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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 00-22690
CONSOLIDATED STAINLESS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 59-1669166
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 East Amelia Street
Orlando, Florida 32803
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (407) 896-4000
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Securities registered pursuant to Section 12(b) of the Exchange Act
Title of Each Class Name of Each Exchange of Which Registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes X NO
--- ---
Transitional Small Business Disclosure Format Yes NO X
--- ---
Check if there is no disclosure of delinquent filers in response to item
405 of Regulation S-B 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-K
or any amendment to this Form 10-K.
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The issuer's net revenues for its most recent fiscal year ended
December 31, 1996 were $50,822,978. The aggregate market value of the
voting stock held by non-affiliates for the issuer as of March 26, 1997 was
$10,291,164.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes NO
--- ---
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the registrant's Common Stock, $.01 Par
Value, on March 26, 1997 was 4,465,866 shares.
Documents incorporated by reference: None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Consolidated Stainless, Inc., (the "Company"), a Delaware corporation, is a
manufacturer of welded stainless steel pipe, ornamental and structural tubing,
flanges, nipples, buttweld fittings and a distributor of welded and seamless
stainless steel pipe, flanges, tubing, fittings, nipples and related products,
including those containing exotic alloys used primarily in high-temperature
and/or corrosive applications for the chemical and processing industries.
Stainless steel products usage has increased significantly in recent years,
principally because of the longer life cycle of stainless steel versus carbon
steel and the enactment of environmental and health regulations mandating the
use of non-corrosive stainless steel products in numerous industries and
commercial applications. The Company's stainless steel products are used by a
variety of original equipment manufacturers and other industrial and commercial
end-users, including citrus and food processing plants, and in the
pharmaceutical, petrochemical, pulp and paper processing industries.
The Company distributes its products on a nationwide basis through regional
and local distributors and through certain master distributors who supply such
regional and local distributors. The Company also sells directly to original
equipment manufacturers, commercial and industrial end-users primarily located
in the State of Florida. The Company currently manufactures in excess of 90% of
all stainless steel pipe, approximately 85% of ornamental and structural tubing,
over 75% of the stainless steel flanges, approximately 75% of stainless steel
nipples and approximately 50% of the buttweld fittings that it sells. The
Company currently purchases substantially all of its other stainless steel
products from third party sources. In addition to its manufacturing facilities,
the Company currently maintains seven distribution centers, three in Florida and
one in each of the metropolitan areas of Los Angeles, Atlanta, Houston and
Chicago.
The origins of the Company date back to 1973 when its predecessor commenced
business in Florida as a broker, and later became a distributor, of stainless
steel pipe and other products. In 1992 the Company commenced manufacturing
stainless steel pipe on a limited basis in New Jersey, and in August 1994
relocated its manufacturing operations to its facility located in Auburndale,
Florida (the "Auburndale Facility"). The Company has since increased the
capacity of its Auburndale Facility and is presently manufacturing approximately
1.1 million pounds of stainless steel pipe per month in a variety of lengths and
in diameters of one-half inch to ten inches.
The Company has recently completed the internal expansion and improvement
of its existing manufacturing facilities. Since the start of the 1996 fiscal
year, the Company has purchased capital equipment and acquired additional space
that enables it to: (i) produce stainless steel buttweld fittings, (ii) slit
stainless steel coils, thereby reducing the per pound cost of the principal raw
material used to manufacture stainless steel pipe (which slitting operation
became fully operational in the fourth quarter of the 1996 fiscal year), (iii)
increase its production of stainless steel nipples, and (iv) manufacture a full
line of ornamental and structural stainless steel tubing in diameters of up to
three inches (which production of stainless steel tubing became fully
operational in the fourth quarter of the 1996 fiscal year). Furthermore, the
Company completed
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a 20,000 square foot expansion of its Auburndale Facility in the third quarter
of the 1996 fiscal year, which expansion gives the Company the ability to
produce and finish up to 2.5 million pounds of stainless steel pipe per month at
such facility. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Capital Expenditures" and "Business -
Manufacturing."
In 1992 a number of related companies controlled by Harvey B. Adams and his
brother, Ronald J. Adams, were merged into Gulf Flange and Fittings Corp., a
Florida corporation. The Company was renamed Consolidated Stainless, Inc. and
was reincorporated in Delaware in 1993.
Strategic Acquisitions
In August 1994, the Company acquired all of the capital stock of
Performance Metals, a master distributor of exotic alloy steel pipe, fittings
and flanges used primarily in high-temperature and/or corrosive applications in
the chemical and processing industries. Since its acquisition by the Company,
sales of the Performance Metals division have more than tripled to approximately
$367,000 per month, as the Company has increased the size and diversity of
Performance Metals' inventories and provided it with access to the Company's
customer base. On April 22, 1996 the Performance Metals subsidiary was merged
into the Company.
Pursuant to the terms of a Stock Purchase Agreement, dated as of September
30, 1995, as subsequently amended (the "Purchase Agreement"), by and among the
Company, as Buyer, and James Read Boles, James T. Callier, Jr., William H.
Blaney, Jr. and Thomas Reinhart (collectively, the "Stockholders"), on January
23, 1996 (effective January 1, 1996) all of the outstanding shares of capital
stock of Flow Components, Inc. ("Flow Components") were sold to the Company.
Messrs. Boles, Callier, Blaney and Reinhart were the only holders of capital
stock of Flow Components prior to consummation of the Purchase Agreement. Flow
Components is a manufacturer of stainless steel forged flanges, which are used
as pipe connectors and are distributed to users of stainless steel pipe. Flow
Components is a leading domestic manufacturer of stainless steel flanges and
sells such products to many of the same master distributors and regional
distributors and service centers which are customers for the Company's stainless
steel pipe and nipples. The Company increased Flow Components' sales by making
available additional working capital, enabling Flow Components to manufacture
flanges from exotic alloys and expanding its distribution of stainless steel
flanges through the Company's existing nationwide distribution network. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Purchase Price for the Flow Components capital stock was $3,650,000 in
cash paid to the Stockholders at closing, and the distribution of 70,000
unregistered shares of Company common stock to one of the Stockholders, Mr.
Boles (who was the sole officer and director of Flow Components prior to the
Closing), certain of which shares he assigned to certain employees of Flow
Components at the Closing (the "Purchase Price"). Simultaneous with the Closing,
certain obligations of Flow Components to the Stockholders, to a corporation
affiliated with the Stockholders, or on behalf of such affiliated corporation
were paid by the Company with the
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proceeds of a financing consummated by the Company in order to provide the funds
necessary to consummate the Purchase Agreement. At the Closing of the Purchase
Agreement, in addition to the Purchase Price, the Company paid an aggregate of
approximately $2,900,000 to repay certain outstanding Flow Components
indebtedness and to purchase certain assets of a corporation affiliated with the
Stockholders ("Scarab Trading Corporation"). See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources", for a description of such financing.
At the closing of the Purchase Agreement, effective January 1, 1996, each
of the Stockholders entered into a five-year Non-Competition and Non-Disclosure
Agreement in favor of the Company and its affiliates, pursuant to which each of
such persons agreed not to compete with the businesses of Flow acquired by the
Company pursuant to the Purchase Agreement. In addition, effective January 1,
1996, the Company engaged Mr. Boles to be the General Manager of Flow Components
through December 31, 1998, at a base salary of $125,000 through December 31,
1996 (the "Employment Agreement"). Under the Employment Agreement, Mr. Boles's
base salary for each of calendar years 1997 and 1998 shall be increased by no
less than the cost of living increase for salaried persons in the Houston, Texas
area, as reported by the Bureau of Labor Statistics, as measured with respect to
1996 and 1997, respectively. Finally, effective upon the effective date of the
Employment Agreement, Mr. Boles received options to acquire 50,000 shares of
Company common stock under the Company's employee stock option plan at the fair
market value on the effective date of the Employment Agreement ($8.50 per
share). A finder's fee was paid in connection with this transaction to First
United Equities Corporation in the form of 5-year warrants allowing them to
purchase up to 200,000 shares of Company Common Stock at an exercise price of
$9.25 per share. 100,000 of the warrants vested immediately upon the closing of
the transaction and the second 100,000 vested in stages during 1996.
For its fiscal years ended December 31, 1993, 1994 and 1995, Flow
Components generated net sales revenues of approximately $7.4 million, $7.6
million and $10.4 million, and its income before taxes was approximately $0.4
million, $0.1 million and $0.9 million, respectively. As at December 31, 1995,
the total indebtedness of Flow Components was approximately $2.7 million. For
the fiscal year ended December 31, 1996, the Company's Flow Components division
manufactured flanges and other products which generated sales of approximately
$12.0 million. On April 22, 1996, the Flow Components subsidiary was merged into
the Company.
On June 21, 1996, the Company acquired all the capital stock of
Twenty-First Century Metals, Inc. ("21st Century"), located in Elk Grove,
Illinois, a suburb of Chicago. 21st Century is a master distributor of stainless
steel products. The Company purchased 21st Century for $50,000 in cash and
26,300 unregistered shares of the Company's common stock. In the six months
since its acquisition by the Company, sales of the 21st Century Metals division
have more than doubled to over $300,000 per month. On October 1, 1996, the 21st
Century Metals subsidiary was merged into the Company.
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Expansion of Manufacturing Capabilities
The Company significantly expanded its manufacturing capabilities at a cost
of approximately $4.3 million for 1996 in order to purchase the capital
equipment and complete development of recently expanded or acquired space to
enable it to: (i) produce stainless steel buttweld fittings, (ii) slit stainless
steel coils, thereby reducing the per pound cost of the principal raw material
used to manufacture stainless steel pipe (which slitting operation became fully
operational in the fourth quarter of the 1996 fiscal year), (iii) increase its
production of stainless steel nipples, and (iv) manufacture a full line of
ornamental and structural stainless steel tubing in diameters of up to three
inches (which production of stainless steel tubing became fully operational in
the fourth quarter of the 1996 fiscal year). Furthermore, the Company completed
a 20,000 square foot expansion of its Auburndale Facility in the third quarter
of the 1996 fiscal year, which expansion gives the Company the ability to
produce and finish up to 2.5 million pounds of stainless steel pipe per month at
such facility. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Capital Expenditures" and "Manufacturing."
Overview of the Stainless Steel Pipe and Related Products Industry
Stainless steel is classified as a steel product containing greater than
10% chromium in an iron-based matrix. Unlike carbon steel, high chromium levels
in stainless steel resist many types of corrosion without necessitating
additional processing steps, such as applying zinc and other galvanized
coatings. Elements such as nickel and molybdenum can be added in different
combinations that change the physical properties of stainless steel in order to
meet specific performance standards.
Stainless steel was created in response to a need for materials which would
provide better resistance to corrosion than carbon steel. The chromium, nickel
and molybdenum elements inherent in stainless steel provide it with unique
qualities of resistance to rust, corrosion and heat, high strength, good wear
characteristics, natural attractiveness and ease of maintenance. Adding chromium
to carbon steel makes it more rust and stain resistant and adding nickel to
chromium stainless steel enhances the physical properties and fabrication
characteristics of the steel.
Stainless steel is manufactured in different types, or groups - austenitic,
martensitic or ferritic. The unique physical properties of austenitic stainless
steel makes it the most popular type of stainless steel in terms of industrial
and commercial applications. Because of its wider use, the substantial majority
of the end-users of the stainless steel products offered by the Company only
require austenitic stainless steel. Accordingly, the Company's manufacturing and
distribution activities are limited to austenitic stainless steel products.
The Company distributes stainless steel pipe, flanges, tubing, fittings,
nipples and related stainless steel products. These products are used, among
other applications, in the citrus and food processing and handling industry, the
pulp and paper processing industries, the
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pharmaceutical, chemical and petrochemical industries, the pollution control
equipment industry and the medical and health equipment industries. In addition,
as companies, particularly those in processing and power generation industries,
have begun to adapt their current production facilities to new environmental
standards or to build new facilities outfitted with the latest technology,
demand for stainless steel products has increased.
Stainless steel pipe is produced in both welded and seamless pipe form.
Seamless pipe is produced from stainless steel billets which are extruded and
drawn to a final size, whereas welded pipe is formed from flat sheets or coils
on pipe mills and welded into a single round shape. The Company only produces
welded stainless steel pipe. See "Manufacturing."
The Company's products are sold on a nationwide basis through regional and
local distributors and master distributors. Master distributors customarily
carry a full line of stainless steel products and generally stock between a six
to twelve month supply of such inventory. They sell such products to regional
and local distributors who resell to end-users in specific geographic regions
and who usually maintain only a one to two month supply of inventory. Generally
larger and more financially stable than many regional and local distributors,
master distributors customarily purchase larger volumes of stainless steel pipe
and flanges at prices which are lower than those charged to regional and local
distributors.
Products
Set forth below is a brief summary of the type of stainless steel products
distributed by the Company.
oPipe - The Company manufactures austenitic welded pipe from stainless
steel coils and sells both welded and seamless pipe in a variety
of sizes and in diameters ranging from one-half to ten inches.
The limited quantities of seamless pipe sold by the Company are
made by third party manufacturers from stainless steel billets
which are extruded and drawn to final size.
oFittings - Fittings are devices used to connect two pieces of pipe and/or to
control the directional flow of fluids through pipe. The Company
purchases for resale and sells a variety of fittings, including
buttweld fittings, threaded fittings and socket weld fittings.
oButtweld Buttweld fittings are a connection between a length of pipe and a
Fittings - fitting which are "butted" (or placed alongside of each other)
and welded together without the fitting having threads, socket,
tapered welded neck or other means of conjunction with the pipe.
Buttweld fittings include elbows, tees, caps, stub ends and
reducer fittings. The Company began to manufacture welded
buttweld fittings in 1996. See "Manufacturing." Additionally, the
Company purchases welded and seamless buttweld fittings from
third parties.
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oTubing - Tubing are segments of welded stainless steel produced in square,
circular, triangular or rectangular shapes and in a variety of
diameters. The Company in 1996 began to manufacture stainless
steel ornamental and structural tubing in diameters of up to
three inches which are used for decorative purposes, including
handrails and boat rails, and to support structures such as
chairs, tables and similar items.
oElbows - Elbows are short pieces of bent pipe which are used to join two
other pieces of pipe at acute, right or obtuse angles by means of
threads or welding. The Company distributes elbows manufactured
by the Company and by third parties.
oNipples - Nipples are short pieces of pipe, generally from two inches to 24
inches in length, with standard threads at each end. In February
1996, the Company expanded its existing capacity to manufacture
nipples by producing nipples at a second location, its Flow
Components division production facility in Houston Texas. See
"Manufacturing."
oT-Fittings - T-Fittings are produced in the shape of a "T" and used to join
three pieces of - pipe by means of threads or welding. The
Company distributes T-Fittings manufactured by the Company and by
third parties.
oValves - Valves are fittings which are joined to two pieces of pipe by
threads, flange type connections or welding for the purpose of
controlling the flow of fluids through the pipe. The Company
distributes valves manufactured by third parties.
oExotic The Performance Metals division sells pipe manufactured at the
Alloys - Auburndale Facility from alloys with high nickel content,
designated as C-276 and A-20, and a high grade of stainless steel
designated as 317L (collectively, "Exotic Alloys"). The Company
also purchases from third parties and resells fittings made from
Exotic Alloys.
oFlanges - Flanges are fittings used to connect pipe segments which may have
to be disconnected at some point in the future, and are primarily
used in piping systems which transport corrosive fluids. Since
the acquisition of Flow Components in January 1996, the Company
has manufactured the majority of flanges it distributes.
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Manufacturing
General
The Company manufactures welded stainless steel pipe at its Auburndale
facility, ornamental and structural tubing at its facility in Eaton Park,
Florida, stainless steel flanges and nipples at its Houston production facility,
and fabricates limited quantities of various custom machined fittings at its
fabrication shop in Apopka, Florida. In 1996, the Company significantly expanded
its manufacturing capabilities by (i) producing stainless steel buttweld
fittings, (ii) slitting stainless steel coils, thereby reducing the per pound
cost of the principal raw material used to manufacture stainless steel pipe
(which slitting operation became fully operational in the fourth quarter of the
1996 fiscal year), (iii) increasing its production of stainless steel nipples,
and (iv) manufacturing a full line of ornamental and structural stainless steel
tubing in diameters of up to three inches (which production of steel tubing
became fully operational in the fourth quarter of the 1996 fiscal year) at the
Company's Eaton Park, Florida facility, which is located approximately 10 miles
from the Company's pipe manufacturing facility in Auburndale, Florida (See Item
2, "Description of Properties"). Furthermore, the Company completed a 20,000
square foot expansion of its Auburndale Facility in the third quarter of the
1996 fiscal year, which expansion provides the Company with the capacity to
produce and finish up to 2.5 million pounds of stainless steel pipe per month at
such facility. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Expenditures." All stainless
steel flanges manufactured by the Company are produced at its production
facility in Houston, Texas.
The Company manufactures austenitic welded pipe from stainless steel coils
purchased from third party suppliers. Pipe is produced on the Company's nine
existing pipe mill machines at the Auburndale Facility. Stainless steel coils of
various widths are fed into the pipe mill machines, which bend and form the
stainless steel into pipe shapes and then weld the seams. The pipe is then
placed in an annealing furnace which heats the pipe to a sufficiently high
temperature (approximately 2000 degrees fahrenheit) to cause a change in its
molecular structure, thereby recrystallizing the seam or weld and creating a
uniform continuous pipe. Certain of the Company's new automated mills contain
in-line annealing capabilities which reduce the processing and handling time
required to manufacture pipe. Finally, the pipe is placed in a bath of nitric
and hydrofluoric acid, a process known as "pickling", to clean the pipe,
eliminate burn marks and smooth ridges and rough edges resulting from the
milling and annealing process.
The Company's Auburndale Facility consists of a 102,000 square foot
manufacturing plant devoted to the production of stainless steel pipe, nipples
and buttweld fittings. The relocation to the Auburndale Facility and the
additional manufacturing equipment now located there, resulted in an increase in
welded stainless steel pipe production from 750,000 pounds per month to the
current 1.1 million pounds per month. The production of buttweld fittings began
in March 1996 at the Auburndale Facility. Limited manufacturing operations at
the Auburndale Facility commenced in August 1994, with one newly purchased pipe
mill in operation. A second
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pipe mill was acquired and installed in the fourth quarter of 1994, together
with four additional pipe mills transferred from the Company's original
manufacturing facility. In March 1995, three additional pipe mills from the
original manufacturing facility in Dover, New Jersey were retooled and brought
on line, bringing the Auburndale Facility to its current full level of operation
with nine pipe mills. Following completion in the third quarter of fiscal 1996
of a 20,000 square foot expansion of the Auburndale Facility, the Company
believes that such expanded facility provides the Company with the capacity to
produce and finish as much as 2.5 million pounds of stainless steel pipe each
month.
In the fourth quarter of fiscal 1996, the Company added slitting machinery
to slit up to 60 inch wide stainless steel coils into specific widths required
to manufacture stainless steel pipe. In order to manufacture pipe of specific
diameters, the Company previously was required to purchase pre-slit stainless
steel coils. The addition of a slitter line enables the Company to reduce both
production turn-around time and inventory costs by eliminating the necessity of
purchasing pre-slit coils. The Company believes that since the implementation of
the slitter line the manufacturing cost of welded stainless steel pipe has
declined approximately $0.03 per pound. The cost of the slitting machinery was
approximately $800,000, and the Company entered into a Master Finance Lease
Agreement with SunTrust to finance the purchase of such machinery. See, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company has expanded its fittings manufacturing activities since its
relocation to the Auburndale Facility, and the Company either manufactures
itself or purchases from third party sources the pipe segments from which it can
produce finished buttweld fittings in diameters ranging between one-half and ten
inches. In March 1996, the Company commenced manufacturing the stub end
components of buttweld fittings at the Auburndale Facility. At that time it also
commenced contracting with third parties to perform the bending operations
required for elbows and other bent pipe segments prior to annealing and
pickling. All finishing operations for buttweld fittings are conducted by the
Company at its Auburndale Facility.
The Company manufactures stainless steel nipples from scrap materials
left-over from pipe manufacturing operations. Nipples are manufactured on four
nipple machines, two located at the Apopka facility and two located at the
Houston production facility (which Houston nipple machines were acquired in 1995
and became operational in February 1996). The Company manufactures nipples in
diameters of one-half to four inches.
In October 1995, the Company purchased for $1.65 million five roll forming,
welding and polishing tube mills. On January 5, 1996, the Company purchased for
$0.75 million a 76,000 square foot manufacturing facility located in Eaton Park,
Florida to house its ornamental and structural tube manufacturing operations.
This facility became fully operational in the fourth quarter of 1996. The
Company's tube manufacturing operations enable the Company to manufacture
square, round and rectangular ornamental and structural stainless steel tubing
in diameters of up to three inches. Such tubing is used primarily as table and
chair legs and for
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other decorative and structural purposes. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Capital
Expenditures."
The Company, through its acquisition of Flow Components, manufactures
flanges from stainless steel forgings. The Flow Components division presently
operates 42 lathes, 12 indexing drills and 2 multi-spindle drills for the
manufacture of stainless steel flanges. The flanges manufactured are primarily
tooled to generic, standardized specifications to fit pipes ranging in diameter
from one-half to 40 inches.
Sales and Distribution
General
The Company sells stainless steel pipe, ornamental and structural tubing,
buttweld fittings, flanges and related stainless steel products to both master
distributors and to regional and local distributors. In addition, the Company's
strategically located seven distribution centers act as "master distributors" in
that they resell to regional and local distributors as well as to unaffiliated
master distributors. The Company also supplies stainless steel pipe and other
related products directly to end-users primarily located in Florida.
The Company sells and distributes stainless steel pipe, ornamental and
structural tubing, buttweld fittings, flanges and related products from its
seven distribution centers located in Apopka, Florida (a suburb of Orlando);
Jacksonville, Florida; Auburndale, Florida (in Central Florida); Acworth,
Georgia (a suburb of Atlanta); Long Beach California (a suburb of Los Angeles);
Houston, Texas and Elk Grove, Illinois (a suburb of Chicago). The Company also
sells its ornamental and structural tubing from its manufacturing facility in
Eaton Park, Florida. The Company consolidated its three separate office,
warehouse and storage facilities in Paramount, California to a single 29,083
square foot facility on approximately a 1.48 acre site in Long Beach, California
in March 1996. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources - Capital
Expenditures."
The Company continues to explore opportunities to open additional
distribution centers. In 1994 it relocated its Houston and Atlanta distribution
centers to larger facilities. In April 1996 the Company exercised its purchase
option to acquire the 10,000 square foot facility it had been leasing as its
Atlanta distribution center. In addition, as part of its acquisition of Flow
Components, the Company assumed that subsidiary's lease of its 56,540 square
foot manufacturing and distribution facility in Houston, Texas. See, Item 2,
"Properties," and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources." In June
1996, the Company acquired a distribution center in the Chicago, Illinois area.
The Company employs a staff of 40 sales and marketing personnel, who take
orders by telephone and make periodic sales calls on established and prospective
original equipment
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manufacturers and industrial and commercial customers. The Company also
maintains several independent sales representatives, who call on regional
distributors and service centers.
The Company advertises in magazines and trade publications on a limited
basis. The Company generally does not have many long-term contractual
arrangements to supply stainless steel products to its customers. Customers
generally place orders on an as-needed basis. The Company customarily makes
delivery of stock items in inventory on a next-day delivery basis. Pipe
manufactured to order is usually shipped within 30 days of ordering.
In marketing its services, the Company emphasizes its experience in meeting
customer requirements for stainless steel products which adhere to strict
quality and size specifications, its ability to quickly source and deliver
products from its multiple locations in Florida, Georgia, Southern California,
Texas and Illinois, and its competitive pricing structure.
The Company believes that as its availability of capital increases, its
increased inventory levels and its strategically located warehouses give it a
significant advantage over many competitors due to the Company's ability to fill
customer orders in a timely and efficient manner.
Customers
The Company sells to approximately 2,500 customers, primarily regional and
local distributors, and to unaffiliated master distributors. Many of the same
distributors and end-users that purchased stainless steel flanges from Flow
Components before its acquisition by the Company also use the stainless steel
pipe and other related products offered by the Company. The Company also sells
Company-manufactured stainless steel pipe directly to certain end-users in the
State of Florida, such as food processors, dairy and citrus processors, oil
companies, paper mills and other original equipment manufacturers. Following its
January 1996 acquisition of Flow Components, the Company commenced the sale of
Company-manufactured flanges to a limited number of end-users. Direct end-user
customers of Company-manufactured stainless steel pipe and flanges include
Tropicana Products, Texaco Incorporated, Unocal Refining and Marketing, Owens &
Pridgen, Georgia-Pacific and Coca-Cola Bottling Company. As a result of its
acquisition of Flow Components, the Company is currently on the approved list of
stainless steel flange manufacturers for Anheuser-Busch and Mobil Oil.
In 1996, no single customer of the Company accounted for 10% or more of
the Company's net sales. The Company was able to obtain consistent raw
materials pricing throughout 1994, and the Company was able to maintain
competitive, consistent prices on sales to customers during that period. Raw
material prices increased substantially during the first six months of fiscal
1995, but the Company was able to pass such raw material price increases on
to its customers in the form of increased prices for the finished products
sold by the Company. During the second half of 1995 and all of 1996 raw
material prices declined, resulting in an eventual $2.5 million inventory
writedown in the fourth quarter of 1996. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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In furtherance of its commitment to customer service and satisfaction, the
Company maintains a small fabrication shop at its Apopka, Florida distribution
facility, which is used to customize stainless steel products and to fill
specific orders requested by its customers on a timely basis.
Suppliers
In the first half of 1995, a general rise in demand for stainless steel
products resulted in supply shortages and increased coil prices. In the latter
half of 1995 and all of 1996, supply not only caught up with demand as demand
weakened, but exceeded it. The result was a general price decline for coil.
Following a general cut back in coil production as a result of this late 1995
oversupply, and in order to stabilize the market, suppliers have again generally
increased coil production to meet increased demand. Prices, however, continued
to decline in 1996 due to the competitive pricing of imports.
During 1996, the Company purchased stainless steel coils from an aggregate
of eight domestic and foreign suppliers under open purchase orders and purchase
commitments on a quarterly basis. The terms of its purchasing arrangements with
its suppliers generally require payment by the Company within 30 days of receipt
of each order.
In 1996, the Company purchased approximately 70% of its stainless steel
coils from four foreign suppliers, with one such foreign supplier alone
accounting for over 50% of all stainless steel coils purchased.
The Company believes that its relations with its principal domestic and
foreign suppliers of coils are satisfactory, and that there are adequate
alternative domestic and foreign sources of supply available to furnish
stainless steel coils at competitive prices in the event that it is no longer
able to purchase supplies from any of such suppliers in the future.
The Company's primary sources for forgings in 1996 were foreign suppliers.
The largest of these foreign suppliers provided approximately 30% of the
Company's forgings and the second largest supplied approximately 20%. The
Company believes that its relations with its principal domestic and foreign
suppliers of forgings are satisfactory, and that there are adequate alternative
domestic and foreign sources of supply available to furnish forgings at
competitive prices in the event that it is no longer able to purchase supplies
from any of such suppliers in the future.
Competition
The Company competes for business in the sale of stainless steel pipe and
related products with a number of companies, some of which are larger and
possess greater financial and other resources than the Company. The basis upon
which the Company believes it successfully competes in the distribution of
stainless steel products are product price, product availability, rapid delivery
and the quality of its sales and marketing personnel.
11
<PAGE>
Although information is not publicly available regarding the sales of most
other producers and distributors of these products, the Company believes that it
ranks among the larger domestic distributors. Stainless steel pipe and related
commodity products are highly competitive with at least 11 known domestic
producers and an unknown number of importers from several different countries.
The Company believes that its largest competitors in terms of multi-size
stainless steel pipe manufacturing and financial resources are Bristol Metals,
Inc., a subsidiary of Synalloy Corporation, Avesta Sheffield, Trent Tube, Davis
Pipe, Union Damascus and Felker Brothers.
Since its acquisition in 1996 of Flow Components, the Company has become
one of the largest producers of stainless steel flanges in the United States.
Sales of stainless steel products manufactured by the Flow Components division
in 1996 were approximately $12.0 million. In 1996, of nine competitors in the
United States, six were integrated producers, in that they forged their own
flanges as well as finished them. The Company believes that only one of these
six, Maass Flange Corporation of Houston, had greater annual sales of
self-manufactured flanges than Flow Components in 1996.
Because of higher labor costs in the United States, domestic forgers have
not historically been able to compete effectively with foreign producers of
forgings. Accordingly, the Company believes that additional domestic integrated
producers will be forced to leave the commodity flange market and concentrate on
the niche markets for special alloy flanges manufactured with higher nickel
content, since products in these markets have a higher profit margin and can
more readily support the cost of domestically forged flanges. Flow Components is
one of the two domestic non-integrated finishers of flange forgings with the
most substantial market share of commodity stainless steel flanges. All of the
other producers with sales of at least $3 million in 1996 are integrated and
have begun pursuing niche markets for flanges made from special alloys, as well
as for larger size flanges.
Environmental Matters
The Company's manufacturing operations must meet extensive federal, state
and local regulatory standards in the areas of safety, health and environmental
controls. Historically, the cost of compliance with these standards has not had
a materially adverse effect on the Company's sales, operations or facilities.
The Company is not aware of any pending legislation that would have a material
impact on the Company's operations. There can be no assurance, however, that
such legislation will not be enacted in the future.
The Company generates acid waste from its pickling process at its
Auburndale Facility, which is classified as a hazardous waste under the Federal
Resource Conservation and Recovery Act, as amended ("RCRA"), and corresponding
Florida law. The Company disposes of all hazardous wastes through licensed
transporters within 90 days of generation. The Company knows of no pending or
threatened litigation against the Company under RCRA or corresponding Florida
environmental laws, and believes that all required environmental permits are
current.
12
<PAGE>
By reason of their 1992 lease of the Dover Facility and sale of related
machinery to the Company, the owners of the Dover Facility and the former
occupant of the Dover Facility (collectively referred to as the "Dover Owners"),
are required to comply with the provisions of the New Jersey Industrial Site
Recovery Act, as amended ("ISRA"). The Dover Owners have conducted soil sampling
at the Dover Facility as required by the New Jersey Department of Environmental
Protection, and have removed five underground storage tanks that contained
petroleum products, contaminated soils and floor drains. In June 1993, the Dover
Owners entered into an indemnity agreement with the Company pursuant to which
the Dover Owners have agreed to undertake, at their sole expense, all necessary
remedial action and to indemnify the Company for any noncompliance with ISRA.
No assurance can be given that if the Dover Owners fail to complete
remediation under ISRA, legal action will not be initiated against the Company
and that the costs of defending any such legal action would not be material.
However, in the opinion of management and legal counsel, any violations by the
Dover Owners' of ISRA prior to the Company's occupancy of the Dover Facility
would not result in liability to the Company, and the Company would not be
liable for any costs of the Dover Owners remedial activities under ISRA.
Management of the Company believes that the assets of the Dover Owners are
sufficient to discharge any liabilities to the Company under the indemnification
agreements.
The Company has agreed to indemnify the Dover Owners for any losses or
liability resulting from violations of environmental regulations and laws in
connection with the Company's use, occupancy and operation of the Dover
Facility. In such connection, and by reason of its cessation of operations at
the Dover Facility, the Company is required to comply with the provisions of
ISRA. The Company has submitted its initial notice forms to the New Jersey
Department of Environmental Protection. As the remediation being conducted by
the Dover Owners is not yet complete it is not known whether, or to what extent,
such agency may require the Company to conduct sampling or remediation at the
Dover Facility. However, in light of the extent of remediation and sampling
undertaken by the Dover Owners, the Company does not believe that further
significant sampling or remediation will be required.
Flow Components uses a coolant for its drills and lathes, hydraulic oil for
its heavy machinery, waylube for its lathes and motor oil for its vehicles. The
coolant is largely burned off in the process of machining and is recycled to the
extent feasible. Waste coolant and other wastes from these fluids and lubricants
are removed from the premises for disposal by licensed transporters within 90
days of being generated.
Prior to moving to its present facilities and for a period of approximately
three years, Flow Components leased premises located at 9011 Sheldon Road in
Houston (the "Sheldon Road Property"). After Flow Components vacated the
premises, the landlord of the Sheldon Road Property engaged a private firm to
undertake an environmental site assessment of the Sheldon Road Property and make
recommendations for any clean-up or remediation such firm deemed appropriate.
Flow Components has implemented all of the recommendations of such firm's
environmental site assessment and management believes that it has fully complied
with all of its
13
<PAGE>
obligations with respect to remediation of the Sheldon Road Property. There can
be no assurance, however, that Flow Components will not be required at some
future date to undertake further remediation or be subject to claims for
environmental contamination allegedly arising in connection with its use of the
Sheldon Road Property.
Flow Components leases its current facilities at 5301 Polk Street from
Baker Hughes Oilfield Operations, Inc., a corporation affiliated with the former
occupant, Hughes Tool Company, which was, for many years, engaged in the
manufacture of bits, drills and similar industrial machine products on or around
the property. The landlord has advised Flow Components that it reasonably
believes disposal of oil laden sand from a prior occupant's foundry operations
has contaminated an upper potential water bearing zone below the surface of a
portion of the Polk Street property, and that surface water passes through an
enclosed pipe under a building on the property. The landlord has indemnified
Flow Components from any liability with respect to such contamination and with
respect to any other toxic or hazardous substances, except those released by
Flow Components, and has agreed to undertake whatever remedial action is
required by applicable environmental law with respect to any toxic or hazardous
substances which are not the responsibility of Flow Components. Management of
the Company believes that it is adequately protected from liability for
environmental remediation on such premises arising from activities engaged in by
prior occupants, but there can be no assurance that such will be the case.
Management of the Company believes that the Company's operations and its
facilities are in material compliance with all applicable federal, state and
local environmental laws and regulations, all required consents are current and
the Company's hazardous waste management practices minimize the potential for
release of hazardous substances into the environment. The Company has not
experienced any significant environmental regulatory problems in the past, and
to date the Company has not been subject to any significant fines, penalties or
other liabilities under such laws and regulations. However, no assurance can be
given that future changes in such laws, regulations or interpretations thereof,
as well as in the nature of the Company's operations, will not have a materially
adverse impact on the Company.
Employees
As of March 26, 1997, the Company employed 309 full-time employees, of
which approximately 139 are in production, 70 are in warehouse and customer
service, 40 are in sales and marketing, 56 are clerical and administrative and
four are executive officers. The Company's employees are not represented by any
labor union. The Company believes that relations with its employees are good.
Safety
The Company has established and seeks to maintain appropriate safety
standards and policies for its employees. To encourage plant safety, training
sessions are held upon commencement of employment and periodically thereafter.
14
<PAGE>
In addition, outstanding safety records are rewarded. All employees are
drug tested upon hiring and at random thereafter.
ITEM 2. DESCRIPTION OF PROPERTIES
The following table sets forth information as to each of the properties
which the Company leases:
<TABLE>
<CAPTION>
Location and Use Lessor Expiration Date Annual Square Purchase
- ---------------- ------ --------------- ------ ------ --------
Rental (1) Feet Options
---------- ---- -------
<C> <C> <C> <C> <C> <C>
3511 Walnut Street Michael & Barbara 4/30/97 $51,600 27,500 No
Jacksonville, Florida Sigmon(2)
(industrial metals
warehouse and offices)
1914 S. Orange Blossom Trail R & H Partners(3) 4/30/97 62,400 12,000 No
Apopka, Florida
(suburban Orlando, Florida)
(industrial metals
warehouse & office)
2201 Old Highway 60 Harvey Adams(3) 4/30/97 56,760 5,000 No
Mulberry, Florida
(industrial metals
warehouse)
1601 East Amelia Street Burton and Barbara month-to-month 33,638 4,500 No
Orlando, Florida Chasnov (4)
(executive offices)
301 Garden Oaks Lucy Billingsley 12/31/97 50,637 22,093 No
Houston, Texas
(office and warehouse)
5301 Polk Street Baker Hughes 11/30/2010 150,335 78,752 No
No. 8, 120 and No. 10 Oilfield Operations,
Houston, Texas Inc.
(manufacturing facility, office and
warehouse)
240 Eisenhower Lane North LaSalle 5/30/00 87,370 20,000 No
Lombardi, Illinois National Bank
(office and warehouse)
</TABLE>
- ----------
(1) All leases are on a "net, net" basis which requires the Company to pay its
pro-rata share of all utilities, heat, air conditioning, taxes and other charges
assessed against the leased premises. Annual rental figures shown exclude sales
taxes, if any.
15
<PAGE>
(2) Michael and Barbara Sigmon are minority stockholders of the Company
beneficially owning in the aggregate 1.1% of its outstanding Common Stock and
manage the Jacksonville, Florida distribution center. Mr. Sigmon is a Vice
President of the Company. See Item 11, Executive Compensation - Compensation
Committee Interlocks and Insider Participation."
(3) R&H Partners is a partnership consisting of Harvey B. Adams and Ronald J.
Adams. Such persons are the principal stockholders, senior executive officers
and directors of the Company. See, Item 10, "Directors and Executive Officers of
the Registrant" and Item 11, "Executive Compensation - Compensation Committee
Interlocks and Insider Participation."
(4) Burton Chasnov is an executive officer of the Company. See Item 10,
"Directors and Executive Officers" and Item 11, "Executive Compensation -
Compensation Committee Interlocks and Inside-Participation."
The Company's principal manufacturing operations are conducted at its
102,000 square foot Auburndale Facility, located on eight acres in Auburndale,
Florida. In the second quarter of the 1996 fiscal year, the Company completed a
20,000 square foot expansion of the Auburndale Facility. In January 1996, the
Company acquired a facility located in Eaton Park, Florida, approximately 10
miles from the Auburndale Facility, in which the Company manufactures ornamental
and structural stainless tubing. See, Item 1, "Business- Manufacturing."
In December 1995, the Company acquired a 29,083 square foot facility on an
approximately 1.48 acre site located in the Los Angeles metropolitan area in
order to consolidate its three existing office, warehouse and storage facilities
in Paramount, California. All of those operations are now located in this
facility. The Company financed $855,000 of the $1,140,000 purchase price with
the seller, United Services Life Insurance Company. The 15 year mortgage bears
interest at a fixed rate of 8% per annum. In March 1996, the Company exercised
its option to purchase for approximately $300,000 the 10,000 square foot
distribution facility located in Acworth, Georgia, a suburb of Atlanta, that is
currently occupied by the Company. The property was acquired with a $232,800
purchase money mortgage provided by SunTrust Bank, Central Florida, National
Association. This mortgage has a fixed interest rate of 9% per annum and is
being amortized over a 15 year period with a balloon payment due after five
years.
The Company also owns a 5,000 square foot warehouse/storage facility in
Mulberry, Florida in addition to its Auburndale Facility.
ITEM 3. LEGAL PROCEEDINGS
Except for the claims identified below, which the Company believes are
without merit, the Company believes there are no pending legal proceedings in
which the Company or its
16
<PAGE>
property is a party, or to which the Company or its property is subject, which
may have a material adverse effect on the results of operations or financial
position of the Company.
In 1994, a former employee filed suit against Flow Components in the
District Court of Harris County, Texas for hip and knee injuries allegedly
sustained during his employment in 1992 which he claims prevented him from
working for approximately nine months thereafter. The complaint demands
damages aggregating approximately $5.0 million. The plaintiff recently has
offered to settle the lawsuit for approximately $81,000. The Company
believes the plaintiff's claims are without merit and that the damage
demands bear no relation to any injury allegedly sustained. The Company has
elected to defend this claim and subsequently counter-offered an $8,000
settlement.
In 1996, another former employee of Flow Components filed suit in the
District Court of Harris County, Texas, in connection with an eye injury
allegedly sustained in 1994 while operating a lathe. The complaint demands
damages for lost wages and physical impairment in an unspecified amount.
The plaintiff recently has offered to settle the lawsuit for approximately
$225,000. Despite paying for the employee's medical and disability costs,
management of the Company believes that any injury sustained was solely due
to the negligence of the employee and that his claims are without merit.
The Company has elected to defend this claim, while at the same time
attempt to effect a settlement of the litigation. The matter is set for
mediation on April 15, 1997.
Prior to November 1994 when the above-referenced incidents allegedly
occurred, Flow Components (which was not owned by the Company) did not
carry worker's compensation insurance. As a result, the Company is
contingently liable for the full amount of any damages awarded in
connection with any claims of negligence on its part which caused or
contributed to injuries sustained by employees prior to such date. The
Company is not indemnified by the former stockholders of Flow Components
for any losses that may be incurred as a result of these or other
contingent liabilities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The principal market for trading the Company's securities is the NASDAQ
National Market System. The following is a table that lists the high and low
selling prices for shares of the Company's Common Stock on the NASDAQ National
Market System during the periods identified:
High Low
---- ---
Fiscal year 1993
Fourth Quarter (commencing November 9, 1993)................. $4.42 $3.29
Fiscal year 1994
First Quarter................................................. 6.58 3.50
Second Quarter................................................ 5.42 4.00
Third Quarter................................................. 5.00 3.75
Fourth Quarter................................................ 5.92 4.25
Fiscal year 1995
First Quarter................................................. 6.58 5.08
Second Quarter............................................... 11.88 6.08
Third Quarter................................................ 14.50 10.13
Fourth Quarter............................................... 12.75 8.00
Fiscal year 1996
First Quarter................................................ 12.63 8.38
Second Quarter............................................... 12.13 7.00
Third Quarter................................................. 8.50 4.63
Fourth Quarter................................................ 6.13 3.63
On March 26, 1997, the last sale price of the Common Stock was $4.00 as
reported on Nasdaq, and the Company estimates that it had 64 stockholders of
record and over 750 beneficial holders of its stock.
18
<PAGE>
Dividend Policy
In the foreseeable future, the Company intends to retain earnings to assist
in financing the expansion of its business. In addition, the credit agreements
between the Company and its commercial lenders prohibit the payment of dividends
without the permission of such lenders. In the future, the payment of dividends
by the Company on its Common Stock will also depend on its financial condition,
results of operations and such other factors as the Board of Directors of the
Company may consider relevant. The Company does not currently intend to pay
dividends on its Common Stock.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the audited
financial statements of the Company. The financial statements as of December 31,
1996 and for each of the years in the five-year period ended December 31, 1996
have been audited by BDO Seidman, LLP.
<TABLE>
Year Ended December 31,
1992 1993 1994(2) 1995 1996(1)
------ ------ -------- ------ --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales $ 25,190 $ 26,135 $ 28,099 $ 45,518 $ 50,823
Net income (loss) 110 482 (312) 2,655 (2,749)
Earnings (loss) per share(3) 0.04 0.18 (0.07) 0.60 (0.63)
Weighted average number of common shares
and share equivalents outstanding(3) 2,453 2,663 4,181 4,460 4,385
</TABLE>
<TABLE>
<CAPTION>
December 31,
1992 1993 1994 1995 1996(1)
------ ------ ------ ------ --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 1,388 $ 6,835 $ 9,289 $ 17,924 $ 16,734
Total assets 12,980 14,955 24,844 42,263 51,252
Short-term debt and bank overdraft(4) 2,285 487 711 1,260 5,851
Long-term debt(4) 1,096 3,131 9,680 19,391 28,730
Stockholders' equity 3,729 7,800 7,707 10,524 9,218
</TABLE>
(1) Includes financial data of Flow Components and 21st Century using the
purchase method of accounting from the date of acquisition of January 1,
1996 and June 21, 1996, respectively.
(2) Includes expenses incurred in connection with the relocation and set-up of
the Company's manufacturing operations from New Jersey to the Auburndale
Facility, of which $1,775,000 is included in cost of sales in 1994.
(3) As adjusted to reflect a 3-for-2 stock split and a 150-to-1 stock split
approved by the Board of Directors in May 1995 and November 1993,
respectively.
(4) Includes capital lease obligations.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
The Company, which was organized initially as a broker and then as a
distributor of stainless steel products, made a strategic decision in 1992 to
become a manufacturer of stainless steel pipe and other related products sold on
a nationwide basis to local and regional distributors, master distributors and
to end-users principally in Florida. The establishment of manufacturing
operations at the Auburndale Facility has enabled the Company to currently
manufacture 1.1 million pounds of stainless steel pipe per month in diameters
from one-half to ten inches, representing less than 50% of that plant's
potential production capacity. In August 1994, the Company acquired Performance
Metals, in January 1996 it acquired Flow Components and in June 1996 it acquired
21st Century Metals. The Performance Metals acquisition expanded the Company's
product line to include exotic alloy items, the Flow Components acquisition
makes the Company one of the leading domestic manufacturers of stainless steel
flanges and the 21st Century Metals acquisition gives the Company its first
distribution outlet in the Midwest.
The Company significantly expanded its manufacturing capabilities at a cost
of approximately $4.3 million in 1996. Such capital expenditures were incurred
in order to purchase capital equipment and to up-fit and develop the 20,000
square foot expansion space at the Auburndale Facility and the newly-acquired
Eaton Park, Florida facility. This enabled the Company to increase its stainless
steel pipe finishing capacity, to begin its production of stainless steel
nipples at its Houston production facility, to commence manufacture of stainless
steel buttweld fittings at the Auburndale Facility, and to commence
manufacturing a full line of ornamental and structural stainless steel tubing in
diameters of up to four inches. See "Capital Expenditures."
A key factor in the Company's ability to achieve and maintain profitability
will be its ability to make opportunistic purchases of inventories of stainless
steel coils and other stainless steel products in order to stock sufficient
quantities and varieties of inventory to accommodate the short lead times and
just-in-time delivery requirements of its customers. Purchases of stainless
steel coils (the principal raw materials used in the manufacture of stainless
steel pipe) and other stainless steel products the Company distributes are
driven by considerations of price, quality and availability of supply. Similar
factors affect the Company's purchases of stainless steel forgings, the
principal inventory items used to fabricate and finish stainless steel flanges.
Prevailing prices which the Company pays for inventories are directly related to
the demand for finished stainless steel products. Accordingly, in 1996, a period
in which supply exceeded demand for stainless steel pipe and other related
products, including exotic alloy steel, prevailing prices for coils, forgings,
exotic alloys and other raw materials steadily declined throughout the year.
The Company made extensive inventory purchases in the fourth quarter of
1994 and during the 1995 fiscal year, in anticipation of rising prices and
increased customer demand.
21
<PAGE>
Such purchases, however, extended the Company to the limits of its line of
credit and impeded liquidity on a short-term basis. As a result, in December
1995, the Company obtained a $5.0 million increase in the maximum availability
under its revolving credit agreement with SunTrust, and in January 1996
refinanced its revolving credit agreement with SunTrust and SouthTrust as
lenders. The refinanced revolving credit agreement maintained the maximum
availability of borrowings under the revolving credit agreement at $17.0
million. Concurrently, in January 1996 the Company entered into an additional
term loan with SunTrust alone of approximately $3.9 principal amount, and with
SunTrust and SouthTrust together as participants in a separate $4.5 million
principal term loan, the proceeds of which loans were used to pay the purchase
price for the Flow Components acquisition, to retire certain outstanding
indebtedness of Flow Components, to repay the balance of scheduled payments
remaining under certain equipment leases for which the Company was obligated and
to provide working capital for the Company. See"-Liquidity and Capital
Resources-Debt Financings."
In 1996, stainless steel prices were declining. Therefore, profit margins
deteriorated on manufactured items (due to lead times necessary to produce the
finished product) and even more so on items not immediately sold, but instead
placed in inventory for future sale. As a result, the Company wrote down
inventory by approximately $2.5 million as of December 31, 1996, to the lower of
cost or market. See "-- Results of Operations".
In addition, the acquisition of Flow Components, 21st Century Metals and
the expansion of manufacturing operations put more pressure on working capital
needs. On June 18, 1996, the Company increased the maximum availability of
borrowings under the revolving credit agreement to $18.0 million. On October 24,
1996, the Company issued $2.5 million of convertible subordinated debentures to
SunTrust Banks, Inc. On March 13, 1997, the Company increased its borrowing
capacity by $3.4 million by replacing its former $18.0 million revolving line of
credit and $3.6 million term loan facility with Suntrust and SouthTrust with a
$25.0 million revolving line of credit with Mellon Bank.
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items of the Company bear to its net
sales.
22
<PAGE>
Year Ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
Net sales ........................................ 100.0% 100.0% 100.0%
Cost of Sales .................................... 79.6 70.9 84.0
Inventory write-down ............................. -- -- 4.9
---- ---- ----
Gross profit ..................................... 20.4 29.1 11.1
Selling, general and administrative expenses ..... 20.1 15.4 13.9
---- ---- ----
Operating income (loss) .......................... 0.3 13.7 (2.8)
Cost of abandoned public offering ................ -- (1.2) --
Interest expense ................................. (2.9) (3.2) (5.9)
Other income ..................................... 0.9 0.3 0.6
---- ---- ----
Income (loss) before income taxes ................ (1.7) 9.6 (8.1)
==== ==== ====
Twelve months ended December 31, 1996 compared to the twelve months ended
December 31, 1995.
Sales for the twelve months ended December 31, 1996 were $50.8 million as
opposed to $45.5 million for the comparable twelve month period in 1995,
resulting in an 11.7% increase from the twelve months of 1995. These increases
are primarily a result of the acquisitions of Flow Components, Inc. (a
Houston-based manufacturer of stainless steel forged flanges), effective as of
January 1, 1996, 21st Century Metals, Inc. (a master distributor of stainless
steel products in the Chicago area) on June 21, 1996, and the operation of the
structural and ornamental tube facility in the fourth quarter of 1996. The
Company's sales would have been even higher had import pressures not reduced
selling prices by approximately 35% during 1996.
Gross profit for the twelve months ended December 31, 1996 decreased 57.5%
to $5.6 million from $13.2 million for the comparable period in 1995. As a
percentage of sales, gross profit decreased to 11.1% for the twelve months
ended December 31, 1996 from 29.1% for the comparable period in 1995. These
decreases caused the Company to write-down the value of its inventory by more
than $2.5 million in the fourth quarter of 1996, to the lower of cost or
market. In the corresponding period of 1995, stainless steel selling prices
were increasing in the first six months of the year, allowing for higher gross
profit margins before beginning their decline in the last six months of the
year. As stainless steel prices declined in 1996, profit margins narrowed as
relatively higher cost inventory was sold at prices that were lower than in
1995.
23
<PAGE>
For the twelve months ended December 31, 1996, selling, general and
administrative expenses increased 1.1% to $7.1 million from $7.0 million for the
twelve months ended December 31, 1995. However, for the twelve months ended
December 31, 1996, selling, general and administrative expenses as a percentage
of sales decreased to 13.9% from 15.4% for the comparable period in 1995. This
percentage decrease can be attributable to approximately a $0.5 million
reduction in executive officer bonuses and the increase in sales from the 1996
acquisitions of Flow Components and 21st Century Metals. In addition,
selling, general and administrative expenses increased in 1996 as a result of
costs necessitated by the integration of Flow Components, 21st Century and
the structural and ornamental tubing manufacturing activities with the
Company's existing operations.
Interest expense for the twelve months ended December 31, 1996 increased
102.1% compared with the comparable period in 1995. For the twelve months ended
December 31, 1996 and 1995, interest expense as a percentage of sales was 5.9%
and 3.2%, respectively. This increase was primarily due to an increase in the
level of indebtedness resulting from financing the Flow Components acquisition,
and from capital improvement projects such as the buttweld fittings operation,
the ornamental and structural tubing operation and the expansion of the
Auburndale manufacturing facility.
As a result of the foregoing factors, the net loss for the twelve months
ended December 31, 1996 was $2.7 million, as compared with a net income of $2.7
million for the comparable period in 1995. This decrease is attributable to
narrower gross profit margins resulting from declining stainless steel selling
prices and increased interest expense from additional indebtedness as described
above.
Twelve months ended December 31, 1995 compared to the twelve months ended
December 31, 1994.
Sales for the twelve months ended December 31, 1995 were $45.5 million as
opposed to $28.1 million for the comparable twelve month period in 1994,
resulting in an 62.0% increase from the twelve months of 1994. This was largely
attributable to the relocation of the Company's manufacturing operations from
Dover, New Jersey to Auburndale, Florida. Since completing its relocation to the
Auburndale Facility in the fourth quarter of 1994, the Company in 1995 increased
the number of pounds of stainless steel pipe it manufactured and sold from
approximately 750,000 pounds per month to approximately 1.4 million pounds per
month. Other factors, such as weather-related problems in the Northeast during
the first quarter of 1994 and increases in 1995 in the selling prices for
stainless steel products also contributed to the rise in sales but to a smaller
degree. In the twelve months ended December 31, 1995, prices charged by the
Company for stainless steel pipe and related products rose by approximately 15%
over prices charged in the corresponding period in 1994.
Gross profit for the twelve months ended December 31, 1995 increased 130.9%
to $13.2 million from $5.7 million for the comparable period in 1994. As a
percentage of sales, gross profit increased to 29.1% for the twelve months ended
December 31, 1995 from 20.4% for the comparable period in 1994. These increases
were a result of approximately $1.8 million in relocation and set-up costs
charged to cost of sales for the twelve months ended December 31, 1994 and a
stainless steel price increase in 1995.
24
<PAGE>
For the twelve months ended December 31, 1995, selling, general and
administrative expenses increased 23.9% to $7.0 million from $5.6 million for
the twelve months ended December 31, 1994. This increase was primarily due to
costs incurred in seeking potential acquisitions and increases in executive
compensation, insurance costs and other growth factors affecting the Company.
However, as a percentage of sales, for the twelve months ended December 31,
1995, selling, general and administrative expenses as a percentage of sales
decreased to 15.4% from 20.1% for the comparable period in 1994. These
percentage decreases were attributable to the increase in sales from the
expanded manufacturing operations due to the relocation to Auburndale, Florida.
Interest expense for the twelve months ended December 31, 1995 increased
81.0% compared with the comparable period in 1994. This increase was primarily
due to an increase in the level of indebtedness as the result of the costs of
financing capital improvements, including additional machinery and equipment
purchases for the Auburndale Facility, as well as financing additional working
capital growth, primarily inventory purchases. For the twelve months ended
December 31, 1995 and 1994, interest expense as a percentage of sales was 3.2%
and 2.9%, respectively.
As a result of the foregoing factors, net income for the twelve months
ended December 31, 1995 was $2.7 million as compared with a net loss of $0.3
million for the comparable period in 1994. This change to profitability was
primarily a result of substantial sales growth and increased gross profit
resulting from the Company's increased manufacturing capacity and increases in
stainless steel prices in 1995, as compared with the costs of relocation and
set-up at the Auburndale Facility in 1994.
Liquidity and Capital Resources
General
In order to implement its expansion program, the Company has incurred
significant expenditures since 1992 in connection with its lease and subsequent
purchase of manufacturing facilities, the acquisition of capital equipment and
the purchase of significant inventories of stainless steel coils as well as
finished stainless steel items for distribution. Although less sensitive to
cyclical swings than the carbon steel industry, there is a direct relation
between end-user demand for stainless steel products and the prices which
suppliers charge the Company and other producers and distributors of stainless
steel products for their raw materials and inventories. Additionally,
competitive import pricing and the volume of stainless steel imported from
overseas contribute to cyclical swings. The Company's expansion of its physical
resources and significant inventory purchases were made in anticipation of
increased demand for stainless steel products. Such expansion has impacted
liquidity and capital resources.
In November 1993, the Company completed an initial public offering of
1,725,000 shares of Common Stock and received net proceeds of approximately $4.3
million. In July 1994, the Company obtained a $6.0 million maximum revolving
credit facility from one of its commercial lenders which it subsequently
increased to a maximum of $12.0 million. The Company
25
<PAGE>
subsequently increased this revolving credit facility to a maximum of $17.0
million in December 1995, and refinanced this revolving credit facility without
increasing the maximum availability thereunder (in conjunction with another
lender) in January 1996. The Company further increased the maximum availability
under this credit facility in June 1996 to $18.0 million. In January 1996, the
Company also obtained term loans in the aggregate principal amount of
approximately $8.4 million. The Company has also financed portions of its
capital equipment additions for the Auburndale Facility, as well as the
acquisition of ornamental tubing mills for operation at the Eaton Park, Florida
facility, through equipment lease credit lines or additional term loans secured
by the equipment financed. On October 24, 1996 the Company issued $2.5 million
of convertible subordinated debentures with SunTrust Banks, Inc. On March 13,
1997, the Company increased its borrowing capacity by $3.4 million by replacing
its $18.0 million revolving line of credit and $3.6 million term loan facility
with a $25.0 million revolving line of credit with Mellon Bank. See "Debt
Financings" below. The receipt of the net proceeds from its initial public
offering, its expanded credit facilities, term loans, capital leases and
internally generated cash flow, all contributed to the Company's ability to
expand its facilities and increase inventories and will continue to do so in the
future.
As a result of the Company's additional financings in 1996, primarily
for the acquisitions of Flow Components and 21st Century Metals, and machinery
and equipment purchases for new manufacturing activities such as coil slitting,
ornamental and structural tubing and buttweld fittings operations, liquidity was
impeded and the Company's debt/equity ratio increased from 1.96 to 1.00 at
December 31, 1995, to 3.75 to 1.00 at December 31, 1996. The Company believes
that as the acquisitions and new manufacturing operations begin contributing
profitably to operations, the Company's debt/equity ratio should improve and the
Company will be able to service its increased debt levels.
Internally generated funds from operations and additional amounts which
will then be available to be borrowed under its line of credit, will provide the
Company with sufficient liquidity to meet its debt service and operating
requirements for at least the next twelve months. The Company anticipates that
it will continue its policy of leasing certain capital equipment through leasing
lines of credit or conventional financing, in order to conserve its cash
resources. See "Capital Expenditures."
26
<PAGE>
Year Ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
(in thousands)
Net cash used for operations .................. $(1,979) $(8,365) $ (327)
Net cash used for investing activities ........ (1,310) (1,163) (7,193)
Net cash provided by financing activities ..... 2,615 9,604 7,699
------- ------- -------
Net increase (decrease) in cash ............... $ (674) $ 76 $ 179
======= ======= =======
An increase of approximately $12.1 million in inventories in 1995 required
approximately $8.4 million of net cash used for operations in such period.
Cash flows used for investing activities were approximately $1.3 million,
$1.2 million and $7.2 million for the years ended December 31, 1994, 1995 and
1996, respectively. Approximately $1.3 million was expended for machinery and
equipment in 1994, and approximately $1.4 million in 1995, primarily as a result
of expansion of the Auburndale Facility. In 1996, approximately $2.7 million was
used to purchase machinery and equipment for the manufacturing operations of
Eaton Park, Florida, the Auburndale Facility and the Flow Components division.
Approximately $4.2 million was used to acquire Flow Components and 21st Century
Metals.
Net cash provided by financing activities was approximately $2.6 million,
$9.6 million and $7.7 million for the years ended December 31, 1994, 1995, and
1996, respectively. Net cash was provided by financing activities as the Company
was able to increase its bank line of credit with its primary lenders to support
its growth. In addition, in 1996 the Company raised $2.5 million through a
convertible subordinated debt offering with SunTrust Banks, Inc.
Acquisitions
Performance Metals
Effective on August 29, 1994, the Company acquired all of the outstanding
capital stock of Performance Metals. The consideration paid to Michael Beam, the
sole stockholder of Performance Metals, was 202,500 unregistered shares of the
Company's Common Stock (subject to the grant of registration rights with respect
to such shares). The last sale price of the Company's Common Stock on August 29,
1994 as reported on Nasdaq was $4.00 per share.
In connection with the acquisition of Performance Metals, the Company and
Michael Beam entered into a five-year employment agreement pursuant to which Mr.
Beam was engaged
27
<PAGE>
to manage the operations of Performance Metals for a variable rate of
compensation equal to (i) $201,500 per year through February 28, 1996, (ii) a
minimum of $101,500 per year from March 1, 1996 through August 1997, and (iii)
$114,000 per year for the balance of the term through August 31, 1999. Effective
February 16, 1996, Mr. Beam resigned from the Company, but continued to be
compensated on a month-to-month basis pursuant to a severance arrangement at his
1995 level. Such payments continued until the Company filed a registration
statement registering, among others, Mr. Beam's 200,800 shares of Company Common
Stock on April 19, 1996.
The acquisition of Performance Metals was treated as a "pooling of
interests" for accounting purposes.
Flow Components
Pursuant to the terms of a Stock Purchase Agreement, dated as of September
30, 1995, as subsequently amended (the "Purchase Agreement"), by and among the
Company, as Buyer, and James Read Boles, James T. Callier, Jr., William H.
Blaney, Jr. and Thomas Reinhart (collectively, the "Stockholders"), on January
23, 1996 (to be effective January 1, 1996) all of the outstanding shares of
capital stock of Flow Components were sold to the Company. Messrs. Boles,
Callier, Blaney and Reinhart were the only holders of capital stock of Flow
prior to consummation of the Purchase Agreement. Flow Components is a
manufacturer of stainless steel forged flanges, which are used as pipe
connectors and are distributed to users of stainless steel pipe.
The Purchase Price for the Flow Components capital stock was $3,650,000 in
cash paid to the Stockholders at closing, and the distribution of 70,000
unregistered shares of Company common stock to one of the Stockholders, Mr.
Boles (who was the sole officer and director of Flow Components prior to the
Closing), certain of which shares he assigned to certain employees of Flow
Components at the Closing (the "Purchase Price"). Simultaneous with the Closing,
certain obligations of Flow to the Stockholders, to a corporation affiliated
with the Stockholders, or on behalf of such affiliated corporation were paid by
the Company with the proceeds of a financing consummated by the Company in order
to provide the funds necessary to consummate the Purchase Agreement. See "-Debt
Financings", for a description of such financing. At the Closing of the Purchase
Agreement, in addition to the Purchase Price, the Company paid an aggregate of
approximately $2,900,000 to repay certain outstanding Flow Components
indebtedness and to purchase certain assets of a corporation affiliated with the
Stockholders ("Scarab Trading Corporation"). See, Item 1, "Business-Strategic
Acquisitions."
Twenty-First Century Metals
On June 21, 1996, the Company acquired all the capital stock of
Twenty-First Century Metals, Inc. ("21st Century"), located in Elk Grove,
Illinois, a suburb of Chicago. 21st Century is a master distributor of stainless
steel products. The Company purchased 21st Century for $50,000 in cash and
26,300 unregistered shares of the Company's common stock. In the six months
since its acquisition by the Company, sales of 21st Century have more than
doubled to
28
<PAGE>
over $300,000 per month. On October 1, 1996, the 21st Century subsidiary was
merged into the Company.
Debt Financings
On January 22, 1996, the Company and its subsidiaries completed several
financing transactions, both to refinance existing revolving credit and leasing
line financings, as well as to provide specific financing for the acquisition of
Flow Components on January 23, 1996. See, Item 1, "Business -Strategic
Acquisitions." With respect to such financings, the Company entered into a
Revolving Line of Credit and Term Loan Agreement, dated January 22, 1996 (the
"Loan Agreement"), among the Company, as borrower, and SunTrust Bank, Central
Florida, National Association ("SunTrust"), and SouthTrust Bank of Alabama,
National Association ("SouthTrust"), as lenders (collectively, the "Former
Lenders"), pursuant to which the Company was able to borrow up to $17.0 million
as a revolving credit line and $4.5 million a term loan basis from its Former
Lenders. On June 18, 1996, the Company increased the maximum availability of
borrowings under the revolving credit agreement to $18.0 million. The $4.5
million term loan was reduced to $3.6 million with a portion of the proceeds
from a $2.5 million convertible subordinated debt offering which was completed
on October 24, 1996. On March 13, 1997, the Company increased its borrowing
capacity by $3.4 million by replacing its $18.0 million revolving line of credit
and $3.6 million term loan facility with a $25.0 million revolving line of
credit with Mellon Bank N.A. ("Mellon Agreement"). The borrowing base under the
Mellon Agreement is 85% of qualified accounts receivable and 65% of eligible
inventory (limited to a $17.0 million advance on the value of eligible
inventory), with a $3.75 million aggregate overadvance which will commence in
September 1997 to be reduced monthly until November 1998, when it must be
reduced to zero. Of the $25.0 million revolver, $0.5 million is reserved for the
funding of future capital expenditures. The interest rate on the revolving line
of credit under the Mellon Agreement is a variable margin over either the
fluctuating prime rate of interest or the fluctuating LIBOR Rate. The Mellon
Agreement contains certain negative covenants to be observed by the Company, as
well as certain financial ratios which the Company must maintain. The maturity
date for borrowings under the revolving loan is March 10, 2001.
Borrowings under the Mellon 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 personally guaranteed up to $3.0 million in
the aggregate by Harvey and Ronald Adams.
In addition, on January 22, 1996, the Company also entered into a Loan
Agreement with SunTrust (the "Equipment Loan") pursuant to which the Company
borrowed approximately $3.9 million on a term loan basis. The proceeds of the
Equipment loan were used to refinance specific items of equipment leased by the
Company and for general working capital purposes. The maturity date of the
Equipment Loan is February 1, 2001, and the loan is subject to a fixed 11.44%
rate of interest. The Equipment Loan is secured by liens on specific items of
equipment owned by the Company.
On April 24, 1996, the Company financed the acquisition of the Acworth,
Georgia distribution facility. The property was acquired with a $232,800
purchase money mortgage
29
<PAGE>
provided by SunTrust Bank, Central Florida, National Association. This mortgage
has a fixed interest rate of 9% per annum and is being amortized over a 15 year
period with a balloon payment due after five years.
Under the terms of a Master Finance Lease Agreement with SunTrust, dated as
of March 13, 1996, the Company financed the approximately $800,000 purchase
price of coil slitting machinery which became fully operational in the fourth
quarter of fiscal 1996. This machinery is financed with a five year loan at an
interest rate of 9% per annum.
At March 26, 1997, approximately $22.0 million was outstanding under the
line of credit owed to Mellon Bank with an additional $0.6 million reserved for
outstanding letters of credit.
The credit facilities with the Former Lenders contained certain covenants
to be performed by the borrower, including prohibitions on the payment of
dividends and maintaining certain financial ratios. The Company failed to meet
the Total Liabilities to Tangible Net Worth and Funded Net Worth to EBITDA ratio
requirements for the first quarter of 1996. Additionally, in the second quarter
of 1996, the Company failed to meet the Interest Coverage ratio covenant. All
covenant violations were waived by the Former Lenders.
The Company acquired the Auburndale Facility in January 1994. The property,
located on eight acres of land in Auburndale, Florida, was appraised for
$850,000 and was purchased for $650,000. The Company financed $500,000 of the
purchase price through a 15-year adjustable rate mortgage bearing interest at a
bank prime rate plus 1.5% and added approximately $500,000 of building
improvements to the Auburndale Facility in 1994. The Company refinanced the
original Auburndale Facility mortgage loan in October 1994 with a new $700,000
principal mortgage loan due 2009 and bearing interest at a bank prime rate plus
1.5%. In November 1995, the Company refinanced the Auburndale Facility with
SouthTrust Bank of Orlando for $1,060,000. The 15 year mortgage loan bears a
fixed interest rate equal to the five year treasury note rate, plus 2.25%. The
loan amortizes in monthly installments over the 15 year term.
In December 1995, the Company acquired a 29,083 square foot facility on an
approximately 1.48 acre site located in the Los Angeles metropolitan area in
order to consolidate its three then separate office, warehouse and storage
facilities in Paramount, California. The Company financed $855,000 of the
$1,140,000 purchase price with the seller, United Services Life Insurance
Company. The 15 year mortgage bears interest at a fixed rate of 8% per annum.
In January 1996, the Company acquired a 78,382 square foot facility on an
approximately 10 acre site located approximately 10 miles from the Auburndale
Facility, in Eaton Park, Florida. Machinery used to manufacture ornamental and
structural stainless steel tubing are operated at this facility. The Eaton Park
facility began production in June 1996 and became fully operational in the
fourth quarter of fiscal 1996. The Company financed 100% of the $750,000
purchase price with SouthTrust Bank of Florida, N.A. The 15 year mortgage bears
interest at a fixed rate of 225 basis points in excess of the United States
Treasury Note on the date the interest rate was initially set, and is re-set
every five years.
30
<PAGE>
In December 1995, a building owned by the Company in New York was destroyed
by fire. Approximately a $205,000 gain on the disposition of this asset occurred
in 1996 as a result of insurance proceeds received by the Company. A contract to
sell the underlying land has been executed which calls for a sales price of
$385,000. The sale is expected to close in April 1997. Due to the relocation of
the manufacturing facility from Dover, New Jersey to Auburndale, Florida,
Management has determined not to rebuild the property or purchase additional
property in New York.
The Company has two equipment lease credit lines with Ally Capital
Corporation, each providing maximum financing of $1,000,000. These credit lines
each have five-year terms and one bears interest at 11% and the other at 13%. As
of December 31, 1994, both equipment lease lines had been fully utilized,
primarily due to the purchase of pipe mills with induction annealing lines, one
of which is capable of continuously manufacturing stainless steel pipe in
diameters of six, eight and ten inches, as well as welders and acid purifiers.
In connection with its refinancing of outstanding indebtedness with its primary
lenders in January 1996, including obtaining financing necessary to acquire Flow
Components, the Company prepaid $738,556, which included a prepayment penalty of
$60,313 under its Ally Capital Corporation leasing line.
In 1996, Harvey B. Adams, Ronald J. Adams and Burton R. Chasnov loaned the
Company $363,158, $100,000 and $100,000, respectively. Interest on these loans
is paid monthly at an interest rate of 12% per annum. The loans are subordinated
to the revolving line of credit with Mellon Bank and the Convertible
Subordinated Debt Agreement with SunTrust Banks.
Convertible Subordinated Debt
On October 24, 1996 the Company issued $2.5 million of convertible
subordinated notes to SunTrust Banks, Inc. (the "Holder"). These ten year
debentures bear interest at 10.75% per annum, payable quarterly beginning
December 31, 1996. At the Company's option, interest payments may be deferred
until September 30, 1998. However, interest will accrue at 15.00% per annum on
the deferred interest portion until such payment is made. The debentures are
convertible into common stock of the Company at $6.09 per share at any time
during the ten year period. Subsequent to conversion, the Holder has piggyback
registration rights. Additionally, the Holder may require the Company to
register its shares of common stock within 45, 90 or 180 days depending on the
circumstances. The Purchase Agreement contains certain negative covenants to be
observed by the Company as well as certain financial ratios which the Company
must maintain. The Company used $0.9 million of the proceeds from the $2.5
million debenture issue to reduce its term loan to its Former Lenders from $4.5
million to $3.6 million. The balance of the proceeds were used for working
capital purposes.
Capital Expenditures
Primarily, as a result of its 1994 expansion and relocation of its
manufacturing operations to the Auburndale Facility, in the last three fiscal
years ended December 31, 1996, the Company incurred significant capital
expenditures aggregating approximately $5.6 million in 1994, $5.2
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<PAGE>
million for 1995, and $5.4 million for 1996. Of the $5.4 million of capital
expenditures in 1996, $4.3 million related to the expansion of manufacturing
operations (See Item 1, "Description of Business-Expansion of Manufacturing
Capabilities") and the remaining $1.1 million related to the acquisition of a
new computer system for the Company, the purchase of the property in Acworth,
Georgia used as a distribution center and miscellaneous other expenditures.
Proposed capital expenditures for 1997 are $500,000 and will be financed
primarily through the revolving line of credit under the Mellon Agreement.
Effect of Inflation
Although inflation is not generally considered a material factor affecting
the Company's business, the prices which it pays for its raw materials of
stainless steel sheets, coils and forgings are affected by factors impacting
international commodity prices. These factors include changes in the level of
demand for stainless steel products and general inflationary conditions, as well
as political considerations affecting certain countries which are the sources of
foreign supply. General operating expenses such as salaries and employee
benefits are also subject to normal inflationary pressures.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
Page
Number
------
Financial Statements:
Report of Independent Certified
Public Accountants F - 1
Balance Sheets as of
December 31, 1996 and 1995 F - 2
Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 F - 4
Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994 F - 5
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F - 6
Notes to Financial Statements F - 7
Financial Statement Schedules:
II. Valuation and Qualifying Accounts for the years ended
December 31, 1996, 1995 and 1994.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
33
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Officers, Directors and Key Employees
- -------------------------------------
The executive officers, directors and key employees of the Company are as
follows:
NAME AGE POSITION
- ------------------ --- ------------------------------------
Harvey B. Adams 49 Chairman of the Board of Directors and
Chief Executive Officer
Ronald J. Adams 48 President, Director, and Chief Operating
Officer
Burton R. Chasnov 49 Executive Vice President and Chief
Financial Officer
Michael A. Sigmon 48 Vice President
James Read Boles 43 Chief Operating Officer and General
Manager - Flow Components Division
Robert J. Gamson 60 Director
David M. Barnes 53 Director
Stephen A. Weiss 56 Director
- ----------
HARVEY B. ADAMS. Mr. Adams is the founder of the Company which he started
in 1973. For approximately six years prior thereto he was employed in chemical
sales by Drew Chemical, Tampa, Florida and started a ship's chandler business.
Harvey Adams is a 1970 graduate of the United States Merchant Marine Academy and
holds a Bachelor of Science degree in Marine Engineering. He is the brother of
Ronald J. Adams, the President of the Company.
RONALD J. ADAMS. Mr. Adams is a principal shareholder of, and has been
continuously employed in senior executive capacities with, the Company since
1978. For approximately five years prior thereto he held sales positions with
small privately-owned corporations. Mr. Ronald Adams is a 1971 graduate of the
United States Merchant Marine
34
<PAGE>
Academy and holds a Bachelor of Science degree in Marine Engineering. He is the
brother of Harvey B. Adams, the Chief Executive Officer of the Company.
BURTON R. CHASNOV. Mr. Chasnov as of July 1, 1996, became an Executive Vice
President and the Chief Financial Officer of the Company. Mr. Chasnov had been
the Company's and its predecessors' tax accountant and outside consultant for
the past 15 years and has operated his own public accounting practice since
1978. Concurrently during the period 1978 through 1987, Mr. Chasnov served as
the Vice President of Finance for Ploss Hotels Corporation, a hotel management
company. Prior to that time, Mr. Chasnov worked in three public accounting firms
including Arthur Andersen & Co., Clarence Rainess & Co. and Laventhol and
Horwath, CPAs.
MICHAEL A. SIGMON. Mr. Sigmon, together with his wife, started Alloy Piping
Supply, Inc. in Jacksonville, Florida in August 1974 as a distributor of
stainless steel welded pipe and related products; which corporation was merged
with the Company as of May 1992. From 1970 to 1974, Mr. Sigmon was a sales
representative for Camalloy, Inc., a stainless steel distributor in
Pennsylvania. For approximately five years prior thereto he was in the sales
department for Bristol Metal Products, Inc., a subsidiary of Synalloy
Corporation.
JAMES READ BOLES. Mr. Boles joined the Company as the Chief Operating
Officer and General Manager of the Flow Components division in January 1996,
when the Company acquired Flow Components, Inc. From 1991 to January 1996, Mr.
Boles served as President and a principal stockholder of Flow Components, Inc.,
a manufacturer and distributor of stainless steel flanges. Prior to his
acquisition of Flow Components, Mr. Boles was a principal in the acquisition and
operation of certain privately-owned businesses.
ROBERT J. GAMSON. From 1968 to 1991, Mr. Gamson was the founder, President
and principal stockholder of Aaron Scrap Metals, Inc., a dealer in ferrous and
non-ferrous metals purchased primarily from industrial plants and government
agencies. Such commodities were resold in both the domestic and foreign metals
markets. In 1991, Mr. Gamson sold Aaron Scrap Metals, Inc. to Commercial Metals
Co. located in Dallas, Texas. Mr. Gamson presently serves as President of
Surplus Steel and Supply, Inc. located in Orlando, Florida.
DAVID M. BARNES. Mr. Barnes has been a Director of the Company since June
21, 1994. Mr. Barnes has been Chief Financial Officer of American United Global,
Inc., a Nasdaq/NMS listed company engaged in technology and construction
equipment distribution businesses, since May 15, 1996. He has been a director of
American United Global, Inc. since October 1996. From April 1990 to July 1990,
Mr. Barnes also served as an officer and director of Intelcom Data Systems,
Inc., which engages in the design and development of software for the foreign
currency exchange and banking industries. From October 1987 until May 1989, Mr.
Barnes was Vice President of Finance at U.S. Home Care Corp., a home health care
provider. From April 1983 until September 1987, Mr. Barnes was Vice President of
Finance and Administration of Lifetime Corporation. From 1975 to 1983, Mr.
Barnes was Executive Vice President of Beefsteak Charlies, Inc. Since May 1991,
he has been a director and minority stockholder of American Complex Care,
Incorporated, a public company formerly engaged in
35
<PAGE>
providing on-site health care services, including intra-dermal infusion
therapies. Since 1994, he has also been President of American Complex Care,
Incorporated. In April 1995, American Complex Care Incorporated's operating
subsidiaries made assignments of their assets for the benefit of creditors
without resort to bankruptcy proceedings.
STEPHEN A. WEISS. Mr. Weiss has been a director of the Company since June
21, 1994. Mr. Weiss is a stockholder of Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quentel, counsel to the Company, and has been a lawyer in private
practice in New York, New York for more than 25 years. Mr. Weiss is a director
of Lanxide Corporation, a developer of patented materials technology related to
the fabrication of ceramic-reinforced composite products.
The Company has Audit and Compensation Committees, and it is the Board's
Compensation Committee which administers the Company's Stock Option Plan. The
responsibilities of the Audit Committee include recommending to the Board of
Directors the firm of independent accountants to be retained by the Company,
reviewing with the Company's independent accountants the scope and results of
their audits, and reviewing with the independent accountants and Management the
Company's accounting and reporting principles, policies and practices, as well
as the Company's accounting, financial and operating controls and staff. The
Compensation Committee will have responsibility for establishing and reviewing
employee compensation plans. The Compensation Committee administers the
Company's stock option plan.
Non-management directors of the Company will receive directors' fees of
$500 per meeting for attendance at Board of Directors meetings, and are
reimbursed for actual expenses incurred in respect of such attendance. The
Company does not intend to separately compensate employees for serving as
directors.
Compliance with Section 16(a) Of the Exchange Act.
To the knowledge of the Company, no officers, directors, beneficial owners
of more than 10 percent of any class of equity securities of the Company
registered pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any other person subject to Section 16 of the
Exchange Act with respect to the Company, failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act during the most recent
fiscal year, which ended December 31, 1996, other than Michael Sigmon, who had a
late filing of his Form 5 for the 1996 fiscal year.
36
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the amount of all compensation paid by the
Company for services rendered during each of 1994, 1995 and 1996 to the person
serving as the Company's Chief Executive Officer at any time during such periods
and to each of the Company's executive officers whose total salary and bonus
compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
All
Other (2) Restricted Other
Annual Stock Options/ LTIP Compen
Name and Fiscal Compensation Awards SARs ($) sation
- -------- ------ ------------ ------ ---- --- ------
Principal Position Year Salary ($) Bonus ($) ($) ($) (#) Payouts ($)
- ------------------ ---- ---------- --------- --- --- --- ------- ---
Annual Compensation (1) Awards Payouts
Long Term Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harvey B. Adams
Chairman of the 1994 312,500 0 30,617 0 45,000 0 0
Board and Chief 1995 312,500 360,000 32,855 0 30,000 0 0
Executive Officer 1996 312,500 0 55,080 0 150,000 0 0
Ronald J. Adams 1994 187,500 0 35,085 0 45,000 0 0
President and Chief 1995 187,500 240,000 47,161 0 30,000 0 0
Operating Officer 1996 187,500 120,000 36,805 0 150,000 0 0
1994 26,842 0 0 0 0 0 0
Christopher B. Cole 1995 125,000 0 7,318 0 0 0 0
Executive V.P. (3) 1996 121,362 0 9,304 0 15,000 0 95,096
1994 140,000 0 11,467 0 7,500 0 0
Michael Sigmon 1995 160,000 24,000 8,736 0 5,000 0 0
Vice President 1996 196,000 0 9,012 0 0 0 0
</TABLE>
- ----------
(1) Does not include an aggregate of $93,238, $33,072 and $54,954 paid in
respect of the 1996 fiscal year, $93,238, $33,072, and $55,108 paid in respect
of the 1995 fiscal year and $94,138, $33,072 and $54,954 paid in respect of the
1994 fiscal year in rent to Harvey Adams, Ronald Adams and Michael and Barbara
Sigmon, respectively, for warehouse and office facilities leased by the Company
from such persons.
(2) Represents the cost of additional employee benefits to the particular
executive officer (e.g., health insurance, automobile) other than cash
compensation.
(3) Employment terminated in November 1996. The dollar amount listed under All
Other Compensation represents severance pay.
37
<PAGE>
Stock Option Grants
The Company has granted (net of forfeitures and cancellations) an aggregate
of 782,150 stock options under its 1993 stock option plan, as amended, of which
56,050 stock options have been exercised through March 31, 1997. The following
table sets forth information concerning the granting of stock options during
fiscal 1996 to each of the executive officers named in the Summary Compensation
Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% of Total
Options/SARs Exercise
Granted to or Base
Options/SARs Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5%($) 10%($)
- ---- ----------- ----------- ------ ---- ----- ------
Potential Realized Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Harvey B. Adams 150,000 37.6 5.125 9/03/01 981,141 1,238,080
Ronald J. Adams 150,000 37.6 5.125 9/03/01 981,141 1,238,080
Christopher B. Cole 15,000 3.8 11.875 8/31/00 227,338 286,872
</TABLE>
The following table sets forth information concerning the number of
unexercised options, and the value of such unexercised options, for each of the
executive officers named in the Summary Compensation Table.
AGGREGATED OPTIONS/SARS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Name Shares Value Number of Unexercised Value of
- ---- Acquired on Realized ($) Options/SARs at Fiscal Unexercised
Exercise (#) ----------- Year-End (#) In-the-Money
------------ ------------ Options/SARs at
Fiscal Year-End ($)
-------------------
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Exercisable/ Exercisable/
Unexercisable Unexercisable
Harvey B. Adams -0- -0- 75,000/150,000 $0
(exercisable/unexercisable)
Ronald J. Adams -0- -0- 75,000/150,000 $0
(exercisable/unexercisable)
Christopher B. Cole -0- -0- 15,000 (exercisable) $0
Michael Sigmon -0- -0- 12,500 (exercisable) $0
</TABLE>
38
<PAGE>
The following table sets forth information concerning option replacement
grants for each of the executive officers named in the Summary Compensation
Table.
10-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
Length of
Number of Original Option
Securities Term
Underlying Market Price of Exercise Price Remaining at
Options/SARs Stock at Time of at Time of New Date of
Repriced or Repricing or Repricing or Exercise Repricing or
Name Date Amendment (#) Amendment ($) Amendment ($) Price ($) Amendment ($)
- ---- ---- ------------- ------------- ------------- --------- -------------
(a) (b) (c) (d) (e) (f) (g)
- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Harvey B. Adams 9/4/96 150,000 5.125 8.25 5.125 4 yrs 2.5 mos
Ronald J. Adams 9/4/96 150,000 5.125 10.25 5.125 4 yrs
</TABLE>
On September 4, 1996, the Compensation Committee elected to replace 150,000
stock options each, granted in 1995 to Harvey Adams and Ronald Adams at a per
share price of $8.25 and $10.25, respectively, with the same number of stock
options priced at $5.125 each (market price at date of grant). This option
replacement was in consideration for personal guarantees placed on the Company's
revolving line of credit with the Former Lenders and loans made to the Company.
Employment Agreements
The Company entered into an employment agreement with Harvey B. Adams,
effective as of January 1, 1993 and expiring on December 31, 1997, pursuant to
which he serves as Chairman of the Board and Chief Executive Officer of the
Company and provides the Company with his full-time business and professional
services, and for which he receives a base annual salary of $312,500.
The Company also entered into an employment agreement with Ronald J. Adams,
effective as of January 1, 1993 and expiring on December 31, 1997, pursuant to
which he serves as President and Chief Operating Officer of the Company and
provides the Company with his full-time services, for which he receives a base
annual salary of $187,500.
Under the terms of an Employment Agreement dated April 15, 1996, effective
July 1, 1996 and expiring June 30, 2001, Burton Chasnov serves as Executive Vice
President and Chief Financial Officer of the Company. Mr. Chasnov's base salary
is $187,500 for the annual period ending June 30, 1997; $195,000 for the annual
period ending June 30, 1998; $205,000 for the annual period ending June 30,
1999; $215,000 for the annual period ending June 30, 2000; and $225,000 for the
annual period ending June 30, 2001. Additionally, Mr. Chasnov operated under the
terms of a written consulting agreement with the Company during the period April
15, 1996 through June 30, 1996 in consideration for the grant of options outside
of the 1993 stock
39
<PAGE>
option plan to acquire 50,000 shares of Company Common Stock at $11.00 per share
(fair market at April 15, 1996) during a five year period. On September 4, 1996,
these options were forfeited and replaced with 50,000 new options which were
granted at $5.125 (fair market at grant date) in consideration for his personal
guarantee of an automobile lease and a loan to the Company. See Item 13,
"Certain Relationships and Related Transactions."
Michael A. Sigmon entered into an employment agreement with the Company,
effective as of May 1, 1993 and expiring on December 31, 1995. Under such
agreement, Mr. Sigmon served as Vice President of the Company and was in charge
of the Jacksonville, Florida distribution center. On January 15, 1995, the
Company increased Mr. Sigmon's base annual salary to $160,000. In January 1996,
the Company increased Mr. Sigmon's base salary to $196,000 per annum, and agreed
to extend the term of his employment agreement to December 31, 1997.
Michael Beam entered into an employment agreement with the Company,
effective as of September 1, 1994 and expiring on August 31, 1999. Under such
agreement, Mr. Beam served as General Manager of the Company's Performance
Metals subsidiary. The Company was to pay Mr. Beam a base annual salary of
$201,500 for the first 18 months of his agreement, not less than $101,500 for
the next 18 months of the agreement and $114,000 for the remainder of the
agreement. Effective February 16, 1996, Mr. Beam resigned from the Company, but
continued to be compensated on a month-to-month basis pursuant to a severance
arrangement at his 1995 level. Such payments were terminated on May 16, 1996
when a registration statement with respect to Mr. Beam's public distribution of
200,800 shares of Company common stock was declared effective by the Securities
and Exchange Commission.
Christopher B. Cole entered into an employment agreement with the Company,
effective as of October 1, 1994 and expiring on September 30, 1996, at a base
salary of $125,000 per annum. Under such agreement, Mr. Cole served as Executive
Vice President of the Company and was in charge of the initial phase of the
Company's relocation to the Auburndale Facility. Following completion of such
relocation, he had been responsible for the management and review of the
manufacturing operations of the Auburndale Facility. In March 1996, the Company
negotiated a 5-year extension of Mr. Cole's employment agreement at a base
salary of $150,000 per annum. Mr Cole's employment with the Company was
terminated in November 1996, at which time he received a severance package
totaling approximately $95,000.
James Read Boles entered into an employment agreement with Flow Components
and the Company expiring on December 31, 1998. Under such agreement, Mr. Boles
serves as Chief Operating Officer and General Manager of the Company's Flow
Components subsidiary. The Company currently pays Mr. Boles a base salary of
$125,000 per annum, which is subject to annual cost-of-living increases and
annual review by the Company's Board of Directors. Additionally, the Company
granted to Mr. Boles options to purchase 50,000 shares of Company Common Stock
under the Company's Stock Option Plan at an exercise price of $8.50 per share
(i.e. equal to the last sale price of the Company's Common Stock, as reported on
Nasdaq on the effective date of the consummation of the Flow Components
acquisition).
40
<PAGE>
On October 25, 1995, the Company entered into an employment agreement with
Robert Rachwal expiring on November 30, 2000, pursuant to which he was engaged
to manage the Company's ornamental and structural tube division. Under such
agreement, Mr. Rachwal receives a base salary of $120,000 per annum, plus
monthly incentive bonuses based on (i) an amount not to exceed $0.004 per pound
of monthly shipments of ornamental and structural stainless steel tubing and
(ii) the monthly adjusted pre-tax income (as defined) of such division, up to a
maximum monthly bonus of $8,000.
Each of the employment agreements with Messrs. Harvey B. Adams, Ronald J.
Adams, Burton R. Chasnov, Michael A. Sigmon, Michael Beam, Christopher B. Cole,
James Read Boles and Robert Rachwal contain covenants restricting the employee
from engaging in any activities competitive with the business of the Company
during the term of his respective employment agreement and for limited periods
thereafter.
Compensation Committee Interlocks and Insider Participation
The Company's Board of Directors has an Audit Committee and a Compensation
Committee. The Compensation Committee also administers the Company's Stock
Option Plan. The responsibilities of the Audit Committee include recommending to
the Board of Directors the firm of independent accountants to be retained by the
Company, reviewing with the Company's independent accountants the scope and
results of their audits, and reviewing with the independent accountants and
management of the Company's accounting and reporting principles, policies and
practices, as well as the Company's accounting, financial and operating controls
and staff. The Compensation Committee has responsibility for establishing and
reviewing employee compensation plans, including the grant of options under the
Company's stock option plan.
Non-management directors of the Company will receive directors' fees of
$500 per meeting for attendance at Board of Directors meetings, and are
reimbursed for actual expenses incurred in respect of such attendance. The
Company does not intend to separately compensate employees for serving as
directors.
Executive Officer Bonus Plan
In order to provide certain of its senior executive officers with
additional incentives for enhanced performance, the Company adopted an Executive
Officer Bonus Plan (the "Bonus Plan") for the benefit of the Company's senior
executive officers from time to time. This Bonus Plan is administered by the
Compensation Committee of the Board of Directors of the Company (the
"Committee"), which has full and final authority to make all calculations of
bonuses under the Bonus Plan, the amount of advances available under the Bonus
Plan to such officers, and all other matters relating to the administration of
the Bonus Plan and the payment of any and all bonuses thereunder.
Only the President and the Chief Executive Officer of the Company (the
"Participants") during the subject fiscal years shall be eligible to participate
in and receive bonuses under the Bonus Plan. Any bonuses paid out under this
plan shall be allocated 60% of the Aggregate
41
<PAGE>
Bonus (as defined herein) to the Chief Executive Officer and 40% of the
Aggregate Bonus to the President. The Aggregate Bonus (as defined in the below
table) shall be deemed earned under the Bonus Plan provided that the Company has
achieved EBITD (as hereinafter defined) equal to or in excess of the following
income levels:
EBITD Aggregate Bonus
----- ---------------
$ 2,000,001 - $ 2,500,000 $ 200,000
$ 2,500,001 - $ 3,000,000 $ 350,000
$ 3,000,001 - $ 3,500,000 $ 500,000
$ 3,500,001 or more $ 600,000
The term "EBITD" means, with respect to the any full fiscal year subject to
the terms of the Bonus Plan, the net income of the Company for such fiscal year
(after all expenses, excluding the executive officer bonus, and before provision
for taxes based on income) calculated in accordance with generally accepted
accounting principles consistently applied, with the amount of any depreciation
to be added back to increase the net income (provided that, in such calculation,
there shall be excluded, and no effect shall be given to, (A) any net gains or
losses realized or incurred by reason of any extraordinary or non-recurring
transactions not in the ordinary course of business, and (B) any net gain
arising from the collection of the proceeds of any insurance policy or policies,
calculations of EBITD for any applicable fiscal year shall be based upon the
Company's annual audited financial statements for such fiscal year, as prepared
by the independent public accountants regularly engaged by the Company. All
bonuses earned under the Bonus Plan shall be paid to the Eligible Employees no
later than March 31 of the year following the fiscal year in which such bonus
was earned. No Bonuses were earned by Messrs. Harvey and Ronald Adams for 1996.
However, the Compensation Committee awarded Ronald Adams a bonus outside of the
Executive Officer Bonus Plan of $120,000 for 1996. In consideration of the 1996
bonus, Ronald Adams agreed to waive any bonus he might be entitled to for 1997
under the Executive Officer Bonus Plan.
The Bonus Plan shall remain in effect for the Company's fiscal year
beginning January 1, 1995 and ending December 31, 1997, without prejudice to the
Company's right to extend the Bonus Plan or its ability to provide compensation
to the Company's executive officers under other plans or in other ways. Advances
may be paid quarterly to eligible employees in anticipation of future bonus
compensation.
Effective January 1, 1996, the Company adopted a 401K retirement savings
plan. The Plan covers all employees with more than three months of service and
allows employees to contribute up to 15% of their income to the Plan. The
Company may contribute to the plan at its discretion. As of December 31, 1996,
the Company had not made a qualified matching contribution to the Plan.
42
<PAGE>
The Compensation Committee of the Board of Directors established in June
1994 consists of Robert J. Gamson, Stephen A. Weiss and David M. Barnes. The
Audit Committee consists of Ronald J. Adams and Messrs. Weiss and Barnes. Such
persons were members of the Board of Directors of the Company for the entire
fiscal year ended December 31, 1996.
For a description of certain transactions involving the Company and its
officers and directors, see "Certain Transactions" below.
Limitation of Directors' and Officers' Liability and Indemnification
The Company has included in its Certificate of Incorporation and/or By-laws
provisions to (i) eliminate the personal liability of its directors and officers
for monetary damages resulting from breaches of their fiduciary duty (provided
that such provisions do not eliminate liability for breaches of the duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
Delaware Law, or for any transaction from which the director and/or officer
derived an improper personal benefit), and (ii) indemnify its directors and
officers to the fullest extent permitted by the Delaware Law, including
circumstances in which indemnification is otherwise discretionary. The Company
believes that these provisions are necessary to attract and retain qualified
persons as directors and officers.
The Company has entered into separate but identical indemnity agreements
(the "Indemnity Agreements") with each director and executive officer of the
Company (the "Indemnitees"). The Indemnity Agreements provide that the Company
will indemnify each Indemnitee against any amounts that he becomes legally
obligated to pay in connection with any claim against him based upon any act,
omission, neglect or breach of duty that he may commit, omit or suffer while
acting in his capacity as a director and/or officer of the Company; provided,
that such claim: (i) is not based upon the Indemnitee's gaining any personal
profit or advantage; (ii) is not for an accounting of profits made from the
purchase or sale by the Indemnitee of securities of the Company within the
meaning of Section 16(b) of the Exchange Act or similar provisions of any state
law; and (iii) is not based upon the Indemnitee's knowingly fraudulent,
deliberately dishonest or willful misconduct. The Indemnity Agreements also
provide that all costs and expenses incurred by the Indemnitee in defending or
investigating such claim shall be paid by the Company in advance of the final
disposition thereof, unless the Company's disinterested directors, independent
legal counsel, the stockholders of the Company or a court of competent
jurisdiction determines that: (x) the Indemnitee did not act in good faith and
in a manner that he reasonably believed to be in or not opposed to the best
interests of the Company; or (y) in the case of any criminal action or
proceeding, the Indemnitee had reasonable cause to believe his conduct was
unlawful. Each Indemnitee has undertaken to repay the Company for any costs or
expenses so advanced if it shall ultimately be determined by a court of
competent jurisdiction in a final, nonappealable adjudication that he is not
entitled to indemnification under an Indemnity Agreement.
43
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table identifies each person or entity known to the Company
to be the beneficial owner of more than five percent of the Company's Common
Stock on March 26, 1997 each director of the Company and all the directors and
executive officers of the Company as a group, and sets forth the number of
shares of the Company's Common Stock beneficially owned by each such person and
such group and the percentage of the shares of the Company's outstanding Common
Stock owned by each such person and such group. In all cases, the named person
has sole voting power and sole investment power of the securities.
Number of Shares
of Common Stock Percentage of
Name and Address of of the Company Outstanding
Beneficial Owner(1) Beneficially Owned(2) Common Stock Owned
- ------------------- --------------------- ------------------
Harvey B. Adams 1,785,800(3)(5) 38.1%
Ronald J. Adams 519,400(4) 11.1%
Burton R. Chasnov 68,750(6) 1.5%
Michael A. Sigmon 28,750(7) *
8035 Pebble Creek Lane West
Ponte Vedra, FL 32082
Stephen A. Weiss 7,000(8) *
11 The Mews
Westport, CT 06880
Robert J. Gamson 12,750(9) *
1501 The Oaks Drive
Maitland, FL 32751
David M. Barnes 3,500(10) *
11130 NE 33 Place
Bellevue, WA 98004
All executive officers
and directors as
a group (7 persons) 2,425,950(3)(4)(5)(6)(7) 48.4%
(8)(9)(10)
- ----------
* Less than 1%.
44
<PAGE>
(1) The addresses of each of Harvey B. Adams, Ronald J. Adams, and Burton R.
Chasnov is c/o Consolidated Stainless, Inc., 1601 East Amelia Street,
Orlando, Florida 32803. Harvey B. Adams and Ronald J. Adams are brothers.
(2) As used herein, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Securities Exchange Act of 1934 as
consisting of sole or shared voting power (including the power to vote or
direct the vote) and/or sole or shared investment power (including the
power to dispose or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or
otherwise, including a right to acquire such power(s) during the next 60
days. Unless otherwise noted, beneficial ownership consists of sole
ownership, voting and investment rights.
(3) Includes non-qualified options to purchase 45,000 shares of the Company's
common stock at $4.42 per share, non-qualified options to purchase 30,000
shares of the Company's common stock at $5.67 per share and non-qualified
options to purchase 150,000 shares of the Company's common stock at $5.125
per share granted under the Company's 1993 Stock Option Plan. The 150,000
non-qualified options were previously granted for $8.25 per share but on
September 4, 1996 were exchanged for new options priced at market value of
$5.125 in consideration for his personal guarantee on the revolving line of
credit with the Former Lenders and a loan to the Company. Also includes
3,000 shares held for the benefit of Mr. Adams' minor children.
(4) Includes 16,500 shares held by a trust for the benefit of Mr. Adams' two
nieces and which Mr. Adams serves as trustee, incentive options to purchase
45,000 shares of the Company's common stock at $4.42 per share,
non-qualified options to purchase 30,000 shares of the Company's common
stock at $5.67 per share and non-qualified options to purchase 150,000
shares of the Company's common stock at $5.125 per share. The 150,000
non-qualified options were previously granted for $10.25 per share, but on
September 4, 1996 were exchanged for new options priced at market value of
$5.125 in consideration for his personal guarantee on the revolving line of
credit with the Former Lenders and a loan to the Company.
(5) Under a Stipulation and Property Settlement Agreement dated February 8,
1993, as amended (the "Marital Settlement Agreement"), as security for the
payment by Harvey B. Adams of a lump sum alimony payment to Candice V.
Adams, his former wife ("Ms. Adams"), of $2,000,000, plus accrued interest
at 6% per annum (the "Alimony Amount"), Mr. Adams agreed (i) to assign to
Ms. Adams, all proceeds payable by the Company to Mr. Adams under the terms
of a stock redemption agreement, dated April 30, 1993 (the "Redemption
Agreement"), (ii) to deliver into escrow with counsel to the Company's
stock certificates evidencing all but 387,000 shares of Company Common
Stock owned by Mr. Adams, and (iii) to pledge to Ms. Adams 180,000 shares
out of such 387,000 shares of Company Common stock to secure accrued
interest on the Alimony Amount. Under the terms of this escrow arrangement,
Mr. Adams retains the sole right to vote all shares held in escrow, and to
sell all or any portions of such shares provided that 50% of the net
proceeds of each sale are paid to Ms. Adams as a reduction of the Alimony
Amount. The shares held in escrow will be released and redelivered to Mr.
Adams upon full payment of the Alimony Amount. However, if any balance of
the Alimony Amount is outstanding on January 1, 2000, and the Company fails
to repurchase shares of Company Common Stock in accordance with the terms
of the Redemption agreement, Ms. Adams will be delivered out of escrow such
number of shares as to which the then market value equals the Alimony
Amount balance. The Company has granted to Ms. Adams "piggyback"
registration rights with respect to any shares so transferred to her out of
escrow (see "Certain Transactions").
(6) Includes 3,500 shares indirectly owned through Burton R. Chasnov, CPA,
Profit Sharing Plan and 2,250 shares of Company common stock indirectly
owned through Burton R. Chasnov, CPA, Money Purchase Pension Plan. Includes
non-qualified options to purchase (i) 7,500 shares of Company common stock
at $4.42 per share (ii) 2,000 shares of Company common stock at $10.25 per
share and (iii) 50,000 of Company common stock at $5.125 per share. The
50,000 non-qualified options were previously granted
45
<PAGE>
for $11.00 per share, but on September 4, 1996 were exchanged for new
options priced at market value of $5.125 in consideration for his personal
guarantee of an automobile lease and a loan to the Company.
(7) Includes incentive options to purchase (i) 7,500 shares of the Company's
common stock at $4.42 per share and (ii) 5,000 shares of the Company's
common stock at $10.25 per share granted under the Company's 1993 Stock
Option Plan. Includes 450 shares of the Company's common stock held jointly
by Mr. Sigmon and his wife. Does not include (i) 25,625 shares of the
Company's common stock held by the wife of Mr. Sigmon, or (ii) 300 shares
of the Company's common stock held for the benefit of Mr. Sigmon's child.
(8) Includes non-qualified options to purchase (i) 2,000 shares of the
Company's common stock at $10.25 per share and (ii) 5,000 shares of the
Company's common stock at $5.125 per share granted under the Company's 1993
Stock Option Plan.
(9) Includes non-qualified options to purchase (i) 3,750 shares of the
Company's common stock at $4.42 per share, (ii) 1,000 shares of the
Company's common stock at $10.25 per share, and (iii) 5,000 shares of the
Company's common stock at $5.125 per share granted under the Company's 1993
Stock Option Plan.
(10) Includes non-qualified options to purchase (i) 1,000 shares of the
Company's common stock at $12.00 per share and (ii) 2,500 shares of the
Company's common stock at $5.125 per share, both of which are granted under
the Company's 1993 Stock Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases two warehouses and office facilities located in Apopka,
Florida under a lease which commenced in May 1992 and expires April 1997 from R
& H Partners, a partnership consisting of Harvey and Ronald Adams. Annual net
rental under the Apopka lease is $62,400. The Company also leases from Harvey B.
Adams a second warehouse/storage facility in Mulberry, Florida under a lease
which commenced in May 1992 and expires in April 1997. Annual net rental on this
5,000 square foot facility is $56,760.
The Company leases a 27,500 square foot warehouse and office facility
located in Jacksonville, Florida under a lease which commenced in May 1992 and
expires April 1997 from Michael and Barbara Sigmon. Mr. Sigmon is a Vice
President and a minority stockholder of the Company. Annual net rental under the
Jacksonville lease is $51,600.
The Company leases its principal executive offices in Orlando, Florida from
Burton and Barbara Chasnov on a month-to-month basis, Mr. Chasnov is an
Executive Vice President and Chief Financial Officer of the Company. Annual net
rental on this 4,500 square foot facility is $33,638.
In 1993, Messrs. Harvey B. Adams and Ronald J. Adams borrowed an aggregate
of $390,000 from the Company. As of December 31, 1994, the principal balance on
such loans, together with interest at 7% per annum, was paid in full. At
December 31, 1996, Messrs. Harvey B. Adams and Ronald J. Adams were also
indebted to the Company in the aggregate amount of $254,155, including $122,124
borrowed prior to 1993, inclusive of accrued interest at the rate of 10% per
annum. All such indebtedness is payable on demand.
46
<PAGE>
In 1996, Harvey B. Adams, Ronald J. Adams, and Burton R. Chasnov loaned the
Company $363,158, $100,000 and $100,000 respectively. Interest on these loans
are paid monthly at the interest rate of 12% per annum. The loans are
subordinated to the revolving line of credit with Mellon Bank and the
Convertible Subordinated Debt Agreement with SunTrust Banks.
To assist him in paying a $2,000,000 obligation incurred in connection with
a marital settlement, the Company entered into a stock redemption agreement with
Harvey B. Adams in 1993 (the "Redemption Agreement"), pursuant to which the
Company agreed under certain conditions to redeem and repurchase from Mr. Adams,
upon his request, shares having a then market value equal to up to $2,500,000 at
any time during the three month period commencing January 1, 2000 and ending
March 31, 2000. The Company may satisfy its obligations to repurchase shares
from Mr. Adams by registering such shares for resale on behalf of Mr. Adams at
the Company's expense. To the extent that Mr. Adams has received proceeds from
sales of, or has otherwise transferred, Company Common Stock on or prior to such
repurchase or registration, the Company's obligations under the Redemption
Agreement will be reduced proportionately. See Item 12 "Security Ownership of
Certain Beneficial Owners and Management."
Net proceeds of the Company's 1993 initial public offering in the amount of
$1,100,000 were distributed to Harvey B. Adams and other stockholders prior to
such public offering to enable them to pay their respective federal income tax
obligations on earnings of the Company taxable to such stockholders but not
distributed in cash to them under its former S Corporation election. Of such
amount, over $1,000,000 in the aggregate was distributed to Harvey B. Adams,
Ronald J. Adams and Michael Sigmon. The Company, Harvey B. Adams, Ronald J.
Adams, Michael Sigmon and certain other stockholders also entered into a tax
indemnity agreement under which such stockholders agreed to indemnify the
Company from any tax liabilities on any undistributed S corporation earnings
prior to such initial public offering. The Company agreed to indemnify Harvey B.
Adams and the other stockholders in the event that Harvey B. Adams and the other
stockholders are required to pay additional federal income taxes on certain
undistributed income of the Company for periods prior to 1993, to the extent
that such taxes result from a change by the Company in the method of reporting
inventory for income tax purposes.
Harvey B. Adams included on his personal federal income tax return filed
for 1992 amounts that were includable in the income of the Company for the year
ended January 31, 1990 relating to the change in the Company's method of
reporting inventory for income tax purposes. In December 1993 the Company
reimbursed Mr. Adams by offsetting the $390,000 against the then aggregate
balance of Messrs. Harvey and Ronald Adams's promissory notes payable to the
Company (aggregating $346,255 principal), with the remainder ($43,775) being
applied against other amounts owed to the Company by Harvey B. Adams. Harvey B.
Adams has indemnified the Company for the full amount of such offsets
($390,000), and to the extent of any additional taxes on income earned during
the fiscal year ended January 31, 1990, in the event that the Company's manner
of filing its tax returns as concerns such method of reporting inventory is not
accepted and the Company incurs a federal income tax liability with respect
thereto.
47
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a)(1) Financial Statements - See Item 8 for the Index to Financial
Statements.
(a)(2) Financial Statement Schedules - See Item 8 for the Index to Financial
Statements (which includes the Index to Financial Statement Schedules)
(a)(3) Exhibits - The Exhibits listed below are filed or incorporated by
reference as part of this report.
3.1 Articles of Incorporation of CSI, as amended.(1)
3.2 By-Laws of CSI.(1)
4.1 Specimen Certificate of CSI Common Stock.(3)
4.2 Form of Underwriter's Warrant Agreement.(3)
4.3 Form of 1993 Stock Option Plan, including forms of Incentive and
Non-Qualified Stock Option Agreements.(1)
10.1 Stock Redemption Agreement, dated as of April 30, 1993, by and among
CSI and Harvey B. Adams.(1)
10.2 Lease Agreement, dated April 15, 1992, for Jacksonville, Florida
property, by and between CSI and Michael and Barbara Sigmon.(1)
10.3 Lease Agreement, dated April 15, 1992, for Apopka, Florida property,
by and between CSI and Harvey and Ronald Adams.(1)
10.4 Lease Agreement, dated April 15, 1992, for Mulberry, Florida property,
by and between CSI and Harvey Adams.(1)
10.5 Employment Agreement, dated as of April 30, 1993, by and between CSI
and Harvey B. Adams.(1)
10.6 Employment Agreement, dated as of April 30, 1993, by and between CSI
and Ronald J. Adams.(1)
10.7 Employment Agreement, dated as of April 30, 1993, by and between CSI
and Michael Sigmon.(1)
48
<PAGE>
Number Description of Exhibit
- ------ ----------------------
10.8 Form of Amended Employment Agreement, dated as of April 30, 1993, by
and between CSI and Harvey B. Adams.(2)
10.9 Form of Amended Employment Agreement, dated as of April 30, 1993, by
and between CSI and Ronald J. Adams.(2)
10.10 Agreement, dated as of May 12, 1993, by and among CSI, Consolidated
Metals Corporation and Cooper-Sullivan.(1)
10.11 Sale and Purchase Agreement, dated November 23, 1993, by and between
Fuqua Homes, Inc. and R & H Partners.(4)
10.12 TransFinancial Leasing Corp. Master Equipment Lease.(4)
10.13 Ally Leasing Corporation Equipment Lease, dated October 7, 1993.(4)
10.14 Environmental Indemnification Agreement, dated January 28, 1994, by
and between the Company and Ally Capital Corporation.(4)
10.15 Indemnification Letter Agreement, dated March 23, 1994, by and between
Harvey B. Adams and the Company.(4)
10.16 Indemnification Letter Agreement, dated November 12, 1993, by and
between Harvey B. Adams and the Company.(4)
10.17 Lease Agreement for Houston, TX facility.(7)
10.18 Stock Purchase Agreement, dated as of September 30, 1995, among
Consolidated Stainless, Inc. ("CSI"), James Read Boles ("Boles") and
the other stockholders (collectively, with Boles, the "Stockholders")
of Flow Components, Inc. ("FCI") (without Schedules and Exhibits). (8)
10.19 First Amendment, dated as of October 31, 1995, to Stock Purchase
Agreement. (8)
10.20 Second Amendment, dated as of January 22, 1995, to Stock Purchase
Agreement. (8)
10.21 Employment Agreement, dated as of January 1, 1996 between CSI, FCI and
Boles. (8)
10.22 Non-Competition Agreement between CSI and FCI with Boles. (8)
49
<PAGE>
Number Description of Exhibit
- ------ ----------------------
10.23 Non-Competition Agreement between CSI and FCI with Blaney. (8)
10.24 Non-Competition Agreement between CSI and FCI with Reinhart. (8)
10.25 Non-Competition Agreement between CSI and FCI with Callier. (8)
10.26 $3,885,684.15 Term Loan Agreement, dated January 22, 1996 between CSI
and FCI, as Borrowers, and SunTrust, as lender (the "Equipment Loan
Agreement"). (8)
10.27 $3,885,684.15 Term Note issued under Equipment Loan Agreement. (8)
10.28 Security Agreement on specified collateral between CSI and SunTrust
issued under Equipment Loan Agreement. (8)
50
<PAGE>
Number Description of Exhibit
- ------ ----------------------
10.29 Security Agreement on specified collateral between FCI and SunTrust
issued under Equipment Loan Agreement. (8)
10.30 Agreement to Purchase Certain Machinery and Equipment of Inductoweld
Tube Corp., dated October 10, 1995, by and between Inductoweld Tube
Corp. and the Company. (9)
10.31 Loan Agreement, dated October 12, 1995, by and between SouthTrust Bank
of Orlando and the Company. (9)
10.32 Master Finance Lease Agreement, dated as of March 13, 1996, with
SunTrust. (9)
10.33 Convertible Subordinated Debt Purchase Agreement with SunTrust Banks,
Inc. (10)
10.34 Waiver and Modification Agreement No. 1 to Convertible Subordinated
Note Purchase Agreement Amendment to Subordinated Debt Purchase
Agreement with SunTrust Banks, Inc.
10.35 Loan and Security Agreement with Mellon Bank, N.A. ("Mellon Bank").
10.36 Open-End Mortgage and Security Agreement with Mellon Bank.
10.37 $25,000,000 Note to Mellon Bank.
10.38 Subordination Agreement between the Company, Mellon Bank and SunTrust
Bank, Inc.
51
<PAGE>
- ----------
1. Incorporated by reference, filed as an exhibit with the Company's
Registration Statement on Form SB-2 on July 22, 1993, SEC File No.
33-66302-A.
2. Incorporated by reference, filed as an exhibit with Amendment No. 2. to the
Company's Registration Statement on Form SB-2 on October 13, 1993.
3. Incorporated by reference, filed as an exhibit with Amendment No. 3. to the
Company's Registration Statement on Form SB-2 on November 4, 1993.
4. Incorporated by reference, filed as an exhibit to the Company's Annual
Report on Form 10-K on April 14, 1994.
5. Incorporated by reference, filed as an exhibit to the Company's Current
Report on Form 8-K on August 1, 1994.
6. Incorporated by reference, filed as an exhibit to the Company's Current
Report on Form 8-K on February 23, 1995.
7. Incorporated by reference, filed as an exhibit to the Company's Annual
Report on Form 10-KSB for the 1994 fiscal year on March 30, 1995.
8. Incorporated by reference, filed as an exhibit to the Company's Current
report on Form 8-K on February 5, 1996.
9. Incorporated by reference, filed as an exhibit to the Company's Annual
Report on Form 10-KSB for the 1995 fiscal year on March 29, 1996.
10. Incorporated by reference, filed on November 14, 1996 as an exhibit to the
Company's Quarterly Report on Form 10-Q for the period ended September 30,
1996.
- ----------
(b) Reports on Form 8-K
None.
52
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Consolidated Stainless, Inc.
We have audited the accompanying balance sheets of Consolidated Stainless, Inc.
as of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. We have also audited the schedule listed in the
accompanying index. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Consolidated Stainless, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO Seidman, LLP
Orlando, Florida
March 21, 1997
F-1
<PAGE>
Consolidated Stainless, Inc.
Balance Sheets
================================================================================
December 31, 1996 1995
- --------------------------------------------------------------------------------
Assets (Note 6)
Current:
Cash and cash equivalents $ 273,914 $ 94,319
Accounts receivable:
Trade, less allowance for possible
losses of $129,000 and $100,000 6,165,794 5,584,943
Other 145,723 55,202
Insurance proceeds receivable (Note 5) -- 804,366
Due from stockholders 279,895 193,806
Inventories (Notes 4 and 13) 21,321,810 22,281,240
Refundable income taxes 957,475 151,059
Prepaid expenses 206,840 300,681
Deferred income taxes (Note 10 292,800 235,500
- --------------------------------------------------------------------------------
Total current assets 29,644,251 29,701,116
- --------------------------------------------------------------------------------
Property and equipment, (Note 5),
less accumulated depreciation and amortization 17,513,878 11,526,318
- --------------------------------------------------------------------------------
Other assets:
Deferred financing costs, less accumulated
amortization of $166,394 and $1,952 357,245 85,938
Deposits on property and equipment -- 599,127
Goodwill, less accumulated amortization of
$176,916 (Note 3) 3,575,587 --
Other 161,290 350,520
- --------------------------------------------------------------------------------
Total other assets 4,094,122 1,035,585
- --------------------------------------------------------------------------------
$ 51,252,251 $ 42,263,019
================================================================================
F-2
<PAGE>
Consolidated Stainless, Inc.
Balance Sheets
================================================================================
December 31, 1996 1995
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,379,114 $ 6,346,754
Book overdrafts 702,116 3,181,657
Due to stockholders 563,158 --
Accrued expenses:
Payroll and related taxes 528,312 494,509
Interest 228,704 270,765
Other 657,695 223,139
Current maturities of long-term debt
(Note 6) 4,989,411 481,550
Current portion of capital lease
obligations (Note 9) 862,004 778,631
- --------------------------------------------------------------------------------
Total current liabilities 12,910,514 11,777,005
Long-term debt, less current maturities
(Note 6) 26,772,909 17,097,544
Long-term capital lease obligations,
less current portion (Note 9) 1,957,497 2,293,192
Deferred income taxes (Note 10) 393,000 570,800
- --------------------------------------------------------------------------------
Total liabilities 42,033,920 31,738,541
- --------------------------------------------------------------------------------
Commitments and contingencies (Notes 9 and 12) -- --
Stockholders' equity (Notes 8 and 9):
Preferred stock $.01 par - shares authorized
2,000,000; none issued -- --
Common stock $.01 par - shares authorized
15,000,000; issued and outstanding
4,465,866 and 4,212,181 44,659 42,122
Additional paid-in capital 7,741,039 6,300,708
Retained earnings 1,432,633 4,181,648
- --------------------------------------------------------------------------------
Total stockholders' equity 9,218,331 10,524,478
- --------------------------------------------------------------------------------
$ 51,252,251 $ 42,263,019
================================================================================
See accompanying notes to financial statements.
F-3
<PAGE>
Consolidated Stainless, Inc.
Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 50,822,978 $ 45,518,335 $ 28,098,544
Cost of sales 42,676,056 32,269,490 22,359,782
Inventory write-down (Note 13) 2,515,377 -- --
- ---------------------------------------------------------------------------------------
Gross profit 5,631,545 13,248,845 5,738,762
Selling, general and administrative
expenses 7,067,012 6,992,709 5,643,283
- ---------------------------------------------------------------------------------------
Income (loss) from operations (1,435,467) 6,256,136 95,479
- ---------------------------------------------------------------------------------------
Other income (expenses):
Interest (3,003,386) (1,486,176) (820,893)
Costs of abandoned public offering -- (533,415) --
Other 337,538 122,702 251,825
- ---------------------------------------------------------------------------------------
(2,665,848) (1,896,889) (569,068)
- ---------------------------------------------------------------------------------------
Income (loss) before taxes
on income (4,101,315) 4,359,247 (473,589)
Taxes on income (benefit) (Note 10) (1,352,300) 1,704,200 (161,148)
- ---------------------------------------------------------------------------------------
Net income (loss) $ (2,749,015) $ 2,655,047 $ (312,441)
=======================================================================================
Earnings (loss) per share $ (.63) $ .60 $ (.07)
=======================================================================================
Weighted average number of common
shares and share equivalents
outstanding 4,385,456 4,460,096 4,180,875
=======================================================================================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
Consolidated Stainless, Inc.
Statements of Stockholders' Equity
================================================================================
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 4,177,506 $ 41,775 $ 5,919,585 $ 1,839,042
Issuance of common stock for
services rendered 10,125 101 40,399 --
Cancellation of notes payable
to stockholders -- -- 178,159 --
Net loss -- -- -- (312,441)
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 4,187,631 41,876 6,138,143 1,526,601
Exercise of stock options 24,550 246 108,265 --
Tax benefit related to employee stock options -- -- 54,300 --
Net income -- -- -- 2,655,047
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 4,212,181 42,122 6,300,708 4,181,648
Exercise of stock options 31,500 315 141,830 --
Exercise of stock warrants 125,885 1,259 464,039 --
Purchase of Flow Components, Inc. (Note 3) 70,000 700 594,300 --
Purchase of Twenty First Century
Metals, Inc. (Note 3) 26,300 263 229,862 --
Tax benefit related to employee stock options -- -- 10,300 --
Net loss -- -- -- (2,749,015)
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 4,465,866 $ 44,659 $ 7,741,039 $ 1,432,633
=========================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Consolidated Stainless, Inc.
Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,749,015) $ 2,655,047 $ (312,441)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Depreciation 1,318,039 845,794 600,591
Amortization 456,655 172,479 176,266
Gain on disposal of property and equipment (235,007) (38,744) (39,738)
Common stock issued for services rendered -- -- 40,500
Deferred income taxes (440,100) 544,300 (36,800)
Cash provided by (used for), net of effect of acquisitions:
Accounts receivable 1,193,628 (739,626) (1,484,425)
Insurance proceeds receivable 230,592 (804,366) --
Due from stockholders (86,089) 9,246 (86,462)
Inventories 5,655,328 (12,083,519) (3,823,925)
Refundable income taxes (806,416) 315,106 (463,377)
Prepaid expenses 154,686 (213,384) (78,688)
Accounts payable (5,138,676) 429,611 3,603,879
Due to related parties -- -- (3,406)
Due to stockholders -- (45,000) 50,112
Accruals 119,733 592,334 (124,704)
Rental deposits -- (4,000) 4,000
- ------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities (326,642) (8,364,722) (1,978,618)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (3,152,593) (1,405,381) (1,309,783)
Proceeds from the disposition of property and equipment 343,967 852,888 63,910
Deposits on equipment -- (409,299) --
Increase in other assets (155,215) (201,026) (64,142)
Purchase of Flow Components, Inc. (4,093,101) -- --
Purchase of Twenty First Century Metals, Inc. (135,798) -- --
- ------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (7,192,740) (1,162,818) (1,310,015)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in book overdrafts (2,479,541) 3,181,657 --
Net proceeds under revolving lines of credit 1,572,442 7,049,682 3,897,281
Repayments of long-term debt (2,617,316) (307,212) (446,298)
Proceeds from long-term debt 11,857,911 393,104 10,339
Repayments of capital lease obligations (1,369,367) (638,194) (256,734)
Proceeds (repayments) of notes payable to stockholders 563,158 (6,346) (83,063)
Deferred financing costs (435,753) (177,799) (72,841)
Distributions to stockholder -- -- (434,107)
Proceeds from exercise of stock options 142,145 108,511 --
Proceeds from exercise of warrants 465,298 -- --
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,698,977 9,603,403 2,614,577
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 179,595 75,863 (674,056)
Cash and cash equivalents, beginning of year 94,319 18,456 692,512
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 273,914 $ 94,319 $ 18,456
==================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
1. Summary of Inventories
Significant
Accounting Inventories are valued at the lower of average cost or
Policies market.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is
computed over the estimated useful lives of the assets by
the straight-line method for financial reporting and by
accelerated methods for income tax purposes.
Deferred Financing Costs
Deferred financing costs related to a secured line of credit
agreement, a convertible subordinated debt agreement,
mortgages payable and other loan agreements are capitalized
and amortized over the term of the loans (see Note ).
Goodwill
Goodwill represents acquisition costs in excess of the fair
value of net tangible assets of businesses purchased and
consist primarily of the value of ongoing client
relationships and goodwill. These costs are being amortized
over 20 years on a straight-line basis. Goodwill is
evaluated for impairment when events or changes in
circumstances indicate that the carrying amounts of the
assets may not be recoverable through the estimated
undiscounted future cash flows resulting from the use of
these assets. When any such impairment exists, the related
assets will be written down to fair value. This policy is in
accordance with SFAS No. 121, "Accounting for the Impairment
of Long- Lived Assets and for Long-Lived Assets to be
Disposed Of," which is effective for fiscal years beginning
after December 15, 1995. Adoption of this pronouncement did
not have a material impact on the financial statements.
F-7
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
Book Overdrafts
Under the Company's cash management system, checks issued
but not presented to banks frequently result in overdraft
balances for accounting purposes and are classified as "book
overdrafts" in the balance sheet. In accordance with the
Company's agreement with a financial institution, all cash
receipts are applied against the revolving line of credit,
and a daily draw is requested to cover checks clearing the
bank.
Revenue Recognition
Sales are recognized upon shipment of products to customers.
Earnings (Loss) Per Share
Earnings (loss) per common share are based on the weighted
average number of common shares and dilutive common stock
equivalents outstanding during each period after giving
effect to the stock split described in Note . Common stock
equivalents include warrants and options and have not been
included for 1996 and 1994 since their effect would be
antidilutive.
Taxes on Income
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS 109") 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,
with the measurement of deferred income tax assets being
reduced by available tax benefits not expected to be
realized.
Reclassifications
Certain amounts from the 1995 and 1994 financial statements
were reclassified to conform to current year presentation.
F-8
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Fair Value of 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, 1996.
The respective carrying value of certain on-balance-sheet
financial instruments approximated their fair values. These
financial instruments include cash and cash equivalents,
trade receivables, accounts payable, book overdrafts 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 value of the Company's long-term debt is
estimated based upon the quoted market prices for the same
or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities.
2. Nature of Consolidated Stainless, Inc. (the "Company") manufactures
Operations welded stainless steel pipe, ornamental and structural
tubing, flanges, nipples and buttweld fittings and is a
distributor of welded and seamless stainless steel pipe,
tubing, flanges, nipples, fittings and related products,
including those containing exotic alloys. The Company's
stainless steel products are used by a variety of original
equipment manufacturers and other industrial and commercial
end-users. The Company manufactures stainless steel pipe and
buttweld fittings at its Auburndale, Florida facility,
ornamental and structural tubing at its Eaton
F-9
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
Park, Florida facility and flanges and nipples at its
Houston, Texas facility. In addition to its manufacturing
facilities, the Company maintains distribution centers in
Auburndale, Jacksonville and Orlando, Florida and in
Atlanta, Georgia; Los Angeles, California; Houston, Texas;
and Chicago, Illinois.
3. Acquisitions Performance Metals Acquisition
Effective on August 29, 1994, the Company, through a
wholly-owned subsidiary, consummated a merger with
Performance Metals, Inc. ("Performance"), with Performance
becoming a wholly-owned subsidiary of the Company.
Performance was incorporated in Houston, Texas in 1991 and
is a master distributor of nickel alloy piping products and
accessories. The Company issued 202,500 shares of its common
stock for all outstanding shares of all classes of
Performance capital stock. The merger was accounted for as a
pooling of interests, and therefore, the financial
statements of the Company have been restated to include the
accounts and results of operations of Performance for all
periods presented herein.
Flow Components Acquisition
Effective January 1, 1996, the Company purchased all of the
outstanding shares of capital stock of Flow Components, Inc.
("Flow") for $3,650,000 in cash and 70,000 unregistered
shares of the Company's common stock. The Company also
retired approximately $2,461,000 of debt owed by Flow. The
acquisition has been recorded using the purchase method of
accounting. Accordingly, the purchase price was allocated to
the net assets acquired based upon their estimated fair
values. The excess of the purchase price over the estimated
fair value of net assets acquired amounted to approximately
$3,300,000, which has been accounted for as goodwill. The
operating results of Flow are included in the Company's
results of operations from the date of acquisition.
Twenty First Century Metals Acquisition
On June 21, 1996, the Company purchased all of the
outstanding shares of common stock of Twenty First Century
Metals, Inc. ("Century") for $135,798 in cash and 26,300
unregistered shares of the Company's common
F-10
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
stock. The acquisition has been recorded using the purchase
method of accounting. Accordingly, the purchase price was
allocated to the net assets acquired based upon their
estimated fair values. The excess of the purchase price over
the estimated fair value of net assets acquired amounted to
approximately $429,000, which has been accounted for as
goodwill. The operating results of Century are included in
the Company's results of operations from the date of
acquisition.
The following unaudited pro forma summary presents the
results of operations as if the Flow and Century
acquisitions had occurred at the beginning of 1995, with pro
forma adjustments to give effect to amortization of
goodwill, interest expense on acquisition debt and certain
other adjustments, together with related income tax effects,
and does not purport to be indicative of what would have
occurred had the acquisition been made as of these dates or
of results which may occur in the future.
Year ended December 31, 1996 1995
------------------------------------------------------------
Sales $ 51,702,459 $ 58,995,984
Net income (loss) $ (2,904,627) $ 2,871,744
Earnings (loss) per share$ (.66) $ .64
============================================================
4. Inventories Inventories are summarized as follows:
December 31, 1996 1995
------------------------------------------------------------
Raw materials $ 3,448,499 $ 7,623,257
Work in process 1,171,911 384,437
Finished goods 16,701,400 14,273,546
------------------------------------------------------------
$ 21,321,810 $ 22,281,240
============================================================
All inventories are pledged as collateral (see Note 6.
F-11
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
5. Property and Property and equipment are summarized as follows:
Equipment
Useful
December 31, Lives 1996 1995
------------------------------------------------------------
Land $ 1,146,729 $ 975,290
Buildings and
leasehold
improvements 5-40 yrs. 4,315,748 2,130,315
Machinery and shop
equipment 5-25 yrs. 14,195,997 9,324,827
Office furniture and
equipment 5-10 yrs. 1,488,312 662,778
Vehicles 5 yrs. 466,047 515,073
Construction in
progress -- 188,963 519,149
------------------------------------------------------------
21,801,796 14,127,432
Less accumulated
depreciation
and amortization 4,287,918 2,601,114
------------------------------------------------------------
$ 17,513,878 $11,526,318
============================================================
All property and equipment is pledged as collateral (see
Note 6.
Property and equipment includes assets acquired under
capital leases with a cost of $4,647,000 and accumulated
depreciation of $654,000 at December 31, 1996.
The Company's building located in New York was destroyed by
fire in December 1995. The Company retired the building and
recorded insurance proceeds receivable of $804,366 as of
December 31, 1995. During 1996, the insurance company paid
off the mortgage on the building of $573,774 (see Note ),
and the Company received net proceeds of $435,666 and
recorded a gain of $205,074.
F-12
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
6. Long-Term Long-term debt consists of the following:
Debt
December 31, 1996 1995
------------------------------------------------------------
Borrowings under line of
credit (see below). $ 16,827,478 $ 13,049,682
Term loan (see below). 3,600,000 --
$3,885,684 note payable,
interest at 11.44%,
principal and interest of
$80,510 payable monthly
through January 2001,
balloon payment of $469,078
due February 2001,
collateralized by equipment. 3,431,894 --
Convertible subordinated debt
see below). 2,551,510 --
$1,650,000 note payable
for equipment purchase,
interest at 8.73%, principal
and interest of $34,036
payable through 2000,
collateralized by equipment. 1,329,744 1,606,204
Various notes for equipment
purchases, interest ranging
from 8.5% - 13.3%, principal
and interest of approximately
$28,200 payable monthly within
five years, collateralized by
machinery and office equipment. 1,104,800 328,728
$1,060,000 mortgage payable
to bank, interest at 8%,
principal and interest of
$10,130 payable through 2000,
and adjusted monthly payments
thereafter through 2005 and
2010 based on assumed 10-year
and 5-year amortization,
respectively. Collateralized by
Auburndale real property. 1,020,056 1,056,937
$855,000 mortgage payable for
California property, interest
at 8%, principal and interest
of $8,170 payable monthly
through 2011, collateralized
by California real property. 830,145 855,000
$750,000 mortgage payable to
bank, interest at 7.80%,
principal and interest of
$7,082 payable monthly
through 2011, collateralized
by Eaton Park real property. 732,615 --
$232,800 mortgage payable to
bank, interest at 9.01%,
principal and interest of
$2,362 payable monthly through
April 2001, balloon payment of
$186,415 due April 2001,
collateralized by Georgia
real property. 227,929 --
Various notes for vehicle purchases,
interest ranging from 8.5% - 9.5%,
principal and interest of
approximately $7,300 payable
monthly within three years,
collateralized by company
vehicles. 106,149 108,769
$750,000 mortgage payable to
bank, principal and interest
(8.0% at December 31, 1995)
of $5,400 payable monthly
through 2019, collateralized
by real property. Paid off
during 1996 from insurance
proceeds (see Note 5). -- 573,774
------------------------------------------------------------
31,762,320 17,579,094
Less current maturities 4,989,411 481,550
------------------------------------------------------------
Total long-term debt $ 26,772,909 $17,097,544
============================================================
F-13
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
The aggregate amount of the maturities of long-term debt
maturing in future years is as follows as of December 31,
1996:
------------------------------------------------------------
1997 $ 4,989,411
1998 18,315,428
1999 1,542,183
2000 1,597,795
2001 667,275
Thereafter 4,650,228
------------------------------------------------------------
$31,762,320
============================================================
Line of Credit and Term Loan
On January 22, 1996, the line of credit agreement, which
existed at December 31, 1996 and 1995, was restructured by
the Company by entering into a Revolving Line of Credit and
Term Loan Agreement (the "Loan Agreement") whereby the
Company was able to borrow up to $17,000,000 as a revolving
credit line and $4,500,000 on a term loan basis from two
banks. The maturity date for the term loan was the earlier
of December 31, 1997 or the completion of a public equity
offering by the Company. The maturity date for borrowings
under the revolving line of credit was May 31, 1998. On June
18, 1996, the Company increased the maximum availability of
borrowings under the Revolving Line of Credit to
$18,000,000. The interest rates on all borrowings under the
Loan Agreement were variable margins over either the
fluctuating prime rate of interest or the fluctuating LIBOR
rate. At December 31, 1996, the Company was paying a rate on
the Revolving Line of Credit of 8.25% (LIBOR plus 2.75%) on
$16,650,000 of the outstanding balance and 8.625% (prime
plus .375%) on the remaining outstanding balance. Interest
on the Term Loan was 8.75% (LIBOR plus 3.25%) at December
31, 1996. Borrowings under the Loan Agreement were
collateralized by all of the assets of the Company, other
than real property and specified equipment already subject
to liens in favor of other lenders.
F-14
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
On March 13, 1997, the Loan Agreement was replaced by a
Revolving Line of Credit Agreement (the "LOC Agreement")
with a different bank whereby the Company is able to borrow
up to $25,000,000. The maturity date for the LOC Agreement
is March 10, 2001. The interest rates on all borrowings
under the LOC Agreement are variable margins over either the
fluctuating prime rate of interest or the fluctuating LIBOR
rate. Borrowings under the LOC Agreement are collateralized
by all of the assets of the Company other than real property
and specified equipment already subject to liens in favor of
other lenders. The agreement contains certain financial and
operating covenants which were retroactive to December 31,
1996. The covenants include requirements on capital
expenditures, net loss and net worth levels, the
satisfaction of certain financial ratios and a restriction
on the payment of dividends to shareholders.
Convertible Subordinated Debt
On October 24, 1996, the Company sold a convertible
subordinated note (the "Note") in the principal amount of
$2,500,000 to one of its banks. Interest on the Note is
10.75% and is payable quarterly, but may be deferred at the
Company's election for a period of up to two years. The
deferred interest may be paid at any time prior to January
1, 1999 by paying the deferred interest plus 15% per year
multiplied by such deferred interest. The bank may convert
any deferred and unpaid interest into additional shares of
nonvoting common stock on or after January 1, 1999. As of
December 31, 1996, the Company had deferred interest
amounting to $51,510. The Note may not be prepaid in whole
prior to October 18, 1999 or in part at any time. The
principal amount of the Note and any accrued interest is due
on December 31, 2006, the mandatory redemption date. The
Note and accrued interest may be converted by the bank at
any time at a conversion price of $6.09 up to a maximum of
4.95% of the outstanding voting common stock on the date of
conversion (221,060 shares at December 31, 1996). The
balance of principal plus accrued interest will be converted
into non-voting common stock which is to be authorized in
1997. The Note contains certain financial and operating
covenants, including requirements that the Company satisfy
certain financial ratios, a minimum net worth requirement
and a restriction on the payment of dividends to
shareholders.
F-15
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
7. Supplemental Cash and cash equivalents include checking accounts and
Cash Flow money market funds. For purposes of the statements of cash
Information flows, the Company considers all highly liquid debt
instruments purchased with a maturity of three months or
less to be cash equivalents.
Cash paid during 1996, 1995 and 1994 for interest was
$3,045,447, $1,296,265 and $951,954, respectively. Cash paid
for income taxes during 1996, 1995 and 1994 was $130,911,
$764,965 and $508,033, respectively. The Company's non-cash
investing and financing activities were as follows:
1996 1995 1994
------------------------------------------------------------
Long-term debt and
capital lease obligations
incurred in connection
with the purchase of
property and equipment $2,246,547 $3,769,491 $3,651,487
Tax benefit related to
employee stock options
recorded as additional
paid-in capital 10,300 54,300 --
Common stock issued for
the purchase of Flow and
Century (see Note 3) 825,125 -- --
Redemption of mortgage
payable paid directly by
insurance company related
to building destroyed by
fire (see Notes 5 and 6) 573,774 -- --
Notes payable to
stockholders canceled and
contributed to capital -- -- 178,159
============================================================
F-16
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
8. Capital Stock Authorized Shares and Stock Split
On August 9, 1995, the Company's Articles of Incorporation
were amended to increase the authorized shares of common
stock from 10,500,000 to 15,000,000 shares and to increase
the authorized shares of preferred stock from 500,000 to
1,000,000 shares. On May 31, 1995, the Company's Board of
Directors approved a 3-for-2 stock split with respect to the
common stock. The earnings-per-share calculation and all
share information contained in these financial statements
have been retroactively adjusted to give effect to the
increases in authorized shares and the stock split. On
October 17, 1996, the Company's Articles of Incorporation
were amended to increase the authorized shares of preferred
stock from 1,000,000 to 2,000,000 shares.
Stock Options
On November 1, 1993, the Company adopted the 1993 Stock
Option Plan (the Plan) pursuant to which 300,000 shares
(increased to 800,000 shares in July 1995) of common stock
have been reserved for issuance upon the exercise of options
designated as either an "incentive stock option" or as a
"nonqualified stock option." These options may be granted to
employees, consultants or representatives of the Company and
are exercisable within five years from the date of grant.
The Company applies APB Opinion 25, "Accounting for Stock
Issued to Employees," and related interpretations in
accounting for options issued to employees. Accordingly, no
compensation cost has been recognized for options granted to
employees at exercise prices which equal or exceed the
market price of the Company's common stock at the date of
grant. Options granted at exercise prices below market
prices are recognized as compensation cost measured as the
difference between market price and exercise price at the
date of grant.
Statement of Financial Accounting Standards No. 123 (FAS
123) "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net
income and earnings per share as if compensation cost for
the Company's employee stock options had been determined in
F-17
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
accordance with the fair value based method prescribed in
FAS 123. The Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively:
no dividend yield for both years; an expected life of five
years for both years; expected volatility of 42% and 38%;
and risk-free interest rates of 5.8% and 6.2%.
Under the accounting provisions of FAS 123, the Company's
net income (loss) and earnings (loss) per share would have
been reduced to the pro forma amounts indicated below:
1996 1995
------------------------------------------------------------
Net income (loss)
As reported $ (2,749,015) $ 2,655,047
Pro forma (3,249,138) 1,562,552
Earnings (loss) per share
As reported (.63) .60
Pro forma (.74) .35
============================================================
F-18
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
A summary of the status of options under this plan as of December 31, 1996, 1995
and 1994 and changes during the years ending on those dates are presented below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year 658,350 $ 7.55 219,450 $ 4.42 -- $ --
Granted 383,500 5.57 466,000 8.85 219,450 4.42
Exercised (31,500) 4.51 (24,550) 4.42 -- --
Forfeited (6,500) 8.90 (2,550) 5.56 -- --
Canceled (300,000) 9.25 -- -- -- --
-------- ------- -------
Balance at end of year 703,850 5.87 658,350 7.55 219,450 4.42
======== ======= =======
Options exercisable at year end 388,850 $ 6.47 658,350 $ 7.55 219,450 $ 4.42
Options granted during the year
at exercise prices which exceed
market price of stock at date
of grant:
Weighted average exercise
price -- $ -- 16,000 $11.88 -- $ --
Weighted average fair value -- -- 16,000 4.08 -- --
Options granted during the year
at exercise prices which equal
market price of stock at date
of grant:
Weighted average exercise
price 383,500 $ 5.57 450,000 $ 8.74 219,450 $ 4.42
Weighted average fair value 383,500 2.64 450,000 3.84 -- --
</TABLE>
The following table summarizes information about options under the plan
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at Dec. 31, 1996 Contractual Life Exercise Price at Dec. 31, 1996 Exercise Price
- -------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 4.42 to 5.67 555,350 4.0 years $ 4.97 240,350 $ 4.77
$ 5.92 to 8.50 78,000 3.7 7.97 78,000 7.97
$10.25 to 12.00 70,500 3.7 10.62 70,500 10.62
-------- --------
703,850 3.8 5.87 388,850 6.47
======== ========
</TABLE>
During 1996, the Company modified 150,000 and 150,000 options previously granted
under the plan with original exercise prices of $8.25 and $10.25, respectively,
by decreasing the exercise price to $5.13, which equaled the market price of the
Company's common stock at the date of modification. In addition, these options
were extended to September 2001 but are not exercisable until March 1997. The
increase in the fair value of these options due to the modification is included
in the 1996 pro forma FAS 123 disclosures.
During 1996, the Company issued 50,000 options outside of the Plan to an
employee. These options have an exercise price of $5.13 per share, which equaled
the market price of the Company's common stock at the date of grant. The fair
value of these options is included in the 1996 pro forma FAS 123 disclosures.
The options are exercisable for the period from March 1997 through September
2001.
F-19
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
Stock Warrants
The following warrants were outstanding as of December 31,
1996:
Exercise
Shares Price Expiration Date
------------------------------------------------------------
Underwriter's warrants 34,115 $3.67 November 1998
Performance warrants 65,000 $4.00 August 1999
Flow warrants 200,000 $9.25 December 1998
Consultant warrants 5,000 $5.25 November 2001
============================================================
The above warrants were issued at exercise prices which
equaled the market price of the Company's common stock at
the date of grant. During 1996, 115,885 of the underwriter's
warrants and 10,000 of the Performance warrants were
exercised, resulting in $465,298 of proceeds to the Company.
None of the Flow or Consultant warrants were exercised as of
December 31, 1996.
Shares Reserved
At December 31, 1996, the Company has reserved common stock
for future issuance under all of the above arrangements and
the convertible subordinated debt (see Note ) totaling
1,319,125 shares.
9. Commitments Leases
and
Contingencies The Company conducts certain of its operations from leased
facilities including land and buildings in Orlando, Tampa
and Jacksonville, Florida; Houston, Texas; and Chicago,
Illinois. The Orlando, Tampa and Jacksonville facilities are
leased from stockholders. The Company also leases certain
computer equipment and vehicles. These leases are classified
as operating leases and expire on various dates from 1997
through 2010. Certain of the leases provide for renewal
options and the payment of real estate taxes and other
occupancy costs.
F-20
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
The Company also leases machinery and equipment under
capital leases that expire on various dates from 1997
through 2002.
As of December 31, 1996, future net minimum lease payments
under capital leases and future minimum rental payments
required under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year
are as follows:
Capital Operating
Leases Leases
------------------------------------------------------------
1997 $ 1,123,650 $ 414,500
1998 1,118,437 174,100
1999 695,270 144,300
2000 206,992 137,800
2001 188,693 109,600
Thereafter 15,608 986,300
------------------------------------------------------------
Total minimum lease payments 3,348,650 $ 1,966,600
===========
Less amount representing interest 529,149
-------
Present value of minimum
lease payments $ 2,819,501
===========
Rental expense under all operating leases was approximately
$726,000, $656,000 and $563,000 during the years ended
December 31, 1996, 1995 and 1994, respectively. The rental
expense includes amounts for leases with its stockholders of
approximately $197,600, $181,400 and $182,200 during the
years ended December 31, 1996, 1995 and 1994, respectively.
Employment Agreements
The Company has entered into employment agreements with
certain key executives for periods up to five years. The
agreements provide for base compensation as follows:
F-21
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
Year ended December 31,
------------------------------------------------------------
1997 $1,040,300
1998 549,000
1999 434,000
2000 338,700
2001 112,500
============================================================
Stock Redemption
The Company has entered into a stock redemption agreement
with the principal stockholder of the Company, pursuant to
which the Company has agreed under certain conditions to
redeem and repurchase from the stockholder, upon his
request, shares having a then-market value equal to up to
$2,500,000 at any time during the three-month period
commencing January 1, 2000 and ending March 31, 2000. The
Company may satisfy its obligation to repurchase such shares
by registering such shares for resale on behalf of the
stockholder at the Company's expense. To the extent that the
stockholder has received proceeds from the sales of, or has
otherwise transferred, Company common stock on or prior to
the repurchase or registration of the shares of stock, the
Company's repurchase or registration obligations will be
reduced proportionately.
New Jersey Environmental Cleanup
By reason of its lease of the Dover facility to the Company
in 1992, the prior owner of the equipment and assets
purchased by the Company and the current lessor of the
facility to the Company are required to comply with the
provisions of the New Jersey Industrial Site Recovery Act
("ISRA"). The Company cannot at this time estimate the
extent or cost of remedial activities that may be required.
In the opinion of management and legal counsel, the Company
does not have any liability for the costs of the above
remedial activities under ISRA, as amended. Furthermore, the
Company has entered into an agreement with both the former
owner of the equipment and assets it acquired and the
current lessor of the facility to the Company pursuant to
which such persons have agreed to indemnify the Company for
any costs and
F-22
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
expenses which may be incurred by the Company as a result of
any failure of the owner or of the current lessor to comply
with the requirements of ISRA.
Legal Proceedings
The Company is party to various legal proceedings arising in
the normal conduct of business. Management believes that the
final outcome of these proceedings will not have a material
adverse effect upon the Company's financial position.
F-23
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
10. Taxes on The provisions for income taxes (benefit) are in accordance
Income with FAS 109 and are made up of the following:
Year ended December 31, 1996 1995 1994
------------------------------------------------------------
Current:
Federal $ (921,100) $ 964,800 $ (122,683)
State 8,900 195,100 (1,665)
------------------------------------------------------------
(912,200) 1,159,900 (124,348)
------------------------------------------------------------
Deferred:
Federal (381,900) 448,200 (30,500)
State (58,200) 96,100 (6,300)
------------------------------------------------------------
(440,100) 544,300 (36,800)
------------------------------------------------------------
Taxes on income
(benefit) $(1,352,300) $1,704,200 $ (161,148)
============================================================
The provision for income taxes (benefit) differs from the
amounts computed by applying Federal statutory rates to the
income (loss) before taxes due to the following:
Year ended December 31, 1996 1995 1994
------------------------------------------------------------
Provision for Federal
income taxes at the
statutory rate $(1,394,500) $1,482,100 $ (161,200)
Increase (decrease):
State income taxes, net
of federal tax benefit (43,400) 195,100 (5,300)
Other 85,600 27,000 5,352
------------------------------------------------------------
Taxes on income
(benefit) $(1,352,300) $1,704,200 $ (161,148)
============================================================
Deferred income taxes arise from temporary differences
between the tax basis of assets and liabilities and their
reported amounts in the financial statements. The components
of the net deferred tax assets consist of the following:
F-24
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
December 31, 1996 1995
------------------------------------------------------------
Deferred tax assets:
Provision for bad debts $ 49,000 $ 38,500
Inventory overhead
(UCR adjustment) 265,600 227,900
Net operating loss
carryforwards 955,600 --
------------------------------------------------------------
Gross deferred tax assets 1,270,200 266,400
Valuation allowance -- --
------------------------------------------------------------
Total deferred tax assets 1,270,200 266,400
------------------------------------------------------------
Deferred tax liabilities:
Change from cash to accrual
method -- (30,900)
Depreciation (1,348,600) (570,800)
Other (21,800) --
------------------------------------------------------------
Total deferred tax liabilities (1,370,400) (601,700)
------------------------------------------------------------
Total net deferred tax
liabilities (100,200) (335,300)
Less current deferred tax assets (292,800) (235,500)
------------------------------------------------------------
Long-term deferred tax
liabilities $ (393,000) $ (570,800)
------------------------------------------------------------
At December 31, 1996, the Company had unused net operating
losses to carry forward against future years' taxable income
of approximately $2,476,000 and $5,196,000 for federal and
state tax purposes, respectively, expiring in 2011.
During 1993, the Company filed with, and subsequently
withdrew from, the Internal Revenue Service an application
for permission to change its method of accounting for
inventories for income tax purposes to conform with the
method used for financial reporting purposes. The difference
between the two methods, which was approximately $3,083,000,
has been reported as additional taxable income in tax
returns filed for periods in which the Company had elected
to be taxed as an S corporation. The Company had previously
recorded a provision for income taxes amounting to $390,000,
which represented the estimated income taxes that would have
been paid for the year ended January 31, 1990, which was
prior to its election to be treated
F-25
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
as an S corporation. Since this income has now been reported
as taxable income in periods in which the Company had
elected to be taxed as an S corporation and the stockholders
have included this income in their personal tax returns, the
$390,000 has been offset against advances previously made to
the stockholders.
In the event that the Internal Revenue Service requires the
Company to recognize this additional taxable income in a
period that would increase the Company's tax liability, the
Company's principal stockholder has agreed to indemnify the
Company for any additional liability it may incur as a
result of this change.
11. Concentration The Company purchased approximately 11%, 42% and 44% of its
of Suppliers products from one supplier, two suppliers and four suppliers
during the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company purchases a substantial amount of raw materials
from foreign suppliers. Management believes that there are
adequate alternative domestic sources of supply to furnish
such products at competitive prices in the event that it is
no longer able to purchase products from any of such
suppliers in the future.
12. Employee Effective January 1, 1996, the Company adopted the
Benefit Plan Consolidated Stainless, Inc. 401(k) Retirement Savings Plan.
The plan covers all employees with more than three months of
service and allows employees to contribute up to 15% of
their income to the plan. The Company may contribute to the
plan at its discretion. As of December 31, 1996, the Company
had not made a qualified matching contribution to the plan.
F-26
<PAGE>
Consolodated Stainless, Inc.
Notes to Financial Statements
================================================================================
13. Significant During the fourth quarter ended December 31, 1996, the
Fourth Quarter Company recorded a significant adjustment of $2,515,377 to
Adjustment reduce inventory to the lower of cost or market.
F-27
<PAGE>
SCHEDULE II
CONSOLIDATED STAINLESS, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additions
Charged to
Balance at Costs, Balance
Beginning Expenses at End
Description of Year and Other Deductions of Year
----------- ------- --------- ---------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts $100,000 $256,176 $226,974 $129,202
Year ended December 31, 1995:
Allowance for doubtful accounts $100,000 $187,900 $187,900 $100,000
Year ended December 31, 1994:
Allowance for doubtful accounts $201,080 $ 0 $101,080(1) $100,000
</TABLE>
- ----------
(1) Includes a $25,875 reduction in the estimate of the allowance for doubtful
accounts balance.
F-28
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: April 14, 1997
CONSOLIDATED STAINLESS, INC.
By: /S/ Harvey B. Adams
---------------------------
Harvey B. Adams, Chairman
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated
Signatures Title Date
---------- ----- ----
/S/ Harvey B. Adams Chairman of the Board April 14, 1997
- ----------------------- and Chief Executive Officer
Harvey B. Adams
/S/ Ronald J. Adams President, Chief Operating April 14, 1997
- ----------------------- Officer and Director
Ronald J. Adams
/S/ Burton R. Chasnov Executive Vice President,
- ----------------------- Chief Financial and Chief
Burton R. Chasnov Accounting Officer
/S/ Robert J. Gamson Director April 14, 1997
- -----------------------
Robert J. Gamson
/S/ David M. Barnes Director April 14, 1997
- -----------------------
David M. Barnes
/S/ Stephen A. Weiss Director April 14, 1997
- -----------------------
Stephen A. Weiss
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: April ___, 1997
CONSOLIDATED STAINLESS, INC.
By:
---------------------------
Harvey B. Adams, Chairman
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated
Signatures Title Date
---------- ----- ----
Chairman of the Board April ___, 1997
- ----------------------- and Chief Executive Officer
Harvey B. Adams
President, Chief Operating April ___, 1997
- ----------------------- Officer and Director
Ronald J. Adams
Executive Vice President,
- ----------------------- Chief Financial and Chief
Burton R. Chasnov Accounting Officer
Director April ___, 1997
- -----------------------
Robert J. Gamson
Director April ___, 1997
- -----------------------
David M. Barnes
Director April ___, 1997
- -----------------------
Stephen A. Weiss
<PAGE>
Exhibit 10.34
WAIVER AND MODIFICATION AGREEMENT NO.1 TO
CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT
THIS WAIVER AND MODIFICATION AGREEMENT NO. 1 TO CONVERTIBLE
SUBORDINATED NOTE PURCHASE AGREEMENT (this "Agreement") dated as of March 10,
1997, by and among CONSOLIDATED STAINLESS, INC., a Delaware corporation (the
"Company"), SUNTRUST BANKS, INC., a Georgia corporation ("Purchaser"), Harvey B.
Adams, an individual resident of the State of Florida and Ronald J. Adams, an
individual resident of the State of Florida (the "Individuals").
W I T N E S S E T H:
WHEREAS, the Company, the Individuals and Purchaser are parties to a
certain Convertible Subordinated Note Purchase Agreement dated as of October 18,
1996 (the "Note Agreement"; defined terms used herein without definition shall
have the meaning ascribed to such terms in the Note Agreement);
WHEREAS, the Company and the Individuals have requested and the
Purchaser has agreed, in return for certain modifications to Article 9 of the
Note Agreement, to (i) waive compliance with certain financial and other
covenants set forth in the Note Agreement. (ii) amend certain requirements with
respect to future fiscal periods with respect to certain of such financial
covenants, (iii) amend certain other covenants set forth in the Note Agreement
and (iv) waive compliance with Section 10.14 of the Note Agreement, all as more
particularly set forth below;
WHEREAS, the parties wish to amend the Note Agreement to reflect
this agreement;
NOW, THEREFORE, for and in consideration of the mutual covenants
contained herein and other valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
SECTION 1. Amendments to Note Agreement. Subject to the satisfaction
of the conditions precedent set forth in Section 3 hereof, and effective as of
the Effective Date (as hereinafter defined), the Note Agreement is hereby
amended as follows:
a. Section 1.1 of the Note Agreement is hereby amended by deleting
the definitions of "Change in Control", "Event of Default", "Investment" and
"Subordinated Debt" in their entirety and substituting therefor the following:
"Chance in Control" shall mean (a) any "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934. as amended), other than members of the Controlling Shareholder
Group, shall become the "beneficial owner(s)" (as defined in said Rule
13d-3) of shares of Stock of the Company (on a Fully Diluted Basis)
<PAGE>
which entitle the holder thereof to control more than twenty-five percent
(25%) of all voting rights with respect to all shares of Stock of the
Company (on a Fully Diluted Basis) excluding the shares of Stock of the
Company issued or issuable upon conversion of the Notes; (b) approval by
the stockholders of the Company of a merger, reorganization,
consolidation, exchange of shares, recapitalization, restructuring or
other business combination which results in ownership of more than fifty
percent (50%) of the Voting Stock of the Company on a Fully Diluted Basis
being transferred to a Person or Persons other than such existing
stockholders, excluding the shares of Stock of the Company issued or
issuable upon conversion of the Notes; (c) sale of all or substantially
all of the Company's assets; (d) Incumbent Directors cease to comprise a
majority of the directors on the Company's board of directors; (e) any
transaction occurs without the prior approval of two-thirds of the
Incumbent Directors that results in the Stock of the Company no longer
being required to be registered under Section 12 of the Securities
Exchange Act of 1934, as amended; or (f) any recapitalization occurs in
which any dividends or other distributions, direct or indirect, on account
of any shares of the Stock of the Company or any of the Subsidiaries are
not paid to the Purchaser on a pari passu basis with all other
stockholders of the Company as set forth in Section 9.10 of this
Agreement.
"Event of Default" means any of the events specified in Article 8
hereof.
"Investment" shall mean, when used with respect to any Person, any
direct or indirect advance, loan or other extension of credit (other than
the creation of receivables in the ordinary course of business) or capital
contribution by such Person (by means of transfers of property to others
or payments for property or services for the account or use of others, or
otherwise) to any Person, or any direct or indirect purchase or other
acquisition by such Person of, or of a beneficial interest in, capital
stock, partnership interests, bonds, notes, debentures or other securities
issued by such Person.
"Subordinated Debt" shall mean (i) the Indebtedness evidenced by the
Notes, (ii) additional Indebtedness incurred by the Company after the
Closing Date which is expressly permitted by Section 7.1(f), and (iii)
additional Indebtedness of the Company to shareholders of the Company
which Indebtedness is expressly permitted hereunder and is subject to a
subordination agreement in favor of the Purchaser in form and substance
acceptable to the Purchaser in its sole discretion."
b. Section 1.1 of the Note Agreement is hereby further amended by
adding the following definitions of "Controlling Shareholder Group" and
"Optional Redemption Period" in correct alphabetical order:
"Controlling Shareholder Group" shall mean collectively, (i) Harvey
B. Adams and Ronald J. Adams, (ii) any of their siblings, spouses or
parents, (iii) any lineal descendants (by birth or adoption) of the
foregoing and their spouses, and (iv) any trusts established for the sole
benefit of the foregoing."
2
<PAGE>
"Optional Redemption Period" shall mean the period commencing on the
date of the first to occur of any of the events described in Section
9.1(b) hereof and ending on third anniversary of Closing Date."
c. Section 2.3 of the Note Agreement is hereby amended by deleting
subsection (c) thereof in its entirety and substituting the following subsection
(c) in lieu thereof:
"(c) The Company may, at its option, pay interest on the last day of
any calendar quarter through and including the calendar quarter ending on
September 30, 1998 by issuing and delivering to the Purchaser, on or prior
to the date which is five (5) Business Days prior to the date such
interest is due and payable, an additional Note with a principal amount
equal to the amount of such interest then due and payable, which Note
shall be identical as to terms, conditions, maturity and other matters as
the Initial Note except that the interest on such Note shall be
automatically deferred until the calendar quarter ending on September 30,
1998 (the "Deferred Interest Notes"). The Deferred Interest Notes may be
prepaid by the Company, together with all accrued and unpaid interest
thereon, at any time prior to January 1, 1999 as long as such prepayment
is accompanied by all accrued and unpaid interest thereon calculated at a
per annum interest rate of 15%. On or after January 1, 1999, any Deferred
Interest Notes issued hereunder, together with any accrued and unpaid
interest thereon, may be converted by Purchaser into additional shares of
Common Stock pursuant to the terms set forth in Article 9 hereof. All
Interest accruing after September 30, 1998 on the Note and the Deferred
Interest Notes shall be payable by the Company in Dollars."
d. Section 6.8 of the Note Agreement is hereby amended deleting
subsections (a) through (c) thereof in their entirety and substituting the
following in lieu thereof:
(a) Total Liabilities to Tangible Net Worth Ratio. The Company's
ratio of Total Liabilities to Tangible Net Worth shall not, as of the last
day of each fiscal quarter of the Company during the periods specified
below, exceed the ratio set forth for such period below:
Period Ratio
------ -----
Fiscal quarter ending 12-31-96 7.00:1.0
Fiscal quarter ending 3-31-97 7.50:1.0
Fiscal quarter ending 6-30-97 7.25:1.0
Fiscal quarter ending 9-30-97 and
thereafter 7.00:1.0
(b) Funded Debt to EBITDA. The Company's ratio of Funded Debt to
EBITDA shall not as of the last day of each fiscal quarter of the Company
during the periods specified below, exceed the ratio set forth for such
period below:
3
<PAGE>
Period Ratio
------ -----
Fiscal quarter ending 12-31-96 13.25:1.0
Fiscal quarter ending 3-31-97 16.50:1.0
Fiscal quarter ending 6-30-97 13.25:1.0
Fiscal quarter ending 9-30-97 11.00:1.0
Fiscal quarter ending 12-31-97 10.50:1.0
Fiscal quarter ending 3-31-98 10.50:1.0
Fiscal quarter ending 6-30-98 10.00:1.0
Fiscal quarter ending 9-30-98 9.50:1.0
Fiscal quarter ending 12-31-98
and thereafter 9.00:1.0
In the event that the Company's write-down of inventory and other balance
sheet items taken with respect to the fiscal quarter ending December 31,
1996 is less than $2,865,000, the Purchaser and the Company hereby agree
to negotiate downward adjustments to the ratios set forth above for the
first three fiscal quarters of 1997.
(c) Senior Funded Debt to EBITDA. The Company's ratio of Senior
Funded Debt to EBITDA shall not as of the last day of each fiscal quarter
of the Company during the periods specified below, exceed the ratio set
forth for such period below:
Period Ratio
------ -----
Fiscal quarter ending 12-31-96 12.25:1.0
Fiscal quarter ending 3-31-97 15.25:1.0
Fiscal quarter ending 6-30-97 12.00:1.0
Fiscal quarter ending 9-30-97 10.00:1.0
Fiscal quarter ending 12-31-97 8.00:1.0
Fiscal quarter ending 3-31-98 8.00:1.0
Fiscal quarter ending 6-30-98 7.75:1.0
Fiscal quarter ending 9-30-98 7.50:1.0
Fiscal quarter ending 12-31-98
and thereafter 7.00:1.0
In the event that the Company's write-down of inventory and other balance
sheet items taken with respect to the fiscal quarter ending December 31,
1996 is less than $2,865,000, the Purchaser and the Company hereby agree
to negotiate downward adjustments to the ratios set forth above for the
first three fiscal quarters of 1997. For purposes of calculating Senior
Funded Debt for the fiscal quarter ending December 31, 1996, the Purchaser
hereby agrees that the Indebtedness of the Company to H. Adams, R. Adams
and Burt Chasnov in the approximate amount of $563,200 constitutes
Subordinated Debt and will thereafter constitute
4
<PAGE>
Subordinated Debt upon execution and delivery of the Shareholder
Subordination Agreement attached hereto as Exhibit A.
e. Section 7.1 of the Note Agreement is hereby amended by deleting
subsection (b) thereof in its entirety and substituting the following in lieu
thereof:
"(b) (i) Indebtedness in the committed amounts of (x) lines of
credit in effect on the Closing Date and described on Schedule 7.1(b) and
(y) the Senior Credit Agreement as in effect on March 13, 1997 in the
amount of $25,000,000, together with all extensions, renewals,
modifications and refinancings thereof, provided, however, any such
extensions, renewals, modifications and refinancings shall not, without
the written consent of the Requisite Purchasers, increase the amount of
such Indebtedness by an amount in excess of the greater of (x) $2,500,000
or (y) the amount supported by the borrowing base set forth in the
applicable credit documents on the date any such additional amount is
advanced, provided that, the borrowing base as defined in such credit
documents does not differ in any material respect from the borrowing base
set forth in the Senior Credit Agreement as in effect on March 13, 1997,
plus (ii) additional Indebtedness incurred by the Company after the
Closing Date, provided that, after giving effect to such additional
Indebtedness contemplated by this clause (ii), the Company shall on a pro
forma basis, calculated as of the date of incurrence of such Indebtedness,
maintain a ratio of Funded Debt to Tangible Net Worth of less than
6.0:1.0.
Notwithstanding the foregoing, in the case of Indebtedness incurred under
clauses (i) or (ii) above after the Closing Date, (x) such Indebtedness
shall be on terms which, in the aggregate, are no less favorable to the
Company than those of the Senior Credit Agreement as in effect on March
13, 1997 and (y) the Company shall have delivered a certificate to the
Purchaser evidencing, on a pro forma basis, the Company's compliance with
Section 6.8 for the immediately preceding four fiscal quarters of the
Company (calculated as if such Indebtedness had been incurred on the first
day of such fiscal period) and for the next four succeeding fiscal
quarters of the Company; provided further that in connection with the
incurrence of any Indebtedness under this Section 7.1(b) the lender shall
deliver to Purchaser a subordination agreement in respect of such
Indebtedness in substantially the same form as attached as Exhibit H
hereto in accordance with Section 10.14;"
f. Section 7.2 of the Note Agreement is hereby amended by deleting
subsections (f) and (g) thereof in their entirety and substituting the following
subsections in lieu thereof:
"(f) Liens existing on property of any Person acquired by the
Company or any of its Subsidiaries at the time of acquisition of such
Person (other than any such Lien created in contemplation of such
acquisition); provided that such acquisition is a Permitted Acquisition
hereunder;
5
<PAGE>
(g) Purchase money Liens upon any property acquired or held by the
Company or any Subsidiary in the ordinary course of business to secure the
purchase price of such property or to secure Indebtedness permitted
pursuant to Section 7.1(c) incurred solely for the purpose of financing
the acquisition of such property, provided that such Lien does not extend
to any other property; and"
g. Section 7.4 of the Note Agreement is hereby amended by deleting
such section in its entirety and substituting the following in lieu thereof:
"Section 7.4. Mergers, Acquisitions, Etc. Merge or consolidate
with any other Person or purchase, lease or otherwise acquire all or
any substantial portion of the property or assets (including capital
stock) of any Person; provided, however, that the restrictions set
forth in this Section 7.4 shall not be applicable to (i) any merger
or consolidation of any Subsidiary into the Company or another
Subsidiary, (ii) sale, lease or transfer of assets of any Subsidiary
to the Company or to any other Subsidiary, and (iii) Permitted
Acquisitions where the Company's Tangible Net Worth after
consummation of such Permitted Acquisition is equal to or greater
than its Tangible Net Worth immediately prior thereto; provided,
however, that no transaction pursuant to clauses (i), (ii) or (iii)
above shall be permitted if any Default or Event of Default
otherwise exists at the time of such transaction or would otherwise
exist as a result of such transaction."
h. Section 7.15 of the Note Agreement is hereby amended by deleting
such section in its entirety and substituting the following in lieu thereof:
"Section 7.15. Changes in Management. Allow or suffer to occur any
material change in the senior management of the Company without the prior
written consent of the Requisite Purchasers, including without limitation,
allow or suffer to occur any event whereby either of Harvey B. Adams or
Ronald J. Adams shall cease to hold the titles and exercise the duties of
the principal executive officers of the Company unless (x) such event is
caused by the death or disability of Harvey B. Adams or Ronald J. Adams,
and (y) such person is replaced by a management figure reasonably
satisfactory to the Purchaser."
i. Section 8.2 of the Note Agreement is hereby amended by deleting
such section in its entirety and substituting the following in lieu thereof:
"Section 8.2. Charter Amendment. The Charter Amendment shall fail to
be approved by the stockholders of the Company and to become effective by
September 30, 1997;"
j. Section 9.1(a) of the Note Agreement is hereby amended by
deleting such subsection in its entirety and substituting the following in lieu
thereof:
6
<PAGE>
"(a) Purchaser may, at its option, in addition to any other rights
set forth hereunder, any time prior to the payment in full of all of the
outstanding principal under and accrued interest on the Note, convert its
Note and any accrued but unpaid interest thereon (which shall for all
purposes of this Article 9 include the Deferred Interest Notes and any
accrued but unpaid interest thereon), in whole or in part, into fully paid
and non-assessable shares of Common Stock at a price (the "Conversion
Price") per share equal to the average closing price of the Common Stock
on the Nasdaq National Market during the twenty (20) trading days
beginning on August 29, 1996 and ending on September 26, 1996 ($6.09);
provided that, the amount of the Note converted pursuant to this
subsection (a) shall be an amount such that the total shares of Common
Stock received pursuant to this subsection (a) shall not exceed 4.95% of
the outstanding Common Stock on the date of such conversion."
k. Article 9 of the Note Agreement is hereby further amended by
adding the following Sections 9.11 and 9.12 thereto:
"Section 9.11. Special Registration and Conversion Right. In
addition to the rights set forth above and in the Registration Rights
Agreement, the Purchaser may require, at any time during the period
commencing on January 1, 1999 and ending on March 31, 1999, that the
Company effect a registered public offering of the Notes Shares under the
Securities Act and the Company shall be required to effect such
registration by no later than three (3) months after the date of such
request. In connection with any such offering pursuant to this Section
9.11, the Purchaser may convert its Note and all accrued but unpaid
interest thereon, and all Deferred Interest Notes and accrued but unpaid
interest thereon into Common Stock of the Company for a price per share
equal to the lesser of (x) the Conversion Price and (y) an amount equal to
80% of the final offering price per share of the Common Stock in
connection with such offering. The rights of the Purchaser hereunder shall
be in addition to the rights to require registration pursuant to the
Registration Rights Agreement but the Purchaser shall be entitled to all
rights and benefits pursuant to the Registration Rights Agreement in
connection with any required registration under this Section 9.11. Unless
the Purchaser is given a chance to participate in such offering and fully
convert its Note and all other amounts due hereunder in accordance with
the piggyback rights set forth in the Registration Rights Agreement and at
the conversion price set forth in this Section 9.11, the Company shall not
effect any other registered offering of its securities during the period
commencing six (6) months prior to January 1, 1999 and ending on March 31,
1999. If such offering is not successfully consummated, then Purchaser
shall have the right to require the registration set forth above but the
March 31, 1999 expiration of such right shall be extended to the date
which is six (6) months after the date that such failed registration is
withdrawn.
Section 9.12. No Conflicting Agreements. The Company shall not enter
into any agreements, contracts or undertakings which would restrict the
rights of the Purchaser pursuant to this Article 9 or the Registration
Rights Agreement."
7
<PAGE>
l. The Note Agreement and the Note are hereby amended by deleting
the reference to the Subordination Agreement in the legend thereon and
substituting a reference to the following Subordination Agreement: SUBORDINATION
AGREEMENT DATED AS OF MARCH 10, 1997 BY AND BETWEEN MELLON BANK, N.A. AND
SUNTRUST BANKS, INC., AS HEREAFTER AMENDED, MODIFIED OR SUPPLEMENTED IN
ACCORDANCE WITH THE TERMS THEREOF.
SECTION 2. Waiver. The Purchaser hereby waives compliance by the Company
with the following provisions of the Note Agreement:
a. With respect to the execution and delivery of the Loan and
Security Agreement, dated March 10, 1997 by and between Mellon Bank, N.A. and
the Company as in effect on the date hereof the Purchaser waives compliance with
Section 7.11 and, with respect to delivery of the pro forma compliance
statements, Sections 7.1(b); and
b. With respect to the form of the Subordination Agreement, the
requirements of Section 7.1(b) and Section 10.14.
SECTION 3. Conditions of Effectiveness. This Amendment shall become
effective as of December 31, 1996 (the 'Effective Date") on the first day when
this Amendment shall have been executed by Purchaser, the Company and the
Individuals and delivered to the Bank in Atlanta, Georgia, each of the following
conditions shall have been met:
a. The Purchaser and Mellon Bank, N.A. shall have entered into a
Subordination Agreement satisfactory to the Purchaser; and
b. The Purchaser shall have received final, execution counterparts
of the Loan and Security Agreement by and between Mellon Bank, N.A. and the
Company and all other "Loan Documents" as such term is defined therein and
Purchaser shall be satisfied with the terms thereof.
SECTION 4. Covenants of the Company and the Individuals. Each of the
Company and the Individuals hereby agree, that by no later than April 12, 1997,
the Purchaser shall receive duly executed original counterparts of the following
documents:
a. A Subordination Agreement substantially in the form of Exhibit A
attached hereto from each of Burt Chasnov and the Individuals with respect to
all Indebtedness of the Company to such persons; and
b. Deferred Interest Notes in favor of the Purchaser with respect to
interest deferred through the date hereof.
8
<PAGE>
The failure to comply with this Section 4 shall constitute an Event of Default
pursuant to the Note Agreement.
SECTION 5. Representations and Warranties of Company. The Company, without
limiting the representations and warranties provided in the Note Agreement,
hereby represents and warrants to the Purchaser as follows:
a. The execution, delivery and performance by Company of this
Agreement are within Company's corporate powers, have been duly authorized by
all necessary corporate action (including any necessary shareholder action) and
do not and will not (a) violate any provision of any law, rule or regulation,
any judgment, order or ruling of any court or governmental agency, the articles
of incorporation or by-laws of Company or any indenture, agreement or other
instrument to which Company is a party or by which Company or any of its
properties is bound or (b) be in conflict with, result in a breach of, or
constitute with notice or lapse of time or both a default under any such
indenture, agreement or other instrument.
b. This Agreement constitutes the legal, valid and binding
obligation of Company, enforceable against Company in accordance with its terms.
c. No Default or Event of Default has occurred and is continuing as
of the Effective Date or the date hereof (after giving effect to the waivers set
forth herein).
SECTION 6. Survival. Each of the foregoing representations and
warranties and each of the representations and warranties made in the Note
Agreement shall be made at and as of the Effective Date. Each of the foregoing
representations and warranties shall constitute a representation and warranty of
Company under the Note Agreement, and it shall be an Event of Default if any
such representation and warranty shall prove to have been incorrect or false in
any material respect at the time when made. Each of the representations and
warranties made under the Note Agreement (including those made herein) shall
survive and not be waived by the execution and delivery of this Agreement or any
investigation by the Purchaser.
SECTION 7. No Waiver, Etc. Company hereby agrees that except as
expressly set forth in Section 2 above, nothing herein shall constitute a waiver
by the Purchaser of any Default or Event of Default, whether known or unknown,
which may exist under the Note Agreement. Company hereby further agrees that no
action, inaction or agreement by the Purchaser, including without limitation,
any indulgence, waiver, consent or agreement altering the provisions of the Note
Agreement which may have occurred with respect to the non-payment of any
obligation during the terms of the Note Agreement or any portion thereof, or any
other matter relating to the Note Agreement, shall require or imply any future
indulgence, waiver, or agreement by the Purchaser. In addition, Company
acknowledges and agrees that it has no knowledge of any defenses, counterclaims,
offsets or objections in its favor against Purchaser with regard to any of the
obligations due under the terms of the Note Agreement as of the date of this
Agreement.
9
<PAGE>
SECTION 8. Affirmation of Covenants. Company hereby affirms and
restates as of the date hereof all covenants set forth in the Note Agreement, as
amended hereby, and such covenants are incorporated by reference herein as if
set forth herein directly.
SECTION 9. Ratification of Note Agreement. Except as expressly
amended herein, all terms, covenants and conditions of the Note Agreement and
the other Loan Documents shall remain in full force and effect, and the parties
hereto do expressly ratify and confirm the Note Agreement as amended herein. All
future references to the Note Agreement shall be deemed to refer to the Note
Agreement as amended hereby.
SECTION 10. Binding Nature. This Agreement shall be binding upon and
inure to the benefit of the parties hereto, their respective heirs, successors,
successors-in-titles, and assigns.
SECTION 11. Costs, Expenses and Taxes. Company agrees to pay on
demand all reasonable costs and expenses of the Purchaser in connection with the
preparation, execution and delivery of this Agreement and the other instruments
and documents to be delivered hereunder, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for the Purchaser with
respect thereto and with respect to advising the Purchaser as to its rights and
responsibilities hereunder and thereunder. In addition, Company shall pay any
and all stamp and other taxes payable or determined to be payable in connection
with the execution and delivery of this Agreement and the other instruments and
documents to be delivered hereunder, and agrees to save the Purchaser harmless
from and against any and all liabilities with respect to or resulting from any
delay in paying or omission to pay such taxes.
SECTION 12. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Florida.
SECTION 13. Execution and Delivery. This Agreement has been executed
and delivered by the Purchaser and the Company outside of the State of Florida.
SECTION 14. Entire Understanding. This Agreement sets forth the
entire understanding of the parties with respect to the matters set forth
herein, and shall supersede any prior negotiations or agreements, whether
written or oral, with respect thereto.
SECTION 15. Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts
and may be delivered by telecopier. Each counterpart so executed and delivered
shall be deemed an original and all of which taken together shall constitute but
one and the same instrument.
[SIGNATURES SET FORTH ON NEXT PAGE]
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
through their authorized officers as of the date first above.
CONSOLIDATED STAINLESS, INC.
By:____________________________
Name:
Title:
[CORPORATE SEAL]
Attest:________________________
Name:
Title:
_______________________________(SEAL)
Harvey B. Adams
_______________________________(SEAL)
Ronald J. Adams
SUNTRUST BANKS, INC.
By:____________________________
Name:
Title:
11
<PAGE>
Exhibit 10.35
LOAN AND SECURITY AGREEMENT
By and Between
MELLON BANK, N.A.
and
CONSOLIDATED STAINLESS, INC.
Dated: March 10, 1997
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS.................................................... 1
1.1 "Accounting Terms"....................................... 1
1.2 "Affiliate".............................................. 1
1.3 "Applicable Base Rate Margin"............................ 1
1.4 "Bank Indebtedness"...................................... 2
1.5 "Base Rate".............................................. 2
1.6 "Borrowing Base"......................................... 2
1.7 "Business Day"........................................... 2
1.8 "Capital Expenditures"................................... 2
1.9 "Capitalized Leases"..................................... 2
1.10 "Capitalized Lease Obligations".......................... 2
1.11 "Change in Control"...................................... 3
1.12 "Contract Period"........................................ 3
1.13 "Corporation"............................................ 3
1.14 "Current Assets"......................................... 3
1.15 "Current Liabilities".................................... 3
1.16 "EBITDA"................................................. 3
1.17 "Effective Net Worth".................................... 3
1.18 "Eligible Inventory"..................................... 3
1.19 "Eligible Receivables"................................... 4
1.20 "Event of Default"....................................... 4
1.21 "Fixed Charge Coverage Ratio"............................ 4
1.22 "Fixed Charges".......................................... 4
1.23 "GAAP"................................................... 4
1.24 "Good Business Day"...................................... 4
1.25 "Indebtedness"........................................... 4
1.26 "Initial Permitted Out-of-Formula Period"................ 5
1.27 "Inventory Turnover Frequency"........................... 5
1.28 "LIBOR Rate"............................................. 5
1.29 "LIBOR Rate Notification"................................ 5
1.30 "LIBOR Rate Portion"..................................... 6
1.31 "LIBOR Rate Reserve Percentage".......................... 6
1.32 "Line Base Rate"......................................... 6
1.33 "Line Base Rate Notification"............................ 6
1.34 "Line Base Rate Portion"................................. 6
1.35 "Loan Documents"......................................... 6
1.36 "Maximum Amount"......................................... 6
1.37 "Net Income" or "Net Loss"............................... 6
1.38 "Net Operating Loss"..................................... 6
1.39 "Out-Of-Formula Advance"................................. 7
1.40 "Permitted Out-of-Formula Advance"....................... 7
1.41 "Person"................................................. 7
1.42 "Prime Rate"............................................. 7
1.43 "Rate Period"............................................ 7
1.44 "Senior Indebtedness".................................... 7
1.45 "Subordinated Indebtedness".............................. 7
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1.46 "Subsidiary"............................................. 7
1.47 "Tangible Net Worth"..................................... 7
1.48 "Total Funded Indebtedness".............................. 7
1.49 "Value".................................................. 8
1.50 "Working Capital"........................................ 8
2. THE LINE; USE OF PROCEEDS...................................... 8
2.1 Line of Credit........................................... 8
2.2 Use of Proceeds.......................................... 9
2.3 Method of Advances....................................... 9
2.4 Letters of Credit........................................ 9
2.5 Closing.................................................. 10
3. INTEREST RATES................................................. 10
3.1 Interest Rate Options on the Line........................ 10
3.2 Permitted Out-of-Formula Advance......................... 12
3.3 Default Interest......................................... 12
3.4 Post Judgment Interest................................... 12
3.5 Calculation.............................................. 12
3.6 Limitation of Interest to Maximum Lawful Rate............ 12
4. PAYMENTS AND FEES.............................................. 12
4.1 Interest Payments on the Line............................ 12
4.2 Principal Payments on the Line........................... 12
4.3 Equipment Purchase Sublimit.............................. 13
4.4 Letter of Credit Fees.................................... 13
4.5 Loan Fee................................................. 13
4.6 Minimum Interest Fee..................................... 13
4.7 Usage Fee................................................ 14
4.8 Collateral Management Fee................................ 14
4.9 Late Charge.............................................. 14
4.10 Termination of Line and Termination Fee.................. 14
4.11 Payment Method........................................... 14
4.12 Application of Payments.................................. 15
4.13 Loan Account............................................. 15
4.14 Indemnity; Loss of Margin................................ 15
4.15 Indemnity for LIBOR Portion.............................. 16
5. SECURITY; COLLECTION OF RECEIVABLES AND PROCEEDS OF
5.1 Personal Property........................................ 16
5.2 Real Property............................................ 18
5.3 Insurance................................................ 18
5.4 Surety................................................... 18
5.5 Validity Assurance and Management Support Letter......... 19
5.6 General.................................................. 19
5.7 Collection of Receivables; Proceeds of Collateral........ 19
ii
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6. REPRESENTATIONS AND WARRANTIES................................. 20
6.1 Valid Organization, Good Standing and Qualification...... 20
6.2 Licenses................................................. 21
6.3 Subsidiaries............................................. 21
6.4 Financial Statements..................................... 21
6.5 No Material Adverse Change in Financial Condition........ 21
6.6 Pending Litigation or Proceedings........................ 21
6.7 Due Authorization; No Legal Restrictions................. 21
6.8 Enforceability........................................... 22
6.9 No Default Under Other Obligations, Orders or
Governmental Regulations................................. 22
6.10 Governmental Consents.................................... 22
6.11 Taxes.................................................... 22
6.12 Title to Collateral...................................... 22
6.13 Addresses................................................ 22
6.14 Current Compliance....................................... 22
6.15 Pension Plans............................................ 22
6.16 Leases and Contracts..................................... 23
6.17 Intellectual Property.................................... 23
6.19 Eligible Account Warranties.............................. 23
6.20 Business Interruptions................................... 24
6.21 Accuracy of Representations and Warranties............... 24
7. GENERAL COVENANTS.............................................. 24
7.1 Payment of Principal, Interest and Other Amounts Due..... 25
7.2 Limitation on Sale and Leaseback......................... 25
7.3 Limitation on Indebtedness............................... 25
7.4 Investments and Loans.................................... 25
7.5 Guaranties............................................... 26
7.6 Disposition of Assets.................................... 26
7.7 Merger; Consolidation; Business Acquisitions;
Subsidiaries............................................. 26
7.8 Taxes; Claims for Labor and Materials.................... 27
7.9 Liens.................................................... 27
7.10 Existence; Approvals; Qualification; Business
Operations; Compliance with Laws......................... 28
7.11 Maintenance of Properties, Intellectual Property......... 28
7.12 Insurance................................................ 29
7.13 Inspections; Examinations................................ 30
7.14 Default Under Other Indebtedness......................... 30
7.15 Pension Plans............................................ 30
7.16 Bank of Account.......................................... 31
7.17 Maintenance of Management................................ 31
7.18 Capital Stock; Dividends................................. 31
7.19 Transactions with Affiliates............................. 31
7.20 Name or Address Change................................... 31
7.21 Notices.................................................. 31
7.22 Additional Documents and Future Actions.................. 31
7.23 Accounts Receivable...................................... 32
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7.24 Material Adverse Contracts............................... 33
7.25 Restrictions on Use of Proceeds.......................... 33
7.26 Subordinated Indebtedness................................ 33
7.27 Life Insurance........................................... 33
7.28 Mortgaged Property....................................... 33
7.29 Books and Records........................................ 33
7.30 Year End................................................. 33
7.31 Specified Tax Refund..................................... 34
8. FINANCIAL COVENANTS............................................ 34
8.1 Financial Covenants...................................... 34
8.2 Changes to Financial Covenants........................... 36
9. ACCOUNTING RECORDS, REPORTS AND FINANCIAL STATEMENTS........... 36
9.1 Annual Statements........................................ 36
9.2 Projections and Cash Flow................................ 37
9.3 Monthly Statements....................................... 37
9.4 10-K; 10-Q Statements.................................... 37
9.5 Accounts Receivable and Accounts Payable Statements...... 37
9.6 Accounts Receivable Borrowing Base Information and
Related Documents........................................ 38
9.7 Inventory Borrowing Base Information and Related
Documents................................................ 38
9.8 Audit Reports............................................ 38
9.9 Reports to Governmental Agencies and Other Creditors..... 38
9.10 Requested Information.................................... 38
9.11 Compliance Certificates.................................. 38
9.12 Accountant's Certificate................................. 39
9.13 Guarantor's Annual Statements............................ 39
10. ENVIRONMENTAL REPRESENTATIONS AND COVENANTS.................... 39
10.1 Representations.......................................... 39
10.2 Real Property............................................ 39
10.3 Covenant Regarding Compliance............................ 40
10.4 Notices.................................................. 40
10.5 Indemnity................................................ 40
10.6 Testing.................................................. 40
10.7 Survival................................................. 41
10.8 Definitions.............................................. 41
11. CONDITIONS OF CLOSING.......................................... 42
11.1 Loan Documents........................................... 42
11.2 Representations and Warranties........................... 42
11.3 No Default............................................... 42
11.4 Proceedings and Documents................................ 42
11.5 Landlord's or Warehouseman's Release and Waiver
Agreements............................................... 42
11.6 Delivery of Other Documents.............................. 42
11.7 Lockbox/Cash Collateral Account.......................... 43
11.8 Minimum Availability..................................... 44
11.9 Non-Waiver of Rights..................................... 44
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12. CERTAIN CONDITIONS TO SUBSEQUENT ADVANCES........................ 44
12.1 Representations and Warranties........................... 44
12.2 No Default............................................... 44
12.3 Other Requirements....................................... 44
13. DEFAULT AND REMEDIES............................................. 44
13.1 Events of Default........................................ 44
13.2 Remedies................................................. 47
13.3 Sale or Other Disposition of Collateral.................. 47
13.4 Actions with Respect to Accounts......................... 48
13.5 Set-Off.................................................. 49
13.6 Turnover of Property Held by Bank........................ 50
13.7 Delay or Omission Not Waiver............................. 50
13.8 Remedies Cumulative; Consents............................ 50
13.9 Certain Fees, Costs, Expenses, Expenditures and
Indemnification.......................................... 50
13.10 Time is of the Essence................................... 51
13.11 Acknowledgement of Confession of Judgment Provisions..... 51
14. COMMUNICATIONS AND NOTICES....................................... 52
14.1 Communications and Notices............................... 52
15. WAIVERS.......................................................... 53
15.1 Waivers.................................................. 53
15.2 Forbearance.............................................. 53
15.3 Limitation on Liability.................................. 53
16. SUBMISSION TO JURISDICTION....................................... 54
16.1 Submission to Jurisdiction............................... 54
17. MISCELLANEOUS.................................................... 54
17.1 Brokers.................................................. 54
17.2 Use of Bank's Name....................................... 54
17.3 No Joint Venture......................................... 55
17.4 Survival................................................. 55
17.5 No Assignment by Borrower................................ 55
17.6 Assignment or Sale by Bank............................... 55
17.7 Publicity................................................ 55
17.8 Binding Effect........................................... 55
17.9 Severability............................................. 56
17.10 No Third Party Beneficiaries............................ 56
17.11 Modifications........................................... 56
17.12 Holidays................................................ 56
17.13 Law Governing........................................... 56
17.14 Integration............................................. 56
17.15 Exhibits and Schedules.................................. 56
17.16 Headings................................................ 56
17.17 Counterparts............................................ 56
17.18 Waiver of Right to Trial by Jury........................ 56
v
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LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made effective the
10th day of March, 1997, by and between CONSOLIDATED STAINLESS, INC.
("Borrower") and MELLON BANK, N.A. ("Bank").
BACKGROUND
A. Borrower has requested that Bank extend a certain credit facility to
Borrower, which Bank is willing to do on the terms set forth herein.
B. Capitalized terms not otherwise defined herein will have the meanings
set forth therefor in Section 1 of this Agreement.
NOW, THEREFORE, in consideration of the terms and conditions contained
herein, and of any extensions of credit now or hereafter made to or for the
benefit of Borrower by Bank, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. DEFINITIONS. The following words and phrases as used in capitalized form in
this Agreement, whether in the singular or plural, shall have the meanings
indicated:
1.1 "Accounting Terms". As used in this Agreement, or any certificate,
report or other document made or delivered pursuant to this Agreement,
accounting terms not defined elsewhere in this Agreement shall have the
respective meanings given to them under GAAP.
1.2 "Affiliate", as to any Person, means each other Person that directly
or indirectly through one or more intermediaries, controls, or is controlled by,
or is under common control with, the Person in question.
1.3 "Applicable Base Rate Margin" shall mean initially three-quarters of
one percent (.75%) and the "Applicable LIBOR Rate Margin" shall mean initially
three percent (3%).
Provided that Borrower is in compliance with all of the financial
covenants set forth in Section 8.1 below and no other Event of Default shall
have occurred and be continuing, the Applicable Base Rate Margin and the
Applicable LIBOR Rate Margin will be adjusted based on Borrower's ratio of Total
Funded Indebtedness to EBITDA as provided in the chart set forth below.
Adjustments to the Applicable Base Rate Margin and the Applicable LIBOR Rate
Margin will be determined semi-annually based on Borrower's annual audited
financial statements and Borrower's internally prepared semi-annual financial
statements as of June 30 of each fiscal year, with the first such determination
to be based on Borrower's audited financial statements for its fiscal year
ending December 31, 1997. Any adjustment in the Applicable Base Rate Margin and
the Applicable LIBOR Rate Margin will become effective only upon delivery by
Borrower to Bank of such financial statements (together with a calculation of
the ratio of Borrower's Total Funded Indebtedness to EBITDA) within the time
periods set forth in Sections 9.1 and 9.3 below and Bank's review and
verification of such financial statements. If any such financial statements are
not delivered within the time periods required in Sections 9.1 and 9.3 below,
then until the next timely delivery of complying financial statements and in
addition to all other rights and remedies available to Bank
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hereunder, the Applicable Base Rate Margin and the Applicable LIBOR Rate Margin
will automatically be the initial Applicable Base Rate Margin and the initial
Applicable LIBOR Rate Margin set forth above. For the purpose of calculating the
Applicable Base Rate Margin and the Applicable LIBOR Rate Margin, the ratio of
Borrower's Total Funded Indebtedness to EBITDA will be determined on the basis
of a trailing four-quarter period.
Ratio of Total Funded Applicable Base Applicable LIBOR
Indebtedness to EBITDA Rate Margin Rate Margin
--------------------- --------------- ----------------
> = 3.50 .75% 3%
> = 2.50 < 3.50:1 .50% 2.75%
< = 2.50:1 .25% 2.5%
1.4 "Bank Indebtedness" shall mean all obligations and Indebtedness of
Borrower to Bank, whether now or hereafter owing or existing, including, without
limitation, all obligations under the Loan Documents, all obligations to
reimburse Bank for payments made by Bank pursuant to any letter of credit issued
for the account or benefit of Borrower by Bank, all other obligations or
undertakings now or hereafter made by or for the benefit of Borrower to or for
the benefit of Bank under any other agreement, promissory note or undertaking
now existing or hereafter entered into by Borrower with Bank, including, without
limitation, all obligations of Borrower to Bank under any guaranty or surety
agreement and all obligations of Borrower to immediately pay to Bank the amount
of any overdraft on any deposit account maintained with Bank, together with all
interest and other sums payable in connection with any of the foregoing.
Notwithstanding the foregoing, Bank Indebtedness shall not include unsecured
Indebtedness of Borrower to a third Person which may be purchased or acquired by
Bank at any time or from time to time.
1.5 "Base Rate" means the per annum rate determined by Bank (which
determination shall be deemed conclusive absent manifest error) to be the higher
of (a) Bank's Prime Rate, or (b) the effective Federal Funds Rate plus one-half
of one percent (.50%) per annum.
1.6 "Borrowing Base" means, as of any date, an amount equal to the sum of
up to (a) eighty-five percent (85%) of the amount of Borrower's Eligible
Receivables, plus (b) sixty-five percent (65%) of the Value of Borrower's
Eligible Inventory.
1.7 "Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in Philadelphia, Pennsylvania are authorized by law to
close.
1.8 "Capital Expenditures" means any expenditure that would be classified
as a capital expenditure on a statement of cash flow of Borrower prepared in
accordance with GAAP, including any deposits made on items which, when such
items are purchased, will be a Capital Expenditure.
1.9 "Capitalized Leases" means all lease obligations which have been or
should be, in accordance with GAAP, capitalized on the books of the lessee.
1.10 "Capitalized Lease Obligations" means all amounts payable with
respect to a Capitalized Lease, determined in accordance with GAAP.
2
<PAGE>
1.11 "Change in Control" shall have the same meaning as provided for such
term in that certain Convertible Subordinated Note Purchase Agreement between
Borrower, Guarantors and SunTrust Banks, Inc. dated October 18, 1996, as the
same may be amended from time to time.
1.12 "Contract Period" shall have the meaning as provided in Section
2.1(a) below.
1.13 "Corporation" means a corporation, partnership, trust, unincorporated
organization, association or joint stock company.
1.14 "Current Assets" at a particular date means the aggregate amount of
all assets of Borrower which would be classified as current assets on a balance
sheet at such date, in accordance with GAAP.
1.15 "Current Liabilities" at a particular date means the liabilities
(including tax and other proper accruals) of Borrower which would be included as
current liabilities on a balance sheet of Borrower at such date, in accordance
with GAAP, plus the outstanding principal balance of the Line at such date.
1.16 "EBITDA" for any period, means Net Income of Borrower for such
period, plus the aggregate amounts deducted in determining Net Income in respect
of (i) interest expense on Indebtedness of Borrower for such period, (ii) income
tax expense for such period, (iii) depreciation for such period, and (iv)
amortization for such period, all as determined in accordance with GAAP.
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.
1.18 "Eligible Inventory" means inventory in the possession of Borrower
which complies with the representations set forth in Section 6.18, and meets all
specifications established by Bank in its sole discretion (exercised in good
faith) from time to time. Eligible Inventory shall not include: (a) inventory
consisting of fuels; (b) inventory consisting of stores; (c) inventory which is
not in good condition or not currently usable or salable in the ordinary course
of Borrower's business as determined by Bank; (d) inventory consisting of
finished goods which do not meet the specifications of the purchase order for
which such inventory was produced; (e) inventory with respect to which Bank does
not have a first and valid, fully perfected security interest; (f) inventory
consisting of packaging, shipping materials or supplies; (g) inventory produced
in violation of the Fair Labor Standards Act and subject to the so-called "hot
goods" provision contained in Title 29 U.S.C. Section 215(a)(1); (h) slow-moving
inventory; (i) tooling; (j) inventory located with a processor; (k) consigned
inventory; (l) inventory consisting of controlled substance or substances for
which Bank would need a license or permit to sell or dispose of; (m) inventory
in transit (except between locations of Borrower described on Schedule 6.13
hereto and other locations of Borrower established in accordance with the terms
and conditions of this Agreement); and (n) work-in-process inventory in excess
of the sublimit set forth in Section 2.1(a) below. In the event that any item or
items of inventory with a Value in excess of One Hundred Thousand Dollars
($100,000.00) individually or in the aggregate previously scheduled, listed or
referred to, in any statement or report by or on behalf of Borrower and upon
which Borrower is basing availability under the Line ceases to be Eligible
Inventory (other than by reason of the sale of such inventory in the ordinary
course of Borrower's business), Borrower shall notify Bank thereof immediately.
3
<PAGE>
1.19 "Eligible Receivables" means accounts receivable of Borrower in which
Bank has a prior, perfected, first priority lien which have been due no more
than ninety (90) days from the invoice date, are not subject to offsets,
deductions, counterclaims, discounts (other than prompt payment discounts not in
excess of five percent (5%) of the face amount thereof), credit, charge back,
freight claim, allowance or adjustment, which comply with the representations
set forth in Section 6.19 and which meet all specifications established by Bank
in its sole discretion from time to time. Eligible Receivables shall not
include: (a) non-trade receivables; (b) foreign accounts receivable not secured
by domestic letters of credit in form and from issuers satisfactory to Bank,
which letters of credit must be assigned to Bank; (c) contra-accounts; (d)
intercompany accounts or accounts from other affiliated corporations,
organizations or individuals; (e) accounts receivable from the United States
government or any of its agencies which have not been assigned to Bank under the
Assignment of Claims Act; (f) finance charges; (g) lease receivables; (h)
accounts receivable owed by a Person if fifty percent (50%) or more of such
Person's accounts receivable owed to Borrower are ninety (90) days or more past
due; (i) accounts receivable of poor credit quality; and (j) that portion of
accounts receivable due from any particular account debtor which exceeds ten
percent (10%) of all Eligible Receivables of Borrower. In the event that any
account receivable or group of accounts receivable in excess of Fifty Thousand
Dollars ($50,000.00) individually or in the aggregate previously scheduled,
listed or referred to in any certificate, statement or report by Borrower and
upon which Borrower is basing availability under the Line ceases to be an
Eligible Receivable (other than by reason of agings in the ordinary course of
business and payments due from Borrower to its account debtors in the ordinary
course of business), Borrower shall notify Bank thereof immediately.
1.20 "Event of Default" means each of the events specified in Section
13.1.
1.21 "Fixed Charge Coverage Ratio" for any period shall mean the ratio of
(a) EBITDA for such period, plus the amount actually received on account of the
Specified Tax Refund in such period, less unfunded Capital Expenditures for such
period to (b) Fixed Charges.
1.22 "Fixed Charges" for any period shall mean the sum of Borrower's
interest expense (excluding deferred interest not paid) for such period, plus
the principal payments of Borrower's long-term Indebtedness and Capital Lease
Obligations for such period, plus the net reduction of the Permitted
Out-of-Formula Advance occurring during such period, plus interest payments
during such period related to previously deferred interest.
1.23 "GAAP" means generally accepted accounting principles in the United
States of America, in effect from time to time, consistently applied and
maintained.
1.24 "Good Business Day" means any Business Day when banks in London,
England and Philadelphia, Pennsylvania are opened for business.
1.25 "Indebtedness", as applied to a Person, means:
(a) all items (except items of capital stock or of surplus) which in
accordance with GAAP would be included in determining total liabilities as shown
on the liability side of a balance sheet of such Person as at the date as of
which Indebtedness is to be determined;
4
<PAGE>
(b) to the extent not included in the foregoing, all indebtedness,
obligations, and liabilities secured by any mortgage, pledge, lien, conditional
sale or other title retention agreement or other security interest to which any
property or asset owned or held by such Person is subject (to the extent of the
value of such asset or property), whether or not the indebtedness, obligations
or liabilities secured thereby shall have been assumed by such Person; and
(c) to the extent not included in the foregoing, all indebtedness,
obligations and liabilities of others which such Person has directly or
indirectly guaranteed, endorsed (other than for collection or deposit in the
ordinary course of business), sold with recourse, or agreed (contingently or
otherwise) to purchase or repurchase or otherwise acquire or in respect of which
such Person has agreed to supply or advance funds (whether by way of loan, stock
purchase, capital contribution or otherwise) or otherwise to become directly or
indirectly liable.
1.26 "Initial Permitted Out-of-Formula Period" means the period commencing
the date hereof through and including June 10, 1997.
1.27 "Inventory Turnover Frequency" means the number of days Borrower's
inventory turns over calculated by (a) dividing the Value of Borrower's
inventory as of the end of the applicable fiscal period by the cost of goods
sold incurred by Borrower through the end of such fiscal period, and (b)
multiplying such fraction by the number of days through the end of the
applicable fiscal period.
1.28 "LIBOR Rate" shall mean, for any day for any proposed or existing
LIBOR Rate Portion of the Line corresponding to a Rate Period, the rate per
annum determined by Bank by adding the Applicable LIBOR Rate Margin to the
quotient obtained by dividing (the resulting quotient to be rounded upward to
the nearest 1/100 of 1%) (a) the rate of interest (which shall be the same for
each day in such Rate Period) determined by Bank (which determination shall be
conclusive) to be the average of the rates per annum for deposits in United
States dollars offered to major money center banks in the London interbank
market at approximately 11:00 a.m., London time, two (2) Good Business Days
prior to the first day of such Rate Period for delivery on the first day of such
Rate Period in amounts comparable to such LIBOR Rate Portion (or, if there are
no such comparable amounts actively traded, the smallest amounts actively
traded) and having maturities comparable to such Rate Period by (b) a number
equal to 1.00 minus the LIBOR Rate Reserve Percentage for such day.
1.29 "LIBOR Rate Notification" means an irrevocable written notice
requesting the LIBOR Rate which must be provided to Bank prior to 11:00 a.m.
Philadelphia time on a business Day which is at least three (3) Good Business
Days prior to the date on which such rate is requested to take effect,
specifying:
(a) The principal amount which is to accrue interest at such rate;
(b) The date on which such rate is to take effect;
(c) Whether such principal amount is a new advance, a conversion
from another interest rate, a renewal of another interest rate
or a combination thereof; and
(d) The Rate Period.
5
<PAGE>
1.30 "LIBOR Rate Portion" shall mean at any time the part, including the
whole, of the unpaid principal amount of the Line bearing interest at such time
at the LIBOR Rate.
1.31 "LIBOR Rate Reserve Percentage" for any day shall mean the percentage
(rounded upward to the nearest 1/100 of 1%), as determined by Bank (which
determination shall be conclusive) as representing for such day the maximum
effective reserve requirement (including without limitation, supplemental,
marginal and emergency requirements) for member banks of the Federal Reserve
System with respect to Eurocurrency funding (currently referred to as
"Eurocurrency liabilities") of any maturity. Each LIBOR Rate shall be adjusted
automatically as of the effective date of any change in the LIBOR Rate Reserve
Percentage.
1.32 "Line Base Rate" means the Base Rate plus the Applicable Base Rate
Margin.
1.33 "Line Base Rate Notification" means an irrevocable written notice
requesting the Line Base Rate which must be provided to Bank prior to 11:00 a.m.
Philadelphia time on the Business Day on which such rate is requested to take
effect, specifying:
(a) The principal amount which is to accrue interest at such rate;
(b) The date on which such rate is to take effect; and
(c) Whether such principal amount is a new advance, a conversion
from another interest rate option or a combination thereof.
1.34 "Line Base Rate Portion" shall mean at any time the part, including
the whole, of the unpaid principal amount of the Line bearing interest at such
time at the Line Base Rate.
1.35 "Loan Documents" means this Agreement, the Line Note, the Surety
Agreement and all other documents, executed or delivered by Borrower or
Guarantors pursuant to this Agreement, as they may be amended, supplemented or
restated from time to time.
1.36 "Maximum Amount" means Twenty-Five Million Dollars ($25,000,000.00).
1.37 "Net Income" or "Net Loss" means income or loss, as applicable, of
Borrower after income and franchise taxes and shall have the meaning given such
term by GAAP, provided that there shall be specifically excluded therefrom: (a)
gains from the sale of assets (other than sales of inventory in the ordinary
course of business); (b) net income of any Person in which Borrower has an
ownership interest, unless received by Borrower in a cash distribution or unless
it is Net Income of a wholly owned Subsidiary of Borrower formed with the prior
written consent of and subject to such terms and conditions as are established
by Bank and which for financial reporting purposes consolidates its operations
and assets with those of Borrower; and (c) any gains arising from extraordinary
items, as defined by GAAP. In determining Net Income, there shall be no
deduction for any non-cash expenses incurred in connection with a Conversion (as
defined in Section 1.17 above).
1.38 "Net Operating Loss" shall mean Net Income before income tax expense,
interest expense and other income.
6
<PAGE>
1.39 "Out-Of-Formula Advance" means the amount by which the then
outstanding principal balance of the Line exceeds the Borrowing Base, subject to
such other restrictions on advances as are otherwise set forth in this
Agreement.
1.40 "Permitted Out-of-Formula Advance" means an amount not to exceed
Three Million Seven Hundred Fifty Thousand Dollars ($3,750,000.00), which amount
will be reduced as provided for in Section 2.1(c) below.
1.41 "Person" means an individual, a Corporation or a government or any
agency or subdivision thereof, or any other entity.
1.42 "Prime Rate" means the annual interest rate established from time to
time by Bank and generally known by Bank as its "prime rate", whether published
by it publicly or only for the internal guidance of its loan officers. The prime
rate is used merely as a pricing index and is not and should not be considered
to represent the lowest or best rate available to a borrower.
1.43 "Rate Period" shall mean for any portion of the Line for which the
Borrower elects the LIBOR Rate, the period of time for which such rate shall
apply to such principal portions. The Rate Period for the LIBOR Rate shall be
for periods of one, two, three or six months.
1.44 "Senior Indebtedness" means all Indebtedness of Borrower, minus the
outstanding principal balance of the Subordinated Indebtedness.
1.45 "Subordinated Indebtedness" means that certain Indebtedness of
Borrower owed to (a) Harvey B. Adams in the principal amount of Three Hundred
Sixty-Three Thousand One Hundred Fifty-Eight and 31/100 ($363,158.31); (b)
Ronald J. Adams in the principal amount of One Hundred Thousand Dollars
($100,000.00); (c) Burton R. Chasnov in the principal amount of One Hundred
Thousand Dollars ($100,000.00); (d) Suntrust Banks, Inc. in the principal amount
of Two Million Five Hundred Thousand Dollars ($2,500,000.00) plus interest
thereon which has been deferred and not paid; and (e) other Indebtedness of
Borrower hereafter incurred and subordinated to the Bank Indebtedness, all of
which Indebtedness must be subordinated to all Bank Indebtedness and otherwise
be in amounts and on terms acceptable to Bank in its sole discretion.
1.46 "Subsidiary" means a Corporation: (a) which is organized under the
laws of the United States or any State thereof, or any other county or
jurisdiction; (b) which conducts substantially all of its business and has
substantially all of its assets within the United States; and (c) of which more
than fifty percent (50%) of its outstanding voting stock of every class (or
other voting equity interest) is owned by Borrower or one or more of its
Subsidiaries.
1.47 "Tangible Net Worth", shall mean, at any time, the amount by which
all assets of Borrower, excluding intangible assets, as that term would be
defined under GAAP, exceed all of Borrower's liabilities, as would be shown on a
balance sheet of Borrower prepared as of such date in accordance with GAAP.
1.48 "Total Funded Indebtedness" means all Indebtedness for borrowed money
including, without limitation, all Bank Indebtedness, Subordinated Indebtedness
and Capitalized Lease Obligations.
7
<PAGE>
1.49 "Value" with respect to Eligible Inventory means the lower of average
cost or market value determined in accordance with GAAP, exclusive of any
transportation, processing or handling charges.
1.50 "Working Capital" as applied to Borrower means the amount, as of the
date of determination thereof, equal to the difference between the aggregate
Current Assets and the aggregate Current Liabilities (including without
limitation all accrued dividends) of any Person, determined in accordance with
GAAP.
2. THE LINE; USE OF PROCEEDS.
2.1 Line of Credit.
(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 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 at no time exceed Seventeen Million Dollars ($17,000,000.00).
(b) Subject to the limitations set forth below, Borrower may from
time to time borrow principal amounts under the Line not to exceed, in the
aggregate, Five Hundred Thousand Dollars ($500,000.00) to be used for the
purchase of equipment for use in Borrower's operations (the "Equipment Purchase
Sublimit"). If no advance is made under the Equipment Purchase Sublimit on or
before March 10, 1998 (the period from the date hereof through and including
March 10, 1998 being the "Initial Draw Period"), the Equipment Purchase Sublimit
will no longer be available to Borrower. If an advance is made under the
Equipment Purchase Sublimit during the Initial Draw Period, the unfunded balance
of the Equipment Purchase Sublimit will remain available to Borrower for the
twelve (12) month period following the date of the first such advance
thereunder. Advances under the Equipment Purchase Sublimit shall be in an amount
not to exceed eighty percent (80%) of the invoiced purchase price (exclusive of
taxes, license, freight/shipping and installation costs) for the items of
equipment in respect of which such advance is being made. In addition, each
request for an advance under the Equipment Purchase Sublimit must be for an
amount equal to at least Fifty Thousand Dollars ($50,000.00) (provided that no
request for such an advance shall include any individual item with a cost to
Borrower of less than Twenty Thousand Dollars ($20,000.00)), and no more than
four (4) total advances will be made thereunder. Advances under the Equipment
Purchase Sublimit shall be repaid in accordance with the terms of Section 4.3
below.
(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 reduction
8
<PAGE>
of Twenty-Five Thousand Dollars ($25,000.00) will occur on November 10, 1998. In
addition to such monthly reductions, the Permitted Out-of-Formula Advance will
be reduced by an amount equal to an additional Seven Hundred Fifty Thousand
Dollars ($750,000.00) by the earlier of (i) December 31, 1997, or (ii) the date
of receipt by Borrower of its federal income tax refund for its fiscal year
ended December 31, 1996 (the "Specified Tax Refund"). 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, November 10, 1998.
(d) Bank may, in its sole discretion exercised in good faith,
require that certain reserves be established against certain Eligible
Receivables or Eligible Inventory from time to time. Within the limitations set
forth in this Section 2.1, Borrower may borrow, repay and reborrow under the
Line. The Line shall be subject to all terms and conditions set forth in all of
the Loan Documents which terms and conditions are incorporated herein.
Borrower's obligation to repay the loans and extensions of credit under the Line
shall be evidenced by Borrower's promissory note (the "Line Note") in the
maximum face amount of Twenty-Five Million Dollars ($25,000,000.00), which shall
be in the form attached hereto as Exhibit "A", with the blanks appropriately
filled in.
2.2 Use of Proceeds. Borrower agrees to use advances under the Line (a) to
repay existing Indebtedness in an aggregate amount of approximately Twenty-One
Million Six Hundred Thousand Dollars ($21,600,000.00) owed by Borrower to
SunTrust Bank, Central Florida, National Association and SouthTrust Bank of
Alabama, National Association, (b) for working capital purposes, and (c) with
respect to advances under the Equipment Purchase Sublimit, the purchase of
equipment for use in Borrower's operations.
2.3 Method of Advances. On any Business Day, Borrower may request an
advance under the Line by delivering to the bank officer designated by Bank no
later than 11:00 a.m. Philadelphia time on the Business Day such advance is
requested to be funded, a completed and executed borrowing base certificate
together with such supporting and back-up documentation as Bank may from time to
time require. In addition, with respect to advances under the Equipment Purchase
Sublimit, Borrower shall deliver to Bank evidence satisfactory to Bank of the
purchase price of the equipment being purchased with such advance identifying
separately all taxes, license, freight/shipping and installation charges in
connection therewith, which evidence shall include, without limitation, the
invoice for such equipment. Subject to the terms and conditions of this
Agreement, Bank may make the proceeds of an advance available to Borrower by
crediting such proceeds to Borrower's operating account with Bank. Each request
for an advance under the Line shall be conclusively presumed to be made by a
Person authorized by Borrower to do so. However, Bank may require that specified
officers of Borrower sign each borrowing base certificate.
2.4 Letters of Credit. Bank, at its sole discretion, may issue for the
account of Borrower merchandise and standby letters of credit in form and
content satisfactory to Bank, at its sole discretion, with a term not to exceed
the earlier to occur of (a) ninety (90) days (for merchandise letters of
credit), (b) twelve (12) months (for standby letters of credit), or (c) the
expiration date of the Contract Period. Notwithstanding the foregoing, (i) at no
time shall the aggregate face amount of all outstanding letters of credit issued
under the Line exceed the amount of Three Million Dollars ($3,000,000.00); and
(ii) at no time shall the principal balance of the Line, plus the aggregate face
amount of all outstanding letters of credit issued under the Line exceed the
amount of the loans and extensions of credit then available to Borrower under
the Line pursuant to Section 2.1 (a) above.
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Borrower will execute a letter of credit application and letter of
credit agreement, and such other documents as may be required by Bank in
connection with the issuance of letters of credit hereunder. The outstanding
face amount of all letters of credit issued by Bank pursuant hereto will reduce
Borrower's ability to borrow under the Line as if such face amount were an
advance under the Line. In the event that Bank pays any sums due pursuant to
such letters of credit for any reason, such payment shall be deemed to be an
advance under the Line repayable by Borrower pursuant to the terms hereof.
In the event that the Line is terminated for any reason or demand is
made thereunder, Borrower will deposit with Bank an amount equal to the undrawn
face amount of all letters of credit then outstanding which have been issued
hereunder, plus all fees related thereto or to accrue thereunder. Such funds
will be held and applied by Bank as cash collateral to secure Borrower's
obligations hereunder in respect of such letters of credit.
2.5 Closing. Closing hereunder will take place at the offices of Wolf,
Block, Schorr & Solis-Cohen at 350 Sentry Parkway, Building 640, Blue Bell, PA
19422 effective on the date of this Agreement.
3. INTEREST RATES.
3.1 Interest Rate Options on the Line.
(a) Options. Provided that no Event of Default shall have occurred
and be continuing, interest on that portion of the unpaid principal balance of
the Line supported by the Borrowing Base will accrue from the date of advance
until final payment thereof, at a rate or rates selected by Borrower from one of
the two (2) interest rate options set forth below, subject to the restrictions
and in accordance with the procedures set forth in this Agreement:
(i) Line Base Rate (such rate to change automatically and
simultaneously with any change in the Line Base Rate);
or
(ii) LIBOR Rate.
(b) Request for Line Base Rate. If the Borrower desires that the
Line Base Rate shall apply to all or part of the principal balance under the
Line, Borrower shall give Bank a Line Base Rate Notification. Upon delivery by
Borrower to Bank of a Line Base Rate Notification, the principal balance under
the Line identified in such Line Base Rate Notification shall accrue interest at
the Line Base Rate as follows: (i) with respect to the principal amount of any
new cash advance under the Line, from the date of such advance until the
effective date of another interest rate chosen for such amount in accordance
with the terms of this Agreement; and/or (ii) with respect to the principal
amount of any portion of the Line outstanding and accruing interest at the LIBOR
Rate at the time of the Line Base Rate Notification related to such principal
amount, from the expiration of the then current Rate Period related to such
principal amount until the effective date of another interest rate option chosen
for such amount in accordance with the terms of this Agreement.
(c) Request for LIBOR Rate. If the Borrower desires that all or part
of the principal balance under the Line accrue interest at the LIBOR Rate,
Borrower shall give Bank a LIBOR Rate Notification. Upon delivery by Borrower to
Bank of a LIBOR Rate Notification, that
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portion of the principal balance outstanding under the Line identified in such
LIBOR Rate Notification shall accrue interest at the LIBOR Rate as follows: (i)
with respect to the principal amount of any new cash advance under the Line,
from the date of such advance until the end of the Rate Period specified in such
LIBOR Rate Notification; and/or (ii) with respect to the principal amount of any
portion of the Line outstanding and accruing interest at another LIBOR Rate at
the time of the LIBOR Rate Notification related to such principal amount, from
the expiration of the then current Rate Period related to such principal amount
until the end of the Rate Period specified in such LIBOR Rate Notification;
and/or (iii) with respect to all or any portion of the principal amount of the
Line outstanding and accruing interest at the Line Base Rate at the time of such
LIBOR Rate Notification, from the date set forth in such LIBOR Rate Notification
until the end of the Rate Period specified in such LIBOR Rate Notification.
(d) Certain Provisions Concerning Interest Rates. Subject to the
provisions of this Agreement, (i) the interest rates set forth in Section 3.1(a)
above may apply simultaneously to different portions of the outstanding
principal of the Line; (ii) the LIBOR Rate may apply simultaneously to various
portions of the outstanding principal of the Line for various Rate Periods;
(iii) the LIBOR Rate applicable to any portion of the outstanding principal of
the Line may be different from the LIBOR Rate applicable to any other portion of
the outstanding principal of the Line; (iv) each advance under the Line accruing
interest at the LIBOR Rate must be in a minimum amount of Five Million Dollars
($5,000,000.00) with One Million Dollar ($1,000,000.00) increments in excess
thereof; and (v) no more than three (3) advances under the Line accruing
interest at the LIBOR Rate may be outstanding at any one time.
(e) Line Base Rate Fall Back for the Line. After expiration of any
Rate Period, any principal portion of the Line corresponding to such Rate Period
which has not been converted or renewed in accordance with the terms of this
Agreement shall accrue interest automatically at the Line Base Rate from the
date of expiration of such Rate Period until paid in full, unless and until the
Borrower requests a conversion to the LIBOR Rate in accordance with the terms of
this Agreement.
(f) LIBOR Rate Unascertainable or Unavailable. If, at any time, Bank
shall determine (which determination shall be conclusive) that the LIBOR Rate is
unavailable or adequate means for ascertaining the LIBOR Rate do not exist, Bank
shall promptly notify Borrower of such determination. Upon such determination,
the right of Borrower to select, maintain and/or convert to the LIBOR Rate shall
be suspended until notice from Bank to Borrower that the LIBOR Rate is again
available or ascertainable and, until such time, the outstanding balance under
the Line shall accrue interest at the Line Base Rate.
(g) LIBOR Unlawful. In the event that, as a result of any change in
any applicable law or regulation or the interpretation thereof, it becomes
unlawful for Bank to maintain or fund any advance under the Line at the LIBOR
Rate, then Bank shall notify Borrower thereof and Bank's obligation to make,
convert to, or maintain any advance under the Line at the LIBOR Rate shall be
suspended until such time as Bank may again cause the LIBOR Rate to be
applicable and, until such time, the advances under the Line subject to the
LIBOR Rate shall accrue interest at the Line Base Rate. Promptly after becoming
aware that it is no longer unlawful for Bank to maintain or fund advances under
the Line at the LIBOR Rate, Bank shall notify Borrower thereof and such
suspension shall cease to exist.
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3.2 Permitted Out-of-Formula Advance. Interest on that portion of the
outstanding principal balance of the Line supported by the Permitted
Out-of-Formula Advance will accrue at a per annum rate equal to two and one-half
percent (2 1/2%) in excess of the Base Rate in effect from time to time (such
rate to change automatically and simultaneously with any change in the Base
Rate).
3.3 Default Interest. Interest will accrue on the principal balance of the
Line during the continuance of an Event of Default or following expiration of
the Contract Period at a rate which is three percent (3%) in excess of the Line
Base Rate. The LIBOR Rate shall not be available to Borrower after the
occurrence of and during the continuance of an Event of Default or an event
which with the giving of notice or the passage of time or both would be an Event
of Default. If Bank, in its sole discretion, (a) permits Borrower to cure an
Event of Default, or (b) waives an Event of Default, the LIBOR Rate shall
thereafter be available to Borrower subject to the terms and conditions of this
Agreement.
3.4 Post Judgment Interest. Any judgment obtained for sums due hereunder
or under the Loan Documents will accrue interest at the applicable default rate
set forth above until paid.
3.5 Calculation. Interest will be computed on the basis of a year of 360
days and paid for the actual number of days elapsed.
3.6 Limitation of Interest to Maximum Lawful Rate. In no event will the
rate of interest payable hereunder exceed the maximum rate of interest permitted
to be charged by applicable law (including the choice of law rules) and any
interest paid in excess of the permitted rate will be refunded to Borrower.
Provided that no Event of Default shall have occurred and be continuing, such
refund will be made by application of the excessive amount of interest paid
against the outstanding principal balance of the Line (excluding that portion
outstanding under the Equipment Purchase Sublimit). If the excessive amount of
interest paid exceeds the principal balance under the Line then outstanding, the
portion exceeding such outstanding amount will be refunded in cash by Bank. Any
such crediting or refunding will not cure or waive any default by Borrower.
Borrower agrees, however, that in determining whether or not any interest
payable hereunder exceeds the highest rate permitted by law, any non-principal
payment, including without limitation prepayment fees and late charges, will be
deemed to the extent permitted by law to be an expense, fee, premium or penalty
rather than interest.
4. PAYMENTS AND FEES.
4.1 Interest Payments on the Line. Borrower will pay interest on the
principal balance of the Line monthly in arrears, on the first day of each
calendar month commencing the first day of the first calendar month following
the date hereof and, as applicable, at the end of each Rate Period.
4.2 Principal Payments on the Line. Borrower will pay the outstanding
principal balance of the Line, together with all accrued and unpaid interest
thereon, and any other sums due pursuant to the terms hereof, ON DEMAND during
the continuance of an Event of Default or immediately upon expiration of the
Contract Period. If any Out-Of-Formula Advance arises or exists under the Line
for any reason whatsoever, including inventory or accounts becoming ineligible
or required reserves, Borrower will repay such Out-Of-Formula Advance
immediately, without demand,
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except for the Permitted Out-of-Formula Advance which shall be reduced as
provided for in Section 2.1(c) above.
4.3 Equipment Purchase Sublimit. In addition to Section 4.2 above,
Borrower will repay all advances under the Equipment Purchase Sublimit in
thirty-six (36) equal and consecutive monthly installments of principal,
commencing on the first anniversary of the date of the first draw under the
Equipment Purchase Sublimit and continuing on the same day of each of the next
thirty-five (35) consecutive months. Notwithstanding the foregoing, all advances
under the Capital Expenditures Sublimit, together with all accrued and unpaid
interest thereon, shall be due and payable in full ON DEMAND during the
continuance of an Event of Default or immediately upon the expiration of the
initial Contract Period.
4.4 Letter of Credit Fees. For each issuance or renewal of a merchandise
letter of credit hereunder, Borrower will pay to Bank an issuance or renewal fee
in an amount equal to one and one-half percent (1.5%) of the face amount of such
merchandise letter of credit, payable coincident with and as a condition of the
issuance or renewal of such merchandise letter of credit. For each issuance or
renewal of a standby letter of credit hereunder, Borrower will pay to Bank an
issuance or renewal fee in an amount equal to one and one-half percent (1.5%)
per annum of the face amount of such standby letter of credit, payable
coincident with and as a condition of the issuance or renewal of such standby
letter of credit. In addition, Borrower shall pay such other fees and charges in
connection with the negotiation or cancellation of each merchandise and standby
letter of credit as may be customarily charged by Bank. Such fees shall be
computed on the basis of a year of 360 days.
4.5 Loan Fee. Borrower shall pay to Bank a loan fee equal to Two Hundred
Fifty Thousand Dollars ($250,000.00) to be paid as follows:
(a) One Hundred Twenty-Five Thousand Dollars ($125,000.00) has
been received by Bank prior to the date hereof;
(b) Sixty-Two Thousand Five Hundred Dollars ($62,500.00) will be
paid to the Bank on the date hereof; and
(c) Sixty-Two Thousand Five Hundred Dollars ($62,500.00) will be
paid to the Bank on March 10, 1998 or, if the Line is
terminated for any reason prior to such date, such sum shall
be paid on the date of such termination.
Borrower agrees that the entire loan fee has been fully earned by
Bank as compensation for the Bank's time and effort in closing the
transactions contemplated hereunder.
4.6 Minimum Interest Fee. If, in any given month, the amount of interest
which actually accrued on the outstanding principal balance of the Line for such
month is less than the amount of interest which would have accrued at the Line
Base Rate on the outstanding principal balance under the Line for such month
assuming that the average daily outstanding principal balance for such month was
Ten Million Dollars ($10,000,000.00), Borrower shall pay to Bank a fee in an
amount equal to such difference.
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4.7 Usage Fee. So long as the Line is outstanding and has not been
terminated, Borrower shall unconditionally pay to Bank a fee equal to one
quarter of one percent (.25%) per annum of the daily unused portion of the Line,
which fee shall be computed on a monthly basis in arrears and shall be due and
payable on the first day of each month commencing on the first day of the first
full month after the date hereof. The daily unused portion of the Line shall be
calculated as the lower of (a) the difference between Twenty-Five Million
Dollars ($25,000,000.00) (or such greater amount if the maximum committed amount
for the Line is ever increased by written agreement of Bank and Borrower), minus
the outstanding principal balance of cash advances under the Line at the close
of business on the date such calculation is made, or (b) Ten Million Dollars
($10,000,000.00),
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 Thirty-Six Thousand Dollars ($36,000.00), payable
in equal quarterly payments, in advance, commencing on the date of closing
hereunder.
4.9 Late Charge. In the event that Borrower fails to pay any principal,
interest or other fees or expenses payable hereunder for a period of at least
fifteen (15) days after such payment is first due, in addition to paying such
sums, Borrower will pay to Bank a late charge equal to five percent (5%) of such
past due payment as compensation for the expenses incident to such past due
payment. The foregoing late charge will not be imposed on a payment of the
principal balance of the Bank Indebtedness which is due by reason of
acceleration.
4.10 Termination of Line and Termination Fee. Borrower may terminate the
Line upon forty-five (45) days prior written notice to Bank, which notice, once
given, shall be irrevocable. In the event that (a) the Line is terminated by
Borrower for any reason, including without limitation, prepayment or refinancing
of the Line with another lender, or (b) an Event of Default occurs and the Line
is terminated by Bank, Borrower shall pay Bank a termination fee calculated as
follows:
(a) 2.25% of the Maximum Amount if such termination occurs prior
to March 10, 1998;
(b) 1.5% of the Maximum Amount if such termination occurs on or
after March 10, 1998 but prior to March 10, 1999;
(c) 1% of the Maximum Amount if such termination occurs on or
after March 10, 1999 but prior to March 10, 2000; and
(d) .5% of the Maximum Amount if such termination occurs on or
after March 10, 2000.
In the event the Line is terminated as a result of an Event of
Default, expiration of the Contract Period, or otherwise, the outstanding
balance of the Line, together with any accrued and unpaid interest thereon and
any other sums due pursuant to the terms hereof shall be due and payable
immediately.
4.11 Payment Method. Borrower irrevocably authorizes Bank to debit all
payments required to be made by Borrower hereunder, under the Line, on the date
due, from any deposit
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account maintained by Borrower with Bank. Otherwise, Borrower will be obligated
to make such payments directly to Bank. All payments are to be made in
immediately available funds. If Bank accepts payment in any other form, such
payment shall not be deemed to have been made until the funds comprising such
payment have actually been received by or made available to Bank.
4.12 Application of Payments. Any and all payments on account of the Line
will be applied to accrued and unpaid interest, outstanding principal and other
sums due hereunder or under the Loan Documents, in such order as Bank, in its
discretion, elects. If Borrower makes a payment or payments and such payment or
payments, or any part thereof, are subsequently invalidated, declared to be
fraudulent or preferential, set aside or are required to be repaid to a trustee,
receiver, or any other person under any bankruptcy act, state or federal law,
common law or equitable cause, then to the extent of such payment or payments,
the obligations or part thereof hereunder intended to be satisfied shall be
revived and continued in full force and effect as if said payment or payments
had not been made.
4.13 Loan Account. Bank will open and maintain on its books a loan account
(the "Loan Account") with respect to advances made, repayments, prepayments, the
computation and payment of interest and fees and the computation and final
payment of all other amounts due and sums paid to Bank under this Agreement.
Except in the case of manifest error in computation, the Loan Account will be
conclusive and binding on the Borrower as to the amount at any time due to Bank
from Borrower under this Agreement or the Line Note. Bank will deliver to
Borrower a summary of the activity in the Loan Account on a monthly basis.
4.14 Indemnity; Loss of Margin. Borrower will indemnify Bank against any
loss or expense which Bank sustains or incurs as a consequence of an Event of
Default, including, without limitation, any failure of Borrower to pay when due
(at maturity, by acceleration or otherwise) any principal, interest, fee or any
other amount due under this Agreement or the other Loan Documents. If Bank
sustains or incurs any such loss or expense it will from time to time notify
Borrower in writing of the amount determined in good faith by the Bank to be
necessary to indemnify Bank for the loss or expense. Such amount will be due and
payable by Borrower to Bank within ten (10) days after presentation by Bank of a
statement setting forth a brief explanation of and Bank's calculation of such
amount, which statement shall be conclusively deemed correct absent manifest
error. Any amount payable to the Bank under this Section will bear interest at
the default rate payable under the Line from the due date until paid, both
before and after judgment.
In the event that any present or future law, rule, regulation,
treaty or official directive or the interpretation or application thereof by any
central bank, monetary authority or governmental authority, or the compliance
with any guideline or request of any central bank, monetary authority or
governmental authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to any amounts payable
under this Agreement or the other Loan Documents by Borrower or otherwise with
respect to the transactions contemplated under this Agreement or the other Loan
Documents (except for taxes on the overall net income of Bank imposed by the
United States of America or any political subdivision thereof); or
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit, capital maintenance, capital adequacy, or similar
requirement against assets held by, or
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deposits in or for the account of, or loans or advances or commitment to make
loans or advances by, or letters of credit issued or commitment to issue letters
of credit by, the Bank; or
(c) imposes upon Bank any other condition with respect to advances
or extensions of credit or the commitment to make advances or extensions of
credit under this Agreement,
and the result of any of the foregoing is to increase the costs of Bank, reduce
the income receivable by or return on equity of Bank or impose any additional
expense upon Bank with respect to any advances or extensions of credit or
commitments to make advances or extensions of credit under this Agreement, Bank
shall so notify Borrower in writing. Borrower agrees to pay Bank the amount of
such increase in cost, reduction in income, reduced return on equity or capital,
or additional expense within ten (10) days after presentation by Bank of a
statement concerning such increase in cost, reduction in income, reduced return
on equity or capital, or additional expense. Such statement shall set forth a
brief explanation of the amount and Bank's calculation of the amount (in
determining such amount the Bank may use any reasonable averaging and
attribution methods), which statement shall be conclusively deemed correct
absent manifest error. If the amount set forth in such statement is not paid
within ten (10) days after such presentation of such statement, interest will be
payable on the unpaid amount at the default rate payable under the Line from the
due date until paid, both before and after judgment.
4.15 Indemnity for LIBOR Portion. Borrower shall indemnify Bank against
any loss or expense (including loss of margin) which Bank has sustained or
incurred as a consequence of (a) payment, prepayment or conversion of any LIBOR
Rate Portion on a day other than the last day of the corresponding Rate Period
(whether or not any such payment is pursuant to demand by Bank and whether or
not any such payment, prepayment or conversion is consented to by Bank); or (b)
attempt by Borrower to revoke in whole or in part any irrevocable LIBOR Rate
Notification pursuant to this Agreement. If any such loss is sustained, Bank
shall notify Borrower of the amount determined in by Bank (which determination
shall be conclusive absent manifest error) to be necessary to indemnify Bank for
such loss or expense. Such amount shall be due and payable by Borrower on
demand.
5. SECURITY; COLLECTION OF RECEIVABLES AND PROCEEDS OF COLLATERAL.
5.1 Personal Property. As security for the full and timely payment and
performance of all Bank Indebtedness, Borrower hereby grants to Bank a security
interest in all of Borrower's personal property including, without limitation,
all of the following:
(a) All of Borrower's present and future accounts, contract rights,
chattel paper, instruments and documents and all other rights to the payment of
money whether or not yet earned, for services rendered or goods sold, consigned,
leased or furnished by Borrower or otherwise, together with (i) all goods
(including any returned, rejected, repossessed or consigned goods), the sale,
consignment, lease or other furnishing of which shall be given or may give rise
to any of the foregoing; (ii) all of Borrower's rights as a consignor,
consignee, unpaid vendor or other lienor in connection therewith, including
stoppage in transit, set-off, detinue, replevin and reclamation; (iii) all
general intangibles related thereto; (iv) all guaranties, mortgages, security
interests, assignments, and other encumbrances on real or personal property,
leases and other agreements or property securing or relating to any accounts;
(v) choses-in-action, claims and judgments; (vi) any return or
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unearned premiums which may be due upon cancellation of any insurance policies;
and (vii) all products and proceeds of any of the foregoing.
(b) All of Borrower's present and future inventory (including but
not limited to goods held for sale or lease or furnished or to be furnished
under contracts for service, raw materials, work-in-process, finished goods and
goods used or consumed in Borrower's business) whether owned, consigned or held
on consignment, together with all merchandise, component materials, supplies,
packing, packaging and shipping materials, and all returned, rejected or
repossessed goods sold, consigned, leased or otherwise furnished by Borrower,
all documents of title covering any of such goods or inventory and all products
and proceeds of any of the foregoing.
(c) All of Borrower's present and future general intangibles
(including but not limited to tax refunds and rebates, manufacturing and
processing rights, designs, patent rights and applications therefor, trademarks
and registrations or applications therefor, tradenames, brand names, logos,
inventions, copyrights and all applications and registrations therefor),
licenses, permits, approvals, software and computer programs, license rights,
royalties, trade secrets, methods, processes, know-how, formulas, drawings,
specifications, descriptions, label designs, plans, blueprints, patterns and all
memoranda, notes and records with respect to any research and development, and
all products and proceeds of any of the foregoing.
(d) All of Borrower's present and future machinery, equipment,
furniture, fixtures, motor vehicles, tools, dies, jigs, molds and other articles
of tangible personal property of every type together with all parts,
substitutions, accretions, accessions, attachments, accessories, additions,
components and replacements thereof, all documents of title covering all of such
goods and inventory and all manuals of operation, maintenance or repair, and all
products and proceeds of any of the foregoing.
(e) All of Borrower's present and future general ledger sheets,
files, records, customer lists, books of account, invoices, bills, certificates
or documents of ownership, bills of sale, business papers, correspondence,
credit files, tapes, cards, computer runs and all other data and data storage
systems whether in the possession of Borrower or any service bureau.
(f) All letters of credit now existing or hereafter issued naming
Borrower as a beneficiary or assigned to Borrower, including the right to
receive payment thereunder, and all documents and records associated therewith.
(g) All of Borrower's investment property.
(h) All deposits, funds, instruments, documents, policies, evidence
and certificates of insurance, securities, chattel paper and other assets of
Borrower or in which Borrower has an interest and all proceeds thereof, now or
at any time hereafter on deposit with or in the possession or control of Bank or
owing by Bank to Borrower or in transit by mail or carrier to Bank or in the
possession of any other Person acting on Bank's behalf, without regard to
whether Bank received the same in pledge, for safekeeping, as agent for
collection or otherwise, or whether Bank has conditionally released the same,
and in all assets of Borrower in which Bank now has or may at any time hereafter
obtain a lien, mortgage, or security interest for any reason.
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(i) All of Borrower's right, title and interest in and to the
Specified Tax Refund and the payment thereof. Borrower shall execute and deliver
to Bank all documents required by Bank in accordance with Section 7.31 below in
order to insure that the payment of such refund will be made directly to Bank.
(j) All of Borrower's right, title and interest as seller in and to
any agreement of sale for the Mortgaged Property (as defined below). Bank shall
not be liable for or be deemed to have assumed any obligations of Borrower under
any such agreement of sale.
5.2 Real Property. As further security for the Bank Indebtedness, Borrower
shall grant to Bank a first priority mortgage lien encumbering the premises
situate at 960 Browers Point Branch, Hewlett Neck, New York, and all
improvements thereon and all rights, licenses, permits and approvals related
thereto, together with an assignment of all rents and leases related thereto
(collectively, the "Mortgaged Property"). Bank shall not record such documents
except as provided for in Section 7.29 below.
5.3 Insurance. As further security for the Bank Indebtedness, Borrower
(and all owners and beneficiaries applicable thereto) shall assign and grant to
Bank a security interest in a life insurance policy and the proceeds payable
thereunder issued by and maintained with an insurance company acceptable to
Bank, insuring the lives of Harvey B. Adams and Ronald J. Adams, each in an
amount at least equal to One Million Dollars ($1,000,000.00). Such insurance
collateral shall be in addition to all insurance required to be maintained under
Section 7.12 hereof.
5.4 Surety. As further security for the Bank Indebtedness, Borrower shall
cause to be executed and delivered to Bank, the absolute, unconditional, joint
and several surety agreement (the "Surety Agreement") of Harvey B. Adams and
Ronald J. Adams (collectively, "Guarantors") in form and content satisfactory to
Bank. The liability of Guarantors under the Surety Agreement shall be limited to
an aggregate principal amount equal to Three Million Dollars ($3,000,000.00)
(the "Maximum Surety Amount"), together with interest thereon and all costs
incurred in collecting such sums.
Provided that (a) Borrower has complied with all financial covenants
set forth in Section 8.1 below (as the same may be amended from time to time,
unless such amendments were in connection with an Event of Default or agreed to
by Bank in order to avoid the occurrence of an Event of Default), and (b) no
other Event of Default or event which with the giving of notice or the passage
of time or both would become an Event of Default shall have occurred and is
continuing, the Maximum Surety Amount will be reduced to One Million Five
Hundred Thousand Dollars ($1,500,000.00) upon request of Guarantors and upon:
(a) receipt by Bank of Borrower's annual audited financial
statements for Borrower's fiscal year ending December 31, 1997, showing Net
Income (before taxes) for such year of not less than Four Million Dollars
($4,000,000.00);
(b) delivery of evidence satisfactory to Bank that Borrower has
maintained excess availability for advances under the Line (not including any
Permitted Out-of-Formula Advance) of at least Two Million Five Hundred Thousand
Dollars ($2,500,000.00) for ninety (90) consecutive days preceding the date of
such reduction and that no accounts payable of Borrower during such ninety (90)
day period and on the date of such reduction are or were past due; and
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(c) Bank having a period of thirty (30) days from the date of
receipt of the items referred to in (a) and (b) above to review and verify the
information contained therein.
Provided that (a) Borrower has complied with all financial covenants
set forth in Section 8.1 below (as the same may be amended from time to time,
unless such amendments were in connection with an Event of Default or agreed to
by Bank in order to avoid the occurrence of an Event of Default), and (b) no
other Event of Default or event which with the giving of notice or the passage
of time or both would become an Event of Default shall have occurred and is
continuing, the Guarantors shall be released from their obligations under the
Surety Agreement upon request of Borrower and upon:
(i) delivery of evidence satisfactory to Bank that Borrower
has received additional cash equity in an amount equal to at least Ten Million
Dollars ($10,000,000.00) (net of all offering expenses); or
(ii) delivery of evidence satisfactory to Bank that (A) for a
period of two (2) consecutive fiscal years, (1) Borrower achieved profitability
for each such fiscal year, and (2) Borrower achieved Net Income (before taxes)
of not less than Four Million Dollars ($4,000,000.00) for each such fiscal year;
and (B) Borrower maintained excess availability for advances under the Line (not
including any Permitted Out-of-Formula Advance) of at least Two Million Five
Hundred Thousand Dollars ($2,500,000.00) for ninety (90) consecutive days
preceding the date of such release and that no accounts payable of Borrower
during such ninety (90) day period and on the date of such release are or were
past due; and
(iii) Bank having a period of thirty (30) days from the date
of receipt of the items referred to in (i) or (ii) above, as applicable, to
review and verify the information contained therein.
5.5 Validity Assurance and Management Support Letter. As further security
for the Bank Indebtedness, Borrower shall cause to be executed and delivered to
Bank a validity assurance and management support letter from each of Harvey B.
Adams, Ronald J. Adams, Burton R. Chasnov and Daniel A. Rashy in form
satisfactory to Bank.
5.6 General. The collateral described above in Sections 5.1, 5.2, 5.3 and
5.4 is collectively referred to herein as the "Collateral". The above-described
security interests, assignments, liens and guarantees shall not be rendered void
by the fact that no Bank Indebtedness exists as of any particular date, but
shall continue in full force and effect until the Bank Indebtedness has been
repaid, and Bank has no agreement or commitment outstanding pursuant to which
Bank may extend credit to or on behalf of Borrower. IT IS THE EXPRESS INTENT OF
THE BORROWER THAT ALL OF THE COLLATERAL SHALL SECURE NOT ONLY THE OBLIGATIONS
UNDER THE LOAN DOCUMENTS, BUT ALSO ALL OTHER PRESENT AND FUTURE BANK
INDEBTEDNESS (as defined herein).
5.7 Collection of Receivables; Proceeds of Collateral.
(a) Borrower will collect its accounts receivable only in the
ordinary course of business. Borrower will notify all of its account debtors to
forward all accounts receivable collections owed to Borrower to a lockbox
maintained by Bank, and will execute such lockbox
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agreements as may be required by Bank and will pay to Bank all customary fees in
connection with such lockbox arrangement. Immediately upon receipt, Borrower
will forward to Bank all other checks, drafts and other monies received by
Borrower which are proceeds of the Collateral to the lockbox maintained by Bank.
(b) All accounts receivable collections of Borrower and all checks,
drafts and other monies received by Borrower which are proceeds of the
Collateral will be deposited in a non-interest bearing cash collateral account
maintained at Bank (the "Cash Collateral Account"). Bank will have sole dominion
and control over all items and funds in the Cash Collateral Account and such
items and funds may be withdrawn only by Bank. However, Bank will apply all such
funds towards payment of the Bank Indebtedness.
(c) Solely for purposes of calculating interest on the balance of
the Line, all items deposited into the Cash Collateral Account will be credited
by Bank as payments of the principal balance of the Line on the Business Day on
which such items are deposited into the Cash Collateral Account. As compensation
for the foregoing arrangement, Borrower will pay to Bank a sum equal to one
day's interest on all such deposits, at the interest rate set forth in Section
3.1(a)(i). Borrower will reimburse Bank on demand for the amount of any items
credited as provided above and subsequently returned unpaid. Bank may terminate
the foregoing arrangement upon notice to Borrower.
(d) Borrower agrees that all monies, checks, notes, instruments,
drafts or other payments relating to or constituting proceeds of any accounts
receivable or other Collateral of Borrower which come into the possession or
under the control of Borrower or any employees, agents or other persons acting
for or in concert with Borrower, shall be received and held in trust for Bank
and such items shall be the sole and exclusive property of Bank. Immediately
upon receipt thereof, Borrower and such other persons shall remit the same or
cause the same to be remitted, in kind, to Bank. Borrower shall deliver or cause
to be delivered to Bank, with appropriate endorsement and assignment to Bank
with full recourse to Borrower, all instruments, notes and chattel paper
constituting an account receivable or proceeds thereof or other Collateral. Bank
is hereby authorized to open all mail addressed to Borrower and endorse all
checks, drafts or other items for payment on behalf of Borrower. Bank is granted
a power of attorney by Borrower with full power of substitution to execute on
behalf of Borrower and in Borrower's name or to endorse Borrower's name on any
check, draft, instrument, note or other item of payment or to take any other
action or sign any document in order to effectuate the foregoing. Such power of
attorney being coupled with an interest is irrevocable until the Bank
Indebtedness has been paid in full and Bank has no further commitment or
obligation to make any advances under the Line.
6. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as follows:
6.1 Valid Organization, Good Standing and Qualification. Borrower is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, has full power and authority to execute, deliver
and comply with the Loan Documents, and to carry on its business as it is now
being conducted and is duly licensed or qualified as a foreign corporation in
good standing under the laws of each other jurisdiction in which the character
or location of the properties owned by it or the business transacted by it
requires such licensing or qualification and
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the failure to be so qualified would have a material adverse effect on the
Collateral, business operations or financial condition of Borrower.
6.2 Licenses. Borrower and its employees, servants and agents have all
licenses, registrations, approvals and other authority as may be necessary to
enable it to own and operate its business and perform all services and business
which it has agreed to perform in any state, municipality or other jurisdiction,
except where the failure to have such licenses, registrations, approvals or
other authority would not have a material adverse affect on the Collateral,
business, operations or financial condition of Borrower or the ability of
Borrower to perform its obligations under the Loan Documents.
6.3 Subsidiaries. Borrower owns no shares of stock or other equity
interests in any Person, directly or indirectly (by any Subsidiary or
otherwise).
6.4 Financial Statements. Borrower has furnished to Bank the audited
financial statements of Borrower certified without qualification by independent
public accountants as of December 31, 1995 and all management and comment
letters from such accountants in connection therewith, and its internally
prepared fiscal year end financial statements as of December 31, 1996. Such
financial statements of Borrower (together with the related notes and comments),
are correct and complete, fairly present the financial condition and the assets
and liabilities of Borrower at such date, and have been prepared in accordance
with GAAP. With respect to the internally prepared fiscal year end statements,
such statements may be subject to year-end adjustment and any accompanying
footnotes.
6.5 No Material Adverse Change in Financial Condition. There has been no
material adverse change in the financial condition of Borrower since December
31, 1996.
6.6 Pending Litigation or Proceedings. Except as set forth on Schedule 6.6
attached hereto, there are no judgments outstanding or actions, suits or
proceedings pending or, to the best of Borrower's knowledge, threatened against
or affecting Borrower, at law or in equity or before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign.
6.7 Due Authorization; No Legal Restrictions. The execution and delivery
by Borrower of the Loan Documents, the consummation of the transactions
contemplated by the Loan Documents and the fulfillment and compliance by
Borrower with the respective terms, conditions and provisions of the Loan
Documents: (a) have been duly authorized by all requisite corporate action of
Borrower; (b) will not conflict with or result in a breach of, or constitute a
default (or might, upon the passage of time or the giving of notice or both,
constitute a default) under, any of the terms, conditions or provisions of any
applicable statute, law, rule, regulation or ordinance or Borrower's Certificate
of Incorporation or By-Laws or any indenture, mortgage, loan or credit agreement
or instrument to which Borrower is a party or by which Borrower may be bound or
affected, or any judgment or order of any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign; and
(c) 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 under the terms or provisions of any such agreement or instrument,
except liens in favor of Bank.
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6.8 Enforceability. The Loan Documents have been duly executed by Borrower
and delivered to Bank and constitute legal, valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their terms, except as
enforceability may be limited by any bankruptcy, insolvency, reorganization,
moratorium or other laws or equitable principles affecting creditors' rights
generally.
6.9 No Default Under Other Obligations, Orders or Governmental
Regulations. Borrower is not in violation of its Certificate of Incorporation or
in default in the performance or observance of any of its obligations, covenants
or conditions contained in any indenture or other agreement creating, evidencing
or securing any Indebtedness or pursuant to which any such Indebtedness is
issued and Borrower is not in violation of or in default under any other
agreement or instrument or any judgment, decree, order, statute, rule or
governmental regulation, applicable to it or by which its properties may be
bound or affected.
6.10 Governmental Consents. No consent, approval or authorization of or
designation, declaration or filing (other than the filing of UCC financing
statements) with any governmental authority on the part of Borrower is required
in connection with the execution, delivery or performance by Borrower of the
Loan Documents or the consummation of the transactions contemplated thereby.
6.11 Taxes. Borrower has filed all tax returns which it is required to
file and has paid, or made provision for the payment of, all taxes which have or
may have become due pursuant to such returns or pursuant to any assessment
received by Borrower. Such tax returns are complete and accurate in all material
respects. Borrower knows of no proposed additional assessment or basis for any
assessment of additional taxes.
6.12 Title to Collateral. The Collateral is and will be owned by Borrower
free and clear of all liens and other encumbrances of any kind (including liens
or other encumbrances upon properties acquired or to be acquired under
conditional sales agreements or other title retention devices), excepting only
liens in favor of the Bank and those liens and encumbrances permitted under
Section 7.9 below. Borrower will defend the Collateral against any claims of all
persons or entities other than the Bank.
6.13 Addresses. During the past five (5) years, Borrower has not been
known by any names (including tradenames) other than those set forth in Schedule
6.13 attached hereto and has not been located at any addresses other than those
set forth on Schedule 6.13 attached hereto. The portions of the Collateral which
are tangible property and Borrower's books and records pertaining thereto will
at all times be located at the addresses set forth on Schedule 6.13; or such
other location determined by Borrower after prior notice to Bank and delivery to
Bank of any items requested by Bank to maintain perfection and priority of
Bank's security interests and access to Borrower's books and records. Schedule
6.13 identifies the chief executive office of Borrower.
6.14 Current Compliance. Borrower is currently in compliance with all of
the terms and conditions of the Loan Documents.
6.15 Pension Plans. Except as disclosed on Schedule 6.15 hereto: (a)
Borrower has no obligations with respect to any employee pension benefit plan
("Plan") (as such term is defined in the Employee Retirement Income Security Act
of 1974, as amended ("ERISA")); (b) no events,
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including, without limitation, any "Reportable Event" or "Prohibited
Transaction" (as those terms are defined under ERISA), have occurred and are
continuing in connection with any Plan of Borrower which might constitute
grounds for the termination of any such Plan by the Pension Benefit Guaranty
Corporation ("PBGC") or for the appointment by any United States District Court
of a trustee to administer any such Plan; (c) all of Borrower's Plans meet with
the minimum funding standards of Section 302 of ERISA; and (d) Borrower has no
existing liability to the PBGC. Borrower is not subject to or bound to make
contributions to any "multi-employer plan" as such term is defined in Section
4001(a)(3) of ERISA.
6.16 Leases and Contracts. Borrower has complied with the provisions of
all material leases, contracts or commitments of any kind (such as employment
agreements, collective bargaining agreements, powers of attorney, distribution
agreements, patent license agreements, contracts for future purchase or delivery
of goods or rendering of services, bonus, pension and retirement plans or
accrued vacation pay, insurance and welfare agreements) to which it is a party
and is not in default thereunder. To the best of Borrower's knowledge, no other
party is in default under any such leases, contracts or other commitments and no
event has occurred which, but for the giving of notice or the passage of time or
both, would constitute an event of default thereunder.
6.17 Intellectual Property. Borrower owns or possesses the irrevocable
right to use all of the patents, trademarks, service marks, trade names,
copyrights, licenses, franchises and permits and rights with respect to the
foregoing necessary to own and operate the Borrower's properties and to carry on
its business as presently conducted and presently planned to be conducted
without conflict with the rights of others. Schedule 6.17 sets forth an accurate
list and description of each such patent, trademark, service mark, trade name,
copyright, license, franchise and permit and right with respect to the
foregoing, together with all registration or application numbers or information
with respect thereto.
6.18 Eligible Inventory Warranties. With respect to Eligible Inventory
from time to time scheduled, listed or referred to in any certificate, statement
or report prepared by or for Borrower and delivered to Bank and upon which
Borrower is basing availability under the Line, Borrower warrants and represents
that: (a) such inventory is located at the address or addresses listed on
Schedule 6.13 attached hereto and is not in transit (except between locations of
Borrower described on Schedule 6.13 hereto and other locations of Borrower
established in accordance with the terms and conditions of this Agreement); (b)
Borrower has good, indefeasible and merchantable title to such inventory and
such inventory is not subject to any lien or security interest whatsoever except
for the prior, perfected security interest granted to Bank; (c) such inventory
is of good and merchantable quality, free from any defects; (d) such inventory
is not subject to any licensing, patent, royalty, trademark, trade name or
copyright agreements with any third parties; and (e) the completion of the
manufacture and sale or other disposition of such inventory by Bank following an
Event of Default shall not require the consent of any person and shall not
constitute a breach or default under any contract or agreement to which Borrower
is a party or to which the inventory is subject.
6.19 Eligible Account Warranties. With respect to all Eligible Receivables
from time to time scheduled, listed or referred to in any certificate, statement
or report prepared by or for Borrower and delivered to Bank and upon which
Borrower is basing availability under the Line, Borrower warrants and represents
that: (a) the accounts arose in the ordinary course of Borrower's business; (b)
the accounts are genuine, are in all respects what they purport to be, and are
not
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evidenced by any chattel paper, note, instrument or judgment; (c) Borrower has
absolute title to such accounts and the accounts represent undisputed, bona fide
transactions completed in accordance with the terms thereof and as represented
to Bank; (d) no payments have been or will be made thereon, except payments
immediately delivered to Bank pursuant to the Loan Documents; (e) there are no
setoffs, counterclaims, disputes, discounts (other than prompt payment discounts
not in excess of five percent (5%) of the face amount thereof), credits, charge
backs, freight claims, allowances or adjustments existing or asserted with
respect thereto and Borrower has not made any agreement with any account debtor
for any deduction therefrom; (f) there are no facts, events or occurrences which
impair the validity or enforcement thereof or may reduce the amount payable
thereunder as shown on any certificates, statements or reports, prepared by or
for Borrower and delivered to Bank, Borrower's books and records and all
invoices and statements delivered to Bank with respect thereto; (g) to the best
of Borrower's knowledge, all account debtors have the capacity to contract and
are solvent; (h) the goods sold giving rise thereto are not subject to any lien,
claim, encumbrance or security interest except that of Bank; (i) to the best of
Borrower's knowledge, there are no proceedings or actions which are threatened
or pending against any account debtor which might result in any material adverse
change in such account debtor's financial condition; (j) the account is not an
account with respect to which the account debtor is an Affiliate of Borrower or
a director, officer or employee of Borrower or its Affiliates; (k) the account
does not arise with respect to goods which have been returned, rejected, lost or
damaged or which have not been shipped or arise with respect to services which
have not been fully performed and accepted as satisfactory by the account
debtor; (l) the account is not an account with respect to which the account
debtor's obligation to pay the account is conditional upon the account debtor's
approval or is otherwise subject to any repurchase obligation or return right,
as with sales made on a consignment bill-and-hold, guaranteed sale,
sale-and-return, or sale on approval basis; (m) the amounts shown on the
applicable certificates, statements, on Borrower's books and records and all
invoices and statements which may be delivered to Bank with respect to such
accounts are actually and absolutely owing to Borrower and are not in any way
contingent (except in connection with Borrower's standard product warranties);
and (n) the accounts have not been sold, assigned or transferred to any other
Person and no Person except Borrower has any claim thereto or (with the
exception of the applicable account debtor) any claims to the goods sold.
6.20 Business Interruptions. Within five (5) years prior to the date
hereof, neither the business, Collateral nor operations of Borrower have been
materially and adversely affected in any way by any casualty, strike, lockout,
combination of workers, order of the United States of America, or any state or
local government, or any political subdivision or agency thereof, directed
against Borrower. There are no pending or threatened labor disputes, strikes,
lockouts or similar occurrences or grievances against the business being
operated by Borrower.
6.21 Accuracy of Representations and Warranties. No representation or
warranty by Borrower contained herein or in any certificate or other document
furnished by Borrower pursuant hereto or in connection herewith fails to contain
any statement of material fact necessary to make such representation or warranty
not misleading in light of the circumstances under which it was made. There is
no fact which Borrower knows or should know and has not disclosed to Bank, which
does or may materially and adversely affect Borrower, or any of its operations.
7. GENERAL COVENANTS. Except with the prior written consent of Bank, Borrower
will comply with the following:
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7.1 Payment of Principal, Interest and Other Amounts Due. Borrower will
pay when due all Bank Indebtedness and all other amounts payable by it
hereunder.
7.2 Limitation on Sale and Leaseback. Borrower will not enter into any
arrangement whereby it will sell or transfer any real property or improvements
thereon or other fixed assets owned by it and then or thereafter rent or lease
as lessee such property, improvements or assets or any part thereof, or other
property which any Borrower shall intend to use for substantially the same
purposes as the property sold or transferred.
7.3 Limitation on Indebtedness. Borrower will not have at any time
outstanding to any Person other than Bank, any Indebtedness for borrowed money,
Capitalized Lease Obligations, or any outstanding letters of credit issued for
Borrower's account, except:
(a) Current accounts payable incurred in the ordinary course of
Borrower's business, accrued expenses and other current items arising out of
transactions (other than borrowings) in the ordinary course of Borrower's
business;
(b) Existing Indebtedness for borrowed money and for Capitalized
Lease Obligations described on Schedule 7.3;
(c) Future purchase money Indebtedness and Capitalized Lease
Obligations in an aggregate amount not to exceed Twenty-Five Thousand Dollars
($25,000.00) per transaction or One Hundred Thousand Dollars ($100,000.00) in
the aggregate per fiscal year of Borrower, provided that Bank shall have the
right of first refusal to provide such financing on substantially similar terms,
which right of first refusal must be exercised, if at all, within fifteen (15)
days after written notice thereof to Bank in each instance. The foregoing
permitted purchase money indebtedness and Capitalized Lease Obligations shall be
on a non-cumulative basis as to any unused portions from year to year; and
(d) Letters of credit issued pursuant to this Agreement.
Except as provided in the next succeeding sentence, any of such
existing permitted Indebtedness may not be refinanced or replaced without the
consent of Bank. Borrower may refinance or replace existing permitted
Indebtedness (other than the Subordinated Indebtedness) provided that such
replacement or refinancing does not result in an increase in the interest rate
or payments due in connection with such existing permitted Indebtedness or is
otherwise on more burdensome terms to Borrower.
7.4 Investments and Loans. Borrower will not have or make any investments
in all or a material portion of the capital stock or securities of any Person,
or any loans, advances or extensions of credit to any Person, except:
(a) Investments in direct or indirect obligations of, or obligations
unconditionally guaranteed by, the United States of America and maturing within
twelve (12) months from the date of acquisition;
(b) Investments in commercial paper of Bank or commercial paper
rated "Prime-1" by Moody's Investors Services or "A-1" by Standard & Poor's
Corporation, or with an equivalent
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rating by another rating agency of nationally recognized standing, maturing
within three hundred sixty-five (365) days from the date of acquisition;
(c) Certificates of deposit maturing within twelve (12) months from
the date of acquisition issued by Bank;
(d) Investments and loans listed on Schedule 7.4 attached hereto;
(e) Future loans to employees (other than Harvey B. Adams, Ronald J.
Adams and Burton R. Chasnov) of not more than Ten Thousand Dollars ($10,000.00)
per employee or One Hundred Thousand Dollars ($100,000.00) in the aggregate
outstanding at any one time. In lieu of year-end bonuses to Harvey B. Adams,
Ronald J. Adams and Burton R. Chasnov, Borrower may make loans to Harvey B.
Adams, Ronald J. Adams and Burton R. Chasnov in an amount not to exceed any
bonuses provided for in any employment contract of such Person with Borrower,
which bonuses have not or will not be paid, provided that, assuming such bonuses
were expensed by Borrower, Borrower would be in compliance with all of the
financial covenants in Section 8.1 below; and
(f) Advances to employees for reimbursable business expenses in
amounts not to exceed Two Thousand Dollars ($2,000.00) per employee outstanding
at any time.
7.5 Guaranties. Borrower will not directly or indirectly guarantee,
endorse (other than for collection or deposit in the ordinary course of
business), discount, sell with recourse or for less than the face value or agree
(contingently or otherwise) to purchase or repurchase or otherwise acquire, or
otherwise become directly or indirectly liable for, or agree (contingently or
otherwise) to supply or advance funds (whether by loan, stock purchase, capital
contribution or otherwise) in respect of, any Indebtedness, obligations or
liabilities of any Person.
7.6 Disposition of Assets. Borrower will not sell, lease, transfer or
otherwise dispose of all, substantially all, or any material portion of its
property or assets, except for sales of inventory in the ordinary course for
fair consideration and sales of assets (not financed by Bank) with a value not
in excess of Twenty-Five Thousand Dollars ($25,000.00) individually or One
Hundred Thousand Dollars ($100,000.00) in the aggregate per fiscal year of
Borrower. The foregoing limitation shall be on a non-cumulative basis as to any
unused portions from year to year.
7.7 Merger; Consolidation; Business Acquisitions; Subsidiaries. Borrower
will not (a) merge into or consolidate with any Person, or (b) without the prior
written consent of Bank (which consent will not be unreasonably withheld or
delayed) acquire any material portion of the stock, ownership interests, assets
or business of any Person, permit any Person to merge into it, or form any new
Subsidiaries. Borrower acknowledges and agrees that any consent by Bank in
connection with Section 7.7(b) shall be conditioned upon no Event of Default or
event which with the giving of notice or the passage of time or both would
become an Event of Default being continuing and may be further conditioned upon
minimum availability requirements, financial covenants and other requirements as
Bank may establish in its sole discretion. Any acquisition by Borrower described
in Section 7.7(b) shall only be in connection with the stock, assets or
securities of an entity engaged in a line of business reasonably similar to that
currently engaged in by Borrower.
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7.8 Taxes; Claims for Labor and Materials. Borrower will pay or cause to
be paid when due all taxes, assessments, governmental charges or levies imposed
upon it or its income, profits, payroll or any property belonging to it,
including without limitation all withholding taxes, and all claims for labor,
materials and supplies which, if unpaid, might become a lien or charge upon any
of its properties or assets; provided that Borrower shall not be required to pay
any such tax, assessment, charge, levy or claim so long as the validity thereof
shall be contested in good faith by appropriate proceedings promptly initiated
and diligently conducted by Borrower and neither execution, foreclosure nor levy
shall have been commenced in respect thereof and Borrower shall have set aside
on its books adequate reserves with respect thereto. Borrower will not file or
consent to the filing of, any consolidated income tax return with any Person
other than a Subsidiary.
7.9 Liens. Borrower will not create, incur or permit to exist any
mortgage, pledge, encumbrance, lien, security interest or charge of any kind
(including liens or charges upon properties acquired or to be acquired under
conditional sales agreements or other title retention devices) on its property
or assets, whether now owned or hereafter acquired, or upon any income, profits
or proceeds therefrom, except:
(a) Security interests and mortgages held by Bank;
(b) Liens incurred or deposits made in the ordinary course of
business (i) in connection with worker's compensation, unemployment insurance,
social security and other like laws, (ii) to secure the performance of statutory
obligations or bids, tenders or contracts, not incurred in connection with
either (A) the borrowing of money or (B) the deferred purchase price of goods or
inventory, or (iii) liens for taxes, assessments or other governmental charges
not delinquent, or being contested in good faith by appropriate proceedings;
(c) Encumbrances consisting of zoning restrictions, easements,
restrictions on the use of real property or minor irregularities of title
thereto, none of which materially impairs the use of such property by Borrower
in the operation of its business;
(d) Liens and security interests listed on Schedule 7.9 attached
hereto;
(e) Purchase money liens or Capitalized Leases, provided that:
(1) the property subject to any of the foregoing is acquired
or leased by Borrower in the ordinary course of its business and the lien on any
such property is created contemporaneously with such acquisition;
(2) purchase money Indebtedness or Capitalized Lease
Obligations so created shall not exceed one hundred percent (100%) of the lesser
of cost or fair market value as of the time of acquisition or lease of the
property covered thereby;
(3) the purchase money Indebtedness or Capitalized Lease
Obligations shall only be secured by the property so acquired or leased; and
(4) the purchase money Indebtedness or Capitalized Lease
Obligations are permitted by the provisions of Section 7.3; or
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(f) Judgment liens not greater than Fifty Thousand Dollars
($50,000.00) individually or in the aggregate, provided that the creditor
thereunder shall not have commenced any collection proceedings in connection
therewith (unless such proceedings shall have been stayed pending appeal).
Borrower shall not enter into any agreement with any other Person
which shall prohibit Borrower from granting, creating or suffering to exist, or
otherwise restrict in any way (whether by covenant, by identifying such event as
a default under such agreement or otherwise) the ability of Borrower to grant,
create or suffer to exist, any lien, security interest or other charge or
encumbrance upon or with respect to any of its assets in favor of Bank.
Borrower will not apply for or obtain any letters of credit for the
payment of or to secure the payment for any inventory or other assets to be
acquired by Borrower, except letters of credit issued by Bank, at its
discretion.
7.10 Existence; Approvals; Qualification; Business Operations; Compliance
with Laws. Borrower (a) will obtain, preserve and keep in full force and effect
its separate corporate existence and all rights, licenses, registrations and
franchises necessary to the proper conduct of its business or affairs; (b) will
qualify and remain qualified as a foreign corporation in each jurisdiction in
which the character or location of the properties owned by it or the business
transacted by it requires such qualification and the failure to be so qualified
would have a material adverse effect on the Collateral, business operations or
financial condition of Borrower; (c) will continue to operate its business in
substantially the same manner as presently operated; and (d) will comply in all
material respects with the requirements of all applicable laws and all rules,
regulations (including environmental regulations) and orders of regulatory
agencies and authorities having jurisdiction over it.
7.11 Maintenance of Properties, Intellectual Property. Borrower will
maintain, preserve, protect and keep or cause to be maintained, preserved,
protected and kept its real and personal property used or useful in the conduct
of its business in good working order and condition, reasonable wear and tear
excepted, and will pay and discharge when due the cost of repairs to and
maintenance of the same.
With respect to any and all trademarks, registrations, copyrights,
patents, patent rights and applications for any of the foregoing, Borrower shall
maintain and protect the same and shall, in the exercise of its reasonable
business judgment, take and assert such remedies as are available to Borrower to
prevent any other Person from infringing upon or claiming any interest in any
such trademarks, registrations, copyrights, patents, patent rights or
application for any of the foregoing.
Borrower will notify Bank immediately of: (a) Borrower's learning of
the creation by Borrower or any of its employees of any significant inventions
relating to Borrower's business; (b) Borrower's learning of any changes or
improvements made to an invention created or owned by Borrower or any of its
employees and relating to Borrower's business; (c) the filing of any patent or
trademark application, whether domestic or foreign, by Borrower or, if Borrower
will have any rights therein, any of its employees; (d) the grant of any patent
or trademark, whether domestic or foreign, to Borrower or, if Borrower will have
any rights therein, any of its employees; or (e) Borrower's intent to abandon a
patent or trademark.
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Borrower will, if requested by Bank: (i) execute and deliver to Bank
assignments, financing statements, patent mortgages or such other documents, in
form and substance acceptable to Bank, necessary to perfect and maintain Bank's
security interest in all existing and future patents, patent applications,
trademarks, trademark applications, and other general intangibles owned by
Borrower; (ii) furnish Bank with evidence satisfactory to Bank that all actions
necessary to maintain and protect each trademark and patent owned by Borrower or
its employees and relating to Borrower's business have been taken in a timely
manner; and (iii) execute and deliver to Bank an agreement permitting Bank to
exercise all of Borrower's rights in, to and under any patent or trademark owned
by Borrower or, to the extent Borrower has any rights therein, any of its
employees.
7.12 Insurance. Borrower will carry adequate insurance issued by an
insurer acceptable to Bank, in amounts acceptable to Bank (at least adequate to
comply with any co-insurance provisions) and against all such liability and
hazards as are usually carried by entities engaged in the same or a similar
business similarly situated or as may be required by Bank, and in addition, will
carry business interruption insurance in such amounts as may be required by
Bank. In the case of insurance on any of the Collateral, Borrower shall carry
insurance in the full insurable value thereof and cause Bank to be named as
insured mortgagee with respect to all real property, loss payee (with a lender's
loss payable endorsement) with respect to all personal property, and additional
insured with respect to all liability insurance, as its interests may appear,
with thirty (30) days' notice to be given Bank by the insurance carrier prior to
cancellation or material modification of such insurance coverage.
Borrower shall cause to be delivered to Bank the insurance policies
therefor or in the alternative, evidence of insurance and at least thirty (30)
business days prior to the expiration of any such insurance, additional policies
or duplicates thereof or in the alternative, evidence of insurance evidencing
the renewal of such insurance and payment of the premiums therefor. Borrower
shall direct all insurers that in the event of any loss thereunder or the
cancellation of any insurance policy, the insurers shall make payments for such
loss and pay all return or unearned premiums directly to Bank and not to
Borrower and Bank jointly.
In the event of any loss, Borrower will give Bank immediate notice
thereof and Bank may make proof of loss whether the same is done by Borrower.
Bank is granted a power of attorney by Borrower with full power of substitution
to file any proof of loss in Borrower's or Bank's name, to endorse Borrower's
name on any check, draft or other instrument evidencing insurance proceeds, and
to take any action or sign any document to pursue any insurance loss claim. Such
power being coupled with an interest is irrevocable until all Bank Indebtedness
is paid in full and Bank has no further funding commitment under or in respect
of the Line.
In the event of any loss, Bank, at its option, may: (a) retain and
apply all or any part of the insurance proceeds to reduce, in such order and
amounts as Bank may elect, the Bank Indebtedness (excluding, provided that no
Event of Default shall have occurred and be continuing, that portion of the Line
outstanding under the Equipment Purchase Sublimit, except to the extent such
insurance proceeds were received in respect of equipment purchased with proceeds
advanced under the Equipment Purchase Sublimit); or (b) disburse all or any part
of such insurance proceeds to or for the benefit of Borrower for the purpose of
repairing or replacing Collateral after receiving proof satisfactory to Bank of
such repair or replacement or the estimated cost thereof, in either case without
waiving or impairing the Bank Indebtedness or any provision of this Agreement.
Borrower
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shall not take out any insurance on the Collateral without having Bank named as
loss payee or additional insured thereon. Borrower shall bear the full risk of
loss from any loss of any nature whatsoever with respect to the Collateral.
7.13 Inspections; Examinations. Borrower hereby irrevocably authorizes and
directs all accountants and auditors employed by Borrower at any time to exhibit
and deliver to Bank copies of any and all of Borrower's financial statements,
trial balances or other accounting records of any sort in the accountant's or
auditor's possession and copies of all reports submitted to Borrower by such
accountants or auditors, including management letters, "comment" letters and
audit reports, and to disclose to Bank any information they may have concerning
Borrower's financial status and business operations. Borrower further authorizes
all federal, state and municipal authorities to furnish to Bank copies of
reports or examinations relating to Borrower, whether made by Borrower or
otherwise.
The officers of Bank, or such Persons as any of them may designate,
may visit and inspect any of the properties of Borrower, examine (either by
Bank's employees or by independent accountants) any of the Collateral or other
assets of Borrower, including the books of account of Borrower, and discuss the
affairs, finances and accounts of Borrower with its officers and with its
independent accountants, at such times as Bank may desire. Provided no Event of
Default shall have occurred, Bank will visit Borrower's locations only upon
reasonable notice and during normal business hours.
Bank may, at its expense provided that no Event of Default shall
have occurred and be continuing, conduct at any time and from time to time, and
Borrower will fully cooperate with, field examinations of the inventory,
accounts receivable and business affairs of Borrower.
7.14 Default Under Other Indebtedness. Borrower will not permit any of its
Indebtedness to be in default. If any Indebtedness of Borrower is declared or
becomes due and payable before its expressed maturity by reason of default or
otherwise or to the knowledge of Borrower, the holder of any such Indebtedness
shall have the right (or upon the giving of notice or the passage of time, or
both, shall have the right) to declare such Indebtedness to be so due and
payable, Borrower will immediately give Bank written notice of such declaration,
acceleration or right of declaration.
7.15 Pension Plans. Borrower will: (a) keep in full force and effect any
and all Plans which are presently in existence or may, from time to time, come
into existence under ERISA, unless such Plans can be terminated without material
liability to Borrower in connection with such termination (as distinguished from
any continuing funding obligation); (b) make contributions to all of Borrower's
Plans in a timely manner and in a sufficient amount to comply with the minimum
funding requirements of ERISA; (c) comply with all material requirements of
ERISA which relate to such Plans so as to preclude the occurrence of any
Reportable Event, Prohibited Transaction or material "accumulated funding
deficiency" as such term is defined in ERISA; and (d) notify Bank immediately
upon receipt by Borrower of any notice of the institution of any proceeding or
other action which may result in the termination of any Plan and deliver to
Bank, promptly after the filing or receipt thereof, copies of all reports or
notices which Borrower files or receives under ERISA with or from the Internal
Revenue Service, the PBGC, or the U.S. Department of Labor.
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7.16 Bank of Account. Borrower will maintain Bank as its major bank of
account, unless otherwise agreed by Bank in writing.
7.17 Maintenance of Management. Borrower will cause its business to be
continuously managed by its present senior management team consisting of Harvey
B. Adams, Ronald J. Adams and Burton R. Chasnov or such other persons (serving
in such management positions) as may be reasonably satisfactory to Bank.
7.18 Capital Stock; Dividends. Borrower will not redeem, repurchase or
otherwise make any payment or distribution to acquire any of its capital stock.
Borrower will not pay cash dividends or make other distributions on account of
its capital stock. The foregoing shall not preclude Borrower from implementing
stock splits or paying stock dividends.
7.19 Transactions with Affiliates. Except for those disclosed on Schedule
7.19 attached hereto, Borrower will not enter into or conduct any transaction
with any Affiliate except on terms that would be usual and customary in a
similar transaction between Persons not affiliated with each other and except as
disclosed to Bank. Borrower will not make any loans or extensions of credit to
any of its Affiliates, shareholders, directors or officers, except for the
existing loans described in Schedule 7.19 attached hereto or to the extent
permitted pursuant to Section 7.4(e) or (f) above. Borrower will cause all of
its Indebtedness at any time owed to its Affiliates, shareholders, directors and
officers to be subordinated in all respects to all present and future Bank
Indebtedness and will not make any payments thereon, except as approved by Bank
in writing.
7.20 Name or Address Change. Borrower shall not change its name or the
address of its principal executive office except upon thirty (30) days prior
written notice to Bank and delivery to Bank of any items requested by Bank to
maintain perfection and priority of Bank's security interests and access to
Borrower's books and records.
7.21 Notices. Borrower will promptly notify Bank of: (a) any action or
proceeding brought against Borrower wherein such action or proceeding would, if
determined adversely to Borrower, result in any material liability of Borrower;
(b) the occurrence of any Event of Default; (c) any fact, condition or event
which, with the giving of notice or the passage of time or both, could become an
Event of Default; (d) the failure of Borrower to observe any of its undertakings
under the Loan Documents; or (e) any material adverse change in the assets,
business, operations or financial condition of Borrower.
7.22 Additional Documents and Future Actions. Borrower will, at its sole
cost, take such actions and provide Bank from time to time with such agreements,
financing statements and additional instruments, documents or information as
Bank may in its discretion deem necessary or advisable to perfect, protect,
maintain or enforce the security interests in the Collateral, to permit Bank to
protect or enforce its interest in the Collateral, or to carry out the terms of
the Loan Documents. Borrower hereby authorizes and appoints Bank as its
attorney-in-fact, with full power of substitution, to take such actions as Bank
may deem advisable to protect the Collateral and its interests thereon and its
rights hereunder, to execute on Borrower's behalf and file at Borrower's expense
financing statements, and amendments thereto, in those public offices deemed
necessary or appropriate by Bank to establish, maintain and protect a
continuously perfected security interest in the Collateral, and to execute on
Borrower's behalf such other documents and notices as Bank may deem advisable to
protect the Collateral and its interests therein and its rights hereunder. Such
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power being coupled with an interest is irrevocable until the Bank Indebtedness
is paid in full and Bank has no further funding commitment under or in respect
of the Line. Borrower irrevocably authorizes the filing of a carbon,
photographic or other copy of this Agreement, or of a financing statement, as a
financing statement and agrees that such filing is sufficient as a financing
statement.
7.23 Accounts Receivable. Unless Bank notifies Borrower in writing that it
dispenses with any one or more of the following requirements, Borrower will: (a)
inform Bank immediately of the rejection of goods, claims made or delay in
delivery or performance in regard to any account or contract right upon which
Borrower has based availability for advances under the Line and will adjust the
Borrowing Base calculation under the Line to reduce the availability for
advances under the Line by the applicable percentage of the amount of such
account; (b) make no change in any account upon which Borrower has based
availability for advances under the Line, unless such change is reflected in the
Borrowing Base calculation; (c) furnish to Bank all information received by
Borrower materially adversely affecting the financial standing of any account
debtor whose account or contract right has been specifically assigned to Bank;
(d) pay Bank the amount loaned against any account or contract right if the
goods are returned by purchaser or the contract is canceled or terminated or
adjust the Borrowing Base calculation to reduce the availability for advances
under the Line by the applicable percentage of the amount of such account; (e)
immediately notify Bank if any of its accounts arise out of contracts with the
United States or any department, agency or instrumentality thereof, and execute
any instruments and take any steps required by Bank in order that all monies due
and to become due under such contract shall be assigned to Bank and notice
thereof given to the Government under the Federal Assignment of Claims Act; and
(f) deliver to Bank, with appropriate endorsement or assignment, any instrument
or chattel paper representing an account or contract right. Any permission
granted to Borrower by Bank to omit any of the requirements of this Section 7.23
may be revoked by Bank at any time.
Borrower will, if requested by Bank: (a) give Bank assignments, in
form acceptable to Bank, of specific accounts or groups of accounts and monies
due and to become due under specific contracts and specific general intangibles;
(b) furnish to Bank a copy, with such duplicate copies as Bank may request, of
the invoice applicable to each account specifically assigned to Bank or arising
out of a contract right, bearing a statement that such account has been assigned
to Bank and such additional statements as Bank may require; (c) mark its records
evidencing its accounts in a manner satisfactory to Bank so as to show which
accounts have been assigned to Bank; (d) furnish to Bank satisfactory evidence
of the shipment and receipt of any goods specified by Bank and the performance
of any services or obligations covered by accounts or contracts in which Bank
has a security interest; (e) pay Bank the unpaid portion of the amount advanced
under the Line in respect of any account or contract right upon which Borrower
has based availability for advances under the Line, or adjust the Borrowing Base
under the Line by the applicable percentage of the amount of such account, if
(i) such account is not paid within ninety (90) days of its invoice date, (ii)
the subject account debtor does not accept the goods or services, (iii) any
petition under the Bankruptcy Code or any similar Federal or State statute is
filed by or against the subject account debtor, or (iv) Bank shall at any time
reject the account as unsatisfactory; and until such payment or adjustment is
made by Borrower, Bank may retain any such account or contract right as security
and may charge any deposit account of Borrower with any such amounts; (f) join
with Bank in executing a financing statement, notice, affidavit or similar
instrument, in form satisfactory to Bank, and such continuation statements and
other instruments as Bank may from time to time request and pay the cost of
filing the same in any public office deemed advisable by Bank; (g) give Bank
such financial statements, reports, certificates, lists of purchasers (showing
names, addresses, and amounts owing) and other
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data concerning its accounts, contracts, collections, inventory, general
intangibles and other matters as Bank may from time to time specify; (h)
segregate cash proceeds of Collateral so that they may be identified readily,
and deliver the same to the Bank at such time or times and in such manner and
form as the Bank may direct; (i) furnish such witnesses as may be necessary to
establish legal proof of the Collateral or records relating to the Collateral;
and (j) obtain from any owner, encumbrancer or other person having an interest
in the property where any Collateral is located, written consent to Bank's
removal of the Collateral therefrom, without liability on the part of Bank to
such owner, encumbrancer or other person, or from any such owner, encumbrancer
or other person such waivers of any interest in the Collateral as Bank may
require.
7.24 Material Adverse Contracts. Neither Borrower nor either Guarantor
will become or be a party to any contract or agreement which might reasonably be
expected to have a materially adverse impact on its or either Guarantor's
ability to perform under this Agreement, the Surety Agreement or any other
agreement with Bank to which it or either Guarantor is a party.
7.25 Restrictions on Use of Proceeds. Borrower will not carry or purchase
with the proceeds of the Line any "margin security" within the meaning of
Regulations U, G, T or X of the Board of Governors of the Federal Reserve
System.
7.26 Subordinated Indebtedness. Borrower will not prepay or otherwise
accelerate payment of any Subordinated Indebtedness except as authorized by Bank
in that certain Subordination Agreement of even date; and will comply with all
of the terms of such Subordination Agreement.
7.27 Life Insurance. Borrower will cause to be maintained the life
insurance coverage required under Section 5.3 and will deliver to Bank evidence
of such coverage showing all premiums paid for the subsequent 12-month period at
least thirty (30) days prior to the expiration of such insurance policy.
7.28 Mortgaged Property. Borrower shall use its best efforts to sell the
Mortgaged Property, provided that any such sale must be for an amount (net of
all closing costs) equal to at least Three Hundred Thousand Dollars
($300,000.00). All proceeds of such sale shall be paid to Bank and applied to
the outstanding balance of the Line or any other Bank Indebtedness. In the event
the Mortgaged Property is not sold in the manner described above on or before
June 10, 1997, Bank will be authorized to record the Mortgaged Property
documents delivered pursuant to Section 5.2 above and Borrower will, on or
before such date, provide Bank with a title insurance policy insuring the Bank's
first priority mortgage lien against the Mortgaged Property in an amount and
issued by a title insurance company acceptable to Bank and such other documents
and information as Bank may reasonably require in connection therewith. Upon
request of Bank from time to time, Borrower shall provide Bank with a status
report regarding Borrower's efforts to sell the Mortgaged Property.
7.29 Books and Records. On or before January 1, 1998, Borrower shall cause
the books and records related to its Flow Components operation, which books and
records shall initially be located at 5301 Polk Street, Houston, Texas, to be
maintained at Borrower's principal office in Orlando, Florida.
7.30 Year End. Borrower shall not change its fiscal year end without
Bank's prior written consent.
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7.31 Specified Tax Refund. Immediately upon completion of Borrower's
federal income tax return for Borrower's fiscal year ended December 31, 1996,
Borrower shall deliver to Bank a copy of such return certified to be true and
complete by Borrower's chief financial officer, together with four (4) fully
executed and completed originals of the Assignment of Tax Refund in the form
attached hereto as Schedule 7.31. In addition, Borrower shall deliver to Bank
all other documentation and information required by Bank in order to insure that
the payment of the Specified Tax Refund is made directly to Bank. Bank is
authorized to deliver such Assignment of Tax Refund and all such other documents
to any governmental agency necessary to insure that the Specified Tax Refund is
paid directly to Bank.
8. FINANCIAL COVENANTS.
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 of not less than (i)
Zero Dollars ($0) for the three (3) month period ending March 31, 1997, (ii)
Five Hundred Eighteen Thousand Dollars ($518,000.00) for the six (6) month
period ending June 30, 1997, (iii) Eight Hundred Fifty Thousand Dollars
($850,000.00) for the nine (9) month period ending September 30, 1997, (iv) One
Million Two Hundred Thousand Dollars ($1,200,000.00) for the twelve (12) month
period ending December 31, 1997, (v) Five Hundred Thousand Dollars ($500,000.00)
for the three (3) month period ending March 31, 1998, (vi) One Million Dollars
($1,000,000.00) for the six (6) month period ending June 30, 1998, (vii) One
Million Five Hundred Thousand Dollars ($1,500,000.00) for the nine (9) month
period ending September 30, 1998, (viii) Two Million Dollars ($2,000,000.00) for
the twelve (12) month period ending December 31, 1998, (ix) Five Hundred
Thousand Dollars ($500,000.00) for the three (3) month period ending March 31,
1999, (x) One Million Dollars ($1,000,000.00) for the six (6) month period
ending June 30, 1999, (xi) One Million Five Hundred Thousand Dollars
($1,500,000.00) for the nine (9) month period ending September 30, 1999, (xii)
Two Million Dollars ($2,000,000.00) for the twelve (12) month period ending
December 31, 1999, (xiii) Five Hundred Thousand Dollars ($500,000.00) for the
three (3) month period ending March 31, 2000, (xiv) One Million Dollars
($1,000,000.00) for the six (6) month period ending June 30, 2000, (xv) One
Million Five Hundred Thousand Dollars ($1,500,000.00) for the nine (9) month
period ending September 30, 2000, and (xvi) Two Million Dollars ($2,000,000.00)
for the twelve (12) month period ending December 31, 2000. In addition,
commencing with Borrower's fiscal quarter ending June 30, 1997, Borrower shall
have Net Income of not less than One Hundred Fifty Thousand Dollars
($150,000.00) for each of its fiscal quarters.
(b) Net Loss. Borrower's Net Loss for the twelve (12) month period
ended December 31, 1996 shall not be greater than Two Million Nine Hundred
Eleven Thousand Dollars ($2,911,000.00).
(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 (i) Eight Million Three Hundred Fifty-Three Thousand Dollars
($8,353,000.00) as of December 31, 1996, (ii) Eight Million Three Hundred
Fifty-Three Thousand Dollars ($8,353,000.00) as of
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March 31, 1997, (iii) Nine Million Two Hundred Fifty-Three Thousand Dollars
($9,253,000.00) as of June 30, 1997, (iv) Nine Million Five Hundred Eighty-Five
Thousand Dollars ($9,585,000.00) as of September 30, 1997, (v) Ten Million Three
Hundred Seventeen Thousand Dollars ($10,317,000.00) as of December 31, 1997,
(vi) Eleven Million Eight Thousand Dollars ($11,008,000.00) as of March 31,
1998, (vii) Eleven Million Six Hundred Ninety-Nine Thousand Dollars
($11,699,000.00) as of June 30, 1998, (viii) Twelve Million Three Hundred Ninety
Thousand Dollars ($12,390,000.00) as of September 30, 1998, (ix) Thirteen
Million Eighty-One Thousand Dollars ($13,081,000.00) as of December 31, 1998,
(x) Thirteen Million Seven Hundred Seventy-Two Thousand Dollars ($13,772,000.00)
as of March 31, 1999, (xi) Fourteen Million Four Hundred Sixty-Three Thousand
Dollars ($14,463,000.00) as of June 30, 1999, (xii) Fifteen Million One Hundred
Fifty-Four Thousand Dollars ($15,154,000.00) as of September 30, 1999, (xiii)
Fifteen Million Eight Hundred Forty-Five Thousand Dollars ($15,845,000.00) as of
December 31, 1999, (xiv) Sixteen Million Five Hundred Thirty-Six Thousand
Dollars ($16,536,000.00) as of March 31, 2000, (xv) Seventeen Million Two
Hundred Twenty-Seven Thousand Dollars ($17,227,000.00) as of June 30, 2000,
(xvi) Seventeen Million Nine Hundred Eighteen Thousand Dollars ($17,918,000.00)
as of September 30, 2000, and (xvii) Eighteen Million Six Hundred Nine Thousand
Dollars ($18,609,000.00) as of December 31, 2000.
(e) Capital Expenditures. Borrower shall not cause, suffer or permit
to exist Capital Expenditures in excess of (i) Five Million Three Hundred
Sixty-Seven Thousand Dollars ($5,367,000.00) for Borrower's fiscal year ended
December 31, 1996, and (ii) 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 fiscal quarter of Borrower commencing with
Borrower's fiscal quarter ending March 31, 1997 through and including Borrower's
fiscal quarter ending December 31, 1997, (iii) 1.0 to 1.0 as of the end of each
fiscal quarter of Borrower commencing with Borrower's fiscal quarter ending
March 31, 1998 through and including Borrower's fiscal quarter ending December
31, 1998, (iv) 1.10 to 1.0 as of the end of each fiscal quarter of Borrower
commencing with Borrower's fiscal quarter ending March 31, 1999 through and
including Borrower's fiscal quarter ending December 31, 1999, and (v) 1.20 to
1.0 as of the end of each fiscal quarter of Borrower commencing with Borrower's
fiscal quarter ending March 31, 2000 through and including Borrower's fiscal
quarter 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) 5.12 to 1.0 as of June 30, 1997, (iv) 4.85 to 1.0 as of September
30, 1997, (v) 4.33 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
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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) 1.0 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.
8.2 Changes to Financial Covenants. The financial covenants described in
Section 8.1 above may be reset by Bank based on and to fairly reflect (a) the
effect of any capital infusion into Borrower or additional Subordinated
Indebtedness loaned to Borrower after the date hereof, and/or (b) any
improvement in Borrower's financial condition, as shown on Borrower's audited
annual financial statements delivered to Bank for Borrower's fiscal year ended
December 31, 1996, over Borrower's financial condition as shown on Borrower's
internally prepared financial statements (draft number 2) for Borrower's fiscal
year ended December 31, 1996, which were delivered to Bank on February 19, 1997.
9. ACCOUNTING RECORDS, REPORTS AND FINANCIAL STATEMENTS. Borrower
will maintain books of record and account in which full, correct and current
entries in accordance with GAAP will be made of all of Borrower's dealings,
business and affairs, and Borrower will deliver or cause to be delivered to Bank
the following:
9.1 Annual Statements. As soon as available and in any event within one
hundred ten (110) days after the end of each fiscal year of Borrower:
(a) the audited income and retained earnings statements of Borrower
for such fiscal year,
(b) the audited balance sheet of Borrower as at the end of such
fiscal year, and
(c) the audited statement of cash flows of Borrower for such fiscal
year,
setting forth in comparative form the corresponding figures as at the end of the
previous fiscal year, all in reasonable detail, including all supporting
schedules and comments. The foregoing statements and balance sheets shall be
prepared in accordance with GAAP and shall be audited by independent certified
public accountants of recognized standing acceptable to Bank in the reasonable
exercise of its discretion (provided that Bank confirms that BDO Seidman, LLP,
Borrower's current independent
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certified public accountants, are currently acceptable to Bank) with respect to
which such accountants shall deliver their unqualified opinion and accountant
prepared management letter. As soon as available and in any event within eighty
(80) days after the end of each fiscal year of Borrower, Borrower shall deliver
to Bank the foregoing statements in draft form.
9.2 Projections and Cash Flow. As soon as available and in any event
within sixty (60) days prior to the end of each fiscal year of Borrower,
projections and cash flows on a month-by-month basis for the next succeeding
twelve (12) months, prepared or reviewed by the chief financial officer of
Borrower. Borrower has furnished to Bank initial projections dated as of the
date hereof and attached hereto as Schedule 9.2 containing the information
required by this Section 9.2. Borrower represents and covenants that (a) the
initial projections attached hereto have been and all projections required by
this Section 9.2 shall be prepared by the chief financial officer of Borrower
and represent, and in the future shall represent, the best available good faith
estimate of Borrower regarding the course of Borrower's business for the periods
covered thereby; (b) the assumptions set forth in the initial projections are
and the assumptions set forth in the future projections delivered hereafter
shall be reasonable and realistic based on then current economic conditions; (c)
Borrower knows of no reason why Borrower should not be able to achieve the
performance levels set forth in the initial projections and Borrower shall have
no knowledge at the time of delivery of future projections of any reason why
Borrower shall not be able to meet the performance levels set forth in said
projections; and (d) Borrower has or has commitments for sufficient capital as
may be required for its ongoing business and to pay its existing and anticipated
debts as they mature.
9.3 Monthly Statements. As soon as available and in any event within
forty-five (45) days after the end of each calendar month prior to January 1998
and within thirty (30) days after the end of each calendar month commencing with
January 1998:
(a) the income and retained earnings statements of Borrower for such
month and for the portion of the fiscal year then ended,
(b) the balance sheet of Borrower as of the end of such month and
for the portion of the fiscal year then ended, and
(c) the statement of cash flows of Borrower for such month and for
the portion of the fiscal year then ended (in a form acceptable to Bank),
setting forth in comparative form the corresponding figures as at the end of the
corresponding month of the previous fiscal year (if applicable) and the
projected figures based upon the projections required under Section 9.2, all in
reasonable detail, subject to year-end adjustments, and certified by the chief
financial officer of Borrower to be accurate and to have been prepared in
accordance with GAAP (subject to year-end adjustments and the absence of full
footnote disclosures).
9.4 10-K; 10-Q Statements. Copies of Borrower's 10-K and 10-Q statements
promptly upon the filing of such statements with the Securities and Exchange
Commission but in any event within five (5) days thereafter.
9.5 Accounts Receivable and Accounts Payable Statements. As soon as
available and in any event within fifteen (15) days after the end of each
calendar month, a schedule of Borrower's accounts receivable and accounts
payable, identifying all Eligible Receivables, and the aging thereof
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by open invoice of each customer of Borrower, all certified as to accuracy by
the chief financial officer of Borrower. Borrower will also provide Bank with
all information reasonably requested by Bank with respect to any account debtor.
9.6 Accounts Receivable Borrowing Base Information and Related Documents.
At least once every calendar week and, if requested by Bank, as a condition of
each advance under the Line, and otherwise as requested by Bank, an accounts
receivable assignment and a sales, collection and credit report in the form of
Exhibit "B" attached hereto, a copy of Borrower's sales, collection and credit
journal entries for the week then ended, together with such additional
information and details as may be requested by Bank, all certified as to
accuracy by (a) the chief financial officer or corporate controller of Borrower
with respect to those delivered monthly or as otherwise specifically requested
by Bank, and (b) any Person identified in writing by Borrower to Bank as being
authorized to do so with respect to all other such reports.
9.7 Inventory Borrowing Base Information and Related Documents. On or
before the fifteenth (15th) day after the end of each calendar month and, if
required by Bank, as a condition of each advance under the Line, and otherwise
as requested by Bank, an inventory certification in the form of Exhibit "C"
attached hereto, together with such additional information and details as may be
requested by Bank, including without limitation identification of all Eligible
Inventory, all certified as to accuracy by (a) the chief financial officer or
corporate controller of Borrower with respect to those delivered monthly or as
otherwise specifically requested by Bank, and (b) any Person identified in
writing by Borrower to Bank as being authorized to do so with respect to all
other such reports.
9.8 Audit Reports. Promptly upon receipt thereof, one copy of each other
report submitted to Borrower, by independent accountants, including management
letters, "comment" letters, in connection with any annual, interim or special
audit report made by them of the books of Borrower.
9.9 Reports to Governmental Agencies and Other Creditors. With reasonable
promptness, copies of all such financial reports, statements and returns which
Borrower shall file with any federal or state department, commission, board,
bureau, agency or instrumentality and any report or statement delivered by
Borrower to any supplier or other creditor in connection with any payment
restructuring.
9.10 Requested Information. With reasonable promptness, all such other
data and information in respect of the condition, operation and affairs of
Borrower as Bank may reasonably request from time to time.
9.11 Compliance Certificates. Within the periods provided in Sections 9.1
and 9.3 above, a certificate of the chief financial officer or corporate
controller of Borrower: (a) stating that Borrower has observed, performed and
complied with each and every undertaking contained herein (or, as applicable,
the nature of any non-compliance and the action taken or proposed to be taken by
Borrower with respect thereto); (b) setting forth the information and
computations (in sufficient detail) required in order to establish whether
Borrower is operating in compliance with the financial covenants in Section 8 of
this Agreement; and (c) certifying that as of the date of such certification,
there does not exist any Event of Default or any occurrence or state of affairs
which with the giving of notice, passage of time or both would constitute an
Event of Default (or, if any Event of Default
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or incipient Event of Default exists, the nature thereof and the action being
taken or proposed to be taken by Borrower with respect thereto). Such
certificate will be in the form of Exhibit "D" attached hereto.
9.12 Accountant's Certificate. Within the period provided in Section 9.1,
a report of the independent public accountants who render an opinion with
respect to the financial statements referred to therein, stating that they have
reviewed the terms of this Agreement and that in making the examinations
necessary to their certification mentioned in Section 9.1, they have reviewed
the accounts and condition of Borrower during the accounting period covered by
their certificate and that such review did not disclose the existence of any
condition or event which constitutes an Event of Default or would, upon giving
notice or passage of time or both, constitute an Event of Default (or if such
conditions or events existed, describing them).
9.13 Guarantor's Annual Statements. On or before April 15 of each year,
financial statements of each Guarantor, in a form reasonably satisfactory to
Bank, and upon filing thereof, a copy of the annual federal tax returns
(including all applicable schedules) of each Guarantor, certified by the subject
Guarantor to be accurate and complete.
10. ENVIRONMENTAL REPRESENTATIONS AND COVENANTS.
10.1 Representations. Borrower represents to Bank as follows: (a) the
Environmental Affiliates are in compliance in all material respects with all
Environmental Requirements and Borrower has no knowledge of any circumstances
which may prevent or interfere with such compliance in the future; (b) the
Environmental Affiliates have all licenses, permits, approvals and
authorizations required under applicable Environmental Requirements unless the
failure to have the same would not have a material adverse effect on the
business operations, Collateral or financial condition of Borrower; (c) there
are no pending or threatened claims against any of the Environmental Affiliates
or any of their assets related to the failure to comply with any Environmental
Requirements, or any facts or circumstances which could give rise to a material
claim; (d) no facility or property now or previously owned, operated or leased
by any Environmental Affiliate is an Environmental Cleanup Site; (e) no
Environmental Affiliate has treated, stored, transported, handled or disposed of
Special Materials at or adjacent to any Environmental Cleanup Site except in
compliance with all applicable Environmental Requirements; (f) there are no
liens or claims for cost reimbursement outstanding or threatened against any
Environmental Affiliate or any of their assets, or any facts or circumstances
which could give rise to such a lien or claim; and (g) there are no facts or
circumstances which, under the provisions of any Environmental Requirements,
could restrict the use, occupancy or transferability of any of the Collateral or
any of the facilities owned, leased or operated by any Environmental Affiliate.
10.2 Real Property. Borrower represents and warrants to Bank that there
are no Special Materials presently located on or, to the best of its knowledge,
near any real property owned, leased or operated by any Environmental Affiliate
(collectively, "Real Property") except for Special Materials which are and have
at all times been treated, stored, transported, handled and disposed of in
compliance with all Environmental Requirements. Borrower represents to Bank that
the Real Property is not now being used nor, to the best of its knowledge, has
it ever been used in the past for activities involving Special Materials,
including but not limited to the use, generation, collection, storage,
treatment, or disposal of any Special Materials except for Special Materials
which are and have at all times been treated, stored, transported, handled and
disposed of in compliance with all
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Environmental Requirements. Without limiting the generality of the foregoing,
the Real Property is not being used nor, to the best of Borrower's knowledge,
has it ever been used in the past for a landfill, surface impoundment or other
area for the treatment, storage or disposal of solid waste (including solid
waste such as sludge).
10.3 Covenant Regarding Compliance. Borrower shall take or cause all
Environmental Affiliates to take, at Borrower's and such Environmental
Affiliate's sole expense, such actions as may be necessary to comply with all
Environmental Requirements, as hereinafter defined. If any Environmental
Affiliate shall fail to take such action, Bank may make advances or payments
towards performance or satisfaction of the same but shall be under no obligation
to do so. All sums so advanced or paid, including all sums advanced or paid by
Bank in connection with any judicial or administrative investigation or
proceeding relating thereto, including, without limitation, attorney's fees,
fines, or other penalty payments, shall be at once repayable by Borrower and all
sums so advanced or paid shall become a part of the Bank Indebtedness.
The Environmental Affiliates will maintain all licenses, permits,
approvals and authorizations required under applicable Environmental
Requirements. In connection with off-site treatment, storage, handling,
transportation or disposal of Special Materials, the Environmental Affiliates
will conduct such activities only at facilities and with carriers who operate in
compliance with all Environmental Requirements and will obtain certificates of
compliance or disposal from all contractors retained in connection with such
activities.
10.4 Notices. In the event Borrower becomes aware of any past, present or
future facts or circumstances which have given rise or could give rise to a
claim against any Environmental Affiliate related to a failure to comply with
any Environmental Requirements, Borrower will promptly give Bank notice thereof,
together with a written statement of an officer of Borrower setting forth the
known details thereof and the action with respect thereto taken or proposed to
be taken by the Environmental Affiliates.
10.5 Indemnity. Borrower agrees to indemnify, defend and hold harmless
Bank, its parents, subsidiaries, successors and assigns, and any officer,
director, shareholder, employee, Affiliate or agent of Bank, for all loss,
liability, damage, cost and expenses, including, without limitation, attorney's
fees and disbursements (including the reasonable allocated cost of in-house
counsel and staff) arising from or related to: (a) the release of any Special
Materials at any facility at any time owned, leased or operated by Borrower or
any Environmental Affiliates, (b) the release of any Special Materials treated,
stored, transported, handled, generated or disposed of by or on behalf of
Borrower or any Environmental Affiliates, at any third party owned site; (c) any
claim against Borrower or any Environmental Affiliate that they have failed to
comply with all Environmental Requirements; and (d) the breach by Borrower of
any representation or covenant in this Section 10; provided that this indemnity
shall not protect any Person from its own willful misconduct.
10.6 Testing. Bank shall have the right from time to time to designate
such persons ("Environmental Consultants") as Bank may select to visit, inspect,
examine and test all properties owned, leased or operated by and all products
and wastes generated, treated, stored, transported, handled or disposed of by or
on behalf of any Environmental Affiliate, for the purpose of investigating
compliance with Environmental Requirements, any actual or potential claims
related thereto, and any condition which could result in potential liability,
cost or expenses to Bank.
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Borrower will permit, and will cause all Environmental Affiliates to permit,
such Environmental Consultants to have access to all of such properties,
products and wastes and all books, records and reports related to compliance by
the Environmental Affiliates with all Environmental Requirements. Borrower will
supply, and will cause all Environmental Affiliates to supply, Bank or the
Environmental Consultants with all information, records, correspondence, audits,
reviews and materials related to compliance by the Environmental Affiliates with
all Environmental Requirements and will make available to Bank or the
Environmental Consultants appropriate personnel employed by or consultants
retained by the Environmental Affiliates having knowledge of such matters.
Provided that an Event of Default has occurred and is continuing or
Bank has a good faith belief that an Environmental Affiliate has failed to
comply with any Environmental Requirements, the cost of such visits,
inspections, examination and tests shall be borne by the Borrower and, if in any
such event, Bank pays such costs, such sums shall be at once repayable by
Borrower and all sums so advanced or paid by Bank shall become part of the Bank
Indebtedness. Notwithstanding the foregoing, Bank shall have no obligation to
perform any tests, examinations or inspections or to monitor the Environmental
Affiliates' compliance with all Environmental Requirements.
10.7 Survival. The representations and covenants of Borrower contained in
this Section 10, including without limitation the indemnification obligation of
Borrower, shall survive the occurrence of any event whatsoever, including the
payment of the Bank Indebtedness or any investigation by or knowledge of Bank.
10.8 Definitions. For purposes of the foregoing:
(a) "Environmental Affiliate" means Borrower and any other Person
for whom Borrower at any time has any liability (contingent or otherwise) with
respect to any claims arising out of the failure of Borrower or such person to
comply with all applicable Environmental Requirements.
(b) "Environmental Cleanup Site" shall mean any location which is
listed or proposed for listing on the National Priorities List, on CERCLIS or on
any similar state list of sites requiring investigation or cleanup, or which is
the subject of any pending or threatened action, suit, proceeding or
investigation related to or arising from any alleged violation of any
Environmental Requirements.
(c) "Environmental Requirements" means any and all applicable
federal, state or local laws, statutes, ordinances, regulations or standards,
administrative or court orders or decrees, common law doctrines or private
agreements, relating to (i) pollution or protection of the environment and
natural resources, (ii) exposure of employees or other persons to Special
Materials, (iii) protection of the public health and welfare from the effects of
Special Materials and their products, by-products, wastes, emissions, discharges
or releases, and (iv) regulation, licensing, approval or authorization of the
manufacture, generation, use, formulation, packaging, labeling, transporting,
distributing, handling, storing or disposing of any Special Materials.
(d) "Special Materials" means any and all materials which, under
Environmental Requirements, require special handling in use, generation,
collection, storage, treatment or disposal, or payment of costs associated with
responding to the lawful directives of any court or agency of
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competent jurisdiction. Special Materials shall include, without limitation: (i)
any flammable substance, explosive, radioactive material, hazardous material,
hazardous waste, toxic substance, solid waste, pollutant, contaminant or any
related material, raw material, substance, product or by-product of any
substance specified in or regulated or otherwise affected by any Environmental
Requirements (including but not limited to any "hazardous substance" as defined
in the Comprehensive Environmental Response, Compensation and Liability Act of
1980 as amended or any similar state or local law), (ii) any toxic chemical or
other toxic substance from or related to industrial, commercial or institutional
activities, and (iii) asbestos, gasoline, diesel fuel, motor oil, waste and used
oil, heating oil and other petroleum products or compounds, polychlorinated
biphenyls, radon, urea formaldehyde and lead-containing materials.
11. CONDITIONS OF CLOSING. The obligation of Bank to make available the Line is
subject to the performance by Borrower of all of its agreements to be performed
hereunder and to the following further conditions (any of which may be waived by
Bank):
11.1 Loan Documents. Borrower and all other required persons and entities
will have executed and delivered to Bank the Loan Documents.
11.2 Representations and Warranties. All representations and warranties of
Borrower set forth in the Loan Documents will be true at and as of the date
hereof.
11.3 No Default. No condition or event shall exist which would constitute
an Event of Default hereunder (or would, upon the giving of notice or the
passage of time or both, constitute such an Event of Default).
11.4 Proceedings and Documents. All proceedings taken by Borrower in
connection with the transactions contemplated by this Agreement and all
documents incident to such transactions shall be satisfactory in form and
substance to Bank and Bank's counsel, and Bank shall have received all documents
or other evidence which it reasonably may request in connection with such
proceedings and transactions. Borrower shall have delivered to Bank a
certificate, in form and substance satisfactory to Bank, dated the date hereof
and signed on behalf of Borrower by an officer of Borrower, certifying (a) true
copies of the Articles of Incorporation and bylaws of Borrower in effect on such
date, (b) true copies of all corporate actions taken by Borrower relative to the
Loan Documents, and (c) the names, true signatures and incumbency of the
officers of Borrower authorized to execute and deliver this Agreement and the
other Loan Documents. Bank may conclusively rely on such certificate unless and
until a later certificate revising the prior certificate has been received by
Bank.
11.5 Landlord's or Warehouseman's Release and Waiver Agreements. Bank
shall have received a landlord's or warehouseman's release and waiver agreement,
satisfactory in form and substance to Bank, from each landlord and warehouseman
for each location leased by Borrower or at which Borrower warehouses inventory.
11.6 Delivery of Other Documents. The following documents shall have been
delivered by or on behalf of Borrower to Bank:
(a) Good Standing and Tax Lien Certificates. A good standing
certificate of the Department of State of Delaware certifying to the good
standing and corporate status of
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Borrower, good standing/foreign qualification certificates from all other
jurisdictions in which Borrower is required to be qualified to do business, and
tax lien certificates for Borrower from each jurisdiction in which Borrower is
required to be qualified to do business.
(b) Authorization Documents. Evidence of authorization of Borrower's
execution and full performance of this Agreement, the Loan Documents and all
other documents and actions required hereunder.
(c) Insurance. Evidence of the insurance coverage required under
Section 7.12.
(d) Opinion of Counsel. An opinion of counsel for Borrower in form
and content satisfactory to Bank.
(e) Life Insurance. Evidence of the life insurance coverage and the
assignment thereof as required under Section 5.3.
(f) Lien Search. Copies of record searches (including UCC searches
and judgments, suits, tax and other lien searches) confirming that Bank has or
will receive a first priority security interest in the Collateral, except as
otherwise provided in this Agreement, acceptable to Bank.
(g) No Material Adverse Change. Evidence satisfactory to Bank that
no material adverse change has occurred with respect to Borrower since December
31, 1996.
(h) Subordination Agreement. Subordination Agreements in form and
content satisfactory to Bank from each holder of the Subordinated Indebtedness.
(i) Financial Reporting. All 10-K, 10-Q and other reports filed or
required to be filed by Borrower with the Securities and Exchange Commission
through the date hereof.
(j) Personal Financial Statements. Personal financial statements for
each Guarantor in form and content satisfactory to Bank.
(k) Environmental. Evidence satisfactory to Bank that Borrower is in
compliance in all material respects with all applicable federal, state and local
environmental laws, rules and regulations and that no environmental hazards
exist upon any property owned or operated by Borrower.
(l) Assignment of Federal Tax Refund. All documents required by
Lender in connection with the assignment to Lender of Borrower's Federal income
tax refund and payment thereof directly to Bank for Borrower's fiscal year
ending December 31, 1996.
(m) Other Documents. Such other documents as may be required to be
submitted to Bank by the terms hereof or of any Loan Document.
11.7 Lockbox/Cash Collateral Account; Operating Account. Establishment
with Bank of the lockbox and cash collateral account referred to in Section 5.7
above and Borrower's main operating account.
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11.8 Minimum Availability. There shall be a minimum additional
availability for advances under the Line (including the Permitted Out-of-Formula
Advance) of One Million Two Hundred Fifty Thousand Dollars ($1,250,000.00) after
repayment of the line of credit and term loan extended by SunTrust Bank, Central
Florida, National Association and SouthTrust Bank of Alabama, National
Association, payment of all payables (including all trade and supplier payables)
in the ordinary course of business then due without delay, default or any
requested extensions, and payment of all closing costs and expenses and all
other advances hereunder.
11.9 Non-Waiver of Rights. By completing the closing hereunder, or by
making advances hereunder, Bank does not thereby waive a breach of any warranty
or representation made by Borrower or either Guarantor hereunder or any
agreement, document or instrument delivered to Bank or otherwise referred to
herein, and any claims and rights of Bank resulting from any breach or
misrepresentation by Borrower or either Guarantor are specifically reserved by
Bank.
12. CERTAIN CONDITIONS TO SUBSEQUENT ADVANCES. Subsequent advances shall be
conditioned upon the following conditions and each request by Borrower for an
advance shall constitute a representation by Borrower to Bank that each
condition has been met or satisfied:
12.1 Representations and Warranties. All representations and warranties of
Borrower contained herein or in the Loan Documents shall be true at and as of
the date of such advance as if made on such date, and each request for an
advance shall constitute reaffirmation by Borrower that such representations and
warranties are then true, or to the extent any such representations or
warranties are not true as of the date of such advance, the events which render
such representations and warranties untrue shall have been disclosed to Bank in
writing prior to such advance being made.
12.2 No Default. No condition or event shall exist at or as of the date of
such advance which would constitute an Event of Default hereunder (or would,
upon the giving of notice or the passage of time or both, constitute such an
Event of Default).
12.3 Other Requirements. Bank shall have received all certificates,
authorizations, affidavits, schedules and other documents which are provided for
hereunder or under the Loan Documents, or which Bank may reasonably request.
13. DEFAULT AND REMEDIES.
13.1 Events of Default. The occurrence of any one or more of the following
events shall constitute an Event or Events of Default hereunder:
(a) The failure of Borrower to pay any amount of principal or
interest on the Line Note, or any fee or other sums payable hereunder, or any
other Bank Indebtedness on the date on which such payment is due, whether on
demand, at the stated maturity or due date thereof, or by reason of any
requirement for the prepayment thereof, by acceleration or otherwise;
(b) The failure of Borrower to duly perform or observe any other
obligation, covenant or agreement on its part contained herein or in any other
Loan Document not otherwise specifically constituting an Event of Default under
this Section 13.1 and such failure continues unremedied for a period of ten (10)
days after the earlier of (i) notice from Bank to Borrower of the existence of
such failure, or (ii) any officer of Borrower knows or should have known of the
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existence of such failure, provided that, in the event such failure is incapable
of remedy or consists of a default of the covenant in Section 7.31 or any of the
financial covenants in Section 8.1 above, or was willfully caused or permitted
by Borrower, Borrower shall not be entitled to any notice or grace hereunder;
(c) The failure of Borrower to pay any Indebtedness for borrowed
money due to any third Person with an outstanding balance in excess of Fifty
Thousand Dollars ($50,000.00) individually or in the aggregate or the existence
of any other event of default under any loan, security agreement, mortgage or
other agreement pertaining thereto binding Borrower after the expiration of any
notice and/or grace periods permitted in such documents;
(d) The failure of Borrower to pay or perform any other obligation
to Bank under any other agreement or note or otherwise arising, whether or not
related to this Agreement, after the expiration of any notice and/or grace
periods permitted in such documents;
(e) The adjudication of Borrower or either Guarantor as a bankrupt
or insolvent, or the entry of an Order for Relief against Borrower or either
Guarantor or the entry of an order appointing a receiver or trustee for Borrower
or either Guarantor of any of their property or approving a petition seeking
reorganization or other similar relief under the bankruptcy or other similar
laws of the United States or any state or any other competent jurisdiction;
(f) A proceeding under any bankruptcy, reorganization, arrangement
of debt, insolvency, readjustment of debt or receivership law is filed by or
(unless dismissed within forty-five (45) days after the filing thereof, provided
that Bank shall have no obligation to make any advances under this Agreement
during such forty-five (45) day period) against Borrower or either Guarantor
makes an assignment for the benefit of creditors, or Borrower or either
Guarantor takes any action to authorize any of the foregoing;
(g) The suspension of the operation of any substantial portion of
Borrower's present business for a period in excess of sixty (60) consecutive
days, or Borrower becoming unable to meet its debts as they mature, or the
admission in writing by Borrower to such effect, or Borrower calling any meeting
of all or any material portion of its creditors for the purpose of debt
restructure;
(h) All or any part of the Collateral or the assets of Borrower
consisting of (i) accounts receivable or inventory, or (ii) other than accounts
receivable or inventory and with a fair market value in excess of Fifty Thousand
Dollars ($50,000.00) are attached, seized, subjected to a writ or distress
warrant, or levied upon, or come within the possession or control of any
receiver, trustee, custodian or assignee for the benefit of creditors;
(i) The entry of a final judgment for the payment of money against
Borrower in an uninsured amount in excess of Fifty Thousand Dollars ($50,000.00)
individually or in the aggregate which, within twenty (20) days after such
entry, shall not have been discharged or execution thereof stayed pending appeal
or shall not have been discharged within five (5) days after the expiration of
any such stay;
(j) Any representation or warranty of Borrower in any of the Loan
Documents is discovered to be untrue in any material respect or any statement,
certificate or data furnished by
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Borrower pursuant hereto is discovered to be untrue in any material respect as
of the date as of which the facts therein set forth are stated or certified;
(k) Borrower voluntarily or involuntarily dissolves or is dissolved,
terminates or is terminated or both Guarantors die;
(l) Either Guarantor dies, unless Borrower shall have, within ninety
(90) days after such event, (i) replaced such deceased Guarantor with a
management person acceptable to Bank in its reasonable discretion, and (ii)
delivered evidence satisfactory to Bank that the estate of such deceased
Guarantor has fully assumed the obligations of such Guarantor under the Surety
Agreement;
(m) Borrower is enjoined, restrained, or in any way prevented by the
order of any court or any administrative or regulatory agency, the effect of
which order restricts Borrower from conducting all or any material part of its
business;
(n) A material and adverse change occurs in Borrower's operations,
management or financial condition or in the value of the Collateral;
(o) The Collateral or the prospects of the payment of the Bank
Indebtedness is jeopardized or impaired;
(p) Any material uninsured damage to, or loss, theft, or destruction
of, any of the Collateral occurs;
(q) Any strike, lockout, labor dispute, embargo, condemnation, act
of God or public enemy, or other casualty loss occurs resulting in the cessation
or substantial curtailment of production or other revenue producing activities
at any facility of Borrower for more than sixty (60) consecutive days;
(r) The loss, suspension, revocation or failure to renew any license
or permit now held or hereafter acquired by Borrower, which loss, suspension,
revocation or failure to renew would likely have a material adverse effect on
the business profits, assets or financial condition of Borrower;
(s) Any projection delivered to Bank pursuant hereto indicates that
an Event of Default will occur;
(t) Any breach by Borrower or any creditor of its obligations under
any subordination agreement now or hereafter executed in favor of Bank;
(u) The validity or enforceability of this Agreement, or any of the
Loan Documents, is contested by Borrower; or Borrower or either Guarantor denies
that it has any or any further liability or obligation hereunder or thereunder;
(v) Any draw is made on any letter of credit issued by any Person
(other than Bank) for the account of Borrower;
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(w) The occurrence of a default under any of the Subordinated
Indebtedness which has not been cured or waived; or
(x) A Change in Control shall have occurred.
13.2 Remedies. At the option of Bank, upon the occurrence and during the
continuance of an Event of Default:
(a) The entire unpaid principal of the Line, all other Bank
Indebtedness, or any part thereof, all interest accrued thereon, all fees due
hereunder and all other obligations of Borrower to Bank hereunder or under any
other agreement, note or otherwise arising will become immediately due and
payable without any further demand or notice;
(b) The Line will immediately terminate and Borrower will receive no
further extensions of credit thereunder;
(c) Bank may increase the interest rate on the Line to the
applicable default rate set forth herein, without notice;
(d) Bank may reduce availability for advances under the formula set
forth in Section 2.1(a) or require additional reserves without notice;
(e) Bank may enter the premises occupied by Borrower and take
possession of the Collateral and any records relating thereto; and/or
(f) Bank may exercise each and every right and remedy granted to it
under the Loan Documents, under the Uniform Commercial Code and under any other
applicable law or at equity.
If an Event of Default occurs under Section 13.1(e) or (f), all Bank
Indebtedness shall become immediately due and payable.
13.3 Sale or Other Disposition of Collateral. The sale, lease or other
disposition of the Collateral, or any part thereof, by Bank after an Event of
Default may be for cash, credit or any combination thereof, and Bank may
purchase all or any part of the Collateral at public or, if permitted by law,
private sale, and in lieu of actual payment of such purchase price, may set-off
the amount of such purchase price against the Bank Indebtedness then owing. Any
sales of the Collateral may be adjourned from time to time with or without
notice. Bank may cause the Collateral to remain on Guarantor's premises or
otherwise or to be removed and stored at premises owned by other persons, at
Borrower's expense, pending sale or other disposition of the Collateral.
Borrower, at Bank's request, shall assemble the Collateral consisting of
inventory and tangible assets and make such assets available to Bank at a place
to be designated by Bank. Bank shall have the right to conduct such sales on
Borrower's premises, at Borrower's expense, or elsewhere, on such occasion or
occasions as Bank may see fit. Any notice required to be given by Bank of a
sale, lease or other disposition or other intended action by Bank with respect
to any of the Collateral which is deposited in the United States mail, postage
prepaid and duly addressed to Borrower at the address specified in Section 14.1
below, at least five (5) business days prior to such proposed action, shall
constitute fair and reasonable notice to Borrower of any such action. The net
proceeds realized by Bank upon
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any such sale or other disposition, after deduction for the expenses of
retaking, holding, storing, transporting, preparing for sale, selling or
otherwise disposing of the Collateral incurred by Bank in connection therewith
and all other costs and expenses related thereto including attorney fees, shall
be applied in such order as Bank, in its sole discretion, elects, toward
satisfaction of the Bank Indebtedness. Bank shall account to Borrower for any
surplus realized upon such sale or other disposition, and Borrower shall remain
liable for any deficiency. The commencement of any action, legal or equitable,
or the rendering of any judgment or decree for any deficiency shall not affect
Bank's security interest in the Collateral. Borrower agrees that Bank has no
obligation to preserve rights to the Collateral against any other parties. Bank
is hereby granted a license or other right to use, during the continuance of an
Event of Default, without charge, Borrower's labels, general intangibles,
intellectual property, equipment, real estate, patents, copyrights, rights of
use of any name, trade secrets, trade names, trademarks, service marks 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
inventory or other Collateral and Borrower's rights under all contracts,
licenses, approvals, permits, leases and franchise agreements shall inure to
Bank's benefit. Bank shall be under no obligation to marshall any assets in
favor of Borrower or any other party or against or in payment of any or all of
the Bank Indebtedness.
13.4 Actions with Respect to Accounts. Borrower hereby irrevocably makes,
constitutes and appoints Bank (and any of Bank's designated officers, employees
or agents) as its true and lawful attorney-in-fact, with full power of
substitution, with power to sign its name and to take any of the following
actions, in its name or the name of Bank, as Bank may determine, without notice
to Borrower and at Borrower's expense:
(a) Verify the validity and amount of or any other matter relating
to the Collateral by mail, telephone, telecopy or otherwise;
(b) Notify all account debtors that Borrower's accounts have been
assigned to Bank and that Bank has a security interest therein;
(c) During the continuance of an Event of Default, direct all
account debtors to make payment of all Borrower's accounts directly to Bank and
forward invoices directly to such account debtors;
(d) Take control in any manner of any cash or non-cash items of
payment or proceeds of such accounts;
(e) During the continuance of an Event of Default, notify the United
States Postal Service to change the address for delivery of mail addressed to
Borrower to such address as Bank may designate;
(f) Have access to any lockbox or postal boxes into which Borrower's
mail is deposited and receive, open and dispose of all mail addressed to
Borrower relating to the Collateral (any sums received pursuant to the exercise
of the rights provided in Sections 13.4 (a) through (f) above may, at Bank's
option, be deposited in the cash collateral account provided for herein);
(g) Take control in any manner of any rejected, returned, stopped in
transit or repossessed goods relating to any accounts;
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(h) During the continuance of an Event of Default, enforce payment
of and collect any accounts, by legal proceedings or otherwise, and for such
purpose Bank may:
(1) Demand payment of any accounts or direct any account
debtors to make payment of accounts directly to Bank;
(2) Receive and collect all monies due or to become due to
Borrower;
(3) Exercise all of Borrower's rights and remedies with
respect to the collection of accounts;
(4) Settle, adjust, compromise, extend, renew, discharge or
release the accounts;
(5) Sell or assign the accounts on such terms, for such amount
and at such times as Bank deems advisable;
(6) Prepare, file and sign Borrower's name or names on any
Proof of Claim or similar document in any proceeding filed under federal or
state bankruptcy, insolvency, reorganization or other similar law as to any
account debtor;
(7) Prepare, file and sign Borrower's name or names on any
Notice of Lien, Claim of Mechanic's Lien, Assignment or Satisfaction of Lien or
Mechanic's Lien or similar document in connection with the Collateral;
(8) Endorse the name of Borrower upon any chattel papers,
documents, instruments, invoices, freight bills, bills of lading or similar
documents or agreements relating to the accounts or goods pertaining thereto or
upon any checks or other media of payment or evidences of a security interest
relating to the Collateral that may come into Bank's possession;
(9) Sign the name of Borrower to verifications of accounts and
notices thereof sent by account debtors to Borrower; or
(10) Take all other actions necessary or desirable to protect
Borrower's or Bank's interest in the accounts.
Borrower ratifies and approves all acts of said attorneys and agree that said
attorneys shall not be liable for any acts of commission or omission, nor for
any error of judgment or mistake of fact or law, except willful misconduct. This
power, being coupled with an interest, is irrevocable. Borrower agrees to assist
Bank in the collection and enforcement of its accounts and not to hinder, delay
or impede Bank in its collection or enforcement of said accounts until the Bank
Indebtedness is paid in full and Bank has no further funding commitment under or
in respect of the Line.
13.5 Set-Off. Without limiting the rights of Bank under applicable law,
Bank has and may exercise a right of set-off, a lien against and a security
interest in all property of Borrower now or at any time in Bank's possession in
any capacity whatsoever, including but not limited to any balance of any
deposit, trust or agency account, or any other bank account with Bank, as
security for all Bank Indebtedness. At any time and from time to time during the
continuance of an Event of
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Default, Bank may without notice or demand, set-off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by Bank to or for the credit of
Borrower against any or all of the Bank Indebtedness.
If any bank account of Borrower with Bank is attached or
otherwise liened or levied upon by any third party, Bank need not await the
running of any applicable grace period hereunder, but Bank shall have and be
deemed to have the immediate right of set-off and may apply the funds or amount
thus set-off against Borrower's obligations to Bank.
13.6 Turnover of Property Held by Bank. Borrower and Guarantor irrevocably
authorize any Affiliate of Bank, during the continuance of an Event of Default,
at the request of Bank and without further notice, to turnover to Bank any
property of Borrower or Guarantor held by such Affiliate, including without
limitation funds and securities held for Borrower's or Guarantor's account and
to debit, for the benefit of the Bank, any deposit account maintained by
Borrower or Guarantor with such Affiliate (even if such deposit account is not
then due or there results a loss or reduction of interest or the imposition of
as penalty in accordance with law applicable to the early withdrawal of time
deposits), in the amount requested by Bank up to the amount of the Bank
Indebtedness, and to pay or transfer such amount or property to Bank for
application to the Bank Indebtedness. The provisions of this Section 13.6 as
they relate to Guarantors shall be limited to Guarantors' maximum liability
under the Surety Agreement.
13.7 Delay or Omission Not Waiver. Neither the failure nor any delay on
the part of Bank to exercise any right, remedy, power or privilege under the
Loan Documents upon the occurrence of any Event of Default or otherwise shall
operate as a waiver thereof or impair any such right, remedy, power or
privilege. No waiver of any Event of Default shall affect any later Event of
Default or shall impair any rights of Bank. No single, partial or full exercise
of any rights, remedies, powers and privileges by Bank shall preclude further or
other exercise thereof. No course of dealing between Bank and Borrower shall
operate as or be deemed to constitute a waiver of Bank's rights under the Loan
Documents or affect the duties or obligations of Borrower.
13.8 Remedies Cumulative; Consents. The rights, remedies, powers and
privileges provided for herein shall not be deemed exclusive, but shall be
cumulative and shall be in addition to all other rights, remedies, powers and
privileges in Bank's favor at law or in equity. Whenever the Bank's consent or
approval is required or permitted, except as otherwise specifically provided for
in this Agreement, such consent or approval shall be at the sole and absolute
discretion of Bank.
13.9 Certain Fees, Costs, Expenses, Expenditures and Indemnification.
Except as otherwise specifically provided for in this Agreement, Borrower agrees
to pay on demand all costs and expenses of Bank relating to Bank's relationship
with Borrower, including without limitation:
(a) all costs and expenses in connection with the preparation,
review, negotiation, execution, delivery and administration of the Loan
Documents, and the other documents to be delivered in connection therewith or
any amendments, extensions and increases to any of the foregoing (including,
without limitation, attorney's fees and expenses, and the cost of appraisals and
reappraisals of Collateral, provided that if no Event of Default shall have
occurred, Borrower shall not be liable for the cost of more than one such
appraisal per year), and the cost of periodic lien searches and tax clearance
certificates, as Bank deems advisable; provided, however Borrower shall not be
obligated to pay Bank's counsel fees incurred through and including the date of
closing
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hereunder in an amount in excess of Twenty-Five Thousand Dollars ($25,000.00)
(exclusive of filing fees and out-of-pocket expenses);
(b) all losses, costs and expenses in connection with the
enforcement, protection and preservation of Bank's rights or remedies under the
Loan Documents, or any other agreement relating to any Bank Indebtedness, or in
connection with legal advice relating to the rights or responsibilities of Bank
(including without limitation court costs, attorney's fees and expenses of
accountants and appraisers); and
(c) any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of the Loan Documents, and
all liabilities to which Bank may become subject as the result of delay in
paying or omission to pay such taxes.
In the event Borrower shall fail to pay taxes, insurance,
assessments, costs or expenses which it is required to pay hereunder, or fails
to keep the Collateral free from security interests or lien (except as expressly
permitted herein), or fails to maintain or repair the Collateral as required
hereby, or otherwise breaches any obligations under the Loan Documents, Bank in
its discretion, may make expenditures for such purposes and the amount so
expended (including attorney's fees and expenses, filing fees and other charges)
shall be payable by Borrower on demand and shall constitute part of the Bank
Indebtedness.
With respect to any amount required to be paid by Borrower under
this Section, in the event Borrower fails to pay such amount on demand, Borrower
shall also pay to Bank interest thereon at the default rate set forth in Section
3.3 for the Line.
Borrower agrees to indemnify and hold harmless, Bank and Bank
officers, directors, shareholders, employees and agents, from and against any
and all claims, liabilities, losses, damages, costs and expenses (whether or not
such person is a party to any litigation), including attorney's fees and costs
and costs of investigation, document production, attendance at depositions or
other discovery with respect to or arising out of this Agreement, the use of any
proceeds advanced hereunder, the transactions contemplated hereunder, or any
claim, demand, action or cause of action being asserted against Borrower or any
of its Affiliates, except to the extent arising out of any such indemnified
Person's willful misconduct.
Borrower's obligations under this Section shall survive termination
of this Agreement and repayment of the Bank Indebtedness.
13.10 Time is of the Essence. Time is of the essence in Borrower's
performance of its obligations under the Loan Documents.
13.11 Acknowledgement of Confession of Judgment Provisions. BORROWER AND
GUARANTORS ACKNOWLEDGE AND AGREE THAT THE LINE NOTE, THE SURETY AGREEMENT AND
THE LOAN DOCUMENTS CONTAIN PROVISIONS WHEREBY BANK MAY ENTER JUDGMENT BY
CONFESSION AGAINST BORROWER OR GUARANTORS, AS APPLICABLE. BEING FULLY AWARE OF
THEIR RIGHTS TO PRIOR NOTICE AND HEARING ON THE QUESTION OF THE VALIDITY OF ANY
CLAIMS THAT MAY BE ASSERTED AGAINST THEM BY BANK UNDER THE LINE NOTE, THE SURETY
AGREEMENT AND LOAN DOCUMENTS, BEFORE JUDGMENT CAN BE ENTERED,
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BORROWER AND GUARANTORS HEREBY WAIVE THESE RIGHTS AND AGREE AND CONSENT TO BANK
ENTERING JUDGMENT AGAINST BORROWER AND GUARANTORS BY CONFESSION. 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 OR GUARANTORS' 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.
14. COMMUNICATIONS AND NOTICES.
14.1 Communications and Notices. All notices, requests and other
communications made or given in connection with the Loan Documents shall be in
writing and, unless receipt is stated herein to be required, shall be deemed to
have been validly given if delivered personally to the individual or division or
department to whose attention notices to a party are to be addressed, or by
private carrier, or registered or certified mail, return receipt requested, or
by telecopy with the original forwarded by first-class mail, in all cases, with
charges prepaid, addressed as follows, until some other address (or individual
or division or department for attention) shall have been designated by notice
given by one party to the other:
To Borrower: Consolidated Stainless, Inc.
1601 East Amelia Street
Orlando, FL 32803
Attention: Ronald J. Adams, President
Telecopier No.: (407) 895-5441
with a copy to: Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel
Citicorp Center
153 E. 53rd Street
New York, NY 10022
Attention: Stephen Weiss, Esquire
Telecopier No.: (212) 223-7161
To Bank: Mellon Bank, N.A.
1735 Market Street, 6th Floor
Philadelphia, PA 19101
Attention: John M. DePledge, Vice President
Telecopier No.: (215) 553-0201
with a copy to: Wolf, Block, Schorr & Solis-Cohen
350 Sentry Parkway, Bldg. 640
Blue Bell, PA 19422
Attention: Bruce R. Lesser, Esquire
Telecopier No.: (610) 238-0374
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15. WAIVERS.
15.1 Waivers. In connection with any proceedings under the Loan Documents,
including without limitation any action by Bank in replevin, foreclosure or
other court process or in connection with any other action related to the Loan
Documents or the transactions contemplated hereunder, Borrower waives:
(a) all errors, defects and imperfections of a procedural nature in
such proceedings;
(b) all benefits under any present or future laws exempting any
property, real or personal, or any part of any proceeds thereof from attachment,
levy or sale under execution, or providing for any stay of execution to be
issued on any judgment recovered under any of the Loan Documents or in any
replevin or foreclosure proceeding, or otherwise providing for any valuation,
appraisal or exemption;
(c) all rights to inquisition on any real estate, which real estate
may be levied upon pursuant to a judgment obtained under any of the Loan
Documents and sold upon any writ of execution issued thereon in whole or in
part, in any order desired by Bank;
(d) presentment for payment, demand, notice of demand, notice of
non-payment, protest and notice of protest of any of the Loan Documents,
including the Line Note;
(e) any requirement for bonds, security or sureties required by
statute, court rule or otherwise;
(f) any demand for possession of Collateral prior to commencement of
any suit; and
(g) all rights to claim or recover attorney's fees and costs in the
event that Borrower is successful in any action to remove, suspend or prevent
the enforcement of a judgment entered by confession, unless such judgment is
removed or suspended or enforcement thereof prevented as a result of a
determination by a court of competent jurisdiction that such judgment was
improperly entered.
15.2 Forbearance. Bank may release, compromise, forbear with respect to,
waive, suspend, extend or renew any of the terms of the Loan Documents, without
notice to Borrower.
15.3 Limitation on Liability. Borrower shall be responsible for and Bank
is hereby released from any claim or liability in connection with:
(a) Safekeeping any Collateral;
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(b) Any loss or damage to any Collateral;
(c) Any diminution in value of the Collateral; or
(d) Any act or default of another Person.
Bank shall only be liable for any act or omission on its part
constituting wilful misconduct. In the event that Bank breaches its required
standard of conduct, Borrower agrees that Bank's liability shall be only for
direct damages suffered and shall not extend to consequential or incidental
damages. In the event Borrower brings suit against Bank in connection with the
transactions contemplated hereunder and Bank is found not to be liable, Borrower
will indemnify and hold Bank harmless from all costs and expenses, including
attorney's fees, incurred by Bank in connection with such suit. This Agreement
is not intended to obligate Bank to take any action with respect to the
Collateral or to incur expenses or perform any obligation or duty of Borrower.
16. SUBMISSION TO JURISDICTION.
16.1 Submission to Jurisdiction. Borrower and Guarantors hereby consent to
the exclusive jurisdiction of any state or federal court located within the
Commonwealth of Pennsylvania, and irrevocably agree that, subject to the Bank's
election, all actions or proceedings relating to the Loan Documents or the
transactions contemplated hereunder shall be litigated in such courts, and
Borrower and Guarantors waive any objection which they may have based on lack of
personal jurisdiction, improper venue or forum non conveniens to the conduct of
any proceeding in any such court and waive personal service of any and all
process upon them, and consent that all such service of process be made by mail
or messenger directed to them at the address set forth in Section 14.1. Nothing
contained in this Section 16.1 shall affect the right of Bank to serve legal
process in any other manner permitted by law or affect the right of Bank to
bring any action or proceeding against Borrower, Guarantors or their property in
the courts of any other jurisdiction.
17. MISCELLANEOUS.
17.1 Brokers. The transaction contemplated hereunder was brought about and
entered into by Bank and Borrower acting as principals and without any brokers,
agents or finders being the effective procuring cause hereof. Borrower
represents to Bank that Borrower has not committed Bank to the payment of any
brokerage fee or commission in connection with this transaction. If any such
claim is made against Bank by any broker, finder or agent or any other Person,
Borrower agrees to indemnify, defend and hold Bank harmless against any such
claim, at Borrower's own cost and expense, including Bank's attorneys' fees.
Borrower further agrees that until any such claim or demand is adjudicated in
Bank's favor, the amount claimed and/or demanded shall be deemed part of the
Bank Indebtedness secured by the Collateral.
17.2 Use of Bank's Name. Borrower shall not use Bank's name or the name of
any of Bank's Affiliates in connection with any of its business or activities
except as may otherwise be required by the rules and regulations of the
Securities and Exchange Commission or any like regulatory body and except as may
be required in its dealings with any governmental agency.
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17.3 No Joint Venture. Nothing contained herein is intended to permit or
authorize Borrower to make any contract on behalf of Bank, nor shall this
Agreement be construed as creating a partnership, joint venture or making Bank
an investor in Borrower.
17.4 Survival. All covenants, agreements, representations and warranties
made by Borrower and Guarantors in the Loan Documents or made by or on their
behalf in connection with the transactions contemplated herein shall be true at
all times this Agreement is in effect (or, if untrue, the events which render
such covenants, agreements, representations and warranties untrue shall have
been disclosed to Bank in writing) and shall survive the execution and delivery
of the Loan Documents, any investigation at any time made by Bank or on its
behalf and the making by Bank of the loans or advances to Borrower. All
statements contained in any certificate, statement or other document delivered
by or on behalf of Borrower pursuant hereto or in connection with the
transactions contemplated hereunder shall be deemed representations and
warranties by Borrower.
17.5 No Assignment by Borrower. Borrower may not assign any of its rights
hereunder without the prior written consent of Bank, and Bank shall not be
required to lend hereunder except to Borrower.
17.6 Assignment or Sale by Bank. Bank may sell, assign or participate all
or a portion of its interest in the Loan Documents and in connection therewith
may make available to any prospective purchaser, assignee or participant any
information relative to Borrower in its possession. If Bank determines to sell
or assign all or any part of its interest in the Loan Documents, Borrower shall
execute and deliver such documents as Bank may require in connection with such
sale or assignment including, without limitation, a modification to this
Agreement regarding the appointing of an agent and the rights and
responsibilities among the agent and the lenders hereunder. In addition, upon
any such sale or assignment, Borrower shall execute and deliver separate
promissory notes to each lender hereunder in a face amount equal to each such
lenders' pro-rata share of the Line, provided that such promissory notes shall
not, in the aggregate, exceed the Maximum Amount. Any documents required to be
executed by Borrower in connection with any such sale or assignment shall not
impose obligations on the Borrower substantially different than those under the
Loan Documents and shall be limited to issues concerning the management of the
credit facility hereunder and the rights and responsibilities of the agent and
the lenders. Provided that no Event of Default shall have occurred and that Bank
shall not be prohibited from doing so by any applicable law, rule, regulation or
otherwise, Bank agrees in connection with any such sale or assignment (other
than by way of a participation) to maintain an interest in the Line and the Loan
Documents of not less than fifty-one percent (51%) of the Maximum Amount then in
effect. Provided that no Event of Default shall have occurred and the documents
to be executed by Borrower in connection with any such sale or assignment do not
provide for an increase in the Maximum Amount or any other terms more favorable
to Borrower, Borrower shall not be liable for Bank's attorney's fees with
respect to such documents in an amount greater than Three Thousand Dollars
($3,000.00) (exclusive of out-of-pocket disbursements).
17.7 Publicity. Bank may use its reasonable discretion in disclosing the
fact of the financing under this Agreement to any public forum including,
without limitation, "tombstone" announcements in the print media whether
individually or part of a general advertisement.
17.8 Binding Effect. This Agreement and all rights and powers granted
hereby will bind and inure to the benefit of the parties hereto and their
respective permitted successors and assigns.
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17.9 Severability. The provisions of this Agreement and all other Loan
Documents are deemed to be severable, and the invalidity or unenforceability of
any provision shall not affect or impair the remaining provisions which shall
continue in full force and effect.
17.10 No Third Party Beneficiaries. The rights and benefits of this
Agreement and the Loan Documents shall not inure to the benefit of any third
party.
17.11 Modifications. No modification of this Agreement or any of the Loan
Documents shall be binding or enforceable unless in writing and signed by or on
behalf of the party against whom enforcement is sought.
17.12 Holidays. If the day provided herein for the payment of any amount
or the taking of any action falls on a Saturday, Sunday or public holiday at the
place for payment or action, then the due date for such payment or action will
be the next succeeding Business Day.
17.13 Law Governing. This Agreement has been made, executed and delivered
in the Commonwealth of Pennsylvania and will be construed in accordance with and
governed by the laws of such Commonwealth.
17.14 Integration. The Loan Documents shall be construed as integrated and
complementary of each other, and as augmenting and not restricting Bank's
rights, powers, remedies and security. The Loan Documents contain the entire
understanding of the parties thereto with respect to the matters contained
therein and supersede all prior agreements and understandings between the
parties with respect to the subject matter thereof and do not require parol or
extrinsic evidence in order to reflect the intent of the parties. In the event
of any inconsistency between the terms of this Agreement and the terms of the
other Loan Documents, the terms of this Agreement shall prevail.
17.15 Exhibits and Schedules. All exhibits and schedules attached hereto
are hereby made a part of this Agreement.
17.16 Headings. The headings of the Articles, Sections, paragraphs and
clauses of this Agreement are inserted for convenience only and shall not be
deemed to constitute a part of this Agreement.
17.17 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
17.18 Waiver of Right to Trial by Jury. BORROWER, GUARANTORS 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, GUARANTORS 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, GUARANTORS AND BANK AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL
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WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENT OF BORROWER, GUARANTORS AND BANK TO THE WAIVER OF THEIR RIGHT TO TRIAL
BY JURY. BORROWER AND GUARANTORS ACKNOWLEDGE THAT THEY HAVE HAD THE OPPORTUNITY
TO CONSULT WITH COUNSEL REGARDING THIS SECTION, THAT THEY FULLY UNDERSTAND ITS
TERMS, CONTENT AND EFFECT, AND THAT THEY VOLUNTARILY AND KNOWINGLY AGREE TO THE
TERMS OF THIS SECTION.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
CONSOLIDATED STAINLESS, INC.
By:________________________________________
Burton R. Chasnov, Executive Vice President
(CORPORATE SEAL)
MELLON BANK, N.A.
By:________________________________________
John M. DePledge, Vice President
The undersigned, intending to be legally bound, but subject in all cases to the
limitation on liability contained in the undersigned's Surety Agreement, hereby
joins in the representations and warranties and consents to and agrees to be
bound by the terms, conditions and covenants applicable to the undersigned as
set forth in the foregoing Loan and Security Agreement, including without
limitation the waivers set forth in Sections 15.1 and Section 17.18.
___________________________________________
HARVEY B. ADAMS
___________________________________________
RONALD J. ADAMS
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Exhibit 10.36
OPEN-END MORTGAGE AND SECURITY AGREEMENT
[THIS MORTGAGE SECURES FUTURE ADVANCES]
THIS OPEN-END MORTGAGE AND SECURITY AGREEMENT ("Mortgage") is made as of
this 10th day of March, 1997, by CONSOLIDATED STAINLESS, INC. ("Mortgagor"), in
favor of MELLON BANK, N.A. ("Mortgagee").
BACKGROUND
A. In accordance with the terms of that certain Loan and Security
Agreement of even date herewith by and between Mortgagee and Mortgagor (as the
same may be amended, modified, supplemented, extended and/or renewed, the "Loan
Agreement"), Mortgagee has agreed to extend to Mortgagor a revolving line of
credit in a principal amount not to exceed Twenty-Five Million Dollars
($25,000,000.00).
B. Mortgagor's obligation to repay the above-described credit facility is
evidenced by Mortgagor's promissory note of even date herewith in the original
maximum principal amount of Twenty-Five Million Dollars ($25,000,000.00) (as the
same may be amended, modified, supplemented, extended and/or renewed from time
to time, the "Note").
C. The Loan Agreement, the Note, all documents executed in connection with
the Future Advances or any of the other Secured Indebtedness, this Mortgage and
all other documents executed and delivered in connection with or collateral to
any of the foregoing, as any of the same may be amended, modified, supplemented,
extended and/or renewed from time to time, are sometimes referred to
collectively as the "Loan Documents", and the terms and conditions thereof are
incorporated herein by reference as though set forth herein in full.
D. References to defined terms in this Mortgage may be found in Section 38
hereof.
NOW, THEREFORE, Mortgagor, for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and intending to be
legally bound hereby, agrees as follows:
1. Granting Clause. As security for the Secured Indebtedness, Mortgagor
mortgages, transfers, assigns, pledges, grants, bargains, sells, conveys,
aliens, releases and confirms unto Mortgagee all of Mortgagor's right, title and
interest in and to that certain lot or parcel of ground located in the Village
of Hewlett Neck, Town of Hempstead, Nassau County, New York, as more fully
described in Exhibit "A" attached hereto (the "Premises"), together with all
present and future:
(a) buildings and improvements erected thereon, and alterations,
additions and improvements thereto and all cash and non-cash proceeds thereof
(collectively, the "Improvements");
(b) easements, rights of way, streets, alleys, passage ways, water,
water courses, mineral rights, rights, liberties, privileges, hereditaments and
the appurtenances belonging or in any way appertaining thereto (collectively,
the "Appurtenances");
(c) reversions, remainders, rents, income, proceeds, issues,
profits, fees, payments, grants, franchises, rights, concessions and operating
privileges derived from or received
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in connection with all purposes for which the Premises and Improvements might be
employed and all cash and non-cash proceeds thereof (collectively, the "Rents");
(d) building materials, machinery, apparatus, equipment, fittings,
furniture, fixtures and articles of personal property owned by Mortgagor located
on, about, under or in the Premises or the Improvements, without regard to
whether the same may be affixed to the Premises or Improvements, and used or
usable in connection with any present or future operation of the Improvements,
including but not limited to all heating, electrical, air conditioning,
ventilating, lighting, laundry, incinerating and power equipment, computers,
computer equipment and all other property incidental thereto, engines, pipes,
pumps, tanks, motors, conduits, switchboards, plumbing, lifting, cleaning, fire
prevention, fire extinguishing, communications apparatus, appliances,
furnishings, carpeting, cabinets, partitions, ducts and compressors and all
parts and accessories therefor and all substitutions and replacements thereof,
and the cash and non-cash proceeds of all of the foregoing, including but not
limited to the proceeds of any policy or policies of insurance thereon
(collectively, the "Building Equipment");
(e) awards, decrees, condemnation or other proceeds and settlements
made to or for the benefit of Mortgagor by reason of any damage to, destruction
of or taking of the Premises or any part thereof or any Improvements or any
Building Equipment, whether such award shall be made by reason of the exercise
of the right of eminent domain or otherwise, or by any public or private
authority, tribunal, corporation or other entity or by any natural person and
all cash and non-cash proceeds thereof (collectively, the "Awards"); and
(f) contracts, licenses, permits, approvals, product and
manufacturer warranties, guarantees and service agreements, including all
manuals, policies, instructions and other documents in connection with the same
in favor of Mortgagor or by and between Mortgagor and any and all boards,
agencies, departments, governmental or other parties of any kind, relating,
directly or indirectly to the Premises, Building Equipment, Improvements,
Appurtenances, Rents or Awards all cash and non-cash proceeds thereof
(collectively, the "Licenses").
Mortgagee, its successors and assigns shall have and hold the Premises
with the Improvements, Appurtenances, Rents, Building Equipment, Awards,
Licenses and all other property hereby mortgaged, with all appurtenances thereto
forever. All of the property of whatever kind described in or covered by this
Mortgage may be hereinafter referred to collectively as the "Mortgaged
Property".
2. Defeasance. Mortgagee agrees that if Mortgagor shall timely pay or
cause to be paid to Mortgagee the Secured Indebtedness and Mortgagee shall no
longer have any obligation, agreement or commitment to advance any sums to
Mortgagor, then this Mortgage and the estate hereby granted shall cease,
terminate and become void.
3. Obligations Secured. This Mortgage secures the full and timely payment
and performance of:
(a) any and all obligations of Mortgagor to Mortgagee, whether now
or hereafter owing or existing, including, without limitation, all obligations
under the Loan Documents and all Future Advances and the full and timely
payment, performance and discharge of all other obligations or undertaking now
or hereafter made by or for the benefit of Mortgagor, including any guaranty
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or surety obligations of Mortgagor and the undertakings of Mortgagor to
immediately pay to Mortgagee the amount of any overdraft on any deposit account
maintained with Mortgagee, up to a maximum principal amount of indebtedness
outstanding at any one time equal to Twenty-Five Million Dollars
($25,000,000.00), plus all accrued and unpaid interest thereon; and
(b) any and all (i) obligations, costs or expenses assumed or
incurred by Mortgagee in connection with any of the Secured Indebtedness; (ii)
advances Mortgagee may make or become obligated to make for the protection of
the security hereby given, including, without limitation, the unpaid balances of
advances made with respect to the Mortgaged Property for the payment of taxes,
assessments, maintenance charges, insurance premiums and costs incurred for the
protection of the Mortgaged Property or the lien of this Mortgage; and all
expenses incurred by Mortgagee by reason of an Event of Default by Mortgagor
hereunder; and (iii) all advances Mortgagee may make to pay toward all or part
of the cost of completing any erection, construction, alteration or repair of
any part of the Mortgaged Property.
All of the obligations, indebtedness and undertakings described in this Section
3 may be referred to collectively as the "Secured Indebtedness".
IT IS THE EXPRESS INTENT OF MORTGAGOR THAT THE MORTGAGED PROPERTY SHALL
SECURE NOT ONLY THE OBLIGATIONS UNDER THE LOAN DOCUMENTS, BUT ALSO ALL OTHER
BANK INDEBTEDNESS UNDER AND AS DEFINED IN THE LOAN AGREEMENT.
4. Future Advances. As used herein, the term "Future Advances" shall mean
(a) any and all future loans, extensions of credit or other financial
accommodations to or for the credit of Mortgagor or to third parties upon the
surety, guaranty, endorsement or other accommodations of Mortgagor, regardless
of the amount, the purpose for which such debt may be created and whether any
reference is made to this Mortgage therein; and (b) any and all future
obligations, indebtedness and/or liabilities of Mortgagor to Mortgagee hereafter
incurred, due or owing under the provisions of any of the Loan Documents.
5. Default Rate. As used herein, the term "Default Rate" shall have the
meaning provided for such term in the Loan Agreement.
6. Warranty of Title. Mortgagor represents that (a) Mortgagor lawfully
holds indefeasible fee simple title to the Mortgaged Property, free of any
liens, claims, encumbrances and/or restrictions except as set forth in the
exceptions to title contained in title policy no. 413170 issued by American
Title Insurance Company; (b) this Mortgage creates a valid and enforceable first
mortgage lien against and security interest in the Mortgaged Property subject
only to the aforesaid title exceptions (if any); and (c) Mortgagee, subject to
Mortgagor's right of possession in the absence of a continuing Event of Default,
shall quietly enjoy and possess the Mortgaged Property. Mortgagor covenants to
preserve such title and the validity and priority of the lien and security
interest hereof and shall forever warrant and defend the same unto Mortgagee
against the claims of all persons and parties whatsoever.
7. Security Agreement. This Mortgage constitutes a security agreement
under the Uniform Commercial Code as adopted and existing from time to time in
the State of New York (the "Code"). Mortgagor grants to Mortgagee a security
interest in and lien upon all that property
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included within the term "Mortgaged Property" which might otherwise be deemed
personal property under the Code, together with all cash and non-cash proceeds
of such personal property. Upon filing this Mortgage in the appropriate offices,
this Mortgage shall also be effective as a financing statement filed in such
offices with respect to such personal property.
8. Payment of Secured Indebtedness. Mortgagor will pay, or cause to be
paid, when due the Secured Indebtedness, together with interest thereon, at the
times and in the manner as provided in and by the Loan Documents.
9. Compliance with Terms. Mortgagor will promptly and faithfully observe
and perform, or cause to be observed and performed, all the terms, covenants and
provisions contained herein and in any of the Loan Documents.
10. Taxes, Rents and Other Charges. Mortgagor will pay, prior to the time
when interest or penalties commence to accrue thereon, all taxes, sewer and
water rents, other claims and charges, including charges in lieu of taxes, owing
to all federal, state and local agencies, boards, bureaus and departments
(collectively the "Governmental Authority") in respect of the Mortgaged
Property. Within thirty (30) days after the payment of each of the foregoing,
Mortgagor will produce to Mortgagee receipts or other satisfactory evidence of
such payment; provided that Mortgagor shall not be required to pay any such tax
or other charge so long as the validity thereof shall be contested in good faith
by appropriate proceedings promptly initiated and diligently conducted by
Mortgagor and neither execution, foreclosure nor levy shall have been commenced
in respect thereof and Mortgagor shall have set aside on its books adequate
reserves with respect thereto.
11. Insurance. Mortgagor shall carry insurance in the full insurable value
of the Mortgaged Property and cause Mortgagee to be named as insured mortgagee
with respect to all real property, loss payee (with a lender's loss payable
endorsement) with respect to all personal property, and additional insured with
respect to all liability insurance, as its interests may appear, with thirty
(30) days' notice to be given Mortgagee by the insurance carrier prior to
cancellation or material modification of such insurance coverage.
Mortgagor shall cause to be delivered to Mortgagee the insurance
policies for the Mortgaged Property or, in the alternative, evidence of
insurance and at least thirty (30) business days prior to the expiration of any
such insurance, additional policies or duplicates thereof or in the alternative,
evidence of insurance evidencing the renewal of such insurance and payment of
the premiums therefor. Mortgagor shall direct all insurers that in the event of
any loss under any insurance policy for the Mortgaged Property or the
cancellation of any such insurance policy, the insurers shall make payments for
such loss and pay all return or unearned premiums directly to Mortgagee and not
to Mortgagor and Mortgagee jointly.
In the event of any loss, Mortgagor will give Mortgagee immediate
notice thereof and Mortgagee may make proof of loss whether the same is done by
Mortgagor. Mortgagee is granted a power of attorney by Mortgagor with full power
of substitution to file any proof of loss in Mortgagor's or Mortgagee's name, to
endorse Mortgagor's name on any check, draft or other instrument evidencing
insurance proceeds, and to take any action or sign any document to pursue any
insurance loss claim. Such power being coupled with an interest is irrevocable
until the Bank
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Indebtedness (as defined in the Loan Agreement) is paid in full and Mortgagee
has no further funding commitments to Mortgagor.
In the event of any loss, Mortgagee, at its option, may (a) retain
and apply all or any part of the insurance proceeds to reduce, in such order and
amounts as Mortgagee may elect, the Secured Indebtedness then outstanding, or
(b) disburse all or any part of such insurance proceeds to or for the benefit of
Mortgagor for the purpose of repairing or replacing the Mortgaged Property after
receiving proof satisfactory to Mortgagee of such repair or replacement or the
estimated cost thereof, in either case without waiving or impairing the Secured
Indebtedness or any provision of this Mortgage. Mortgagor shall not take out any
insurance without having Mortgagee named as loss payee or additional insured
thereon. Mortgagor shall bear the full risk of loss from any loss of any nature
whatsoever with respect to the Mortgaged Property.
In the event of foreclosure of this Mortgage or other transfer of
title to the Mortgaged Property in extinguishment of all or any part of the
Secured Indebtedness, all right, title and interest of Mortgagor to any
insurance policies then in force covering the Mortgaged Property shall, subject
to the provisions of such policies, pass to the transferee of the Mortgaged
Property.
12. Escrow Deposits. Mortgagor will deposit with Mortgagee monthly, if so
requested by Mortgagee in writing during the continuance of an Event of Default,
(a) a sum equal to one-twelfth (1/12) of the annual taxes, sewer and water
rents, and such other claims and charges as may be assessed or levied by any
Governmental Authority on or against the Mortgagor or the Mortgaged Property,
including charges in lieu of taxes; and (b) such amounts as shall be necessary
to create a fund adequate to pay the premiums on all insurance required herein
prior to expiration of the current policies. Unless otherwise required by law,
Mortgagee shall have no obligation to pay interest to Mortgagor on such escrow
deposits. It is intended that not later than one month prior to the respective
dates on which the premiums shall be due and payable and the real property taxes
shall last be due and payable without interest or penalty, and provided no Event
of Default shall have occurred and be continuing, such sums shall be applied to
the payment of the item or items in respect of which such amounts were deposited
or, at Mortgagee's option, to the payment of such items in such order of
priority as Mortgagee shall determine, as the same become due and payable, and
Mortgagor shall make available to Mortgagee proper bills therefor. If Mortgagor
is required to have deposited such sums with Mortgagee and the amount then held
by Mortgagee on deposit shall be insufficient to pay such premiums or taxes,
Mortgagor, upon demand, shall pay to Mortgagee any amount necessary to make up
such deficiency. If an Event of Default shall have occurred and remains uncured
or unwaived, Mortgagee may, at its option, apply the amounts then deposited with
Mortgagee, or any part thereof, in payment of the Secured Indebtedness. Nothing
contained in this Section shall be deemed to affect any right or remedy of
Mortgagee under any other provisions of this Mortgage or of any statute or rule
of law to pay any such items and to add the amount of the payment, with
interest, as herein provided, to the Secured Indebtedness, and to require
payment thereof on demand. If, when making any assignment of this Mortgage, the
then mortgagee shall pay over to its assignee the then balance of the deposits
made by Mortgagor under this Section, such assigning mortgagee shall have no
further obligation to Mortgagor for the proper application of such deposits.
13. Maintenance of Mortgaged Property. Mortgagor (a) shall maintain the
Mortgaged Property in good repair and order; (b) shall not remove from the
Premises or Improvements, any Building Equipment or any other property of any
nature covered by the lien or security interest
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granted by this Mortgage, unless such Building Equipment is replaced with
comparable Building Equipment of equal or greater value acceptable to Mortgagee;
(c) shall not make, install or permit to be made or installed any alterations,
additions or improvements of any nature to or in the Mortgaged Property that
negatively affect the value of the Mortgaged Property or are structural in
nature without obtaining the prior written consent of Mortgagee and without
obtaining insurance thereon; and (d) shall not commit or suffer any waste of the
Mortgaged Property or make any change in the use thereof which will in any way
increase the risk of fire or other hazard or that may impair the security of
this Mortgage.
14. Declaration of Amount Due and No Set-Off. Mortgagor shall, within five
(5) days after request in person or ten (10) days after request by mail,
furnish, or cause to be furnished, a written statement or declaration, duly
acknowledged, of the amount due under the Loan Documents and whether any offsets
or defenses exist thereto or against this Mortgage.
15. Compliance with Laws. Mortgagor shall comply with all laws,
ordinances, regulations, agreements, covenants, conditions, contracts,
declarations, easements, licenses and restrictions affecting the Mortgaged
Property, or any part thereof and will not suffer or permit any violation
thereof. The foregoing shall not preclude the right of Mortgagor to, in good
faith, contest the enforcement of any of the foregoing provided that enforcement
is stayed by the operation of such contest.
16. Maintenance and Preservation of Easements. Mortgagor will do or cause
to be done all things necessary to preserve intact and unimpaired any and all
easements, appurtenances, rights of way and other interests and rights in favor
of, or constituting any portion of, the Mortgaged Property.
17. Other Liens. Mortgagor will not create, incur, assume or suffer to
exist any mortgage, lien, charge, security interest or other encumbrance upon
the Mortgaged Property, or any part thereof, other than the liens and security
interests created hereby, liens and security interests in favor of Mortgagee and
the liens approved herein (if any), or in the Loan Agreement, without the prior
written consent of Mortgagee, which consent Mortgagee may withhold in its sole
discretion.
In the event that the Mortgaged Property, or any part thereof, is now or
hereafter subject to any other mortgage, lien, charge, security interest or
other encumbrance, with respect to which Mortgagor shall have received
Mortgagee's prior written consent as required herein (the "Approved Mortgage"):
(a) Mortgagor will pay the principal, interest and all other sums
due and payable with respect to such Approved Mortgage on or before the
applicable due date, and will comply with all of the other terms, covenants and
conditions thereof;
(b) Mortgagor will forward to Mortgagee a copy of the check or other
evidence of each payment in connection with the Approved Mortgage;
(c) Without the prior written consent of Mortgagee, Mortgagor will
not enter into any modification, amendment, agreement or arrangement pursuant to
which Mortgagor is granted any forbearance or indulgence (as to time or amount)
in the payment of any principal, interest or other sums due in accordance with
the terms and provisions of the Approved Mortgage;
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(d) Mortgagor will obtain the agreement of the holder, from time to
time, of any Approved Mortgage, to send Mortgagee copies of all notices with
respect thereto; and
(e) Mortgagor will notify Mortgagee promptly of the receipt of any
notice given by the holder of any Approved Mortgage and will forward to
Mortgagee a copy of such notice given to Mortgagor.
18. Condemnation. Mortgagor shall notify Mortgagee promptly upon receiving
any notice of commencement of any proceedings for the condemnation or other
taking of any or all of the Mortgaged Property and shall permit Mortgagee to
participate in such proceedings and to receive all proceeds payable to Mortgagor
as an award or in settlement, up to the amount of the Secured Indebtedness.
Mortgagor hereby appoints Mortgagee attorney-in-fact for Mortgagor (which
appointment, being coupled with an interest, shall be irrevocable until the Bank
Indebtedness is paid in full and Mortgagee has no further funding commitment to
Mortgagor) (a) to collect and receive any such awards, damages, payments and
compensation from the authorities making the same, (b) to give receipts and
acquittances therefor and (c) to institute, appear in and prosecute any
proceeding therefor in the event Mortgagor fails to take such action. All sums
collected by or paid to Mortgagee, net of any costs, including attorney's fees,
incurred by Mortgagee in collecting the same may be (i) applied by Mortgagee, in
such order of priority as Mortgagee shall determine, to the Secured Indebtedness
then outstanding, or (ii) paid or made available by Mortgagee to Mortgagor, on
such terms as Mortgagee may specify, without Mortgagee thereby waiving or
impairing any equity or lien, under and by virtue of this Mortgage, as a result
of any such taking, alteration of grade or other injury to or decrease in value
of the Mortgaged Property. If, prior to the receipt by Mortgagee of said sums,
the Mortgaged Property shall have been sold on foreclosure of this Mortgage,
Mortgagee shall have the right, whether or not a deficiency judgment on the
Secured Indebtedness shall have been sought, recovered or denied, to receive
said sums to the extent of the Secured Indebtedness remaining unsatisfied after
such sale, with interest thereon at the Default Rate and to receive costs and
expenses, disbursements, including attorney's fees, incurred by Mortgagee in
connection with the collection of said sums.
19. Leases; Agreements of Sale. Without the prior consent of Mortgagee as
to the form and content of any such lease, including without limitation, the
term and rental amount of such lease, Mortgagor shall not lease or permit anyone
else to lease, any portion of the Mortgaged Property. Mortgagee shall not in any
way assume or will be deemed to have assumed any of the obligations as landlord
under any leases or as seller under any agreements of sale. Mortgagor shall
perform (or cause to be performed) every obligation of the lessor or seller, as
the case may be, and shall enforce (in the exercise of its reasonable business
judgment) every obligation of the lessee or buyer, as the case may be, in every
lease or agreement of sale or any tenancy with respect to the Mortgaged
Property. Mortgagor shall not, without Mortgagee's prior written consent,
modify, alter, waive or cancel any lease, agreement of sale or any part thereof,
nor assign any such lease or any such rents. At Mortgagee's request, Mortgagor
shall deliver or cause to be delivered to Mortgagee, assignments of specific
leases together with subordination and/or attornment agreements and estoppel
letters or certificates from any or all tenants of the Mortgaged Property, all
such assignments, agreements, estoppel letters and certificates to be in such
form as Mortgagee may reasonably require.
Mortgagor shall furnish to Mortgagee from time to time as requested
by Mortgagee (a) a complete list of all agreements of sale and leases for the
Mortgaged Property, or any portion thereof, in such detail as may be requested
by Mortgagee, and (b) certified copies of all agreements
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of sale and leases, together with copies of correspondence and memoranda between
Mortgagor and purchasers or tenants or any successors thereunder setting forth
the contractual arrangements between them.
To the extent permitted by law, Mortgagor shall deposit with
Mortgagee all monies collected as security (or escrow) deposits or other
deposits under any leases or agreements of sale for the Mortgaged Property or
any part thereof, and Mortgagee shall maintain the same in a non-interest
bearing account. Mortgagee shall hold such security deposits pursuant to the
terms and conditions of the respective leases or agreements of sale. To the
extent not permitted under law to deposit the foregoing monies with Mortgagee,
Mortgagor will comply with all applicable laws relating to such security (or
escrow) deposits.
20. Right to Remedy. In the event Mortgagor shall fail to perform any of
its obligations hereunder or under any of the other Loan Documents, including,
without limitation, fail to (a) pay any taxes, water and sewer rents,
assessments, charges, claims, costs, expenses or fees required to be paid under
the terms of this Mortgage, (b) maintain insurance as required herein, or (c)
make all necessary repairs to the Mortgaged Property as required herein,
Mortgagee may advance sums on behalf of Mortgagor to remedy such failure,
including, without limitation, payment of any taxes, water and sewer rents,
assessments, charges, claims, costs, expenses, fees, insurance premiums and
repairs, without prejudice to the right of enforcement of the Loan Documents.
Mortgagor shall immediately reimburse Mortgagee for any such sums advanced by
Mortgagee on Mortgagor's behalf.
21. Sums Advanced by Mortgagee. Any sums advanced by Mortgagee for the
payment of any repairs, insurance premiums, taxes, water and sewer rents,
assessments, charges, claims, costs, expenses, fees and any other sums advanced
by Mortgagee in any way connected with the Mortgaged Property or any of the Loan
Documents shall be added to and become a part of the Secured Indebtedness, and
repayment thereof, together with interest thereon at the Default Rate from the
date of the respective expenditure, may be enforced by Mortgagee against
Mortgagor at any time.
22. Stamps and Taxes. If at any time any Governmental Authority shall
require internal revenue stamps on all or any part of the Loan Documents or the
Secured Indebtedness, Mortgagor shall pay for same upon demand. If Mortgagor
fails to make such payment within fifteen (15) days after demand for same,
Mortgagee may pay for such stamps. If any law or ordinance adopted hereafter
imposes a tax on Mortgagee with respect to the Mortgaged Property, the value of
Mortgagor's equity therein, the amount of the indebtedness secured hereby or
this Mortgage, Mortgagee shall have the right at its election, from time to
time, to give Mortgagor thirty (30) days written notice to pay the Secured
Indebtedness, whereupon the Secured Indebtedness shall become immediately due,
payable and collectible at the expiration of such period of thirty (30) days,
without further notice or demand. However, if prior thereto, lawfully and
without violation of usury laws, Mortgagor has paid any such tax in full as the
same became due and payable, such notice shall be deemed to have been rescinded
with respect to any right of Mortgagee hereunder arising by reason of the tax so
paid.
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23. Representations and Warranties. Mortgagor represents and warrants
that:
(a) No notice of taking of any of the Mortgaged Property by eminent
domain or condemnation has been received by Mortgagor or its agents, servants or
employees and neither Mortgagor nor its agents, servants or employees has
knowledge that any such taking or condemnation is contemplated;
(b) Mortgagor has heretofore given Mortgagee an original executed or
true copy of all of the existing leases or agreements of sale relating to the
Mortgaged Property, accompanied in each case by all related documents;
(c) The current and proposed uses of the Mortgaged Property comply
with all applicable zoning laws and other statutes, ordinances, rules and
regulations of all governmental authorities having jurisdiction;
(d) All Licenses are in full force and effect on the date hereof and
are not subject to any defenses, set-offs or counterclaims whatsoever;
(e) All Licenses are fully assignable and Mortgagee may exercise and
enjoy all rights and powers granted herein without the necessity of obtaining
any consent or approval of any other party; and
(f) None of the Mortgaged Property has been damaged by fire or other
casualty which has not now been fully restored.
24. Notices. In addition to any notice requirements contained elsewhere in
this Mortgage or any of the other Loan Documents, Mortgagor shall notify
Mortgagee of the occurrence of any of the following:
(a) A fire or other casualty causing damage to any portion of the
Mortgaged Property;
(b) Receipt of notice of condemnation or intended condemnation of
any portion of the Mortgaged Property;
(c) Receipt of notice from any government or quasi-governmental
authority asserting that the present or proposed development, structure, use or
occupancy of the Mortgaged Property constitutes a violation of or noncompliance
with any applicable law, statute, code, ordinance, rule or regulation
promulgated or enforced by such authority;
(d) Receipt of any default or acceleration notice from the holder of
any lien or security interest in the Mortgaged Property;
(e) Commencement of any litigation affecting the Mortgaged Property;
or
(f) Receipt of any default or termination notice from any tenant of
the Mortgaged Property.
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25. Events of Default. Each of the following shall constitute an event of
default hereunder (an "Event of Default"):
(a) If there shall occur an Event of Default under the Loan
Agreement or under any of the other Loan Documents.
(b) If Mortgagor shall fail to maintain and deliver to Mortgagee any
and all policies of insurance herein required.
(c) If Mortgagor shall fail to observe or perform any of the other
terms, covenants or conditions of this Mortgage or any agreement entered into
with respect to any Secured Indebtedness not otherwise specifically constituting
an Event of Default under this Section 25 and such failure continues unremedied
for a period of ten (10) days after the earlier of (i) notice from Mortgagee to
Mortgagor of the existence of such failure, or (ii) any officer of Mortgagor
knows or should have known of the existence of such failure, provided that, in
the event such failure is incapable of remedy or consists of a default of any of
the financial covenants in the Loan Agreement or was willfully caused or
permitted by Mortgagor, Mortgagor shall not be entitled to any notice or grace
hereunder.
(d) If there shall occur and be continuing an event of default under
any other mortgage encumbering the Premises or any document collateral thereto.
(e) If there shall be any sale, lease, transfer or other disposal
(whether voluntarily or by operation of law) of all, substantially all, or any
portion of the Mortgaged Property or an interest therein, except for a sale in
accordance with the terms and conditions of the Loan Agreement.
Any Event of Default under this Mortgage shall constitute a default
under any other mortgage from Mortgagor to Mortgagee, under the other Loan
Documents and under any other agreement between Mortgagor and Mortgagee. All
notice and grace periods under the Loan Documents shall be deemed to run
concurrently with each other.
26. Remedies. Upon the occurrence and during the continuance of an Event
of Default, at the option of Mortgagee, all of the Secured Indebtedness shall
become immediately due and payable. In such event, Mortgagee may forthwith and
without demand exercise any one or more of the following rights and remedies in
addition to any of the rights or remedies provided herein or in any other Loan
Documents or such rights and remedies otherwise available to Mortgagee at law or
in equity, without further stay, any law, usage or custom to the contrary
notwithstanding:
(a) Take possession of the Mortgaged Property and exercise with
respect thereto all rights of a mortgagee-in-possession.
(b) Collect all proceeds from agreements of sale with respect to the
Mortgaged Property and revoke Mortgagor's license to collect all rentals from
the Mortgaged Property and, after deducting all costs of collection and
administration expenses, apply the net proceeds or rentals to the payment of
taxes, water and sewer rents, charges and claims, insurance premiums and all
other carrying charges, maintenance, repair or restoration of the Mortgaged
Property, or on account and
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in reduction of the principal, interest or both of the Secured Indebtedness, in
such order and amounts as Mortgagee, in Mortgagee's sole discretion, may elect.
(c) Institute any appropriate action or proceeding to foreclose this
Mortgage and may proceed therein to judgment and execution for all sums secured
by this Mortgage.
(d) Exercise each and every right available to it as a secured party
under the Uniform Commercial Code as enacted in the State of New York.
(e) Exercise each and every right granted to it hereunder, under any
of the other Loan Documents, or at law or in equity.
(f) Exercise any and all rights and remedies of Mortgagor under the
Licenses, without any interference or objection from Mortgagor.
(g) As it deems necessary, effect new Licenses, cancel or surrender
existing Licenses, alter or amend the terms of and renew existing Licenses and
made concessions to any third party in connection therewith.
(h) Have a receiver appointed to enter into possession of the
Mortgaged Property to collect the earnings, revenues, rents, issues, profits and
income derived therefrom and apply the same as the court may direct. Mortgagee
shall be entitled to the appointment of a receiver without the necessity of
proving either the inadequacy of the security on the insolvency of Mortgagor or
any other person who may be legally or equitably liable to pay the Secured
Indebtedness and Mortgagor and each such person shall be deemed to have waived
such proof and to have consented to the appointment of such receiver.
(i) Construct improvements upon the Mortgaged Property or cause
repairs to be made to or otherwise alter any present or existing improvements
thereon.
27. Remedies Cumulative. All rights and remedies hereby granted or
otherwise available to Mortgagee shall be cumulative and concurrent; may be
pursued singly, successively or together at Mortgagee's sole option; and may be
exercised from time to time and as often as occasion therefor shall occur until
the Secured Indebtedness is paid in full. Mortgagee may resort to any security
it holds in such order and manner as Mortgagee sees fit and may sell at any
foreclosure sale on this Mortgage the Premises, Improvements and Building
Equipment in one parcel or in such parcels as Mortgagee in its sole discretion
elects so to do and such foreclosure sale shall pass title to all such property.
28. No Release. No extension or indulgence granted to Mortgagor, no
alteration, change or modification hereof or of any other Loan Document
consented or agreed to by Mortgagee and no other act or omission of Mortgagee,
including the taking of additional security or the release of any security,
shall constitute a release of the lien and obligation of this Mortgage or be
interposed as a defense against the enforcement of this Mortgage, except for an
act of Mortgagee that constitutes an express, effective release and satisfaction
of the Secured Indebtedness.
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29. Modification. This Mortgage may not be changed orally or by any course
of dealing between Mortgagor and Mortgagee, but only by an agreement in writing
duly executed on behalf of the party against whom enforcement of any waiver,
change, modification or discharge is sought.
30. Further Assurances. Mortgagor shall provide Mortgagee from time to
time on request by Mortgagee with such mortgages, agreements, financing
statements and additional instruments, documents or information as Mortgagee may
in its discretion deem necessary or advisable to protect, perfect and/or
maintain the liens and security interests in the Mortgaged Property. Mortgagor
hereby authorizes and appoints Mortgagee as Mortgagor's attorney-in-fact (which
appointment, being coupled with an interest, is irrevocable until the Bank
Indebtedness is paid in full and Mortgagee has no further funding obligation to
Mortgagor) with full power of substitution, to execute on Mortgagor's behalf and
file at Mortgagor's expense such mortgages, financing statements and amendments
thereto, in those public offices deemed necessary or appropriate by Mortgagee to
establish, maintain and protect a continuously perfected lien and security
interest in the Mortgaged Property.
31. Communications and Notices. All notices, requests and other
communications made or given in connection with the Loan Documents shall be in
writing and, unless receipt is stated herein to be required, shall be deemed to
have been validly given if delivered personally to the individual or division or
department to whose attention notices to a party are to be addressed, or by
private carrier, or registered or certified mail, return receipt requested, or
by telecopy with the original forwarded by first class mail, in all cases with
charges prepaid, addressed as follows, until some other address (or individual
or division or department for attention) shall have been designated by notice
given by one party to the other:
To Mortgagor: Consolidated Stainless, Inc.
1601 East Amelia Street
Orlando, FL 32803
Attention: Ronald J. Adams, President
Telecopy No.: (407) 895-5441
with a copy to: Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel
Citicorp Center
153 E. 53rd Street
New York, NY 10022
Attention: Stephen Weiss, Esquire
Telecopier No.: (212) 223-7161
To Mortgagee: Mellon Bank, N.A.
1735 Market Street
Philadelphia, PA 19101
Attention: John M. DePledge, Vice President
Telecopy No.: (215) 553-0201
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with a copy to: Wolf, Block, Schorr & Solis-Cohen
350 Sentry Parkway, Building 640
Blue Bell, PA 19422-0757
Attention: Bruce R. Lesser, Esquire
Telecopy No.: (610) 238-0374
32. Waivers. In connection with any proceedings under the Loan Documents,
including without limitation any action by Mortgagee in replevin, foreclosure or
other court process or in connection with any other action related to the Loan
Documents or the transactions contemplated hereunder, Mortgagor waives:
(a) all errors, defects and imperfections in such proceedings;
(b) all benefits under any present or future laws exempting any
property, real or personal, or any part of any proceeds thereof from attachment,
levy or sale under execution, or providing for any stay of execution to be
issued on any judgment recovered under any of the Loan Documents or in any
replevin or foreclosure proceeding, or otherwise providing for any valuation,
appraisal or exemption;
(c) all rights to inquisition on any real estate, which real estate
may be levied upon pursuant to a judgment obtained under any of the Loan
Documents and sold upon any writ of execution issued thereon in whole or in
part, in any order desired by Mortgagee;
(d) presentment for payment, demand, notice of demand, notice of
non-payment, protest and notice of protest of any of the Loan Documents,
including the Note;
(e) any requirement for bonds, security or sureties required by
statute, court rule or otherwise; and
(f) any demand for possession of the Mortgaged Property prior to
commencement of any suit.
33. Construction. The use of the words "Mortgagor" or "Mortgagee" shall be
deemed to include the successors and assigns of the party or parties. If there
shall be more than one Mortgagor or party constituting the Mortgagor, the
obligation of each shall be joint and several. The use of any gender shall
include all genders. The singular number shall include the plural, or the plural
the singular, as the context may require. Wherever in this Mortgage the
Mortgagee's consent or approval is required or permitted, such consent or
approval shall be at the sole and absolute discretion of Mortgagee.
34. Invalid Provisions Disregarded. If any term or provision of this
Mortgage or the application thereof to any particular circumstances shall to any
extent be invalid or unenforceable, the remainder of this Mortgage or the
application of such terms or the provision to persons or circumstances other
than those to which it is held invalid or unenforceable shall not be affected
thereby and each term and provision of this Mortgage shall be valid and be
enforced to the fullest extent permitted by law.
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35. Applicable Law. This Mortgage shall be governed by and construed in
accordance with the laws of the State of New York.
36. Captions. The captions appearing in this Mortgage are inserted solely
for convenience of reference and shall not constitute a part of this Mortgage,
nor shall they in any way affect its meaning, construction or effect.
37. No Beneficiaries. The rights and remedies of this Mortgage shall not
inure to the benefit of any third party other than the successors or assigns of
Mortgagee.
38. Defined Terms. Defined terms in this Mortgage may be found in the
following Paragraphs, Recitals and Sections:
(a) Approved Mortgage - Section 17
(b) Appurtenances - Section 1(b)
(c) Awards - Section 1(e)
(d) Building Equipment - Section 1(d)
(e) Code - Section 7
(f) Default Rate - Section 5
(g) Event of Default - Section 25
(h) Future Advances - Section 4
(i) Governmental Authority - Section 10
(j) Improvements - Section 1(a)
(k) Licenses - Section 1(f)
(l) Loan Agreement - Recital A
(m) Loan Documents - Recital C
(n) Mortgaged Property - Section 1
(o) Mortgagee - First Paragraph
(p) Mortgage - First Paragraph
(q) Mortgagor - First Paragraph
(r) Note - Recital B
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(s) Premises - Section 1
(t) Rents - Section 1(c)
(u) Secured Indebtedness - Section 3
IN WITNESS WHEREOF, the undersigned has caused this Open-End Mortgage and
Security Agreement to be duly executed the day and year first above written.
MORTGAGOR:
CONSOLIDATED STAINLESS, INC.
By: _______________________________________
Burton R. Chasnov, Executive Vice President
[CORPORATE SEAL]
The address of the within
named Mortgagee is:
1735 Market Street
Philadelphia, PA 19101
By:_____________________________
John M. DePledge, Vice President
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DESCRIPTION OF PREMISES
SEE ATTACHED
EXHIBIT "A"
TO
OPEN-END MORTGAGE AND SECURITY AGREEMENT
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COMMONWEALTH OF PENNSYLVANIA :
: SS.
COUNTY OF MONTGOMERY :
On this, the 10th day of March, 1997 before me, a Notary Public,
personally appeared Burton R. Chasnov, who acknowledged himself to be the
Executive Vice President of Consolidated Stainless, Inc., and that he as such
officer, being authorized to do so, executed the foregoing instrument for the
purposes therein contained by signing the name of the corporation by himself as
Executive Vice President.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
--------------------------------------
Notary Public
My commission expires:
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Exhibit 10.37
NOTE
Blue Bell, Pennsylvania
Dated: March 10, 1997
$25,000,000.00
FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND, CONSOLIDATED
STAINLESS, INC. ("Borrower"), hereby promises to pay to the order of MELLON
BANK, N.A. ("Bank"), ON DEMAND after the occurrence and during the continuance
of an Event of Default or immediately after expiration of the Contract Period,
the principal sum of Twenty-Five Million Dollars ($25,000,000.00), or such
greater or lesser principal amount as may be outstanding from time to time under
the line of credit established by Bank for the benefit of Borrower pursuant to
the terms of that certain Loan and Security Agreement of even date herewith
between Borrower and Bank (such Loan and Security Agreement, as the same may be
amended, supplemented or restated from time to time, being the "Loan
Agreement"), together with interest thereon, upon the following terms:
1. Line Note. This Note is the "Line Note" as defined in the Loan
Agreement and, as such, shall be construed in accordance with all terms and
conditions thereof. Capitalized terms not defined herein shall have such meaning
as provided in the Loan Agreement. This Note is entitled to all the rights and
remedies provided in the Loan Agreement and the Loan Documents and is secured by
all collateral as described therein.
2. Interest Rate. Interest on the unpaid principal balance hereof will
accrue from the date of advance until final payment thereof at the applicable
rates provided for in the Loan Agreement.
3. Default Interest. Interest will accrue on the outstanding principal
amount hereof following the occurrence and during the continuance of an Event of
Default or following the expiration of the Contract Period until paid at a rate
per annum which is three percent (3%) in excess of the Line Base Rate (the
"Default Rate").
4. Post Judgment Interest. Any judgment obtained for sums due hereunder or
under the Loan Documents will accrue interest at the Default Rate until paid.
5. Computation. Interest will be computed on the basis of a year of three
hundred sixty (360) days and paid for the actual number of days elapsed.
6. Principal and Interest Payments. Principal and interest hereunder will
be paid when and as provided for in the Loan Agreement.
7. Place of Payment. Principal and interest hereunder shall be payable as
provided in the Loan Agreement, or at such other place as Bank, from time to
time, may designate in writing.
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8. Default; Remedies. Upon the occurrence and during the continuance of an
Event of Default or upon the expiration of the Contract Period, Bank, at its
option, may declare immediately due and payable the entire unpaid balance of
principal and all other sums due by Borrower hereunder or under the Loan
Documents, together with interest accrued thereon at the applicable rate
specified above. Payment thereof may be enforced and recovered in whole or in
part at any time and from time to time by one or more of the remedies provided
to Bank in this Note or in the Loan Documents or as otherwise provided at law or
in equity, all of which remedies are cumulative and concurrent.
9. Waivers. Borrower and all endorsers, jointly and severally, waive
presentment for payment, demand, notice of demand, notice of nonpayment or
dishonor, protest and notice of protest of this Note, and all other notices in
connection with the delivery, acceptance, performance, default or enforcement of
the payment of this Note, except for such notices, if any, as are expressly
required to be delivered by Bank to Borrower under this Note and/or the Loan
Agreement.
10. Miscellaneous. If any provision of this Note shall be held invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision hereof. This Note has been delivered in and shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
without regard to the law of conflicts. This Note shall be binding upon Borrower
and upon Borrower's successors and assigns and shall benefit Bank and its
successors and assigns. The prompt and faithful performance of all of Borrower's
obligations hereunder, including without limitation, time of payment, is of the
essence of this Note.
11. Confession of Judgment. BORROWER HEREBY AUTHORIZES AND EMPOWERS ANY
ATTORNEY OR THE PROTHONOTARY OR CLERK OF ANY COURT IN THE COMMONWEALTH OF
PENNSYLVANIA, OR IN ANY OTHER JURISDICTION WHICH PERMITS THE ENTRY OF JUDGMENT
BY CONFESSION, TO APPEAR FOR BORROWER AT ANY TIME AFTER DEMAND HEREUNDER AS
PROVIDED ABOVE OR DURING THE CONTINUANCE OF AN EVENT OF DEFAULT UNDER THE LOAN
AGREEMENT IN ANY ACTION BROUGHT AGAINST BORROWER ON THIS NOTE OR THE LOAN
DOCUMENTS AT THE SUIT OF BANK, WITH OR WITHOUT COMPLAINT OR DECLARATION FILED,
WITHOUT STAY OF EXECUTION, AS OF ANY TERM OR TIME, AND THEREIN TO CONFESS OR
ENTER JUDGMENT AGAINST BORROWER FOR THE ENTIRE UNPAID OUTSTANDING PRINCIPAL
AMOUNT OF THIS NOTE AND ALL OTHER SUMS TO BE PAID BY BORROWER TO OR ON BEHALF OF
BANK PURSUANT TO THE TERMS HEREOF OR OF THE LOAN DOCUMENTS AND ALL ARREARAGES OF
INTEREST THEREON, TOGETHER WITH ALL COSTS AND OTHER EXPENSES AND AN ATTORNEY'S
COLLECTION COMMISSION OF ONE PERCENT (1%) OF THE AGGREGATE AMOUNT OF THE
FOREGOING SUMS, BUT IN NO EVENT LESS THAN $5,000.00; AND FOR SO DOING THIS NOTE
OR A COPY HEREOF VERIFIED BY AFFIDAVIT SHALL BE A SUFFICIENT WARRANT.
THE AUTHORITY GRANTED HEREIN TO CONFESS JUDGMENT SHALL NOT BE EXHAUSTED BY
ANY EXERCISE THEREOF BUT SHALL CONTINUE FROM TIME TO TIME AND AT ALL TIMES UNTIL
PAYMENT IN FULL OF ALL THE AMOUNTS DUE
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HEREUNDER. BORROWER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED BY COUNSEL IN
CONNECTION WITH THE EXECUTION AND DELIVERY OF THIS NOTE AND THAT IT KNOWINGLY
WAIVES ITS RIGHT TO BE HEARD PRIOR TO THE ENTRY OF SUCH JUDGMENT AND UNDERSTANDS
THAT, UPON SUCH ENTRY, SUCH JUDGMENT SHALL BECOME A LIEN ON ALL REAL PROPERTY OF
BORROWER IN THE COUNTY WHERE SUCH JUDGMENT IS ENTERED.
IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has
caused this Note to be duly executed the day and year first above written.
CONSOLIDATED STAINLESS, INC.
By:________________________________________
Burton R. Chasnov, Executive Vice President
(CORPORATE SEAL)
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Exhibit 10.38
SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT (this "Agreement") is made as of March 10,
1997 by and among MELLON BANK, N. A. ("Senior Creditor") having an address of
1735 Market Street, Philadelphia, PA 19103 and SUNTRUST BANKS, INC., a Georgia
corporation ("Subordinated Creditor") and acknowledged by CONSOLIDATED
STAINLESS, INC., a Delaware corporation ("Borrower").
RECITALS
WHEREAS, the Borrower and the Senior Creditor are parties to the Senior
Credit Agreement (as such term is defined below);
WHEREAS, pursuant to that certain Convertible Subordinated Note Purchase
Agreement dated October 18, 1996, by and between the Borrower and the
Subordinated Creditor (as hereafter amended, modified or supplemented, the
"Subordinated Credit Agreement"), the Subordinated Creditor agreed to purchase a
Subordinated Note of the Borrower in the original principal amount of $2,500,000
(as hereafter amended, modified or replaced, the "Subordinated Note");
WHEREAS, the Senior Creditor and the Subordinated Creditor have agreed
that the Subordinated Creditor will expressly subordinate the obligations of the
Borrower with respect to the Subordinated Note to the prior payment in full of
the obligations of the Borrower to the Senior Creditor on the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the premises, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE 1.
SUBORDINATION
Section 1.1. Specific Definitions.
As used in this Agreement, the term:
"Bankruptcy Code" means The Bankruptcy Code of 1978", as amended from time
to time (11 U.S.C. Sections 101 et seq.), and any replacement or successor act
which has a substantially similar purpose.
"Blockage Default" means a Senior Covenant Default or a Senior Payment
Default.
"Blockage Notice" means a Notice signed by the Senior Creditor and
delivered to the Subordinated Creditor to the effect that a Blockage Default has
occurred and is continuing as of the date of such certificate.
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"Blockage Period" shall mean any period during which the Subordinated
Creditor is in receipt of Notice that a Senior Bankruptcy Default exists and
also any period commencing from the date of receipt by the Subordinated Creditor
of a Blockage Notice and continuing until: (i) the Senior Indebtedness is paid
and satisfied in full (or until the default is sooner cured within any
applicable grace period or cured with the Senior Creditor's unconditional
permission), if such default is a Senior Payment Default; or (ii) in the case of
a Senior Covenant Default, the earliest of (a) 120 days after the Blockage
Notice minus the number of days in all other Blockage Periods during the 360 day
interval preceding the Blockage Notice (the "Maximum Blockage Period"), or (b)
the date on which the Subordinated Creditor receives Notice from the Senior
Creditor that the Blockage Period is terminated or (c) the date on which all
such defaults have been cured or waived with the Senior Creditor's unconditional
written permission; provided that the Senior Creditor shall not be entitled to
deliver more than four (4) Blockage Notices in any period of 360 consecutive
days, and further provided that if any Blockage Notice with respect to a Senior
Covenant Default is given (an "Initial Blockage Notice"), then no subsequent
Blockage Notice may be given with respect to a particular Senior Covenant
Default existing and known to the Senior Creditor at the time the Initial
Blockage Notice was given.
"Borrower" shall have the meaning set forth in the initial paragraph of
this Agreement.
"Default Notice" means Notice by the Senior Creditor to the Subordinated
Creditor of a default by the Borrower under the Senior Indebtedness.
"Financing Documents" means the collective reference to each and every
note, instrument, security agreement, pledge agreement, guaranty agreement,
mortgage, deed of trust, loan agreement, hypothecation agreement, indemnity
agreement, letter of credit application, assignment or any other document
(whether similar or dissimilar to any of the foregoing) previously,
simultaneously or hereafter executed and delivered by the Borrower or any other
Person, singly or jointly with another Person or Persons, in connection with any
of the Senior Indebtedness.
"Insolvency Proceeding" means any receivership, conservatorship, general
meeting of creditors, insolvency or bankruptcy proceeding, assignment for the
benefit of creditors, or any proceeding by or against the Borrower for any
relief under any bankruptcy or insolvency law or other laws relating to the
relief of debtors, readjustment of indebtedness, reorganizations, compositions
or extensions, including, without limitation, proceedings under the Bankruptcy
Code, or under any other federal, state or local statute, laws, rules and
regulations, all whether now or hereafter in effect.
"Lien" means any mortgage, deed of trust, deed to secure debt, grant,
pledge, security interest, assignment, encumbrance, judgment, financing
statement, lien or charge of any kind, whether perfected or unperfected,
voidable or unavoidable, consensual or non-consensual including, without
limitation, any conditional sale or other title retention agreement, any lease
in the nature thereof, and the filing of or agreement to give any financing
statement under the Uniform Commercial Code of any jurisdiction.
"Notice" means notice given in accordance with Section 5.5 hereof.
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"Person" means an individual, a corporation, a partnership, a joint
venture, a trust, an unincorporated association, a government or political
subdivision or agency thereof or any other entity.
"Security" means any security agreement, pledge, pledge agreement,
guaranty agreement, mortgage, deed of trust, deed to secure debt, trust deed,
land trust, indenture, indemnity deed of trust, indemnification agreement,
proceeding in rem, reimbursement agreement, financing statement, purchase
agreement, conditional sales contract, installment sales contract, collateral
agreement, financing lease, letter of credit, bond, loan agreement,
hypothecation agreement, deposit, financing statement or assignment, and also
means any agreement, document, security device or arrangement, documents,
statutory lien, lien arising by operation of law, judgment or other lien, right
of setoff, encumbrance, proceeding or other document or right, in whatever form
or however arising, whether similar or dissimilar to the foregoing which
directly or indirectly secures or enforces payment or performance of any Person
against, or otherwise encumbers or gives notice of an encumbrance upon, the real
property, personal property, rights or assets of any Person.
"Senior Bankruptcy Default" means any event of default under or contained
in any agreement or instrument evidencing Senior Indebtedness or pursuant to
which Senior Indebtedness has been incurred arising out of an Insolvency
Proceeding.
"Senior Covenant Default" means any event of default, other than a Senior
Bankruptcy Default or a Senior Payment Default, under or contained in the Senior
Credit Agreement, which event of default entitles the holder or holders of such
Senior Indebtedness (immediately or following the expiration of any applicable
grace periods, the giving of any required notices or the taking of any action by
such holder) to accelerate the maturity thereof.
"Senior Credit Agreement" means that certain Loan and Security Agreement
between Senior Creditor and Borrower dated March 10, 1997, as hereafter amended,
increased in accordance with the terms hereof, modified or restated (but
increased only in accordance with the definition of Senior Indebtedness).
"Senior Creditor" shall have the meaning set forth in the initial
paragraph to this Agreement.
"Senior Indebtedness" means all indebtedness, liabilities and obligations
of the Borrower to the Senior Creditor of every kind and nature whatsoever,
whether now existing or hereafter created arising pursuant to the Senior Credit
Agreement or any Financing Document executed in connection therewith, including,
without limitation, such indebtedness, liabilities and obligations of the
Borrower to the Senior Creditor (i) which are direct, indirect, contingent,
primary, secondary, alone, jointly with others, acquired directly or by
assignment, due, to become due, unsecured, secured, future advances, incurred or
assumed, (ii) which relate to or arise from the issuance of letters of credit,
or guaranties, indemnifications or other similar agreements in favor of third
parties made by the Senior Creditor at the request or for the benefit of the
Borrower, (iii) which are claims of subrogation, indemnification, reimbursement
or contribution of the Senior Creditor against the Borrower or any other Person
relating in any manner to obligations of the Borrower or the Security, (iv)
which are claims of whatever nature and whenever arising on account of the
avoidance of payments or other transfers to or for the benefit of the Senior
Creditor in Insolvency Proceedings or otherwise, or (v) which are claims
(including, without limitation, claims arising or accruing after the
commencement of Insolvency Proceedings by or against the Borrower or its assets,
whether or
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not such claims are allowed) for principal, interest, cost or expense payments,
liquidation costs, and attorneys' fees and expenses, all of the foregoing
whether arising under contract, by tort, at law, in equity or otherwise;
provided, that, with respect to any amendment, modification, assignment or
supplement to the Senior Credit Agreement or any Financing Document entered into
after the date of this Agreement which increases the Senior Indebtedness by a
sum in excess of (i) $2,500,000.00 or (ii) any higher sum which is within the
Borrowing Base set forth in the Senior Credit Agreement; provided that the
formula and related definitions used in calculating the Borrowing Base do not
differ in any material respect from the provisions set forth in the Senior
Credit Agreement as in effect on the date hereof, the Company is in compliance
with Section 7.1(b) of the Subordinated Credit Agreement.
"Senior Payment Default" means any event of default in respect of any
payment of principal (including but not limited to principal due by
acceleration) or interest or mandatory prepayment of principal with respect to
any Senior Indebtedness, which event of default entitles the holder or holders
of such Senior Indebtedness (immediately or following the expiration of any
applicable grace periods, the giving of any required notices or the taking of
any action by such holder) to accelerate the maturity thereof.
"Subordinated Creditor" shall have the meanings set forth in the initial
paragraph to this Agreement.
"Subordinated Indebtedness" means any and all existing and future
indebtedness, liabilities and obligations of the Borrower to the Subordinated
Creditor of every kind and nature whatsoever, which arise pursuant to the
Subordinated Credit Agreement and Subordinated Note including, without
limitation, such indebtedness, liabilities, and obligations of the Borrower to
the Subordinated Creditor (i) which are direct, indirect, contingent, primary,
secondary, alone, jointly with others, due, to become due, acquired directly or
by assignment, unsecured, secured, future advances, incurred or assumed, and all
guaranties, indemnifications and other undertakings of Persons other than the
Borrower with respect to the foregoing, (ii) which relate to or arise from
guaranties, indemnifications or other similar agreements in favor of third
parties made by the Subordinated Creditor at the request of or for the benefit
of the Borrower, (iii) which are claims of indemnification, reimbursement or
contribution of the Subordinated Creditor against the Borrower or any other
Person relating in any manner to obligations of the Borrower, (iv) which are
claims of whatever nature and whenever arising on account of the avoidance of
payments or other transfers to or for the benefit of the Subordinated Creditor
in Insolvency Proceedings or otherwise, or (v) which are claims (including,
without limitation, claims arising or accruing after the commencement of
Insolvency Proceedings by or against the Borrower or its assets, whether or not
such claims are allowed) for interest, expense payments, liquidation costs, and
attorneys' fees and expenses, all of the foregoing whether arising under
contract, by tort, at law, in equity or otherwise.
Section 1.2. Other Definitional Provisions. Unless otherwise defined
herein, all terms used herein which are defined by the Pennsylvania Uniform
Commercial Code shall have the same meanings as assigned to them by the
Pennsylvania Uniform Commercial Code unless and to the extent varied by this
Agreement. The word "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement, and section, subsection,
schedule and exhibit references are references to sections or subsections of, or
schedules or exhibits to, as the case may be, this Agreement unless otherwise
specified. As used herein, singular number shall include the plural, the
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plural the singular and the use of the masculine, feminine or neuter gender
shall include all genders, as the context may require. Reference to any one or
more of the Financing Documents and any of the Financing Documents shall mean
the same as the foregoing may from time to time be amended, restated,
substituted, extended, renewed, supplemented or otherwise modified.
ARTICLE 2.
SUBORDINATION
Section 2.1. Subordinated Indebtedness. The Senior Creditor consents to
the existence of the Subordinated Indebtedness. The Subordinated Creditor hereby
subordinates and postpones the payment of, and the time of payment of, and the
right to bring any action to collect all or any portion of the Subordinated
Indebtedness to and in favor of the payment of all of the Senior Indebtedness to
the extent and in the manner set forth herein. The parties hereby agree that:
(a) Provided that no Blockage Period shall then be in effect,
Borrower may make and Subordinated Creditor may accept regularly scheduled, non
accelerated quarterly payments of non default interest (with the understanding
that interest pursuant to Section 2.3(d) does not constitute default interest)
on the Subordinated Indebtedness (including interest payments with respect to
the Deferred Interest Notes, as such term is defined in the Subordinated Credit
Agreement) which accrue after September 30, 1998, as well as non-accelerated
regularly scheduled payment of principal pursuant to the terms of the
Subordinated Credit Agreement or the Subordinated Note and Deferred Interest
Notes. Subordinated Creditor shall not accept any other payment of the
Subordinated Indebtedness unless Subordinated Creditor has complied with
subsections (b), (e) or (f) of this Section 2.1 and such payment is not
otherwise prohibited by the terms of this Agreement.
(b) During any Blockage Period, unless and until all of the Senior
Indebtedness has been fully paid and any commitment pursuant to the Senior
Credit Agreement is terminated, or each Blockage Default shall have been
remedied or waived or shall have ceased to exist (as evidenced by a Notice from
the Senior Creditor to the Subordinated Creditor to that effect), the
Subordinated Creditor shall not, without the prior written consent of the Senior
Creditor, ask, demand, accelerate, sue for, set off, accept or receive any
direct or indirect payment (in cash, property or security) of all or any part of
the Subordinated Indebtedness. Upon termination of any Blockage Period, the
Borrower may pay and the Subordinated Creditor may receive any payments on
account of the Subordinated Indebtedness which are otherwise due and payable
(including any payments accruing before or during such Blockage Period). Nothing
set forth herein shall restrict the Subordinated Creditor from declaring a
default under the Subordinated Indebtedness but the Subordinated Creditor shall
not take any action to demand for or accelerate the Subordinated Indebtedness
prior to giving any notice required pursuant to subsection (e) below provided
that, subject to Section 3.1 below, nothing shall prohibit the Subordinated
Creditor from accelerating or taking any other action upon the occurrence of an
Insolvency Proceeding.
(c) The Subordinated Creditor represents and warrants to the Senior
Creditor that it is the lawful owner of the Subordinated Indebtedness and no
part thereof has been assigned to or subordinated or subjected to any other
security interest in favor of anyone other than the Senior Creditor.
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(d) The Subordinated Creditor and the Borrower agree and warrant
that any instrument, agreement, security or other writing now or hereafter
evidencing all or any portion of the Subordinated Indebtedness shall bear on its
face a clear and conspicuous legend that it is subject to the terms of this
Agreement. Until all Senior Indebtedness has been paid in full, the Borrower
shall not issue any instrument, security or other writing evidencing any part of
the Subordinated Debt (other than the Subordinated Note and the Subordinated
Credit Agreement and the Deferred Interest Notes) or amend or modify in any
respect any such instrument, security or other writing except at the request of
and in the manner requested by the Senior Creditor if the effect thereof is to
(i) increase the amount of indebtedness or interest rate thereunder or (ii)
accelerate the schedule of repayment (including without limitation, the addition
of any required prepayments of the Subordinated Debt).
(e) The Subordinated Creditor hereby agrees that, upon the
occurrence of an event of default pursuant to the Subordinated Credit Agreement
(other than an event of default arising out of the bankruptcy of the Borrower),
it will not, without the consent of the Senior Creditor, take any action to
accelerate, demand, set-off or accept any payment (other than a payment of past
due interest which cures such default) with respect to the Subordinated
Indebtedness until ten (10) days after notice of such action has been received
by the Senior Creditor (which notice may be sent during a Blockage Period to
expire upon the later of (i) ten (10) days after the sending of such notice and
(ii) the termination of such Blockage Period). Such notice may not be sent in
the event of a default under the Subordinated Indebtedness which is caused
solely by a non payment default under the Senior Indebtedness, which non payment
default has not resulted in an acceleration of the Senior Indebtedness.
(f) In addition to the restrictions set forth above, the
Subordinated Creditor shall not, without the prior written consent of the Senior
Creditor, accept any voluntary prepayment of the Subordinated Indebtedness
except in connection with a public offering by the Company as described in
section 2.4(b) of the Subordinated Credit Agreement as in effect on the date
hereof.
The Senior Creditor hereby acknowledges and agrees that nothing set
forth in this Agreement or the Senior Credit Agreement or any document executed
in connection therewith shall be deemed to limit or abridge the rights of the
Subordinated Creditor to exercise its conversion rights pursuant to the
Subordinated Credit Agreement and to exercise all rights granted to it
thereunder and under any document executed in connection therewith as an equity
holder including, without limitation, all rights to convert, require public
offerings, receive payments thereof and receive payment of the Make Whole
Premium (as defined in Section 9.3 of the Subordinated Credit Agreement)
pursuant to Article IX of the Subordinated Credit Agreement, all rights to
receive dividends pursuant to Section 9.10 of the Subordinated Credit Agreement
(the "Special Dividends") provided that the dividends paid by the Company which
triggered payment of the Special Dividends were permitted by the Senior Credit
Agreement and all rights to indemnification under Section 7(a) of the
Registration Rights Agreement.
The Senior Creditor further agrees that it shall not amend any
existing agreement or enter into any new agreement with the Borrower which would
(x) restrict the adoption of the Charter Amendment (as such term is defined in
the Subordinated Credit Agreement), or (y) prohibit the Borrower from complying
with any exercise of the Subordinated Creditor's rights pursuant to Article 9 of
the Subordinated Credit Agreement or the Registration Rights Agreement.
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Section 2.2. Security.
(a) The Subordinated Creditor and the Borrower represent and warrant
that the Subordinated Indebtedness is not and shall not be secured in any way
directly or indirectly by any Security, except as provided in Section 6.13 of
the Subordinated Credit Agreement regarding Key Man Life Insurance, unless
otherwise agreed by the Senior Creditor.
(b) The Subordinated Creditor hereby subordinates the lien and the
priority of the Subordinated Creditor's existing and future Liens and other
interests, if any, in and to the Security to the Senior Lenders' existing and
future interest in the Security notwithstanding the time of attachment of the
interests of the Senior Creditor or the Subordinated Creditor or the time the
Senior Indebtedness or the Subordinated Indebtedness is incurred.
Notwithstanding anything to the contrary contained in this Agreement, under
applicable law or otherwise, in the event that the Liens of the Senior Creditor
are at any time unperfected with respect to any or all of the Security, the lack
of perfection by the Senior Creditor as to any such Security shall not affect
the validity, enforceability or priority of any Lien on the Security in favor of
the Subordinated Creditor. In any such event, the Liens of the Subordinated
Creditor shall have priority over any and all other Liens in favor of any third
party with respect to the Security (including, but not limited to any trustee
under the Bankruptcy Code), the Subordinated Creditor shall be, and is hereby
constituted, as the Senior Creditor's agent and bailee for purposes of
perfection of the Liens of the Senior Creditor in the Security such that the
Lien in favor of the Subordinated Creditor shall be held by the Subordinated
Creditor for the benefit of the Senior Creditor and the proceeds of any
disposition of the Security shall be and are in all respects subject to the
priority of right to payment and satisfaction of first, the Senior Indebtedness
and then, the Subordinated Indebtedness. The lien priorities provided in this
Section shall not be altered or otherwise affected by any amendment,
modification, supplement, extension, renewal, restatement or refinancing of
either the Senior Indebtedness or the Subordinated Indebtedness, nor by any
action or inaction which either the Senior Creditor or the Subordinated Creditor
may take or fail to take in respect of the Security, except as otherwise
provided above in this subsection.
(c) Until the Senior Indebtedness has been fully paid and there
exists no commitment pursuant to the Senior Credit Agreement, Subordinated
Creditor shall not, without the prior written consent of the Senior Creditor,
sue for, liquidate, sell, foreclose, set off, collect, accept or surrender,
receive any proceeds, petition, commence or otherwise initiate any action (or
join any other Person in so doing) against the Borrower to realize or seek to
realize upon all or any part of the Security. In the event the Senior Creditor
may from time to time execute releases, partial releases, terminations,
reconveyances, subordinations or other documents releasing or otherwise limiting
the Senior Creditor's interests in the Security, the Subordinated Creditor
agrees to execute and deliver at such time such further documents as the Senior
Creditor may require to effect a corresponding change to the Subordinated
Creditor's position in the same Security, but only to the extent such Security
is sold or otherwise disposed of by the Borrower with the consent of the Senior
Creditor or in a commercially reasonable manner by the Senior Creditor or its
agents.
(d) The Senior Creditor shall have the exclusive right to exercise
and enforce all privileges and rights with respect to the Security according to
the Senior Creditor's discretion and the exercise of its business judgment,
including, without limitation, the exclusive right to take or retake control or
possession of such Security and to hold, prepare for sale, process, sell, lease,
dispose of, or liquidate such Security.
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<PAGE>
(e) Only the Senior Creditor shall have the right to restrict or
permit, or approve or disapprove, the sale, transfer or other disposition of
Security. In the event the Senior Creditor releases its Liens on all or any part
of the Security, the Subordinated Creditor will, immediately upon the request of
the Senior Creditor, release it Liens upon the same Security, but only to the
extent such Security is sold or otherwise disposed of by the Borrower with the
consent of the Senior Creditor or in a commercially reasonable manner by the
Senior Creditor or its agents. The Subordinated Creditor will immediately
deliver such releases, acknowledgments and other documents as the Senior
Creditor may require in connection therewith.
Section 2.3. Further Representations and Warranties. The Subordinated
Creditor represents and warrants to the Senior Creditor that:
(a) the Subordinated Creditor is the exclusive legal and beneficial
owner of all of the Subordinated Indebtedness and of all interests of the
secured party, mortgagee, assignee, indemnitee, or the like in any Security
relating to the Subordinated Indebtedness, if any;
(b) neither the Subordinated Indebtedness, nor the interests of the
secured party, mortgagee, assignee, indemnitee, or the like in any Security
relating to the Subordinated Indebtedness, is subject to any lien, security
interest, financing statements, subordination, assignment or other claim;
(c) true, correct and complete copies of all documents relating to
the Subordinated Indebtedness in effect as of the date hereof have been
furnished to the Senior Creditor; and
(d) the execution, deliver and performance of this Agreement is
within the corporate powers of the Subordinated Creditor, has been duly
authorized by all necessary corporate action of he Subordinated Creditor, and
does not contravene any statute, regulation, rule, order or judgment, any
charter, by-law or preference stock provision of the Subordinated Creditor, or
any provision of any mortgage, indenture, contract or other agreement binding on
the Subordinated Creditor or affecting it properties, which would prohibit, or
cause a default under or in any way prevent the execution, delivery, or carrying
out of the terms of this Agreement.
Section 2.4. Further Documents. The Subordinated Creditor and the Borrower
agree they shall promptly execute such further documents and acknowledgments
(including, without limitation, amendments to and releases of financing
statements and other documents of record) as the Senior Creditor may require to
confirm or evidence their respective obligations and the Senior Creditor's
rights under this Agreement.
ARTICLE 3.
DISTRIBUTIONS AND RECEIPTS
Section 3.1. Distributions, etc. In the event of any distribution,
division or application, partial or complete, voluntary or involuntary, by
operation of law or otherwise, of all or any part of the assets of the Borrower
or the proceeds thereof to creditors of the Borrower or to any indebtedness,
liabilities and obligations of the Borrower, by reason of the liquidation,
dissolution or other winding up of the Borrower or Borrower's business, or in
the event of any sale or Insolvency Proceedings with respect to the Borrower or
Borrower's business, or in the event of any sale or
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<PAGE>
Insolvency Proceedings with respect to the Borrower or its assets, in any such
event, any payment, distribution or benefit of any kind whatsoever or character,
either in cash, securities or other property, whether or not on account of the
Security, which shall be payable, deliverable or receivable upon or with respect
to all or any part of the Subordinated Indebtedness shall be paid or delivered
directly to the Senior Creditor for application to the Senior Indebtedness
(whether due or not due and in such order and manner as the Senior Creditor may
elect; and including, without limitation any interest accruing subsequent to the
commencement of any such event or Insolvency Proceedings) until the Senior
Indebtedness shall have been fully paid and satisfied.
In connection with any Insolvency Proceedings, the Subordinated Creditor
hereby irrevocably authorizes and empowers the Senior Creditor (but places no
duty upon the Senior Creditor to take any such action), and irrevocably appoints
the Senior Creditor as the Subordinated Creditor's attorney-in-fact to file
proofs of claim on account of the Subordinated Indebtedness in the event that
the Subordinated Creditor fails to do so within fifteen (15) days of the bar
date pertaining thereto; provided, however, that Senior Creditor shall not be
permitted to vote such claim, all voting rights being retained by the
Subordinated Creditor.
Section 3.2. Receipts by Subordinated Creditor. Should any payment or
distribution not permitted by the provisions of this Agreement or property or
proceeds thereof be received by the Subordinated Creditor upon or with respect
to all or any part of the Subordinated Indebtedness and/or the Security prior to
the full payment and satisfaction of the Senior Indebtedness, the Subordinated
Creditor will deliver the same to the Senior Creditor in the form received
(except for the endorsement or assignment of the Subordinated Creditor when the
Senior Creditor deems appropriate), for application to the Senior Indebtedness
(whether due or not due and in such order and manner as the Senior Creditor may
elect in accordance with the Financing Documents) and, until so delivered, the
same shall be held in trust by the Subordinated Creditor as property of the
Senior Creditor. In the event of the failure of the Subordinated Creditor to
make any such endorsement or assignment, the Senior Creditor, or any of its
officers or employees on behalf of the Senior Creditor, is hereby irrevocably
authorized in its own name or in the name of the Subordinated Creditor to make
the same, and is hereby appointed the Subordinated Creditor's attorney-in-fact
for those purposes, that appointment being coupled with an interest and
irrevocable.
ARTICLE 4.
ADDITIONAL AGREEMENTS.
Section 4.1. Consents; Waivers; etc. The Subordinated Creditor hereby
consents that at any time and from time to time and with or without
consideration, the Senior Creditor may, without further consent of or notice to
the Subordinated Creditor and without in any manner affecting, impairing,
lessening or releasing any of the provisions of this Agreement, renew, extend,
change the manner, time, place and terms of payment of, sell, exchange, release,
substitute, surrender, realize upon, modify, waive, grant indulgences with
respect to and otherwise deal with in any manner: (a) all or any part of the
Senior Indebtedness; (b) all or any of the Financing Documents; (c) all or any
part of any property at any time included within the Security; and (d) any
Person at any time primarily or secondarily liable for all or any part of the
Senior Indebtedness and/or any collateral and security therefor, all as if this
Subordination Agreement and any interest which the Subordinated Creditor has in
the Security did not exist. The Subordinated Creditor hereby waives demand,
presentment for payment, protest, notice of dishonor and of protest with respect
to the Senior
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<PAGE>
Indebtedness, the Subordinated Indebtedness and/or the Security, notice of
acceptance of this Agreement, notice of the making of any of the Senior
Indebtedness and notice of default under any of the Financing Documents.
Section 4.2. Continuing Agreement. This is a continuing Subordination
Agreement until all of the Senior Indebtedness has been fully paid, until all of
the Senior Indebtedness and all of the Subordinated Creditor's obligations to
the Senior Creditor have been performed and satisfied, and until the Senior
Creditor has no obligation or agreement to allow further Senior Indebtedness.
Section 4.3. No Third Party Beneficiaries. The provisions of this
Agreement are solely for the benefit of the Senior Creditor, its successors and
assigns and there are no other parties or Persons whatsoever (including, without
limitation, the Borrower, its successors and assigns) who are intended to be
benefitted in any manner whatsoever by this Agreement.
Section 4.4. Transfer or Assignment by Subordinated Creditor. The
Subordinated Creditor agrees not to subordinate, assign or transfer all or any
part of the Subordinated Indebtedness or the Security to any Person other than
the Senior Creditor without the prior written consent of the Senior Creditor,
which consent shall not be unreasonably withheld or delayed.
Section 4.5. Subordination of Senior Indebtedness. The Senior Creditor
hereby agrees not to subordinate all or any part of the Senior Indebtedness or
its rights pursuant to the Senior Credit Agreement without the prior written
consent of the Subordinated Creditor.
Section 4.6. Statement of Debt. The Subordinated Creditor and the Borrower
will, at any time or times upon the request of the Senior Creditor, promptly
furnish to the Senior Creditor a true, correct and complete statement of the
outstanding Subordinated Indebtedness.
Section 4.7. Subrogation; Marshalling. The Subordinated Creditor shall not
be subrogated to, or be entitled to any assignment of any Senior Indebtedness or
evidence of any Senior Indebtedness or any Security until all Senior
Indebtedness is paid in full. The Subordinated Creditor hereby waives any and
all rights to have any Security or any part thereof granted to the Senior
Creditor marshalled in any Insolvency Proceedings or upon any foreclosure or
other disposition of such Security by the Senior Creditor or otherwise.
Section 4.8. Successor to Senior Creditor. Subordinated Creditor shall
execute and deliver to any Person who succeeds to the interest of Senior
Creditor with respect to the Senior Indebtedness or which refinances the Senior
Indebtedness a Subordination Agreement in the form hereof with conforming
changes as long as the indebtedness thereunder constitutes Senior Indebtedness.
ARTICLE 5.
MISCELLANEOUS
Section 5.1. Delay in Enforcement, etc. No delay or failure on the part of
the Senior Creditor to exercise any of its rights or remedies hereunder or now
or hereafter existing at law or in equity or by statute or otherwise, or any
partial or single exercise thereof, shall constitute a waiver thereof. All such
rights and remedies are cumulative and may be exercised singly or concurrently
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<PAGE>
and the exercise of any one or more of them will not be a waiver of any other.
No waiver of any of its rights and remedies hereunder, and no modification or
amendment of this Agreement shall be deemed to be made by the Senior Creditor
unless the same shall be in writing, duly signed on behalf of the Senior
Creditor, and each such waiver, if any, shall apply only with respect to the
specific instance involved and shall in no way impair the rights and remedies of
the Senior Creditor hereunder in any other respect at any other time.
Section 5.2. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and the Senior Creditor and the
Borrower and their respective successors and assigns.
Section 5.3. Headings. The titles and headings of Articles, sections or
other parts of this Agreement are for convenience only, and shall not limit or
otherwise affect any of the terms hereof.
Section 5.4. Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the Commonwealth of Pennsylvania, with the same
force and effect as if this Agreement had been executed, delivered, accepted and
performed solely in the Commonwealth of Pennsylvania.
Section 5.5. Notices. All notices, requests and demands to or upon the
parties to this Agreement shall be deemed to have been given, made or received
when delivered by hand, or three (3) days after the date when deposited in the
mail, postage prepaid by registered or certified mail, return receipt requested,
or, in the case of telegraphic notice, when delivered to the telegraphic company
and when properly transmitted, or, when sent by overnight courier, on the first
business day after the day when delivered to such overnight courier. All such
notices shall be addressed to the Senior Creditor as set forth in the initial
paragraph to this Agreement, and, in the case of any
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notice pursuant to Section 2.1(d), to counsel for the Senior Creditor as set
forth below, and to the Borrower and the Subordinated Creditor as set forth
below the signature lines to this Agreement, or to such other address as may be
hereafter designed by notice by the Senior Creditor, the Borrower or the
Subordinated Creditor to one another. The address for counsel to the Senior
Creditor is Wolf, Block, Schorr and Solis-Cohen, 350 Sentry Parkway, Bldg 640,
P.O. Box 1115, Blue Bell, PA 19422-0757, Attention: Bruce R. Lesser, Esquire.
IN WITNESS WHEREOF, the Senior Creditor and the Subordinated Creditor have
caused their duly authorized officers to execute this Agreement under seal as of
the date first written above.
SENIOR CREDITOR:
MELLON BANK, N. A.
By:_______________________________________________
Name/Title
1735 Market Street, 6th Fl.
Philadelphia, PA 19103
Attention: John M. DePledge, Vice President
SUBORDINATED CREDITOR:
SUNTRUST BANKS, INC.
By:_______________________________________________
Name/Title
Address:
25 Park Place, 5th Floor
Atlanta, Georgia 30303
Attention: Mr. Robert L. Dudiak
Acknowledged and Agreed as of the
date first written above:
CONSOLIDATED STAINLESS, INC.
By:________________________________
Name/Title
Address:
1601 E. Amelia Street
Orlando, FL 32803
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND ON PAGES
1 THROUGH 3 OF THE COMPANY'S FORM 10-K FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 273,914
<SECURITIES> 0
<RECEIVABLES> 6,294,794
<ALLOWANCES> 129,000
<INVENTORY> 21,321,810
<CURRENT-ASSETS> 29,644,251
<PP&E> 21,801,796
<DEPRECIATION> 4,287,918
<TOTAL-ASSETS> 51,252,251
<CURRENT-LIABILITIES> 12,910,514
<BONDS> 28,730,406
0
0
<COMMON> 44,659
<OTHER-SE> 9,173,672
<TOTAL-LIABILITY-AND-EQUITY> 51,252,251
<SALES> 50,822,978
<TOTAL-REVENUES> 50,822,978
<CGS> 45,191,433
<TOTAL-COSTS> 45,191,433
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 226,974
<INTEREST-EXPENSE> 3,003,386
<INCOME-PRETAX> (4,101,315)
<INCOME-TAX> (1,352,300)
<INCOME-CONTINUING> (2,749,015)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,749,015)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
