attention of such other officer, as the Company shall have
furnished to the Holder in writing with a copy to: Tenzer Greenblatt LLP, 405
Lexington Avenue, New York, New York 10174, Attention: J. Russell Bulkeley, Esq.
Each such notice, request or other communication shall be effective (i) if given
by mail, 48 hours after such communication is deposited in the mails (except as
otherwise provided in Section 1) by first class postage prepaid, addressed as
aforesaid or (ii) if given by any other means (including, without limitation, by
fax or air courier), when delivered at the address specified above, provided
that any such notice, request or communication shall not be effective until
received.
7. Assignment. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto. In addition, and whether or
not any express assignment shall have been made, the provisions of this
Agreement which are for the benefit of Holder shall also be for the benefit of
and enforceable by any subsequent holder of the Registrable Shares. Holder
agrees, by accepting any portion of the Registrable Shares after the date
hereof, to the provisions of this Agreement.
8. Governing Law.
(a) THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND
THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF NEW
YORK WITHOUT REFERENCE TO THE PRINCIPLES OF CONFLICTS OF LAWS.
-5-
<PAGE>
(b) Each of the Company and Holder hereby irrevocably and unconditionally
consents to submit to the exclusive jurisdiction of the courts of the State of
New York and of the United States located in the County of New York, State of
New York (the "New York Courts") for any litigation arising out of or relating
to this Agreement and the transactions contemplated hereby (and agrees not to
commence any litigation relating thereto except in such courts), waives any
objection to the laying of venue of any such litigation in the New York Courts
and agrees not to plead or claim that such litigation brought in any New York
Courts has been brought in an inconvenient forum.
9. Counterparts. This Agreement may be executed by facsimile and may be
signed simultaneously in any number of counterparts, each of which shall be
deemed an original, but all such counterparts shall together constitute one and
the same instrument.
10. Entire Agreement. This Agreement embodies the entire agreement and
understanding between the Company and each other party hereto relating to the
subject matter hereof and supersedes all prior agreements and understandings
relating to such subject matter.
11. Severability. If any provision of this Agreement, or the application of
such provisions to any person or circumstance, shall be held invalid, the
remainder of this Agreement, or the application of such provision to persons or
circumstances other than those to which it is held invalid, shall not be
affected thereby.
[Signature Page Follows]
-6-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized as of the
date first above written.
U.S. AUTOMOTIVE MANUFACTURING, INC.
By:
------------------------------------
John W. Kohut, Chairman of the Board
Address: Route 627, Airport Drive
Tappahannock, Virginia 22560
Telephone: (___)__________
Telecopier: (___)__________
HOLDER:
----------------------------------------
Address: ______________________________
______________________________
______________________________
______________________________
Telephone: ( ) ______________________
Telephone: ( ) ______________________
-7-
REVOLVING CREDIT FACILITY
THIS AGREEMENT, dated as of March 31, 1998 by and between U.S. Automotive
Manufacturing, Inc., with offices located at Route 627, Airport Drive,
Tappahannock, Virginia 22560 (the "Borrower" or the "Company"), and
_________________, having an address at ________________(the "Lender").
WHEREAS, the Borrower has requested that the Lender make available from
time to time to the Borrower up to an aggregate amount of Two Million
($2,000,000) Dollars; and
WHEREAS, subject to the terms and conditions hereinafter set forth, the
Lender is willing to make such funds available to the Borrower;
NOW, THEREFORE, in consideration of the promises and the mutual covenants
and agreements herein contained, the parties hereto agree as follows:
Section 1. THE CREDIT FACILITY
1.1 Advances.
(a) The Lender agrees, subject to the terms and conditions hereinafter
set forth, to advance (an "Advance") to Borrower from time to time in an
aggregate principal amount outstanding at any one time not to exceed
$2,000,000 (the "Credit Facility"), which is being drawn down by Borrower
to the extent of $300,000 on the date hereof (the "Initial Borrowing Date")
and may be further drawn down by Borrower, and shall be provided by Lender,
from time to time as the proceeds of prior draw downs are expended as
contemplated hereby on five (5) business days' notice to Lender from the
Borrower.
(b) Notwithstanding anything to the contrary contained in subparagraph
1.1(a) above, Borrower acknowledges that Lender may not be able to Advance
up to the full amount of the Credit Facility to Borrower and waives any
obligation for Lender to do so; provided, however, that Lender covenants
and agrees to make available to Borrower Advances of not less than
$1,000,000 in the aggregate at any time during the term of this Credit
Facility.
1.2 Security Interest/Collateral.
(a) The Credit Facility creates in favor of the Lender a general
security interest in the assets of the Company as well as a first security
interest (prior to all other liens) in and to the Company's property
located at 1875 Lake Mary Boulevard, Sanford, FL 32773 (collectively, the
"Collateral").
<PAGE>
(b) The Company authorizes the Lender to sign and file on its behalf
one or more financing statements with respect to the Collateral pursuant to
the Uniform Commercial Code. At any time and from time to time, upon
request of the Lender, the Company shall give, execute, file and/or record
any notice, financing statement, statement, instrument, document or
agreement that the Lender considers necessary to create, preserve,
continue, perfect or validate any security interest granted hereunder or
which the Lender considers necessary or desirable to exercise or enforce
the Lender's rights hereunder with respect to such security interest,
naming the Company as debtor and the Lender as secured party.
1.3 Promissory Note. Borrower's obligation to repay each Advance, together
with accrued interest thereon, will be evidenced by a Revolving Credit Note in
the form attached hereto (the "Note") to be executed by Borrower and delivered
to Lender concurrently with Borrower's acceptance of this Agreement.
1.4 Interest. Interest at the rate of eleven percent (11%) per annum shall
be payable in arrears monthly, commencing August 1, 1998, on all outstanding
Advances.
1.5 Payment. All Advances made pursuant to this Credit Facility shall be
due three (3) business days after the earlier of: (i) the second anniversary
from the Initial Borrowing Date (the "Maturity Date") or (ii) the transfer by
the Company to its wholly-owned subsidiary, Quality Automotive Company, of any
part of the Collateral which has the effect of reducing the aggregate value of
the Collateral (excluding that value of any Collateral subject to a prior lien)
to less than 150% of the Credit Facility.
1.6 Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given or
made as of the date delivered, if delivered personally, or one (1) business day
after having been deposited with a courier, if sent by overnight courier or
having been sent by telecopy, if sent by telecopy (receipt confirmed), or three
(3) business days after having been mailed, if mailed by registered or certified
mail, postage prepaid, return receipt requested, to the addresses of the parties
first set forth above or to such other address as any party shall have
designated by like notice to the other parties hereto (except that a notice of
change of address shall only be effective upon receipt). A copy of notice to
Borrower shall also be sent to Tenzer Greenblatt LLP, 405 Lexington Avenue, New
York, New York 10174 (Attn: Russell Bulkeley, Esq.).
1.7 Use of Proceeds. The Borrower agrees that the proceeds of the Loan
shall be used to finance the working capital requirements of Borrower.
2
<PAGE>
Section 2. ADDITIONAL CONSIDERATION
2.1 Grant of Initial Warrants.
(a) Subject to Section 2.3 hereof, Borrower shall simultaneously herewith
issue to Lender five year warrants ("Initial Warrants") to purchase up to
200,000 shares ("Initial Warrant Shares") of the common stock, $.001 par value,
of the Company (the "Common Stock"). exercisable any time after the one year
anniversary of the Initial Borrowing Date at an exercise price equal to eighty
percent (80%) of the average Current Market Price (as defined in paragraph (b)
below) of the Common Stock for the twenty (20) trading days preceding such one
year anniversary date.
(b) For purposes of this Agreement, "Current Market Price," when used with
references to shares of Common Stock or other securities for any period shall
mean the average of the daily closing prices per share of Common Stock or such
other securities for such period. The closing price for each day shall be the
last quoted sale price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc., Automated Quotation System or such
other system then in use, or, on any such date the Common Stock or such other
securities are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Common Stock or such other securities selected by the Board of Directors
of the Corporation. If the Common Stock is listed or admitted to trading on a
national securities exchange, the closing price shall be the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the Common
Stock on such other securities are not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Common Stock or such other securities are
listed or admitted to trading. If the Common Stock or such other securities are
not publicly held or so listed or publicly traded, "Current Market Price" shall
mean the Fair Market Value per share of Common Stock or of such other securities
as determined in good faith by the Board of Directors of the Corporation based
on an opinion of an independent investment banking firm with an established
national reputation as a valuer of securities, which opinion may be based on
such assumptions as such firm shall deem to be necessary and appropriate.
2.2 Additional Grant of Warrants.
(a) Subject to Section 2.3 and paragraphs (b) and (c) below, Borrower shall
grant to Lender five year warrants (the "Warrants") to purchase up to 600,000
shares of Common Stock (the
<PAGE>
"Warrant Shares"), or a portion thereof which Warrants shall be granted on each
of the dates below (each, a "Grant Date"), as follows:
(1) at September 30, 1997, Warrants to purchase up to 200,000 Warrant
Shares, exercisable any time after the one year anniversary of the
Initial Borrowing Date at an exercise price equal to eighty percent
(80%) of the average Current Market Price of the Common Stock for the
twenty (20) trading days preceding such one year anniversary date.
(2) at March 31, 1999, Warrants to purchase up to 100,000 Warrant Shares,
exercisable any time after such Grant Date at an exercise price equal
to eighty percent (80%) of the average Current Market Price of the
Common Stock for the twenty (20) trading days preceding such Grant
Date.
(3) at June 30, 1999, Warrants to purchase up to 100,000 Warrant Shares,
exercisable any time after the date such Grant Date at an exercise
price equal to eighty percent (80%) of the average Current Market
Price of the Common Stock for the twenty (20) trading days preceding
such Grant Date.
(4) at September 30, 1999, Warrants to purchase up to 100,000 Warrant
Shares, exercisable any time after the date such Grant Date at an
exercise price equal to eighty percent (80%) of the average Current
Market Price of the Common Stock for the twenty (20) trading days
preceding such Grant Date.
(5) at December 31, 1999, Warrants to purchase up to 100,000 Warrant
Shares, exercisable any time after the date such Grant Date at an
exercise price equal to eighty percent (80%) of the average Current
Market Price of the Common Stock for the twenty (20) trading days
preceding such Grant Date.
(b) Notwithstanding anything to the contrary contained in this Agreement,
in the event that, on or before the six month anniversary of the Initial
Borrowing Date, Borrower indefeasibly pays in full all Advances outstanding
under this Credit Facility (together with interest thereon), the Borrower shall
be under no further obligation to grant to Lender, and the Lender shall not be
entitled to any Warrants pursuant to this Section 2.2.
(c) Notwithstanding anything to the contrary contained in this Agreement,
in the event that, any time prior to the Maturity Date but subsequent to the six
month anniversary of the Initial Borrowing Date (the "Early Payment Date"), the
Borrower
<PAGE>
indefeasibly pays in full all Advances outstanding under this Credit Facility
(together with interest thereon), the Borrower shall be under no obligation to
grant to Lender, and the Lender shall not be entitled to, any Warrants which
would otherwise be granted to Lender subsequent to the Early Payment Date
pursuant to this Section 2.2.
2.3 Limitations. Notwithstanding anything to the contrary contained in this
Agreement, if the aggregate amount of Advances on or before the forty-fifth day
after the Initial Borrowing Date (the "Forty-Five Day Anniversary") is less than
$2,000,000, then
(a) the total number of Initial Warrant Shares to be granted under
Section 2.1 hereof shall be reduced to the amount of Initial Warrant Shares
equal to the product obtained by multiplying: (i) ten percent (10%) by (ii)
the aggregate dollar amount of any Advances having been made by Lender to
Borrower within such forty-five day period. Anything to the contrary
contained herein notwithstanding, in no event shall the aggregate number of
Initial Warrant Shares issued pursuant to Section 2.1 hereof exceed 200,000
shares of Common Stock; and
3
<PAGE>
(b) the total number of Warrant Shares to be granted under Section 2.2
hereof shall be reduced to the amount of Warrant Shares (the "Adjusted
Warrant Total") equal to the product obtained by multiplying: (i) 600,000
by (ii) that percentage, the numerator of which is the aggregate dollar
amount of the Advances made by the Lender at the Forty-Five Day Anniversary
and the denominator of which is $2,000,000. In the event of any adjustment
pursuant to this paragraph (b), the number of Warrants to be granted
pursuant to Section 2.2 hereof shall be adjusted pro ratably and the
Borrower shall be under no obligation to grant to Lender, and the Lender
shall not be entitled to, any Warrant Shares in excess of such Adjusted
Warrant Total.
2.4 Registration Rights. The Company shall grant the Lender or its assigns
"piggyback" registration rights with respect to the Initial Warrant Shares and
the Warrant Shares, as adjusted pursuant to Section 2.1 hereof. The Initial
Warrants and the Warrants received under the terms of this agreement may be
sold, transferred, hypothecated or assigned at the option of the Lender.
4
<PAGE>
2.5 Company Information. The Company has heretofore made available to the
Lender and the Lender has received, or had access to, the Borrower's reports on
Form 10-K for the year ended December 31, 1996 and Form 10-Q for the quarter
ended September 30, 1997 and such supplemental information pertaining to the
Company and its management as at the date hereof (including the Audited
Financial Statements for the year ended December 31, 1997).
2.6 Investment Representatives.
The Lender hereby represents, warrants and covenants as follows:
(a) The Lender understands that (A) neither the Warrants, Initial
Warrant Shares nor Warrant Shares have not been registered under the
Securities Act of 1933, as amended (the "Act"), or the securities laws of
any state, based upon applicable exemptions from such registration
requirements; (B) the Warrants, the Initial Warrant Shares and Warrant
Shares are "restricted securities," as said term is defined in Rule 144 of
the Rules and Regulations promulgated under the Act; (C) the Warrants,
Initial Warrant Shares and Warrant Shares may not be sold or otherwise
transferred unless they have been first registered under the Act and all
applicable state securities laws, or unless exemptions from such
registration provisions are available with respect to said resale or
transfer; (D) a legend (in the form of Schedule A hereto) to the foregoing
effect will be placed on the certificate or certificates representing the
Warrants, Initial Warrant Shares and Warrant Shares; and (E) stop transfer
instructions with respect to the foregoing will be placed with the transfer
agent for the Warrants, Initial Warrant Shares and Warrant Shares;
(b) The Lender is acquiring the Warrants, Initial Warrant Shares and
Warrant Shares solely for the account of the Lender for investment purposes
only, and not with a current view towards the distribution thereof;
(c) The Lender shall not sell, transfer, hypothecate or otherwise
dispose of the Warrants, Initial Warrant Shares or Warrant Shares other
than pursuant to an effective registration statement under the Act unless
prior thereto the Company receives either an opinion, in form and substance
reasonably acceptable to the Company, of the Company's counsel or counsel
for the Lender reasonably acceptable to the Company, that the proposed
transaction may be effected without compliance with the registration
provisions of the Act;
5
<PAGE>
(d) The Lender has had a reasonable opportunity to ask questions of
and receive answers from the Company, or a person or persons acting on
behalf of the Company, concerning the Company and its financial condition,
and all such questions, if any, have been answered to the full satisfaction
of the Lender;
(e) The Lender is not an "affiliate" of the Company, as such terms are
defined under the Act; and
(f) The Lender shall indemnify the Company and hold it harmless from
and against any and all losses, damages, liabilities, costs and expenses
which it may sustain or incur in connection with the breach by the Lender
of any representation, warranty or covenant made by the Lender herein;
2.7 Transfer Instructions. To enable the Company to enforce the Lender's
covenants contained in Section 2.4 above, the Lender consents to the Company
imposing transfer instructions consistent hereto with the transfer agent of the
Company's securities with respect to any Warrants, Initial Warrant Shares and
Warrant Shares until the end of such period.
Section 3. REPRESENTATIONS AND WARRANTIES OF BORROWER
The Borrower represents and warrants to Lender, as follows:
3.1 Corporation Existence, Power and Authority of the Borrower. The
Borrower is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and is duly licensed or
qualified in each jurisdiction where the property owned by it or the nature of
the business transacted by it requires such licensing and qualification, except
where such failure to qualify would not have a material adverse effect on the
Company. The Borrower has all requisite corporate power and authority to conduct
business as it is now being conducted and to enter into, consummate and perform
all the provisions of this Agreement, and any instrument, agreement or document
referred to herein to which the Borrower is or shall be a party, having been
duly authorized by all corporate and other required actions.
3.2 No Conflicts. The execution, delivery and performance of the Borrower
of this Agreement, the Promissory Note or any other instrument, agreement or
document referred to herein does not and will not result in any violation of, or
be in conflict with, any terms or provisions of the Certificate of Incorporation
or the by-laws of the Borrower, or any material statute, governmental regulation
or order, judgment, decree, agreement, indenture, or instrument applicable to
the Company.
3.3 Authorizations. All governmental approvals, licenses, authorizations,
consents, filings and registrations, if any are
6
<PAGE>
required for the delivery and execution of this Agreement, and any applicable
instrument, agreement or document referred to herein as having been obtained or
made, are final and are not subject to review or appeal or, to the knowledge and
belief of the Borrower, the subject of any pending or threatened attack or
appeal to direct proceedings or otherwise.
Section 4. GOVERNING LAW/JURISDICTION
This Agreement shall be construed and enforced in accordance with, and the
rights of the parties shall be governed by, the laws of the State of New York
without reference to the principles of conflicts of laws. The Borrower hereby
irrevocably submits to the jurisdiction of the Supreme Court of the State of New
York, County of New York in any action, suit, or proceeding brought against the
Borrower and related to or in connection with this Agreement or any other
instrument, agreement or document referred to herein or any transaction
contemplated hereby.
Section 5. MISCELLANEOUS
5.1 Amendments. This Agreement may only be amended by a written instrument
executed by the Lender and Borrower.
5.2 Notices. All notices, requests and communications to any person
provided for hereunder shall be in writing and shall be given to such person at
the address first set forth above or such other address as either party shall
specify to the other party (and in the case of the Borrower, with a copy to:
Tenzer Greenblatt LLP, 405 Lexington Avenue, New York, New York 10174,
Attention: J. Russell Bulkeley, Esq.) Each such notice, request or communication
shall be effective (i) if given by mail, 48 hours after such notice is deposited
in the mails by first class postage prepaid, addressed as aforesaid or (ii) if
given by any other means (including, without limitation, by fax or courier),
when delivered at the address specified above, provided that any such notice
shall not be effective until received.
5.3 Assignment. Neither this Agreement nor any rights, interests or
obligations hereunder may be assigned by any party hereto without the prior
written consent of all of the parties hereto. Any assignment not made in
compliance with this provision shall be null and void.
5.4 Severability. If any provision of this Agreement, or the application of
such provisions to any person or circumstance, shall be held invalid, the
remainder of this Agreement, or the application of such provision to persons or
circumstances other than those to which it is held invalid, shall not be
affected thereby.
5.5 Entire Agreement. This Agreement embodies the entire agreement and
understanding between the Company and each other
7
<PAGE>
party hereto relating to the subject matter hereof and supersedes all prior
agreements and understandings relating to such subject matter.
5.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
U.S. AUTOMOTIVE MANUFACTURING, INC.
By:
--------------------------------
Name:
Title:
______________________
[LENDER]
By:
----------------------------
Name:
Title:
8
<PAGE>
SCHEDULE A
Form of Legend
A. Warrant Shares
"THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE
SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO (1) AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT; (II) TO THE EXTENT APPLICABLE, RULE
144 UNDER THE ACT (OR SIMILAR RULE UNDER SUCH ACT RELATING TO THE
DISPOSITION OF SECURITIES); OR (III) OTHER EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE ACT AND APPLICABLE STATE SECURITIES LAWS, SUPPORTED BY
AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY AND ITS
COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
B. Warrants
"THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE
EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE
UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON
THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL,
REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE."
9
REVOLVING PROMISSORY NOTE
$2,000,000.00 ___________, New York
March 31, 1998
FOR VALUE RECEIVED, U.S. Automotive Manufacturing, Inc., a Delaware
corporation, having an address at Route 627, Airport Drive, Tappahanock,
Virginia 22560 ("Borrower"), promises to pay to the order of _______________,
("Lender"), the lesser of the aggregate unpaid principal sum of all Advances (as
shown in the attached schedule) made to Borrower by Lender pursuant to the
Revolving Credit Agreement, dated as of March 31, 1998 (the "Credit Agreement"),
on the Maturity Date and Two Million ($2,000,000) on demand after April 1, 1999,
together with interest, in arrears, from the date hereof on the unpaid balance
from time to time outstanding, before maturity of or default under this Note at
the rate of eleven percent (11%) per annum and, after the maturity of or default
under this note at the rate of fifteen percent (15%) per annum. Accrued and
unpaid interest only shall be payable monthly beginning August 1, 1998. All
accrued and unpaid interest shall be payable in full with the payment of the
principal.
All sums payable hereunder are payable at Lender's mailing address of
_________________________________, or such other place or places as Lender, its
successors or assigns ("Holder") may designate.
This Note may be prepaid, in whole at any time, or in part from time to
time without penalty or premiums.
All sums paid under this Note shall be applied first to any interest and
then any unpaid principal, with the remaining balance, if any, to be applied to
fees, expenses and other charges then due and unpaid.
All capitalized terms not otherwise defined herein shall have the meaning
ascribed to such term in the Credit Agreement.
The occurrence of any or more of the following events will constitute an
"Event of Default" hereunder:
1. Nonpayment of any interest due under this note when it shall
become due and payable (no prior demand therefore being
necessary), which nonpayment shall have continued for more than
ten (10) days.
2. Nonpayment of any principal due under this note when it shall
become due and payable, which nonpayment shall have continued for
more than ten (10) days.
1
<PAGE>
3. The dissolution, liquidation, or termination of existence of
Borrower or a sale of assets of Borrower out of the ordinary
course of business.
4. The merger or consolidation with any corporation or other entity
by Borrower, where Borrower is not the surviving entity other
than a merger or consolidation of the Borrower with and into a
wholly-owned subsidiary.
5. Entry of an order of relief of Borrower in any federal bankruptcy
proceeding or any order or proceeding of similar effect under any
state insolvency or receivership law.
6. Failure to maintain Collateral in the Company having an aggregate
value of at least 150% of the Credit Facility, which failure is
not cured within ten (10) days.
Upon the occurrence of any Event of Default, this Note, at the option of
the Holder, shall become immediately due and payable without presentment,
demand, protest or notice of any kind, all of which are hereby waived by
Borrower. Holder's failure to exercise such option shall not constitute a waiver
of the right to exercise it at any time.
Borrower will pay all legal and other fees and expenses reasonably incurred
by Holder in connection with or incidental to the enforcement of any of the
obligations of Borrower or rights of Holder under this Note, and all such fees
and expenses shall be indebtedness under this Note.
Notwithstanding anything to the contrary contained in this note, the Holder
shall not be permitted to charge, take or receive, and the Borrower shall not be
obligated to pay, any interest in excess of the maximum rate from time to time
permitted by applicable law.
This Note may not be modified or terminated orally.
For all purposes, this Note shall be enforced and construed in accordance
with the substantive law of New York, without resort to the conflict of laws and
rules of each state.
U.S. AUTOMOTIVE MANUFACTURING, INC.
By:
--------------------------------------
Name:
Title:
2
<PAGE>
<TABLE>
<CAPTION>
Schedule Attached to Revolving Promissory Note
in the amount of $2,000,000
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
DATE OF INTEREST AMOUNT UNPAID PRINCIPAL DATE OF NOTATION
ADVANCE RATE OF AMOUNT OF BALANCE MATURITY MADE BY
(% p.a.) ADVANCE REPAYMENT OF LOAN
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</TABLE>
3
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON
EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, MARCH 31, 2003
No. WR- _______ Warrants
U.S. AUTOMOTIVE MANUFACTURING, INC.
WARRANT
This warrant certificate (the "Warrant Certificate") certifies that
___________________ or registered assigns, is the registered holder of warrants
to purchase, at any time from the issuance hereof until 5:00 P.M. New York City
time on March 31, 2003 (the "Expiration Date"), up to _______ fully-paid and
non-assessable shares, subject to adjustment in accordance with Article 5 hereof
(the "Warrant Shares"), of the common stock (the "Common Shares"), par value
$.001 par value of U.S. Automotive Manufacturing, Inc., a Delaware corporation
(the "Company"), subject to the terms and conditions set forth herein. The
warrants represented by this Warrant Certificate and any warrants resulting from
a transfer or subdivision of the warrants represented by this Warrant
Certificate
<PAGE>
shall sometimes hereinafter be referred to, individually, as a "Warrant" and,
collectively, as the "Warrants."
1. Exercise of Warrants. Each Warrant is initially exercisable to purchase
one Warrant Share at an initial exercise price of $ per Warrant Share, subject
to adjustment as set forth in Article 5 hereof, payable in cash or by check to
the order of the Company, or any combination of cash or check. Upon surrender of
this Warrant Certificate with the annexed Form of Election to Purchase duly
executed, together with payment of the Exercise Price (as hereinafter defined)
for the Warrant Shares purchased, at the Company's principal offices (presently
located at 627 Airport Road, Tappahannock, Virginia 22560, the registered holder
of the Warrant Certificate ("Holder" or "Holders") shall be entitled to receive
a certificate or certificates for the Warrant Shares so purchased. The purchase
rights represented by this Warrant Certificate are exercisable at the option of
the Holder hereof, in whole or in part (but not as to fractional shares). In the
case of the purchase of less than all the Warrant Shares purchasable under this
Warrant Certificate, the Company shall cancel this Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Warrant Shares purchasable hereunder.
2. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for the Warrant Shares purchased pursuant to such
exercise shall be made forthwith
-2-
<PAGE>
without charge to the Holder thereof including, without limitation, any tax
which may be payable in respect of the issuance thereof, and such certificates
shall (subject to the provisions of Article 3 hereof) be issued in the name of,
or in such names as may be directed by, the Holder thereof; provided, however,
that the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificates in a name other than that of the Holder and the Company shall not
be required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
The Warrant Certificates and, upon exercise of the Warrants, the
certificates representing the Warrant Shares shall be executed on behalf of the
Company by the manual or facsimile signature of those officers required to sign
such certificates under applicable law.
This Warrant Certificate and, upon exercise of the Warrants, in part or in
whole, certificates representing the Warrant Shares shall bear a legend
substantially similar to the following:
"The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("Act"), and may not be sold,
pledged or otherwise transferred except pursuant to (i) an effective
registration statement under the Act, (ii) to the extent applicable,
pursuant to Rule 144 under the Act (or any
-3-
<PAGE>
similar rule under such Act relating to the disposition of securities), or
(iii) other exemption from the registration requirements of the Act and
applicable state securities laws, supported by an opinion of counsel,
reasonably satisfactory to the Company or its counsel, that such
registration is not required."
3. Restriction on Transfer of Warrants. The Holder of this Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
and the Warrant Shares issuable upon exercise of the Warrants are being acquired
as an investment and not with a view to the distribution thereof and that the
Warrants and the Warrant Shares may not be transferred unless such securities
are either registered under the Act and any applicable state securities law or
an exemption from such registration is available. The Holder of this Warrant
Certificate acknowledges that the Holder is an "accredited investor" within the
meaning of Regulation D promulgated under the Act who has been provided with an
opportunity to ask questions of representatives of the Company concerning the
Company and that all such questions were answered to the satisfaction of the
Holder. In connection with any purchase of Warrant Shares the Holder agrees to
execute any documents which may be reasonably required by counsel to the Company
to comply with the provisions of the Act and applicable state securities laws.
4. Price.
4.1 Initial and Adjusted Exercise Price. The initial exercise price of each
Warrant shall be $____ per Warrant Share. The adjusted exercise price shall be
the price which shall result from time to time from any and all adjustments of
the
-4-
<PAGE>
initial exercise price in accordance with the provisions of Article 5 hereof.
4.2 Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
5. Adjustments of Exercise Price and Number of Warrant Shares.
5.1 Subdivision and Combination. In case the Company shall at any time
subdivide or combine the outstanding Common Shares, the Exercise Price shall
forthwith be proportionately decreased in the case of subdivision or increased
in the case of combination.
5.2 Adjustment in Number of Warrant Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Article 5, the number of
Warrant Shares issuable upon the exercise of each Warrant shall be adjusted to
the nearest full Common Share by multiplying a number equal to the Exercise
Price in effect immediately prior to such adjustment by the number of Warrant
Shares issuable upon exercise of the Warrants immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price.
5.3 Reclassification, Consolidation, Merger. etc. In case of any
reclassification or change of the outstanding Common Shares (other than a change
in par value, or from par value to no par value, or from no par value to par
value, or as a result of a
-5-
<PAGE>
subdivision or combination), or in the case of any consolidation of the Company
with, or merger of the Company into, another corporation (other than a
consolidation or merger in which the Company is the surviving corporation and
which does not result in any reclassification or change of the outstanding
Common Shares, except a change as a result of a subdivision or combination of
such shares or a change in nominal value, as aforesaid), or in the case of a
sale or conveyance to another corporation of the property of the Company as an
entirety, the Holder shall thereafter have the right to purchase the kind and
number of shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance as if the
Holder were the owner of the Warrant Shares issuable upon exercise of the
Warrants immediately prior to any such events at a price equal to the product of
(x) the number of Warrant Shares issuable upon exercise of the Warrants and (y)
the Exercise Price in effect immediately prior to the record date for such
reclassification, change, consolidation, merger, sale or conveyance as if such
Holder had exercised the Warrants.
5.4 Determination of Outstanding Shares. The number of Common Shares at any
one time outstanding shall include the aggregate number of shares issued or
issuable upon the exercise of outstanding options, rights, warrants and upon the
conversion or exchange of outstanding convertible or exchangeable securities.
-6-
<PAGE>
6. Exchange and Replacement of Warrant Certificates. This Warrant
Certificate is exchangeable without expense, upon the surrender hereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant of like tenor, in
lieu thereof.
7. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Common Shares and shall not be
required to issue scrip or pay cash in lieu of fractional interests, it being
the intent of the parties that all fractional interests shall be eliminated by
rounding any fraction up to the nearest whole number of Common Shares.
8. Reservation of Shares. The Company covenants and agrees that it will at
all times reserve and keep available out of
-7-
<PAGE>
its authorized share capital, solely for the purpose of issuance upon the
exercise of the Warrants, such number of Common Shares as shall be equal to the
number of Warrant Shares issuable upon the exercise of the Warrants, for
issuance upon such exercise, and that, upon exercise of the Warrants and payment
of the Exercise Price therefor, all Warrant Shares issuable upon such exercise
shall be duly and validly issued, fully paid, nonassessable and not subject to
the preemptive rights of any shareholder.
9. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to a registered Holder of the Warrants, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 1 of this
Agreement or to such other address as the Company may designate by notice
to the Holders.
10. Successors. All the covenants and provisions of this Agreement by or
for the benefit of the Company and the Holders inure to the benefit of their
respective successors and assigns hereunder.
11. Governing Law.
11.1 Choice of Law. This Warrant Certificate is being delivered in New
York. This Agreement shall be deemed to
-8-
<PAGE>
have been made and delivered in the State of New York and shall be governed as
to validity, interpretation, construction, effect and in all other respects by
the internal laws of the State of New York.
11.2 Jurisdiction and Service of Process. The Company and the Holder each
(a) agrees that any legal suit, action or proceeding arising out of or relating
to this Warrant Certificate, or any other agreement entered into between the
Company and the Holder pursuant to the Offering shall be instituted exclusively
in New York State Supreme Court, County of New York, or in the United States
District Court for the Southern District of New York, (b) waives any objection
which the Company or such Holder may have now or hereafter to the venue of any
such suit, action or proceeding, and (c) irrevocably consents to the
jurisdiction of the New York State Supreme Court, County of New York and the
United States District Court for the Southern District of New York in any such
suit, action or proceeding. The Company and the Holder each further agrees to
accept and acknowledge service of any and all process which may be served in any
such suit, action or proceeding in the New York State Supreme Court, County of
New York or in the United States District Court for the Southern District of New
York and agrees that service of process upon the Company or the Holder mailed by
certified mail to their respective addresses shall be deemed in every respect
effective service of process upon the
-9-
<PAGE>
Company or the Holder, as the case may be, in any suit, action or proceeding.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed, as of the __ day of __________ 199_.
U.S. AUTOMOTIVE MANUFACTURING, INC.
By: _______________________________
Name:
Title:
-10-
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ________ Warrant Shares and
herewith tenders in payment for such Warrant Shares cash or a check payable to
the order of U.S. Automotive Manufacturing, Inc. in the amount of $_________,
all in accordance with the terms hereof. The undersigned requests that a
certificate for such Warrant Shares be registered in the name of _____
________________________________, whose address is _____________________________
________________________________________________________________________________
______________________________________, and that such certificate be delivered
to __________________, whose address is ________________________________________
_______________________________________________________________________.
Dated: Signature:
____________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate.)
---------------------------------
---------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ________________________________________________ hereby
sells, assigns and transfers unto
_______________________________________________________________________________
(Please print name and address of transferee) this Warrant Certificate, together
with all right, title and interest therein, and does hereby irrevocably
constitute and appoint _____________________, Attorney, to transfer the within
Warrant Certificate on the books of the within-named Company, with full power of
substitution.
Dated: Signature:
____________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate.)
- ----------------------------------------
- ----------------------------------------
(Insert Social Security or Other
Identifying Number of Assignee)
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of March 31,
1998, between U.S. Automotive Manufacturing, Inc., a Delaware corporation (the
"Company"), _______________________, having an office at
_______________________________ (individually, a "Holder" or collectively with
the holders of the Units issued in the Offering, each as defined below, the
"Holders").
RECITALS
WHEREAS, simultaneously with the execution and delivery of this Agreement,
the Company has entered into a $2,000,000 revolving credit facility, pursuant to
which the Company granted certain warrants to purchase shares of the Company's
Common Stock (the "Warrant Shares"), upon the terms and conditions of that
Credit Agreement of even date herewith;
WHEREAS, the Company has agreed to grant to the Holder certain piggyback
registration rights with respect to the Warrants Shares (the "Registrable
Shares"), upon the terms and conditions herein set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Piggyback Registration.
(a) If at any time any time prior to the fifth (5th) year anniversary of
the date hereof, the Company proposes to prepare and file with the Securities
and Exchange Commission a registration statement covering equity or debt
securities of the Company, or any such securities of the Company held by its
stockholders, other than in connection with a merger, acquisition or pursuant to
a registration statement on Form S-4 or Form S-8 or any successor form (for
purposes of this Section 1, collectively, a "Registration Statement"), the
Company will give written notice of its intention to do so by registered or
certified mail ("Notice"), at least 15 days prior to the filing of each such
Registration Statement, to Holder. Upon the written request of Holder, made
within 10 days after receipt of the Notice, that the Company include any of the
Registrable Shares in the Registration Statement, the Company shall, as to
Holder, use reasonable efforts to effect the registration under the Securities
Act of 1933, as amended (the "Act"), of the Registrable Shares which it has been
so requested to register ("Piggyback Registration"), at the Company's sole cost
and expense and at no cost or expense to Holder (other than any underwriting or
other commissions, discounts or fees of any counsel or advisor to the Holder
which shall be payable by the Holder, as further provided in Section 2(b)
hereof); provided, however, that if, the Piggyback Registration is in connection
with an underwritten public offering and in the written opinion of the Company's
underwriter or managing underwriter of the underwriting group, if any, for such
offering, the inclusion of all or a portion of the Registrable Shares requested
to be registered, when added to the securities being
<PAGE>
registered by the Company or the selling stockholder(s), if any, will exceed the
maximum amount of the Company's securities which can be marketed (i) at a price
reasonably related to their then current market value, or (ii) without otherwise
having a material adverse effect on the entire offering, then the Company may,
subject to the allocation priority set forth in the next paragraph, exclude from
such offering all or a portion of the Registrable Shares which it has been
requested to register. Without limiting the generality of the foregoing, such
underwriter or managing underwriter may condition its consent to the inclusion
of all or a portion of the Registrable Shares requested to be registered upon
the participation by Holder in the underwritten public offering on the terms and
conditions thereof.
(b) If securities are proposed to be offered for sale pursuant to such
Registration Statement by other security holders of the Company and the total
number of the Registrable Shares to be offered by Holder and such other selling
security holders is required to be reduced pursuant to a request from the
underwriter or managing underwriter (which request shall be made only for the
reasons and in the manner set forth above), the aggregate number of Registrable
Shares to be offered by Holder pursuant to such Registration Statement shall
equal the number which bears the same ratio to the maximum number of securities
that the underwriter or managing underwriter believes may be included for all
the selling security holders (including Holder) as the original number of
securities proposed to be sold by Holder bears to the total original number of
securities proposed to be offered by Holder and the other selling
securityholders.
(c) Notwithstanding the preceding provisions of this Section, the Company
shall have the right at any time after it shall have given written notice
pursuant to this Section (irrespective of whether any written request for
inclusion of such securities shall have already been made) to elect not to file
any proposed Registration Statement, or to withdraw the same after the filing
but prior to the effective date thereof.
(d) For purposes of this Agreement, the term "Registrable Shares" shall
mean each of the shares of Common Stock of the Company acquired and beneficially
owned by Holder upon the exercise of the Warrants granted in connection with the
Offering and any securities issued or issuable with respect to such shares of
Common Stock by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise. Once issued, any such securities shall cease to be
Registrable Shares registerable hereunder upon the earlier of (a) the sale of
such securities pursuant to an effective registration statement under the Act,
(b) the distribution thereof to the public pursuant to Rule 144 (or any
successor provision) under the Act, (c) a transfer pursuant to which new
certificates for them not bearing a legend restricting further transfer shall
have been delivered by the Company and subsequent disposition of them shall not
require registration or qualification of them under the Act or any similar state
law then in force, (d) they shall have ceased to be outstanding, or (e) any and
all legends restricting transfer thereof have been removed in accordance with
the provisions of Rule 144(k) (or any successor provision) under the Act.
-2-
<PAGE>
2. Covenants of the Company With Respect to Registration. The Company
hereby covenants and agrees as follows:
(a) Following the effective date of a Registration Statement, the
Company shall, upon the request of Holder, forthwith supply such reasonable
number of copies of the Registration Statement, preliminary prospectus and
prospectus meeting the requirements of the Act, and other documents
necessary or incidental to the public offering of the Registrable Shares as
shall be reasonably requested by Holder to permit Holder to make a public
distribution of the Registrable Shares. The obligations of the Company
hereunder with respect to the Registrable Shares are expressly conditioned
on Holder's furnishing to the Company such appropriate information
concerning Holder, the Registrable Shares and the terms of Holder's
offering of such shares as the Company may request.
(b) The Company will pay all costs, fees and expenses in connection
with all Registration Statements filed pursuant to Section 1, including,
without limitation, the Company's legal and accounting fees, printing
expenses and blue sky fees and expenses; provided, however, that Holder
shall be solely responsible for the fees of any counsel or advisor retained
by Holder in connection with such registration and any transfer taxes or
underwriting discounts, selling commissions or selling fees applicable to
the Registrable Shares sold by Holder pursuant thereto.
(c) The Company will use reasonable efforts to qualify or register the
Registrable Shares included in a Registration Statement for offering and
sale under the securities or blue sky laws of such states as are reasonably
requested by Holder, provided that the Company shall not be obligated to
execute or file any general consent to service of process (unless the
Company is already then subject to service in such jurisdiction) or to
qualify as a foreign corporation to do business under the laws of any such
jurisdiction.
(d) Notwithstanding anything contained in this Agreement to the
contrary, the Company shall not be obligated to register the Registrable
Shares under the Act or maintain the effectiveness of any registration
statement filed under Section 1 hereof if it receives an opinion of counsel
to the Company that any of the Registrable Shares may be freely traded
without registration under the Act, under Rule 144 of the Act or otherwise.
Nothing contained in this Agreement shall require the Company to undergo an
audit, other than in the ordinary course of business.
3. Covenant of Holder.
(a) Holder, upon receipt of notice from the Company that an event has
occurred which requires a post-effective amendment to the Registration Statement
or a supplement to the prospectus included therein, shall promptly discontinue
the sale of the Registrable Shares until Holder receives a copy of a
supplemented or amended prospectus from the Company, which the Company shall
provide as soon as practicable after such notice.
(b) Holder agrees to fully cooperate with the Company and to furnish to the
Company such information regarding Holder as the Company may from time to time
deem reasonably necessary in connection with the preparation and filing of the
Registration Statement.
-3-
<PAGE>
4. Indemnification.
(a) In the event of any registration of any the Registrable Shares under
the Act, the Company shall indemnify and hold harmless the holder of the
Registrable Shares covered by such registration statement, its directors and
officers, against any losses, claims, damages or liabilities to which such
holder or any such director or officer may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities caused by or
arising out of any untrue statement of a material fact contained in any
registration statement under which such securities were registered under the
Act, any preliminary prospectus, final prospectus or summary prospectus
contained therein, or any amendment or supplement thereto, or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, provided that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage, liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
registration statement, any such preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement in reliance upon and in conformity
with written information furnished or required to be furnished to the Company by
such holder for use in the preparation thereof.
(b) As a condition to including any of the Registrable Shares in any
registration statement filed pursuant to this Agreement, the Holder of the
Registrable Shares, as a prospective seller of the Registrable Shares hereby
agrees to indemnify and hold harmless (in the same manner and to the same extent
as set forth in subdivision (a) of this Section 4) the Company, each director of
the Company, each officer, employee or agent of the Company and each underwriter
of the Registrable Shares and each other person or entity, if any, which
controls the Company or such underwriter within the meaning of the Act, with
respect to any statement or alleged statement in, or omission or alleged
omission from, such registration statement, any preliminary prospectus, final
prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, if such statement or alleged statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by the Holder for use in the preparation of
such registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement. Any such indemnity shall remain in full
force and effect, regardless of any investigation made by or on behalf of the
Company or any such director, officer or controlling person and shall survive
the transfer of such securities by Holder.
(c) Promptly after receipt by an indemnified party of notice of the
commencement of any action or proceeding involving a claim referred to in the
preceding subdivisions of this Section 4, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party, give
written notice to the latter of the commencement of such action, provided that
the failure of any indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under the preceding
subdivisions of this Section 4, except to the extent that the indemnifying party
is actually prejudiced by such failure to give notice. In case any such action
is brought against an indemnified party, unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
-4-
<PAGE>
indemnifying parties may exist in respect of such claim, the indemnifying party
shall be entitled to participate in and to assume the defense thereof, jointly
with any other indemnifying party similarly notified, to the extent that the
indemnifying party may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall, without the consent of the indemnified party, consent to entry of
any judgment or enter into any settlement of any such action which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a release from all liability, or a covenant not to
sue, in respect to such claim or litigation. No indemnified party shall consent
to entry of any judgment or enter into any settlement of any such action the
defense of which has been assumed by an indemnifying party without the consent
of such indemnifying party.
5. Amendments. This Agreement may only be amended by a written instrument
executed by the Company and the Holder.
6. Notices. Except as otherwise provided in this Agreement, all notices,
requests and other communications to any person provided for hereunder shall be
in writing and shall be given to such person (a) in the case of the Holder,
addressed to such party at the address set forth on the signature page of this
Agreement or such other address as the Holder shall specify to the Company in
writing, or (b) in the case of the Company, at the address set forth on the
signature page hereto, to the attention of its President, or at such other
address, or to the attention of such other officer, as the Company shall have
furnished to the Holder in writing with a copy to: Tenzer Greenblatt LLP, 405
Lexington Avenue, New York, New York 10174, Attention: J. Russell Bulkeley, Esq.
Each such notice, request or other communication shall be effective (i) if given
by mail, 48 hours after such communication is deposited in the mails (except as
otherwise provided in Section 1) by first class postage prepaid, addressed as
aforesaid or (ii) if given by any other means (including, without limitation, by
fax or air courier), when delivered at the address specified above, provided
that any such notice, request or communication shall not be effective until
received.
7. Assignment. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto. In addition, and whether or
not any express assignment shall have been made, the provisions of this
Agreement which are for the benefit of Holder shall also be for the benefit of
and enforceable by any subsequent holder of the Registrable Shares. Holder
agrees, by accepting any portion of the Registrable Shares after the date
hereof, to the provisions of this Agreement.
8. Governing Law.
(a) THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND
THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF NEW
YORK WITHOUT REFERENCE TO THE PRINCIPLES OF CONFLICTS OF LAWS.
-5-
<PAGE>
(b) Each of the Company and Holder hereby irrevocably and unconditionally
consents to submit to the exclusive jurisdiction of the courts of the State of
New York and of the United States located in the County of New York, State of
New York (the "New York Courts") for any litigation arising out of or relating
to this Agreement and the transactions contemplated hereby (and agrees not to
commence any litigation relating thereto except in such courts), waives any
objection to the laying of venue of any such litigation in the New York Courts
and agrees not to plead or claim that such litigation brought in any New York
Courts has been brought in an inconvenient forum.
9. Counterparts. This Agreement may be executed by facsimile and may be
signed simultaneously in any number of counterparts, each of which shall be
deemed an original, but all such counterparts shall together constitute one and
the same instrument.
10. Entire Agreement. This Agreement embodies the entire agreement and
understanding between the Company and each other party hereto relating to the
subject matter hereof and supersedes all prior agreements and understandings
relating to such subject matter.
11. Severability. If any provision of this Agreement, or the application of
such provisions to any person or circumstance, shall be held invalid, the
remainder of this Agreement, or the application of such provision to persons or
circumstances other than those to which it is held invalid, shall not be
affected thereby.
[Signature Page Follows]
-6-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized as of the
date first above written.
U.S. AUTOMOTIVE MANUFACTURING, INC.
By:____________________________________
John W. Kohut, Chairman of the Board
Address: Route 627, Airport Drive
Tappahannock, Virginia 22560
Telephone: (___)______________________
Telecopier: (___)______________________
HOLDER:
_______________________________________
Address: ______________________________
______________________________
______________________________
______________________________
______________________________
Telephone: ( ) ______________________
Telephone: ( ) ______________________
-7-
1. Quality Automotive Company
2. Roinco Manufacturing, Inc.
3. RT Friction, Inc.
4. Ultra - Brake Corporation
5. Ultratech of South Florida, Inc.
6. U.S. Automotive Friction, Inc.
7. Verico, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-KSB AT DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,001,843
<SECURITIES> 0
<RECEIVABLES> 2,936,755
<ALLOWANCES> (136,000)
<INVENTORY> 8,739,028
<CURRENT-ASSETS> 12,967,407
<PP&E> 11,069,428
<DEPRECIATION> (812,872)
<TOTAL-ASSETS> 29,497,628
<CURRENT-LIABILITIES> (10,070,123)
<BONDS> 0
0
0
<COMMON> (15,725)
<OTHER-SE> (14,669,366)
<TOTAL-LIABILITY-AND-EQUITY> (29,497,628)
<SALES> (6,999,636)
<TOTAL-REVENUES> (6,999,636)
<CGS> 5,978,271
<TOTAL-COSTS> 5,978,271
<OTHER-EXPENSES> 10,107,801
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,948,363
<INCOME-PRETAX> 13,034,799
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,034,799
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,034,799
<EPS-PRIMARY> (1.22)
<EPS-DILUTED> (1.22)
</TABLE>
