<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 00-22690
CONSOLIDATED STAINLESS, INC.
State of Incorporation: Delaware
IRS Employer Identification Number: 59-1669166
1601 East Amelia Street
Orlando, Florida 32803
(407) 896-4000
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
----- ----
As of August 1, 1997, Consolidated Stainless, Inc. had
outstanding 4,610,329 shares of Common Stock, par value $.01 per share.
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TABLE OF CONTENTS
ITEM PAGE (S)
Part I
Financial Information
1. FINANCIAL STATEMENTS
Balance Sheets ............................................ 1 - 2
Statements of Operations .................................. 3
Statements of Cash Flows................................... 4
Notes to Financial Statements ............................. 5
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ..................... 6 - 10
Part II
Other Information
6. EXHIBITS AND REPORTS ON FORM 8-K ............................. 11
<PAGE>
PART I
Financial Information
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STAINLESS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
6/30/97
(Unaudited) 12/31/96
--------------------------------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 650,419 $ 273,914
Accounts Receivable:
Trade, less allowance for possible losses
of $195,204 and $129,000 8,634,513 6,165,794
Other 124,464 145,723
Due from stockholders 151,031 279,895
Inventories 22,120,030 21,321,810
Refundable income taxes 930,000 957,475
Prepaid expenses 530,262 206,840
Deferred income taxes 968,393 292,800
------------------------------
TOTAL CURRENT ASSETS 34,109,112 29,644,251
PROPERTY AND EQUIPMENT, less
accumulated depreciation and amortization 16,893,303 17,513,878
OTHER ASSETS:
Deferred financing costs, less accumulated
amortization $61,381 and $166,394 502,929 357,245
Goodwill, less accumulated amortization of
$270,732 and $176,916 3,481,771 3,575,587
Other 189,869 161,290
------------------------------
TOTAL OTHER ASSETS 4,174,569 4,094,122
------------------------------
TOTAL ASSETS $ 55,176,984 $ 51,252,251
------------------------------
------------------------------
</TABLE>
See the accompanying notes to the financial statements.
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CONSOLIDATED STAINLESS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
6/30/97
(Unaudited) 12/31/96
------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,142,342 $ 4,379,114
Book overdrafts 612,832 702,116
Due to stockholders 100,000 563,158
Accrued expenses:
Payroll and related taxes 632,591 528,312
Interest 111,532 228,704
Other 609,159 657,695
Current maturities of long-term debt 1,376,871 4,989,411
Current portion of capital lease obligations 937,621 862,004
------------------------------
TOTAL CURRENT LIABILITIES 12,522,948 12,910,514
LONG-TERM DEBT, less current maturities 32,648,554 26,772,909
LONG-TERM CAPITAL LEASE OBLIGATIONS,
less current portion 1,505,036 1,957,497
DEFERRED INCOME TAXES 393,000 393,000
------------------------------
TOTAL LIABILITIES 47,069,538 42,033,920
COMMITMENTS AND CONTIGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par - shares authorized
2,000,000; none issued
Common stock $.01 par - shares authorized
15,000,000; issued and outstanding 4,610,329
and 4,465,866 46,103 44,659
Additional paid-in capital 8,064,638 7,741,039
Retained earnings (accumulated deficit) (3,295) 1,432,633
------------------------------
TOTAL STOCKHOLDERS' EQUITY 8,107,446 9,218,331
------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 55,176,984 $ 51,252,251
------------------------------
------------------------------
</TABLE>
See the accompanying notes to the financial statements.
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CONSOLIDATED STAINLESS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
6/30/97 6/30/96 6/30/97 6/30/96
(UNAUDITED) (UNAUDITED)
-------------------------- -----------------------------
<S> <C> <C> <C> <C>
SALES $ 14,005,738 $ 12,740,361 $ 27,377,422 $ 27,167,589
COST OF SALES 12,306,658 10,524,911 24,252,266 21,788,066
----------------------------- ----------------------------
Gross profit 1,699,080 2,215,450 3,125,156 5,379,523
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,837,178 1,796,687 3,579,277 3,662,073
----------------------------- ----------------------------
Income (loss) from operations (138,098) 418,763 (454,121) 1,717,450
OTHER INCOME (EXPENSES):
Interest (875,533) (647,459) (1,716,155) (1,387,699)
Other 45,556 240,863 59,048 280,716
----------------------------- ----------------------------
(829,977) (406,596) (1,657,107) (1,106,983)
----------------------------- ----------------------------
Income (loss) before taxes on income (benefit) (968,075) 12,167 (2,111,228) 610,467
TAXES ON INCOME (BENEFIT) (308,984) 4,867 (675,300) 244,187
----------------------------- ----------------------------
NET INCOME (LOSS) $ (659,091) $ 7,300 $(1,435,928) $ 366,280
----------------------------- ----------------------------
----------------------------- ----------------------------
EARNINGS (LOSS) PER COMMON SHARE:
Primary $ (0.15) $ 0.00 $ (0.32) $ 0.08
Fully diluted N/A $ 0.00 N/A $ 0.08
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND SHARE EQUIVALENTS OUTSTANDING:
Primary 4,473,804 4,341,959 4,469,857 4,322,420
Fully diluted N/A 4,398,348 N/A 4,378,808
</TABLE>
See the accompanying notes to the financial statements.
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CONSOLIDATED STAINLESS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
6/30/97 6/30/96
-----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,435,928) $ 366,280
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation 810,690 587,987
Amortization 191,262 110,702
Loss (gain) on disposal of property and equipment 14,525 (23,000)
Deferred income taxes (675,593) 128,182
Cash provided by (used for):
Accounts receivable (2,447,460) (259,299)
Insurance proceeds receivable - 777,324
Due from stockholders (9,251) (25,363)
Inventories (798,220) (39,479)
Refundable income taxes 27,475) -
Prepaid expenses (323,422) 68,539
Accounts payable 3,763,228 (1,727,699)
Accruals (61,429) 231,429
-----------------------------
Net cash provided by (used for) operating activities (944,123) 195,603
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (483,103) (3,179,974)
Proceeds from the sale of property and equipment 345,298 23,000
Purchase of Flow Components, Inc. - (4,093,101)
Purchase of 21st Century, net of cash acquired - (135,798)
Increase in other assets (86,225) (163,205)
-----------------------------
Net cash used for investing activities (224,030) (7,549,078)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in book overdrafts (89,284) (2,421,155)
Net proceeds under revolving lines of credit 6,435,688 4,456,475
Repayments of long-term debt (4,185,641) (3,819,894)
Proceeds from long-term debt - 10,335,282
Repayments of capital lease obligations (430,621) (1,015,181)
Deferred financing costs (185,484) (151,404)
Proceeds from exercise of stock options - 142,145
Proceeds from exercise of stock warrants - 351,898
-----------------------------
Net cash provided by financing activities 1,544,658 7,878,166
-----------------------------
Net increase in cash and cash equivalents 376,505 524,691
CASH AND CASH EQUIVALENTS, beginning of period 273,914 94,319
-----------------------------
CASH AND CASH EQUIVALENTS, end of period $ 650,419 $ 619,010
-----------------------------
-----------------------------
</TABLE>
See the accompanying notes to the financial statements.
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NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q, and do not include all of the
information and disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for the year
ended December 31, 1996. The accompanying financial statements have not been
examined by an independent accountant in accordance with generally accepted
auditing standards, but in the opinion of management, such financial statements
include all adjustments, consisting only of normal recurring adjustments and
accruals, to fairly report the Company's financial position and results of
operations. The results of operations for the interim periods shown in this
report are not necessarily indicative of results to be expected for the fiscal
year.
NOTE 2 - EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share are based on the weighted average number of
common shares and dilutive common stock equivalents outstanding during the three
months and six months ended June 30, 1996. Common stock equivalents include
warrants and options and have not been included for the three months and six
months ended June 30, 1997 since their effect would be antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS
128 establishes new standards for computing and presenting earnings per share
("EPS"). Specifically, SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS, requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. SFAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, earlier application is not permitted. EPS for
the three and six months ended June 30, 1997 and June 30, 1996 computed under
SFAS 128 would not be materially different than previously computed.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
The Company incurred long-term debt and capital lease obligations of $66,835 and
$778,053 in connection with the purchase of property and equipment and during
the six months ended June 30, 1997 and 1996, respectively.
On June 26, 1997, the Chief Executive Officer and President elected to convert
$325,043 of subordinated debt which the Company borrowed from them in 1996 into
144,463 shares of common stock based on the closing value at that date ($2.25
per share).
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Consolidated Stainless, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
The statements contained herein that are not historical facts may be forward
looking statements. The forward looking statements are subject to certain risks
and uncertainties, including without limitation those identified below, which
could cause actual results to differ materially from historical results or those
anticipated. Readers are cautioned not to place undue reliance on these forward
looking statements, which speak only as of their dates.
The following factors could cause actual results to differ materially from
historical results or those anticipated; adverse economic conditions, the impact
of competitive products and pricing, product demand and acceptance risks, raw
material and other increased costs, customer delays or difficulties in the
production of products, and other risks detailed from time to time in
Consolidated Stainless, Inc.'s Securities and Exchange Commission filings.
RESULTS OF OPERATIONS
Sales for the three months ended June 30, 1997 were $14.0 million, reflecting a
9.9% increase from the comparable period in 1996. Sales for the six months
ended June 30, 1997 were $27.4 million, resulting in a 0.8% increase from the
six months of 1996. These increases can be attributed to the Company's strategic
decision to increase market share. These increases would have been
significantly higher if not for a 35% reduction in selling prices for stainless
steel pipe compared with the prior periods.
Gross profit as a percentage of sales for the second quarter of 1997 decreased
to 12.1%, as compared to 17.4% for the second quarter of 1996. Similarly, for
the six months ended June 30, 1997, gross profit as a percentage of sales
decreased to 11.4% from 19.8% in the comparable period in 1996. These
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decreases are primarily due to downward pressure on selling prices from
oversupply in the U.S. market and also increased overhead costs charged against
gross profit resulting from a low level of production at the new manufacturing
operations (i.e. ornamental tubing and buttweld fitting facilities). The
Company expects increased production levels beginning in July 1997.
Selling, general and administrative expenses remained relatively consistent;
increasing 2.2% for the three months ended June 30, 1997 as compared with the
same period in 1996 and decreasing 2.3% for the six months ended June 30, 1997
relative to the comparable period in 1996.
Interest expense increased 35.2% for the second quarter of 1997 as compared with
the second quarter in 1996. For the six months ended June 30, 1997 interest
expense increased 23.7% compared with the six months ended June 30, 1996. These
increases were primarily due to a rise in the Company's indebtedness incurred
throughout 1996 to finance capital improvement projects such as the buttweld
fittings, coil slitting, and ornamental and structural tubing operations, and
the expansion of the Auburndale manufacturing facility.
As a result of the foregoing factors, the net loss for the three months ended
June 30, 1997 was $0.7 million, as compared with a net income of $7,300
generated during the second quarter of 1996. The net loss for the six months
ended June 30, 1997 was $1.4 million as compared to net income of $0.4 million
for the
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comparable period in 1996. These decreases are primarily attributable to
narrower gross profit margins resulting from a decline in stainless steel
selling prices, increased overhead costs due to the new manufacturing operations
and higher interest costs.
LIQUIDITY AND CAPITAL RESOURCES
On August 11, 1997, the Company amended its Loan and Security Agreement ("Second
Amendment") with Mellon Bank, N.A. In addition to the First Amendment to the
Loan and Security Agreement dated as of March 31, 1997, which amended certain
financial covenants contained in the Loan and Security Agreement dated March 10,
1997 by and between Mellon Bank, N.A. and the Company (the "Loan Agreement") for
the period ended March 31, 1997, the main purpose of the Second Amendment was to
amend certain covenants for the period June 30, 1997 through December 31, 2000.
The Second Amendment also reduces the maximum advance on eligible inventory from
$17.0 million to $16.0 million, with a further reduction as of October 15, 1997
to $15.0 million; the eligible inventory maximum advance amount will remain at
$15.0 million until the maturity date of the Loan Agreement on March 10, 2001.
The borrowing base of 85% of the qualified accounts receivable and 65% of
eligible inventory, subject to the amended maximum advance amount, remains
unchanged on this $25.0 million revolving line of credit facility. The interest
rate continues to be a variable margin over either the fluctuating prime rate of
interest or the fluctuating LIBOR Rate. The Loan Agreement, as amended,
continues to contain certain negative
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<PAGE>
covenants to be observed by the Company, as well as certain financial ratios
which the Company must maintain.
Borrowings under the Loan Agreement are secured by all of the assets of the
Company, other than real property and specified equipment already subject to
liens in favor of other lenders, and such borrowings are personally guaranteed
up to $3.0 million in the aggregate by Harvey Adams, Chief Executive Officer,
and Ronald Adams, President.
On August 8, 1997, approximately $22.6 million was outstanding under the line of
credit created pursuant to the Loan Agreement.
On August 12, 1997, the Company amended ("Amendment No. 3) its Convertible
Subordinated Note Purchase Agreement (the "Note Purchase Agreement"), dated
October 18, 1996, by and between the Company, SunTrust Banks, Inc., and Messrs.
Harvey and Ronald Adams. In addition, Waiver and Modification Agreement No. 2
amended certain financial ratios contained in the Note Purchase Agreement for
the period ended March 31, 1997. The main purpose of Amendment No. 3 is to
amend certain financial ratios for the period ended June 30, 1997.
The Company has been notified by the Department of Treasury - Internal Revenue
Service ("IRS") that it has concluded an examination of the Company's
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tax returns for the tax periods ended December 31, 1992, November 30, 1993,
December 31, 1994 and December 31, 1995. The IRS is proposing changes to the
tax returns resulting in additional taxes amounting to $1,210,706 and penalties
totaling an additional $242,140. The issues raised by the IRS relate to a
Built-in Gains Tax for the disposition of inventory and the valuation of
inventory based upon the tax requirement that certain indirect costs be included
in the value of its inventory which are not required for financial statement
purposes.
The Company appealed the proposed findings to the Office of the Regional
Director of Appeals and has requested a hearing to present its position on the
issues raised by the IRS. The Company has substantial arguments, both in the
facts and circumstances and in the law, to refute the arguments of the IRS. The
Company believes that the Built-in Gains Tax does not apply to the years
examined and that it has capitalized sufficient costs to comply with IRS
regulations. However, should the IRS prevail on the capitalization of costs
issue, it would immediately create an additional net operating loss increasing
the amount of available losses to carry forward and offset against future
taxable earnings of the Company.
Should the Appeals Officer find in favor of the IRS, the Company has additional
administrative channels of appeal available to challenge the proposed changes
and intends to vigorously defend its position. The Company does not intend at
this time to set up a reserve for payment of the alleged deficiencies and
penalties.
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Consolidated Stainless, Inc.
Part II: Other Information
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - First Amendment to Loan and Security Agreement as of March 31, 1997
with Mellon Bank, N.A.
10.2 - Waiver and Modification Agreement No.2 to Convertible Subordinated
Note Purchase Agreement Amendment as of March 31, 1997 with
Suntrust Banks, Inc. [To be filed by Amendment]
10.3 - Second Amendment to Loan and Security Agreement dated August 11,
1997 between Consolidated Stainless, Inc. and Mellon Bank, N.A.
10.4 - Waiver and Modification Agreement No.3 to Convertible Subordinated
Note Purchase Agreement Amendment dated August 12, 1997 with
Suntrust Banks, Inc. [To be filed by Amendment]
(b) Form 8 - K
The Company filed a Form 8-K dated July 22, 1997 with respect to a
30-day letter received on April 30, 1997 from the Internal Revenue Service
regarding the tax periods ended December 31, 1992, November 30, 1993, December
31, 1994 and December 31, 1995.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CONSOLIDATED STAINLESS, INC.
(Registrant)
Date: AUGUST 12, 1997 By: /s/Burton R. Chasnov
--------------- --------------------
Burton R. Chasnov
Executive Vice President
Chief Financial Officer
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<PAGE>
Exhibit 10.1
As of March 31, 1997
Consolidated Stainless, Inc.
1601 E. Amelia Street
Orlando, FL 32803
Re: First Amendment to Loan and Security Agreement
Gentlemen:
Reference is made to the Loan and Security Agreement dated March 10, 1997 by and
between Consolidated Stainless, Inc. and Mellon Bank, N.A. (the "Loan
Agreement"). All capitalized terms used herein without definition have the
respective meanings ascribed to them in the Loan Agreement.
This will confirm the agreement of Borrower and Bank to amend certain covenants
contained in the Loan Agreement, as follows:
1. Net Income. Section 8.1 (a)(i) of the Loan Agreement, relating to
the Net Income of Borrower for the three (3) month period ended March 31,
1997, is hereby amended so as to provide that the Borrower shall have Net
Loss for such three (3) month period of not greater than Seven Hundred
Seventy-Eight Thousand Dollars ($778,000.00).
2. Effective Net Worth. Section 8.1 (d)(ii) of the Loan Agreement,
relating to the Effective Net Worth of Borrower as of March 31, 1997, is
hereby amended so as to require Borrower to have an Effective Net Worth
of not less than Eight Million Ninety-Three Thousand Dollars
($8,093,000.00) as of such date.
Except as expressly set forth herein, all of the terms and conditions of the
Loan Agreement shall remain unchanged and in full force and effect, and are
hereby ratified, confirmed and continued.
The amendments set forth herein shall only be applicable for the specific date
and time period stated herein, and shall not be applicable to any other dates or
any other time periods whatsoever. Furthermore, this amendment shall not be
applicable to, and shall not imply Bank's agreement to grant any amendment,
consent or waiver in respect of, any covenant not specified herein, or for any
date or time period not specified herein, or in any other circumstances (whether
of like or unlike nature).
<PAGE>
Consolidated Stainless, Inc.
As of March 31, 1997
Page - 2 -
The effectiveness of this amendment is expressly subject to the execution and
delivery by SunTrust Banks, Inc. ("SunTrust"), of a certain modification
agreement with Borrower relating to certain covenants under the Convertible
Subordinated Note Purchase Agreement dated as of October 18, 1996 (as amended)
by and among Borrower, SunTrust and the other parties thereto. Such modification
agreement must be in form and substance satisfactory to Bank in its sole
discretion.
Bank hereby requests that Borrower acknowledge and confirm its agreement to the
foregoing amendments by countersigning a counterpart copy of this letter. When
signed, this amendment may not be altered or amended except in accordance with
Section 17.11 of the Loan Agreement.
Very truly yours,
MELLON BANK, N.A.
By:_________________________________
John M. DePledge
Its Vice President
Duly Authorized
ACKNOWLEDGED AND AGREED TO INTENDING
TO BE LEGALLY BOUND HEREBY:
CONSOLIDATED STAINLESS, INC.
By:_________________________________
Burton R. Chasnov
Its Chief Financial Officer
Duly Authorized
<PAGE>
Exhibit 10.3
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT ("Amendment") is made effective as of the ______ day
of August, 1997 by and between CONSOLIDATED STAINLESS, INC. ("Borrower") and
MELLON BANK, N.A. ("Bank").
BACKGROUND
A. Pursuant to a certain Loan and Security Agreement dated March 10, 1997
by and between Borrower and Bank, as amended by a First Amendment dated as of
March 31, 1997 and letter agreement dated April 7, 1997 (collectively, the "Loan
Agreement"), Bank agreed, subject to the terms and conditions stated therein, to
extend to Borrower a $25,000,000.00 line of credit ("Line").
B. Borrower has notified Bank of its intention to market for sale its Flow
Components operation ("Components Division").
C. Borrower and Bank have agreed to amend the terms of the Loan Agreement,
inter alia, to (i) ratify and confirm the obligations and liability of Borrower
to Bank under the Loan Documents, (ii) reaffirm, ratify and continue Bank's
liens on, and security interests in, all assets of Borrower, (iii) reduce the
inventory sublimit, (iv) modify certain financial covenants, and (v) amend
certain other terms and conditions of the Loan Documents.
D. All capitalized terms not defined herein shall have the meanings set
forth therefor in the Loan Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties hereto
agree as follows:
1. Effective Net Worth. Section 1.17 of the Loan Agreement shall be and is
hereby amended to read in its entirety as follows:
"1.17 "Effective Net Worth" means the Tangible Net Worth of
Borrower, plus the outstanding principal balance of the Subordinated
Indebtedness, minus any increase or plus any non-cash decrease in
the Tangible Net Worth of Borrower as a result of a conversion
("Conversion") under Section 9 of that certain Convertible
Subordinated Note Agreement between Borrower and SunTrust Banks,
Inc., dated October 18, 1996. Effective Net Worth shall not include
any gains from sales of assets (other than sales of inventory in the
ordinary course of Borrower's business), including gains, if any,
realized by Borrower from the sale of the Components Division."
2. Inventory Sublimit. Section 2.1(a) of the Loan Agreement shall be and
is hereby amended to read in its entirety as follows:
"(a) Bank will establish for Borrower for and during the period from
the date hereof and until March 10, 2001 (the "Contract Period"),
subject to the terms and conditions hereof, a revolving line of
credit (the "Line") pursuant to which Bank will from time to time
make loans or
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other extensions of credit to Borrower in an aggregate amount not
exceeding at any time the lesser of: the (i) Borrowing Base, plus
the Permitted Out-of-Formula Advance, if available, or (ii) Maximum
Amount. Notwithstanding the foregoing, the aggregate maximum amount
of advances against the Value of that portion of Borrower's Eligible
Inventory consisting of work-in-process will at no time exceed Two
Million Dollars ($2,000,000.00) and the maximum amount of advances
against the Value of all of Borrower's Eligible Inventory
(including, without limitation, work-in-process) will not exceed (A)
Sixteen Million Dollars ($16,000,000.00) for the period from August
___, 1997 until the Reduction Date (as hereafter defined), and (B)
Fifteen Million Dollars ($15,000,000.00) for the period from the
earlier of (1) the date on which the Components Division is sold, or
(2) October 15, 1997 (the "Reduction Date") and at all times
thereafter."
3. Equipment Purchase Sublimit. Unless and until the Components Division
is sold upon terms and conditions acceptable to Bank, the Equipment Purchase
Sublimit shall not be available to Borrower.
4. Overadvance Payment Moratorium. Section 2.1(c) of the Loan Agreement
shall be and is hereby amended to read in its entirety as follows:
"(c) In addition to the sums otherwise available to Borrower in
accordance with the Borrowing Base calculation, during the Initial
Permitted Out-of-Formula Period only, Borrower may borrow an
additional amount under the Line not to exceed the Permitted
Out-of-Formula Advance. Commencing on June 10, 1997, and on the 10th
day of each of the next sixteen (16) consecutive months thereafter,
the Permitted Out-of-Formula Advance will be reduced by an amount
equal to One Hundred Seventy-Five Thousand Dollars ($175,000.00) per
month and a final payment of all remaining amounts outstanding
thereunder will occur on December 10, 1998. In any event, the entire
Permitted Out-of-Formula Advance, together with all accrued and
unpaid interest thereon, will be reduced to zero by, and will no
longer be available to Borrower after, December 10, 1998.
Notwithstanding the foregoing, Bank agrees to waive the required
principal installments for the Permitted Out-of-Formula Advance due
on July 10, 1997 and on August 10, 1997, provided that such waiver
is expressly conditioned upon the following:
(i) Borrower shall at all times hereafter diligently pursue
the sale of the Components Division,
(ii) an agreement of sale for the sale of the Components
Division, as fully executed and delivered by all parties thereto and
with terms and conditions acceptable to Bank, shall be delivered to
Bank by not later than August 31, 1997; and
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(iii) the sale of the Components Division contemplated by the
foregoing agreement of sale shall be consummated by not later than
September 30, 1997.
If the foregoing conditions described in subsections (i) and (ii)
above are not met, on September 10, 1997 Borrower shall pay to Bank
the sum of Five Hundred Twenty-Five Thousand Dollars ($525,000.00)
in payment of the required principal installments for the reduction
of the permitted Out-of-Formula Advance which would have otherwise
been due and payable on July 10, 1997, August 10, 1997 and September
10, 1997.
In consideration of Bank's agreement to waive the July 10, 1997 and
August 10, 1997 payments, Borrower agrees to pay to Bank the entire
federal income tax refund due to Borrower for its fiscal year ended
December 31, 1996 (the "Specified Tax Refund"), which Specified Tax
Refund has been received by Bank and applied to the Permitted
Out-of-Formula Advance."
5. Collateral Management Fee. Section 4.8 of the Loan Agreement shall be
and is hereby amended to read in its entirety as follows:
"4.8 Collateral Management Fee. So long as the Line has not been
terminated pursuant to the terms hereof, and the Bank Indebtedness
has not been satisfied in full, Borrower shall unconditionally pay
to Bank a non-refundable annual collateral management fee of Sixty
Thousand Dollars ($60,000.00), payable in equal monthly payments, in
advance, commencing on August 1, 1997. Notwithstanding the
foregoing, if at any time after December 31, 1996 Borrower has been
in complete and full compliance with all terms and conditions of the
Loan Documents for two (2) consecutive fiscal quarters, Bank will
reduce the annual collateral management fee to Thirty-Six Thousand
Dollars ($36,000.00), which shall be payable in equal quarterly
payments, in advance."
6. Financial Covenants. Section 8.1 of the Loan Agreement shall be and is
hereby amended to read in its entirety as follows:
"8.1 Financial Covenants. Except with the prior written consent of
Bank, Borrower will comply with the following:
(a) Net Income. Borrower shall have Net Income (as measured
quarterly on a fiscal year-to-date basis) of not less than (i) Five
Hundred Thousand Dollars ($500,000.00) as of March 31, 1998, (ii)
One Million Dollars ($1,000,000.00) as of June 30, 1998, (iii) One
Million Five Hundred Thousand Dollars ($1,500,000.00) as of
September 30, 1998, (iv) Two Million Dollars ($2,000,000.00) as of
December 31, 1998, (v) Five Hundred Thousand Dollars ($500,000.00)
as of March 31, 1999, (vi) One Million Dollars ($1,000,000.00) as of
June 30, 1999, (vii) One
-3-
<PAGE>
Million Five Hundred Thousand Dollars ($1,500,000.00) as of
September 30, 1999, (viii) Two Million Dollars ($2,000,000.00) as of
December 31, 1999, (ix) Five Hundred Thousand Dollars ($500,000.00)
as of March 31, 2000, (x) One Million Dollars ($1,000,000.00) as of
June 30, 2000, (xi) One Million Five Hundred Thousand Dollars
($1,500,000.00) as of September 30, 2000, and (xii) Two Million
Dollars ($2,000,000.00) as of December 31, 2000. In addition,
commencing with the Borrower's fiscal quarter ending March 31, 1998,
Borrower shall have Net Income of not less than One Hundred Fifty
Thousand Dollars ($150,000.00) for each fiscal quarter.
(b) Net Loss. Borrower shall have a Net Loss (as measured quarterly
on a fiscal year to date basis) of not more than (i) Two Million
Nine Hundred Eleven Thousand Dollars ($2,911,000.00) as of December
31, 1996, (ii) Seven Hundred Seventy-Eight Thousand Dollars
($778,000.00) as of March 31, 1997, (iii) One Million Four Hundred
Thirty-Six Thousand Dollars ($1,436,000.00) as of June 30, 1997,
(iv) One Million Three Hundred Twenty Six Thousand Dollars
($1,326,000.00) as of September 30, 1997, and (v) Nine Hundred
Ninety-Seven Thousand Dollars ($997,000.00) as of December 31, 1997.
(c) Net Operating Loss. Borrower's Net Operating Loss for the twelve
(12) month period ended December 31, 1996 shall not be greater than
One Million Five Hundred Two Thousand Dollars ($1,502,000.00).
(d) Effective Net Worth. Borrower shall have Effective Net Worth of
not less than:
Month Ending Effective Net Worth(in Dollars)
------------ -------------------------------
12/31/96 8,353,000
3/31/97 8,093,000
6/30/97 7,415,000
7/31/97 7,397,000
8/31/97 7,473,000
9/30/97 7,619,000
10/31/97 7,777,000
11/30/97 7,933,000
12/31/97 8,072,000
1/31/98 8,277,000
2/28/98 8,482,000
3/31/98 8,686,000
4/30/98 8,891,000
5/31/98 9,096,000
6/30/98 9,300,000
7/31/98 9,505,000
-4-
<PAGE>
8/31/98 9,710,000
9/30/98 9,914,000
10/31/98 10,119,000
11/30/98 10,324,000
12/31/98 10,528,000
1/31/99 10,711,000
2/28/99 10,894,000
3/31/99 11,076,000
4/30/99 11,259,000
5/31/99 11,442,000
6/30/99 11,624,000
7/31/99 11,807,000
8/31/99 11,990,000
9/30/99 12,172,000
10/31/99 12,355,000
11/30/99 12,538,000
12/31/99 12,720,000
1/31/00 12,903,000
2/29/00 13,086,000
3/31/00 13,268,000
4/30/00 13,451,000
5/31/00 13,634,000
6/30/00 13,816,000
7/31/00 13,999,000
8/31/00 14,182,000
9/30/00 14,364,000
10/31/00 14,547,000
11/30/00 14,730,000
12/31/00 14,912,000
(e) Capital Expenditures. Borrower shall not cause, suffer or permit
to exist Capital Expenditures in excess of (i) Five Million Four
Hundred Thousand Dollars ($5,400,000.00) for Borrower's fiscal year
ended December 31, 1996, (ii) Seven Hundred Thousand Dollars
($700,000.00) for Borrower's fiscal year ended December 31, 1997,
and (iii) Five Hundred Thousand Dollars ($500,000.00) during any
fiscal year of Borrower thereafter. The foregoing permitted Capital
Expenditures shall be non-cumulative as to any unused portions
during any fiscal year and shall be measured as of the end of each
fiscal quarter.
(f) Current Ratio. Borrower shall maintain a ratio of Current Assets
to Current Liabilities of not less than (i) .99 to 1.0 as of
December 31, 1996, (ii) .90 to 1.0 as of the end of each month
commencing with the month ending June 30, 1997 through and including
the month ending December 31, 1997, (iii) 1.0 to 1.0 as of the end
of each month
-5-
<PAGE>
commencing with the month ending January 31, 1998 through and
including the month ending December 31, 1998, (iv) 1.10 to 1.0 as of
the end of each month commencing with the month ending January 31,
1999 through and including the month ending December 31, 1999, and
(v) 1.20 to 1.0 as of the end of each month commencing with the
month ending January 31, 2000 through and including the month ending
December 31, 2000.
(g) Senior Indebtedness to Effective Net Worth. Borrower shall
maintain a ratio of Senior Indebtedness to Effective Net Worth of
not greater than (i) 4.68 to 1.0 as of December 31, 1996, (ii) 5.78
to 1.0 as of March 31, 1997, (iii) 6.20 to 1.0 as of June 30, 1997,
(iv) 5.92 to 1.0 as of September 30, 1997, (v) 5.40 to 1.0 as of
December 31, 1997, (vi) 4.06 to 1.0 as of March 31, 1998, and (vii)
4.00 to 1.0 as of June 30, 1998 and as of the end of each fiscal
quarter of Borrower thereafter.
(h) Inventory Turnover. Borrower shall maintain an Inventory
Turnover Frequency of not more than (i) one hundred ninety (190)
days for the six (6) month period ending June 30, 1997, (ii) one
hundred ninety (190) days for the nine (9) month period ending
September 30, 1997, (iii) one hundred eighty-five (185) days for the
twelve (12) month period ending December 31, 1997, (iv) one hundred
eighty-five (185) days for the three (3) month period ending March
31, 1998, (v) one hundred eighty (180) days for the six (6) month
period ending June 30, 1998, (vi) one hundred seventy-five (175)
days for the nine (9) month period ending September 30, 1998, (vii)
one hundred seventy (170) days for the twelve (12) month period
ending December 31, 1998, (viii) one hundred seventy (170) days for
the three (3) month period ending March 31, 1999, (ix) one hundred
sixty-five (165) days for the six (6) month period ending June 30,
1999, (x) one hundred sixty-five (165) days for the nine (9) month
period ending September 30, 1999, (xi) one hundred sixty (160) days
for the twelve (12) month period ending December 31, 1999, (xii) one
hundred sixty (160) days for the three (3) month period ending March
31, 2000, (xiii) one hundred fifty-five (155) days for the six (6)
month period ending June 30, 2000, (xiv) one hundred fifty-five
(155) days for the nine (9) month period ending September 30, 2000,
and (xv) one hundred fifty (150) days for the twelve (12) month
period ending December 31, 2000.
(i) Fixed Charge Coverage Ratio. Borrower shall maintain a Fixed
Charge Coverage Ratio of not less than (i) 0.70 to 1.0 for the
twelve (12) month period ending December 31, 1997, (ii) 1.25 to 1.0
for the twelve (12) month period ending December 31, 1998, (iii) 1.5
to 1.0 for the twelve (12) month period ending December 31, 1999,
and (iv) 1.5 to 1.0 for the twelve (12) month period ending December
31, 2000."
7. Consultant. By not later than August 31, 1997, Borrower shall have
interviewed candidates, acceptable to Bank, to serve as a financial/operational
consultant to Borrower. The
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<PAGE>
consultant shall be retained by Borrower by (a) September 30, 1997, if the
Components Division is not sold by that date or (b) October 15, 1997. The
consultant shall be retained for a minimum term of ninety (90) days to, inter
alia, review management information systems, efficiencies of manufacturing
operations, branch profitability and issues relating to the sale of the
Components Division and its effect on the remaining operations and long term
viability of the business of Borrower.
8. Projections. Within thirty (30) days after the closing of the sale of
the Components Division, Borrower shall deliver to Bank revised projections
prepared in accordance with the provisions of Section 9.2 of the Loan Agreement
and giving effect to such sale. Upon its receipt and review of the revised
projections, Bank may, in the exercise of its reasonable discretion, require
revisions to the financial covenants set forth in Article 8 of the Loan
Agreement. Nothing contained herein shall obligate Bank to make any
modifications of the financial covenants.
9. Closing Conditions. The effectiveness of this Amendment and the Bank's
obligations hereunder are expressly conditioned upon the execution and delivery
to Bank and compliance with each the following by Borrower:
(a) Corporate resolutions of the directors of the Borrower
authorizing the execution and delivery by Borrower of this Amendment and all
documents required to be delivered by Borrower hereunder and thereunder.
(b) Any agreements, modifications and/or amendments of the
documentation evidencing the Subordinated Indebtedness necessary to (i)
demonstrate any required consent of the holders of the Subordinated Indebtedness
to the terms and conditions of this Amendment and (ii) modify the terms and
conditions of such documentation to cause Borrower's compliance with all the
terms and conditions thereof.
(c) A letter evidencing Borrower's agreement to pay to Bank certain
fees associated with the transaction contemplated hereby.
(d) Any other agreements, instruments, and/or documents Bank may
reasonably request.
10. Other References. All references in the Loan Agreement and all the
Loan Documents to the term "Loan Documents" shall mean the Loan Documents as
defined therein, and this Amendment, and any and all other documents executed
and delivered by Borrower pursuant to and in connection herewith.
11. Further Agreements and Representations. Borrower hereby:
(a) Ratifies, confirms and acknowledges that the Loan Agreement, as
amended hereby, and the other Loan Documents continue to be valid, binding and
in full force and effect;
(b) Renews, confirms and continues all liens, security interests,
rights and remedies granted to the Bank in the Loan Documents, which liens,
security interests, rights and remedies shall also secure the performance by
Borrower of its obligations hereunder and under the Loan Documents;
-7-
<PAGE>
(c) Covenants and agrees to perform all of its obligations under the
Loan Agreement, as amended hereby, and the Loan Documents;
(d) Acknowledges and agrees that as of the date hereof, Borrower has
no defense, set-off, counterclaim or challenge against the payment of any sums
constituting Bank Indebtedness or the enforcement of any of the terms of the
Loan Agreement, as amended hereby, or any of the other Loan Documents;
(e) Ratifies and confirms that all representations and warranties of
the Borrower, contained in the Loan Agreement and/or the other Loan Documents,
are true and complete on and as of the date hereof, as if made on and as of the
date hereof;
(f) Represents and warrants that the execution and delivery of this
Amendment by Borrower and all documents and agreements to be executed and
delivered pursuant to the terms hereof;
(i) have been duly authorized by all requisite corporate action
by Borrower;
(ii) will not conflict with or result in the breach of or
constitute a default (upon the passage of time, delivery of notice or both)
under Borrower's Certificate of Incorporation or By-Laws or any applicable
statute, law, rule, regulation or ordinance or any indenture, mortgage, loan or
other document or agreement to which Borrower is a party or by which it is bound
or affected; and
(iii) will not result in the creation or imposition of any lien,
charge or encumbrance of any nature whatsoever upon any of the property or
assets of Borrower, except liens in favor of the Bank or as permitted hereunder
or under the Loan Documents;
(g) Represents and warrants that, after giving effect to this
Amendment, no Event of Default or event, which with the giving of notice,
passage of time or both, would constitute an Event of Default exists and all of
the information described in the foregoing Background is accurate and complete;
and
(h) Acknowledges and agrees that Borrower's failure to comply with
or perform any of its covenants, agreements or obligations contained in this
Amendment or any other documents executed and delivered by Borrower in
connection herewith will, subject to applicable notice, grace and cure periods,
constitute an Event of Default under the Loan Agreement and each of the Loan
Documents.
12. Costs and Expenses. Borrower agrees to pay all of Bank's out-of-pocket
expenses in connection with the review, preparation, negotiation, documentation
and consummation of the transactions contemplated under this Amendment
including, without limitation, all reasonable attorney's fees.
13. No Novation. Nothing contained herein and no actions taken pursuant to
the terms hereof are intended to constitute a novation of the Loan Agreement or
any of the Loan Documents and shall not constitute a release, termination or
waiver of any of the liens, security interests, rights or remedies granted to
Bank in the Loan Documents, which liens, security interests, rights or remedies
are hereby ratified, confirmed, extended and continued as security for all Bank
Indebtedness.
-8-
<PAGE>
14. No Waiver. Nothing contained herein constitutes an agreement or
obligation by Bank to grant any further amendments to any of the Loan Documents.
Nothing contained herein constitutes a waiver or release by Bank of any rights
or remedies available to Bank under the Loan Documents, at law or in equity,
except as expressly provided herein.
15. Inconsistencies. To the extent of any inconsistency between the terms
and conditions of this Amendment and the terms and conditions of the Loan
Agreement or the Loan Documents, the terms and conditions of this Amendment
shall prevail. All terms and conditions of the Loan Agreement and the Loan
Documents not inconsistent herewith shall remain in full force and effect, and
are hereby ratified and confirmed by Borrower.
16. Construction. All references to the Loan Agreement therein or in any
of the other Loan Documents shall be deemed to be a reference to the Loan
Agreement, as amended hereby.
17. Binding Effect. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
18. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
19. Headings. The headings of the sections of this Amendment are inserted
for convenience only and shall not be deemed to constitute a part of this
Amendment.
20. ACKNOWLEDGMENT OF CONFESSION OF JUDGMENT PROVISIONS. BORROWER
ACKNOWLEDGES AND AGREES THAT THE NOTE AND THE LOAN DOCUMENTS CONTAIN PROVISIONS
WHEREBY BANK MAY ENTER JUDGMENT BY CONFESSION AGAINST BORROWER. BEING FULLY
AWARE OF ITS RIGHTS TO PRIOR NOTICE AND HEARING ON THE QUESTION OF THE VALIDITY
OF ANY CLAIMS THAT MAY BE ASSERTED AGAINST IT BY BANK UNDER THE NOTES AND LOAN
DOCUMENTS, BEFORE JUDGMENT CAN BE ENTERED, BORROWER HEREBY WAIVES THESE RIGHTS
AND AGREES AND CONSENTS TO BANK ENTERING JUDGMENT AGAINST BORROWER BY CONFESSION
AFTER THE OCCURRENCE AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT. ANY
PROVISION IN A CONFESSION OF JUDGMENT IN ANY OF THE LOAN DOCUMENTS FOR AN
ATTORNEY'S COLLECTION COMMISSION SHALL IN NO WAY LIMIT BORROWER'S LIABILITY TO
REIMBURSE BANK FOR ALL LEGAL FEES ACTUALLY INCURRED BY BANK, EVEN IF SUCH FEES
ARE IN EXCESS OF THE ATTORNEY'S COLLECTION COMMISSION PROVIDED FOR IN SUCH
CONFESSION OF JUDGMENT.
21. Waiver of Right to Trial by Jury. BORROWER AND BANK WAIVE ANY RIGHT TO
TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER
ANY OF THE LOAN DOCUMENTS OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF BORROWER OR BANK WITH RESPECT TO ANY OF THE LOAN
DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE. BORROWER AND BANK AGREE AND CONSENT
THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT
TRIAL WITHOUT A JURY, AND THAT BORROWER OR BANK MAY FILE AN ORIGINAL COUNTERPART
OR A COPY OF THIS SECTION WITH ANY
-9-
<PAGE>
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF BORROWER AND BANK TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY. BORROWER ACKNOWLEDGES THAT IT HAS HAD THE
OPPORTUNITY TO CONSULT WITH COUNSEL REGARDING THIS SECTION, THAT IT FULLY
UNDERSTANDS ITS TERMS, CONTENT AND EFFECT, AND THAT IT VOLUNTARILY AND KNOWINGLY
AGREES TO THE TERMS OF THIS SECTION.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
effective as of the day and year first above written.
CONSOLIDATED STAINLESS
By:____________________________________
Name/Title:_____________________________
[SIGNATURES CONTINUED ON NEXT PAGE]
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
MELLON BANK, N.A.
By:____________________________________
Name/Title:____________________________
Intending to be legally bound hereby, each of the undersigned hereby
covenants and agrees that (i) the foregoing Amendment does not in any manner or
to any extent constitute a release or waiver of any of his respective
obligations to Mellon Bank, N.A. (the "Bank") under his certain Surety Agreement
dated March 10, 1997 in favor of Bank (the "Surety Agreement"); and (ii) all of
his respective obligations under the Surety Agreement and the other Loan
Documents, as defined in the Amendment, as the same are or may be amended and
increased by the Amendment, are hereby adopted, ratified and confirmed.
______________________________________ (SEAL)
Ronald J. Adams
______________________________________ (SEAL)
Harvey B. Adams
-10-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 1 THROUGH 3 OF THE COMPANY'S
FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 650,419
<SECURITIES> 0
<RECEIVABLES> 8,829,717
<ALLOWANCES> 195,204
<INVENTORY> 22,120,030
<CURRENT-ASSETS> 34,109,112
<PP&E> 21,962,369
<DEPRECIATION> 5,069,066
<TOTAL-ASSETS> 55,176,984
<CURRENT-LIABILITIES> 12,522,948
<BONDS> 34,153,590
0
0
<COMMON> 46,103
<OTHER-SE> 8,061,343
<TOTAL-LIABILITY-AND-EQUITY> 55,176,984
<SALES> 27,377,422
<TOTAL-REVENUES> 27,377,422
<CGS> 24,252,266
<TOTAL-COSTS> 24,252,266
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 67,500
<INTEREST-EXPENSE> 1,716,155
<INCOME-PRETAX> (2,111,228)
<INCOME-TAX> (675,300)
<INCOME-CONTINUING> (1,435,928)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,435,928)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
