U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number 00-22690
CONSOLIDATED STAINLESS, INC.
State of Incorporation: Delaware
IRS Employer Identification Number: 59-1669166
1601 East Amelia Street
Orlando, Florida 32803
(407) 896-4000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock
Warrants
Indicate by check mark whether the issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES |_| NO |X|
As of August 7, 1998, Consolidated Stainless, Inc. had outstanding
4,610,329 shares of Common Stock, par value $.01 per share.
Indicate by check mark whether the issuer has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution under a plan confirmed by a
court.
YES |_| NO |X|
<PAGE>
TABLE OF CONTENTS
Item Page(s)
Part I
Financial Information
1. FINANCIAL STATEMENTS
Balance Sheets ................................................ 1 - 2
Statements of Operations ...................................... 3
Statements of Cash Flows ...................................... 4
Notes to Financial Statements ................................. 5 - 7
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .............................. 8 - 12
Part II
Other Information
1. LEGAL PROCEEDINGS ................................................ 13 - 15
2. OTHER INFORMATION ................................................ 15
6. EXHIBITS AND REPORTS ON FORM 8-K ................................. 16
<PAGE>
PART I
Financial Information
Item 1. Financial Statements
CONSOLIDATED STAINLESS, INC.
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS
(UNAUDITED)
6/30/98 12/31/97
============================
ASSETS
CURRENT:
Cash and cash equivalents $ 208,578 $ 5,648
Accounts receivable:
Trade, less allowance for possible losses
of $444,596 and $377,748 3,123,463 6,074,981
Other 84,792 175,229
Inventories 11,583,115 17,434,164
Prepaid expenses 154,874 326,151
Deferred financing costs, less accumulated
amortization of $589,721 -- 79,167
Notes receivable 267,931 254,294
Deferred income taxes 398,042 398,042
----------------------------
TOTAL CURRENT ASSETS 15,820,795 24,747,676
PROPERTY AND EQUIPMENT, less
accumulated depreciation and amortization 14,322,264 15,123,911
OTHER ASSETS:
Due from stockholders 49,341 48,388
Other 189,592 240,531
----------------------------
TOTAL OTHER ASSETS 238,933 288,919
----------------------------
TOTAL ASSETS $30,381,992 $40,160,506
============================
See the accompanying notes to the financial statements.
-1-
<PAGE>
CONSOLIDATED STAINLESS, INC.
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
6/30/98 12/31/97
===============================
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES:
Accounts payable $ 204,420 $ 70,897
Professional fees payable 753,715 47,707
Book overdrafts 105,794 60,844
Accrued expenses:
Payroll and related taxes 204,912 76,425
Interest 100,980 79,526
Other 171,872 20,850
Notes Payable 12,440 --
-------------------------------
TOTAL CURRENT LIABILITIES 1,554,133 356,249
LIABILITIES SUBJECT TO COMPROMISE 32,001,755 37,967,664
-------------------------------
TOTAL LIABILITIES 33,555,888 38,323,913
COMMITMENTS AND CONTIGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock $.01 par - shares authorized
2,000,000; none issued -- --
Common stock $.01 par - shares authorized
15,000,000; issued and outstanding 4,610,329 46,103 46,103
Additional paid-in capital 8,064,636 8,064,636
Deficit (11,284,635) (6,274,146)
-------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (3,173,896) 1,836,593
-------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) $ 30,381,992 $ 40,160,506
===============================
</TABLE>
See the accompanying notes to the financial statements.
-2-
<PAGE>
CONSOLIDATED STAINLESS, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
6/30/98 6/30/97 6/30/98 6/30/97
============================== ===============================
<S> <C> <C> <C> <C>
SALES $ 4,880,380 $ 14,005,738 $ 11,073,836 $ 27,377,422
COST OF SALES 4,182,415 12,306,658 9,893,529 24,252,266
------------------------------ -------------------------------
Gross profit 697,965 1,699,080 1,180,307 3,125,156
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,250,647 1,837,178 2,747,350 3,579,277
------------------------------ -------------------------------
Loss from operations (552,682) (138,098) (1,567,043) (454,121)
OTHER INCOME (EXPENSES):
Interest (628,652) (875,533) (1,341,960) (1,716,155)
Other 11,063 45,556 90,117 59,048
------------------------------ -------------------------------
(617,589) (829,977) (1,251,843) (1,657,107)
------------------------------ -------------------------------
Loss before reorganization costs and
taxes on income (benefit) (1,170,271) (968,075) (2,818,886) (2,111,228)
REORGANIZATION COSTS 1,436,161 -- 2,189,414 --
------------------------------ -------------------------------
Loss before taxes on income (benefit) (2,606,432) (968,075) (5,008,300) (2,111,228)
TAXES ON INCOME (BENEFIT) 2,064 (308,984) 2,189 (675,300)
------------------------------ -------------------------------
NET LOSS $(2,608,496) $ (659,091) $ (5,010,489) $ (1,435,928)
============================== ===============================
BASIC LOSS PER SHARE $ (0.57) $ (0.15) $ (1.09) $ (0.32)
============================== ===============================
DILUTED LOSS PER SHARE $ (0.57) $ (0.15) $ (1.09) $ (0.32)
============================== ===============================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 4,610,329 4,473,804 4,610,329 4,469,857
============================== ===============================
</TABLE>
See the accompanying notes to the financial statements.
-3-
<PAGE>
CONSOLIDATED STAINLESS, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
6/30/98 6/30/97
-----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,010,489) $(1,435,928)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation 801,010 810,690
Amortization 79,167 191,262
Loss on disposal of property and equipment 637 14,525
Deferred income taxes -- (675,593)
Cash provided by (used for):
Accounts receivable 3,041,955 (2,447,460)
Due from stockholders (953) (9,251)
Inventories 5,851,049 (798,220)
Refundable income taxes -- 27,475
Prepaid expenses 171,277 (323,422)
Accounts payable 435,003 3,763,228
Interest payable 627,304 --
Accruals 265,555 (61,429)
-----------------------------
Net cash provided by (used for) operating activities 6,261,515 (944,123)
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment -- (483,103)
Proceeds from the sale of property and equipment -- 345,298
Increase in notes receivable (13,637) --
Increase in other assets 50,939 (86,225)
-----------------------------
Net cash provided by (used for) investing activities 37,302 (224,030)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in book overdrafts 44,950 (89,284)
Proceeds from notes payable 12,440 --
Net proceeds (repayments) under revolving line of credit (6,067,598) 6,435,688
Repayments of long-term debt (55,216) (4,185,641)
Repayments of capital lease obligations (30,463) (430,621)
Deferred financing costs -- (185,484)
-----------------------------
Net cash provided by (used for) financing activities (6,095,887) 1,544,658
-----------------------------
Net increase in cash and cash equivalents 202,930 376,505
CASH AND CASH EQUIVALENTS, beginning of period 5,648 273,914
-----------------------------
CASH AND CASH EQUIVALENTS, end of period $ 208,578 $ 650,419
=============================
</TABLE>
See the accompanying notes to the financial statements.
-4-
<PAGE>
CONSOLIDATED STAINLESS, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - REORGANIZATION AND BASIS OF PRESENTATION
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q, and do not include all of the
information and disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for the year
ended December 31, 1996. Note: A Form 10-K for the year ended December 31, 1997
has not been prepared at the current time, due to the excessive financial burden
it would place on the Company. The accompanying financial statements have not
been examined by an independent accountant in accordance with generally accepted
auditing standards, but in the opinion of management, such financial statements
include all adjustments, consisting only of normal recurring adjustments and
accruals, to fairly report the Company's financial position and results of
operations. The results of operations for the interim periods shown in this
report are not necessarily indicative of results to be expected for the fiscal
year.
On December 15, 1997 (the "Petition Date"), the Company filed a voluntary
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code ("Chapter 11") in the United States Bankruptcy Court for the District of
Delaware. Management determined that filing the Chapter 11 petition would allow
the Company the needed time and flexibility to restructure its operations and
provide the time and protection necessary to restructure the Company's funding
sources.
Since the Petition Date, the Company has continued in possession of its assets
and, as debtor-in-possession, is authorized to operate and manage its business
and enter into all transactions (including obtaining services, inventories and
supplies) that it could have entered into in the ordinary course of business
without approval of the Bankruptcy Court. A statutory Creditors' Committee has
been appointed in the Chapter 11 case.
In a Chapter 11 filing, substantially all liabilities as of the Petition Date
are subject to compromise or other treatment under a plan of reorganization. For
financial reporting purposes, those liabilities and obligations whose
disposition is dependent on the outcome of the Chapter 11 filing have been
segregated and classified as liabilities subject to compromise under
reorganization proceedings in the accompanying balance sheet (Note 2).
Generally, actions to enforce or otherwise effect payment of all pre-Chapter 11
liabilities as well as all pending litigation against the Company are stayed
while the Company continues its business operations as Debtor-in-Possession.
Schedules have been filed by the Company with the Bankruptcy Court setting forth
its assets and liabilities as of the Petition Date as reflected in the Company's
accounting records. Differences between amounts reflected in such schedules and
claims filed by creditors will be investigated and either resolved or
adjudicated before the Bankruptcy Court. The ultimate amount of and settlement
terms for such liabilities are subject to a plan of reorganization and
accordingly are not presently determinable.
-5-
<PAGE>
Under the Bankruptcy Code, the Company may elect to assume or reject real estate
leases and employment contracts, subject to Bankruptcy Court approval. The
Company will continue to analyze its executory contracts and may assume or
reject additional contracts.
The accompanying financial statements have been prepared in conformity with
principles of accounting applicable to a going concern, which contemplate the
realization of assets and the satisfaction of liabilities in the normal course
of business. As a result of the Chapter 11 filing and circumstances relating to
this event, such realization of assets and satisfaction of liabilities is
subject to uncertainty. A plan of reorganization could materially change the
amounts reported in the accompanying financial statements, which do not give
effect to adjustments to the carrying values of assets and liabilities, which
may be necessary as a consequence of a plan of reorganization. The Company's
ability to continue as a going concern is contingent upon, among other things,
its ability to formulate a plan of reorganization that will be confirmed by the
Bankruptcy Court, to achieve satisfactory levels of profitability and cash flow
from operations, to maintain compliance with the Post-Petition Loan and Security
Agreement, its modifications and extensions (collectively, the "DIP Financing
Agreement") and the ability to obtain sufficient financing sources to meet
future obligations.
NOTE 2 - LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS
Liabilities subject to compromise under reorganization proceedings consist of
the following:
June 30, 1998 December 31, 1997
------------- -----------------
Priority debt (including interest): $ 721,172 $ 707,629
=========== ===========
Secured liabilities:
Borrowings under revolving
credit facility 11,171,112 17,238,710
Mortgages, notes payable and
capital lease obligations
(including interest)
9,232,675 9,054,795
----------- -----------
Subtotal 20,403,787 26,293,505
=========== ===========
Unsecured liabilities:
Trade and other payables
(including interest) 7,875,887 8,125,084
Convertible subordinated debt
(including interest) 3,000,909 2,841,446
----------- -----------
Subtotal 10,876,796 10,966,530
=========== ===========
Total liabilities subject to compromise $32,001,755 $37,967,664
=========== ===========
-6-
<PAGE>
Any plan of reorganization ultimately approved by the Company's pre-petition
creditors and shareholders and confirmed by the Bankruptcy Court may materially
change the amounts and terms of these pre-petition liabilities. Such amounts are
estimated as of June 30, 1998 and December 31, 1997, and the Company anticipates
that claims filed with the Bankruptcy Court by the Company's creditors will be
reconciled to the Company's financial records. The additional liability arising
from this reconciliation process, if any, is not subject to reasonable
estimation, and accordingly, no provision has been recorded for these possible
claims. The termination of other contractual obligations and the settlement of
disputed claims may create additional pre-petition liabilities. Such amounts, if
any, will be recognized in the balance sheet as they are identified and become
subject to reasonable estimation.
NOTE 3 - EARNINGS (LOSS) PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS 128") as of January 1, 1998. SFAS 128 establishes
new standards for computing and presenting earnings per share ("EPS").
Specifically, SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS, requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share is computed by dividing net income by the sum of the weighted
average number of common shares outstanding for the period plus the assumed
exercise of all dilutive securities. However, in the case of a loss per share,
dilutive securities outstanding would be antidilutive and would therefore be
excluded from the computation of diluted earnings per share.
The weighted average number of shares used to calculate basic earnings per share
was 4,610,329 and 4,473,804 for the three months ended June 30, 1998 and 1997,
respectively, and 4,610,329 and 4,469,857 for the six months ended June 30, 1998
and 1997, respectively. Diluted earnings per share were the same as basic
earnings per share.
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
The Company incurred long-term debt and capital lease obligations of $0 and
$66,835 in connection with the purchase of property and equipment during the six
months ended June 30, 1998 and 1997, respectively.
-7-
<PAGE>
Consolidated Stainless, Inc.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
The statements contained herein that are not historical facts may be forward
looking statements. The forward looking statements are subject to certain risks
and uncertainties, including without limitation those identified below, which
could cause actual results to differ materially from historical results or those
anticipated. Readers are cautioned not to place undue reliance on these forward
looking statements, which speak only as of their dates.
The following factors could cause actual results to differ materially from
historical results or those anticipated: failure to maintain adequate working
capital financing; decisions made in the context of the Company's pending
bankruptcy proceedings which are adverse to the Company; adverse economic
conditions, the impact of competitive products and pricing, product demand and
acceptance risks, raw material and other increased costs, customer delays or
difficulties in the production of products, and other risks detailed from time
to time in Consolidated Stainless, Inc.'s Securities and Exchange Commission
filings.
Proceedings Under Chapter 11
On December 15, 1997, (the "Petition Date"), the Company commenced a
reorganization case by filing a voluntary petition (the "Chapter 11 Petition")
for relief under chapter 11 ("Chapter 11") of title 11 of the United States Code
(as amended from time to time, the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), case
number 97-2593 (JJF). Management determined that filing of the Chapter 11
Petition would allow the needed time and flexibility to restructure the
Company's operations and provide the time and protection necessary to
restructure the Company's funding sources.
Since the Petition Date, the Company has continued in possession of its assets
and, as debtor-in-possession, is authorized to operate and manage its business
and enter into all transactions (including obtaining services, inventories and
supplies) that it could have entered into in the ordinary course of business
without approval of the Bankruptcy Court. A statutory Creditors' Committee has
been appointed in the Chapter 11 case.
Subsequent to the filing of the Chapter 11 Petition, the Company sought and
obtained several orders from the Bankruptcy Court which were intended to
stabilize its business. The most significant of these orders: (1) authorizing
the Company to obtain secured post-petition financing through the Post-Petition
Loan and Security Agreement, its modifications and extensions (collectively, the
"DIP Financing Agreement"); (2) authorized payment of certain pre-petition
liabilities, principally pre-petition wages and employee benefits; (3)
authorizing the Company to reject the employment agreement of the Executive Vice
President and Chief Financial Officer; (4) authorizing the Company to reject the
lease of the non-residential real property located in Houston, Texas, thereby
allowing the Company to reduce its administrative costs, by consolidating its
warehouse needs to its facilities in Florida; (5) authorizing the Company to
reject the lease of the
-8-
<PAGE>
non-residential real property located in Lombard, Illinois, and enter into a new
lease strictly for a sales office in Addison, Illinois, thereby allowing the
Company to reduce its administrative costs, by consolidating its warehouse needs
to its facilities in Florida; (6) authorizing the appointment of Phoenix
Management Services as the Company's turnaround management consultant and to
assist in the development and the formulation of a Plan of Reorganization.
Due to the Creditors' Committee's dissatisfaction with the Company's initial
business plan and the results of the Company's internal investigation in which
it was discovered that the Company's Chief Executive Officer, on his own behalf,
was involved in organizing two other stainless steel companies subsequent to the
Chapter 11 filing, the United States Trustee and the unsecured creditors'
committee had made separate motions to the Bankruptcy Court for the appointment
of a Chapter 11 trustee. As a result of these motions, a global settlement was
reached whereby an independent examiner would be engaged to perform an
investigation limited to specific areas and a turnaround consultant would be
retained as Co-Chief Executive Officer to assist in the operation and assessment
of the Company's business operations (See Part II - Other Information, Item 1 -
Legal Proceedings). Additionally, as a result of the Company's change in
management, a new business plan is currently under development.
The Company's financial statements have been prepared on a going concern basis,
which contemplates realization of assets and satisfaction of liabilities in the
normal course of business. As a result of the Chapter 11 filing and
circumstances relating to this event, such realization of assets and
satisfaction of liabilities is subject to uncertainty. A plan of reorganization
could materially change the amounts reported in the accompanying financial
statements, which do not give effect to adjustments to the carrying values of
assets and liabilities, which may be necessary as a consequence of a plan of
reorganization. The Company's ability to continue as a going concern is
contingent upon, among other things, its ability to form a plan of
reorganization that will be confirmed by the Bankruptcy Court, to achieve
satisfactory levels of profitability and cash flow from operations, to maintain
compliance with the DIP Financing Agreement and the ability to obtain sufficient
financing sources to meet future obligations.
Results of Operations
Sales for the three months ended June 30, 1998 were $4.9 million, reflecting a
65.2% decrease from the comparable period in 1997. Sales for the six months
ended June 30, 1998 were $11.1 million, resulting in a 59.6% decrease from the
six months of 1997. These decreases can be attributed to the sale of the Flow
Components division effective November 1, 1997, and the Company's announcement
of its December 15, 1997 bankruptcy filing.
Gross profit as a percentage of sales for the second quarter of 1998 increased
to 14.3%, as compared to 12.1% for the second quarter of 1997. However, for the
six months ended June 30, 1998, gross profit as a percentage of sales decreased
to 10.7% from 11.4% in the comparable period in 1997. These mixed results are
primarily due to slight market fluctuations.
-9-
<PAGE>
Selling, general and administrative expenses decreased 31.9% for the three
months ended June 30, 1998 as compared with the same period in 1997 and
decreased 23.2% for the six months ended June 30, 1998 relative to the
comparable period in 1997. These decreases are due primarily to a decline in
payroll and payroll related costs resulting from a cutback in compensation
levels as well as a reduction in the workforce in 1998.
Interest expense decreased 28.2% for the second quarter of 1998 as compared with
the second quarter in 1997. For the six months ended June 30, 1998 interest
expense decreased 21.8% compared with the six months ended June 30, 1997. This
was primarily due to a decrease in the Company's indebtedness as the Company
began downsizing its operations through the sale of its Flow Components division
and reductions in inventory throughout the Company.
Reorganization costs of $1.4 million were incurred in the second quarter of 1998
and $2.2 million for the six months ended June 30, 1998 as the Company attempts
to emerge from bankruptcy. Since the Chapter 11 filing occurred on December 15,
1997, no such costs were incurred for the three months or six months ended June
30, 1997.
As a result of the foregoing factors, the net loss for the three months ended
June 30, 1998 was $2.6 million, as compared with a $0.7 million net loss
generated during the second quarter of 1997. The net loss for the six months
ended June 30, 1998 was $5.0 million as compared to $1.4 million net loss for
the comparable period in 1997. This increased loss can be primarily attributed
to a decline in sales, reorganization costs associated with the Chapter 11
filing, and no income tax benefit for 1998.
Liquidity and Capital Resources
On May 29, 1998, the Company entered into the Extension and Modification to
Post-Petition Loan and Security Agreement (the "Extension") with Mellon Bank,
N.A. ("Mellon"). The maximum borrowing amount was changed by reducing it to
$12.3 million from $13.0 million by June 15, 1998 per the Fifth Modification to
Post-Petition Loan and Security Agreement dated April 16, 1998. The advance rate
percentages for accounts receivable and inventory remain unchanged at 80% of
qualified accounts receivable and 65% of eligible inventory on pre-petition
assets, and 60% of eligible inventory on post-petition assets. In addition to
amending the maximum borrowing amount and maximum advance limits for inventory
and the over-advance, the Extension requires that the Texas and Illinois
distribution locations be closed no later than May 31, 1998, rather than April
22, 1998 and May 8, 1998, respectively. As a result of these closures, the
Company replaced its distribution facility in Illinois with a sales office in
the Chicago area. Additionally, under the Extension, the Company is no longer
required to close down its Georgia distribution facility. The Extension further
stipulates that as of June 14, 1998, rather than the previously set date of May
31, 1998, Mellon shall have no obligations to advance for any operational costs
associated with the manufacturing facilities. Finally, the Extension requires
the Company to hire a crisis manager
-10-
<PAGE>
acceptable to Mellon to assist in management of the Company (see Part II - Other
Information, Item 5 - Other Events). This Extension expired June 14, 1998.
On June 12, 1998, the Company entered into the Second Extension and Modification
to Post-Petition Loan and Security Agreement (the "Second Extension") with
Mellon Bank, N.A. ("Mellon"). The maximum borrowing amount was changed by
reducing it to $11.8 million from $12.3 million by June 26, 1998. The advance
rate percentages for accounts receivable and inventory remain unchanged. In
addition to amending the maximum borrowing amount and maximum advance limits for
inventory and the over-advance, the Second Extension stipulates that as of June
28, 1998, rather than the previously set date of June 14, 1998, Mellon shall
have no obligations to advance for any operational costs associated with the
manufacturing facilities. Additionally, the Second Extension requires that
Vincent Colistra, of Phoenix Management Services, act as Co-Chief Executive
Officer along with Ronald J. Adams (see Part II - Other Information , Item 5 -
Other Events). Finally, the Second Extension requires if the Company fails to
file a Chapter 11 Plan of Reorganization acceptable to Mellon by July 15, 1998,
Mellon shall be permitted to file and solicit acceptances to its own Chapter 11
Plan. This Second Extension expired June 28, 1998.
On June 26, 1998, the Company entered into the Third Extension and Modification
to Post-Petition Loan and Security Agreement (the "Third Extension") with Mellon
Bank, N.A. ("Mellon"). The maximum borrowing amount was changed by reducing it
to $11.0 million from $11.8 million by August 1, 1998. The advance rate
percentages for accounts receivable and inventory remain unchanged. In addition
to amending the maximum borrowing amount and maximum advance limits for
inventory and the over-advance, the Third Extension stipulates that as of July
15, 1998, rather than the previously set date per the Second Extension of June
28, 1998, Mellon shall have no obligations to advance for any operational costs
associated with the manufacturing facilities. Finally, the Third Extension
requires if the Company fails to file a Chapter 11 Plan of Reorganization
acceptable to Mellon by July 31, 1998, rather than the previously set date of
July 15, 1998, Mellon shall be permitted to file and solicit acceptances to its
own Chapter 11 Plan. This Third Extension expired July 31, 1998.
On July 31, 1998, the Company entered into the Fourth Extension and Modification
to Post-Petition Loan and Security Agreement (the "Fourth Extension") with
Mellon Bank, N.A. ("Mellon"). The maximum borrowing amount was changed by
reducing it to $10.0 million from $11.0 million by August 28, 1998. The advance
rate percentages for accounts receivable and inventory remain unchanged. In
addition to amending the maximum borrowing amount and maximum advance limits for
inventory and the over-advance, the Fourth Extension stipulates that as of
August 31, 1998, rather than the previously set date per the Third Extension of
July 15, 1998, Mellon shall have no obligations to advance for any operational
costs associated with the manufacturing facilities. Finally, the Fourth
Extension requires if the Company fails to file a Chapter 11 Plan of
Reorganization acceptable to Mellon by August 17, 1998, rather than the
previously set date per the Third Extension of July 31, 1998, Mellon shall be
permitted to file and solicit acceptances to its own Chapter 11 Plan. This
Fourth Extension expires August 31, 1998.
-11-
<PAGE>
Upon expiration of this agreement, a new loan agreement will need to be entered
into with Mellon or some other lender. There is no guaranty that the Company
will be able to obtain such renewed financing on terms satisfactory to the
Company, or on any terms.
Maximum advance limits are set, on a declining basis throughout the term of the
DIP Financing Agreement, for inventory and the over-advance. The interest rate
on this revolving line of credit facility is a variable margin over the
fluctuating prime rate of interest. Additionally, the DIP Financing Agreement
contains certain negative covenants to be observed by the Company.
Borrowings under the DIP Financing Agreement are secured by all of the assets of
the Company. Additionally, such borrowings are personally guaranteed up to $3.0
million in the aggregate by Harvey Adams, former Chief Executive Officer, and
Ronald Adams, current Co-Chief Executive Officer.
The Company is in default of certain covenants included in the DIP Financing
Agreement, such as its failure to achieve projected monthly sales. Accordingly,
Mellon may exercise its rights and remedies under this agreement, including but
not limited to, an immediate termination of the line of credit provided by
Mellon, the cessation of any future advances under the line of credit,
acceleration of all indebtedness due under the DIP Financing Agreement and
foreclosure and taking possession of substantially all of the Company's assets.
While Mellon has not at the present time chosen to seek such remedy, there is no
guarantee that no such action will be taken in the future.
On August 7, 1998, approximately $10.3 million was outstanding under the line of
credit owed to Mellon Bank.
-12-
<PAGE>
Consolidated Stainless, Inc.
(Debtor-in-Possession)
Part II: Other Information
Item 1. Legal Proceedings
Except as set forth below, there are no pending material proceedings of a
material nature (exceeding ten percent of current assets or $1.58 million) in
which the Company is a party, or to which any of its respective properties are
subject, which either individually or in the aggregate may have a material
adverse effect on the results of operations or financial position of the
Company.
A petition was filed with the Equal Employment Opportunity Commission (the
"EEOC") in Houston, Texas on December 10, 1997 in which Theresa K. Reich, a
former employee of the Company, filed a charge of sexual discrimination. On that
same day, Lynn Medley filed a petition with the EEOC in Houston, Texas in which
Medley, a former employee of the Company, filed a charge of sexual
discrimination. In both lawsuits, The EEOC has issued a no-action letter on the
matter. Both plaintiffs are seeking compensatory and punitive damages with an
unspecified amount of monetary relief.
SouthTrust Bank, N.A. filed a complaint with the Florida State Court,
State of Florida on December 4, 1997. This was a debt foreclosure action
involving two promissory notes. SouthTrust Bank is seeking $1,699,658, the sum
of both disputed notes, plus interest and legal fees in relief. Another action
was filed by SouthTrust Bank with the 11th Circuit Court in Florida, for another
debt foreclosure action, involving six promissory notes against both the Company
and Ronald J. Adams. Mr. Adams is being sued personally on an alleged guaranty.
The plaintiff is seeking close to $2,000,000, the sum of the six notes in
dispute plus added interest and legal fees in relief. Both actions against the
Company were stayed by operation of the Company's Chapter 11 filing.
Similarly, on February 17, 1998, SouthTrust Bank, N.A. filed a motion with
the District Court of Delaware for relief from the automatic stay and/or for
adequate protection for the eight promissory notes, discussed above, as well as
two additional promissory notes. The amount at issue is approximately
$4,000,000. A contested hearing was held on June 4, 1998 and was continued on
June 18, 1998. Both parties are awaiting the Court's decision. Should the Court
decide to lift the automatic stay, SouthTrust Bank may be entitled to pursue its
remedies with respect to seeking the repossession of a substantial portion of
the real and personal property used in the Company's manufacturing operations.
This could result in a shut down of such operations and greatly impact the
Company's business plan currently under development.
A motion was filed for relief from the automatic stay and/or for adequate
protection by SunTrust Bank, Central Florida, N.A. on February 17, 1998. The
amount at issue is approximately $4,785,000. The plaintiff and the debtor have
reached a "standstill" agreement, pursuant to which SunTrust Bank has agreed
inter alia to forbear from pursuing the requested relief until approximately
August 31, 1998, in exchange for adequate protection payments from the debtor.
-13-
<PAGE>
By motion papers dated April 23, 1998, the United States Trustee (the
"Trustee") moved the Bankruptcy Court for appointment of a trustee to operate
the business of the Company, or, in the alternative, for appointment of an
examiner. The Trustee alleged that certain of the Company's officers, directors
and employees have engaged in a course of conduct that constituted self-dealing
and an usurpation of corporate opportunity, represented a conflict between a
director's fiduciary duty to the shareholders and a director's self-interests
and constituted a breach of duty and loyalty. The Trustee alleged, among other
things, the following factual bases for the foregoing allegations: Harvey Adams
breached his fiduciary duty by (i) forming two companies in apparent direct
competition with the Company, (ii) issuing purchase orders on the Company's
computers for approximately $700,000 of stainless steel products and (iii) using
Company employees, equipment and transport to unload approximately 45,000 pounds
of this product purchased through the newly formed companies at a Florida
warehouse owned by him and thereafter to inspect the product.
By motion papers dated April 29, 1998, the Official Committee of Unsecured
Creditors (the "Committee") in the Chapter 11 case also moved the Bankruptcy
Court for appointment of a trustee to operate the Company's business. The
Committee alleged two grounds for the motion: mismanagement of the Company and
irregularities and improprieties on the part of Harvey and Ronald Adams,
including alleged self-dealing, establishment of competing businesses,
usurpation of corporate opportunities belonging to the Company, use of the
Company's assets for personal gain and breach of fiduciary duty. The Committee
alleged, among other things, the following factual bases for the foregoing
allegations:
(a) Management has made no legitimate progress in seeking a purchaser
for the Company's manufacturing facilities.
(b) The Company has experienced substantial losses since the filing of
the Chapter 11 Petition, the Company's post-petition sales are
significantly below projected levels and senior management
(including Stephen Adams, brother of Harvey and Ronald Adams)
continues to receive compensation and benefits at excessive levels
in relation to the size of the Company and despite its financial
difficulties.
(c) The Committee alleged substantially the same improprieties as the
Trustee regarding Harvey Adams forming two competing stainless steel
companies and his placing purchase orders for $700,000 of stainless
steel product.
In addition, the Committee asserted that previously made reductions in
compensation and benefits for the three Adams brothers in the aggregate of
approximately 26% were inadequate, management's proposed business plan was
unacceptable and that operation of the Company under the plan has shown
continuing and increasing losses.
As a result of both the Trustee and the Committee motions stated above, a
global settlement was reached which provided, among other things, that (1) an
independent examiner would be engaged to perform an investigation limited to
issues
-14-
<PAGE>
raised in the internal investigation report, review post-petition date insider
transactions and post-petition date scrap sales, (2) a turnaround consultant
would be retained as Co-Chief Executive Officer to assist in the operation and
assessment of the Company's business operations, and (3) the Trustee and
Committee motions would be dismissed.
Item 5 - Other Information
On June 10, 1998, Harvey B. Adams ("H. Adams") resigned as Chairman of the
Board, Chief Executive Officer and employee of Consolidated Stainless, Inc. (the
"Company"). H. Adams's resignation was in response to a consensus of the Board
of Directors, after considering among other things the position of the Official
Committee of Unsecured Creditors of the Company (in connection with its pending
bankruptcy proceedings) and Mellon Bank (the lender for the Company's current
debtor-in-possession financing) as a necessary measure to assist the Company in
its reorganization efforts.
As part of the terms of his severance agreement, H. Adams will receive two
months pay along with related benefits. In consideration for his severance pay,
H. Adams will not compete with the Company for 60 days nor solicit or employ any
of the Company's employees for 120 days from the date of his resignation.
Prior to H. Adams's resignation, Ronald J. Adams ("R. Adams") held the
positions of President, Chief Operating Officer and Director of the Company. R.
Adams has now become the Chairman of the Board and, along with Vince Colistra
(turnaround consultant with Phoenix Management Services, Inc.), Co-Chief
Executive Officer and Co-President. Additionally, R. Adams remains the Chief
Operating Officer of the Company.
In accordance with the Consulting Agreement dated June 3, 1998, effective
June 15, 1998, between Phoenix Management Services, Inc. ("Phoenix") and the
Company, Vince Colistra, along with R. Adams, will co-manage the day-to-day
operations and oversee the future direction of the Company, during the interim
period, as the Company attempts to emerge from Bankruptcy. In consideration for
this service, the Company will compensate Phoenix based on hourly rates, but at
a rate of no more than $6,250 per week plus expenses. In addition, the Company
paid a $12,500 retainer, which will be returned at the time the assignment is
complete or offset against any of the then outstanding invoices.
On June 22, 1998, the Company expanded the scope of its original
engagement with Phoenix to include the development and the formulation of a Plan
of Reorganization. The fee for this additional service will be a total of
$40,000 plus expenses for the work required over an eight week period, and
hourly charges for any work required thereafter. It is anticipated that there
will also be a fee, in an amount to be determined at a later date, payable to
Phoenix if the Company successfully emerges from bankruptcy.
-15-
<PAGE>
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
10.1 - Extension and Modification to Post-Petition Loan and Security
Agreement dated as of May 29, 1998 with Mellon Bank, N.A.
10.2 - Second Extension and Modification to Post-Petition Loan and
Security Agreement dated as of June 12, 1998 with Mellon Bank, N.A.
10.3 - Third Extension and Modification to Post-Petition Loan and
Security Agreement dated as of June 26, 1998 with Mellon Bank, N.A.
10.4 - Fourth Extension and Modification to Post-Petition Loan and
Security Agreement dated as of July 31, 1998 with Mellon Bank, N.A.
10.5 - Letter of H. Adams's Resignation from Broad and Cassel to
Proskauer Rose, LLP and Saul, Ewing, Remick & Saul, LLP dated June
10, 1998.
10.6 - Consulting Agreement with Phoenix Management Services, Inc. dated
June 3, 1998, effective June 15, 1998.
10.7 - Expanded Consulting Agreement with Phoenix Management Services,
Inc. dated June 22, 1998.
27 - Financial Data Schedule
(b) Form 8 - K
A requirement of the Chapter 11 filing is that monthly operating reports
(Monthly Reports) be submitted to the United States Trustee and the Bankruptcy
Court.
(1) On May 29, 1998, the Company filed those previously submitted Monthly
Reports (i) for the month ending March 31, 1998, and (ii) for the month
ending April 30, 1998 on Form 8-K.
(2) On August 14, 1998, the Company filed those previously submitted Monthly
Reports (i) for the month ending May 31, 1998, and (ii) for the month
ending June 30, 1998 on Form 8-K.
-16-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CONSOLIDATED STAINLESS, INC.
(Registrant)
Date: August 14, 1998 By:/s/ -Ronald J. Adams
------------------
Ronald J. Adams
Chairman of the Board
Co-Chief Executive Officer
-17-
EXTENSION AND MODIFICATION TO POST-PETITION
LOAN AND SECURITY AGREEMENT
EXTENSION AND MODIFICATION TO POST-PETITION LOAN AND SECURITY AGREEMENT
(the "Modification") dated May ____, 1998, by and between CONSOLIDATED
STAINLESS, INC. (the "Borrower"), RONALD J. ADAMS and HARVEY B. ADAMS
(collectively, the "Guarantors" and each, a "Guarantor"), and MELLON BANK, N.A.
(the "Bank"). Borrower and Guarantors are sometimes collectively referred to
herein as the "Obligors".
BACKGROUND
A. Pursuant to a certain Post-Petition Loan and Security Agreement dated
December 12, 1997 by and between Borrower and Bank as modified on February 24,
1998, on March 4, 1998, on March 9, 1998, April 13, 1998 and April 16, 1998,
(the "Loan Agreement"), Bank agreed, subject to the terms and conditions stated
therein, to extend to Borrower a line of credit up to the maximum amount as
defined therein (the "Line").
B. By that certain Surety Agreement dated December 12, 1997, Guarantors
agreed to guarantee and become sureties for certain obligations of Borrower to
Bank, including those arising under the Loan Documents.
C. Borrower has requested that Bank consent to the extension of the term
and modification of certain provisions of the Loan Agreement, which Bank is
willing to do upon and subject to the terms and conditions of this Modification.
D. All capitalized terms not defined herein shall have the meanings set
forth therefor in the Loan Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties hereto
agree as follows:
1. ACKNOWLEDGMENT OF DEFAULTS. Borrower hereby confirms and acknowledges that
it is in default of its respective obligations under the Loan Documents as
a result, inter alia, of (a) Borrower's failure to achieve projected
monthly sales as required in Article 13.1(c) of the Loan Agreement, and
(b) Borrower exceeding the Inventory Sublimit, WIP Sublimit and Permitted
Overadvance as scheduled under the Loan Agreement. Borrower further
acknowledges and agrees that the Bank has certain rights and remedies
available to it as a result of the occurrence of the defaults, including
the right to confess judgment against the Borrower and each Guarantor.
BORROWER AND GUARANTORS EXPRESSLY AGREE THAT NOTHING CONTAINED HEREIN
SHALL BE DEEMED TO CONSTITUTE A WAIVER OR RELEASE OF ANY EXISTING EVENTS
OF DEFAULT OR OF ANY RIGHTS AND REMEDIES AVAILABLE TO BANK AS A RESULT
THEREOF.
<PAGE>
2. MODIFICATIONS.
The Loan Agreement shall be modified, effective as of June 1, 1998, as
follows:
a. Schedule 1.57 shall be modified by substituting the following
Schedule 1.57:
PERMITTED OUT-OF-FORMULA ADVANCES
Time Period Permitted Out-of-Formula Advances
----------- ---------------------------------
From June 1, 1998 to and $2,181,000.00 less the Additional Reduction,
including June 7, 1998 if any.
From June 8, 1998 to and $2,156,000.00 less the Additional Reduction,
including June 14, 1998 if any.
From June 15, 1998 and at $2,131,000.00 less the Additional Reduction,
all times thereafter if any
"Additional Reduction" means the sum of (i) fifty percent (50%) of the proceeds
of Borrower's pre-petition date accounts receivable that are ninety days or
more past invoice date as of April 10, 1998, plus (ii) sixty-five percent (65%)
of the amount by which the Value of Borrower's ineligible inventory is less than
$1,000,000.00. Notwithstanding anything in the Loan Agreement, fifty percent
(50%) of the proceeds of the collection of pre-petition date accounts receivable
that are ninety days or more past invoice date as of April 10, 1998 shall be
applied to the reduction of the Permitted Out-of-Formula Advance at the Bank's
discretion.
b. Schedule 3.1(b) shall be modified by substituting the following
Schedule 3.1(b):
SUBLIMITS ON INVENTORY AND WIP ADVANCES
A. Inventory Sublimit
Time Period Inventory Sublimit
----------- ------------------
From June 1, 1998 to and $7,600,000.00
including June 14, 1998
From June 15, 1998 and at all $7,475,000.00
times thereafter
B. WIP Sublimit
<PAGE>
Time Period WIP Sublimit
----------- ------------
From June 1, 1998 to and $225,000.00
including June 14, 1998
From June 15, 1998 and at $200,000.00
all times thereafter
c. Schedule 1.46 shall be modified by substituting the following
Schedule 1.46:
MAXIMUM AMOUNT
Time Period Maximum Amount
----------- --------------
From June 1, 1998 to and including $12,350,000.00
June 14, 1998
From June 15, 1998 and at all times $12,250,000.00
thereafter
d. Paragraph 3.1(a) shall be modified by substituting the following
Paragraph 3.1(a):
3.1(a) Establishment of Line. Bank will establish for Borrower for
and during the period from June 1, 1998 until June 14, 1998 (as such
period may be extended hereunder, 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, or (ii)
Adjusted Maximum Amount. Within the limitations set forth in this
Section 3.1, 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
Nineteen Million Dollars ($19,000,000.00), dated December 12, 1997.
e. Paragraph 3.1 (d) shall be modified by substituting the following
Paragraph 3.1(d):
3.1(d) Extension of Contract Period. Bank may extend the Contract
Period beyond June 14, 1998 on terms and conditions acceptable to
Bank and at Bank's sole discretion upon payment of an additional
Loan Fee.
<PAGE>
f. Paragraph 8.28 shall be modified by substituting the following
Paragraph 8.28:
8.28 Permanent Financing Order. Borrower will use its best efforts
to cause the Permanent Financing Order to be entered by the
Bankruptcy Court on or before twenty (20) days after the date of
entry of the Interim Financing Order.
g. The following Paragraph 8.36 shall be added to the Loan Agreement:
8.36 Closing of Distribution Locations. The following distribution
locations have been closed and all inventory from such locations has
and/or will be be moved to the Borrower's Jacksonville. Mulberry or
Auburndale locations by the dates set forth below:
(a) Houston, Texas - May 31, 1998; and
(b) Chicago, Illinois - May 31, 1998.
h. The following paragraph 8.37 shall be added to the Loan Agreement:
8.37 Financing of Manufacturing Facilities. As of June 15, 1998,
Bank shall have no obligation to advance any sums to Borrower for
any operational costs associated with the Lakeland and Auburndale
manufacturing facilities including, but not limited to, payroll,
payroll taxes and employee benefits.
i. Paragraph 14.1 shall be modified by substituting the following
Paragraph 14.1:
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
<PAGE>
Telecopier No.: (407) 895-5441
with a copy to: Saul, Ewing, Remick & Saul LLP
Centre Square West
1500 Market Street, 38th Floor
Philadelphia, PA 19102
Attention: Alan R. Gordon, Esquire
Telecopier No.: (215) 972-7725
with a copy to: Greenberg, Traurig, Hoffman, Lipoff, Rosen
& Quentel
Citicorp Center
153 E. 53rd Street
New York, NY 10022
Attention: Richard Tilton, Esquire
Telecopier No.: (212) 223-7161
To Bank: Mellon Bank, N.A.
1735 Market Street, 6th Floor
Philadelphia, PA 19101
Attention: Ronald Comito, Vice President
Telecopier No.: (215) 553-0201
with a copy to: Klehr, Harrison, Harvey, Branzburg &
Ellers LLP
1401 Walnut Street
Philadelphia, PA 19102
Attention: Domenic E. Pacitti, Esquire
Telecopier No.: (215) 568-6603
with a copy to: Wolf, Block, Schorr & Solis-Cohen LLP
111 South 15th Street
Philadelphia, PA 19102
Attention: Marvin Krasny, Esquire
Telecopier No.: (215)977-2334
j. Paragraph 8.16 shall be modified by substituting the following
Paragraph 8.16:
8.16 Maintenance of Management. Borrower shall cause its business to
be continuously managed by its present management consisting of
Ronald J. Adams and a crisis manager acceptable to Bank.
k. Paragraph 5.7 shall be modified by substituting the following
Paragraph 5.7:
5.7 Loan Fee. Borrower shall pay Bank a loan fee of
<PAGE>
$10,000.00, which fee shall be paid contemporaneously herewith.
l. Paragraph 1.14 shall be modified by substituting the following
Paragraph 1.14:
1.14 "Budget" means that certain Budget and Cash Flow Projections
dated May 27, 1998, prepared by Borrower for the period June 1, 1998
through June 12, 1998 and attached hereto as Exhibit "A", as the
same may be updated from time to time. The Budget includes, without
limitation, statements of receipts and disbursements and
availability reports prepared on a weekly cash basis for the
Contract Period, and balance sheets, profit and loss statements and
cash flow statements prepared on a monthly accrual basis for the
Contract Period.
3. OTHER REFERENCES. All references in the Loan Agreement and all the Loan
Documents to the term "Loan Documents" shall mean the Loan Documents as
defined therein, and this Modification, and any and all other documents
executed and delivered by Borrower pursuant to and in connection herewith.
4. FURTHER AGREEMENTS AND REPRESENTATIONS. Obligors hereby:
a. Ratify, confirm and acknowledge that the Loan Agreement, as amended
hereby, and the other Loan Documents continue to be valid, binding
and in full force and effect;
b. Covenant and agree to perform all of their respective obligations
under the Loan Agreement, as amended hereby, and the Loan Documents;
c. Acknowledge and agree that as of the date hereof, no Obligor has any
defense, set-off, counterclaim or challenge against the payment of
any sums constituting Bank Indebtedness or the enforcement of any of
the terms of the Loan Agreement, as amended hereby, or any of the
other Loan Documents;
d. Ratify and confirm that all representations and warranties of the
Obligors, contained in the Loan Agreement and/or the other Loan
Documents, are true and complete on and as of the date hereof, as if
made on and as of the date hereof;
e. Acknowledge and agree that nothing contained herein shall be deemed
to impair, reduce or release in any manner whatsoever any of the
Obligations of Guarantors under the Surety Agreement;
f. Represent and warrant that the execution and delivery of this
Amendment by Obligors and all documents and agreements to be
executed and delivered pursuant to the terms hereof;
i. have been duly authorized by all requisite corporate action by
Borrower;
<PAGE>
ii. will not conflict with or result in the breach of or
constitute a default (upon the passage of time, delivery of
notice or both) under Borrower's Certificate of Incorporation
or By-Laws or any applicable statute, law, rule, regulation or
ordinance or any indenture, mortgage, loan or other document
or agreement to which any Obligor is a party or by which any
of them is bound or affected; and
iii. will not result in the creation or imposition of any lien,
charge or encumbrance of any nature whatsoever upon any of the
property or assets of any Obligor, except liens in favor of
the Bank or as permitted hereunder or under the Loan
Documents;
g. Represent and warrant that all of the information described in the
foregoing Background is accurate; and
h. Acknowledge and agree that Obligors' failure to comply with or
perform any of their respective covenants, agreements or obligations
contained in this Amendment or any other documents executed and
delivered by any of them in connection herewith will, subject to
applicable notice, grace and cure periods, constitute an Event of
Default under the Loan Agreement and each of the Loan Documents.
5. NO NOVATION. Nothing contained herein and no actions taken pursuant to the
terms hereof are intended to constitute a novation of the Loan Agreement
or any of the Loan Documents and shall not constitute a release,
termination or waiver of any of the liens, security interests, rights or
remedies granted to Bank in the Loan Documents.
6. NO FURTHER AMENDMENTS. Nothing contained herein constitutes an agreement
or obligation by Bank to grant any further amendments or modifications to
any of the Loan Documents.
7. INCONSISTENCIES. To the extent of any inconsistency between the terms and
conditions of this Modification and the terms and conditions of the Loan
Agreement or the Loan Documents as previously modified, the terms and
conditions of this Modification shall prevail. All terms and conditions of
the Loan Agreement and the Loan Documents as previously modified and not
inconsistent herewith shall remain in full force and effect, and are
hereby ratified and confirmed by Borrower and Guarantors.
8. CONSTRUCTION. All references to the Loan Agreement therein or in any of
the other Loan Documents shall be deemed to be a reference to the Loan
Agreement, as modified hereby.
9. BINDING EFFECT. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
10. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
11. HEADINGS. The headings of the sections of this Amendment are inserted for
convenience only and shall not be deemed to constitute a part of this
Amendment.
<PAGE>
12. COUNTERPARTS. This amendment may be executed in any number of
counterparts, all of which taken together shall constitute one and the
same instrument, and any party hereto may execute this Amendment by
signing any such counterpart.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
effective as of the day and year first above written.
CONSOLIDATED STAINLESS, INC.
By:
----------------------------
Name/Title:
--------------------
{CORPORATE SEAL}
(SEAL)
-----------------------
RONALD J. ADAMS
MELLON BANK, N.A.
By:
----------------------------
Name/Title:
--------------------
STATE OF FLORIDA :
: SS
COUNTY OF __________ :
On this, the ________ day of May, 1998, before me, a notary public,
personally appeared RONALD J. ADAMS, known to me (or satisfactorily proven) to
be the person whose name is
<PAGE>
subscribed to the within instrument, and acknowledged that he executed the same
for the purposes therein contained.
----------------------
Notary Public
My Commission Expires:
SECOND EXTENSION AND MODIFICATION TO POST-PETITION
LOAN AND SECURITY AGREEMENT
SECOND EXTENSION AND MODIFICATION TO POST-PETITION LOAN AND SECURITY
AGREEMENT (the "Modification") dated June 12, 1998, by and between CONSOLIDATED
STAINLESS, INC. (the "Borrower"), RONALD J. ADAMS and HARVEY B. ADAMS
(collectively, the "Guarantors" and each, a "Guarantor"), and MELLON BANK, N.A.
(the "Bank"). Borrower and Guarantors are sometimes collectively referred to
herein as the "Obligors".
BACKGROUND
A. Pursuant to a certain Post-Petition Loan and Security Agreement dated
December 12, 1997 by and between Borrower and Bank as modified on February 24,
1998, on March 4, 1998, on March 9, 1998, April 13, 1998 and April 16, 1998, and
as extended and modified by the Extension and Modification to Post-Petition Loan
and Security Agreement dated May 29, 1998 (the "Loan Agreement"), Bank agreed,
subject to the terms and conditions stated therein, to extend to Borrower a line
of credit up to the maximum amount as defined therein (the "Line").
B. By that certain Surety Agreement dated December 12, 1997, Guarantors
agreed to guarantee and become sureties for certain obligations of Borrower to
Bank, including those arising under the Loan Documents.
C. Borrower has requested that Bank consent to the extension of the term
and modification of certain provisions of the Loan Agreement, which Bank is
willing to do upon and subject to the terms and conditions of this Modification.
D. All capitalized terms not defined herein shall have the meanings set
forth therefor in the Loan Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties hereto
agree as follows:
1. ACKNOWLEDGMENT OF DEFAULTS. Borrower hereby confirms and acknowledges that
it is in default of its respective obligations under the Loan Documents as
a result, inter alia, of (a) Borrower's failure to achieve projected
monthly sales as required in Article 13.1(c) of the Loan Agreement, and
(b) Borrower exceeding the Inventory Sublimit, WIP Sublimit and Permitted
Overadvance as scheduled under the Loan Agreement. Borrower further
acknowledges and agrees that the Bank has certain rights and remedies
available to it as a result of the occurrence of the defaults, including
the right to confess judgment against the Borrower and each Guarantor.
BORROWER AND GUARANTORS EXPRESSLY AGREE THAT NOTHING CONTAINED HEREIN
SHALL BE DEEMED TO CONSTITUTE A WAIVER OR RELEASE OF ANY EXISTING EVENTS
OF DEFAULT OR OF ANY RIGHTS AND REMEDIES AVAILABLE TO BANK AS A RESULT
THEREOF.
<PAGE>
2. MODIFICATIONS.
The Loan Agreement shall be modified, effective as of June 15, 1998, as
follows:
a. Schedule 1.57 shall be modified by substituting the following
Schedule 1.57:
PERMITTED OUT-OF-FORMULA ADVANCES
Time Period Permitted Out-of-Formula Advances
----------- ---------------------------------
From June 15, 1998 to and $2,131,000.00 less the Additional Reduction
including June 18, 1998 if any.
From June 19, 1998 to and $2,100,000.00 less the Additional Reduction
including June 25, 1998 if any.
From June 26, 1998 and at $2,030,000.00 less the Additional
all times thereafter Reduction, if any.
"Additional Reduction" means the sum of (i) fifty percent (50%) of the proceeds
of Borrower's "Pre-Petition Delinquent Accounts" (defined as Borrower's
pre-petition date accounts receivable that are ninety days or more past invoice
date as of April 10, 1998), plus (ii) sixty-five percent (65%) of the amount by
which the Value of Borrower's ineligible inventory is less than $1,000,000.00.
Notwithstanding anything in the Loan Agreement, fifty percent (50%) of the
proceeds of the collection of Pre-Petition Delinquent Accounts shall be applied
to the reduction of the Permitted Out-of-Formula Advance at the Bank's
discretion. The Additional Reduction shall apply upon the occurrence of either:
(a) June 27, 1998, or (b) the aggregate collection by Borrower of Borrower's
Pre-Petition Delinquent Accounts in excess of $100,000.00 during the period June
15, 1998 through June 28, 1998. Any additional availability under the Line in
excess of that set forth in the Budget may not be used by the Borrower for any
cash disbursements other than the cash disbursements as set forth in the Budget,
until the Bank and Borrower have agreed to a further reduction in the Permitted
Out-of-Formula Advances beyond those set forth above.
b. Schedule 3.1(b) shall be modified by substituting the following
Schedule 3.1(b):
SUBLIMITS ON INVENTORY AND WIP ADVANCES
A. Inventory Sublimit
Time Period Inventory Sublimit
----------- ------------------
From June 15, 1998 to and including $7,475,000.00
June 18, 1998
<PAGE>
From June 19, 1998 to and including $7,300,000.00
June 25, 1998
From June 26, 1998 and at all times $7,200,000.00
thereafter
B. WIP Sublimit
Time Period WIP Sublimit
----------- ------------
From June 15, 1998 $200,000.00
to and including June 25, 1998
From June 26, 1998 and at all times $175,000.00
thereafter
c. Schedule 1.46 shall be modified by substituting the following
Schedule 1.46:
MAXIMUM AMOUNT
Time Period Maximum Amount
----------- --------------
From June 15, 1998 to and including $12,000,000.00
June 18, 1998
From June 19, 1998 to and including $11,900,000.00
June 25, 1998
From June 26, 1998 and at all times $11,750,000.00
thereafter
d. Paragraph 3.1(a) shall be modified by substituting the following
Paragraph 3.1(a):
3.1(a) Establishment of Line. Bank will establish for Borrower for
and during the period from June 15 1998 until June 28, 1998 (as such
period may be extended hereunder, 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, or (ii)
Adjusted Maximum Amount and only for cash disbusements as set forth
in the Budget. Within the limitations set forth in this Section 3.1,
Borrower may borrow, repay and reborrow under the Line. The
<PAGE>
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 Nineteen
Million Dollars ($19,000,000.00), dated December 12, 1997.
e. Paragraph 3.1 (d) shall be modified by substituting the following
Paragraph 3.1(d):
3.1(d) Extension of Contract Period. Bank may extend the Contract
Period beyond June 28, 1998 on terms and conditions acceptable to
Bank and at Bank's sole discretion upon payment of an additional
Loan Fee.
f. Paragraph 8.28 shall be modified by substituting the following
Paragraph 8.28:
8.28 Permanent Financing Order. Borrower will use its best efforts
to cause the Permanent Financing Order to be entered by the
Bankruptcy Court on or before twenty (20) days after the date of
entry of the Interim Financing Order.
g. The following paragraph 8.37 shall be added to the Loan Agreement:
8.37 Financing of Manufacturing Facilities. As of June 28, 1998,
Bank shall have no obligation to advance any sums to Borrower for
any operational costs associated with the Lakeland and Auburndale
manufacturing facilities including, but not limited to, payroll,
payroll taxes and employee benefits.
h. Paragraph 14.1 shall be modified by substituting the following
Paragraph 14.1:
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.
<PAGE>
1601 East Amelia Street
Orlando, FL 32803
Attention: Ronald J. Adams, President
Telecopier No.: (407) 895-5441
with a copy to: Saul, Ewing, Remick & Saul LLP
Centre Square West
1500 Market Street, 38th Floor
Philadelphia, PA 19102
Attention: Alan R. Gordon, Esquire
Telecopier No.: (215) 972-7725
with a copy to: Greenberg, Traurig, Hoffman, Lipoff, Rosen
& Quentel
Citicorp Center
153 E. 53rd Street
New York, NY 10022
Attention: Richard Tilton, Esquire
Telecopier No.: (212) 223-7161
To Bank: Mellon Bank, N.A.
1735 Market Street, 6th Floor
Philadelphia, PA 19101
Attention: Ronald Comito, Vice President
Telecopier No.: (215) 553-0201
with a copy to: Klehr, Harrison, Harvey, Branzburg
& Ellers LLP
1401 Walnut Street
Philadelphia, PA 19102
Attention: Domenic E. Pacitti, Esquire
Telecopier No.: (215) 568-6603
with a copy to: Wolf, Block, Schorr & Solis-Cohen LLP
111 South 15th Street
Philadelphia, PA 19102
Attention: Marvin Krasny, Esquire
Telecopier No.:(215)977-2334
i. Paragraph 8.16 shall be modified by substituting the following
Paragraph 8.16:
8.16 Maintenance of Management. Borrower shall cause its business to
be continuously managed by its present management consisting of
Ronald J. Adams as President and Co-CEO and Vincent
<PAGE>
Colistra of Phoenix Management Services, Inc. as Co-CEO on terms and
conditions and with responsibilities acceptable to Bank.
j. Paragraph 5.7 shall be modified by substituting the following
Paragraph 5.7:
5.7 Loan Fee. Borrower shall pay Bank a loan fee of $5,000.00, which
fee shall be paid contemporaneously herewith.
k. Paragraph 1.14 shall be modified by substituting the following
Paragraph 1.14:
1.14 "Budget" means that certain Budget and Cash Flow Projections
dated June 11, 1998, prepared by Borrower for the period June 15,
1998 through June 26, 1998 and attached hereto as Exhibit "A", as
the same may be updated from time to time. The Budget includes,
without limitation, statements of receipts and disbursements and
availability reports prepared on a weekly cash basis for the
Contract Period, and balance sheets, profit and loss statements and
cash flow statements prepared on a monthly accrual basis for the
Contract Period.
l. Paragraph 13.1 shall be modified by adding the following
subparagraph 13.1(y):
(y) The failure by the Borrower to file a Chapter 11 Plan of
Reorganization on or before July 15, 1998 that is acceptable in all
respects to Bank in Bank's sole discretion.
m. The following paragraph 8.38 shall be added to the Loan Agreement:
8.38 Access to Investment Bankers. Borrower shall make available to
Bank, and Bank may contact directly, the investment bankers retained
by the Borrower. Such investment bankers shall discuss with and
disclose to Bank any and all information regarding the potential
sale of any of the Borrower's assets and any information requested
by Bank. Bank agrees to attempt to notify Borrower prior to
contacting the investment bankers, but Bank will notify Borrower
when Bank has had contact with the investment bankers.
n. The following paragraph 8.39 shall be added to the Loan Agreement:
8.39 Phoenix Management Services, Inc. Borrower shall retain Phoenix
Management Services, Inc. and Vincent Colistra of Phoenix Management
Services, Inc. as Co-CEO of the Borrower on terms and conditions and
with responsibilities acceptable to Bank. At times convenient to
Bank and Borrower, Vince Colistra and Phoenix Management Services,
Inc. shall be available to Bank to apprise Bank
<PAGE>
of any issues and/or status with respect to the Borrower's
operations, financing, asset disposition or reorganization. The
compensation of Vincent Colistra and Phoenix Management Services,
Inc. may be paid by Bank either debiting Borrower's account or
advancing funds under the Line consistent with the Loan Agreement
and this Modification.
o. The following paragraph 13.2 (d) shall be added to the Loan
Agreement:
13.2 (d) Borrower's Exclusivity Period. If Borrower fails to file a
Chapter 11 Plan of Reorganization on or before July 15, 1998 or if
any Plan of Reorganization that is filed by Borrower is not
acceptable to Bank, in Bank's sole discretion, then Borrower agrees
that any existing exclusive period in which to file or solicit
acceptances to Borrower's Plan of Reorganization shall be dissolved
as to Bank and Bank shall be permitted to file and solicit
acceptances to its own Chapter 11 Plan, should Bank so chose.
3. OTHER REFERENCES. All references in the Loan Agreement and all the Loan
Documents to the term "Loan Documents" shall mean the Loan Documents as
defined therein, and this Modification, and any and all other documents
executed and delivered by Borrower pursuant to and in connection herewith.
4. FURTHER AGREEMENTS AND REPRESENTATIONS. Obligors hereby:
a. Ratify, confirm and acknowledge that the Loan Agreement, as amended
hereby, and the other Loan Documents continue to be valid, binding
and in full force and effect;
b. Covenant and agree to perform all of their respective obligations
under the Loan Agreement, as amended hereby, and the Loan Documents;
c. Acknowledge and agree that as of the date hereof, no Obligor has any
defense, set-off, counterclaim or challenge against the payment of
any sums constituting Bank Indebtedness or the enforcement of any of
the terms of the Loan Agreement, as amended hereby, or any of the
other Loan Documents;
d. Ratify and confirm that all representations and warranties of the
Obligors, contained in the Loan Agreement and/or the other Loan
Documents, are true and complete on and as of the date hereof, as if
made on and as of the date hereof;
e. Acknowledge and agree that nothing contained herein shall be deemed
to impair, reduce or release in any manner whatsoever any of the
Obligations of Guarantors under the Surety Agreement;
f. Represent and warrant that the execution and delivery of this
Amendment by Obligors and all documents and agreements to be
executed and delivered pursuant to the terms
<PAGE>
hereof;
i. have been duly authorized by all requisite corporate action by
Borrower;
ii. will not conflict with or result in the breach of or
constitute a default (upon the passage of time, delivery of
notice or both) under Borrower's Certificate of Incorporation
or By-Laws or any applicable statute, law, rule, regulation or
ordinance or any indenture, mortgage, loan or other document
or agreement to which any Obligor is a party or by which any
of them is bound or affected; and
iii. will not result in the creation or imposition of any lien,
charge or encumbrance of any nature whatsoever upon any of the
property or assets of any Obligor, except liens in favor of
the Bank or as permitted hereunder or under the Loan
Documents;
g. Represent and warrant that all of the information described in the
foregoing Background is accurate; and
h. Acknowledge and agree that Obligors' failure to comply with or
perform any of their respective covenants, agreements or obligations
contained in this Amendment or any other documents executed and
delivered by any of them in connection herewith will, subject to
applicable notice, grace and cure periods, constitute an Event of
Default under the Loan Agreement and each of the Loan Documents.
5. NO NOVATION. Nothing contained herein and no actions taken pursuant to the
terms hereof are intended to constitute a novation of the Loan Agreement
or any of the Loan Documents and shall not constitute a release,
termination or waiver of any of the liens, security interests, rights or
remedies granted to Bank in the Loan Documents.
6. NO FURTHER AMENDMENTS. Nothing contained herein constitutes an agreement
or obligation by Bank to grant any further amendments or modifications to
any of the Loan Documents.
7. INCONSISTENCIES. To the extent of any inconsistency between the terms and
conditions of this Modification and the terms and conditions of the Loan
Agreement or the Loan Documents as previously modified, the terms and
conditions of this Modification shall prevail. All terms and conditions of
the Loan Agreement and the Loan Documents as previously modified and not
inconsistent herewith shall remain in full force and effect, and are
hereby ratified and confirmed by Borrower and Guarantors.
8. CONSTRUCTION. All references to the Loan Agreement therein or in any of
the other Loan Documents shall be deemed to be a reference to the Loan
Agreement, as modified hereby.
9. BINDING EFFECT. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
<PAGE>
10. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
11. HEADINGS. The headings of the sections of this Amendment are inserted for
convenience only and shall not be deemed to constitute a part of this
Amendment.
12. COUNTERPARTS. This amendment may be executed in any number of
counterparts, all of which taken together shall constitute one and the
same instrument, and any party hereto may execute this Amendment by
signing any such counterpart.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
effective as of the day and year first above written.
CONSOLIDATED STAINLESS, INC.
By: /s/ Ronald Adams
-------------------------
Ronald Adams, President
{CORPORATE SEAL}
/s/ Ronald J. Adams (SEAL)
-----------------------------
RONALD J. ADAMS
Personally known /s/ WGB
MELLON BANK, N.A.
By:
--------------------------
Name/Title:
------------------
<PAGE>
STATE OF FLORIDA :
: SS
COUNTY OF Orange :
On this, the 12th day of June, 1998, before me, a notary public,
personally appeared RONALD J. ADAMS, known to me (or satisfactorily proven) to
be the person whose name is subscribed to the within instrument, and
acknowledged that he executed the same for the purposes therein contained.
/s/ Winifred G. Bennett
-----------------------
Notary Public
My Commission Expires:
------------------------------------------------
Winifred G. Bennett
[SEAL] Notary Public, State of Florida
Commission No. CC 602158
My Commission Exp. 01/13/2001
Bonded Through Fla. Notary Service & Bonding Co.
------------------------------------------------
THIRD EXTENSION AND MODIFICATION TO POST-PETITION
LOAN AND SECURITY AGREEMENT
THIRD EXTENSION AND MODIFICATION TO POST-PETITION LOAN AND SECURITY
AGREEMENT (the "Modification") dated June 26, 1998, by and between CONSOLIDATED
STAINLESS, INC. (the "Borrower"), RONALD J. ADAMS and HARVEY B. ADAMS
(collectively, the "Guarantors" and each, a "Guarantor"), and MELLON BANK, N.A.
(the "Bank"). Borrower and Guarantors are sometimes collectively referred to
herein as the "Obligors".
BACKGROUND
A. Pursuant to a certain Post-Petition Loan and Security Agreement dated
December 12, 1997 by and between Borrower and Bank as modified on February 24,
1998, on March 4, 1998, on March 9, 1998, April 13, 1998 and April 16, 1998, and
as extended and modified by the Extension and Modification to Post-Petition Loan
and Security Agreement dated May 29, 1998 and the Second Extension and
Modification to Post-Petition Loan and Security Agreement dated June 12, 1998
(collectively, the "Loan Agreement"), Bank agreed, subject to the terms and
conditions stated therein, to extend to Borrower a line of credit up to the
maximum amount as defined therein (the "Line").
B. By that certain Surety Agreement dated December 12, 1997, Guarantors
agreed to guarantee and become sureties for certain obligations of Borrower to
Bank, including those arising under the Loan Documents.
C. Borrower has requested that Bank consent to the extension of the term
and modification of certain provisions of the Loan Agreement, which Bank is
willing to do upon and subject to the terms and conditions of this Modification.
D. All capitalized terms not defined herein shall have the meanings set
forth therefor in the Loan Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties hereto
agree as follows:
1. ACKNOWLEDGMENT OF DEFAULTS. Borrower hereby confirms and acknowledges that
it is in default of its respective obligations under the Loan Documents as
a result, inter alia, of (a) Borrower's prior failure to achieve projected
monthly sales as required in Article 13.1(c) of the Loan Agreement, (b)
Borrower exceeding the Inventory Sublimit, WIP Sublimit and Permitted
Out-of-Formula Advances as scheduled under the Loan Agreement, and (c) the
existence of Out-of-Formula Advances from time to time. Borrower further
acknowledges and agrees that the Bank has certain rights and remedies
available to it as a result of the occurrence of the defaults, including
the right to confess judgment against the Borrower and each Guarantor.
BORROWER AND GUARANTORS EXPRESSLY AGREE THAT NOTHING CONTAINED HEREIN
SHALL BE DEEMED TO CONSTITUTE A WAIVER OR RELEASE OF ANY EXISTING EVENTS
OF DEFAULT OR OF ANY RIGHTS AND REMEDIES AVAILABLE TO BANK AS A RESULT
THEREOF.
<PAGE>
2. MODIFICATIONS.
The Loan Agreement shall be modified, effective as of June 29, 1998, as
follows:
a. Schedule 1.57 shall be modified by substituting the following
Schedule 1.57:
PERMITTED OUT-OF-FORMULA ADVANCES
Time Period Permitted Out-of-Formula Advances
----------- ---------------------------------
From June 29, 1998 to and including $2,275,000.00 less the Additional
July 3, 1998 Reduction if any.
From July 4, 1998 to and including $2,175,000.00 less the Additional
if July 10, 1998 Reduction if any.
From July 11, 1998 to and including $2,150,000.00 less the Additional
July 17, 1998 Reduction if any.
From July 18, 1998 to and including $2,000,000.00 less the Additional
July 24, 1998 Reduction if any.
From July 25, 1998 to and including $1,950,000.00 less the Additional
July 31, 1998 Reduction if any.
From August 1, 1998 and at all times $1,925,000.00 less the Additional
thereafter Reduction if any.
"Additional Reduction" means the sum of (i) fifty percent (50%) of the proceeds
of Borrower's "Pre-Petition Delinquent Accounts" (defined as Borrower's
pre-petition date accounts receivable that are ninety days or more past invoice
date as of April 10, 1998), plus (ii) sixty-five percent (65%) of the amount by
which the Value of Borrower's ineligible inventory is less than $1,000,000.00.
Notwithstanding anything in the Loan Agreement, fifty percent (50%) of the
proceeds of the collection of Pre-Petition Delinquent Accounts shall be applied
to the reduction of the Permitted Out-of-Formula Advance at the Bank's
discretion. The Additional Reduction shall apply upon the occurrence of either:
(a) July 30, 1998, or (b) the aggregate collection by Borrower of Borrower's
Pre-Petition Delinquent Accounts in excess of $60,000.00 during the period June
29, 1998 through July 31, 1998. Any additional availability under the Line in
excess of that set forth in the Budget may not be used by the Borrower for any
cash disbursements other than the cash disbursements as set forth in the Budget,
until the Bank and Borrower have agreed to a further reduction in the Permitted
Out-of-Formula Advances beyond those set forth above.
<PAGE>
b. Schedule 3.1(b) shall be modified by substituting the following
Schedule 3.1(b):
SUBLIMITS ON INVENTORY AND WIP ADVANCES
A. Inventory Sublimit
Time Period Inventory Sublimit
----------- ------------------
From June 29, 1998 to and including $7,100,000.00
July 3, 1998
From July 4, 1998 to and including $7,000,000.00
July 10, 1998
From July 11, 1998 to and including $6,800,000.00
July 17, 1998
From July 18, 1998 to and including $6,500,000.00
July 24, 1998
From July 25, 1998 to and including $6,300,000.00
July 31, 1998
From August 1, 1998 and at all times $6,000,000.00
thereafter
B. WIP Sublimit
Time Period WIP Sublimit
----------- ------------
From June 29, 1998 $175,000.00
to and including July 31, 1998
From August 1, 1998 and at all $150,000.00
times thereafter
c. Schedule 1.46 shall be modified by substituting the following
Schedule 1.46:
MAXIMUM AMOUNT
Time Period Maximum Amount
----------- --------------
From June 29, 1998 to and including $11,600,000.00
July 3, 1998
<PAGE>
From July 4, 1998 to and including $11,500,000.00
July 10, 1998
From July 11, 1998 to and including $11,350,000.00
July 17, 1998
From July 18, 1998 to and including $11,250,000.00
July 24, 1998
From July 25, 1998 to and including $11,150,000.00
July 31, 1998
From August 1, 1998 and at all times $11,000,000.00
thereafter
d. Paragraph 3.1(a) shall be modified by substituting the following
Paragraph 3.1(a):
3.1(a) Establishment of Line. Bank will establish for Borrower for
and during the period from June 29, 1998 until July 31, 1998 (as
such period may be extended hereunder, 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, or (ii) Adjusted Maximum Amount and only for cash
disbursements as set forth in the Budget. Within the limitations set
forth in this Section 3.1, 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 Nineteen Million Dollars ($19,000,000.00), dated December
12, 1997.
e. Paragraph 3.1 (d) shall be modified by substituting the following
Paragraph 3.1(d):
3.1(d) Extension of Contract Period. Bank may extend the Contract
Period beyond July 31, 1998 on terms and conditions acceptable to
Bank and at Bank's sole discretion upon payment of an additional
Loan Fee and approval by the Court.
f. Paragraph 8.28 shall be modified by substituting the following
Paragraph 8.28:
8.28 Permanent Financing Order. Borrower will use its best efforts
to cause the Permanent Financing Order to be entered by the
Bankruptcy Court
<PAGE>
on or before twenty (20) days after the date of entry of the Interim
Financing Order.
g. The following paragraph 8.37 shall be added to the Loan Agreement:
8.37 Financing of Manufacturing Facilities. As of July 15, 1998,
Bank shall have no obligation to advance any sums to Borrower for
any operational costs or other costs associated with the Lakeland
and Auburndale manufacturing facilities including, but not limited
to, payroll, payroll taxes and employee benefits, unless Bank agrees
otherwise in writing prior to July 15, 1998.
h. Paragraph 14.1 shall be modified by substituting the following
Paragraph 14.1:
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: Saul, Ewing, Remick & Saul LLP
Centre Square West
1500 Market Street, 38th Floor
Philadelphia, PA 19102
Attention: Alan R. Gordon, Esquire
Telecopier No.: (215) 972-7725
<PAGE>
with a copy to: Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quentel
Citicorp Center
153 E. 53rd Street
New York, NY 10022
Attention: Richard Tilton, Esquire
Telecopier No.: (212) 223-7161
To Bank: Mellon Bank, N.A.
1735 Market Street, 6th Floor
Philadelphia, PA 19101
Attention: Ronald Comito, Vice President
Telecopier No.: (215) 553-0201
with a copy to: Klehr, Harrison, Harvey, Branzburg
& Ellers LLP
1401 Walnut Street
Philadelphia, PA 19102
Attention: Domenic E. Pacitti, Esquire
Telecopier No.: (215) 568-6603
with a copy to: Wolf, Block, Schorr & Solis-Cohen LLP
111 South 15th Street
Philadelphia, PA 19102
Attention: Marvin Krasny, Esquire
Telecopier No.: (215)977-2334
i. Paragraph 8.16 shall be modified by substituting the following
Paragraph 8.16:
8.16 Maintenance of Management. Borrower shall cause its business to
be continuously managed by its present management consisting of
Ronald J. Adams as President and Co-CEO and Vincent Colistra of
Phoenix Management Services, Inc. as Co-CEO on terms and conditions
and with responsibilities acceptable to Bank.
j. Paragraph 1.14 shall be modified by substituting the following
Paragraph 1.14:
1.14 "Budget" means that certain Budget and Cash Flow Projections
dated June 26, 1998, prepared by Borrower for the period June 29,
1998 through July 31, 1998 and attached hereto as Exhibit "A", as
the same may be updated from time to time. The Budget includes,
without limitation, statements of receipts and disbursements and
availability reports prepared on a weekly cash basis for the
Contract Period, and balance sheets, profit and loss statements and
cash flow statements prepared on a monthly accrual basis for the
Contract Period.
<PAGE>
k. Paragraph 13.1 shall be modified by adding the following
subparagraph 13.1(y):
(y) The failure by the Borrower to file a Chapter 11 Plan of
Reorganization on or before July 31, 1998 that is acceptable in all
respects to Bank in Bank's sole discretion.
l. The following paragraph 8.38 shall be added to the Loan Agreement:
8.38 Access to Investment Bankers. Borrower shall make available to
Bank, and Bank may contact directly, the investment bankers retained
by the Borrower. Such investment bankers shall discuss with and
disclose to Bank any and all information regarding the potential
sale of any of the Borrower's assets and any information requested
by Bank. Bank agrees to attempt to notify Borrower prior to
contacting the investment bankers, but Bank will notify Borrower
when Bank has had contact with the investment bankers.
m. The following paragraph 8.39 shall be added to the Loan Agreement:
8.39 Phoenix Management Services, Inc. Borrower shall retain Phoenix
Management Services, Inc. and Vincent Colistra of Phoenix Management
Services, Inc. as Co-CEO of the Borrower on terms and conditions and
with responsibilities acceptable to Bank. At times convenient to
Bank and Borrower, Vince Colistra and Phoenix Management Services,
Inc. shall be available to Bank to apprise Bank of any issues and/or
status with respect to the Borrower's operations, financing, asset
disposition or reorganization. The compensation of Vincent Colistra
and Phoenix Management Services, Inc. may be paid by Bank either
debiting Borrower's account or advancing funds under the Line
consistent with the Loan Agreement and this Modification.
n. The following paragraph 13.2 (d) shall be added to the Loan
Agreement:
13.2 (d) Borrower's Exclusivity Period. If Borrower fails to file a
Chapter 11 Plan of Reorganization on or before July 31, 1998 or if
any Plan of Reorganization that is filed by Borrower is not
acceptable to Bank, in Bank's sole discretion, then Borrower agrees
that any existing exclusive period in which to file or solicit
acceptances to Borrower's Plan of Reorganization shall be dissolved
as to Bank and Bank shall be permitted to file and solicit
acceptances to its own Chapter 11 Plan, should Bank so chose.
3. OTHER REFERENCES. All references in the Loan Agreement and all the Loan
Documents to the term "Loan Documents" shall mean the Loan Documents as
defined therein, and this
<PAGE>
Modification, and any and all other documents executed and delivered by
Borrower pursuant to and in connection herewith.
4. FURTHER AGREEMENTS AND REPRESENTATIONS. Obligors hereby:
a. Ratify, confirm and acknowledge that the Loan Agreement, as amended
hereby, and the other Loan Documents continue to be valid, binding
and in full force and effect;
b. Covenant and agree to perform all of their respective obligations
under the Loan Agreement, as amended hereby, and the Loan Documents;
c. Acknowledge and agree that as of the date hereof, no Obligor has any
defense, set-off, counterclaim or challenge against the payment of
any sums constituting Bank Indebtedness or the enforcement of any of
the terms of the Loan Agreement, as amended hereby, or any of the
other Loan Documents;
d. Ratify and confirm that all representations and warranties of the
Obligors, contained in the Loan Agreement and/or the other Loan
Documents, are true and complete on and as of the date hereof, as if
made on and as of the date hereof;
e. Acknowledge and agree that nothing contained herein shall be deemed
to impair, reduce or release in any manner whatsoever any of the
Obligations of Guarantors under the Surety Agreement;
f. Represent and warrant that the execution and delivery of this
Amendment by Obligors and all documents and agreements to be
executed and delivered pursuant to the terms hereof;
i. have been duly authorized by all requisite corporate action by
Borrower;
ii. will not conflict with or result in the breach of or
constitute a default (upon the passage of time, delivery of
notice or both) under Borrower's Certificate of Incorporation
or By-Laws or any applicable statute, law, rule, regulation or
ordinance or any indenture, mortgage, loan or other document
or agreement to which any Obligor is a party or by which any
of them is bound or affected; and
iii. will not result in the creation or imposition of any lien,
charge or encumbrance of any nature whatsoever upon any of the
property or assets of any Obligor, except liens in favor of
the Bank or as permitted hereunder or under the Loan
Documents;
g. Represent and warrant that all of the information described in the
foregoing Background is accurate; and
<PAGE>
h. Acknowledge and agree that Obligors' failure to comply with or
perform any of their respective covenants, agreements or obligations
contained in this Amendment or any other documents executed and
delivered by any of them in connection herewith will, subject to
applicable notice, grace and cure periods, constitute an Event of
Default under the Loan Agreement and each of the Loan Documents.
5. NO NOVATION. Nothing contained herein and no actions taken pursuant to the
terms hereof are intended to constitute a novation of the Loan Agreement
or any of the Loan Documents and shall not constitute a release,
termination or waiver of any of the liens, security interests, rights or
remedies granted to Bank in the Loan Documents.
6. NO FURTHER AMENDMENTS. Nothing contained herein constitutes an agreement
or obligation by Bank to grant any further amendments or modifications to
any of the Loan Documents.
7. INCONSISTENCIES. To the extent of any inconsistency between the terms and
conditions of this Modification and the terms and conditions of the Loan
Agreement or the Loan Documents as previously modified, the terms and
conditions of this Modification shall prevail. All terms and conditions of
the Loan Agreement and the Loan Documents as previously modified and not
inconsistent herewith shall remain in full force and effect, and are
hereby ratified and confirmed by Borrower and Guarantors.
8. CONSTRUCTION. All references to the Loan Agreement therein or in any of
the other Loan Documents shall be deemed to be a reference to the Loan
Agreement, as modified hereby.
9. BINDING EFFECT. This Modification shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
10. GOVERNING LAW. This Modification shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
11. HEADINGS. The headings of the sections of this Modification are inserted
for convenience only and shall not be deemed to constitute a part of this
Modification.
12. COUNTERPARTS. This Modification may be executed in any number of
counterparts, all of which taken together shall constitute one and the
same instrument, and any party hereto may execute this Modification by
signing any such counterpart.
[THIS SPACE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Modification to be
executed effective as of the day and year first above written.
CONSOLIDATED STAINLESS, INC.
By: /s/ Ronald Adams PRES.
-------------------------
Ronald Adams, President
{CORPORATE SEAL}
/s/ Ronald Adams (SEAL)
-----------------------------
RONALD J. ADAMS
Florida Driver License
A352-730-49-019-0
MELLON BANK, N.A.
By:
-------------------------
Name/Title:
-----------------
<PAGE>
STATE OF FLORIDA :
: SS
COUNTY OF Orange :
On this, the 26th day of June, 1998, before me, a notary public,
personally appeared RONALD J. ADAMS, known to me (or satisfactorily proven) to
be the person whose name is subscribed to the within instrument, and
acknowledged that he executed the same for the purposes therein contained.
/s/ Winifred G. Bennett
-----------------------
Notary Public
My Commission Expires:
------------------------------------------------
Winifred G. Bennett
[SEAL] Notary Public, State of Florida
Commission No. CC 602158
My Commission Exp. 01/13/2001
Bonded Through Fla. Notary Service & Bonding Co.
------------------------------------------------
FOURTH EXTENSION AND MODIFICATION TO POST-PETITION
LOAN AND SECURITY AGREEMENT
FOURTH EXTENSION AND MODIFICATION TO POST-PETITION LOAN AND SECURITY
AGREEMENT (the "Modification") dated July 31, 1998, by and between CONSOLIDATED
STAINLESS, INC. (the "Borrower"), RONALD J. ADAMS and HARVEY B. ADAMS
(collectively, the "Guarantors" and each, a "Guarantor"), and MELLON BANK, N.A.
(the "Bank"). Borrower and Guarantors are sometimes collectively referred to
herein as the "Obligors".
BACKGROUND
A. Pursuant to a certain Post-Petition Loan and Security Agreement dated
December 12, 1997 by and between Borrower and Bank as modified on February 24,
1998, on March 4, 1998, on March 9, 1998, April 13, 1998 and April 16, 1998, and
as extended and modified by the Extension and Modification to Post-Petition Loan
and Security Agreement dated May 29, 1998, the Second Extension and Modification
to Post-Petition Loan and Security Agreement dated June 12, 1998 and the Third
Extension and Modification to Post-Petition Loan and Security Agreement dated
June 26, 1998 (collectively, the "Loan Agreement"), Bank agreed, subject to the
terms and conditions stated therein, to extend to Borrower a line of credit up
to the maximum amount as defined therein (the "Line").
B. By that certain Surety Agreement dated December 12, 1997, Guarantors
agreed to guarantee and become sureties for certain obligations of Borrower to
Bank, including those arising under the Loan Documents.
C. Borrower has requested that Bank consent to the extension of the term
and modification of certain provisions of the Loan Agreement, which Bank is
willing to do upon and subject to the terms and conditions of this Modification.
D. All capitalized terms not defined herein shall have the meanings set
forth therefor in the Loan Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties hereto
agree as follows:
1. ACKNOWLEDGMENT OF DEFAULTS. Borrower hereby confirms and acknowledges that
it is in default of its respective obligations under the Loan Documents as
a result, inter alia, of (a) Borrower's prior failure to achieve projected
monthly sales as required in Article 13.1(c) of the Loan Agreement, (b)
Borrower exceeding the Inventory Sublimit, WIP Sublimit and Permitted
Out-of-Formula Advances as scheduled under the Loan Agreement, and (c) the
existence of Out-of-Formula Advances from time to time. Borrower further
acknowledges and agrees that the Bank has certain rights and remedies
available to it as a result of the occurrence of the defaults, including
the right to confess judgment against the Borrower and each Guarantor.
BORROWER AND GUARANTORS EXPRESSLY AGREE THAT NOTHING CONTAINED HEREIN
SHALL BE DEEMED TO CONSTITUTE A WAIVER OR
<PAGE>
RELEASE OF ANY EXISTING EVENTS OF DEFAULT OR OF ANY RIGHTS AND REMEDIES
AVAILABLE TO BANK AS A RESULT THEREOF.
2. MODIFICATIONS.
The Loan Agreement shall be modified, effective as of August 1, 1998, as
follows:
a. Schedule 1.57 shall be modified by substituting the following
Schedule 1.57:
PERMITTED OUT-OF-FORMULA ADVANCES
Time Period Permitted Out-of-Formula Advances
----------- ---------------------------------
From August 1, 1998 to and including $1,950,000.00 less the Additional
August 31, 1998 Reduction if any.
"Additional Reduction" means the sum of (i) fifty percent (50%) of the proceeds
of Borrower's "Pre-Petition Delinquent Accounts" (defined as Borrower's
pre-petition date accounts receivable that are ninety days or more past invoice
date as of April 10, 1998), plus (ii) sixty-five percent (65%) of the amount by
which the Value of Borrower's ineligible inventory is less than $1,000,000.00.
Notwithstanding anything in the Loan Agreement, fifty percent (50%) of the
proceeds of the collection of Pre-Petition Delinquent Accounts shall be applied
to the reduction of the Permitted Out-of-Formula Advance at the Bank's
discretion. The Additional Reduction shall apply upon the occurrence of either:
(a) August 31, 1998, or (b) the aggregate collection by Borrower of Borrower's
Pre-Petition Delinquent Accounts in excess of $12,000.00 during the period July
31, 1998 through August 28, 1998. Any additional availability under the Line in
excess of that set forth in the Budget may not be used by the Borrower for any
cash disbursements other than the cash disbursements as set forth in the Budget,
until the Bank and Borrower have agreed to a further reduction in the Permitted
Out-of-Formula Advances beyond those set forth above.
b. Schedule 3.1(b) shall be modified by substituting the following
Schedule 3.1(b):
SUBLIMITS ON INVENTORY AND WIP ADVANCES
A. Inventory Sublimit
Time Period Inventory Sublimit
----------- ------------------
From August 1, 1998 to and including $6,300,000.00
August 6, 1998
From August 7, 1998 to and including $6,200,000.00
August 13, 1998
2
<PAGE>
From August 14, 1998 to and including $6,000,000.00
August 20, 1998
From August 21, 1998 to and including $5,900,000.00
August 27, 1998
From August 28, 1998 and at all times thereafter $5,800,000.00
B. WIP Sublimit
Time Period WIP Sublimit
----------- ------------
From August 1, 1998 $175,000.00
to and including August 31, 1998
From September 1, 1998 and at all times thereafter $150,000.00
c. Schedule 1.46 shall be modified by substituting the following
Schedule 1.46:
MAXIMUM AMOUNT
Time Period Maximum Amount
----------- --------------
From August 1, 1998 to and including $10,750,000.00
August 6, 1998
From August 7, 1998 to and including $10,500,000.00
August 13, 1998
From August 14, 1998 to and including $10,250,000.00
August 27, 1998
From August 28, 1998 and at all times thereafter $10,000,000.00
d. Paragraph 3.1(a) shall be modified by substituting the following
Paragraph 3.1(a):
3.1(a) Establishment of Line. Bank will establish for Borrower for
and during the period from August 1, 1998 until August 31, 1998 (as
such period may be extended hereunder, the "Contract Period"),
subject to the terms and conditions hereof, a revolving line of
credit
3
<PAGE>
(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, or (ii) Adjusted Maximum Amount and only for cash
disbursements as set forth in the Budget. Bank may, at its
discretion, make Out of Formula Overadvances to Borrower. Within the
limitations set forth in this Section 3.1, 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 Nineteen Million Dollars ($19,000,000.00),
dated December 12, 1997, which notwithstanding the modification of
the Loan Agreement, shall remain in full force and effect.
e. Paragraph 3.1 (d) shall be modified by substituting the following
Paragraph 3.1(d):
3.1(d) Extension of Contract Period. Bank may extend the Contract
Period beyond August 31, 1998 on terms and conditions acceptable to
Bank and at Bank's sole discretion upon payment of an additional
Loan Fee and approval by the Court.
f. Paragraph 8.28 shall be modified by substituting the following
Paragraph 8.28:
8.28 Permanent Financing Order. Borrower will use its best efforts
to cause the Permanent Financing Order to be entered by the
Bankruptcy Court on or before twenty (20) days after the date of
entry of the Interim Financing Order.
g. The following paragraph 8.37 shall be added to the Loan Agreement:
8.37 Financing of Manufacturing Facilities. As of August 31, 1998,
Bank shall have no obligation to advance any sums to Borrower for
any operational costs or other costs associated with the Lakeland
and Auburndale manufacturing facilities including, but not limited
to, payroll, payroll taxes and employee benefits, unless Bank agrees
otherwise in writing prior to August 31, 1998. The Borrower has
determined to limit manufacturing at the Lakeland facilities as
reflected on the Budget.
4
<PAGE>
h. Paragraph 14.1 shall be modified by substituting the following
Paragraph 14.1:
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: Saul, Ewing, Remick & Saul LLP
Centre Square West
1500 Market Street, 38th Floor
Philadelphia, PA 19102
Attention: Alan R. Gordon, Esquire
Telecopier No.: (215) 972-7725
with a copy to: Greenberg, Traurig, Hoffman, Lipoff, Rosen
& Quentel
Citicorp Center
153 E. 53rd Street
New York, NY 10022
Attention: Richard Tilton, Esquire
Telecopier No.: (212) 223-7161
To Bank: Mellon Bank, N.A.
1735 Market Street, 6th Floor
Philadelphia, PA 19101
Attention: Ronald Comito, Vice President
Telecopier No.: (215) 553-0201
5
<PAGE>
with a copy to: Klehr, Harrison, Harvey, Branzburg
& Ellers LLP
1401 Walnut Street
Philadelphia, PA 19102
Attention: Domenic E. Pacitti, Esquire
Telecopier No.: (215) 568-6603
with a copy to: Wolf, Block, Schorr & Solis-Cohen LLP
111 South 15th Street
Philadelphia, PA 19102
Attention: Marvin Krasny, Esquire
Telecopier No.: (215)977-2334
i. Paragraph 8.16 shall be modified by substituting the following
Paragraph 8.16:
8.16 Maintenance of Management. Borrower shall cause its business to
be continuously managed by its present management consisting of
Ronald J. Adams as President and Co-CEO and Vincent Colistra of
Phoenix Management Services, Inc. as Co-CEO on terms and conditions
and with responsibilities acceptable to Bank.
j. Paragraph 1.14 shall be modified by substituting the following
Paragraph 1.14:
1.14 "Budget" means that certain Budget and Cash Flow Projections
dated July 31, 1998, prepared by Borrower for the period August 1,
1998 through August 31, 1998 and attached hereto as Exhibit "A", as
the same may be updated from time to time, which assumes and
incorporates the intentions of Borrower to reduce personnel and
salaries on or before August 1, 1998. The Budget includes, without
limitation, statements of receipts and disbursements and
availability reports prepared on a weekly cash basis for the
Contract Period, and balance sheets, profit and loss statements and
cash flow statements prepared on a monthly accrual basis for the
Contract Period.
k. Paragraph 13.1 shall be modified by adding the following
subparagraph 13.1(y):
(y) The failure by the Borrower to file a Chapter 11 Plan of
Reorganization on or before August 17, 1998 that is acceptable in
all respects to Bank in Bank's sole discretion.
l. The following paragraph 8.38 shall be added to the Loan Agreement:
8.39 Access to Investment Bankers. Borrower shall make available to
Bank, and Bank may contact directly, the investment bankers retained
by the Borrower. Such investment bankers shall discuss with and
6
<PAGE>
disclose to Bank any and all information regarding the potential
sale of any of the Borrower's assets and any information requested
by Bank. Bank agrees to attempt to notify Borrower prior to
contacting the investment bankers, but Bank will notify Borrower
when Bank has had contact with the investment bankers.
m. The following paragraph 8.40 shall be added to the Loan Agreement:
8.40 Phoenix Management Services, Inc. Borrower shall retain Phoenix
Management Services, Inc. and Vincent Colistra of Phoenix Management
Services, Inc. as Co-CEO of the Borrower on terms and conditions and
with responsibilities acceptable to Bank. At times convenient to
Bank and Borrower, Vince Colistra and Phoenix Management Services,
Inc. shall be available to Bank to apprise Bank of any issues and/or
status with respect to the Borrower's operations, financing, asset
disposition or reorganization. The compensation of Vincent Colistra
and Phoenix Management Services, Inc. may be paid by Bank either
debiting Borrower's account or advancing funds under the Line
consistent with the Loan Agreement and this Modification.
n. The following paragraph 13.2 (d) shall be added to the Loan
Agreement:
13.2 (d) Borrower's Exclusivity Period. If Borrower fails to file a
Chapter 11 Plan of Reorganization on or before August 17, 1998 or if
any Plan of Reorganization that is filed by Borrower is not
acceptable to Bank, in Bank's sole discretion, then Borrower agrees
that any existing exclusive period in which to file or solicit
acceptances to Borrower's Plan of Reorganization shall be dissolved
as to Bank and Bank shall be permitted to file and solicit
acceptances to its own Chapter 11 Plan, should Bank so chose.
o. Paragraph 8.38 shall be modified by substituting the following
Paragraph 8.38:
8.38 Accounts Receivable Collections. Borrower shall deliver to Bank and
Bank's counsel via telecopy on Tuesday of each week for the prior
week a status and update report on all collection efforts with
respect to Borrower's accounts receivable that are ninety (90) days
or more past invoice date ("Delinquent Accounts") in a form
satisfactory to Bank, which report shall include the name of each
account, the amount due on each account, any action taken on each
account, the last conversation or communication with respect to each
account, and the status of any litigation on each account. Bank, at
its sole discretion, may retain a collection agency determined by
Bank to collect all pre-petition date Delinquent Accounts. The
Borrower may
7
<PAGE>
not compromise, other than in the ordinary course of business
including short shipments, damages, returns, adjustments and billing
errors, the amount of any account receivable or settle any
litigation with respect to any account receivable without Bank's
prior written consent.
p. The following paragraph 1.79 shall be added to the Loan Agreement:
1.79 "Out of Formula Overadvance" means advances under the Line
above the Borrowing Base that Bank may make to Borrower in Bank's
sole discretion for amounts as set forth in the Budget which in
combination with the Borrowing Base shall at no time exceed the
Maximum Amount as scheduled on Schedule 1.46.
3. OTHER REFERENCES. All references in the Loan Agreement and all the Loan
Documents to the term "Loan Documents" shall mean the Loan Documents as
defined therein, and this Modification, and any and all other documents
executed and delivered by Borrower pursuant to and in connection herewith.
4. FURTHER AGREEMENTS AND REPRESENTATIONS. Obligors hereby:
a. Ratify, confirm and acknowledge that the Loan Agreement, as amended
hereby, and the other Loan Documents continue to be valid, binding
and in full force and effect;
b. Covenant and agree to perform all of their respective obligations
under the Loan Agreement, as amended hereby, and the Loan Documents;
c. Acknowledge and agree that as of the date hereof, no Obligor has any
defense, set-off, counterclaim or challenge against the payment of
any sums constituting Bank Indebtedness or the enforcement of any of
the terms of the Loan Agreement, as amended hereby, or any of the
other Loan Documents;
d. Ratify and confirm that all representations and warranties of the
Obligors, contained in the Loan Agreement and/or the other Loan
Documents, are true and complete on and as of the date hereof, as if
made on and as of the date hereof;
e. Acknowledge and agree that nothing contained herein shall be deemed
to impair, reduce or release in any manner whatsoever any of the
Obligations of Guarantors under the Surety Agreement;
f. Represent and warrant that the execution and delivery of this
Amendment by Obligors and all documents and agreements to be
executed and delivered pursuant to the terms hereof;
i. have been duly authorized by all requisite corporate action by
Borrower;
8
<PAGE>
ii. will not conflict with or result in the breach of or
constitute a default (upon the passage of time, delivery of
notice or both) under Borrower's Certificate of Incorporation
or By-Laws or any applicable statute, law, rule, regulation or
ordinance or any indenture, mortgage, loan or other document
or agreement to which any Obligor is a party or by which any
of them is bound or affected; and
iii. will not result in the creation or imposition of any lien,
charge or encumbrance of any nature whatsoever upon any of the
property or assets of any Obligor, except liens in favor of
the Bank or as permitted hereunder or under the Loan
Documents;
g. Represent and warrant that all of the information described in the
foregoing Background is accurate; and
h. Acknowledge and agree that Obligors' failure to comply with or
perform any of their respective covenants, agreements or obligations
contained in this Amendment or any other documents executed and
delivered by any of them in connection herewith will, subject to
applicable notice, grace and cure periods, constitute an Event of
Default under the Loan Agreement and each of the Loan Documents.
5. NO NOVATION. Nothing contained herein and no actions taken pursuant to the
terms hereof are intended to constitute a novation of the Loan Agreement
or any of the Loan Documents and shall not constitute a release,
termination or waiver of any of the liens, security interests, rights or
remedies granted to Bank in the Loan Documents.
6. NO FURTHER AMENDMENTS. Nothing contained herein constitutes an agreement
or obligation by Bank to grant any further amendments or modifications to
any of the Loan Documents.
7. INCONSISTENCIES. To the extent of any inconsistency between the terms and
conditions of this Modification and the terms and conditions of the Loan
Agreement or the Loan Documents as previously modified, the terms and
conditions of this Modification shall prevail. All terms and conditions of
the Loan Agreement and the Loan Documents as previously modified and not
inconsistent herewith shall remain in full force and effect, and are
hereby ratified and confirmed by Borrower and Guarantors.
8. CONSTRUCTION. All references to the Loan Agreement therein or in any of
the other Loan Documents shall be deemed to be a reference to the Loan
Agreement, as modified hereby.
9. BINDING EFFECT. This Modification shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
10. GOVERNING LAW. This Modification shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
9
<PAGE>
11. HEADINGS. The headings of the sections of this Modification are inserted
for convenience only and shall not be deemed to constitute a part of this
Modification.
12. COUNTERPARTS. This Modification may be executed in any number of
counterparts, all of which taken together shall constitute one and the
same instrument, and any party hereto may execute this Modification by
signing any such counterpart.
IN WITNESS WHEREOF, the parties have caused this Modification to be
executed effective as of the day and year first above written.
CONSOLIDATED STAINLESS, INC.
By:
-------------------------------------
Ronald Adams, President and Co-CEO
{CORPORATE SEAL}
(SEAL)
----------------------------------------
RONALD J. ADAMS
MELLON BANK, N.A.
By: /s/ Ronald J. Comito V.P.
-------------------------------------
Name/Title: Ronald J. Comito
-----------------------------
Vice President
10
<PAGE>
11. HEADINGS. The headings of the sections of this Modification are inserted
for convenience only and shall not be deemed to constitute a part of this
Modification.
12. COUNTERPARTS. This Modification may be executed in any number of
counterparts, all of which taken together shall constitute one and the
same instrument, and any party hereto may execute this Modification by
signing any such counterpart.
IN WITNESS WHEREOF, the parties have caused this Modification to be
executed effective as of the day and year first above written.
CONSOLIDATED STAINLESS, INC.
By: /s/ Ronald J. Adams
-------------------------------------
Ronald Adams, President and Co-CEO
{CORPORATE SEAL}
/s/ Ronald J. Adams (SEAL)
----------------------------------------
RONALD J. ADAMS
FL Driver License
[ILLEGIBLE]
MELLON BANK, N.A.
By:
-------------------------------------
Name/Title:
-----------------------------
/s/ W.G.B.
-----------------------------------------------
Winifred G. Bennet
[SEAL] Notary Public, State of Florida
Commission No. CC 602158
My Commission Exp. 01/13/2001
Bonded Through Fla Notary Service & Bonding Co.
-----------------------------------------------
10
<PAGE>
STATE OF FLORIDA :
: SS
COUNTY OF ORANGE :
On this, the 31st day of July, 1998, before me, a notary public,
personally appeared RONALD J. ADAMS, known to me (or satisfactorily proven) to
be the person whose name is subscribed to the within instrument, and
acknowledged that he executed the same for the purposes therein contained.
/s/ Winifred G. Bennet
----------------------------------------
Notary Public
My Commission Expires:
-----------------------------------------------
Winifred G. Bennet
[SEAL] Notary Public, State of Florida
Commission No. CC 602158
My Commission Exp. 01/13/2001
Bonded Through Fla Notary Service & Bonding Co.
-----------------------------------------------
11
BROAD AND CASSEL
ATTORNEYS AT LAW
BOCA RATON o FT. LAUDERDALE o MIAMI o ORLANDO o TALLAHASSEE o TAMPA o
WEST PALM BEACH
390 NORTH ORANGE AVENUE
SUITE 1100
ORLANDO, FLORIDA 32801 Reply to:
PO BOX 4961 (32802-4961) ROY S. KOBERT, P.A.
TEL: (407) 839-4200 DIRECT FAX: (407) 650-0927
FAX: (407) 425-8377 INTERNET: [email protected]
June 10, 1998
VIA FACSIMILE
Scott K. Rutsky, Esquire Jeffrey C. Hampton, Esquire
Counsel for Official Unsecured Saul, Ewing, Remick & Saul, LLP
Creditors Committee Counsel to the Debtor
Proskauer Rose LLP 1500 Market Street 38th Floor
1585 Broadway Philadelphia, Pennsylvania 19102-2186
New York, New York 10036
Re: Consolidated Stainless, Inc., United States Bankruptcy Court, Delaware,
Case No. 97-2593(JJF)
Gentlemen:
Over the last several days, we have engaged in fruitful discussion
regarding the future affiliation of Mr. Harvey B. Adams ("HBA") with the company
he founded, Consolidated Stainless, Inc. (the "Debtor"). Last night, HBA agreed
to accept the terms proposed by the Official Unsecured Creditors Committee and
recommended by the Board of Directors of Consolidated Stainless, Inc. Based on
the consensus of the Board of Directors, the Creditors Committee as well as
joinder by Mellon Bank, that in order to assist the Debtor in its reorganization
efforts, HBA should resign.
HBA has agreed to resign as the Chairman of the Board, Chief Executive
Officer and employee of Consolidated Stainless, Inc. under the following terms:
1. HBA is resigning in his capacity as an officer, director and employee
of the Debtor. It has been represented by the recipients of this letter that the
Official Unsecured Creditors Committee, the Board of Directors of the Debtor,
and Mellon Bank do not oppose severance terms contained herein and the Debtor
will forthwith seek to obtain the necessary Bankrutpcy Court approval of the
letter with his resignation effective as of June 5, 1998 ("Resignation Date").
2. HBA shall receive severance, from the Resignation Date, in the form of
2 (two) months pay in the reduced amounts established during the Chapter 11,
existing insurance and related benefits including COBRA benefits that the law
allows, to be paid in accordance with the Debtor's current payroll and benefit
practices. HBA shall not be compensated and waives
<PAGE>
Scott K. Rutsky, Esquire
Jeffrey C. Hampton, Esquire
August 11, 1998
Page 2
any claim for any post-petition vacation earned. Any unpaid severance pursuant
to this agreement shall be an allowed administrative expense pursuant to 11
U.S.C. ss. 503(b)(1)(A) and paid as an administrative priority pursuant to 11
U.S.C. ss. 507(a)(1).
3. HBA shall make himself reasonably available to the corporate officers
and any retained turnaround specialists for the next 60 days after the
Resignation Date for any related corporate issues, at no additional compensation
to HBA.
4. HBA represents and warrants that he has returned any proprietary
information belonging to the Debtor from his home office on June 8, 1998. HBA
represents that neither he nor any corporation, partnership, joint venture or
other entity in which HBA has a direct or indirect ownership or management
interest is currently in possession of any proprietary information of the
Debtor.
5. In consideration of the agreements and payments set forth herein, HBA
(both in his individual capacity, or through any corporation, partnership, joint
venture or other entity in which HBA has a direct or indirect ownership or
management interest) shall not, at any time during the earlier of (i)
non-payment under paragraph 2; (ii) conversion of the Debtor's Chapter 11 case
to a case under Chapter 7 of the Bankruptcy Code; or (iii) 60 days from the
Resignation Date, directly or indirectly, at any place within the United States,
solicit, call upon or service any of the Debtor's customers or otherwise in any
manner compete with the Debtor with respect to any business, identical or
similar in nature to any business now or then being conducted by the Debtor or
in any other manner divert or take away or attempt to divert or take away from
the Debtor any of the business of the Debtor or any customer of the Debtor. For
this purpose, the term "customer" includes anyone who was a customer of the
Debtor at any time during the two years preceding the date hereof.
6. In consideration of the agreements and payments set forth herein, HBA
(both in his capacity, or through any corporation, partnership, joint venture or
any entity in which HBA has a direct or indirect ownership or management
interest) shall not, at any time from the date hereof through and including the
earlier of the date of (a) confirmation of a Chapter 11 Plan regarding the
Debtor; (b) conversion of the Debtor's Chapter 11 case to a case under Chapter 7
of the Bankruptcy Code; (c) the dismissal of the Debtor's Chapter 11 case; (d)
120 days from the Resignation Date; or (e) non-payment under paragraph 2, shall
not employ, retain, or solicit the employment or retention of, any person who
was or is an employee of the Debtor at any time during the two years preceding
the date hereof without having first obtained the Debtor's written consent to
any such action. This paragraph shall not apply to any person who is laid off,
terminated, fired, or otherwise involuntarily disengaged by the Debtor.
7. HBA acknowledges that the provisions of paragraphs 5 and 6 above are
necessary for the Debtor's protection and are reasonable. If, however, any
provision of
BROAD AND CASSEL
<PAGE>
Scott K. Rutsky, Esquire
Jeffrey C. Hampton, Esquire
August 11, 1998
Page 3
paragraph 5 and 6 is held to be unenforceable because of the duration,
geographical area or scope of the restriction, the Court making that
determination shall modify that provision to the extent necessary to make it
valid.
8. Since a breach by HBA of any of the provisions of paragraphs 5 and 6
would injure the Debtor in a way that could not be adequately compensated for by
damages, in addition to any other remedies available to the Debtor, it may
obtain an injunction restraining any such breach, without the necessity of
showing actual damage, after posting a bond if so required by a court of
competent jurisdiction.
9. Nothing in terms of this severance letter agreement shall waive any
claim(s) or release any cause(s) of action that any party could raise against
the other, whether or not a cause of action currently exists or could arise in
the future.
I am authorized to tender this letter offer on behalf of HBA and request
the Debtor to (i) seek board approval of these terms herein and (ii) serve me
with a copy of the motion to approve the terms, set forth herein. Please signify
your agreement to these resignation terms by your signature below and return an
executed copy to me. If there are any questions, please do not hesitate to
contact me.
Very truly yours,
Roy S. Kobert, P.A.
By: /s/ Roy S. Kobert
-------------------------------------
Roy S. Kobert, Esquire
[email protected]
RSK/dsr
Official Committee of Unsecured Consolidated Stainless, Inc.
Creditors of Consolidated Stainless, Inc. By its Counsel:
By its Counsel: Saul, Ewing, Remick & Saul, LLP
Proskauer Rose LLP
By: /s/ Scott K. Rutsky By:
---------------------------------- -------------------------------------
Scott K. Rutsky, Esquire Jeffrey C. Hampton, Esquire
c: Harvey B. Adams
Marvin Krasney, Esquire
BROAD AND CASSEL
PHOENIX MANAGEMENT SERVICES, INC.
- --------------------------------------------------------------------------------
110 Chadds Ford Commons
Chadds Ford, PA 19317
Mitchell B. Arden 610-358-4700
Executive Vice President FAX 610-358-9377
June 3, 1998
Mr. Ronnie J. Adams
President
Consolidated Stainless Inc.-Debtor in Possession
1601 East Amelia Street
Orlando, Florida 32803
Dear Ron:
It was a pleasure meeting with you again yesterday and both Vince and I
appreciated the opportunity to be brought up to date regarding the current
situation at Consolidated Stainless Incorporated (hereinafter referred to as
"CSI" or the "Company").
Based upon our conversation, Phoenix Management Services, Inc. ("Phoenix")
is prepared to assist CSI by assuming on an interim basis the responsibilities
generally held by a Company's Co-Chief Executive Officer (Co-CEO). As we
discussed, I believe that Vince Colistra, a Senior Vice President at Phoenix,
would be ideal for this interim Co-CEO assignment. Vince is a seasoned senior
executive whose experience will meet the needs of the Company and the
personalities of the individuals involved with this situation. Further, Vince's
past experience in the steel distribution operations will minimize any required
learning curve and will allow Vince to begin adding value immediately. Phoenix's
broad resources will be available to Vince throughout the course of this
assignment, and additional Phoenix professionals will be available should that
be necessary at some future point. A copy of Vince's resume was provided to you
yesterday, and an additional copy is attached to this proposal for distribution
to CSI's other interested parties. Throughout the course of this engagement,
Phoenix (referring jointly to Vince Colistra and Phoenix) will report directly
to CSI's Board of Directors, or such other body as Phoenix and CSI jointly agree
is appropriate, and Phoenix will be available to communicate with all of the
Company's various constituents.
As interim Co-CEO, it is our understanding that Phoenix, on a co-basis
with Ronald J. Adams, will oversee the daily operations of the Company and will
be responsible for the ongoing management of the Company during this interim
period. In addition, it is expected that Phoenix, on a co-basis with Ronnie J.
Adams, will have direct, day-to-day management responsibility of the Company's
ongoing business activities. In the event Phoenix and Ronnie J. Adams, acting in
their capacities as Co-CEO's, are unable to reach agreement with respect to a
particular business issue,
<PAGE>
the decision of Phoenix shall be binding.
Phoenix will have decision making authority in all functional areas of the
Company, including, but not limited to, cash management, purchasing, inventory
management and control, production and distribution operations, sales and
marketing activities, as well as customer and supplier interface. Further,
Phoenix will address the Company's staffing needs, oversee the Company's
development of a consolidation plan for the manufacturing and distribution
locations should that be necessary, and will, in conjunction with the Company's
financial management, develop CSI's cash forecasts. Notwithstanding Phoenix's
involvement in all functional areas of the Company, Phoenix shall not have the
authority to terminate Mr. Ronnie J. Adams.
Throughout the course of its involvement, Phoenix will also seek to
improve the Company's current operating performance by developing and
implementing those plans which will enhance the operating efficiency of CSI, as
well as the effectiveness of the Company's sales and marketing activities.
Additionally, we recognize that Phoenix will be involved with (and at times
responsible for) maintaining an open line of communication with all of the
Company's constituents including, but not necessarily limited to the Bankruptcy
Court, the Company's secured and unsecured creditors, the Company's employees,
customers, and suppliers.
Phoenix is also aware that CSI has engaged BDO Seidman ("BDO") as its
accountant and financial advisor and that, in addition to its other duties, BDO
is responsible for developing a Plan of Reorganization (the "Plan"). We
understand that Phoenix is not responsible for the development or presentation
of this Plan, but we will be available to review the plan and, if desired, offer
input as to its viability.
As compensation for the above services, Phoenix will bill CSI based upon
the following hourly rates for Phoenix's professionals:
President $315/hr.
Executive Vice President $265/hr.
Senior Vice Presidents $225/hr. - $245/hr.
(Including Vince Colistra @ $245/hr.)
Vice Presidents $195/hr. - $205/hr.
Analysts $ 75/hr. - $125/hr.
As indicated during our meeting, Vince Colistra, a Phoenix Senior Vice
President, will be filling the position of interim Co-CEO for CSI. Vince has an
intimate, working operational and financial knowledge of the industry, having
served as COO/CFO for five years at a large, Mid-West steel service operation
with revenues of $175 million for five years. Vince will, as necessary, and
within the scope of services discussed herein, have the support of the various
professionals at Phoenix. We are prepared to commit Vince for an average of at
least forty (40) hours per week and, as requested, we will cap our professional
fees for the scope of all services outlined in this letter at $6,250/week.
Should the cost of the actual professional hours amount to less than an
<PAGE>
aggregate $6,250, the Company would be billed the lesser amount. However, in the
event Phoenix's actual professional fees for the services to be performed in
accordance with this letter exceed $6,250 in any given week, the Company would
still only be subject to the $6,250 cap.
We are prepared to begin this assignment immediately upon receipt of a
$12,500 retainer, a signed copy of this engagement letter, an executed copy of
the attached Indemnification Agreement, and the appropriate Federal Bankruptcy
Court Order authorizing CSI's engagement of Phoenix. Phoenix's retainer will be
returned at the time this assignment is completed and payment in full for all of
Phoenix's services hereunder has been made, or can be offset against any
outstanding invoices at that time.
Normal out-of-pocket operating and travel expenses will be billed at cost,
and will be in addition to the previously discussed professional fee weekly cap
of $6,250, and detailed invoices will be issued weekly to help you monitor the
cost of the engagement. Invoices are payable upon presentation. Phoenix
recognizes and acknowledges that all payments received from CSI are subject to
final Bankruptcy Court approval.
We appreciate the confidence you have expressed in our firm and look
forward to assisting CSI during this critical period. This agreement may be
terminated in writing by either Phoenix or CSI's Board of Directors on ten (10)
days prior written notice.
Sincerely,
/s/ Mitchell B. Arden
Mitchell B. Arden
Executive Vice President
Agreed and Accepted on behalf
of Consolidated Stainless, Inc.:
/s/ Ronald J. Adams
Title: Pres.
Date: 6-17-98
<PAGE>
CONSENT, RELEASE, AND INDEMNIFICATION
Whereas, Consolidated Stainless, Inc. (the "Company") would like to
utilize the services of Phoenix Management Services, Inc. ("Phoenix") to manage
the Company's activities on an interim basis in the capacity of Interim Co-CEO
and in accordance with the terms of the attached engagement letter.
Now, therefore, in consideration of Phoenix's agreement to perform such
services in good faith and in the exercise of its best efforts, the Company
hereby consents and agrees to have Phoenix perform such services, releases and
waives any and all claims which it may have or claim to have in the future
against Phoenix, its principals, employees or agents arising out of the
performance of such services, except for claims resulting from Phoenix's gross
negligence or willful misconduct, and agrees to indemnify, hold harmless and
defend Phoenix, its principals, employees or agents against any and all claims,
demands or suits by any directors, officers, employees, shareholders, customers,
representatives, or vendors of the Company or subject developments arising out
of the performance of such services, except for claims, demands or suits which
result from Phoenix's gross negligence or willful misconduct.
Intending to be bound hereby, the undersigned, having been duly authorized
by the Board of Directors of Consolidated Stainless, Inc. and the Federal
Bankruptcy Court in the State of Delaware have set their hands and seal this
17 day of June, 1998.
By: /s/ Ronald J. Adams
Name: Ronald J. Adams
Title: President
Date: 6-17-98
Witness: /s/ Donna Richey
By:
Name: Donna Richey
Title: Asst. Controller
Date: 6-17-98
(SEAL)
PHOENIX MANAGEMENT SERVICES, INC.
- --------------------------------------------------------------------------------
110 Chadds Ford Commons
Chadds Ford, PA 19317
610-358-4700
FAX 610-358-9377
Vincent J. Colistra
Senior Vice President
June 22, 1998
Mr. Ronald J. Adams
President
Consolidated Stainless, Inc.-Debtor in Possession
1601 East Amelia Street
Orlando, Florida 32803
Dear Ron:
Based upon our ongoing conversations during the past two weeks with the
various constituents involved in the bankruptcy case of Consolidated Stainless,
Inc. (hereinafter referred to as "CSI" or the "Company"), it is our
understanding that the Company would like Phoenix Management Services, Inc.
("Phoenix") to consider expanding the scope of our original engagement as
interim Co-Chief Executive Officer to now include the formulation of a Business
Plan (the "Plan") and to assist the Company with respect to the development and
formulation of a Plan of Reorganization.
Accordingly, Phoenix is prepared to assist CSI in the development and
formulation of the Plan. The scope of the assignment will include, but not be
limited to the following:
* Analyze and determine the optimum structure for the Company's
emergence.
* Develop a financial model to help in the analysis and validation of
the optimum structure.
* Determine the amount of projected cash available for the
restructured debt service of the Company.
* Conduct meetings with prospective "equity investors" for the purpose
of obtaining "Letters of Intent" and "Commitment Letters".
* Assist in the negotiations with the various constituents.
1
<PAGE>
Phoenix anticipates the continuation and utilization of the services of
BDO Seidman ("BDO") on a limited basis, for certain accounting and modeling
validation requirements in conjunction with the development of the Plan.
As compensation for the above services, and separate and apart from the
responsibilities, duties and financial arrangement for the Co-CEO assignment,
Phoenix's fee will be $40,000 for the next six weeks (covering the period from
7/6/98 thru 8/14/98). This amount covers approximately 80 hours that have
already been devoted to the expanded engagement and an additional estimated 150
hours that will still be needed to complete the work required for the August
14th deadline. Phoenix proposes to be paid as follows:
$10,000 Upon approval and authorization from the Bankruptcy Court.
$10,000 On 7/27/98
$10,000 On 8/3/98
$10,000 On 8/14/98
-------
$40,000 Total
On or about August 7, 1998, Phoenix will submit a budget (the "Budget") to
CSI which will set forth the proposed fees for services in excess of the forty
hours per week for the ten weeks subsequent to August 14, 1998. CSI will provide
the creditors' committee and Mellon Bank with a copy of the Budget and the
Budget shall be subject to the approval of CSI, the creditors' committee and
Mellon Bank. At the end of the 8/14/98 period, any hours by Vince Colistra in
excess of forty hours per week and any hours by any other Phoenix professionals
still working on the Plan will be billed and paid as agreed pursuant to the
Budget.
In addition to the above fees, Phoenix will be entitled to a success fee
("Success Fee") in an amount to be determined by August 14, 1998, which Success
Fee shall be payable pursuant to the terms of CSI's plan of reorganization. The
Plan will include, among other things, the participation of a new equity
investor at a level sufficient enough to enable acceptance and approval of a
Plan of Reorganization by the Federal Bankruptcy Court.
Normal and reasonable out-of-pocket operating and travel expenses will be
billed at cost, and will be in addition to the above payment of $40,000.
Detailed invoices, separate and apart from the invoices for the interim Co-CEO
assignment, will be issued weekly to help you monitor the cost of this
engagement. Invoices are payable upon presentation. Phoenix recognizes and
acknowledges that all payments received from CSI are subject to final Bankruptcy
Court approval.
2
<PAGE>
We appreciate the confidence you have expressed in our firm and look
forward to assisting CSI during this critical period. As we discussed, this
agreement may be canceled in writing by either party at any time.
Sincerely,
/s/ Vincent J. Colistra
Vincent J. Colistra
Senior Vice President
Agreed and Accepted on behalf
of Consolidated Stainless, Inc.:
/s/ Ronald J. Adams Pres & Co CEO
- ------------------------------------
Title:
7-10-98
- ------------------------------------
Date:
3
<PAGE>
CONSENT, RELEASE, AND INDEMNIFICATION
Whereas, Consolidated Stainless, Inc. (the "Company") would like to
utilize the services of Phoenix Management Services, Inc. ("Phoenix") to assist
the Company in developing and formulating a Business Plan which best achieves
the Company's objectives.
Now, therefore, in consideration of Phoenix's agreement to perform such
services in good faith and in the exercise of its best efforts, the Company
hereby consents and agrees to have Phoenix perform such services, releases and
waives any and all claims which it may have or claim to have in the future
against Phoenix, its principals, employees or agents arising out of the
performance of such services, except for claims resulting from Phoenix's gross
negligence or willful misconduct, and agrees to indemnify, hold harmless and
defend Phoenix, its principals, employees or agents against any and all claims,
demands or suits by any directors, officers, employees, shareholders, customers,
representatives, or vendors of the Company or subject developments arising out
of the performance of such services, except for claims, demands or suits which
result from Phoenix's gross negligence or willful misconduct.
Intending to be bound hereby, the undersigned, having been duly authorized
by the Board of Directors of Consolidated Stainless, Inc. and the Federal
Bankruptcy Court in the State of Delaware have set their hands and seal this
_____ day of _________________, 1998.
By: /s/ Ronald J. Adams
-------------------------------------
Name: Ronald J. Adams
-----------------------------------
Title: Pres. & Co CEO
----------------------------------
Date: 7-10-98
-----------------------------------
Witness:
By: /s/ Daniel A. Rashy
-------------------------------------
Name: Daniel A. Rashy
-----------------------------------
Title: Secretary
----------------------------------
Date: 7-10-98
-----------------------------------
(SEAL)
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 1 THROUGH 3 OF THE COMPANY'S
FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 208,578
<SECURITIES> 0
<RECEIVABLES> 3,568,059
<ALLOWANCES> 444,596
<INVENTORY> 11,583,115
<CURRENT-ASSETS> 15,820,795
<PP&E> 20,084,710
<DEPRECIATION> 5,762,446
<TOTAL-ASSETS> 30,381,992
<CURRENT-LIABILITIES> 1,554,133
<BONDS> 32,001,755
0
0
<COMMON> 46,103
<OTHER-SE> (3,219,999)
<TOTAL-LIABILITY-AND-EQUITY> 30,381,992
<SALES> 11,073,836
<TOTAL-REVENUES> 11,073,836
<CGS> 9,893,529
<TOTAL-COSTS> 9,893,529
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 67,500
<INTEREST-EXPENSE> 1,341,960
<INCOME-PRETAX> (5,008,300)
<INCOME-TAX> 2,189
<INCOME-CONTINUING> (5,010,489)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,010,489)
<EPS-PRIMARY> (1.09)
<EPS-DILUTED> (1.09)
</TABLE>
