<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
---------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998. COMMISSION FILE NUMBER 1-12870 .
----------
COLD METAL PRODUCTS, INC.
-------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 16-1144965
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8526 SOUTH AVENUE, YOUNGSTOWN, OHIO 44514
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (330) 758-1194
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
COMMON SHARES NEW YORK STOCK EXCHANGE, INC.
PAR VALUE $.01 PER SHARE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
----
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----- -----
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING COMMON SHARES, $.01 PAR VALUE, HELD BY
NON AFFILIATES OF THE REGISTRANT AS COMPUTED BY REFERENCE TO THE CLOSING PRICE
ON THE NEW YORK STOCK EXCHANGE ON JUNE 12, 1998 WAS $16,991,250.
THE NUMBER OF SHARES OF REGISTRANT'S COMMON STOCK, PAR VALUE $.01 PER SHARE,
OUTSTANDING AS OF JUNE 12, 1998 WAS 7,074,250
<PAGE> 2
COLD METAL PRODUCTS, INC.
FORM 10-K - FISCAL YEAR ENDED MARCH 31, 1998
--------------------------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
DESCRIPTION PAGE
----------- ----
<S> <C> <C>
PART I Item 1 Business 3
2 Properties 7
3 Legal Proceedings 8
4 Submission of Matters to a Vote of Security Holders 8
4A Executive Officers of the Registrant 8
PART II Item 5 Market Information 10
6 Selected Consolidated Financial Data 11
7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
8 Financial Statements and Supplementary Data 15
9 Changes in and Disagreements with Accountants
in Accounting and Financial Disclosure 31
PART III Item 10 Directors and Executive Officers of the Registrant 31
11 Executive Compensation 31
12 Security Ownership of Certain Beneficial
Owners and Management 31
13 Certain Relationships and Related Transactions 31
PART IV Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 31
Signatures 35
</TABLE>
2
<PAGE> 3
COLD METAL PRODUCTS, INC.
FORM 10-K - 1998
PART I
------
ITEM 1. BUSINESS
(a) General Development of Business.
--------------------------------
Cold Metal Products, Inc. (which, together with its wholly-owned
Canadian subsidiary, is referred to herein as the "Company") is a corporation
organized in 1980 under the laws of the State of New York. The Company is a
leading intermediate processor of flat-rolled steel engineered to meet the
critical requirements of precision parts manufacturers. As an intermediate
processor of flat-rolled steel, the Company purchases coils of rolled steel from
primary producers and processes the steel, using techniques such as
cold-rolling, annealing, normalizing, edge-conditioning and oscillate-winding,
as well as more basic services of slitting and cutting to length. The Company's
products include strip steel for speciality and conventional applications and
processed sheet steel. "Specialty" strip is highly engineered to meet customer
needs in precision parts manufacturing, and "conventional" strip is supplied to
high-volume manufacturers whose purchasing criteria emphasize quality, price and
service rather than unique specifications.
(b) Financial Information about Industry Segments
---------------------------------------------
Production of specialty strip steel, conventional strip steel
and processed sheet steel comprises a single segment of the intermediate steel
processing industry, involving inter-related equipment, technology and raw
materials. Accordingly, the business of the Company cannot be separated into
industry segments.
(c) Narrative Description of Business
---------------------------------
Products and Services
---------------------
An intermediate processor of flat-rolled steel, the Company
purchases coils of rolled steel from primary producers and processes the steel,
using techniques such as cold-rolling, annealing, normalizing, edge-conditioning
and oscillate-winding, as well as the more basic services of slitting and
cutting-to-length. The Company processes and markets over 50 grades of steel,
including ultra-low carbon, low carbon, medium and high carbon, very high
carbon, alloy, high strength-low alloy and both 300 and 400 series stainless.
The following table sets forth management's estimates of the percentages of net
sales for the three years ended March 31, 1998, 1997 and 1996 attributable to
the Company's strip steel products, which include both specialty and
conventional applications, and processed sheet products, respectively:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
Product 1998 1997 1996
------- ---- ---- ----
<S> <C> <C> <C>
Strip Steel... 61% 62% 79%
Processed Sheet... 39 38 21
---- ---- ----
100% 100% 100%
==== ==== ====
</TABLE>
The increase in the percent of net sales of processed sheet in
fiscal 1997 is primarily attributable to the expansion of service center
business through the acquisition of Direct Steel, Inc., which became a
wholly-owned subsidiary of the Company in June 1996 and Cold Metal Processing,
which was acquired in November 1996.
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<PAGE> 4
The Company believes that it is one of the few flat-rolled steel
processors with a significant position in both the specialty strip steel and
conventional strip steel markets, and is an industry leader in at least two key
areas of specialty strip technology: (i) continuous annealing and normalizing of
steel to produce special metallurgical properties and (ii) multi-head
oscillate-winding to produce long lengths of narrow strip steel.
Strip Steel Products. Specialty strip products are highly engineered
and customized, processed from flat-rolled coils of steel meeting exacting
specifications in multiple rolling, annealing and finishing operations.
Specialty strip is used in the manufacture of a variety of products, including
bearings, cutting tools and chain saw blades, tape measures, high-tolerance
springs and pen clips. Conventional strip products are generally used in
high-volume manufacturing applications. Quality requirements for conventional
strip products are typically stringent, and customer purchasing decisions are
usually based on prices offered by processors which can meet those requirements.
Conventional strip products are used in the manufacture of such products as seat
belt parts, transmission parts, industrial chains, door hinges, drawer slides,
golf club shafts and other products.
Processed Sheet. At its steel service centers, the Company produces
processed sheet consisting primarily of hot-rolled, cold-rolled and galvanized
steel. The Company's processed sheet steel is typically used in applications
that do not require precision tolerances, such as for heating ducts, wall studs
and unexposed automobile parts. The Company's steel service centers purchase
steel from primary steel producers and add value by slitting, cutting to length
and providing warehousing services.
The principal processing techniques and the related equipment of the
Company -- rolling, annealing, slitting, oscillate-winding and finishing -- are
described below:
- Cold-rolling is the process of rolling steel to a specified
thickness, temper and finish. Most strip-rolling is performed on
reversing mills of three major types: 4-High, 6-High and cluster
mills (or "Z-mills"). The Company utilizes all three types.
- Annealing is a thermal process which changes the hardness and
certain metallurgical characteristics of steel. The most common
means of softening strip steel for further processing or
customer use is by annealing (heating and cooling) stacks of
wound coils of strip steel in batch furnaces. All of the
Company's strip mills are equipped for batch annealing.
- Slitting is the cutting of steel to specified widths and is
performed at all of the Company's facilities. Coils of
fully-processed strip or wide sheet coil are unwound, passed
through rotary slitting knives and rewound in narrow-width coils
as required by customer specifications.
- Oscillate-winding is a means of producing exceptionally long
lengths of narrow strip steel by winding consecutive coils, much
like thread is wound on a spool. This operation can be performed
after slitting or, at a lower cost, on a multiple head-slitting
and oscillate- winding line.
- Several auxiliary operations are performed by the Company,
including coating and edge- conditioning. Coating is performed
internally on an electro-galvanizing line at the Youngstown
facility and by outside vendors for other platings or paints as
needed to meet a given customer's needs. Edge-conditioning is
the conditioning of edges of processed steel into square,
full-round or partially-round shapes by rolling and skiving and
is done at several of the Company's plants.
4
<PAGE> 5
Raw Materials.
--------------
The primary raw materials used in the Company's operations are
hot-rolled and cold-rolled steel coils. Currently, the Company obtains steel for
processing from a number of primary steel producers, and has developed
cooperative relationships with its principal suppliers which, the Company
believes, enable it to assure itself of the availability of steel. Pursuant to
an agreement between the Company and one of its principal suppliers, the Company
has agreed to purchase, and the supplier has agreed to supply, certain specified
volumes of various grades and specifications of steel on competitive terms. This
arrangement, which extends through the year 2001, has been, and is expected to
be, significant to the Company during periods when demand for steel is high and
primary steel suppliers are likely to allocate grades and quantities of steel.
During the fiscal year ended March 31, 1998, the Company purchased approximately
7% of its requirements for hot-rolled and cold-rolled steel under this
arrangement.
The Company has developed supply relationships with several primary
steel producers outside of the U.S. and Canada. Over the Company's last three
fiscal years, approximately 16% of its steel requirements was purchased from
these suppliers. The Company's ability to acquire steel from sources outside the
U.S. and Canada affords it access to certain grades required for its specialty
strip production and, the Company believes, can afford substantial protection in
the event of limited steel supply in North America.
The Company's largest component of cost of sales is raw material costs.
These costs can vary over time due to changes in steel pricing which the Company
typically passes on to customers. In periods of changing steel prices, however,
reductions in the Company's raw material costs may lag behind pressure on the
Company's prices or increases in raw material costs may precede increases in the
Company's prices, temporarily compressing the Company's profit margins.
Patents and Trademarks
----------------------
The Company has no patents material to its business. With respect to
trademarks, the Company has developed a proprietary LaserMatte(TM) finish to
enhance drawability in certain difficult forming operations, which the Company
applies utilizing laser texturing technology acquired by the Company in March of
1995. The Company also has developed and produces the UniForm(TM) series of
specialty strip products that help customers solve problems in their
manufacturing processes. These include:
Product Application
------- -----------
UniForm(TM)100 Magnetic shielding and relay applications
UniForm(TM)200 Extra-deep drawn parts
UniForm(TM)300 Cup-shaped parts
UniForm(TM)500 Applications involving severe bending or stretch forming
UniForm(TM)700 Pre-hardened flat parts
UniForm(TM)800 High-strength parts requiring high ductility
Seasonality
-----------
The Company experiences lower levels of net sales in the months of
July, November and December due, primarily, to holiday periods and customer
plant shutdowns.
Working Capital Requirements
----------------------------
The Company generally maintains its inventory of raw materials at
levels that it believes are sufficient to satisfy the anticipated needs of its
customers based on historic buying practices and market conditions. The Company
believes that its practices are comparable to other companies in the
intermediate steel processing industry. The Company believes that cash generated
from operations and
5
<PAGE> 6
from borrowing under its committed credit facility provide adequate cash for the
Company's working capital requirements.
Customers
---------
The Company sells its products primarily in the automotive,
construction, cutting tools, consumer goods and industrial markets and to
specialty steel distributors. During the fiscal year ended March 31, 1998, 44%
of the Company's net sales were to the automotive market. Net sales are
primarily to manufacturers who produce component parts for sale to automotive
manufacturers and after-market parts suppliers. The balance of the Company's net
sales are almost equally divided among the other markets served. The markets
served by the Company's steel service centers are primarily the automotive
industry in Ontario and the construction industry in Quebec.
During the fiscal year ended March 31, 1998, the Company sold products
to approximately 1200 customers with the largest single customer accounting for
approximately 7% of the Company's net sales. The Company's ten largest customers
accounted for 31% percent of its net sales during that period. During the fiscal
year ended March 31, 1998, approximately 25% of the Company's net sales were
made pursuant to arrangements with customers which contemplate deliveries over a
period of 12 months or more.
For the fiscal year ended March 31, 1998, approximately 51% of the
Company's net sales were to customers in the U.S. and 48% were to customers in
Canada. Less than 1% of the Company's net sales, in each of its last three
fiscal years, were derived from sales to customers outside the U.S. and Canada.
See Note 1 to Consolidated Financial Statements included herein at Item 8.
Backlog
-------
At May 31, 1998, the Company's backlog was approximately $44 million
compared with approximately $48 million at May 31, 1997. Management estimates
that substantially all of the existing backlog will be shipped during the
current fiscal year.
Competition
-----------
The intermediate steel processing industry is highly competitive. The
Company competes on the basis of quality, technical expertise, price and its
ability to meet the delivery demands of its customers. Its principal competitors
in the specialty strip market consist primarily of small, privately-held
concerns, many of which focus on certain grades, finishes or coatings. The
Company's competitors in the conventional strip market include Steel
Technologies, Inc., Worthington Industries and Gibraltar Steel Corporation, each
of which may have greater financial and other resources than the Company.
Imported processed steel from Japan and Europe also competes with the Company's
strip steel products.
Compliance With Environmental Regulations
-----------------------------------------
The Company's steel processing facilities are subject to many federal,
state, provincial and local requirements relating to the protection of the
environment, and the Company has made, and will continue to make, expenditures
to comply with such provisions. The Company believes that its facilities are
being operated in material compliance with these laws and regulations and does
not believe that future compliance with such existing laws and regulations will
have a material adverse effect on its results of operations or financial
condition. Capital expenditures and expenses attributable to environmental
control compliance were approximately $250,000 in fiscal 1998, and are forecast
to be approximately $400,000 in fiscal 1999 and $450,000 in fiscal 2000.
The Company has retained the services of an environmental consultant
who continuously reviews the Company's operations to insure compliance with
environmental laws and regulations. While the Company's facilities are located
on old industrial sites, and although some contamination has been discovered,
based upon studies and reports conducted by the Company's consultants, the
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Company believes it is unlikely that any of the sites will require the Company
to incur material remediation costs.
Employees
---------
As of May 31, 1998, the Company employed a total of 834 people,
consisting of 297 salaried, 465 union, hourly and 72 non-union, hourly
employees. The Company is a party to six collective bargaining agreements at its
different facilities. The Company believes its employee relations are good.
ITEM 2. PROPERTIES
The following table sets forth the location, square footage and use of
each of the Company's principal production facilities.
<TABLE>
<CAPTION>
Square Principal Use Owned or
------------- --------
Location Footage Leased (1)
- -------- ------- ----------
<S> <C> <C> <C>
Youngstown, Ohio 430,000 Specialty Strip production Owned
New Britain, Connecticut 290,000 Specialty Strip production Owned
Hamilton, Ontario 314,000 Conventional Strip production Owned
(Imperial Street)
Indianapolis, Indiana 140,000 Specialty and Conventional Owned
Strip production
Ottawa, Ohio 145,000 Speciality and Conventional Owned
Strip production
Waterbury, Connecticut 16,000 Specialty Strip processing Leased(2)
Montreal, Quebec 45,000 Steel service center Owned
Hamilton, Ontario 87,000 Steel service center Owned
(Kenora Avenue)
Concord, Ontario 35,000 Steel service center Owned
</TABLE>
(1) Each of the facilities owned by the Company is subject to the liens of
financial institutions providing term loans and credit facilities.
(2) Leased under lease expiring on November 30, 1998, concurrent with the
Company's plans to consolidate operations at the New Britain,
Connecticut plant.
Changes in product mix result in significant variations in productive
capacity of the Company's strip facilities in any measurable period. The Company
estimates that its strip facilities operated at an estimated 73% of productive
capacity in fiscal 1998, and the Company's slitting equipment at its steel
service centers operated at approximately 79% of productive capacity in fiscal
1998.
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ITEM 3. LEGAL PROCEEDINGS
In December 1997, a jury in the Mahoning County Common Pleas Court
issued a verdict against the Company awarding $950,000 in favor of an injured
employee. In May 1998, the court awarded pre-judgment interest related to the
verdict in the amount of $350,000. The Company, on the advice of counsel, is
vigorously pursuing all appropriate procedures to have the verdict overturned,
including post-trial motions and appeals. Additionally, the Company is pursuing
it rights to indemnity under various insurance policies.
Although there can be no assurance that the Company will be successful
in its effort to have the verdict overturned or indemnified under insurance
policies, management believes a reasonable estimate of the final outcome is
approximately $450,000, which the Company has provided as a reserve in fiscal
1998. Although the outcome of the case, to the extent that it exceeds the
reserve, could have a material adverse effect on future results of operations of
the Company in a particular quarterly or annual period, the Company believes
that the effect would not have a material adverse effect on the Company's
consolidated financial position.
Certain claims, suits, and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, none of such claims, suits, or complaints is material, and in the
aggregate, they will not have a material adverse effect on the Company's results
of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of the shareholders in
the period in the fourth quarter of the fiscal year ended March 31, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the names, positions held and ages of all the
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position with Company
---- --- ---------------------
<S> <C> <C>
James R. Harpster........ 50 President and Chief Executive Officer
R. Quintus Anderson....... 67 Chairman of the Board
Gordon A. Wilber........ 56 Executive Vice President, Chief Operating Officer
Allen R. Morrow............ 48 Vice President, Chief Administrative Officer, Treasurer
John E. Sloe................. 45 Vice President, Chief Financial Officer
Robert R. Albert............ 68 Vice President - Commercial
Jack W. Watson........... 54 Vice President, General Manager, Canada
Heidi A. Nauleau......... 41 Corporate Secretary
</TABLE>
Executive officers are elected by the Board of Directors and serve at
its discretion.
JAMES R. HARPSTER has served as President and Chief Executive Officer of the
Company since 1984, and has served as a Director since 1982. Prior to assuming
his current position, he was Vice President of Sales for the Company since its
incorporation. He has twenty-nine years' experience in the steel industry,
having begun his career in 1969 with Jones & Laughlin Steel Corporation. During
his career with Jones & Laughlin, Mr. Harpster held various management positions
in the areas of product quality and plant operations. He graduated from Lehigh
University in 1969 with a B.S. in Metallurgy and from
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the University of Akron in 1975 with an MBA. He is a member and past president
of the Association of Cold-Rolled Strip Steel Producers and a member of the
Department of Commerce's Industry Sector Advisory Committee on Ferrous Ores and
Metals for Trade Policy Matters.
R. QUINTUS ANDERSON has served as Chairman of the Board of Directors of the
Company since its incorporation in 1980. Mr. Anderson and Aarque Capital
Corporation, a corporation controlled by Mr. Anderson, together own
approximately 52% of the shares of Common Stock of the Company. Aarque Capital
Corporation is one of a group of privately-held corporations owned or controlled
by Mr. Anderson, known as The Aarque Companies, which are in businesses
unrelated to the business of the Company. Mr. Anderson holds a Bachelor of
Engineering degree from Princeton University and was granted a post-graduate
fellowship at the Sloane School of Industrial Management at the Massachusetts
Institute of Technology. Since his discharge as a lieutenant from the U.S. Navy
in 1957, Mr. Anderson has managed, operated and acquired businesses related
principally to the metal fabrication industry. Mr. Anderson is a trustee of
Northwestern Mutual Life Insurance Company and a director of Oneida Ltd.
GORDON A. WILBER has served as Vice President since 1984, and Executive Vice
President of the Company since 1987. Mr. Wilber was appointed Chief Operating
Officer and was elected a Director in 1994. Prior to 1987, he held the positions
of Vice President of Operations, Manager of Operations and Technical Director of
the Company. Mr. Wilber began his career as a Research Metallurgist at the
Graham Laboratories of Jones & Laughlin in 1968. Following a series of technical
positions in the basic and specialty flat-rolled divisions of Jones & Laughlin,
he became Manager of Quality Control for Jones & Laughlin's specialty strip
plants in 1977. He has a Master's Degree in Metallurgical Engineering from the
University of Illinois and a Ph.D. from Rensselaer Polytechnic Institute. He is
a member of the Board of Directors and is currently serving as President of the
Association of Cold Rolled Strip Steel Producers.
ALLEN R. MORROW serves as Vice President, Chief Administrative Officer and
Treasurer of the Company. Prior to his appointment as Chief Administrative
Officer in April 1996, he had served as Chief Financial Officer of the Company
since its incorporation in 1980. He was elected Vice President and Treasurer in
1994. Prior thereto, he held various management positions with LTV and Jones &
Laughlin and, immediately preceding his employment with the Company, was
Division Controller, Strip Plants of Jones & Laughlin. He began his career with
Coopers & Lybrand and is a Certified Public Accountant. Mr. Morrow graduated
from Geneva College in 1971 with a B.S. Bus. Ad. in Accounting and from the
University of Pittsburgh in 1978 with an MBA.
JOHN E. SLOE joined the Company on April 1, 1996 as Vice President, Chief
Financial Officer. From 1993 to 1996, he served as a turnaround management
consultant with Sloe & Associates, whereby he independently assisted
manufacturing companies improve productivity, efficiencies and profitability.
From 1990 to 1993, he served as President and Chief Executive Officer of Denman
Tire Corporation, a $45 million specialty tire manufacturer. He joined Denman
Tire as Vice President & Chief Financial Officer in 1987. Mr. Sloe began his
career in 1977 with Eaton Corporation as an accountant and rapidly progressed to
Division Controller. He is a Certified Public Accountant and graduate of
Cleveland State University with a BBA in Accounting in 1977 and in 1983 earned
an MBA degree.
ROBERT R. ALBERT has served as Vice President - Commercial of the Company since
1987 and has over 45 years experience in the steel industry. Immediately prior
to joining the Company, he served as Vice President-Sales for Sharon Steel
Corporation and has held various sales and marketing positions at both the
Empire Detroit Division of Cyclops Corporation and Bethlehem Steel Corporation.
He is a 1952 graduate of Bucknell University with a B.S. degree in Commerce and
Finance.
JACK W. WATSON has served as Vice President, General Manager, Canada since 1991.
Prior to 1991 he held positions of Manager Operations, Manager Sales/Marketing
and Quality Control at the
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Company. Mr. Watson began his career at British Steel Corporation as a Research
Metallurgist. In 1967 he joined Dofasco Inc. holding various technical positions
before joining the Company's predecessor company, Stanley Steel, in 1980. He is
a graduate Metallurgist from Tees-Side Polytechnic, England. He is a
Professional Engineer and a member of Association of Professional Engineers of
Ontario.
HEIDI A. NAULEAU is Secretary of the Company and a Director, having been elected
to those positions in 1993. Mrs. Nauleau is Chairman of The Aarque Companies,
having been elected to that position in February 1996. Mrs. Nauleau joined The
Aarque Companies in 1981 as Assistant to the Chairman and was appointed Vice
President/Europe in 1984. From 1987 until 1992, she was manager of a subsidiary
of Aarque Steel Corporation. Prior to joining The Aarque Companies in 1981, from
1979 until 1981, Mrs. Nauleau served as a research associate for Berndtsen
International Ltd. Mrs. Nauleau is the daughter of R. Quintus Anderson. She is a
graduate of the University of Pennsylvania.
PART II
-------
ITEM 5. MARKET AND DIVIDEND INFORMATION
As of June 12, 1998, there were 7,074,250 shares of common stock
outstanding that were held by 109 shareholders of record. The Company has
declared no dividends in either of the two previous fiscal years. The Company's
ability to pay dividends in the future is limited by the terms of its credit
facilities so as not to exceed twenty-five percent of after tax income on a
cumulative basis exclusive of certain accounting adjustments, commencing as of
March 31, 1994, and by the requirement that no dividend shall result in a
default under the credit facility. Additional information regarding the
principal market for the Company's common stock and market prices for the
Company's common stock is set forth below.
<TABLE>
<CAPTION>
Market Price Ranges
-------------------
Fiscal Year Ending March 31,
----------------------------
1998 1997
---- ----
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $ 5.88 $ 4.88 $ 6.75 $ 5.38
Second Quarter $ 6.00 $ 5.50 $ 6.75 $ 5.50
Third Quarter $ 6.25 $ 5.06 $ 6.88 $ 5.50
Fourth Quarter $ 5.31 $ 4.50 $ 6.50 $ 5.13
</TABLE>
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996 1995 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 289,213 $ 286,024 $ 227,128 $ 235,145 $ 221,286
Cost of sales 264,799 262,133 205,727 208,408 196,870
-------------------------------------------------------------------------------
Gross profit 24,414 23,891 21,401 26,737 24,416
Selling, general, and administrative expenses 16,019 15,739 13,645 13,773 13,079
Income (loss) from equity investment --- 28 (98) 616 ---
Management fee to principal shareholder --- --- --- --- 1,022
Interest expense 4,624 3,115 2,918 2,956 3,707
-------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of accounting changes 3,771 5,065 4,740 10,624 6,608
Income taxes 1,438 1,700 1,685 3,698 2,530
-------------------------------------------------------------------------------
Income before cumulative effect of accounting
changes 2,333 3,365 3,055 6,926 4,078
Cumulative effect of accounting changes --- --- --- --- (10,956)
-------------------------------------------------------------------------------
Net income (loss) $ 2,333 $ 3,365 $ 3,055 $ 6,926 $ (6,878)
===============================================================================
BASIC AND DILUTED EARNINGS PER SHARE:
Income before cumulative effect of
accounting changes $ 0.33 $ 0.47 $ 0.43 $ 0.96 $ 0.75
Cumulative effect of accounting changes --- --- --- --- (2.02)
-------------------------------------------------------------------------------
Net income (loss) $ 0.33 $ 0.47 $ 0.43 $ 0.96 $ (1.27)
===============================================================================
Weighted average number of common
shares outstanding 7,142,026 7,162,250 7,172,271 7,200,201 5,422,429
===============================================================================
BALANCE SHEET DATA:
Total assets $ 150,381 $ 153,034 $ 127,785 $ 131,971 $ 110,939
Working capital 56,773 43,419 51,450 54,794 16,640
Long-term debt 60,859 48,330 39,000 34,250 4,250
Shareholders' equity 35,709 35,194 32,368 28,616 20,088
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information with respect
to the results of operations of the Company for fiscal 1998, 1997 and 1996 and
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto.
Results of Operations
- ---------------------
The following table presents the Company's results of operations
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
---- ------ -----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 91.6 91.7 90.6
--------------------------------------------
Gross profit 8.4 8.3 9.4
Selling, general, and administrative expenses 5.5 5.4 6.0
Interest expense 1.6 1.1 1.3
--------------------------------------------
Income before income taxes 1.3 1.8 2.1
Income taxes 0.5 0.6 0.7
--------------------------------------------
Net income 0.8% 1.2% 1.4%
============================================
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales increased $3.2 million, or 1.1% to $289.2 million. Volume of
tons shipped was up 3.2% for a $9.0 million sales increase, offset by an
aggregate decrease in sales dollars per ton of $5.8 million. Increased volume
from the Ottawa expansion and stronger construction market sales were offset by
the discontinuation of a sheet services brokerage business, a mix shift to lower
revenue products and the weakened Canadian dollar.
Gross profit for fiscal 1998 was $24.4 million, up $523,000, or 2.2%,
over fiscal 1997. As a percent of sales, margins varied only slightly at 8.4% in
fiscal 1998 versus 8.3% in fiscal 1997. Margin improvements resulted primarily
from strong construction market demand and discontinuation of the brokerage
business which weakened last year's performance. Margin improvements were offset
by weaker mix and the continued effect of ramp-up activity at Ottawa, where
increased expenses out-paced growth in volume for the year.
Selling, general and administrative (SG&A) expenses of $16.0 million
were up $280,000 over the fiscal 1997 level of $15.8 million, but as a percent
of sales at 5.5% changed only slightly, due to the higher sales volume. The
increase reflects higher sales salaries in support of operational expansion.
Overall operating income for fiscal 1998 was reduced by $800,000 of
one-time charges. Included was a $350,000 cost-saving initiative charge
associated with a reduction in employment levels and realignment of certain
plant operations. Additionally, a $450,000 reserve was established in connection
with an unfavorable court judgment. In fiscal 1997, the cessation of a brokerage
business reduced operating income by $880,000.
Interest expense was $4.6 million, or 1.6% of net sales for fiscal
1998, an increase of $1.5 million over the fiscal 1997 level of $3.1 million, or
1.1% of net sales. The increase reflected a full year of financing cost expense
for the Ottawa expansion. Through the third quarter of fiscal 1997, financing
costs associated with the project were capitalized.
12
<PAGE> 13
Income taxes for fiscal 1998 were $1.4 million or an effective rate of
38%. In fiscal 1997, taxes were $1.7 million, an effective rate of 34%.
Adjustments to state taxes and a valuation allowance lowered the effective rate
in fiscal 1997.
As a result of the factors discussed above, net income for fiscal 1998
was $2.3 million or .8% of net sales compared to $3.4 million or 1.2% of net
sales in fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased $58.9 million, or 25.9% to $286.0 million. The
increase is mainly attributable to the addition to the Company's consolidated
financial statements of sales of $43.5 million at Direct Steel, Inc. ("Direct
Steel"), which became a wholly owned subsidiary of the Company in June 1996 and
sales of $1.3 million attributable to the processing center acquired on November
1, 1996. Excluding the effect of these transactions, the Company's sales
increased $14.1 million, or 6.2%. Volume of tons shipped was up 12.9% accounting
for a $29.3 million sales increase, offset by an aggregate decrease in sales
dollars per ton of $15.2 million due to a decline in average selling price,
resulting from a mix shift to lower revenue products.
Gross profit for fiscal 1997 was $23.9 million, or 8.3% of net sales,
up $2.5 million or 11.6% over fiscal 1996. As a percent of sales, it was down
from 9.4% in the prior year reflecting several factors. Start-up costs
associated with the new Ottawa facility decreased the margins by approximately
$1.6 million for fiscal 1997, approximately $700,000 of which affected the
fourth fiscal quarter. Additionally, a fourth quarter charge related to the
cessation of brokerage activities reduced gross profit by approximately $880,000
for the year. With the consolidation of Direct Steel, a greater proportion of
sales activity was weighted by a lower margin mix of business. The effect of
higher raw material costs, particularly in the fourth fiscal quarter, also
reduced margins.
SG&A expenses of $15.7 million in fiscal 1997 were $2.1 million over
the fiscal 1996 level. As a percentage of sales, expenses decreased to 5.4% from
6.0%. Increased expenses were attributable principally to incremental activities
associated with acquisitions competed during fiscal 1997, while the lower
percentage level reflected the comparison of the expense level on the higher
sales activity level. SG&A expenses net of acquisitions increased $633,000,
reflecting higher expenses associated with normal salary increases and the
Company's general growth plan.
Income from equity investment at Direct Steel was $28,000 for fiscal
1997. Subsequent to June 18, 1996, the operations were consolidated with the
Company's and no longer reported as income from equity investment.
Interest expense was $3.1 million, an increase of $197,000, but 1.1 %
of net sales in fiscal 1997, down from 1.3% of net sales in fiscal 1996. Lower
interest expense through the third quarter of fiscal 1997 reflected lower
borrowing levels associated with decreased inventory levels resulting from
improved inventory management and lower rates. These favorable effects more than
offset the increased interest costs attributable to acquisition activity. The
consolidation of Direct Steel increased interest expense by $592,000 from fiscal
1996 levels. In the fourth quarter of fiscal 1997, the capitalization of
interest costs associated with the Ottawa expansion project ended and these
costs began to be reflected as interest expense, impacting the year to year
comparison by $499,000.
Income taxes for fiscal 1997 were $1.7 million or .6% of net sales
compared to $1.7 million in fiscal 1996 or .7% of net sales. The effective tax
rates computed on income exclusive of income (loss) from equity investment were
down slightly in the current year at 33.8% versus 34.8% in the prior fiscal
year.
As a result of the factors discussed above, net income for fiscal 1997
was $3.4 million or 1.2% of net sales compared to $3.1 million or 1.4% of net
sales in fiscal 1996.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily to fund working capital needs,
capital projects, including the acquisition, expansion and improvement of
facilities, machinery and equipment and to acquire complementary steel-related
businesses consistent with the Company's growth strategy to increase its size
and profitability. The Company met its capital requirements in fiscal 1998
through cash flow from operations and from borrowings under credit facilities.
During fiscal 1998, the Company generated cash flow from operating
activities of $1.7 million. Contributing to cash inflows in the current year
were net income, non-cash depreciation and amortization, and a decrease in
receivables. Offsetting these effects were decreases in accounts payable and
other liabilities, and an increase in inventories.
Cash flows used for investing activities in fiscal 1998 consisted of
$3.4 million of capital spending, down from previous year spending which
included the Ottawa expansion.
Cash flows from financing activities provided $1.9 million for fiscal
1998. The Company was in compliance with covenant requirements under its credit
facilities as of March 31, 1998.
The Company's two bank lending arrangements provide an aggregate
maximum borrowing availability of approximately $90.2 million, of which $63.6
million was outstanding as of March 31, 1998. One of the borrowing facilities is
a term loan in the approximate amount of $20.2 million secured by the fixed
assets of the Company's facility in Ottawa, Ohio. The other is a revolving
credit facility secured by the rest of the Company's assets. The revolving
credit facility was amended on April 1, 1998 to provide maximum borrowing
availability of $70 million and to eliminate a discretionary facility with one
of the Company's Canadian operations upon completion of the amalgamation of
Direct Steel and Cold Metal Products, Limited.
Management expects that cash generated from operating activities and its
borrowing capacity will be sufficient to meet planned capital expenditures and
other cash requirements for the next twelve months.
SEASONALITY
The Company has in the past experienced lower levels of sales in the
months of July, November, and December, due primarily to holiday periods and
customer's temporary plant shutdowns.
INFLATION/IMPACT OF CHANGING PRICES
The Company's largest component of cost of sales is raw material costs.
These costs can vary over time due to changes in steel pricing which the Company
typically passes on to customers. The Company does not believe that inflation
has had a significant impact on the results of its operations over the periods
presented.
ENVIRONMENTAL MATTERS
The Company's facilities are subject to numerous federal, state,
provincial and local regulations related to environmental protection and
compliance with such regulations is a factor in the Company's operations. The
Company has made, and intends to make, expenditures necessary to comply with
such regulations. Under existing laws and regulations, the Company believes that
compliance will not have a material adverse effect on its results of operations
or financial condition.
IMPACT OF YEAR 2000
The Year 2000 issue relates to computer programs which recognize a date
using "00" as the year 1900 rather than the year 2000. The Company does not
anticipate that expenditures to ensure that its computer systems are Year 2000
compliant will have a material impact on its financial position, results of
operations or cash flows. Although the Company does not anticipate that
third-party non-compliance, if any,
14
<PAGE> 15
will have a material impact on the Company, the Company's operations could be at
risk if its suppliers and other third-parties fail to adequately address the
problem.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Cold Metal Products, Inc.
Youngstown, Ohio
We have audited the accompanying consolidated balance sheets of Cold
Metal Products, Inc. and Subsidiary (the "Company") as of March 31, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended March 31,
1998. Our audits also included the financial statement schedules listed in the
Index at Item 14(a)(2). These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on the consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Cold Metal Products, Inc.
and Subsidiary as of March 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
Cleveland, Ohio
May 8, 1998
15
<PAGE> 16
CONSOLIDATED BALANCE SHEETS
COLD METAL PRODUCTS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
MARCH 31,
1998 1997
(Dollars in thousands, except per share amounts)
<S> <C> <C>
ASSETS:
Cash $ 1,140 $ 898
Receivables 35,996 41,386
Inventories 53,703 50,104
Prepaid and other current assets 3,134 2,090
--------------- --------------
Total current assets 93,973 94,478
Property, plant, and equipment - at cost 80,583 78,233
Less accumulated depreciation (33,203) (29,475)
--------------- --------------
Property, plant and equipment - net 47,380 48,758
Other assets 9,028 9,798
--------------- --------------
Total assets $ 150,381 $ 153,034
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term borrowings $ 2,736 $ 13,192
Accounts payable 26,467 29,322
Other current liabilities 7,997 8,545
--------------- --------------
Total current liabilities 37,200 51,059
Long-term debt 60,859 48,330
Postretirement and other benefits 16,613 18,451
Shareholders' equity:
Common stock, $.01 par value; 15,000,000 shares
authorized, 7,532,250 shares issued 75 75
Additional paid-in capital 25,350 25,330
Retained earnings 18,245 15,912
Cumulative translation adjustment (4,034) (2,649)
--------------- --------------
Less treasury stock, 458,000 and 370,000 shares at cost (3,927) (3,474)
--------------- --------------
Total shareholders' equity 35,709 35,194
--------------- --------------
Total liabilities and shareholders' equity $ 150,381 $ 153,034
=============== ==============
</TABLE>
See notes to consolidated financial statements
16
<PAGE> 17
CONSOLIDATED STATEMENTS OF OPERATIONS
COLD METAL PRODUCTS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
(Dollars in thousands except per share amounts)
<S> <C> <C> <C>
Net sales $ 289,213 $ 286,024 $ 227,128
Cost of sales 264,799 262,133 205,727
-------------------------------------------------
Gross profit 24,414 23,891 21,401
Selling, general, and administrative expenses 16,019 15,739 13,645
Income (loss) from equity investment --- 28 (98)
Interest expense 4,624 3,115 2,918
-------------------------------------------------
Income before income taxes 3,771 5,065 4,740
Income taxes 1,438 1,700 1,685
-------------------------------------------------
Net income $ 2,333 $ 3,365 $ 3,055
=================================================
Basic and diluted net income per share $ 0.33 $ 0.47 $ 0.43
=================================================
Weighted average number of
shares outstanding 7,142,026 7,162,250 7,172,271
=================================================
</TABLE>
See notes to consolidated financial statements
17
<PAGE> 18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COLD METAL PRODUCTS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
COMMON
SHARES ADDITIONAL CUMULATIVE
($.01 PAID-IN RETAINED TRANSLATION TREASURY
PAR VALUE) CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1995 $ 75 $ 25,437 $ 9,492 $(3,022) $(3,366) $ 28,616
Net income --- --- 3,055 --- --- 3,055
Shares deferred in lieu of
pay --- 20 --- --- --- 20
Reduction in contribution of
principal shareholder --- (157) --- --- --- (157)
TREASURY STOCK --- --- --- --- (108) (108)
Net adjustment for foreign
currency translation --- --- --- 942 --- 942
-----------------------------------------------------------------------------------------
Balance, March 31, 1996 75 25,300 12,547 (2,080) (3,474) 32,368
Net income --- --- 3,365 --- --- 3,365
Shares deferred in lieu of
pay --- 30 --- --- --- 30
Net adjustment for foreign
currency translation --- --- --- (569) --- (569)
-----------------------------------------------------------------------------------------
Balance, March 31, 1997 75 25,330 15,912 (2,649) (3,474) 35,194
Net income --- --- 2,333 --- --- 2,333
Shares deferred in lieu of
pay --- 20 --- --- --- 20
Treasury stock (453) (453)
Net adjustment for foreign
currency translation --- --- --- (1,385) --- (1,385)
-----------------------------------------------------------------------------------------
Balance, March 31, 1998 $ 75 $ 25,350 $18,245 $(4,034) $(3,927) $ 35,709
=========================================================================================
</TABLE>
See notes to consolidated financial statements
18
<PAGE> 19
CONSOLIDATED STATEMENTS OF CASH FLOWS
COLD METAL PRODUCTS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,333 $ 3,365 $ 3,055
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 4,408 3,333 2,511
(Income) loss from equity investment --- (28) 98
Deferred income taxes 301 703 468
Deferred directors' fees 20 30 20
Changes in operating assets and liabilities (5,334) (43) 3,211
-----------------------------------------------
Net cash provided by operating activities 1,728 7,360 9,363
CASH FLOWS FOR INVESTING ACTIVITIES:
Additions to property, plant, and equipment (3,391) (14,259) (14,220)
Acquisitions --- (8,525) ---
-----------------------------------------------
Net cash used in investing activities (3,391) (22,784) (14,220)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from term loans --- 23,095 ---
Payments of term loans (1,263) (363) ---
Proceeds from other debt 218,124 198,475 168,818
Payments of other debt (214,462) (207,278) (160,158)
Defeasance of industrial revenue bond --- --- (4,250)
Acquisition of treasury stock (453) --- (108)
Other equity transaction --- --- (157)
-----------------------------------------------
Net cash provided by financing activities 1,946 13,929 4,145
Net increase (decrease) in cash 283 (1,495) (712)
Effect of exchange rates on cash (41) 75 84
Cash, beginning of period 898 2,318 2,946
-----------------------------------------------
Cash, end of period $ 1,140 $ 898 $ 2,318
===============================================
</TABLE>
See notes to consolidated financial statements
19
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COLD METAL PRODUCTS, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
1. PRINCIPLES OF CONSOLIDATION, BUSINESS DESCRIPTION AND ACCOUNTING POLICIES
Consolidation and Presentation -- The consolidated financial statements
include the accounts of the Company and its subsidiary, Cold Metal Products,
Limited, a Canadian Company. All significant intercompany transactions and
accounts have been eliminated.
Business Description -- The Company is in the intermediate steel
processing business and processes specialty and conventional strip steel, and
premium and standard sheet steel, to meet the critical requirements of precision
parts manufacturers. Through cold rolling, annealing, normalizing,
edge-conditioning, oscillate- winding, slitting, and cutting-to-length, the
Company provides value-added products to manufacturers in the automotive,
construction, cutting tools, consumer goods, and industrial goods markets. The
Company also supplies specialty steel distributors. Its customers are located
predominately in the U.S. and Canada.
During fiscal 1998, 1997, and 1996, approximately 44%, 41% and 37% of
the Company's sales, respectively, and 44%, and 43% of accounts receivable at
March 31, 1998 and 1997, respectively, were with companies in the automotive
industry. The balance of the Company's net sales are approximately equally
divided among the other markets served. During fiscal 1998, 1997, and 1996, the
Company's ten largest customers accounted for 31%, 31% and 35% of the Company's
net sales. No single customer accounted for 10% or more of sales in any of the
years. The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral.
Production facilities are located in Youngstown and Ottawa, Ohio;
Indianapolis, Indiana; New Britain and Waterbury, Connecticut; Hamilton and
Concord Ontario; and Pointe Claire, Quebec, Canada.
Results of Foreign Operations -- Net sales, operating income and net
income, respectively, of the Company's Canadian subsidiary were $158.9 million,
$5.1 million and $2.0 million in fiscal 1998; $155.3 million, $5.2 million and
$2.5 million in fiscal 1997; and $97.6 million, $2.0 million and $634,000 in
fiscal 1996. Identifiable assets of the Canadian subsidiary were $67.8 million
and $71.2 million at March 31, 1998 and 1997, respectively. The remainder of the
Company's consolidated net sales, operating income, net income and assets are
related to operations in the United States.
Both United States and Canadian operations sell to customers located
predominately in the United States and Canada. Of total net sales, approximately
51% was to customers in the United States, 48% to customers in Canada, and less
than 1% to customers in other countries.
Inventories -- Inventories are valued at the lower of cost or market.
Cost of domestic inventories is determined under the last-in, first-out (LIFO)
method; cost of inventories of the Canadian subsidiary is determined on the
first-in, first-out (FIFO) method. Domestic inventories represent approximately
49% of total consolidated inventories at both March 31, 1998 and 1997. Under the
FIFO method of inventory pricing, domestic inventories would have been
approximately $2,017,000 and $2,622,000 higher at March 31, 1998 and 1997,
respectively.
In fiscal 1997, inventory quantities were reduced resulting in a
liquidation of certain LIFO inventory layers carried at costs which were
different than the cost of current purchases. The effect of the LIFO liquidation
in fiscal 1997 increased income before taxes by $199,000 respectively, and net
income by $128,770.
20
<PAGE> 21
Property, Plant, and Equipment -- Property, plant, and equipment are
stated at cost. The Company provides for depreciation over the estimated useful
lives of the assets on the straight-line method for financial statement
reporting and an accelerated method for income tax reporting purposes. Estimated
useful lives range from five to thirty years.
Interest is capitalized in connection with the construction of
qualified assets. Under this policy, interest of $722,000 and $301,000 was
capitalized in fiscal 1997 and 1996, respectively.
Goodwill -- Goodwill is amortized using the straight-line method over a
period of forty years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through projected undiscounted cash
flows. The accumulated amount amortized at 3/31/98 and 3/31/97 was $144,000 and
$77,000, respectively.
Revenue Recognition -- Revenue is recognized when products are shipped
to customers. Sales returns and allowances are treated as a reduction to sales
and are provided for based on historical experience and current estimates.
Start-up Costs -- Start-up costs are expensed as incurred.
Stock Based Compensation -- The Company accounts for its stock option
plans using the intrinsic value accounting method, measured as the difference
between the option exercise price and the market value of the stock at the
measurement date. Accordingly, no compensation expense has been recognized for
its stock-based compensation plans in the accompanying financial statements as
all option exercise prices were equal to market price on the date of grant.
Earnings Per Share -- In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share" which is effective for financial statements issued for periods ending
after December 15, 1997. SFAS No. 128 simplifies the standards for computing
earnings per share (EPS), replacing the presentation of primary EPS with a
presentation of basic EPS, which includes only the weighted average number of
common shares outstanding and does not include any potentially dilutive
securities in the calculation. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. For fiscal 1998, 1997 and
1996, basic and dilutive earnings per share amounts are the same as the effect
of dilutive outstanding stock options is immaterial.
Financial Instruments -- The Company has various financial instruments
including cash, receivables, short-term and long-term debt, and miscellaneous
other assets. The Company has determined that the estimated fair value of its
financial instruments approximates carrying value.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions pending completion of related events. These estimates and
assumptions affect the amounts reported at the date of the financial statements
for assets, liabilities, revenues and expenses and the disclosure of
contingencies. Actual results could differ from these estimates.
New Accounting Standards -- The Financial Accounting Standards Board
has issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", effective
for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes new
standards for reporting comprehensive income and its components. The Company
does not expect that comprehensive income will differ materially from net
income, except for foreign currency translation adjustments included in
comprehensive income. SFAS No. 131 requires that a public business enterprise
report financial and descriptive information about its reportable operating
segments such as a measure of segment profit or loss, certain specific revenue
and expense items, and segment assets. The Company does not expect adoption of
the standard to have a material effect on financial position or results of
operations, as the Company operates in one business segment, intermediate steel
processing.
21
<PAGE> 22
2. OTHER BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
MARCH 31,
1998 1997
--------------------------------------------
(In thousands)
<S> <C> <C>
RECEIVABLES:
Customers $ 36,546 $ 41,932
Allowance for doubtful accounts (550) (546)
--------------------------------------------
$ 35,996 $ 41,386
============================================
INVENTORIES:
Raw materials $ 28,241 $ 28,209
Work in process 14,978 15,048
Finished goods 10,484 6,847
--------------------------------------------
$ 53,703 $ 50,104
============================================
PREPAID AND OTHER CURRENT ASSETS:
Prepaid expenses $ 1,470 $ 603
Deferred income taxes 1,664 1,487
--------------------------------------------
$ 3,134 $ 2,090
============================================
PROPERTY, PLANT, AND EQUIPMENT:
Land $ 2,192 $ 2,227
Buildings 17,810 17,829
Machinery and equipment 59,290 56,481
Construction in process 1,291 1,696
--------------------------------------------
$ 80,583 $ 78,233
============================================
OTHER ASSETS:
Deferred income taxes $ 3,177 $ 3,629
Goodwill 2,417 2,566
Other 3,434 3,603
--------------------------------------------
$ 9,028 $ 9,798
============================================
OTHER CURRENT LIABILITIES:
Payroll and related employee benefits $ 5,066 $ 5,342
Other 2,931 3,203
--------------------------------------------
$ 7,997 $ 8,545
============================================
</TABLE>
3. ACQUISITIONS
Effective June 18, 1996, Cold Metal Products, Limited acquired the
remaining outstanding shares of its 50% equity affiliate, Direct Steel, Inc.,
("Direct Steel"), for approximately $2.6 million. Direct Steel operates a steel
service center located in Concord, Ontario, Canada. The acquisition has been
accounted for as a purchase and, accordingly, assets and liabilities were
recorded at estimated fair values. The allocation of purchase price resulted in
goodwill of approximately $1.9 million, which is being amortized over 40 years.
On November 1, 1996, Cold Metal Products, Limited acquired real
property and steel processing equipment at Hamilton, Ontario for approximately
$5.9 million including acquisition costs. The purchase was completed utilizing
the Company's existing banking facilities and short-term seller financing. The
transaction was accounted for as a purchase and assets and liabilities were
recorded at estimated fair values.
22
<PAGE> 23
4. DEBT
<TABLE>
<CAPTION>
SHORT-TERM LONG-TERM
MARCH 31, MARCH 31,
1998 1997 1998 1997
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Committed facility $ 1,358 $ 1,115 $ 42,000 $ 27,000
Discretionary facility --- 10,621 --- ---
Term notes 1,378 1,456 18,859 21,330
-------------------------------------------------------------------------
Total $ 2,736 $ 13,192 $ 60,859 $ 48,330
=========================================================================
</TABLE>
The Company has a committed credit facility which provides availability
based on a percentage of accounts receivable, inventory, and an amortizing term
loan. On April 1, 1998, the Company amended its credit facility agreement to
provide total borrowing availability of $70 million and eliminate the
discretionary facility between Direct Steel and its lender. On the same date,
Direct Steel was amalgamated into its parent, Cold Metal Products, Limited.
The amended facility continues to provide for borrowing at Libor rates
plus one-half percent. The agreement extends through October 2, 2000, and
contains certain financial and other covenants, including restrictions on
payment of dividends, with which the Company was in compliance at March 31,
1998. Under the committed facility, the Company has determined that $1.4 million
would be subject to repayment with funds generated from operating activities
during the business cycle. As such, these funds are reflected as short-term in
nature. The weighted average interest rate at March 31, 1998 and 1997 was 6.2%
and 7.4%, respectively. The facility is collateralized by accounts receivable,
inventory, common stock of the Canadian subsidiary, and property, plant and
equipment. As of March 31, 1998, the credit line supported letters of credit in
the amount of $448,000.
In December 1996, the Company borrowed $21.8 million under an eight and
one-half year term loan at a fixed rate of 8.8% secured by the fixed assets of
its expanded Ottawa, Ohio facility. Proceeds of the loan were used to pay-down
debt under the Company's primary lending facility. The term loan agreement
contains certain financial and other covenants with which the Company was in
compliance at March 31, 1998. At March 31, 1998, approximately $20.2 million of
the term loan was outstanding. Aggregate maturities of the term loan for the
next five fiscal years are as follows: 1999 - $1.4 million; 2000 - $1.5 million;
2001 - $1.6 million; 2002 - $1.8 million; and 2003 - $2.0 million.
23
<PAGE> 24
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of (i) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (ii)
operating loss and tax credit carryforwards. Components of the Company's
deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
MARCH 31,
U.S.: 1998 1997
--------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Postretirement and postemployment benefit obligations $ 5,755 $ 5,994
Inventory basis differences (75) 44
Reserves not currently deductible 743 877
Tax operating loss carrryforwards (expires 2012 and 2013) 2,162 622
Tax credit carryforwards (expires 2002, 2003 and unlimited) 375 256
--------------------------
8,960 7,793
Valuation allowance (313) (313)
--------------------------
8,647 7,480
Deferred tax liabilities-property basis differences (3,196) (1,838)
--------------------------
Total U.S. 5,451 5,642
CANADA:
Deferred tax assets:
Postretirement and postemployment benefit obligations 120 112
Reserves not currently deductible 25 26
Tax operating loss carryforwards (expires 2005) 550 ---
--------------------------
695 138
Deferred tax liabilities:
Property basis differences (578) (448)
Pension asset (727) (216)
--------------------------
(1,305) (664)
--------------------------
Total Canada (610) (526)
--------------------------
Net deferred tax asset $ 4,841 $ 5,116
==========================
</TABLE>
The provision for income taxes includes:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
-----------------------------------------
(In thousands)
-----------------------------------------
<S> <C> <C> <C>
CURRENT TAXES:
U.S. federal $ 87 $ (182) $ 825
Canadian federal and provincial 1,019 1,128 310
State and local 31 51 82
-----------------------------------------
1,137 997 1,217
DEFERRED TAXES:
U.S. 95 620 457
Canadian 206 83 11
-----------------------------------------
301 703 468
-----------------------------------------
Total $ 1,438 $ 1,700 $ 1,685
=========================================
</TABLE>
24
<PAGE> 25
Reconciliations of the U.S. federal statutory tax rate to the effective tax rate
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
U. S. federal statutory tax rate 35.0% 35.0% 35.0%
Effect of graduated rates (1.0) (1.0) (1.0)
Effect of Canadian rates 2.6 1.0 (0.8)
State taxes 0.8 0.7 2.4
Reduction in valuation allowance 0.0 (1.5) (1.3)
Equity (income) loss 0.0 (0.2) 0.8
Other 0.7 (0.4) 0.4
---------------------------------------------------
Effective tax rate 38.1% 33.6% 35.5%
===================================================
</TABLE>
6. RETIREMENT BENEFIT PLANS
Substantially all of the Company's salaried and hourly employees are
covered by noncontributory retirement benefit plans. These plans generally
provide benefits based upon a formula using fiscal average earnings or at a
stated amount for each year of service. The plans' assets are principally
invested by outside asset managers in marketable debt and equity securities. The
company's funding policy is to make the annual contributions required by
applicable regulations.
Domestic pension expense includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost $ 730 $ 686 $ 597
Interest cost 1,670 1,489 1,261
Actual return on assets (6,421) (2,021) (3,289)
Net amortization 4,784 628 2,154
Cost of special termination benefits 149 293 ---
------------------------------------------------
Domestic pension expense $ 912 $ 1,075 $ 723
================================================
</TABLE>
Accrued domestic pension asset/liability in the balance sheets is as follows:
<TABLE>
<CAPTION>
MARCH 31,
1998 1997
------------------------------
(In thousands)
<S> <C> <C>
Vested accumulated benefit obligation $ 19,325 $ 14,344
Nonvested accumulated benefits 3,129 2,247
------------------------------
Accumulated benefit obligation 22,454 16,591
Effect of projected salary increases 3,687 2,653
------------------------------
Projected benefit obligation 26,141 19,244
Plan assets at market value 27,197 20,035
------------------------------
Plan assets in excess of projected benefit obligation (1,056) (791)
Unrecognized net obligation (1,367) (1,508)
Unrecognized net gain 1,477 2,213
Additional liability --- 100
------------------------------
Net domestic pension (asset) liability $ (946) $ 14
==============================
</TABLE>
25
<PAGE> 26
Assumptions used in developing the domestic pension information were:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
-------------------------------------------------------
<S> <C> <C> <C>
Discount rate for obligation 7.00% 8.25% 8.00%
Discount rate for expense 8.25 8.00 8.25
Long-term rate of investment return 8.50 8.50 8.50
Salary increase rate 5.00 5.00 5.00
</TABLE>
Domestic employees are eligible to participate in savings plans, which
include a 401(k) feature. The Company matches employee contributions 50% to
100%, in ranges of 3% to 6% of basic earnings. Employees vest in matching
contributions after attaining three years of service. Company matching
contributions were $602,000, $556,000 and $430,000 for fiscal 1998, 1997 and
1996, respectively.
The Canadian subsidiary has a defined contribution pension plan
covering substantially all of its salaried employees. The Company's
contributions to the defined contribution pension plan include a noncontributory
portion, which is a stated percentage of salary, and a contributory portion, in
which the Company matches the employee's contribution 100% up to 5% of their
salary. The Canadian subsidiary also has a defined benefit plan for its hourly
employees.
Canadian pension expense includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
--------------------------------------------------------
(In thousands)
DEFINED BENEFIT PLAN:
<S> <C> <C> <C>
Service cost $ 174 $ 132 $ 110
Interest cost 302 225 182
Actual return on assets (242) (179) (144)
Net amortization 108 74 57
--------------------------------------------------------
342 252 205
Defined contribution plan 281 255 234
--------------------------------------------------------
Canadian pension expense $ 623 $ 507 $ 439
========================================================
</TABLE>
Accrued Canadian pension asset/ liability in the balance sheets is as follows:
<TABLE>
<CAPTION>
MARCH 31,
1998 1997
-----------------------------
(In thousands)
<S> <C> <C>
DEFINED BENEFIT PLAN:
Projected benefit obligation-fully vested $ 4,777 $ 3,712
Plan assets at market value 4,864 2,841
-----------------------------
Projected benefit obligation (less than) in excess of plan assets (87) 871
Unrecognized net obligation (2,088) (1,499)
Additional liability (included in postretirement and other benefits) 0 1,499
-----------------------------
Net Canadian pension (asset) liability $ (2,175) $ 871
=============================
</TABLE>
The Canadian pension information was developed using a discount rate of
7% and 8% and a long term rate of investment return of 8% and 8% for fiscal 1998
and 1997, respectively.
26
<PAGE> 27
7. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSION
Net postretirement benefit cost consisted of the following components :
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost $ 142 $ 141 $ 163
Interest cost 825 793 864
Net amortization (720) (718) (645)
------------------------------------------
Total $ 247 $ 216 $ 382
==========================================
</TABLE>
The Company's postretirement benefit plans are not funded. The status
of the plans' accumulated postretirement benefit obligation is as follows:
<TABLE>
<CAPTION>
MARCH 31,
1998 1997
---------------------------
(In thousands)
<S> <C> <C>
Retirees $ 6,116 $ 5,161
Fully eligible active plan participants 2,646 2,463
Other active plan participants 3,046 2,453
Unrecognized net gain 1,090 2,650
Unrecognized prior service cost 2,600 3,164
---------------------------
Postretirement benefits 15,498 15,891
Postemployment benefits 100 100
---------------------------
Total postretirement and postemployment
benefits $ 15,598 $ 15,991
===========================
</TABLE>
The assumed healthcare cost trend rate used in measuring the
accumulated postretirement benefit obligation as of March 31, 1998 was 10.0% for
pre-age 65 payments (8.0% for post-age 65 payments) decreasing linearly each
successive year until it reaches 5.5% in 2007 for pre-age 65 payments and 2003
for post-age 65 payments, after which it remains constant. A one
percentage-point increase in assumed healthcare cost trend rate for each year
would increase the accumulated postretirement benefit obligation and net
postretirement benefit cost by approximately 2% and 10%, respectively. The
assumed discount rate as of March 31, 1998 and 1997, used in determining the
accumulated postretirement benefit obligation was 7.00% and 8.25%, respectively.
8. MANAGEMENT INCENTIVE PROGRAMS
The Company has a discretionary deferred compensation plan for certain
key employees. The Company's policy is to expense and fund to a trust fund,
annually, amounts for services rendered, $100,000, $116,000 and $141,000 in
fiscal 1998, 1997, and 1996, respectively. The amounts vest 100% five years from
the grant date, contingent upon continued employment or attainment of a normal
retirement.
The Company has two programs that provide for the grant of incentive
awards including stock options or restricted stock to officers, key employees,
and non-employee directors. In 1997, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the
Company has not changed its method of accounting for stock-based compensation.
Pro forma compensation costs for options granted in fiscal 1997 and 1996
determined under the requirements of SFAS No. 123 resulted in an immaterial
reduction of net income and earnings per share for each year.
Effective January 27, 1994, The Company's Board of Directors approved
the officer and key employee stock option program. Under the program, stock
options granted may be either options intended to qualify for federal income tax
purposes as "incentive stock options" or options not qualifying for favorable
tax treatment, "nonqualified stock options." In fiscal 1996, the shareholders
approved an increase in the total number shares of common stock issuable under
the program to 715,350 shares. The stock options are exercisable over a period
27
<PAGE> 28
determined by the Board of Directors, but no longer than ten years after the
date they are granted. Details of stock options under the program are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 397,500 375,000 210,000
Granted --- 22,500 165,000
----------------------------------------------
Outstanding at end of year (prices ranging from $5.75 to $10.00 per share) 397,500 397,500 375,000
==============================================
Exercisable at end of year 192,500 160,000 50,000
Available for grant at end of year 317,850 317,850 340,350
</TABLE>
The Company's Non-Employee Directors' Incentive Plan, which was adopted
on March 3, 1994 and amended by the shareholders on July 20, 1996, provides for
the issuance of shares to Directors (i) on a deferred basis, in lieu of payment
of annual retainer fees and (ii) through options granted at the beginning of a
director's terms or, on a discretionary basis, thereafter. The Plan reserves for
issuance 60,000 shares for deferral elections and 100,000 shares for the
granting of options. At the beginning of his or her term, each director is
granted an option to purchase 10,000 shares at a price equal to the market price
on the date of the grant, exercisable after three years or upon certain
specified events, such as a sale or merger of the Company. Options grantable on
a discretionary basis under the plan are exercisable no less than six months
from the date of the grant. Deferral elections under the plan allow each
eligible director to defer receipt of director fees in cash or common stock
until a specified period after his or her resignation or certain other events,
such as a sale or merger of the Company. Amounts deferred under this election
were 4,000 shares in fiscal 1998 and 5,581 shares in fiscal 1997.
Details of stock options under the plan are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1998 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 75,000 65,000 30,000
Granted --- 10,000 35,000
-----------------------------------------------------
Outstanding at end of year (prices ranging from $5.75 to $10.00 per share) 75,000 75,000 65,000
=====================================================
Exercisable at end of year 50,000 30,000 --
Available for grant at end of year 25,000 25,000 35,000
</TABLE>
9. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
--------------------------------------------------------
CHANGES IN OPERATING ASSETS AND LIABILITIES (In thousands)
<S> <C> <C> <C>
(Increase) decrease in assets:
Receivables $ 4,705 $ (1,325) $ 5,371
Inventories (4,417) 5,110 11,356
Prepaid expenses and other assets (754) (261) (287)
Increase (decrease) in liabilities:
Accounts payable (2,558) (3,244) (11,603)
Other liabilities (2,310) (323) (1,626)
--------------------------------------------------------
$ (5,334) $ (43) $ 3,211
========================================================
Interest paid $ 4,617 $ 3,904 $ 3,811
========================================================
Income taxes paid $ 455 $ 724 $ 2,097
========================================================
</TABLE>
10. COMMON STOCK
Under a stock repurchase program authorized by the Company's Board of
Directors, the Company purchased 88,000 shares of treasury stock in fiscal 1998
for a total of $453,000. Current financing
28
<PAGE> 29
agreements allow for the repurchase of stock not to exceed an aggregate amount
of $2.0 million. The aggregate amount purchased by the Company under the program
to date totals $847,000. In March 1998, the Board of Directors authorized an
additional 100,000 share stock repurchase program to be completed over an
unspecified period of time.
11. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and various equipment under
noncancelable leases expiring through February 2002. The future minimum
obligations under noncancelable operating leases in effect at March 31, 1998
are: $569,000 in 1999, $482,000 in 2000, $453,000 in 2001, $310,000 in 2002 and
$0 thereafter. Total rental expense for operating leases was $1,047,000,
$914,000 and $855,000 in fiscal 1998, 1997, and 1996, respectively.
In December 1997, a jury in the Mahoning County Common Pleas Court
issued a verdict against the Company awarding $950,000 in favor of an injured
employee. In May 1998, the court awarded prejudgment interest related to the
verdict in the amount of $350,000. The Company, on the advice of counsel, is
vigorously pursuing all appropriate procedures to have the verdict overturned,
including post-trial motions and appeals. Additionally, the Company is pursuing
it rights to indemnity under various insurance policies.
Although there can be no assurance that the Company will be successful
in its effort to have the verdict overturned or indemnified under insurance
policies, management believes a reasonable estimate of the final outcome is
approximately $450,000, which the Company has provided as a reserve in fiscal
1998. Although the outcome of the case, to the extent that it exceeds the
reserve, could have a material adverse effect on future results of operations of
the Company in a particular quarterly or annual period, the Company believes
that the effect would not have a material adverse effect on the Company's
consolidated financial position.
Certain other claims, suits, and complaints arising in the ordinary
course of business have been filed or are pending against the Company. In the
opinion of management, none of these other such claims, suits or complaints is
material and in the aggregate they will not have a material adverse effect on
the Company's results of operations or financial condition.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth certain quarterly financial data.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1998
--------------------------------------------------------------------------------------
(In thousands, except per share amounts)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER FISCAL YEAR
<S> <C> <C> <C> <C> <C>
Net sales $ 78,232 $ 73,694 $ 67,059 $ 70,228 $ 289,213
Gross profit 5,993 6,397 5,738 6,286 24,414
Net income $ 479 $ 585 $ 514 $ 755 $ 2,333
======================================================================================
Basic and diluted income per share $ 0.07 $ 0.08 $ 0.07 $ 0.11 $ 0.33
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1997
--------------------------------------------------------------------------------------
(In thousands, except per share amounts)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER FISCAL YEAR
<S> <C> <C> <C> <C> <C>
Net sales $ 62,405 $ 71,646 $ 73,162 $ 78,811 $ 286,024
Gross profit 6,438 6,308 5,248 5,897 23,891
Net income $ 1,405 $ 1,011 $ 437 $ 512 $ 3,365
======================================================================================
Basic and diluted income per share $ 0.20 $ 0.14 $ 0.06 $ 0.07 $ 0.47
======================================================================================
</TABLE>
29
<PAGE> 30
SCHEDULE II
COLD METAL PRODUCTS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Other Deductions Balance at
---------- ---------- ----- ---------- ----------
April 1, 1995 Costs and March 31, 1996
------------- --------- --------------
Description Expenses
----------- --------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 679 $ 537 -- $ (748) (1) $ 468
Inventory aging reserves (2) $ 1,604 -- -- $ (110) (3) $ 1,494
Balance at Charged to Other Deductions Balance at
---------- ---------- ----- ---------- ----------
April 1, 1996 Costs and March 31, 1997
------------- --------- --------------
Description Expenses
----------- --------
Allowance for doubtful accounts $ 468 -- $ 78(4) -- $ 546
Inventory aging reserves (2) $ 1,494 -- -- $ (58) (3) $ 1,436
Balance at Charged to Other Deductions Balance at
---------- ---------- ----- ---------- ----------
April 1, 1997 Costs and March 31, 1998
------------- --------- --------------
Description Expenses
----------- --------
Allowance for doubtful accounts $ 546 $ 4 -- -- $ 550
Inventory aging reserves (2) $ 1,436 $ 188 -- -- $ 1,624
</TABLE>
(1) Deductions relate to write-off of specific accounts.
(2) To adjust specific inventory items to lower of cost or market value. Reserve
is reflected in appropriate inventory categories.
(3) Adjustments against the account for purposes provided.
(4) Reserves related to acquired businesses.
30
<PAGE> 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In addition to the information reported in Part I of this Form 10-K
under the caption "Executive Officers of the Registrant," the information on
pages 2 through 3 of the Proxy Statement under the heading "Election of
Directors" and on page 9 of the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management" is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation set forth in the
Proxy Statement on pages 5 through 6 under the heading "Executive Compensation,"
on pages 6 through 8 under the heading "Human Resources Committee Report on
Executive Compensation," on page 8 under the heading "Performance Graph," as
well as the information on pages 3 through 4 under the heading "Compensation of
Directors," is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management set forth in the Proxy Statement on page 9 under the
heading "Security Ownership of Certain Beneficial Owners and Management," is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES, AND REPORTS ON FORM 8-K
A. The following documents are filed as part of this Form 10-K.
1. Consolidated Financial Statements
---------------------------------
Included under Item 8 of this report:
Opinion of Independent Public Accountants.
Consolidated Balance Sheets, March 31, 1998 and 1997
Consolidated Statement of Operations for the each of the three years in
the period ended March 31, 1998. Consolidated Statement of
Shareholders' Equity for each of the three years in the period ended
March 31, 1998. Notes to Consolidated Financial Statement for each of
the three years in the period ended March 31, 1998.
2. Supplemental Schedules
----------------------
Included under Item 8 of this report:
Financial Statement Schedule II - Valuation and Qualifying Accounts and
Reserves
All other Schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
31
<PAGE> 32
3. Exhibits
<TABLE>
<CAPTION>
Exhibit No. and Description Location
- --------------------------- --------
<S> <C> <C>
(3)(i)(a) Restated Certificate of Incorporation of Registrant Previously filed as Exhibit 3.1 to the
Company's Registration Statement on Form
S-1, which became effective on March 21,
1994 at 4:00 p.m. (Commission File No.
33-74986)
(3)(i)(b) Amendment to the Restated Certificate of Previously filed as Exhibit 3.3 to the
Incorporation of Registrant Company's Registration Statement on Form
S-1, which became effective on March 21,
1994 at 4:00 p.m. (Commission File No.
33-74986)
(3)(ii) Amended By-Laws of Registrant Previously filed as Exhibit E-1 to the
Company's 1994 Annual Report on Form
10-K filed on June 29, 1994
(4) Specimen stock certificate for the Common Stock Previously filed as Exhibit E-1 to the
Company's 1995 Annual Report on Form
10-K filed on June 29, 1995
(10)(a) Third Amended and Restated Credit Facility and Exhibit (10)(a) hereto.
Security Agreement between The Bank of New
York and the Company, dated as of April 1, 1998,
which amended and restated the Second Amended
and Restated Discretionary Credit facility
previously filed and listed as Exhibit 10(a) to the
Company's Annual Report on Form 10K for the
fiscal year ended March 31, 1997.
(10)(b) Cold Metal Canadian Subsidiary Guaranty Agreement, Previously filed as Exhibit 3.1 to the
dated as of July 31, 1987, between Irving Trust Company Company's Registration Statement on Form
(predecessor to The Bank of New York) and Registrant's S-1, which became effective on March 21,
Canadian Subsidiary, Cold Metal Products Company, Ltd. 1994 at 4:00 p.m. (Commission File No.
33-74986)
(10)(c) Supply Agreement, dated February 1987, as amended Previously filed as Exhibit 10.3 to the
June 20, 1989, December 31, 1992 and December 31, 1993, Company's Registration Statement on Form
subject to request for confidential treatment S-1, which became effective on March 21,
1994 at 4:00 p.m. (Commission File No.
33-74986)
(10)(d) Tax Sharing and Indemnification Agreement, dated Previously filed as Exhibit 10.5 to the
January 31, 1994, among Registrant and its Company's Registration Statement on Form
affiliates S-1, which became effective on March 21,
1994 at 4:00 p.m. (Commission File No.
33-74986)
(10)(e) Special Incentive Compensation Plan of Previously filed as Exhibit 10.10 to the
Registrant, effective December 1, 1993 Company's Registration Statement on Form
S- 1,which became effective on March 21,
1994 at 4:00 p.m. (Commission File No.
33-74986)
</TABLE>
32
<PAGE> 33
<TABLE>
<S> <C> <C>
(10)(f) Special Incentive Compensation Plan Trust Previously filed as Exhibit 10.11 to the
Agreement, dated January 28, 1994 Company's Registration Statement on Form
S-1, which became effective on March 21,
1994 at 4:00 p.m. (Commission File No.
33-74986)
(10)(g) Amended and Restated 1994 Incentive Program Previously filed as Exhibit A to the
Company's 1995 Proxy Statement filed on
June 22, 1995.
(10)(h) Share Purchase and Loan Agreement, dated Previously filed as Exhibit 10.13 to the
December 30, 1993, among Cold Metal Products Company's Registration Statement on Form
Company, Ltd., Lance and Mara Dunlap, 955404 S-1, which became effective on March 21,
Ontario, Inc. and Direct Steel, Inc. 1994 at 4:00 p.m. (Commission File No.
33-74986)
(10)(i) Share Purchase and Loan Amendment. Agreement Previously filed as Exhibit E-5 to the
dated March 23, 1994 among Cold Metal Products Company's 1994 Annual Report on Form
Company, Ltd., Lance and Mara Dunlap, 955404 10-K filed on June 29, 1994
Ontario Inc. and Direct Steel, Inc.
(10)(j) Shareholders Agreement, dated March Previously filed as Exhibit E-6 to the
23, 1994, Cold Metal Products Company, Ltd. Company's 1994 Annual Report on Form
Lance and Mara Dunlap, 955404 Ontario Inc. and 10-K filed on June 29, 1994
Direct Steel, Inc.
(10)(k) Supply Agreement, dated March 23, 1994, Previously filed as Exhibit E-7 to the
between Cold Metal Products Company, Ltd. and Company's 1994 Annual Report on Form
Direct Steel, Inc. 10-K filed on June 29, 1994
(10)(l) Agreement between Registrant and The Stanley Previously filed as Exhibit 10.20 to the
Works, dated February 17, 1994 Company's Registration Statement on Form
S-1, which became effective on March 21,
1994 at 4:00 p.m. (Commission File No.
33-74986)
(10)(m) Amended and Restated Non-Employee Directors' Previously filed as Exhibit B to the
Incentive Plan Company's 1995 Proxy Statement filed on
June 22, 1995.
(10)(n) Master Equipment Lease Agreement, Equipment Previously filed as Exhibit E-2 to the
Schedule No. 01 and related addenda between Company's 1995 Annual Report on Form
Cold Metal Products, Inc. and KeyCorp Leasing 10-K filed on June 29, 1995.
Ltd.
(10)(o) Russell Metal, Inc. and Cold Metal Products Previously filed as an exhibit to the
Company, Ltd. Asset Purchase Agreement dated Company's Report on Form 10-Q for the
10/21/96. fiscal quarter ended December 31, 1996.
(10)(p) Loan Agreement between Cold Metal Products, Previously filed as an exhibit to the
Inc. and The CIT Group/Equipment Financing, Company's Report on Form 10-Q for the
Inc. fiscal quarter ended December 31, 1996.
(21) Subsidiary of Registrant. Previously filed as Exhibit 21.1 to the
Company's Registration Statement on Form
S-1, which became effective on March 21,
1994 at 4:00 p.m. (Commission File No.
33-74986.)
(23) Independent Auditors' Consent. Exhibit 23 hereto.
(27) Financial Data Schedule. Exhibit 27 hereto.
</TABLE>
33
<PAGE> 34
(b) Reports on Form 8-K
None filed during the year ended March 31, 1998.
(c) Exhibits Required by Item 601 of Regulation S-K
Exhibits 3 (i)(a)-(b), (10)(b)-(f), (10)(h), (10)(l), and (21) are
incorporated herein by reference to the Company's Registration Statement on Form
S-1, which was previously filed and became effective on March 21, 1994 at 4:00
p.m. (Commission file No. 33-74986.) Exhibits (3)(ii), and (10)(i)-(k), are
incorporated herein by reference to the Company's Annual Report on Form 10-K
(Commission file No. 1-12870) for the fiscal year ended March 31, 1994. Exhibits
4, and (10)(n), are incorporated herein by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1995. Exhibits (10)(g)
and (10)(m) are incorporated herein by reference to the Company's 1995 Proxy
Statement filed on June 22, 1995. Exhibits (10)(o)-(p) are incorporated herein
by reference to the Company's Report on Form 10-Q (Commissions file No. 1-12870)
for the fiscal quarter ended December 31, 1996. The remaining exhibits are
contained herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COLD METAL PRODUCTS, INC.
June 24, 1998 By /s/ James R. Harpster
--------------------------------------
James R. Harpster
President and Chief Executive Officer
34
<PAGE> 35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below, as of June 24, 1998, by the following persons on
behalf of the Registrant and in the capacities indicated.
/s/ R. Quintus Anderson Chairman of the Board of Directors
- -----------------------------
R. Quintus Anderson
/s/ James R. Harpster President, Chief Executive Officer and Director
- ----------------------------- (Principal Executive Officer)
James R. Harpster
/s/ Heidi A. Nauleau Director
- -----------------------------
Heidi A. Nauleau
/s/ Gordon A. Wilber Director
- -----------------------------
Gordon A. Wilber
/s/ Wilbur J. Berner Director
- -----------------------------
Wilbur J. Berner
Director
- -----------------------------
Claude F. Kronk
/s/ Robert D. Neary Director
- -----------------------------
Robert D. Neary
/s/ Edwin H. Gott, Jr. Director
- -----------------------------
Edwin H. Gott, Jr.
/s/ Peter B. Sullivan Director
- -----------------------------
Peter B. Sullivan
/s/ John E. Sloe Vice President, Chief Financial Officer
- ----------------------------- (Principal Financial and Accounting Officer)
John E. Sloe
35
<PAGE> 1
Exhibit (10)(a)
================================================================================
THIRD AMENDED AND RESTATED CREDIT
AND
SECURITY AGREEMENT
================================================================================
BNY FINANCIAL CORPORATION
(AS LENDER)
================================================================================
WITH
================================================================================
COLD METAL PRODUCTS, INC.
(BORROWER)
================================================================================
As of April 1, 1998
================================================================================
<PAGE> 2
Table of Contents
-----------------
I. DEFINITIONS..............................................................1
1.1 Accounting Terms......................................................1
1.2 General Terms.........................................................2
1.3 Uniform Commercial Code Terms........................................15
1.4 Certain Matters of Construction......................................15
II. ADVANCES, PAYMENTS......................................................15
2.1. (a) Revolving Advances...............................................15
(b) Discretionary Rights.............................................16
2.2. Procedure for Revolving Advances Borrowing...........................16
2.3. Disbursement of Advance Proceeds.....................................17
2.4. INTENTIONALLY OMITTED................................................17
2.5. Maximum Advances.....................................................17
2.6. Repayment of Advances................................................17
2.7. Repayment of Excess Advances.........................................18
2.8. Statement of Account.................................................18
2.9. Letters of Credit and Acceptances....................................18
2.10. Issuance of Letters of Credit; Creation of Acceptances...............19
2.11. Requirements For Issuance of Letters of Credit and Acceptances.......19
2.12. Additional Payments..................................................20
2.13. Mandatory Prepayments................................................20
III. INTEREST AND FEES.......................................................20
3.1 Interest.............................................................20
3.2 Letter of Credit and Acceptance Fees.................................21
3.3. INTENTIONALLY OMITTED................................................21
3.4 Collateral Monitoring Fee............................................21
3.5 Computation of Interest and Fees.....................................22
3.6 Maximum Charges......................................................22
3.7 Regulatory Changes...................................................22
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3.8 Intentionally Omitted................................................23
3.9. Taxes................................................................23
3.10. Survival.............................................................23
IV. COLLATERAL: GENERAL TERMS...............................................24
4.1 Security Interest in the Collateral..................................24
4.2 Perfection of Security Interest......................................24
4.3 Disposition of Collateral............................................24
4.4 Preservation of Collateral...........................................24
4.5 Ownership of Collateral..............................................25
4.6 Defense of Lender's Interests........................................25
4.7 Books and Records....................................................26
4.8 Financial Disclosure.................................................26
4.9 Compliance with Laws.................................................26
4.10 Inspection of Premises...............................................26
4.11 Insurance............................................................27
4.12 Failure to Pay Insurance.............................................27
4.13 Payment of Taxes.....................................................28
4.14 Payment of Leasehold Obligations.....................................28
4.15 Receivables..........................................................28
(a) Nature of Receivables................................................28
(b) Solvency of Customers................................................28
(c) Locations of Borrower................................................29
(d) Collection of Receivables............................................29
(e) Notification of Assignment of Receivables............................29
(f) Power of Lender to Act on Borrower's Behalf..........................29
(g) No Liability.........................................................30
(h) Establishment of a Lockbox Account, Dominion Account.................30
(i) Adjustments..........................................................31
4.16 Inventory............................................................31
4.17 Maintenance of Equipment.............................................31
4.18 Exculpation of Liability.............................................31
4.19 Environmental Matters................................................31
4.20 Financing Statements.................................................34
4.21 Release of Security Interest in Equipment............................34
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V. REPRESENTATIONS AND WARRANTIES..........................................34
5.1 Authority............................................................34
5.2 Formation and Qualification..........................................35
5.3 Survival of Representations and Warranties...........................35
5.4 Tax Returns..........................................................35
5.5 Financial Statements.................................................35
5.6 Corporate Name.......................................................36
5.7 O.S.H.A. and Environmental Compliance................................36
5.8 Solvency; No Litigation, Violation, Indebtedness or Default..........36
5.9 Patents, Trademarks, Copyrights and Licenses.........................39
5.10 Licenses and Permits.................................................39
5.11 Default of Indebtedness..............................................39
5.12 No Default...........................................................40
5.13 No Burdensome Restrictions...........................................40
5.14 No Labor Disputes....................................................40
5.15 Margin Regulations...................................................40
5.16 Investment Company Act...............................................40
5.17 Disclosure...........................................................40
5.18 INTENTIONALLY OMITTED................................................40
5.19 Swaps................................................................41
5.20 Conflicting Agreements...............................................41
5.21 Application of Certain Laws and Regulations..........................41
5.22 Business and Property of Borrower....................................41
5.23. Workers' Compensation................................................41
5.24. Responsible Premises.................................................41
VI. AFFIRMATIVE COVENANTS...................................................42
6.1 Payment of Fees......................................................42
6.2 Conduct of Business and Maintenance of Existence and Assets..........42
6.3 Violations...........................................................43
6.4 Government Receivables...............................................43
6.5 Current Ratio........................................................43
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6.6 INTENTIONALLY OMITTED................................................43
6.7 INTENTIONALLY OMITTED................................................43
6.8 Fixed Charge Coverage................................................43
6.9 Total Liabilities to Equity..........................................44
6.10 Execution of Supplemental Instruments................................44
6.11 Payment of Indebtedness..............................................44
6.12 Standards of Financial Statements....................................44
VII. NEGATIVE COVENANTS...................................................44
7.1 Merger, Consolidation, Acquisition and Sale of Assets................45
7.2 Creation of Liens....................................................45
7.3 Guarantees...........................................................45
7.4 Investments..........................................................45
7.5 Loans................................................................45
7.6 Capital Expenditures.................................................46
7.7 Dividends............................................................46
7.8 Indebtedness.........................................................46
7.9 Nature of Business...................................................46
7.10 Transactions with Affiliates.........................................46
7.11 Leases...............................................................47
7.12 Subsidiaries.........................................................47
7.13 Fiscal Year and Accounting Changes...................................47
7.14 Pledge of Credit.....................................................47
7.15 Amendment of Articles of Incorporation, By-Laws......................47
7.16 Compliance with ERISA and PBA........................................47
7.17 Prepayment of Indebtedness...........................................48
VIII. CONDITIONS PRECEDENT.................................................48
8.1 Conditions to Initial Advances.......................................48
(a) Filings, Registrations and Recordings................................48
(b) Corporate Proceedings of Borrower....................................48
(c) Incumbency Certificates of Borrower..................................49
(d) Certificates.........................................................49
(e) Good Standing Certificates...........................................49
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(f) Legal Opinion........................................................49
(g) Guarantee, Guarantor Security Documents..............................49
(h) Consents.............................................................49
(i) No Adverse Material Change...........................................49
8.2 Conditions to Each Advance...........................................50
(a) Representations and Warranties.......................................50
(b) No Default...........................................................50
(c) Maximum Advances.....................................................50
IX. INFORMATION AS TO BORROWER..............................................50
9.1 Disclosure of Material Matters.......................................51
9.2 Schedules............................................................51
9.3 Environmental Reports................................................51
9.4 Litigation...........................................................51
9.5 Material Occurrences.................................................51
9.6 Government Receivables...............................................52
9.7 Annual Financial Statements..........................................52
9.8 INTENTIONALLY OMITTED................................................52
9.9 Monthly Financial Statements.........................................52
9.10 Other Reports........................................................53
9.11 Additional Information...............................................53
9.12 Projected Operating Budget...........................................53
9.13 Revisions to Projections.............................................53
9.14 Notice of Suits, Adverse Events......................................53
9.15 ERISA Notices and Requests...........................................53
9.16 Additional Documents.................................................54
X. EVENTS OF DEFAULT.......................................................54
XI. BANK'S RIGHTS AND REMEDIES AFTER DEFAULT................................57
11.1 Rights and Remedies..................................................57
11.2 Lender's Discretion..................................................58
11.3 Setoff...............................................................58
11.4 Rights and Remedies not Exclusive....................................58
XII. WAIVERS AND JUDICIAL PROCEEDINGS........................................59
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12.1 Waiver of Notice..................................................59
12.2 Delay.............................................................59
12.3 Jury Waiver.......................................................59
XIII. EFFECTIVE DATE AND TERMINATION.......................................59
13.1 Term..............................................................59
13.2 Termination.......................................................60
XIV. MISCELLANEOUS........................................................60
14.1 Governing Law.....................................................60
14.2 Entire Understanding..............................................60
14.3 Successors and Assigns; Participations; New Lenders...............61
14.4 Application of Payments...........................................61
14.5 Indemnity.........................................................61
14.6 Notice............................................................62
14.7 Severability......................................................63
14.8 Expenses..........................................................63
14.9 Injunctive Relief.................................................63
14.10 Consequential Damages.............................................63
14.11 Captions..........................................................63
14.12 Counterparts; Telecopied Signatures...............................63
14.13 Construction......................................................64
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<PAGE> 8
THIRD AMENDED AND RESTATED CREDIT
AND
SECURITY AGREEMENT
Third Amended and Restated Credit and Security Agreement dated as of
April 1,1998 between COLD METAL PRODUCTS, INC., a corporation organized under
the laws of the State of New York ("Borrower"), and BNY FINANCIAL CORPORATION
("Lender"), a corporation organized under the laws of the State of New York.
BACKGROUND
Borrower and The Bank of New York ("Bank") have previously entered into
a Second Amended and Restated Credit and Security Agreement dated as of August
1, 1994 (the "Original Loan Agreement"). Bank assigned all of its right, title
and interest in the Original Loan Agreement and all Other Documents to Lender
effective as of July 1, 1997. Borrower has requested Lender to amend and restate
the Original Loan Agreement to provide, inter alia, for the working capital
needs of the Guarantor (as hereafter defined) following the amalgamation of Cold
Metal Products Company, Ltd. and Direct Steel Inc. By execution of this
Agreement, Borrower and Lender wish to amend and restate the Original Loan
Agreement on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings herein contained, Borrower and Lender hereby agree as follows:
AMENDMENT AND RESTATEMENT
As of the date of this Agreement, the terms, conditions, covenants,
agreements, representations and warranties contained in the Original Loan
Agreement shall be deemed amended and restated in their entirety as follows and
the Original Loan Agreement shall be consolidated with and into and superseded
by this Agreement; provided, however, that nothing contained in this Agreement
shall impair, limit or affect the Liens heretofore granted, pledged or assigned
to Lender as security for Borrowers' obligations to Lender under the Original
Loan Agreement.
I. DEFINITIONS.
1.1. Accounting Terms. As used in this Agreement or any certificate,
report or other document made or delivered pursuant to this Agreement,
accounting terms not defined in Section 1.2 or elsewhere in this Agreement and
accounting terms partly defined in Section 1.2 to the extent not defined, shall
have the respective meanings given to them under GAAP; provided, however,
whenever such accounting terms are used for the purposes of determining
compliance with financial covenants in this Agreement, such accounting terms
shall be defined in accordance with GAAP applied in preparation of the audited
financial statements of Borrower for the fiscal year ended March 31, 1997.
<PAGE> 9
1.2. General Terms. For purposes of this Agreement the following terms
shall have the following meanings:
"Acceptances" shall have the meaning set forth in Section 2.9
hereof.
"Acceptance Fees" shall have the meaning set forth in Section
3.2(i)(C) hereof.
"Advances" shall mean and include the Revolving Advances, Letters
of Credit and Acceptances.
"Advance Rates" shall have the meaning set forth in Section 2.1(a)
hereof.
"Affiliate" of any Person shall mean (a) any Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is controlled by,
or is under common control with such Person, or (b) any Person who is a director
or officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of
any Person described in clause (a) above. For purposes of this definition,
control of a Person shall mean the power, direct or indirect, (x) to vote 5% or
more of the securities having ordinary voting power for the election of
directors of such Person, or (y) to direct or cause the direction of the
management and policies of such Person whether by contract or otherwise.
"Alternate Base Rate" shall mean, for any day, a rate per annum
equal to the higher of (i) the Prime Rate in effect on such day and (ii) the
Federal Funds Rate in effect on such day plus 1/2 of 1%.
"Authority" shall have the meaning set forth in Section 4.19(d).
"Average Monthly LIBOR Rate" shall mean, at any date of
determination, the rate per annum for the one month LIBOR rate as published in
The Wall Street Journal, averaged monthly on a calendar month basis.
"Bank" shall mean The Bank of New York and any successor thereto.
"Blocked Accounts" shall have the meaning set forth in Section
4.15(h).
"Borrower" shall mean Cold Metal Products, Inc., a New York
corporation, and all permitted successors and assigns.
"Borrower's Exempt Property" shall mean and include any and all
property of Borrower, real or personal, which is subject to a security interest
in favor of The CIT Group/Equipment Financing, Inc. pursuant to the Ottawa
Financing.
"Borrowing Base Certificate" means a certificate duly executed by
an officer of
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<PAGE> 10
Borrower appropriately completed and in substantially the form of Schedule
1.2(c) hereto.
"Business Day" shall mean with respect to LIBOR Rate Loans, any
day on which Lender is open for domestic and international business, including
dealings in Dollar deposit in London, England and New York, New York and with
respect to all other loans, any day other than a day on which Lender is
authorized or required by law to close.
"Canadian Dollar" shall mean the lawful money of Canada.
"CERCLA" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sections 9601 et
seq.
"Change of Control" shall mean (a) the occurrence of any event
(whether in one or more transactions) which results in a transfer of control of
Borrower to a Person who is not an Original Owner or (b) any merger or
consolidation of or with Borrower or sale of all or substantially all of the
property or assets of Borrower. For purposes of this definition, "control of
Borrower" shall mean the power, direct or indirect (x) to vote 35% or more of
the securities having ordinary voting power for the election of directors of
Borrower or (y) to direct or cause the direction of the management and policies
of Borrower by contract or otherwise.
"Charges" shall mean all taxes, charges, fees, imposts, levies or
other assessments, including, without limitation, all net income, gross income,
gross receipts, sales, use, ad valorem, value added, transfer, franchise,
profits, inventory, capital stock, license, withholding, payroll, employment,
social security, unemployment, excise, severance, stamp, occupation and property
taxes, custom duties, fees, assessments, liens and charges of any kind
whatsoever, together with any interest and any penalties, additions to tax or
additional amounts, imposed by any taxing or other authority, domestic or
foreign (including, without limitation, the Pension Benefit Guaranty
Corporation, the Pension Regulator or any environmental agency or superfund),
upon the Collateral, Borrower, Guarantor or any of its or their Affiliates.
"Closing Date" shall mean April 1, 1998 or such other date as may
be agreed to by the parties hereto.
"Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time and the regulations promulgated thereunder.
"Collateral" shall mean and include, in each case whether now or
hereafter existing or now owned or hereafter acquired by Borrower or Guarantor
(and whether or not the same is subject to Article 8 or 9 of the Uniform
Commercial Code or constitutes Collateral by reason of one or more than one of
the following clauses), the following:
(a) all Receivables;
(b) all Inventory;
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<PAGE> 11
(c) all Equipment;
(d) all General Intangibles;
(e) all books, records, ledgercards, files, correspondence,
computer programs, tapes, disks and related data processing software (owned by
Borrower or Guarantor or Borrower's or Guarantor's respective interests in any
of the foregoing) which at any time evidence or contain information relating to
any of the Collateral or are otherwise necessary or helpful in the collection
thereof or realization thereupon;
(f) all of Borrower's and Guarantor's right, title and
interest in and to all goods and other property, whether or not delivered, (i)
the sale, lease or furnishing of which gives or purports to give rise to any
Receivable, including but not limited to all merchandise returned or rejected by
or repossessed from customers, or (ii) securing any Receivable, including all of
Borrower's and Guarantor's rights as an unpaid vendor or lienor, including
stoppage in transit, replevin and reclamation with respect to such goods and
other properties;
(g) all documents of title, policies and certificates of
insurance, securities, chattel paper, other documents or instruments evidencing
or pertaining to any and all items of Collateral;
(h) all guaranties, Liens on real or personal property,
leases, and other agreements and property which in any way secure or relate to
any Collateral, or are acquired for the purpose of securing and enforcing any
item thereof;
(i) (i) all cash held as cash collateral pursuant to Section
3.2 and, to the extent not otherwise constituting Collateral, all other cash at
any time on deposit with or held by Lender for the account of Borrower or
Guarantor (whether for safekeeping, custody, pledge, transmission or otherwise),
(ii) all deposit accounts (whether time or demand or interest or non-interest
bearing) of Borrower or Guarantor with (A) Lender, including those to which any
such cash may at any time and from time to time be credited, and (B) with other
institutions, but only if, in the case of accounts with other institutions,
proceeds of Collateral have been or are to be deposited in or credited to such
accounts, (iii) all investments and reinvestments (however evidenced) of amounts
from time to time credited to such accounts, and (iv) all interest, dividends,
distributions and other proceeds payable on or with respect to (A) such
investments and reinvestments and (B) such accounts;
(j) to the extent not included in the foregoing, all Guarantor
Collateral, and
(k) all products and proceeds of such Collateral in whatever
form, including, but not limited to, all claims to items referred to in the
definition of Collateral and all claims of Borrower or Guarantor against third
parties (i) for (A) loss, destruction or infringement of, or damage to, and (B)
payments due or to become due under leases, rentals and hires of, any or all of
the Collateral and (ii) for proceeds payable under or unearned premiums with
respect to
4
<PAGE> 12
policies of insurance; provided, however, that notwithstanding any of the
foregoing provisions, "Collateral" shall not include any of Borrower's Exempt
Property.
"Consents" shall mean all filings and all licenses, permits,
consents, approvals, authorizations, qualifications and orders of governmental
authorities and other third parties, domestic or foreign, necessary to carry on
Borrower's or, as the case may be, Guarantor's, business, including, without
limitation, any Consents required under all applicable federal, state,
provincial or other applicable law.
"Controlled Group" shall mean all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with Borrower, are treated as a single employer
under Section 414 of the Code.
"Customer" shall mean and include the account debtor with respect
to any Receivable or the prospective purchaser of goods, services or both with
respect to any contract or contract right, or any party who enters into or
proposes to enter into any contract or other arrangement with Borrower or
Guarantor, pursuant to which Borrower or Guarantor is to deliver any personal
property or perform any services.
"Default" shall mean an event which, with the giving of notice or
passage of time or both, would constitute an Event of Default.
"Default Rate" shall have the meaning set forth in Section 3.1
hereof.
"Depository Accounts" shall have the meaning set forth in Section
4.15(h) hereof.
"Documents" shall have the meaning set forth in Section 8.1(b)
hereof.
"Dollar" and the sign "$" shall mean lawful money of the United
States of America.
"Dollar Equivalent" shall mean, on any date of determination
thereof, the amount of Dollars which could be purchased with the amount of
Canadian Dollars at the spot rate then being offered by the Bank as determined
by Lender.
"Domestic Rate Loan" shall mean any Advance based upon the
Alternate Base Rate.
"Eligible Inventory" shall mean and include Inventory valued at
the lower of cost or market value, determined on a first-in-first-out basis,
which, in Lender's opinion, meets all of the following requirements:
(a) such Inventory (i) is subject to the security interest of
Lender and such security interest is perfected as to such Inventory, and (ii) is
subject to no other Lien whatsoever;
5
<PAGE> 13
(b) such Inventory is in good condition and meets all
standards imposed by any governmental agency, or department or division thereof,
having regulatory authority over such goods, their use or sale;
(c) such Inventory is currently either readily usable or
salable, at prices approximating at least cost, in the normal course of
Borrower's or Guarantor's business ;
(d) no event has occurred and no condition exists which would
substantially impede Borrower's or, as the case may be, Guarantor's, ability to
continue to use or sell such Inventory in the normal course ;
(e) no claim disputing Borrower's or Guarantor's title to, or
right to possession of or dominion over, its respective Inventory has been
asserted ;
(f) such Inventory is not determined by Lender to be
ineligible for any other reason generally accepted in the commercial finance
business as a reason for ineligibility.
"Eligible Receivables" shall mean each Receivable arising in
the ordinary course of Borrower's or Guarantor's business and which Lender, in
its sole credit judgment, shall deem to be an Eligible Receivable, based on such
considerations as Lender may from time to time deem appropriate. A Receivable
will not be "eligible" unless Lender in its sole and absolute discretion
determines that it meets all of the following requirements:
(a) such Receivable represents a complete bona fide
transaction which requires no further act under any circumstances on the part of
Borrower or Guarantor to make such Receivable payable by the Customer and which
arises from an arm's length transaction between unrelated parties in the
ordinary course of Borrower's or, as the case may be, Guarantor's, business ;
(b) such Receivable shall not be unpaid more than 90 days from
the date of the original invoice;
(c) the goods the sale of which gave rise to such Receivable
were shipped or delivered to the Customer on an absolute sale basis and not on a
bill and hold sale basis, a consignment sale basis, a guaranteed sale basis, a
sale or return basis, or on the basis of any other similar understanding, and no
part of such goods has been returned or rejected;
(d) such Receivable is not evidenced by chattel paper or an
instrument of any kind;
(e) the Customer with respect to such Receivable is not
insolvent or the subject of any bankruptcy or insolvency proceedings of any kind
or of any other proceeding or action, threatened or pending, which might have a
materially adverse effect on the business of such Customer or is not, in the
sole discretion of Lender, deemed ineligible for credit or other
6
<PAGE> 14
reasons;
(f) if such Receivable arises from the performance of
services, such services have been fully rendered;
(g) if the Customer with respect thereto is located outside of
Canada or the United States of America (excluding for this purpose the
Commonwealth of Puerto Rico), the goods which gave rise to such Receivable were
shipped after receipt by Borrower, or Guarantor, as the case may be, from the
Customer of an irrevocable letter of credit, which letter of credit has been
issued or confirmed by a financial institution acceptable to Lender and is in
form and substance acceptable to Lender, payable in the full face amount of the
face value of the Receivable in freely convertible United States dollars at a
place of payment located within such United States, or Lender is otherwise
satisfied with the collectability of the Receivable;
(h) such Receivable is a valid, legally enforceable obligation
of the Customer with respect thereto and is not subject to any present, or
contingent, and no facts exist which are the basis for any future, offset or
counterclaim or other defense or dispute on the part of such Customer;
(i) such Receivable is subject to the security interest of
Lender and such security interest is perfected as to such Receivable and such
Receivable is subject to no other Lien whatsoever;
(j) such Receivable is evidenced by an invoice or other
documentation in form acceptable to Lender;
(k) Borrower or Guarantor has observed and complied with all
laws of the State, province or other political unit in which the Customer on
such Receivable is located which, if not observed and complied with, would deny
to Borrower or, as the case may be, Guarantor access to the courts of such
State, province or other political unit;
(l) such Receivable does not arise out of any transaction with
a subsidiary or affiliate of Borrower or Guarantor or with a Governmental
Authority, entity or agency;
(m) such Receivable is not subject to any provision
prohibiting its assignment or requiring notice of or consent to such assignment;
(n) the goods giving rise to such Receivable were not, at the
time of the sale or leasing thereof, subject to any Lien, except the security
interest of Lender or the security interest under the Guarantor Security
Documents or Permitted Liens;
(o) such Receivable is payable in freely transferable United
States Dollars or, in the case of Guarantor, Canadian Dollars; and
7
<PAGE> 15
(p) such Receivable is not determined by Lender to be
ineligible for any other reason generally accepted in the commercial finance
business as a reason for ineligibility.
"Environmental Complaint" shall have the meaning set forth in
Section 4.19(d) hereof.
"Environmental Laws" shall mean all federal, state, provincial
and local environmental, land use, health, chemical use, statutes, regulations,
rules, decrees, orders, programs, duties, ordinances and codes relating to the
protection of the environment or governing the use, storage, treatment,
generation, transportation, processing, handling, production or disposal of
Hazardous Substances and the rules, regulations, decisions, orders and
directives of federal, state, provincial and local governmental agencies and
authorities with respect thereto.
"Equipment" shall mean and include all of Borrower's, and
Guarantor's goods, (excluding Inventory and Borrower's Exempt Property) whether
now owned or hereafter acquired and wherever located including, without
limitation, all equipment, machinery, apparatus, motor vehicles, fittings,
furniture, furnishings, fixtures, parts, accessories and all replacements and
substitutions therefor or accessions thereto.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time and the rules and regulations promulgated
thereunder.
"Event of Default" shall mean the occurrence of any of the
events set forth in Article X hereof.
"Federal Funds Rate" shall mean, for any day, the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published for such
day (or if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Lender of New York, or if such rate is not so published
for any day which is a Business Day, the average of quotations for such day on
such transactions received by the Bank from three Federal funds brokers of
recognized standing selected by the Bank.
"Fixed Rate Loan" shall mean a LIBOR Rate Loan.
"Formula Amount" shall have the meaning set forth in Section
2.1(a).
"GAAP" shall mean generally accepted accounting principles in
the United States of America in effect from time to time.
"General Intangibles" shall mean and include all of Borrower's
and Guarantor's general intangibles, whether now owned or hereafter acquired
including, without limitation, all choses in action, causes of action, corporate
or other business records, inventions, designs, patents, patent applications,
equipment formulations, manufacturing procedures, quality control
8
<PAGE> 16
procedures, trademarks, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, tax refunds, tax refund claims, computer
programs, all claims under guaranties, security interests or other security held
by or granted to Borrower or Guarantor to secure payment of any of the
Receivables by a Customer, all rights of indemnification and all other
intangible property of every kind and nature (other than Receivables).
"Governmental Authority" means any nation or government, any
state, any province, territory or other political subdivision thereof, any
central bank (or similar monetary or regulatory authority) thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.
"Guarantee" shall mean collectively, the guarantee dated as of
August 4, 1987 whereby the Guarantor's predecessor guaranteed the obligations of
the Borrower to the Bank, the supplemental guarantee dated May 14, 1997 whereby
the Guarantor's predecessor guaranteed the obligations of the Borrower to the
Bank, the acknowledgment and confirmation dated May 14, 1997 whereby the
Guarantor's predecessor acknowledged and confirmed the obligation of its
predecessor to the Bank and the acknowledgement and assumption agreement dated
April 1, 1998 whereby the Guarantor, inter alia, acknowledged and assumed the
obligations of its predecessors as assigned to Lender, as the same may be
amended, supplemented, revised or replaced from time to time.
"Guarantor" shall mean Cold Metal Products, Limited., an
Ontario, Canada corporation, the surviving company resulting from the
amalgamation of Cold Metal Products Company, Ltd. and Direct Steel Inc.
"Guarantor Collateral" shall mean all property and assets,
real or personal, moveable or immoveable, tangible or intangible, now owned or
hereafter acquired, of the Guarantor.
"Guarantor Plan" shall mean a Plan listed on Schedule
5.8(d)(2).
"Guarantor Security Documents" shall mean, collectively, a US
$100,000,000 fixed and floating charge debenture, a pledge of the debenture, a
hypothec of moveable and immoveable property, an assumption agreement in regard
to certain existing security and charges/mortgages of lands in respect of the
two parcels of real estate of the Guarantor in Hamilton, Ontario, and one parcel
in Concord, Ontario as the same may be amended, supplemented, revised, replaced
or restated from time to time.
"Hazardous Discharge" shall have the meaning set forth in
Section 4.19(d) hereof.
"Hazardous Substance" shall mean, without limitation, any
flammable explosives, radon, radioactive materials, asbestos, urea formaldehyde
foam insulation, polychlorinated biphenyls, petroleum and petroleum products,
methane, hazardous materials, Hazardous Wastes, hazardous or toxic substances or
related materials as defined in CERCLA, the Hazardous
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<PAGE> 17
Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et seq.),
RCRA, Ontario EPA or any other applicable Environmental Law and in the
regulations adopted pursuant thereto.
"Hazardous Wastes" shall mean all waste materials subject to
regulation under CERCLA, RCRA, Ontario EPA or applicable federal, provincial or
state law, and any other applicable federal, provincial or state laws now in
force or hereafter enacted relating to hazardous waste disposal.
"Indebtedness" of a Person at a particular date shall mean all
obligations of such Person which in accordance with GAAP would be classified
upon a balance sheet as liabilities (except capital stock and surplus earned or
otherwise) and in any event, without limitation by reason of enumeration, shall
include all indebtedness, debt and other similar monetary obligations of such
Person whether direct or guaranteed, and all premiums, if any, due at the
required prepayment dates of such indebtedness, and all indebtedness secured by
a Lien on assets owned by such Person, whether or not such indebtedness actually
shall have been created, assumed or incurred by such Person. Any indebtedness of
such Person resulting from the acquisition by such Person of any assets subject
to any Lien shall be deemed, for the purposes hereof, to be the equivalent of
the creation, assumption and incurring of the indebtedness secured thereby,
whether or not actually so created, assumed or incurred.
"Inventory" shall mean all of Borrower's and Guarantor's now
owned or hereafter acquired goods, merchandise and other personal property,
wherever located, to be furnished under any contract of service or held for sale
or lease, all raw materials, scrap metal, work in process, finished goods and
materials and supplies of any kind, nature or description which are or might be
used or consumed in Borrower's or Guarantor's business or used in selling or
furnishing such goods, merchandise and other personal property, and all
documents of title or other documents representing them.
"Inventory Advance Rate" shall have the meaning set forth in
Section 2.1(a)(ii) hereof.
"Lender" shall mean BNY Financial Corporation and any
successor or assign.
"Letters of Credit" shall have the meaning set forth in
Section 2.9.
"Letter of Credit Fees" shall have the meaning set forth in
Section 3.2.
"LIBOR Rate Loan" shall mean an Advance at any time that it
bears interest based on the Average Monthly LIBOR Rate.
"Lien" shall mean (a) any mortgage, deed of trust, pledge,
hypothecation, assignment, security interest, lien (whether statutory or
otherwise), Charge, claim or encumbrance, or preference, priority or other
security agreement or preferential arrangement held or asserted in respect of
any asset of any kind or nature whatsoever including, without limitation,
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<PAGE> 18
any conditional sale or other title retention agreement, any lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement under the Uniform Commercial
Code, PPSA, the Civil Code of Quebec or comparable law of any jurisdiction and
(b) to the extent not included under clause (a), and only with respect to the
Guarantor, (i) any rights of repossession or similar rights of unpaid suppliers,
(ii) any reservation, exception, encroachment, easement, right-of-way, covenant,
condition, restrictment, lease or other title exception or encumbrance affecting
property, and (iii) any other lien, charge, privilege, secured claim, title
retention, garnishment right, deemed trust, encumbrance or other right affecting
property, choate or inchoate, whether or not crystallized or fixed, whether or
not for amounts due or accruing due, arising by any statute or law of any
jurisdiction, at common law, in equity or by any agreement.
"Maximum Loan Amount" shall mean $70,000,000.
"Maximum Revolving Advance Amount" shall mean $70,000,000.
"Multiemployer Plan" shall mean a "multiemployer plan" as
defined in Sections 3(37) and 4001(a)(3) of ERISA.
"Obligations" shall mean and include any and all of Borrower's
Indebtedness or liabilities to Lender or any corporation that directly or
indirectly controls or is controlled by or is under common control with Lender
of every kind, nature and description, direct or indirect, secured or unsecured,
joint, several, joint and several, absolute or contingent, due or to become due,
now existing or hereafter arising, contractual or tortious, liquidated or
unliquidated, regardless of how such indebtedness or liabilities arise or by
what agreement or instrument they may be evidenced or whether evidenced by any
agreement or instrument, including, but not limited to, any and all of
Borrower's Indebtedness or liabilities under this Agreement or under any other
agreement between Lender and Borrower and all obligations of Borrower to Lender
to perform acts or refrain from taking any action.
"Ontario EPA" shall mean the Environmental Protection Act of
Ontario, Canada as the same may be amended or replaced from time to time.
"Original Loan Agreement" shall have the meaning set forth in
the Background section of this Agreement.
"Original Owners" shall mean AARQUE Management Corporation, a
New York corporation.
"Other Documents" shall mean the Guarantee, the Guarantor
Security Documents and any and all other agreements, instruments and documents,
including, without limitation, guaranties, pledges, mortgages, powers of
attorney, consents, and all other writings heretofore, now or hereafter executed
by Borrower or Guarantor and delivered to Lender or to Bank in respect of the
transactions contemplated by this Agreement.
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<PAGE> 19
"Ottawa Financing" shall mean and include any and all
Indebtedness of the Borrower in connection with that certain Loan and Security
Agreement dated November 22, 1996 between Borrower and CIT Group/Equipment
Financing, Inc., and shall also refer to any and all documents executed in
connection therewith, each as in effect on the Closing Date.
"Parent" of any Person shall mean a corporation or other
entity owning, directly or indirectly, at least 50% of the shares of stock or
other ownership interests having ordinary voting power to elect a majority of
the directors of the Person, or other Persons performing similar functions for
any such Person.
"PBA" shall mean the Pension Benefits Act (Ontario) and the
Supplemental Pension Plans Act (Quebec), each as amended and replaced from time
to time, each as applicable, and the applicable acts, statutes, laws or
regulations of any other applicable jurisdiction regulating to or governing
Plans.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or
any Governmental Authority succeeding to the functions thereof.
"Payment Office" shall mean initially 1290 Avenue of the
Americas, New York, New York 10104; thereafter, such other office of Lender, if
any, which it may designate by notice to Borrower to be the Payment Office.
"Pension Regulator" shall mean the Superintendent of Pensions
or, to the extent applicable, Pension Commission of Ontario or its successors or
any similar Governmental Authority of any other applicable jurisdiction having
authority to regulate, govern or administer Plans, and any Governmental
Authority succeeding to the functions thereof.
"Permitted Encumbrance" shall mean (a) (i) a Lien consented to
in writing by the Lender and (ii) (A) a Lien for taxes not yet due and (B) any
other Lien, such as those in favor of a landlord, warehouseman, carrier, or the
like, arising by operation of law and incurred in the ordinary course of
business that does not (1) arise under ERISA or, except for contribution amounts
not due and unpaid and for an inchoate Lien in connection with a solvency
deficiency or unfunded liability greater than the Threshold Amount or as
consented to by the Lender from time to time, the PBA or under any environmental
law, or (2) secure an obligation (aa) which is (x) due and payable or (y) for
borrowed money, or (bb) which, when aggregated with all other obligations
secured by Liens otherwise permitted by this clause (a)(ii)(B)(2) would exceed
$100,000 at any time outstanding, but only, in the case of a Lien referred to in
either clause (i) or (ii), until Lender shall have requested the discharge
thereof and so long as availability is sufficient to permit adequate reserves
against such Lien, (b) , Liens with respect to Borrower's Exempt Property or any
refinancing, restructure or replacement of the indebtedness in connection
therewith as permitted by Schedule 7.8 and in the case of any Real Property, any
and all exceptions or other qualifications included in any title option for Real
Property or in any title policy for such Real Property delivered to Lender
through the Closing Date, (c) the encumbrances described on Schedule 7.2 and (d)
Liens created in favor of Lender.
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<PAGE> 20
"Person" shall mean an individual, a partnership, a
corporation, a business trust, a joint stock company, a trust, an unincorporated
association, a joint venture, a governmental authority or any other entity of
whatever nature.
"Plan" shall mean any employee benefit plan within the meaning
of Section 3(3) of ERISA, maintained for employees of Borrower or any member of
a Controlled Group or any such Plan to which Borrower or any member of a
Controlled Group is required to contribute on behalf of any of its employees and
includes, in the case of the Guarantor, any pension plan required to be
registered under the PBA which the Guarantor sponsors, maintains or to which it
makes or is obligated to make contributions or in respect of which the Guarantor
has incurred or may incur any liability, including contingent liability, either
to such plan, the Pension Regulator, any administrator, trustee, Governmental
Authority or other Person.
"PPSA" means the Personal Property Security Act of Ontario, as
the same may be amended or replaced from time to time.
"Prime Rate" shall mean the prime commercial lending rate of
the Bank as publicly announced to be in effect from time to time, such rate to
be adjusted automatically, without notice, on the effective date of any change
in such rate. This rate of interest is determined from time to time by the Bank
as a means of pricing some loans to its customers and is neither tied to any
external rate of interest or index nor does it necessarily reflect the lowest
rate of interest actually charged by the Bank to any particular class or
category of customers of the Bank.
"RCRA" shall mean the Resource Conservation and Recovery Act,
42 U.S.C. Sections 6901 et seq., as same may be amended from time to time.
"Real Property" shall mean all of Borrower's and Guarantor's
right, title and interest in and to the premises set forth on Schedule 1.2(a)
hereof.
"Receivables" shall mean and include all of Borrower's and
Guarantor's accounts, contract rights, instruments (including those evidencing
indebtedness among Borrower and its Affiliates), documents, chattel paper,
general intangibles relating to accounts, drafts and acceptances, and all other
forms of obligations owing to Borrower or Guarantor arising out of or in
connection with the sale or lease of Inventory or the rendition of services, all
guarantees and other security therefor, whether secured or unsecured, now
existing or hereafter created, and whether or not specifically sold or assigned
to Lender hereunder.
"Receivables Advance Rate" shall have the meaning set forth in
Section 2.1(a)(i) hereof.
"Regulatory Change" means an applicable law, interpretation,
directive, request or guideline (whether or not having the force of law), or any
change therein or in the administration or enforcement thereof, that becomes
effective or is implemented or first required or expected to be complied with,
whether the same is (i) the result of an enactment by a government or any
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<PAGE> 21
agency or political subdivision thereof, a determination of a court or
regulatory authority, or otherwise or (ii) enacted, adopted, or issued after the
date hereof, that imposes, increases or modifies any tax, reserve requirement,
insurance charge, special deposit requirement, assessment or capital adequacy
requirement, but excluding any such that imposes, increases or modifies any
income or franchise tax imposed upon Lender by any jurisdiction (or any
political subdivision thereof) in which Lender or any lending office is located.
"Related Person" shall mean as to any Person, any other Person
which, together with such Person, is treated as a single employer under Section
414(c) of the Code.
"Release" shall have the meaning set forth in Section
5.7(c)(i) hereof.
"Reportable Event" shall mean a reportable event described in
Section 4043(b) of ERISA or the regulations promulgated thereunder or any event
which the Borrower or Guarantor is required to report to the Pension Regulator
or otherwise under the PBA which may give rise to, or to the assertion of, any
Lien or which may otherwise adversely affect the property, business, prospects
or condition (financial or otherwise) of the Borrower or Guarantor.
"Responsible Premises" means all property which is now or, to
the extent that the Guarantor has any actual or potential liability or
responsibility, whether by operation of law, by order of any court or by any
agreement, has ever been in the charge, management or control (as such phrases
are interpreted under the Ontario EPA) of the Guarantor, and as used herein,
shall apply only to the Guarantor.
"Revolving Advances" shall mean Advances made other than
Letters of Credit and Acceptances.
"Revolving Interest Rate" shall mean an interest rate per
annum equal to, as appropriate, (a) the Alternate Base Rate with respect to
Domestic Rate Loans, or (b) the sum of the Average Monthly LIBOR Rate plus one
half of one percent (1/2%) with respect to LIBOR Rate Loans.
"Subsidiary" shall mean a corporation or other entity of whose
shares of stock or other ownership interests having ordinary voting power (other
than stock or other ownership interests having such power only by reason of the
happening of a contingency) to elect a majority of the directors of such
corporation, or other Persons performing similar functions for such entity, are
owned, directly or indirectly, by such Person.
"Term" shall mean the Closing Date through October 2, 2000, as
same may be extended in accordance with the provisions of Section 13.1.
"Termination Date" shall have the meaning set forth in Section
13.1 hereof.
"Termination Event" shall mean (a) in respect of Borrower (i)
a Reportable Event
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<PAGE> 22
with respect to any Plan or Multiemployer Plan; (ii) the withdrawal of either
Borrower or any member of the Controlled Group from a Plan or Multiemployer Plan
during a plan year in which such entity was a "substantial employer" as defined
in Section 4001(a)(2) of ERISA; (iii) the providing of notice of intent to
terminate a Plan in a distress termination described in Section 4041(c) of
ERISA; (iv) the institution by the PBGC of proceedings to terminate a Plan or
Multiemployer Plan; (v) any event or condition (a) which might constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Plan or Multiemployer Plan, or (b) that may
result in termination of a Multiemployer Plan pursuant to Section 4041A of
ERISA; or (vi) the partial or complete withdrawal within the meaning of Sections
4203 and 4205 of ERISA, of either Borrower or any member of the Controlled Group
from a Multiemployer Plan and (b) in respect of Guarantor (i) the Guarantor
ceases to be an employer under any Multiemployer Plan; or (ii) the filing of a
notice of intent to terminate or wind up (in whole or in part) a Plan or (iii)
the doing of or failure to do any act or thing in furtherance of any termination
or wind up (in whole or in part) of a Plan or which may result in such
termination or wind up; or (iv) the institution of any proceedings or action by
the Pension Regulator or any other Person to terminate, wind up (in whole or in
part) or have a trustee appointed to administer a Plan; or (v) the issuance of
any notice of proposal to windup a Plan or notice of proposal to appoint an
administrator for any Plan or any determination that a wind up (in whole or in
part) or termination of any Plan has occurred or will occur; (vi) Borrower or
Guarantor is required to make any payment in respect of any unfunded liability
or solvency deficiency in respect of any Plan in addition to its minimum regular
monthly contribution amounts from time to time required (inclusive of current
service, solvency and unfunded liability payments) in respect thereof; (vii) any
other event or condition which may, as determined by Lender in the exercise of
its discretion, give rise to any Lien in favor of any Person (except in respect
of the regular monthly contribution amount not overdue).
"Threshold Amount" shall mean the amount identified on
Schedule 5.8(d)(2) as the "Threshold Amount."
"Toxic Substance" shall mean and include any material present
on the Real Property or the Leasehold Interests or any Responsible Premises
which is subject to regulation under the Toxic Substances Control Act (TSCA), 15
U.S.C. Sections 2601 et seq., Ontario EPA, applicable federal, provincial or
state law, or any other applicable federal, provincial or state laws now in
force or hereafter enacted relating to toxic substances. "Toxic Substance"
includes but is not limited to asbestos, polychlorinated biphenyls (PCBs) and
lead-based paints.
"Undrawn Availability" at a particular date shall mean an
amount equal to (a) the lesser of (i) the Formula Amount or (ii) the Maximum
Revolving Advance Amount, minus (b) the sum of (i) the outstanding amount of
Advances plus (ii) all amounts due and owing to Borrower's trade creditors which
are outstanding beyond normal trade terms.
1.3. Uniform Commercial Code Terms. All terms used herein and defined
in the Uniform Commercial Code as adopted in the State of New York shall have
the meaning given therein unless otherwise defined herein.
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<PAGE> 23
1.4. Certain Matters of Construction. The terms "herein", "hereof" and
"hereunder" and other words of similar import refer to this Agreement as a whole
and not to any particular section, paragraph or subdivision. Any pronoun used
shall be deemed to cover all genders. Wherever appropriate in the context, terms
used herein in the singular also include the plural and vice versa. All
references to statutes and related regulations shall include any amendments of
same and any successor statutes and regulations. All references to any
instruments or agreements, including, without limitation, references to any of
the Other Documents shall include any and all modifications or amendments
thereto and any and all extensions or renewals thereof.
II. ADVANCES, PAYMENTS.
2.1. (a) Revolving Advances. Subject to the terms and conditions set
forth in this Agreement, Lender will make Revolving Advances to Borrower in
aggregate amounts outstanding at any time equal to the lesser of (x) the Maximum
Revolving Advance Amount less the aggregate amount of outstanding Letters of
Credit and Acceptances or (y) an amount equal to the sum of:
(i) up to 85%, subject to the provisions of Section
2.1(b) hereof ("Receivables Advance Rate"), of Eligible
Receivables (calculated based upon the Dollar Equivalent of
Receivables of Guarantor), plus
(ii) up to 60%, subject to the provisions of Section
2.1(b) hereof ("Inventory Advance Rate"), of the value of the
Eligible Inventory (calculated based upon the Dollar
Equivalent of the Inventory of Guarantor) (the Receivables
Advance Rate and the Inventory Advance Rate shall be referred
to collectively, as the "Advance Rates"); provided, however,
the maximum amount of outstanding Advances against Eligible
Inventory shall not exceed $41,000,000 at any one time, plus
(iii) but only until the release of Lender's Liens in
accordance with Section 4.21 of this Agreement, $17,100,000,
which amount shall be reduced by $100,000 on the first day of
each month commencing May 1, 1998 until October 2, 2000 when
the entire unpaid balance of such amount shall be due and
payable, minus
(iv) the aggregate amount of outstanding Letters of
Credit and Acceptances, minus
(v) such reserves as Lender may reasonably deem
proper and necessary from time to time, including, as
determined by Lender to be appropriate in respect of the
Guarantor Collateral, reserves for goods and services, sales
and excise taxes and for the rights of unpaid suppliers.
The amount derived from (x) the sum of Sections
2.1(a)(y)(i) (ii) and (iii)
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<PAGE> 24
minus (y) Section 2.1(a)(y)(v) at any time and from time to
time shall be referred to as the "Formula Amount".
(b) Discretionary Rights. Lender's determination of Eligible
Receivables and Eligible Inventory may result in an increase or decrease by
Lender of the Advance Rates at any time and from time to time in the exercise of
its reasonable discretion. Borrower consents to any such increases or decreases
and acknowledges that decreasing the Advance Rates may limit or restrict
Advances requested by Borrower.
2.2. Procedure for Revolving Advances Borrowing. Borrower may notify
Lender prior to 1:00 p.m. on a Business Day of its request to incur, on that
day, a Revolving Advance hereunder. Should any amount required to be paid as
interest hereunder, or as fees or other charges under this Agreement or any
other agreement with Lender, or with respect to any other Obligation, become
due, same shall be deemed a request for a Revolving Advance as of the date such
payment is due, in the amount required to pay in full such interest, fee, charge
or Obligation under this Agreement or any other agreement with Lender, and such
request shall be irrevocable. Notwithstanding the foregoing, Lender will not
make any Advance pursuant to any notice unless Lender has also received the most
recent Borrowing Base Certificate required under Section 9.2 hereof. Each
request for a Revolving Advance shall be deemed to be a request for a LIBOR Rate
Loan unless a Domestic Rate Loan is specifically requested. Whenever, subsequent
to the date of this Agreement, the Alternate Base Rate or Average Monthly LIBOR
Rate is increased or decreased, the applicable Revolving Interest Rate shall be
similarly changed without notice or demand by an amount equal to the amount of
such change in the Alternate Base Rate or Average Monthly LIBOR Rate, as
applicable.
2.3. Disbursement of Advance Proceeds. All Advances shall be disbursed
from whichever office or other place Lender may designate from time to time and,
together with any and all other Obligations of Borrower to Lender, shall be
charged to Borrower's account on Lender's books. During the Term, except as
otherwise provided in Section 4.21 hereof, Borrower may use the Revolving
Advances by borrowing, prepaying and reborrowing, all in accordance with the
terms and conditions hereof. The proceeds of each Revolving Advance requested by
Borrower or deemed to have been requested by Borrower under Section 2.2 hereof
shall, with respect to requested Revolving Advances to the extent Lender makes
such Revolving Advances, be made available to Borrower on the day so requested
by way of credit to Borrower's operating account at Lender, or such other bank
as Borrower may designate following notification to Lender, in federal funds or
other immediately available funds or, with respect to Revolving Advances deemed
to have been requested, be disbursed to Lender to be applied to the outstanding
Obligations giving rise to such deemed request.
2.4. INTENTIONALLY OMITTED.
2.5. Maximum Advances. The aggregate balance of Advances outstanding at
any time shall not exceed the Maximum Loan Amount.
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2.6. Repayment of Advances.
(a) The Advances shall be due and payable in full on the last
day of the Term subject to earlier prepayment as herein provided.
(b) Borrower recognizes that the amounts evidenced by checks,
notes, drafts or any other items of payment relating to or proceeds of
Collateral may not be collectible by Lender on the date received. Lender shall
credit to Borrower's account (conditional upon final collection) all payments of
Receivables (whether received by it from Borrower, through a lock box
arrangement or otherwise), in the case of a payment in the form of a wire
transfer, upon the Business Day following the Business Day it is received by
Lender, in the case of a payment in the form of a depository transfer check,
upon the second Business Day following the Business Day Lender deposits it for
collection and, in the case of payment in any other form, upon the third
Business Day following the Business Day after the day Lender deposits it for
collection, and for this purpose deposits of checks and other instruments by a
lock box depository bank other than Lender shall not be deemed to be deposits by
Lender.
(c) All payments of principal, interest and other amounts
payable hereunder, or under any of the related agreements shall be made to
Lender at the Payment Office not later than 1:00 P.M. (New York Time) on the due
date therefor in lawful money of the United States of America in federal funds
or other funds immediately available to Lender. Lender shall have the right to
effectuate payment on any and all Obligations due and owing hereunder by
charging Borrower's account or by making Advances as provided in Section 2.2
hereof.
(d) Borrower shall pay principal, interest, and all other
amounts payable hereunder, or under any related agreement, without any deduction
whatsoever, including, but not limited to, any deduction for any setoff or
counterclaim.
2.7. Repayment of Excess Advances. The aggregate balance of Advances
outstanding at any time in excess of the maximum amount of Advances permitted
hereunder shall be immediately due and payable without the necessity of any
demand, at the Payment Office, whether or not a Default or Event of Default has
occurred.
2.8. Statement of Account. Lender shall maintain, in accordance with
its customary procedures, a loan account in the name of Borrower in which shall
be recorded the date and amount of each Advance made by Lender and the date and
amount of each payment in respect thereof; provided, however, the failure by
Lender to record the date and amount of any Advance shall not adversely affect
Lender. For each month, Lender shall send to Borrower a statement showing the
accounting for the Advances made, payments made or credited in respect thereof,
and other transactions between Lender and Borrower, during such month. The
monthly statements shall be deemed correct and binding upon Borrower in the
absence of manifest error and shall constitute an account stated between Lender
and Borrower unless Lender receives a written statement of Borrower's specific
exceptions thereto within thirty-five (35) days after such statement is received
by Borrower. The records of Lender with respect to the loan account shall
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<PAGE> 26
be prima facie evidence of the amounts of Advances and other charges thereto and
of payments applicable thereto.
2.9. Letters of Credit and Acceptances. Subject to the terms and
conditions hereof, Lender shall (a) issue or cause the issuance of Letters of
Credit ("Letters of Credit") or (b) accept, or cause to be accepted, drafts for
Borrower under such Letters of Credit or drafts unrelated to drafts under
Letters of Credit ("Acceptances"); provided, however, that Lender will not be
required to issue or cause to be issued any Letters of Credit or accept or cause
to be accepted any Acceptances to the extent that the face amount of such
Letters of Credit and Acceptances would then cause the sum of (i) the
outstanding Revolving Advances plus (ii) outstanding Letters of Credit (with the
requested Letter of Credit being deemed to be outstanding for purposes of this
calculation) plus (iii) outstanding Acceptances to exceed the lesser of (x) the
Maximum Revolving Advance Amount or (y) the Formula Amount. The maximum amount
of outstanding Letters of Credit shall not exceed $15,000,000 in the aggregate
at any time. The maximum amount of outstanding Acceptances shall not exceed
sixty (60%) percent of the amount of Revolving Advances (minus the amount
outstanding under clause (iii) of Section 2.1(a)(y) hereof) outstanding. All
disbursements or payments related to Letters of Credit and Acceptances shall be
deemed to be Revolving Advances and shall bear interest at the Revolving Advance
Rate for Domestic Loans; Letters of Credit that have not been drawn upon and
unmatured Acceptances shall not bear interest. The amount that Lender shall make
available with respect to Acceptances shall be the face amount of the applicable
draft less a discount calculated at Lender's banker's acceptance rate in effect
on the date of such discount.
2.10. Issuance of Letters of Credit; Creation of Acceptances.
(a) Borrower may request Lender to issue or cause the issuance
of a Letter of Credit or create an Acceptance by delivering to Lender at the
Payment Office, Lender's standard form of Letter of Credit and Security
Agreement together with Bank's standard form of Letter of Credit Application
(collectively, the "Letter of Credit Application") with respect to Letters of
Credit to be issued and any draft, if applicable, completed to the satisfaction
of Lender and, such other certificates, documents and other papers and
information as Lender may reasonably request.
(b) Each Letter of Credit shall, among other things, (i)
provide for the payment of sight drafts when presented for honor thereunder in
accordance with the terms thereof and when accompanied by the documents
described therein and (ii) have an expiry date not later than twelve months
after such Letter of Credit's date of issuance and in no event later than the
last day of the Term. Each Letter of Credit Application and each Letter of
Credit shall be subject to the Uniform Customs and Practice for Documentary
Credits (1993 Revision), International Chamber of Commerce Publication No. 500,
and any amendments or revision thereof and, to the extent not inconsistent
therewith, the laws of the State of New York.
2.11. Requirements For Issuance of Letters of Credit and Acceptances.
(a) In connection with the issuance of any Letter of Credit or
Acceptance,
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Borrower shall indemnify, save and hold Lender harmless from any loss, cost,
expense or liability, including, without limitation, payments made by Lender,
and expenses and reasonable attorneys' fees incurred by Lender arising out of,
or in connection with, any Letter of Credit or Acceptance to be issued or
created for Borrower. Borrower shall be bound by Lender's or any issuing or
accepting bank's regulations and good faith interpretations of any Letter of
Credit or Acceptance issued or created for Borrower's account, although this
interpretation may be different from Borrower's own; and, neither Lender, the
bank which opened the Letter of Credit, nor any of its correspondents shall be
liable for any error, negligence, or mistakes, whether of omission or
commission, in following Borrower's instructions or those contained in any
Letter of Credit, Acceptance or of any modifications, amendments or supplements
thereto or in issuing or paying any Letter of Credit or Acceptance, except for
Lender's or such correspondents' willful misconduct.
(b) Borrower shall authorize and direct any bank which issues
a Letter of Credit to name Borrower as the "Account Party" therein and to
deliver to Lender all instruments, documents, and other writings and property
received by the bank pursuant to the Letter of Credit or in connection with any
Acceptance and to accept and rely upon Lender's instructions and agreements with
respect to all matters arising in connection with the Letter of Credit, the
application therefor or any Acceptance therefor.
(c) In connection with all Letters of Credit and Acceptances
issued or caused to be issued or created by Lender under this Agreement,
Borrower hereby appoints Lender, or its designee, as its attorney, with full
power and authority if an Event of Default or Default shall have occurred, (i)
to sign or endorse Borrower's name upon any warehouse or other receipts, letter
of credit applications and acceptances; (ii) to sign Borrower's name on bills of
lading; (iii) to clear Inventory through the United States of America Customs
Department ("Customs") in the name of Borrower or Lender or Lender's designee,
and to sign and deliver to Customs officials powers of attorney in the name of
Borrower for such purpose; and (iv) to complete in Borrower's name or Lender's,
or in the name of Lender's designee, any order, sale or transaction, obtain the
necessary documents in connection therewith, and collect the proceeds thereof.
Neither Lender nor its attorneys will be liable for any acts or omissions nor
for any error of judgment or mistakes of fact or law, except for Lender's or its
attorney's willful misconduct. This power, being coupled with an interest, is
irrevocable as long as any Letters of Credit or Acceptances remain outstanding.
2.12. Additional Payments. Any sums expended by Lender due to
Borrower's failure to perform or comply with its obligations under this
Agreement or any Other Document including, without limitation, Borrower's
obligations under Sections 4.2, 4.4, 4.12, 4.13, 4.14 and 6.1 hereof, may be
charged to Borrower's account as a Revolving Advance and added to the
Obligations.
2.13. Mandatory Prepayments. When Borrower sells or otherwise disposes
of any Collateral other than (i) Inventory in the ordinary course of business,
and (ii) as permitted by Section 4.3, Borrower shall repay the Advances in an
amount equal to the net proceeds of such sale (i.e., gross proceeds less the
reasonable costs of such sales or other dispositions), such
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repayments to be made promptly but in no event more than one (1) Business Day
following receipt of such net proceeds. Until the date of payment, such proceeds
shall be held in trust for Lender. The foregoing shall not be deemed to be
implied consent to any such sale otherwise prohibited by the terms and
conditions hereof. Such repayments shall be applied to the Advances in such
order as Lender may determine.
III. INTEREST AND FEES.
3.1. Interest. Interest on Advances shall be payable in arrears on the
last day of each month. Interest charges shall be computed on the actual
principal amount of Revolving Advances outstanding at the end of each day at a
rate per annum equal to the Revolving Interest Rate for Domestic Rate Loans and
the Average Monthly LIBOR Rate with respect to LIBOR Rate Loans. Commencing
thirty (30) days after the due date for any financial statement required
hereunder which financial statement indicates the occurrence of an Event of
Default, and during the continuation of such Event of Default, the Obligations
shall bear interest at the applicable Revolving Interest Rate plus two (2%)
percent per annum (the "Default Rate").
3.2. Letter of Credit and Acceptance Fees.
Borrower shall pay Lender (i) (A) for issuing or causing the
issuance of a standby Letter of Credit, a fee computed at a rate per annum of
one and one half percent (1.5%) on the outstanding amount thereof from time to
time, (B) for issuing or causing the issuance of a Letter of Credit that is not
a standby Letter of Credit, a fee equal to one percent (1%) per annum of the
original and each increase in the face amount thereof computed on the
undisbursed amount thereof from time to time, on the actual number of days
elapsed (the fees set forth in (A) and (B) referred to as "Letter of Credit
Fees"), and (C) for the acceptance of a draft (whether or not discounted by
Lender), a fee ("Acceptance Fee") consisting of: (1) the then prevailing
discount rate applicable to Acceptances of a like tenor and amount and (2) one
percent (1%) per annum of the face amount of the accepted draft, and (ii) Bank's
other customary charges payable in connection with Letters of Credit or
Acceptances, as the case may be, as in effect from time to time (which charges
shall be furnished to Borrower by Lender upon request). Such fees and charges
shall be payable (i) in the case of any Letter of Credit, on its opening (ii) in
the case of a standby Letter of Credit, (A) monthly thereafter in advance and
(B) upon each increase in the outstanding amount thereof, (iii) in the case of
any Letter of Credit that is not a standby Letter of Credit, at the time of each
increase in face amount thereof and (iv) in the case of an Acceptance, at the
time thereof. Any such charge in effect at the time of a particular transaction
shall be the charge for that transaction, notwithstanding any subsequent change
in Bank's prevailing charges for that type of transaction. All Letter of Credit
Fees and Acceptance Fees payable hereunder shall be deemed earned in full on the
date when the same are due and payable hereunder and shall not be subject to
rebate or proration upon the termination of this Agreement for any reason.
On demand following acceleration of all Obligations in accordance
with the terms hereof, Borrower will cause cash to be deposited and maintained
in an account with Lender, as
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cash collateral, in an amount equal to outstanding Letters of Credit and
Acceptances, and Borrower hereby irrevocably authorizes Lender, in its
discretion, on Borrower's behalf and in Borrower's name, to open such an account
and to make and maintain deposits therein, or in an account opened by Borrower,
in the amounts required to be made by Borrower, out of the proceeds of
Receivables or other Collateral or out of any other funds of Borrower coming
into Lender's possession at any time. Lender will invest such cash collateral
(less applicable reserves) in such short-term money-market items as to which
Lender and Borrower mutually agree and the net return on such investments shall
be credited to such account and constitute additional cash collateral. Borrower
may not withdraw amounts credited to any such account except upon payment and
performance in full of all Obligations and termination of this Agreement.
3.3. INTENTIONALLY OMITTED.
3.4. Collateral Monitoring Fee. Borrower shall pay Lender a collateral
monitoring fee equal to $5,000.00 per month commencing on the first day of the
month following the Closing Date and on the first day of each month thereafter
during the Term. The collateral monitoring fee shall be deemed earned in full on
the date when same is due and payable hereunder and shall not be subject to
rebate or proration upon termination of this Agreement for any reason.
3.5. Computation of Interest and Fees. Interest and fees hereunder
shall be computed on the basis of a year of 360 days and for the actual number
of days elapsed. If any payment to be made hereunder becomes due and payable on
a day other than a Business Day, the due date thereof shall be extended to the
next succeeding Business Day and interest thereon shall be payable at the
Revolving Interest Rate applicable to Domestic Rate Loans during such extension.
3.6. Maximum Charges. In no event whatsoever shall interest and other
charges charged hereunder exceed the highest rate permissible under law which a
court of competent jurisdiction shall, in a final determination, deem applicable
hereto. In the event that a court determines that Lender has received interest
and other charges hereunder in excess of the highest rate applicable hereto,
such excess interest shall be first applied to any unpaid principal balance owed
by Borrower, and if the then remaining excess interest is greater than the
previously unpaid principal balance, Lender shall promptly refund such excess
amount to Borrower as of the date paid and the provisions hereof shall be deemed
amended to provide for such permissible rate.
3.7. Regulatory Changes. If (a) any Regulatory Change shall directly or
indirectly (i) reduce the amount of any sum received or receivable by Lender
with respect to any Advance or the return to be earned by Lender on any Advance,
(ii) impose any reserve requirements on Lender or any affiliate of Lender that
is attributable to the making or maintaining of, or Lender's commitment to make,
any Advance, (iii) reduce, or have the effect of reducing, the rate of return on
the capital of Lender or any affiliate of Lender allocable to any Advance or
Lender's commitment to make any Advance and (b) such reduction, increased
reserve or payment shall not be fully compensated for by an adjustment in the
applicable rates of interest payable hereunder, then Lender shall promptly
notify Borrower of such amounts as Lender determines will, together with any
adjustment in the applicable rates of interest payable hereunder, fully
compensate for
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such reduction, increased cost or payment. Borrower and Lender shall thereafter
in good faith negotiate an adjustment to the fees payable or increased interest
payable hereunder which, in the reasonable judgment of Borrower and Lender, will
adequately compensate Lender (or Lender affiliate) in light of these
circumstances. In the event that Borrower and Lender are unable to agree on such
adjustment within thirty (30) days after the date on which Lender sends such
notice to Borrower, Borrower may pay the Advances and terminate this Agreement
without payment of the Termination Fee provided for in Section 13.1 at any time
within the next one hundred eighty (180) days, but with payment of the amount of
money that Lender has determined will adequately compensate Lender or its
affiliate in these circumstances for the period from the later of the date of
such Regulatory Change or the date that is three (3) months prior to the date of
Lender's notice to Borrower of such Regulatory Change. In the event Borrower and
Lender agree on such adjustment, such amounts shall be paid, in the case of
those applicable to prior periods, within fifteen (15) days after request by
Lender for such payment or, in the case of those applicable to future periods,
on the dates specified, or determined in accordance with a method specified, by
Lender.
3.8. INTENTIONALLY OMITTED.
3.9. Taxes. (a) Any and all payments by Borrower or Guarantor to Lender
under this Agreement, the Guarantee and the Guarantor Security Documents shall
be paid in full without set off or counterclaim and made free and clear of, and
without deduction or withholding for, any present or future taxes.
(b) Borrower agrees to indemnify and hold harmless the Lender
for the full amount of taxes (including any taxes imposed by any jurisdiction on
amounts payable under this Section) paid by Lender (save its income taxes) and
any liability (including penalties, interest, additions to tax and expenses)
arising therefrom or with respect thereto, whether or not such taxes were
correctly or legally asserted. Payment under this indemnification shall be made
within thirty (30) days after the date Lender makes written demand therefor.
(c) If Borrower or Guarantor shall be required by law to
deduct or withhold any taxes from or in respect of any sum payable hereunder to
Lender, then:
(i) the sum payable shall be increased as necessary
so that after making all required deductions and withholdings
(including deductions and withholdings applicable to
additional sums payable under this Section) the Lender
receives an amount equal to the sum it would have received had
no such deductions or withholdings been made;
(ii) Borrower shall, or shall cause Guarantor to,
make such deductions and withholdings;
(iii) Borrower shall, or shall cause Guarantor to,
pay the full amount deducted or withheld to the relevant
taxing authority or other authority in
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accordance with applicable law; and
(iv) Borrower shall, or shall cause Guarantor to,
also pay to Lender, at the time interest is paid, all
additional amounts which the Lender specifies as necessary to
preserve the after-tax yield the Lender would have received if
such taxes had not been imposed.
(d) Within thirty (30) days after the date of any payment by
Borrower or Guarantor of taxes, Borrower shall, or shall cause Guarantor to,
furnish Lender the original or a certified copy of a receipt evidencing payment
thereof, or other evidence of payment satisfactory to the Lender.
3.10. Survival. The obligations of Borrower under Sections 2.2(f), 3.7
and 3.9 shall survive termination of this Agreement and the Other Documents and
payment in full of the Obligations.
IV. COLLATERAL: GENERAL TERMS
4.1. Security Interest in the Collateral. To secure the prompt payment
and performance to Lender of the Obligations, Borrower confirms its and
Guarantor's prior grant of a security interest to Lender in all of the
Collateral and hereby assigns, pledges and grants to Lender a continuing
security interest in and to all of its Collateral, whether now owned or existing
or hereafter acquired or arising and wheresoever located. Borrower shall, and
shall cause Guarantor to, mark its books and records as may be necessary or
appropriate to evidence, protect and perfect Lender's security interest and
shall cause its financial statements to reflect such security interest.
4.2. Perfection of Security Interest. Borrower shall, and shall cause
Guarantor to, take all action that may be necessary or desirable, or that Lender
may request, so as at all times to maintain the validity, perfection,
enforceability and priority of Lender's security interest in the Collateral or
to enable Lender to protect, exercise or enforce its rights hereunder and in the
Collateral, including, but not limited to (i) immediately discharging all Liens
other than Permitted Encumbrances, (ii) obtaining landlords' or mortgagees' lien
waivers, (iii) delivering to Lender, endorsed or accompanied by such instruments
of assignment as Lender may specify, and stamping or marking, in such manner as
Lender may specify, any and all chattel paper, instruments, letters of credit
and advices thereof and documents evidencing or forming a part of the
Collateral, (iv) entering into warehousing, lockbox and other custodial
arrangements satisfactory to Lender, and (v) executing and delivering financing
statements, instruments of pledge, mortgages, notices and assignments, in each
case in form and substance satisfactory to Lender, relating to the creation,
validity, perfection, maintenance or continuation of Lender's security interest
under the Uniform Commercial Code, the PPSA, or other applicable law. All
charges, expenses and fees Lender may incur in doing any of the foregoing, and
any local taxes relating thereto, shall be charged to Borrower's account and
added to the Obligations, or, at Lender's option, shall be paid to Lender
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immediately upon demand.
4.3. Disposition of Collateral. Borrower shall, and shall cause
Guarantor to, safeguard and protect all Collateral for Lender's general account
and make no disposition thereof whether by sale, lease or otherwise except (a)
the sale of Inventory in the ordinary course of business and (b) the disposition
or transfer of obsolete and worn-out Equipment in the ordinary course of
business during any fiscal year having an aggregate fair market value of not
more than $250,000 and only to the extent that (i) the proceeds of any such
disposition are used to acquire replacement Equipment which is subject to
Lender's first priority security interest or (ii) the proceeds of which are
remitted to Lender to be applied to the Advances.
4.4. Preservation of Collateral. Following the occurrence and during
the continuance of a Default or Event of Default, in addition to the rights and
remedies set forth in Section 11.1 hereof, Lender: (a) may at any time take such
steps as Lender deems necessary to protect Lender's interest in and to preserve
the Collateral, including the hiring of such security guards or the placing of
other security protection measures as Lender may deem appropriate; (b) may
employ and maintain at any of Borrower's or Guarantor's premises a custodian who
shall have full authority to do all acts necessary to protect Lender's interests
in the Collateral; (c) may lease warehouse facilities to which Lender may move
all or part of the Collateral; (d) may use any of Borrower's owned or leased
lifts, hoists, trucks and other facilities or equipment for handling or removing
the Collateral; and (e) shall have, and is hereby granted, a right of ingress
and egress to the places where the Collateral is located, and may proceed over
and through any of Borrower's or Guarantor's owned or leased property. Borrower
shall, and shall cause Guarantor to, cooperate fully with all of Lender's
efforts to preserve the Collateral and will take such actions to preserve the
Collateral as Lender may direct. All of Lender's expenses of preserving the
Collateral, including any expenses relating to the bonding of a custodian, shall
be charged to Borrower's account and added to the Obligations.
4.5. Ownership of Collateral. With respect to the Collateral, at the
time the Collateral becomes subject to Lender's security interest: (a) Borrower
or in the case of the Guarantor Collateral, Guarantor, shall be the sole owner
of and fully authorized and able to sell, transfer, pledge or grant a first
security interest in each and every item of the Collateral to Lender; and,
except for Permitted Encumbrances the Collateral shall be free and clear of all
Liens and encumbrances whatsoever; (b) each document and agreement executed by
Borrower or Guarantor or delivered to Lender in connection with this Agreement
shall be true and correct in all respects; (c) all signatures and endorsements
of Borrower or Guarantor that appear on such documents and agreements shall be
genuine and Borrower or Guarantor shall have full capacity to execute same; and
(d) Borrower's or Guarantor's Equipment and Inventory shall be located at the
locations set forth on Schedule 4.5 and shall not be removed from such
location(s) without the prior written consent of Lender except with respect to
(i) the sale of Inventory in the ordinary course of business, (ii) Equipment to
the extent permitted in Section 4.3 hereof, and (iii) up to five percent (5%) of
the book value of Inventory which may at any time be located at outside
processors not set forth on Schedule 4.5.
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4.6. Defense of Lender's Interests. Until (a) payment and performance
in full of all of the Obligations and (b) termination of this Agreement,
Lender's interests in the Collateral shall continue in full force and effect.
During such period Borrower shall not, and shall not permit Guarantor to,
without Lender's prior written consent, pledge, sell (except Inventory in the
ordinary course of business and Equipment to the extent permitted in Section 4.3
hereof), assign, transfer, create or suffer to exist a Lien upon or encumber or
allow or suffer to be encumbered in any way except for Permitted Encumbrances,
any part of the Collateral. Borrower shall, and shall cause Guarantor to, defend
Lender's interests in the Collateral against any and all Persons whatsoever. At
any time following demand by Lender for payment of all Obligations, Lender shall
have the right to take possession of the indicia of the Collateral and the
Collateral in whatever physical form contained, including without limitation:
labels, stationery, documents, instruments and advertising materials. If Lender
exercises this right to take possession of the Collateral, Borrower shall, and
shall cause Guarantor to, upon demand, assemble it in the best manner possible
and make it available to Lender at a place reasonably convenient to Lender. In
addition, with respect to all Collateral, Lender shall be entitled to all of the
rights and remedies set forth herein and further provided by the Uniform
Commercial Code, the PPSA or other applicable law. Borrower shall, and Lender
may, at its option, instruct all suppliers, carriers, forwarders, warehouses or
others receiving or holding cash, checks, Inventory, documents or instruments in
which Lender holds a security interest to deliver same to Lender or subject to
Lender's order and if they shall come into Borrower's or Guarantor's possession,
they, and each of them, shall be held by Borrower in trust as Lender's trustee,
and Borrower will, and shall cause Guarantor to, immediately deliver them to
Lender in their original form together with any necessary endorsement.
4.7. Books and Records. Borrower shall, and shall cause Guarantor to,
(a) keep proper books of record and account in which full, true and correct
entries will be made of all dealings or transactions of or in relation to its
business and affairs; (b) set up on its books accruals with respect to all
taxes, assessments, charges, levies and claims; and (c) on a reasonably current
basis set up on its books, from its earnings, allowances against doubtful
Receivables, advances and investments and all other proper accruals (including
without limitation by reason of enumeration, accruals for premiums, if any, due
on required payments and accruals for depreciation, obsolescence, or
amortization of properties), which should be set aside from such earnings in
connection with its business. All determinations pursuant to this subsection
shall be made in accordance with, or as required by, GAAP consistently applied
in the opinion of such independent public accountant as shall then be regularly
engaged by Borrower.
4.8. Financial Disclosure. Borrower hereby authorizes all federal,
state and municipal authorities to furnish to Lender copies of reports or
examinations relating to Borrower or Guarantor, whether made by Borrower or
Guarantor or otherwise; however, Lender will attempt to obtain such information
or materials directly from Borrower prior to obtaining such information or
materials.
4.9. Compliance with Laws. Borrower shall, and shall cause Guarantor
to, comply in all material respects with all acts, rules, regulations and orders
of any legislative, administrative or
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judicial body or official applicable to the Collateral or any part thereof or to
the operation of Borrower's or Guarantor's business the non-compliance with
which would have a material adverse effect on the Collateral, or the operations,
business or condition (financial or otherwise) of Borrower. Borrower or
Guarantor may, however, contest or dispute any acts, rules, regulations, orders
and directions of those bodies or officials in any reasonable manner, provided
that any related Lien is inchoate or stayed and sufficient reserves are
established to the reasonable satisfaction of Lender to protect Lender's lien on
or security interest in the Collateral. The Collateral at all times shall be
maintained in accordance with the requirements of all insurance carriers which
provide insurance with respect to the Collateral so that such insurance shall
remain in full force and effect.
4.10. Inspection of Premises. At all reasonable times Lender shall have
full access to and the right to audit, check, inspect and make abstracts and
copies from Borrower's and Guarantor's books, records, audits, correspondence
and all other papers relating to the Collateral and the operation of Borrower's
and Guarantor's business. Upon two (2) days prior notice, Lender and its agents
may enter upon any of Borrower's and Guarantor's premises at any time during
business hours and at any other reasonable time, and from time to time, for the
purpose of inspecting the Collateral and any and all records pertaining thereto
and the operation of Borrower's and Guarantor's business; provided, that, no
notice shall be required upon the occurrence and during the continuance of a
Default.
4.11. Insurance. Borrower and Guarantor shall bear the full risk of any
loss of any nature whatsoever with respect to the Collateral. At Borrower's own
cost and expense in amounts and with carriers acceptable to Lender, Borrower
shall (a) keep all its insurable properties and properties in which Borrower or
Guarantor has an interest insured against the hazards of fire, flood, sprinkler
leakage, those hazards covered by extended coverage insurance and such other
hazards, and for such amounts, as is customary in the case of companies engaged
in businesses similar to Borrower's and Guarantor's including, without
limitation, business interruption insurance; (b) maintain a bond in such amounts
as is customary in the case of companies engaged in businesses similar to
Borrower's and Guarantor's insuring against larceny, embezzlement or other
criminal misappropriation of insured's officers and employees who may either
singly or jointly with others at any time have access to the assets or funds of
Borrower or Guarantor either directly or through authority to draw upon such
funds or to direct generally the disposition of such assets; (c) maintain public
and product liability insurance against claims for personal injury, death or
property damage suffered by others; (d) maintain all such worker's compensation
or similar insurance as may be required under the laws of any state or
jurisdiction in which Borrower or Guarantor is engaged in business; (e) furnish
Lender with (i) certificates of insurance in form and substance reasonably
satisfactory to Lender showing continual maintenance and renewal, and (ii)
appropriate loss payable endorsements in form and substance satisfactory to
Lender, naming Lender as a co-insured and loss payee as its interests may appear
with respect to all insurance coverage referred to in clauses (a), (b) and (c)
above, and providing (A) that all proceeds thereunder shall be payable to
Lender, (B) no such insurance shall be affected by any act or neglect of the
insured or owner of the property described in such policy, and (C) that such
policy and loss payable clauses may not be cancelled, amended or terminated
unless at least thirty
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(30) days' prior written notice is given to Lender. In the event of any loss
thereunder, the carriers named therein hereby are directed by Lender, Borrower
and Guarantor to make payment for such loss to Lender and not to Borrower (or
Guarantor) and Lender jointly. If any insurance losses are paid by check, draft
or other instrument payable to Borrower and Lender jointly, Lender may endorse
Borrower's or Guarantor's name thereon and do such other things as Lender may
deem advisable to reduce the same to cash. Upon the occurrence and during the
continuance of a Default, Lender is hereby authorized to adjust and compromise
claims under insurance coverage referred to in clauses (a) and (b) above. All
loss recoveries received by Lender upon any such insurance may be applied to the
Obligations, in such order as Lender in its sole discretion shall determine. Any
surplus shall be paid by Lender to Borrower (or Guarantor, as applicable) or
applied as may be otherwise required by law. Any deficiency thereon shall be
paid by Borrower to Lender, on demand.
4.12. Failure to Pay Insurance. If Borrower fails to obtain or to cause
Guarantor to obtain insurance as hereinabove provided, or to keep the same in
force, Lender, if Lender so elects, may obtain such insurance and pay the
premium therefor for Borrower's account, and charge Borrower's account therefor
and such expenses so paid shall be part of the Obligations.
4.13. Payment of Taxes. Borrower will, and will cause Guarantor to,
pay, when due, all taxes, assessments and other Charges lawfully levied or
assessed upon Borrower or Guarantor or any of the Collateral including, without
limitation, real and personal property taxes, assessments and charges and all
franchise, income, employment, social security benefits, withholding, and sales
taxes. If any tax by any governmental authority is or may be imposed on or as a
result of any transaction between Borrower or Guarantor and Lender which Lender
may be required to withhold or pay or if any taxes, assessments, or other
Charges remain unpaid after the date fixed for their payment, or if any claim
shall be made which, in Lender's opinion, may possibly create a valid Lien on
the Collateral, upon reasonable notice to Borrower, Lender may pay the taxes,
assessments or Charges and Borrower hereby indemnifies and holds Lender harmless
in respect thereof. Lender will not pay any taxes, assessments or Charges to the
extent that Borrower or Guarantor has contested or disputed those taxes,
assessments or Charges in good faith, by expeditious protest, administrative or
judicial appeal or similar proceeding provided that any related tax lien is
stayed and sufficient reserves are established to the reasonable satisfaction of
Lender to protect Lender's security interest in or Lien on the Collateral. The
amount of any payment by Lender under this Section 4.13 shall be charged to
Borrower's account as a Revolving Advance and added to the Obligations and,
until Borrower shall furnish Lender with an indemnity therefor (or supply Lender
with evidence satisfactory to Lender that due provision for the payment thereof
has been made), Lender may hold without interest any balance standing to
Borrower's or Guarantor's credit and Lender shall retain its security interest
in any and all Collateral held by Lender.
4.14. Payment of Leasehold Obligations. Borrower shall, and shall cause
Guarantor to, at all times pay, when and as due (and before the expiration of
any applicable grace period), its rental obligations under all leases under
which it is a tenant, and shall otherwise comply, in all material respects, with
all other terms of such leases and keep them in full force and effect and, at
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Lender's request, will provide evidence of having done so.
4.15. Receivables.
(a) Nature of Receivables. Each of the Receivables shall be a
bona fide and valid account representing a bona fide indebtedness incurred by
the Customer therein named, for a fixed sum as set forth in the invoice relating
thereto (provided immaterial or unintentional invoice errors shall not be deemed
to be a breach hereof) with respect to an absolute sale or lease and delivery of
goods upon stated terms of Borrower or Guarantor, as the case may be, or work,
labor or services theretofore rendered by Borrower or Guarantor as of the date
each Receivable is created. Same shall be due and owing in accordance with
Borrower's or Guarantor's, as the case may be, standard terms of sale without
dispute, setoff or counterclaim except as may be stated on the accounts
receivable schedules delivered by Borrower to Lender.
(b) Solvency of Customers. Each Customer, to the best of
Borrower's and Guarantor's knowledge, as of the date each Receivable is created,
is and will be solvent and able to pay all Receivables on which the Customer is
obligated in full when due or with respect to such Customers of Borrower or
Guarantor who are not solvent Borrower or Guarantor has set up on its books and
in its financial records bad debt reserves adequate to cover such Receivables.
(c) Locations of Borrower and Guarantor. Borrower's chief
executive office is located at 8526 South Avenue, Youngstown, OH 44514.
Guarantor's chief executive office and principal place of business is located at
65 Imperial Street, P.O. Box 66, Station "B", Hamilton, Ontario Canada L8L 7V2.
Until written notice is given to Lender by Borrower of any other office at which
it or Guarantor keeps its records pertaining to Receivables, all such records
shall be kept at such executive office except that original invoices of the
Borrower may be kept at Borrower's 45 South Montgomery Avenue, Youngstown, Ohio
facility.
(d) Collection of Receivables. Until Borrower's or Guarantor's
authority to do so is terminated by Lender (which notice Lender may give at any
time following the occurrence and during the continuance of an Event of Default
or a Default), Borrower will, at Borrower's sole cost and expense, but on
Lender's behalf and for Lender's account, collect as Lender's property and in
trust for Lender all amounts received on Borrower's Receivables, and shall not,
in the case of Borrower's Receivables, commingle such collections with
Borrower's funds or use the same except to pay Obligations. Borrower shall, upon
request, deliver (and, in the case of Guarantor, upon request following the
occurrence and during the continuance of an Event of Default or a Default, cause
Guarantor to deliver) to Lender in original form and on the date of receipt
thereof, all checks, drafts, notes, money orders, acceptances, cash and other
evidences of Indebtedness.
(e) Notification of Assignment of Receivables. At any time
following the occurrence and during the continuance of an Event of Default or a
Default, Lender shall have the right to send notice of the assignment of, and
Lender's security interest in, the Receivables to any and all Customers or any
third party holding or otherwise concerned with any of the Collateral.
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Thereafter, Lender shall have the sole right to collect the Receivables, take
possession of the Collateral, or both. Lender's actual collection expenses,
including, but not limited to, stationery and postage, telephone and telegraph,
secretarial and clerical expenses and the salaries of any collection personnel
used for collection, may be charged to Borrower's account and added to the
Obligations.
(f) Power of Lender to Act on Borrower's Behalf. Lender shall
have the right to receive, endorse, assign or deliver in the name of Lender or
Borrower or Guarantor any and all checks, drafts and other instruments for the
payment of money relating to the Receivables, and Borrower hereby waives notice
of presentment, protest and non-payment of any instrument so endorsed. Borrower
hereby constitutes Lender or Lender's designee as Borrower's attorney with power
(i) to endorse Borrower's name upon any notes, acceptances, checks, drafts,
money orders or other evidences of payment or Collateral; (ii) to sign
Borrower's name on any invoice or bill of lading relating to any of the
Receivables, drafts against Customers, assignments and verifications of
Receivables; (iii) to send verifications of Receivables to any Customer; (iv) to
sign Borrower's name on all financing statements or any other documents or
instruments deemed necessary or appropriate by Lender to preserve, protect, or
perfect Lender's interest in the Collateral and to file same; and (v) to do all
other acts and things necessary to carry out this Agreement, Lender shall have
the right at any time following the occurrence and during the continuance of an
Event of Default or Default (i) to demand payment of the Receivables; (ii) to
enforce payment of the Receivables by legal proceedings or otherwise; (iii) to
exercise all of Borrower's rights and remedies with respect to the collection of
the Receivables and any other Collateral; (iv) to settle, adjust, compromise,
extend or renew the Receivables; (v) to settle, adjust or compromise any legal
proceedings brought to collect Receivables; (vi) to prepare, file and sign
Borrower's name on a proof of claim in bankruptcy or similar document against
any Customer; (vii) to prepare, file and sign Borrower's name on any notice of
Lien, assignment or satisfaction of Lien or similar document in connection with
the Receivables; and (viii) to change the address for delivery of mail addressed
to Borrower to such address as Lender may designate and to receive, open and
dispose of all mail addressed to Borrower (with all mail not constituting,
evidencing or relating to the Collateral to be forwarded by Lender to Borrower).
All acts of said attorney or designee are hereby ratified and approved, and said
attorney or designee shall not be liable for any acts of omission or commission
nor for any error of judgment or mistake of fact or of law, unless done
maliciously or with gross (not mere) negligence; this power being coupled with
an interest is irrevocable while any of the Obligations remain unpaid. Borrower
agrees to cause Guarantor to grant to the Lender a power of attorney
substantially on the terms of this Section.
(g) No Liability. Lender shall not, under any circumstances or
in any event whatsoever, have any liability for any error or omission or delay
of any kind occurring in the settlement, collection or payment of any of the
Receivables or any instrument received in payment thereof, or for any damage
resulting therefrom. Following the occurrence and during the continuance of an
Event of Default or Default the Lender may, without notice or consent from
Borrower, sue upon or otherwise collect, extend the time of payment of,
compromise or settle for cash, credit or upon any terms any of the Receivables
or any other securities, instruments or insurance applicable thereto or release
any obligor thereof. Lender is authorized and empowered
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<PAGE> 38
to accept following the occurrence of an Event of Default or Default the return
of the goods represented by any of the Receivables, without notice to or consent
by Borrower, all without discharging or in any way affecting Borrower's
liability hereunder.
(h) Establishment of a Lockbox Account, Dominion Account. All
proceeds of Collateral other than Guarantor Collateral shall, at the direction
of Lender, be deposited by Borrower into a lockbox account, dominion account or
such other "blocked account" ("Blocked Accounts") as Lender may require pursuant
to an arrangement with such bank as may be selected by Borrower and be
acceptable to Lender. Borrower shall issue to any such bank, an irrevocable
letter of instruction directing said bank to transfer such funds so deposited to
Lender, either to any account maintained by Lender at said bank or by wire
transfer to appropriate account(s) of Lender. All funds deposited in such
"blocked account" shall immediately become the property of Lender and Borrower
shall obtain the agreement by such bank to waive any offset rights against the
funds so deposited. Lender assumes no responsibility for such "blocked account"
arrangement, including without limitation, any claim of accord and satisfaction
or release with respect to deposits accepted by any bank thereunder.
Alternatively in the case of Borrower, and upon demand by Lender in the case of
Guarantor , Lender may establish depository accounts ("Depository Accounts") in
the name of Lender at a bank or banks for the deposit of such funds and Borrower
or Guarantor, as the case may be, shall deposit all proceeds of Collateral or
cause same to be deposited, in kind, in such Depository Accounts of Lender in
lieu of depositing same to the Blocked Accounts.
(i) Adjustments. Borrower will not, and will not permit
Guarantor to, without Lender's consent, compromise or adjust any Receivables (or
extend the time for payment thereof) or accept any returns of merchandise or
grant any additional discounts, allowances or credits thereon except for those
compromises, adjustments, returns, discounts, credits and allowances as have
been heretofore customary in the business of Borrower or Guarantor.
4.16. Inventory. All Inventory of Borrower has been, and will be,
produced by Borrower in accordance with the Federal Fair Labor Standards Act of
1938, as amended, and all rules, regulations and orders thereunder.
4.17. Maintenance of Equipment. Except as set forth in Section 4.3, the
Equipment shall be maintained in good operating condition and repair (reasonable
wear and tear excepted) and all necessary replacements of and repairs thereto
shall be made so that the value and operating efficiency of the Equipment shall
be maintained and preserved. Borrower shall not, and will not permit Guarantor
to, use or operate the Equipment in violation of any law, statute, ordinance,
code, rule or regulation.
4.18. Exculpation of Liability. Nothing herein contained shall be
construed to constitute Lender as Borrower's or Guarantor's agent for any
purpose whatsoever, nor shall Lender be responsible or liable for any shortage,
discrepancy, damage, loss or destruction of any part of the Collateral wherever
the same may be located and regardless of the cause thereof. Lender does not,
whether by anything herein or in any assignment or otherwise, assume any of
Borrower's or
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Guarantor's obligations under any contract or agreement assigned to Lender, and
Lender shall not be responsible in any way for the performance by Borrower or
Guarantor of any of the terms and conditions thereof.
4.19. Environmental Matters.
(a) Borrower will, and will cause Guarantor to, ensure that
the Real Property and Responsible Premises remains in material compliance with
all Environmental Laws and it will not place any Hazardous Substances on any
Real Property or Responsible Premises except as not prohibited by applicable law
or appropriate governmental authorities.
(b) Borrower will, and will cause Guarantor to, maintain a
system to assure and monitor continued compliance with all applicable
Environmental Laws which system shall include periodic reviews of such
compliance.
(c) Borrower will, and, in the case of the Responsible
Premises will cause Guarantor to, (i) employ in connection with its use of the
Real Property and Responsible Premises appropriate technology necessary to
maintain compliance with any applicable Environmental Laws and (ii) dispose of
any and all Hazardous Waste generated at the Real Property and Responsible
Premises only at facilities and with carriers that maintain valid permits under
RCRA, Ontario EPA and any other applicable Environmental Laws. Borrower shall,
and will cause Guarantor to, use its best efforts to obtain certificates of
disposal, such as hazardous waste manifest receipts, from all treatment,
transport, storage or disposal facilities or operators employed by Borrower or
Guarantor, as the case may be in connection with the transport or disposal of
any Hazardous Waste generated at the Real Property or Responsible Premises.
(d) Within thirty (30) Business Days after receipt by it or
the Guarantor of a Notice of Release of Hazardous Discharge (as hereafter
defined) or Environmental Complaint (as hereafter defined), Borrower shall give
written notice thereof to the Lender and simultaneously therewith Borrower shall
furnish such information about the Notice of Release of Hazardous Discharge or
Environmental Complaint as may be in its or Guarantor's possession. Such
information is to be provided to allow Lender to protect its security interest
in the Collateral and is not intended to create nor shall it create any
obligation upon Lender with respect thereto. For purposes of this paragraph, the
following shall have the following meanings:
"Notice of Release of Hazardous Discharge" shall mean written notice of
any Release of a reportable quantity of any Hazardous Substance at the Real
Property or Responsible Premises (such a Release of any Hazardous Substance
herein referred to as a "Hazardous Discharge") whether received by the Borrower
or Guarantor or given by the Borrower or Guarantor to an applicable Governmental
Authority which is likely to or may result in an expenditure in excess of
$500,000 with respect to any Release or in excess of $2,000,000 in the aggregate
during the Term with respect to all Releases.
"Environmental Complaint" shall mean any written notice of violation,
notification of
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<PAGE> 40
potential responsibility for investigation of clean-up of environmental
conditions at the Real Property or Responsible Premises, any demand letter or
complaint, order, citation or other written notice with regard to any Hazardous
Discharge or violation of Environmental Laws affecting the Real Property or
Responsible Premises or Borrower's or Guarantor's interest therein which by the
express terms thereof or absence such express terms in Borrower's reasonable
judgment is likely to or may result in an expenditure in excess of $500,000 with
respect to any Release or in excess of $2,000,000 in the aggregate during the
Term with respect to all Releases.
Borrower shall, and in the case of the Responsible Premises, will cause
Guarantor to, promptly forward to Lender all documents and reports concerning a
Hazardous Discharge at the Real Property or Responsible Premises for which
Borrower has furnished notice to the Lender as required under this Section
4.19(d).
(e) Borrower shall promptly forward to Lender copies of any
written notification of potential liability, demand letter relating to potential
responsibility with respect to the investigation or cleanup of Hazardous
Substances at any other site owned, operated or used by Borrower or Guarantor to
dispose of Hazardous Substances which by the express terms thereof or absent
such express terms is likely to or may result in an expenditure in excess of
$500,000 with respect to any Release or in excess of $2,000,000 in the aggregate
during the Term with respect to all Releases. Such information is to be provided
solely to allow Lender to protect Lender's security interest in the Real
Property and the Collateral.
(f) Borrower shall, and shall cause Guarantor to, respond as a
reasonably prudent owner within a reasonable time to any Notice of Release of
Hazardous Discharge or Environmental Complaint and take all necessary action in
order to safeguard the health of any Person and to avoid subjecting the
Collateral or Real Property to any Lien. If Borrower or Guarantor shall fail to
respond promptly to any Notice of Release of Hazardous Discharge or
Environmental Complaint or Borrower or Guarantor shall fail to comply with any
of the requirements of any Environmental Laws, Lender may, but without the
obligation to do so, for the sole purpose of protecting Lender's interest in
Collateral: (A) give such notices or (B) enter onto the Real Property or
Responsible Premises (or authorize third parties to enter onto the Real Property
or Responsible Premises) and take such actions as Lender (or such third parties
as directed by Lender) deem reasonably necessary or advisable, to clean up,
remove, mitigate or otherwise deal with any such Hazardous Discharge or
Environmental Complaint. All reasonable costs and expenses incurred by Lender
(or such third parties) in the exercise of any such rights, including any sums
paid in connection with any judicial or administrative investigation or
proceedings, fines and penalties, together with interest thereon from the date
expended at the Default Rate for Domestic Rate Loans constituting Revolving
Advances shall be paid upon demand by Borrower, and until paid shall be added to
and become a part of the Obligations secured by the Liens created by the terms
of this Agreement or any other agreement between Lender and Borrower.
(g) Within a reasonable time upon receipt of Notice of Release
of Hazardous Discharge or Environmental Complaint under Section 4.19(d) hereof,
Borrower shall provide
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<PAGE> 41
Lender, at Borrower's expense, with an environmental site assessment or
environmental audit report prepared by an environmental engineering firm
acceptable in the reasonable opinion of Lender, to assess with a reasonable
degree of certainty the existence of a Hazardous Discharge and the potential
costs in connection with abatement, cleanup and removal of any Hazardous
Substances found on, under, at or within the Real Property or Responsible
Premises and whether or not any abatement or remediation is necessary. Any
report or investigation of such Hazardous Discharge proposed and deemed to be
acceptable to an appropriate Authority that is charged to oversee the clean-up
of such Hazardous Discharge shall be acceptable to Lender. If such estimates,
individually or in the aggregate, exceed $500,000 with respect to any Release or
$2,000,000 in the aggregate during the Term with respect to all Releases, Lender
shall have the right to require Borrower to post a bond, letter of credit or
other security reasonably satisfactory to Lender to secure payment of these
costs and expenses.
(h) Borrower shall defend and indemnify Lender and hold Lender
harmless from and against all loss, liability, damage and expense, claims,
costs, fines and penalties, including attorney's fees, suffered or incurred by
Lender under or on account of any Environmental Laws, including, without
limitation, the assertion of any lien thereunder, with respect to any Hazardous
Discharge, the presence of any Hazardous Substances affecting the Real Property
or Responsible Premises, whether or not the same originates or emerges from the
Real Property or Responsible Premises or any contiguous real estate, including
as a result of any loss of value of the Real Property or the Collateral as a
result of the foregoing except to the extent such loss, liability, damage and
expense is attributable to any Hazardous Discharge resulting from actions on the
part of Lender. Borrower's obligations under this Section 4.19 shall arise upon
the discovery of the presence of any Hazardous Substances at the Real Property
or Responsible Premises, whether or not any federal, provincial, state, or local
environmental agency has taken or threatened any action in connection with the
presence of any Hazardous Substances. Borrower's obligation and the
indemnifications hereunder shall survive the termination of this Agreement.
(i) For purposes of Section 4.19 and 5.7, all references to
Real Property shall be deemed to include all of Borrower's right, title and
interest in and to leased premises.
4.20. Financing Statements. Except for the financing statements filed
by Lender and the financing statements described on Schedule 1.2(b), no
financing statement covering any of the Collateral or any proceeds thereof is on
file in any public office.
4.21. Release of Security Interest in Equipment. At such time as the
amount of availability under clause (iii) of Section 2.1(a)(y) is reduced to
zero, whether by operation of such clause (iii) or by prepayment without penalty
at the option of Borrower (which prepayment shall be made via financing from a
third party lender as set forth in Schedule 7.8 hereof), and all accrued
interest on such availability to such time has been paid by Borrower, Lender
shall release its Liens upon the Equipment and shall also release its Liens upon
the fixed assets of Guarantor.
V. REPRESENTATIONS AND WARRANTIES.
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Borrower represents and warrants as follows:
5.1. Authority. Each of Borrower and Guarantor has, with respect to any
and all of this Agreement or the Other Documents into which it may be required
to enter or under which it assumes any Obligations, full power, authority and
legal right to enter into this Agreement and the Other Documents and perform all
Obligations hereunder and thereunder. The execution, delivery and performance
hereof and of the Other Documents (a) are within Borrower's and, as the case may
be, Guarantor's corporate powers, have been duly authorized, are not in
contravention of law or the terms of Borrower's or Guarantor's by-laws,
certificate of incorporation, articles of amalgamation or other applicable
documents relating to Borrower's or Guarantor's formation or to the conduct of
Borrower's or Guarantor's business or of any material agreement or undertaking
to which Borrower or Guarantor is a party or by which Borrower or Guarantor is
bound, and (b) will not conflict with nor result in any breach in any of the
provisions of or constitute a default under or result in the creation of any
Lien except Permitted Encumbrances upon any asset of Borrower or Guarantor under
the provisions of any agreement, charter document, instrument, by-law, or other
instrument to which Borrower or Guarantor is a party or by which it may be
bound.
5.2. Formation and Qualification.
(a) Borrower is duly incorporated and in good standing under
the laws of the State of New York, Guarantor is duly amalgamated and in good
standing under the laws of Ontario, and each of the Borrower and Guarantor is
qualified to do business and is in good standing in the respective jurisdictions
listed on Schedule 5.2 which constitute all jurisdictions in which qualification
and good standing are necessary for Borrower or Guarantor, as applicable, to
conduct its respective business and own its respective property and where the
failure to so qualify would have a material adverse effect on Borrower or
Guarantor or its respective business. Borrower and Guarantor have each delivered
to Lender true and complete copies of its certificate of incorporation or
articles of amalgamation, as the case may be, and by-laws and will promptly
notify Lender of any amendment or changes thereto.
(b) The only Subsidiaries of Borrower are listed on Schedule
5.2.
5.3. Survival of Representations and Warranties. All representations
and warranties of Borrower and Guarantor contained in this Agreement and the
Other Documents shall be true at the time of Borrower's execution of this
Agreement and the Other Documents, and shall survive the execution, delivery and
acceptance thereof by Lender and the parties thereto and the closing of the
transactions described therein or related thereto.
5.4. Tax Returns. Borrower's federal tax identification number is
16-1144965. Each of Borrower and Guarantor has filed all federal, state,
provincial and local tax returns and other reports it is required by law to file
and has paid all taxes, assessments, fees and other governmental charges that
are due and payable. Federal, state, provincial and local income tax returns of
Borrower and Guarantor have been examined and reported upon by the appropriate
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<PAGE> 43
taxing authority or closed by applicable statute and satisfied for all fiscal
years prior to and including the fiscal year ending March 31, 1983, with respect
to Borrower and 1991, with respect to Guarantor. The provision for taxes on the
books of Borrower and Guarantor are adequate for all years not closed by
applicable statutes, and for its current fiscal year, and Borrower has no
knowledge of any deficiency or additional assessment in connection therewith not
provided for on its or Guarantor's books.
5.5. Financial Statements.
The consolidated and consolidating balance sheets of Borrower
and its Subsidiaries which is accounted for by Borrower using the equity method
and such other Persons described therein (including the accounts of all such
Subsidiaries for the respective periods during which a subsidiary relationship
existed) as of March 31, 1997, and the related statements of income, changes in
stockholder's equity, and changes in cash flow for the period ended on such
date, all accompanied by reports thereon containing opinions without
qualification by independent certified public accountants, copies of which have
been delivered to Lender, have been prepared in accordance with GAAP,
consistently applied (except for changes in application in which such
accountants concur) and present fairly the financial position of Borrower and
its Subsidiaries which is accounted for by Borrower using the equity method at
such date and the results of their operations for such period. Since March 31,
1997 there has been no change in the condition, financial or otherwise, of
Borrower or its Subsidiaries which is accounted for by Borrower using the equity
method as shown on the consolidated balance sheet as of such date and no change
in the aggregate value of machinery, equipment and Real Property owned by
Borrower and its Subsidiaries which is accounted for by Borrower using the
equity method, except changes in the ordinary course of business, none of which
individually or in the aggregate has been materially adverse.
5.6. Corporate Name. Neither Borrower nor Guarantor has been known by
any other corporate name in the past five years except for Cold Metal Products
Company, Inc. and, in the case of Guarantor, Cold Metal Products Company, Ltd.
and Direct Steel Inc. and neither Borrower nor Guarantor sells Inventory under
any other name except as set forth on Schedule 5.6, nor has Borrower or
Guarantor been the surviving corporation of a merger or consolidation (except
for the Guarantor amalgamation on or about April 1, 1998) or acquired all or
substantially all of the assets of any Person during the preceding five (5)
years except as set forth in Schedule 5.6(b).
5.7. O.S.H.A. and Environmental Compliance.
(a) Each of Borrower and Guarantor has duly complied with, and
its facilities, business, assets, property, leaseholds and Equipment are in
compliance in all material respects with, to the extent applicable, the
provisions of the Federal Occupational Safety and Health Act, RCRA, Ontario EPA
and all other Environmental Laws; there have been no outstanding citations,
notices or orders of non-compliance issued to Borrower or Guarantor or relating
to its business, assets, property, leaseholds or equipment under any such laws,
rules or regulations.
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(b) Each of Borrower has been issued or duly applied for all
required federal, state, provincial and local licenses, certificates or permits
relating to all applicable Environmental Laws.
(c) Except as disclosed to Lender in Schedule 5.7, (i) there
are no visible signs of releases, spills, discharges, leaks or disposal
(collectively referred to as "Releases") of Hazardous Substances at, upon, under
or within any Real Property or Responsible Premises or any premises leased by
Borrower; (ii) there are no underground storage tanks or polychlorinated
biphenyls on the Real Property or Responsible Premises or any premises leased by
Borrower; (iii) neither the Real Property nor any Responsible Premises or
premises leased by Borrower has ever been used as a treatment, storage or
disposal facility of Hazardous Waste; and (iv) no Hazardous Substances are
present on the Real Property or Responsible Premises or any premises leased by
Borrower or Guarantor, excepting such quantities as are handled in accordance
with all Environmental Laws.
5.8. Solvency; No Litigation, Violation, Indebtedness or Default.
(a) Each of Borrower and Guarantor is solvent, able to pay its
debts as they mature, has capital sufficient to carry on its business and all
businesses in which it is about to engage, and (i) as of the Closing Date, the
fair present saleable value of its assets (calculated on a going concern basis)
is in excess of the amount of its liabilities and (ii) subsequent to the Closing
Date, the fair saleable value of its assets (calculated on a going concern
basis) will be in excess of the amount of its liabilities.
(b) Except as disclosed in Schedule 5.8(b), neither Borrower
nor Guarantor has (i) any pending or threatened litigation, actions or
proceedings which involve the possibility of materially and adversely affecting
its business, assets, operations, condition or prospects, financial or
otherwise, or the Collateral, or the ability of Borrower to perform this
Agreement, and (ii) any liabilities nor indebtedness other than the Obligations.
(c) Neither Borrower nor Guarantor is in violation of any
applicable statute, regulation or ordinance in any respect materially and
adversely affecting the Collateral or its business, assets, operations or
condition (financial or otherwise), or prospects, nor is Borrower or Guarantor
in violation of any order of any court, governmental authority or arbitration
board or tribunal.
(d) (1) Neither Borrower nor any member of a Controlled Group
maintains or contributes to any Plan other than those listed on Schedule
5.8(d)(1) hereto. Except as set forth in Schedule 5.8(d)(1): (i) no Plan has
incurred any "accumulated funding deficiency", as defined in Section 302(a)(2)
of ERISA and Section 412(a) of the Code, whether or not waived, and Borrower and
each member of the Controlled Group has met all applicable minimum funding
requirements under Section 302 of ERISA and the applicable laws of all other
jurisdictions in respect of each Plan, (ii) each Plan which is intended to be a
qualified plan under Section 401(a) of the Code as currently in effect has been
determined by the Internal Revenue Service to be
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qualified under Section 401(a) of the Code and the trust related thereto is
exempt from federal income tax under Section 501(a) of the Code, (iii) neither
Borrower nor any member of the Controlled Group has incurred any liability to
the PBGC, any plan administrator or trustee or any other Person in respect of a
Plan other than for the payment of premiums, and there are no premium payments
which have become due which are unpaid, (iv) no Plan has been terminated (in
whole or in part) by the plan administrator thereof or by the PBGC, and there is
no occurrence which would cause the PBGC, any Plan administrator or trustee or
any other Person in respect of a Plan to institute proceedings under Title IV of
ERISA to terminate (in whole or in part) any Plan, (v) at this time, the current
value of the assets of each Plan exceeds the present value of the accrued
benefits and other liabilities of such Plan and neither Borrower nor any member
of the Controlled Group knows of any facts or circumstances which would
materially change the value of such assets and accrued benefits and other
liabilities, (vi) neither Borrower nor any member of the Controlled Group has
breached any of the responsibilities, obligations or duties imposed on it by
ERISA, or the applicable laws of any other jurisdiction with respect to any
Plan, (vii) neither Borrower nor any member of a Controlled Group has incurred
any liability for any excise tax including arising under Section 4972 or 4980B
of the Code, and no fact exists which could give rise to any such liability,
(viii) neither Borrower nor any member of the Controlled Group nor any fiduciary
of, nor any trustee to, any Plan, has engaged in a "prohibited transaction"
described in Section 406 of the ERISA or Section 4975 of the Code nor taken any
action which would constitute or result in a Termination Event with respect to
any such Plan, (ix) Borrower and each member of the Controlled Group has made
all contributions due and payable with respect to each Plan, (x) there exists no
event described in Section 4043(b) of ERISA, for which the thirty (30) day
notice period contained in 29 CFR Section 2615.3 has not been waived, (xi)
neither Borrower nor any member of the Controlled Group has any fiduciary
responsibility for investments with respect to any plan existing for the benefit
of persons other than employees or former employees of Borrower and any member
of the Controlled Group, and (xii) neither Borrower nor any member of the
Controlled Group has withdrawn, completely or partially, from any Multiemployer
Plan including so as to incur liability under the Multiemployer Pension Plan
Amendments Act of 1980, (xiii) Borrower has not made any application for a
funding waiver or holiday or any extension of an amortization period in respect
of any Plan; (xiv) all vacation pay, bonuses, salaries and wages, to the extent
accruing due, are properly reflected in Borrowers' books and records; (xv) no
Lien (except for contribution amounts not yet due and owing) has arisen in
connection with any Plan; and (xvi) there are no outstanding or pending or
threatened investigations, claims, suits or proceedings in respect of any Plans
(including to assert rights or claims to benefits) that has resulted or could
reasonably result in a material adverse effect on the Collateral, the business,
property, condition (financial or otherwise) or prospects of Borrower or
Guarantor.
5.8 (d) (2) Guarantor does not maintain or contribute to any Plan other
than the Guarantor Plans. Except as set forth in Schedule 5.8(d)(2): (i) no
Guarantor Plan has incurred any funding deficiency on a solvency basis or going
concern unfunded liability, as such terms are interpreted under the PBA, whether
or not waived, and Guarantor has met all applicable minimum funding requirements
under the PBA and the applicable laws of all other jurisdictions in respect of
each Guarantor Plan, (ii) each Guarantor Plan is duly registered where required
by, and is in compliance and good standing in all material respects under, the
PBA and all other applicable
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laws, acts, statutes, regulations, orders, directives and agreements, including,
without limitation, the Income Tax Act of Canada, (iii) Guarantor has not
incurred any liability to the Pension Regulator, any Plan administrator or
trustee or any other Pension in respect of a Guarantor plan, other than for
payment of premiums and plan benefits, and there are no premium payments which
have become due which are unpaid, (iv) no Guarantor Plan has been terminated or
wound up (in either case, in whole or in part) by the Pension Regulator or the
plan administrator thereof, and there is no occurrence which would cause any
plan administrator or trustee or to the knowledge of the Guarantor, the Pension
Regulator or any other Person in respect of a Plan to institute proceedings to
terminate or wind up (in either case, in whole or in part) any Guarantor Plan,
(v) the current value of the assets of each Guarantor Plan exceeds the present
value of the accrued benefits and other liabilities of such Guarantor Plan, and
neither Borrower nor Guarantor knows of any facts or circumstances which would
materially change the value of such assets and accrued benefits and other
liabilities, (vi) neither Borrower nor Guarantor has breached any of the
responsibilities, obligations or duties imposed on it by the PBA or the
applicable laws of any other jurisdiction with respect to any Guarantor Plan,
(vii) Guarantor has not to its knowledge taken any action which would constitute
or result in a Termination Event with respect to any such Guarantor Plan, (viii)
Guarantor has made all contributions due and payable with respect to each
Guarantor Plan, (ix) Guarantor has no fiduciary responsibility for investments
with respect to any Plan existing for the benefit of persons other than
employees and former employees of Guarantor and their beneficiaries, and (x)
Guarantor has not made any application for any extension of an amortization
period in respect of any Guarantor Plan; (xi) all vacation pay, bonuses,
salaries and wages, to the extent accruing due, are properly reflected in
Guarantor's books and records; (xii) no Lien has arisen in connection with any
Guarantor Plan, except for Permitted Encumbrances; and (xiii) to the knowledge
of the Guarantor there are no outstanding or pending or threatened
investigations, claims, suits or proceedings in respect of any Guarantor Plans
(including to assert rights or claims to benefits) that has resulted or could
reasonably result in a material adverse effect on the Collateral, the business
property, condition (financial or otherwise) or prospects of Borrower or
Guarantor.
5.9. Patents, Trademarks, Copyrights and Licenses. All patents, patent
applications, trademarks, trademark applications, service marks, service mark
applications, copyrights, copyright applications, tradenames, assumed names, and
trade secrets, and licenses with respect to the foregoing, owned or utilized by
Borrower or Guarantor are set forth on Schedule 5.9, are valid and have been
duly registered (or application for registration duly filed) or filed with all
appropriate governmental authorities and constitute all of the intellectual
property rights which are necessary for the operation of its business; there is
no objection to or pending challenge to the validity of any such material
patent, trademark, copyright, tradename, trade secret or license and Borrower is
not aware of any grounds for any challenge, except as set forth in Schedule 5.9
hereto. Each patent, patent application, patent license, trademark, trademark
application, trademark license, service mark, service mark application, service
mark license, copyright, copyright application and copyright license owned or
held by Borrower or Guarantor and all trade secrets used by Borrower or
Guarantor consists of original material or property developed by Borrower or
Guarantor or was lawfully acquired by Borrower or Guarantor from the proper and
lawful owner thereof. Each of such items has been maintained so as to preserve
the value thereof
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from the date of creation or acquisition thereof. With respect to all software
used by Borrower or Guarantor , Borrower or Guarantor, as applicable, is in
possession of all source and object codes related to each piece of software or
is the beneficiary of a source code escrow agreement, each such source code
escrow agreement being listed on Schedule 5.9 hereto.
5.10. Licenses and Permits. Except as set forth in Schedule 5.10, each
of Borrower and Guarantor (a) is in compliance with and (b) has procured and is
now in possession of, all material licenses or permits required by any
applicable federal, state, provincial or local law or regulation for the
operation of its business in each jurisdiction wherein it is now conducting or
proposes to conduct business and where the failure to procure such licenses or
permits would have a material adverse effect on the business, properties,
condition (financial or otherwise) or operations, present or prospective of
Borrower or Guarantor.
5.11. Default of Indebtedness. Neither Borrower nor Guarantor is in
default in the payment of the principal of or interest on any Indebtedness in
excess of $100,000 or under any instrument or agreement under or subject to
which any Indebtedness has been issued and no event has occurred under the
provisions of any such instrument or agreement which with or without the lapse
of time or the giving of notice, or both, constitutes or would constitute an
event of default thereunder and result in the acceleration of such Indebtedness.
5.12. No Default. Neither Borrower nor Guarantor is in default in any
material respect in the payment or performance of any of its contractual
obligations and no Default has occurred.
5.13. No Burdensome Restrictions. Neither Borrower nor Guarantor is
party to any contract or agreement the performance of which would materially
adversely affect the business, assets, operations, condition (financial or
otherwise) or prospects of Borrower or Guarantor. Borrower has not agreed or
consented to cause or permit in the future (upon the happening of a contingency
or otherwise) any of its property, whether now owned or hereafter acquired, to
be subject to a Lien which is not a Permitted Encumbrance.
5.14. No Labor Disputes. Neither Borrower nor Guarantor is involved in
any labor dispute; there are no strikes or walkouts or union organization of any
of Borrower's or Guarantor's employees threatened or in existence and no labor
contract is scheduled to expire during the Term other than as set forth on
Schedule 5.14 hereto.
5.15. Margin Regulations. Neither Borrower nor Guarantor is engaged,
nor will it engage, principally or as one of its important activities, in the
business of extending credit for the purpose of "purchasing" or "carrying" any
"margin stock" within the respective meanings of each of the quoted terms under
Regulation U or Regulation G of the Board of Governors of the Federal Reserve
System as now and from time to time hereafter in effect. No part of the proceeds
of any Advance will be used for "purchasing" or "carrying" "margin stock" as
defined in Regulation U of such Board of Governors.
5.16. Investment Company Act. Borrower is not an "investment company"
registered or
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required to be registered under the Investment Company Act of 1940, as amended,
nor is it controlled by such a company.
5.17. Disclosure. No representation or warranty made by Borrower or
Guarantor in this Agreement or in any financial statement, report, certificate
or any other document furnished in connection herewith contains any untrue
statement of a material fact or omits to state any material fact necessary to
make the statements herein or therein not misleading. There is no fact known to
Borrower or Guarantor or which reasonably should be known to Borrower or
Guarantor which Borrower or Guarantor has not disclosed to Lender in writing
with respect to the transactions contemplated by this Agreement which materially
and adversely affects the condition (financial or otherwise), results of
operations, business, or assets of Borrower or Guarantor.
5.18. INTENTIONALLY OMITTED.
5.19. Swaps. Neither Borrower nor Guarantor is a party to, nor will it
be a party to, any swap agreement whereby Borrower has agreed or will agree to
swap interest rates or currencies unless same provides that damages upon
termination following an event of default thereunder are payable on an unlimited
"two-way basis" without regard to fault on the part of either party.
5.20. Conflicting Agreements. No provision of any mortgage, indenture,
contract, agreement, judgment, decree or order binding on Borrower or Guarantor
or affecting the Collateral conflicts with, or requires any Consent which has
not already been obtained to, or would in any way prevent the execution,
delivery or performance of, the terms of this Agreement or the Other Documents.
5.21. Application of Certain Laws and Regulations. Neither Borrower nor
any Affiliate of Borrower is subject to any statute, rule or regulation which
regulates the incurrence of any Indebtedness, including without limitation,
statutes or regulations relative to common or interstate carriers or to the sale
of electricity, gas, steam, water, telephone, telegraph or other public utility
services.
5.22. Business and Property of Borrower. Upon and after the Closing
Date, Borrower does not propose to engage in any business other than as
described in the Company's Form 10-K Annual Report for the fiscal year ended
March 31, 1996. On the Closing Date, Borrower and Guarantor will own all the
property and possess all of the rights and Consents necessary for the conduct of
the business of Borrower and Guarantor.
5.23. Workers' Compensation. Neither the Borrower nor Guarantor has any
unpaid workers' compensation or like obligations which could in the aggregate,
have a material adverse effect on the business or affairs of Borrower or
Guarantor as the case may be, except as are being incurred, and paid on a
current basis in the ordinary course of business, and there are no proceedings,
claims, actions, orders or investigations relating to worker's compensation
outstanding, pending or, to their knowledge, threatened relating to them or any
of their employees or former employees which could, in the aggregate, have such
material adverse effect.
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5.24. Responsible Premises. Except as set forth in Schedule 5.24 (a) no
part of the Responsible Premises has been condemned, taken or expropriated by
any provincial, state, municipal or any other competent authority, and no
alteration, repair, improvement or other work has been ordered or directed to be
done or performed to or in respect of such property by any provincial, state,
municipal or any other competent authority; (b) there are no Liens, easements,
encroachments, rights-of-way, work orders, licenses, concession agreements,
leases or tenancies affecting the Responsible Premises, save and except for
Permitted Encumbrances; (c) there is nothing owing in respect of the Responsible
Premises including any leasehold property (to the extent Borrower or Guarantor
is or may be liable for same) to any municipality or to any corporation or
commission owning or operating a public utility for water, gas, electrical power
or energy, steam or hot water or for the use thereof or for the fittings,
machines, apparatus, meters or other things leased in respect thereof or for any
work or service performed for any such corporation or commission in connection
with such public utilities, except current charges and Permitted Encumbrances;
(d) Borrower and Guarantor do not retain any interest, beneficially or
otherwise, in any land abutting the Responsible Premises either by way of fee or
equity of redemption in or a power or right to grant or exercise a power of
appointment with respect to, any such land abutting the Responsible Premises;
(e) the buildings on the Responsible Premises are located entirely within the
limits of such Responsible Premises, and all present uses in respect of the
Responsible Premises may lawfully be continued, and all permitted uses are
satisfactory for the Borrower's and Guarantor's current and intended purposes;
(f) there are no unsatisfied judgments against Borrower or Guarantor and there
are no writs of execution which would affect the Responsible Premises, including
or any of their interests in any leasehold property; (g) all real property
taxes, including local improvement rates, have been paid when due to date in
respect of the Responsible Premises; (h) all accounts for work and service
performed, and materials placed or furnished upon or in respect of the
Responsible Premises, including any of its leasehold property, including any
claims by any municipal, provincial or other competent authority, have been
fully paid, and no one is entitled to claim a lien under the Construction Lien
Act of Ontario (or any similar law or legislation of any jurisdiction applicable
to the Responsible Premises) against such Responsible Premises or any part
thereof; and (i) no portion of the loans are being advanced or used in
connection with any alteration, addition or improvement to or work on or in
respect of the Responsible Premises.
VI. AFFIRMATIVE COVENANTS.
Borrower shall and shall cause Guarantor to, until payment in full of
the Obligations and termination of this Agreement:
6.1. Payment of Fees. Pay to Lender on demand all usual and customary
fees and expenses which Lender incurs in connection with (a) the forwarding of
Advance proceeds and (b) the establishment and maintenance of any Blocked
Accounts or Depository Accounts as provided for in Section 4.15(h). Lender may,
without making demand, charge the account of Borrower for all such fees and
expenses.
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6.2. Conduct of Business and Maintenance of Existence and Assets. (a)
Conduct continuously and operate actively its business according to good
business practices and maintain all of its properties useful or necessary in its
business in good working order and condition (reasonable wear and tear excepted
and except as may be disposed of in accordance with the terms of this
Agreement), including, without limitation, all licenses, patents, copyrights,
tradenames, trade secrets and trademarks and take all actions necessary to
enforce and protect the validity of any intellectual property right or other
right included in the Collateral; (b) keep in full force and effect its
existence and comply in all material respects with the laws and regulations
governing the conduct of its business where the failure to do so would have a
material adverse effect on Borrower or Guarantor or its business; and (c) make
all such reports and pay all such franchise and other taxes and license fees and
do all such other acts and things as may be lawfully required to maintain its
rights, licenses, leases, powers and franchises under the laws of the United
States or any political subdivision thereof.
6.3. Violations. Promptly notify Lender in writing of any violation of
any law, statute, regulation or ordinance of any governmental entity, or of any
agency thereof, applicable to Borrower or Guarantor which may materially and
adversely affect the Collateral or Borrower's or Guarantor's business, assets,
operations, condition (financial or otherwise) or prospects.
6.4. Government Receivables. Take all steps necessary to protect
Lender's interest in the Collateral under the Federal Assignment of Claims Act
or other applicable state or local statutes or ordinances and deliver to Lender
appropriately endorsed, any instrument or chattel paper connected with any
Receivable arising out of contracts between Borrower and the United States, any
state or any department, agency or instrumentality of any of them. The Lender
and Borrower acknowledge that the Guarantor will not comply with the Financial
Administration Act of Canada or similar provincial laws and that no Receivables
payable by the Government of Canada or any province, or any agency or
instrumentality thereof will be "Eligible Receivables".
6.5. Current Ratio. Cause the ratio of consolidated current assets to
consolidated current liabilities to be not less than 1.23 to 1 at the end of the
fiscal quarter ending March 31, 1998 and at the end of each fiscal quarter
thereafter during the Term; provided, however, that for the fiscal quarter
ending June 30, 1998 and thereafter during the Term the ratio may be adjusted by
the mutual agreement of Borrower and Lender based upon projections delivered to
Lender in accordance with Section 9.12 hereof. The above ratios shall be
calculated exclusive of the effect of any conversion to a current liability of
any Indebtedness to Lender.
6.6. INTENTIONALLY OMITTED.
6.7. INTENTIONALLY OMITTED.
6.8. Fixed Charge Coverage. Cause the ratio of (x) the sum of aggregate
consolidated net income during each fiscal period set forth below plus the
aggregate amount of income tax, and the interest, depreciation, amortization and
all other non-cash expense deducted in determining such net income during such
fiscal period to (y) aggregate consolidated interest expense during
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<PAGE> 51
such fiscal period plus aggregate amount of tax expense and capital expenditures
paid in cash during such fiscal period plus, without duplication, the aggregate
amount of scheduled reductions in availability during such fiscal period
pursuant to Section 2.1(a)(y)(iii) hereof to be not less than the ratio
corresponding to the fiscal periods set forth below:
Fiscal Period Ratio
------------- -----
4/1/97 - 3/31/98 1.00 to 1
and each four quarter
fiscal period thereafter
during the Term;
provided, however, that for the fiscal period ending June 30, 1998 and
thereafter during the Term the ratio may be adjusted by the mutual agreement of
Borrower and Lender based upon projections delivered to Lender in accordance
with Section 9.12 hereof.
6.9. Total Liabilities to Equity. Cause the ratio of total consolidated
Indebtedness to consolidated stockholders equity (exclusive of Borrower's
foreign currency translation adjustment account) to be not more than 3.89 to 1
at the end of the fiscal quarter ending March 31, 1998 and at the end of each
fiscal quarter thereafter during the Term; provided, however, that for the
fiscal quarter ending June 30, 1998 and thereafter during the Term the ratios
provided in this Section 6.9 may be adjusted by the mutual agreement of Borrower
and Lender based upon projections delivered to Lender in accordance with Section
9.12 hereof. The above ratios shall be calculated exclusive of any future
accounting changes and their impact on non-current liabilities and shareholders'
equity.
6.10. Execution of Supplemental Instruments. Execute and deliver to
Lender, from time to time, upon demand, such supplemental agreements,
statements, assignments and transfers, or instructions or documents relating to
the Collateral, and such other instruments as Lender may request, in order that
the full intent of this Agreement may be carried into effect.
6.11. Payment of Indebtedness. Pay, discharge or otherwise satisfy at
or before maturity (subject, where applicable, to specified grace periods and,
in the case of the trade payables, to normal payment practices) all its
obligations and liabilities of whatever nature, except when the amount or
validity thereof is currently being contested in good faith by appropriate
proceedings and Borrower shall have provided for such reserves as Lender may
reasonably deem proper and necessary, subject at all times to any applicable
subordination arrangement in favor of Lender.
6.12. Standards of Financial Statements. Cause all financial statements
referred to in Sections 9.7, 9.9, 9.10, 9.12 and 9.13 as to which GAAP is
applicable to be complete and correct in all material respects (subject, in the
case of interim financial statements, to normal year-end audit adjustments) and
to be prepared in reasonable detail and in accordance with GAAP applied
consistently throughout the periods reflected therein (except as concurred in by
such reporting accountants or officer, as the case may be, and disclosed
therein).
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VII. NEGATIVE COVENANTS.
Borrower shall not, and shall not permit Guarantor to, until
satisfaction in full of the Obligations and termination of this Agreement:
7.1. Merger, Consolidation, Acquisition and Sale of Assets.
(a) Enter into any merger, consolidation, amalgamation or
other reorganization with or into any other Person or acquire all or a
substantial portion of the assets or stock of any Person or permit any other
Person to consolidate with or merge with it; provided, however, that Borrower
may enter into any such transaction if (i) the aggregate amount of all such
transactions during any fiscal year does not exceed $2,000,000, (ii) Lender has
a valid and enforceable lien on and security interest in the assets of any such
acquired Person and (iii) no Default or Event of Default would be in existence
after giving effect thereto.
(b) Sell, lease, transfer or otherwise dispose of any of its
properties or assets, except in the ordinary course of its business and except
as otherwise permitted elsewhere in this agreement.
7.2. Creation of Liens. Create or suffer to exist any Lien or transfer
upon or against any of its property or assets now owned or hereafter acquired,
except Permitted Encumbrances.
7.3. Guarantees. Become liable upon the obligations of any Person by
assumption, endorsement or guaranty thereof or otherwise (other than to Lender)
except (a) as disclosed on Schedule 7.3, and (b) the endorsement of checks in
the ordinary course of business.
7.4. Investments. Except as otherwise provided in this Agreement,
purchase or acquire obligations or stock of, or any other interest in, any
Person, except (a) obligations issued or guaranteed by the United States of
America or any agency thereof, (b) commercial paper with maturities of not more
than 180 days and a published rating of not less than A-1 or P-1 (or the
equivalent rating), (c) certificates of time deposit and bankers' acceptances
having maturities of not more than 180 days and repurchase agreements backed by
United States government securities of a commercial bank if (i) such bank has a
combined capital and surplus of at least $500,000,000, or (ii) its debt
obligations, or those of a holding company of which it is a Subsidiary, are
rated not less than A (or the equivalent rating) by a nationally recognized
investment rating agency, and (d) U.S. money market funds that invest solely in
obligations issued or guaranteed by the United States of America or an agency
thereof.
7.5. Loans. Make advances, loans or extensions of credit to any Person,
including without limitation, any Parent, Subsidiary or Affiliate except with
respect to (a) the extension of commercial trade credit in connection with the
sale of Inventory in the ordinary course of its business, (b) loans to its
employees in the ordinary course of business not to exceed the aggregate amount
of $100,000 at any time outstanding, (c) loans by Borrower to (and repayments of
loans
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by) the Guarantor and (d) loans by Guarantor to (and repayment of loans by) the
Borrower.
7.6. Capital Expenditures. Contract for, purchase or make any
expenditure or commitments for fixed or capital assets (including capitalized
leases) in any fiscal year in an amount in excess of $12,000,000 in the
aggregate for itself and its Subsidiaries;
7.7. Dividends. Declare, pay or make any dividend or distribution on
any shares of the common stock or preferred stock of Borrower or Guarantor
(other than dividends or distributions payable in its stock, or split-ups or
reclassifications of its stock) or apply any of its funds, property or assets to
the purchase, redemption or other retirement of any common or preferred stock,
or of any options to purchase or acquire any such shares of common or preferred
stock of Borrower except that dividends may be declared and paid by the
Guarantor to the Parent provided that all applicable withholding taxes are
withheld and remitted when required and so long as (a) a notice of termination
with regard to this Agreement shall not be outstanding, (b) no Event of Default
or Default shall have occurred, and (c) the purpose for such purchase,
redemption or dividend shall be as set forth in writing to Lender at least ten
(10) days prior to such purchase, redemption or dividend and such purchase,
redemption or dividend shall in fact be used for such purpose, Borrower shall be
permitted to (1) pay dividends in an aggregate, cumulative amount not to exceed
twenty-five percent (25%) of Borrower's after-tax income on a cumulative basis
(exclusive of the (i) FASB 106, 109 and 112 adjustments for Borrower's fiscal
year ending March 31, 1994 in the amount of $10,956,000 and (ii) the effect of
any future accounting changes on the cumulative income recorded as a result of
recognizing non-current liabilities) calculated commencing with the results of
Borrower's fiscal year ending March 31, 1997 and (2) repurchase or redeem its
common stock not to exceed the aggregate amount of $2,000,000; provided,
however, that after giving effect to the payment of such dividends there shall
not exist any Event of Default or Default and Borrower shall have Undrawn
Availability equal to no less than the amount of dividends to be paid.
7.8. Indebtedness. Create, incur, assume or suffer to exist any
Indebtedness (exclusive of trade debt) of Borrower or Guarantor except in
respect of (i) Indebtedness to Lender; (ii) Indebtedness incurred for capital
expenditures permitted under Section 7.6 hereof, (iii) Indebtedness disclosed on
Schedule 7.8 and (iv) Indebtedness in connection with loans permitted under
Section 7.5.
7.9. Nature of Business. Substantially change the nature of the
business in which it is presently engaged, nor except as specifically permitted
hereby purchase or invest, directly or indirectly, in any assets or property
other than in the ordinary course of business for assets or property which are
useful in, necessary for and are to be used in its business as presently
conducted.
7.10. Transactions with Affiliates. Except as permitted by Section 7.5
hereof, directly or indirectly, purchase, acquire or lease any property from, or
sell, transfer or lease any property to, or otherwise deal with, any Affiliate,
except transactions in the ordinary course of business, on an arm's-length basis
on terms no less favorable than terms which would have been obtainable from a
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<PAGE> 54
Person other than an Affiliate; provided, however, that Borrower may engage in
any activity contemplated by that certain Tax Sharing and Indemnification
Agreement dated January 31, 1994 between Borrower and Aarque Management
Corporation as in effect on August 1, 1994.
7.11. Leases. Enter as lessee into any lease arrangement for real or
personal property (unless capitalized and permitted under Section 7.6 hereof) if
after giving effect thereto, aggregate annual rental payments for all leased
property would exceed $5,000,000 in any one fiscal year.
7.12. Subsidiaries.
(a) Form any Subsidiary.
(b) Enter into any partnership, joint venture or similar
arrangement; provided, however, that Borrower may enter into any such
transactions or arrangements to the extent that (i) the aggregate value of all
such transactions or arrangements do not exceed $2,000,000 during any fiscal
year and (ii) there is no existing Default or Event of Default and no Default or
Event of Default would occur as a result of such transaction or arrangement.
7.13. Fiscal Year and Accounting Changes. Change its fiscal year from
March 31 or make any significant change (i) in accounting treatment and
reporting practices except as required by GAAP or (ii) in tax reporting
treatment except as required by law.
7.14. Pledge of Credit. Now or hereafter pledge Lender's credit on any
purchases or for any purpose whatsoever or use any portion of any Advance in or
for any business other than Borrower's or Guarantor's business as conducted on
the date of this Agreement.
7.15. Amendment of Articles of Incorporation, By-Laws. Amend, modify or
waive any material term or provision of its Articles of Incorporation or
Amalgamation or By-Laws unless required by law.
7.16. Compliance with ERISA and PBA. (i) (x) Maintain, or permit any
member of a Controlled Group to maintain, or (y) become obligated to contribute,
or permit any member of a Controlled Group to become obligated to contribute, to
any Plan, other than those Plans disclosed on Schedule 5.8(d), (ii) in the case
of the Borrower, engage, or permit any member of a Controlled Group to engage,
in any non-exempt "prohibited transaction", as that term is defined in section
406 of ERISA and Section 4975 of the Code, (iii) incur, or permit any member of
a Controlled Group to incur, any, in the case of Borrower, "accumulated funding
deficiency", as that term is defined in Section 302 of ERISA or Section 412 of
the Code or, in the case of the Guarantor, any funding deficiency on a solvency
basis as such term is interpreted under the PBA that is greater than the
Threshold Amount, (iv) terminate or wind up (in whole or in part), or permit any
member of a Controlled Group to terminate or wind up (in whole or in part), any
Plan where such event could result in the imposition of a Lien (other than a
Permitted Encumbrance) on the property of Borrower or Guarantor or any member of
a Controlled Group pursuant to
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<PAGE> 55
Section 4068 of ERISA or applicable provisions of the PBA, (v) assume, or permit
any member of a Controlled Group to assume, any obligation to contribute to any
Multiemployer Plan not disclosed on Schedule 5.8(d), (vi) incur, or permit any
member of a Controlled Group to incur, any withdrawal liability to any
Multiemployer Plan; (vii) fail promptly to notify Lender of the occurrence of
any Termination Event of which it is aware, (viii) fail to comply, or permit a
member of a Controlled Group to fail to comply, with the requirements of ERISA,
the PBA or the Code or other applicable laws in respect of any Plan, or (ix)
fail to meet, or permit any member of a Controlled Group to fail to meet, all
minimum funding requirements under ERISA, the PBA or the Code or postpone or
delay or allow any member of a Controlled Group to postpone or delay any funding
requirement with respect of any Plan.
7.17. Prepayment of Indebtedness. At any time, directly or indirectly,
prepay any Indebtedness (other than to Lender and other than trade accounts
payable and pension obligations), or repurchase, redeem, retire or otherwise
acquire any Indebtedness of Borrower for borrowed money; provided, however,
that, so long as no Default or Event of Default shall have occurred and be
continuing or would exist after giving effect thereto, (i) Borrower may modify,
refinance or prepay any Indebtedness related to the Ottawa Financing, (ii)
Borrower and Guarantor may prepay Indebtedness in the ordinary course of
business not to exceed $100,000 in the aggregate in any fiscal year and (iii)
Borrower and Guarantor may repay loans by each of them to the other.
VIII. CONDITIONS PRECEDENT.
8.1. Conditions to Initial Advances. The agreement of Lender to make
the initial Advances requested to be made on or after the Closing Date is
subject to the satisfaction, or waiver by Lender, immediately prior to or
concurrently with the making of such Advances, of the following conditions
precedent:
(a) Filings, Registrations and Recordings. Each document
(including, without limitation, any Uniform Commercial Code financing statement)
required by this Agreement, any related agreement or under law or reasonably
requested by Lender to be filed, registered or recorded in order to create, in
favor of Lender, a perfected security interest in or lien upon the Collateral
shall have been properly filed, registered or recorded in each jurisdiction in
which the filing, registration or recordation thereof is so required or
requested, and Lender shall have received an acknowledgment copy, or other
evidence satisfactory to it, of each such filing, registration or recordation
and satisfactory evidence of the payment of any necessary fee, tax or expense
relating thereto;
(b) Corporate Proceedings of Borrower. Lender shall have
received a copy of the resolutions in form and substance reasonably satisfactory
to Lender, of the Board of Directors of Borrower and Guarantor authorizing (i)
the execution, delivery and performance of this Agreement, and any Other
Documents, (collectively the "Documents") and (ii) the granting by Borrower and
Guarantor of the security interests in and
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<PAGE> 56
liens upon the Collateral in each case certified by the Secretary or an
Assistant Secretary of Borrower or Guarantor as of the Closing Date; and, such
certificate shall state that the resolutions thereby certified have not been
amended, modified, revoked or rescinded as of the date of such certificate;
(c) Incumbency Certificates of Borrower. Lender shall have
received a certificate of the Secretary or an Assistant Secretary of Borrower or
Guarantor , dated the Closing Date, as to the incumbency and signature of the
officers of Borrower or Guarantor executing this Agreement, any certificate or
other documents to be delivered by it pursuant hereto, together with evidence of
the incumbency of such Secretary or Assistant Secretary;
(d) Certificates. Lender shall have received a copy of the
Articles or Certificate of Incorporation and Amalgamation of Borrower and
Guarantor, and all amendments thereto, certified by the Secretary of State or
other appropriate official of its jurisdiction of incorporation together with
copies of the By-Laws of Borrower and Guarantor and all agreements of Borrower's
and Guarantor's shareholders certified as accurate and complete by the Secretary
or Assistant Secretary of Borrower or Guarantor ;
(e) Good Standing Certificates. Lender shall have received
good standing certificates for Borrower and Guarantor dated not more than 25
days prior to the Closing, issued by the Secretary of State or other appropriate
official of Borrower's and Guarantor's jurisdiction of incorporation and each
jurisdiction where the conduct of Borrower's and Guarantor's business activities
or the ownership of its properties necessitates qualification;
(f) Legal Opinion. Lender shall have received the executed
legal opinion of Cohen Swados Wright Hanifin Bradford & Brett, LLP and of Blake,
Cassels & Graydon and Quebec counsel to the Guarantor, in form and substance
satisfactory to Lender, which shall cover such matters incident to the
transactions contemplated by this Agreement and related agreements as Lender may
reasonably require;
(g) Guarantee, Guarantor Security Documents. Lender shall have
received (i) executed copies of the Guarantee and the Guarantor Security
Documents, (ii) all Other Documents, and (iii) evidence of the due filing and
recording of the Guarantor Security Documents as first priority Liens on the
Guarantor Collateral in each jurisdiction where Lender or its counsel determine
such filings to be necessary or of advantage;
(h) Consents. Lender shall have received any and all Consents
necessary to permit the effectuation of the transactions contemplated by this
Agreement and the Other Documents; and, Lender shall have received such Consents
and waivers of such third parties as might assert claims with respect to the
Collateral, as Lender and its counsel shall deem necessary; and
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(i) No Adverse Material Change. (i) Since December 31, 1997,
there shall have occurred (x) no material adverse change in the condition,
financial or otherwise, operations, properties or prospects of Borrower or
Guarantor, (y) no material damage or destruction to any of the Collateral nor
any material depreciation in the value thereof and (z) no event, condition or
state of facts which would reasonably be expected materially and adversely to
affect the business, financial condition or results of operations of Borrower or
Guarantor and (ii) no representations made or information supplied to Lender
shall have been proven to be inaccurate or misleading in any material respect.
(j) Consent of Participants. Lender shall have received the
consent of the existing Transferee lenders to the execution of this Agreement
and the transactions contemplated herein.
8.2. Conditions to Each Advance. The agreement of Lender to make any
Advance requested to be made on any date (including, without limitation, the
initial Advance), is subject to the satisfaction of the following conditions
precedent as of the date such Advance is made:
(a) Representations and Warranties. Except for such events or
changes in circumstances which are permitted under this Agreement and of which
Borrower has notified Lender, each of the representations and warranties made by
Borrower or Guarantor in or pursuant to this Agreement and any related
agreements to which it is a party, and each of the representations and
warranties contained in any certificate, document or financial or other
statement furnished at any time under or in connection with this Agreement or
any related agreement shall be true and correct in all material respects on and
as of such date as if made on and as of such date;
(b) No Default. No Event of Default or Default shall have
occurred and be continuing on such date, or would exist after giving effect to
the Advances requested to be made, on such date; provided, however that Lender,
in its sole discretion, may continue to make Advances notwithstanding the
existence of an Event of Default or Default and that any Advances so made shall
not be deemed a waiver of any such Event of Default or Default; and
(c) Maximum Advances. In the case of any Advances requested to
be made, after giving effect thereto, the aggregate Advances shall not exceed
the maximum Advances permitted under Section 2.1 hereof.
Each request for an Advance by Borrower hereunder shall constitute a
representation and warranty by Borrower as of the date of such Advance that the
conditions contained in this subsection shall have been satisfied.
IX. INFORMATION AS TO BORROWER.
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Borrower shall, until satisfaction in full of the Obligations and the
termination of this Agreement:
9.1. Disclosure of Material Matters. Immediately upon learning thereof,
report to Lender all matters materially affecting the value, enforceability or
collectability of any portion of the Collateral including, without limitation,
Borrower's or Guarantor's reclamation or repossession of, or the return to
Borrower or Guarantor of, a material amount of goods or claims or disputes
asserted by any Customer or other obligor.
9.2. Schedules. Deliver to Lender on or before the twentieth (20th) day
of each month as and for the prior month (a) accounts receivable ageings, (b)
accounts payable schedules, (c) Inventory reports and (d) Borrowing Base
Certificate, provided, however, Lender may require reporting on a daily basis
following the occurrence and during the continuance of an Event of Default. In
addition, Borrower will deliver to Lender at such intervals as Lender may
require: (i) confirmatory assignment schedules together with invoice registers,
and (ii) such further schedules, documents or information regarding the
Collateral as Lender may require including, without limitation, trial balances
and test verifications. Lender shall have the right to confirm and verify all
Receivables by any manner and through any medium it considers advisable and do
whatever it may deem reasonably necessary to protect its interests hereunder.
The items to be provided under this Section are to be in form satisfactory to
Lender and executed by Borrower and delivered to Lender from time to time solely
for Lender's convenience in maintaining records of the Collateral, and
Borrower's failure to deliver any of such items to Lender shall not affect,
terminate, modify or otherwise limit Lender's Lien with respect to the
Collateral.
9.3. Environmental Reports. Furnish Lender, concurrently with the
delivery of the financial statements referred to in Sections 9.7, with a
certificate of Borrower signed by the President of Borrower stating, to the best
of his knowledge, that there have been no events requiring notice to the Lender
as required under Section 4.19 of this Agreement other than such notices as have
been furnished to the Lender since the last such certificate furnished by the
Borrower.
9.4. Litigation. Promptly notify Lender in writing of any litigation,
suit or administrative proceeding affecting Borrower or Guarantor, whether or
not the claim is covered by insurance, which may materially and adversely affect
the Collateral or Borrower's business, assets, operations, condition or
prospects (financial or otherwise).
9.5. Material Occurrences. Promptly notify Lender in writing upon the
occurrence of (a) any Event of Default or Default; (b) any event, development or
circumstance whereby any financial statements or other reports furnished to
Lender fail in any material respect to present fairly, in accordance with GAAP
consistently applied, the financial condition or operating results of Borrower
as of the date of such statements; (c) any accumulated retirement plan funding
deficiency which, if such deficiency continued for two plan years and was not
corrected as provided in Section 4971 of the Internal Revenue Code, could
subject Borrower to a tax imposed by Section 4971 of the Internal Revenue Code;
(d) any matter which may give rise to a
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Termination Event or any termination or windup (in whole or in part) of any Plan
or any Lien (choate or inchoate, except for monthly contribution amounts not due
and unpaid) on any of Collateral, (e) each and every default by Borrower or
Guarantor which might result in the acceleration of the maturity of Indebtedness
in excess of $750,000, including the names and addresses of the holders of such
Indebtedness with respect to which there is a default existing or with respect
to which the maturity has been or could be accelerated, and the amount of such
Indebtedness; and (f) any other development in the business or affairs of
Borrower or Guarantor which might reasonably be expected to be materially
adverse; in each case describing the nature thereof and the action Borrower
proposes to take with respect thereto.
9.6. Government Receivables. Notify Lender immediately if any of its or
Guarantor's Receivables arise out of contracts between Borrower or Guarantor and
the United States or Canada, any state, province or any department, agency or
instrumentality of any of them.
9.7. Annual Financial Statements. Furnish Lender within ninety (90)
days after the end of each fiscal year of Borrower and Guarantor, financial
statements of Borrower and Guarantor on a consolidating and consolidated basis
including, but not limited to, statements of income and stockholders' equity and
cash flow from the beginning of the current fiscal year to the end of such
fiscal year and the balance sheet as at the end of such fiscal year, all
prepared in accordance with GAAP applied on a basis consistent with prior
practices, and in reasonable detail and reported upon without qualification by
an independent certified public accounting firm selected by Borrower and
satisfactory to Lender (the "Accountants"). The report of such accounting firm
shall be accompanied by a statement of such accounting firm certifying
Borrower's compliance with the requirements or restrictions imposed by Sections
6.5, 6.8 and 6.9. In addition, the reports shall be accompanied by a certificate
of Borrower's Chief Financial Officer which shall state that, based on an
examination sufficient to permit him to make an informed statement, no Default
or Event of Default exists, or, if such is not the case, specifying such Default
or Event of Default, its nature, when it occurred, whether it is continuing and
the steps being taken by Borrower with respect to such event and, such
certificate shall have appended thereto calculations which set forth Borrower's
compliance with the requirements or restrictions imposed by Sections 6.5, 6.8
and 6.9 hereof.
9.8. INTENTIONALLY OMITTED.
9.9. Monthly Financial Statements. Furnish Lender within thirty (30)
days after the end of each month, an unaudited balance sheet of Borrower and
Guarantor and unaudited statements of income and stockholders' equity and cash
flow of Borrower and Guarantor on a consolidated and consolidating basis
reflecting results of operations from the beginning of the fiscal year to the
end of such month and for such month, prepared on a basis consistent with prior
practices and complete and correct in all material respects, subject to normal
year end adjustments. The reports shall be accompanied by a certificate of
Borrower, signed by the President or Chief Financial Officer of Borrower, which
shall state whether an Event of Default or a Default has occurred. With respect
to the monthly financial statements relating to the last month of a fiscal
quarter, such certificate shall have appended thereto calculations which set
forth Borrower's compliance with
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the requirements or restrictions imposed by Sections 6.5, 6.8 and 6.9 hereof.
9.10. Other Reports. Furnish Lender as soon as available, but in any
event within twenty (20) days after the issuance thereof, with copies of such
financial statements, reports and returns as Borrower shall send to its
stockholders generally.
9.11. Additional Information. Furnish Lender with such additional
information as Lender shall reasonably request in order to enable Lender to
determine whether the terms, covenants, provisions and conditions of this
Agreement have been complied with by Borrower including, without limitation and
without the necessity of any request by Lender, (a) copies of all environmental
audits and reviews, (b) at least thirty (30) days prior thereto, notice of
Borrower's or Guarantor's opening of any new office or place of business or
Borrower's closing of any existing office or place of business, and (c) promptly
upon Borrower's or Guarantor's learning thereof, notice of any labor dispute to
which Borrower may become a party, any strikes or walkouts relating to any of
its plants or other facilities, and the expiration of any labor contract to
which Borrower or Guarantor is a party or by which Borrower or Guarantor is
bound.
9.12. Projected Operating Budget. Furnish Lender, no later than
forty-five (45) days after the beginning of each of Borrower's fiscal years
commencing with fiscal year 1998, a month by month projected operating budget
and cash flow of Borrower (on a consolidated basis) for such fiscal year
(including an income statement for each month and a balance sheet as at the end
of the last month in each fiscal quarter), such projections to be accompanied by
a certificate signed by Borrower's President or Chief Financial Officer to the
effect that such projections have been prepared on the basis of sound financial
planning practice consistent with past budgets and financial statements and that
such officer has no reason to question the reasonableness of any material
assumptions on which such projections were prepared.
9.13. Revisions to Projections. Promptly furnish Lender, on a quarterly
basis, any revisions of the projections delivered pursuant to Section 9.12
hereof, giving effect to actual year to date results and anticipated results for
the balance of the applicable fiscal year.
9.14. Notice of Suits, Adverse Events. Furnish Lender with prompt
notice of (i) any lapse or other termination of any Consent issued to Borrower
or Guarantor by any Governmental Authority or any other Person that is material
to the operation of Borrower's or Guarantor's business, (ii) any refusal by any
Governmental Authority or any other Person to renew or extend any such Consent;
and (iii) copies of any periodic or special reports filed by Borrower or
Guarantor with any Governmental Authority or Person, if such reports indicate
any material change in the business, operations, affairs or condition of
Borrower or Guarantor , or if copies thereof are requested by Lender, and (iv)
copies of any material notices and other communications from any Governmental
Authority or Person which specifically relate to Borrower or Guarantor.
9.15. ERISA Notices and Requests. Furnish Lender with immediate written
notice in the event that (i) Borrower, Guarantor or any member of a Controlled
Group knows or has reason to know that a Lien has arisen in respect of any Plan
(except for current contribution
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amounts not due and unpaid) or that a Termination Event has occurred, together
with a written statement describing such Termination Event and the action, if
any, which Borrower, Guarantor or member of a Controlled Group has taken, is
taking, or proposes to take with respect thereto and, when known, any action
taken or threatened by the Internal Revenue Service, Department of Labor,
Pension Regulator, PBGC or any other Governmental Authority or Person (except
for benefit claims in the ordinary course)with respect thereto, (ii) Borrower,
Guarantor or any member of a Controlled Group knows or has reason to know that a
prohibited transaction (as defined in Sections 406 of ERISA and 4975 of the
Internal Revenue Code) has occurred together with a written statement describing
such transaction and the action which Borrower or any member of the Controlled
Group has taken, is taking or proposes to take with respect thereto, (iii) a
funding waiver or holiday request has been filed or taken with respect to any
Plan of Borrower together with all communications received by Borrower or any
member of the Controlled Group with respect to such request or action, (iv) the
establishment of any new Plan or the commencement of contributions to any Plan
to which Borrower, Guarantor or any member of the Controlled Group was not
previously contributing shall occur, (v) Borrower, Guarantor or any member of
the Controlled Group shall receive from the PBGC, Pension Regulator or other
Governmental Authority or notice of proposal to windup any Plan or notice of
proposal to appoint an administrator in respect of any Plan or any other notice
of intention to terminate or wind up (in whole or in part) a Plan or to have a
trustee appointed to administer a Plan, together with copies of each such
notice, (vi) Borrower, Guarantor or any member of the Controlled Group shall
receive any unfavorable determination letter from the Internal Revenue Service
regarding the qualification of a Plan under Section 401(a) of the Internal
Revenue Code, together with copies of each such letter; (vii) Borrower,
Guarantor or any member of the Controlled Group shall receive a notice regarding
the imposition of withdrawal liability, together with copies of each such
notice; (viii) Borrower, Guarantor or any member of the Controlled Group shall
fail to make a required installment or any other required payment or remittance
in respect of any Plan on or before the due date for such installment or
payment; (ix) Borrower or any member of the Controlled Group knows that (a) a
Multiemployer Plan has been terminated, (b) the administrator or plan sponsor of
a Multiemployer Plan intends to terminate a Multiemployer Plan, or (c) the PBGC
has instituted or will institute proceedings under Section 4042 of ERISA to
terminate a Multiemployer Plan. Borrower shall forthwith provide to Lender a
copy of each actuarial valuation made in respect of any Plan of Borrower or
Guarantor that is filed with a Pension Regulator.
9.16. Additional Documents. Execute and deliver to Lender, upon
request, such documents and agreements as Lender may, from time to time,
reasonably request to carry out the purposes, terms or conditions of this
Agreement.
X. EVENTS OF DEFAULT.
The occurrence of any one or more of the following events shall
constitute an "Event of Default":
10.1. failure by Borrower to pay any principal or interest on the
Obligations when due, whether at maturity or by reason of acceleration pursuant
to the terms of this Agreement or by
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notice of intention to prepay, or by required prepayment or failure to pay any
other liabilities or make any other payment, fee or charge provided for herein
when due;
10.2. any representation or warranty made or deemed made by Borrower or
Guarantor in this Agreement, any of the Other Documents or any related agreement
or in any certificate, document or financial or other statement furnished at any
time in connection herewith or therewith shall prove to have been misleading in
any material respect on the date when made or deemed to have been made;
10.3. failure by Borrower or Guarantor to (i) furnish financial
information when due or when requested, or (ii) permit the inspection of its
books or records;
10.4. issuance of a notice of Lien, levy, assessment, injunction or
attachment against a material portion of Borrower's or Guarantor's property
which is not stayed or lifted within thirty (30) days;
10.5. failure or neglect of Borrower or Guarantor to perform, keep or
observe any term, provision, condition, covenant herein contained, or contained
in any other agreement or arrangement, now or hereafter entered into between
Borrower or Guarantor and Lender other than a failure or neglect of Borrower or
Guarantor to perform, keep or observe any term, provision, condition or
covenant, contained in Sections 4.6, 4.7, 4.9, 6.4 or 9.6 hereof which is cured
within thirty (30) days from the occurrence of such failure or neglect;
10.6. one or more judgments is rendered or judgment liens or writs of
seizure, execution or similar process or distress or hypothecary right of a
landlord or any right of an unpaid seller to reclaim or repossess any property
shall be issued, exercised or filed against Borrower or Guarantor for an amount
in excess of $500,000 in the aggregate which within thirty (30) days of such
rendering or filing are not either satisfied, stayed or discharged of record;
10.7. Borrower shall (i) apply for or consent to the appointment of, or
the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of creditors, (iii) commence a voluntary case under
any state or federal bankruptcy laws (as now or hereafter in effect), (iv) be
adjudicated a bankrupt or insolvent, (v) file a petition seeking to take
advantage of any other law providing for the relief of debtors, (vi) acquiesce
to, or fail to have dismissed, within thirty (30) days, (x) any petition filed
against it in any involuntary case under such bankruptcy laws, or (y) any
proceeding or petition seeking the appointment of a receiver, custodian, trustee
or liquidator of itself or all or a substantial part of its property, or (vii)
take any action for the purpose of effecting any of the foregoing;
10.8. Borrower shall admit in writing its inability, or be generally
unable, to pay its debts as they become due or cease operations of its present
business;
10.9. Guarantor or any other Subsidiary of Borrower shall (i) apply for
or consent to the
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appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of all or a substantial part of its property, (ii)
admit in writing its inability, or be generally unable, to pay its debts as they
become due or cease operations of its present business, (iii) make a general
assignment for the benefit of creditors or, in the case of Guarantor or any
Canadian Subsidiary, file any proposal or notice of intent to file a proposal,
(iv) commence a voluntary proceeding under any state, province or federal
bankruptcy, insolvency, liquidation, winding up or restructuring laws (as now or
hereafter in effect) (collectively "Bankruptcy Laws"), (v) be adjudicated a
bankrupt or insolvent, (vi) file a petition or otherwise institute any
proceeding seeking to take advantage of any other law providing for the relief
of debtors, (vii) acquiesce to, or fail to have dismissed, within thirty (30)
days, (x) any petition, action, proposal or proceeding filed or instituted
against it in any involuntary case under such Bankruptcy Laws or (y) any action
or proceeding or petition seeking the appointment of a receiver, custodian,
administrator, monitor, trustee or liquidator of itself or all or a substantial
part of its property, or (viii) take any action for the purpose of effecting any
of the foregoing;
10.10. any change in Borrower's or Guarantor's condition or affairs
(financial or otherwise) which in Lender's good faith opinion materially and
adversely impairs the Collateral or the ability of Borrower to perform its
Obligations under this Agreement or of Guarantor under the Guarantee;
10.11. any Lien created hereunder or provided for hereby or under the
Other Documents for any reason ceases to be or is not a valid and perfected Lien
having a first priority interest;
10.12. a default of the obligations of Borrower or Guarantor under the
Other Documents or any other agreement to which it is a party shall occur which
materially and adversely affects its condition, affairs or prospects (financial
or otherwise) which default is not cured within any applicable grace period;
10.13. termination or breach of any Guarantee or similar agreement
executed and delivered to Lender in connection with the Obligations of Borrower,
or if any Guarantor attempts to terminate, challenges the validity of, or its
liability under, any such Guarantee or similar agreement or, Guarantor fails to
perform or observe any of its obligations under the Other Documents to which it
is party or shall challenge the validity, binding effect or enforceability of
any such Other Documents;
10.14. any Change of Control or if Borrower ceases to own 100% of the
capital stock of Guarantor;
10.15. any material provision of this Agreement shall, for any reason,
cease to be valid and binding on Borrower, or Borrower shall so claim in writing
to Lender;
10.16. (i) any Governmental Authority shall (A) revoke, terminate,
suspend or adversely modify any license, permit, patent trademark or tradename
of Borrower or Guarantor, the continuation of which is material to the
continuation of Borrower's or Guarantor's business, or
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(B) commence proceedings to suspend, revoke, terminate or adversely modify any
such license, permit, trademark, tradename or patent and such proceedings shall
not be dismissed or discharged within sixty (60) days, or (c) schedule or
conduct a hearing on the renewal of any license, permit, trademark, tradename or
patent necessary for the continuation of Borrower's or Guarantor's business and
the staff of such Governmental Authority issues a report recommending the
termination, revocation, suspension or material, adverse modification of such
license, permit, trademark, tradename or patent; (ii) any agreement which is
necessary or material to the operation of Borrower's or Guarantor's business
shall be revoked or terminated and not replaced by a substitute acceptable to
Lender within thirty (30) days after the date of such revocation or termination,
and such revocation or termination and non-replacement would have a material
adverse effect on Borrower's or Guarantor's business or financial condition;
10.17. any portion of the Collateral shall be seized or taken by a
Governmental Authority, or Borrower or Guarantor or the title and rights of
Borrower or Guarantor or any Original Owner which is the owner of any material
portion of the Collateral shall have become the subject matter of litigation
which might, in the opinion of Lender, upon final determination, result in
impairment or loss of the security provided by this Agreement or the Other
Documents;
10.18. an event or condition specified in Sections 7.16 or 9.15 hereof
shall occur or exist with respect to any Plan and, as a result of such event or
condition, together with all other such events or conditions, Borrower,
Guarantor or any member of the Controlled Group shall incur, or in the opinion
of Lender be reasonably likely to incur, a liability to a Plan or the applicable
Governmental Authority, including as applicable the Pension Regulator or PBGC,
(or both) which, in the reasonable judgment of Lender, would have a material
adverse effect upon the Collateral or the ability of Borrower or Guarantor to
perform its Obligations under this Agreement or the Other Documents; or
10.19. any Event of Default shall occur under any of the Guarantor
Security Documents.
XI. BANK'S RIGHTS AND REMEDIES AFTER DEFAULT.
11.1. Rights and Remedies. Upon the occurrence of (i) an Event of
Default pursuant to Article 10.7 all Obligations shall be immediately due and
payable and this Agreement and the obligation of Lender to make Advances shall
be deemed terminated; (ii) any of the other Events of Default and at any time
thereafter (such default not having previously been cured), at the option of
Lender all Obligations shall be immediately due and payable and Lender shall
have the right to terminate this Agreement and to terminate the obligation of
Lender to make Advances; and (iii) a filing of a petition against Borrower in
any involuntary case under any state or federal bankruptcy laws the obligation
of Lender to make Advances hereunder shall be terminated other than as may be
required by an appropriate order of the bankruptcy court having jurisdiction
over Borrower. Upon the occurrence of any Event of Default, Lender shall have
the right to exercise any and all other rights and remedies provided for herein,
under the Uniform Commercial Code, the PPSA, including rights as a hypothecary
creditor under the Civil Code of Quebec, and at law or equity
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generally, including, without limitation, the right to foreclose the security
interests granted herein and to realize upon any Collateral by any available
judicial procedure or to take possession of and sell any or all of the
Collateral with or without judicial process. Lender may enter any of Borrower's
premises or other premises without legal process and without incurring liability
to Borrower therefor, and Lender may thereupon, or at any time thereafter, in
its discretion without notice or demand, take the Collateral and remove the same
to such place as Lender may deem advisable and Lender may require Borrower to
make the Collateral available to Lender at a convenient place. With or without
having the Collateral at the time or place of sale, Lender may sell the
Collateral, or any part thereof, at public or private sale, at any time or
place, in one or more sales, at such price or prices, and upon such terms,
either for cash, credit or future delivery (other than Guarantor Collateral), as
Lender may elect. Except as to that part of the Collateral which is perishable
or threatens to decline speedily in value or is of a type customarily sold on a
recognized market, Lender shall give Borrower reasonable notification of such
sale or sales, it being agreed that in all events written notice mailed to
Borrower at least five (5) days prior to such sale or sales is reasonable
notification. At any public sale Lender may bid for and become the purchaser,
and Lender or any other purchaser at any such sale thereafter shall hold the
Collateral sold absolutely free from any claim or right of whatsoever kind,
including any equity of redemption and such right and equity are hereby
expressly waived and released by Borrower. In connection with the exercise of
the foregoing remedies, Lender is granted permission to use without charge all
of Borrower's trademarks, trade styles, trade names, patents, patent
applications, licenses, franchises and other proprietary rights which are used
in connection with (a) Inventory for the purpose of disposing of such Inventory
and (b) Equipment for the purpose of completing the manufacture of unfinished
goods. The proceeds realized from the sale of any Collateral (other than
Guarantor Collateral) shall be applied as follows: first, to the reasonable
costs, expenses and attorneys' fees and expenses incurred by Lender for
collection and for acquisition, completion, protection, removal, storage, sale
and delivery of the Collateral; second, to interest due upon any of the
Obligations; and, third, to the principal of the Obligations. If any deficiency
shall arise, Borrower shall remain liable to Lender therefor. All proceeds
realized from the sale of any Guarantor Collateral and payments made by
Guarantor pursuant to the Guarantee or otherwise shall be applied as follows:
first, to the principal of the Obligations; second, to reasonable costs and
expenses incurred by the Lender; and third, to interest due upon or compromised
in the Obligations and to any other Obligations then due.
11.2. Lender's Discretion. Lender shall have the right in its sole
discretion to determine which rights, Liens, security interests or remedies
Lender may at any time pursue, relinquish, subordinate, or modify or to take any
other action with respect thereto and such determination will not in any way
modify or affect any of Lender's rights hereunder.
11.3. Setoff. In addition to any other rights which Lender may have
under applicable law, upon the occurrence of an Event of Default hereunder,
Lender shall have a right to apply any of Borrower's or Guarantor's property
held by Lender to reduce the Obligations.
11.4. Rights and Remedies not Exclusive. The enumeration of the
foregoing rights and remedies is not intended to be exhaustive and the exercise
of any right or remedy shall not
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preclude the exercise of any other right or remedies, all of which shall be
cumulative and not alternative.
XII. WAIVERS AND JUDICIAL PROCEEDINGS.
12.1. Waiver of Notice. Borrower hereby waives notice of non-payment of
any of the Receivables, demand, presentment, protest and notice thereof with
respect to any and all in struments, notice of acceptance hereof, notice of
loans or advances made, credit extended, Collateral received or delivered, or
any other action taken in reliance hereon, and all other demands and notices of
any description, except such as are expressly provided for herein.
12.2. Delay. No delay or omission on Lender's part in exercising any
right, remedy or option shall operate as a waiver of such or any other right,
remedy or option or of any default.
12.3. Jury Waiver. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES
ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A)
ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT
EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH
OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM
WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT
EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO
OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE AND EACH PARTY HEREBY CONSENTS THAT
ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT
TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENTS OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
XIII. EFFECTIVE DATE AND TERMINATION.
13.1. Term. This Agreement, which shall inure to the benefit of and
shall be binding upon the respective successors and permitted assigns of each of
Borrower and Lender, shall become effective on the date hereof and shall
continue in full force and effect until the last day of the Term unless sooner
terminated as herein provided. The Term shall be automatically extended for
successive periods of one (1) year each unless terminated by either party at the
end of such initial Term or any successive Term by giving the other party sixty
(60) days prior written notice. Borrower may terminate this Agreement at any
time upon ten (10) days' prior written notice ("Termination Date") upon payment
in full of the Obligations.
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<PAGE> 67
13.2. Termination. The termination of the Agreement shall not affect
any of Borrower's or Lender's rights, or any of the Obligations having their
inception prior to the effective date of such termination, and the provisions
hereof shall continue to be fully operative until all transactions entered into,
rights or interests created or Obligations have been fully disposed of,
concluded or liquidated. The security interests, Liens and rights granted to
Lender hereunder and the financing statements filed hereunder shall continue in
full force and effect except as set forth in Section 4.21, notwithstanding the
termination of this Agreement or the fact that Borrower's account may from time
to time be temporarily in a zero or credit position, until all of the
Obligations of Borrower have been paid or performed in full after the
termination of this Agreement or Borrower has furnished Lender with an
indemnification satisfactory to Lender with respect thereto. Accordingly,
Borrower waives any rights which it may have under Section 9- 404(1) of the
Uniform Commercial Code to demand the filing of termination statements with
respect to the Collateral, and Lender shall not be required to send such
termination statements to Borrower, or to file them with any filing office,
unless and until this Agreement shall have been terminated in accordance with
its terms and all Obligations paid in full in immediately available funds. All
representations, warranties, covenants, waivers and agreements contained herein
shall survive termination hereof until all Obligations are repaid or performed
in full.
XIV. MISCELLANEOUS.
14.1. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applied to contracts to be
performed wholly within the State of New York. Any judicial proceeding brought
by or against Borrower with respect to any of the Obligations, this Agreement or
any related agreement may be brought in any court of competent jurisdiction in
the State of New York, United States of America, and, by execution and delivery
of this Agreement, Borrower accepts for itself and in connection with its
properties, generally and unconditionally, the non-exclusive jurisdiction of the
aforesaid courts, and irrevocably agrees to be bound by any judgment rendered
thereby in connection with this Agreement. Nothing herein shall affect the right
to serve process in any manner permitted by law or shall limit the right of
Lender to bring proceedings against Borrower in the courts of any other
jurisdiction. Borrower waives any objection to jurisdiction and venue of any
action instituted hereunder and shall not assert any defense based on lack of
jurisdiction or venue or based upon forum non conveniens. Any judicial
proceeding by Borrower against Lender involving, directly or indirectly, any
matter or claim in any way arising out of, related to or connected with this
Agreement or any related agreement, shall be brought only in a federal or state
court located in the City of New York, State of New York.
14.2. Entire Understanding. This Agreement and the documents executed
concurrently herewith contain the entire understanding between Borrower and
Lender and supersedes all prior agreements and understandings, if any, relating
to the subject matter hereof. Any promises, representations, warranties or
guarantees not herein contained and hereinafter made shall have no force and
effect unless in writing, signed by Borrower's and Lender's respective officers.
Neither this Agreement nor any portion or provisions hereof may be changed,
modified, amended, waived,
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<PAGE> 68
supplemented, discharged, cancelled or terminated orally or by any course of
dealing, or in any manner other than by an agreement in writing, signed by the
party to be charged. Borrower acknowledges that it has been advised by counsel
in connection with the execution of this Agreement and Other Documents and is
not relying upon oral representations or statements inconsistent with the terms
and provisions of this Agreement.
14.3. Successors and Assigns; Participations; New Lenders.
(a) This Agreement shall be binding upon and inure to the
benefit of Borrower, Lender, all future holders of the Notes and their
respective successors and assigns, except that Borrower may not assign or
transfer any of its rights or obligations under this Agreement without the prior
written consent of Lender.
(b) Lender may sell, assign or transfer all or any part of its
rights under this Agreement and all related agreements, instruments and
documents provided Borrower is given notice of such sale as soon as practicable
and the transferee agrees to perform the obligations of the transferor; in
addition to the foregoing, Borrower acknowledges that in the regular course of
commercial banking business Lender may at any time and from time to time sell
participating interests in the Advances to other financial institutions (each
such transferee or purchaser of a participating interest, a "Transferee"). Each
Transferee may exercise all rights of payment (including without limitation
rights of set-off) with respect to the portion of such Advances held by it or
other Obligations payable hereunder as fully as if such Transferee were the
direct holder thereof. Borrower hereby grants to any Transferee a continuing
security interest in any deposits, moneys or other property actually or
constructively held by such Transferee as security for the Transferee's interest
in the Advances.
14.4. Application of Payments. Lender shall, subject to Section 11.1
hereof, have the continuing and exclusive right to apply or reverse and re-apply
any payment and any and all proceeds of Collateral to any portion of the
Obligations. To the extent that Borrower or Guarantor makes a payment or Lender
receives any payment or proceeds of the Collateral for Borrower's or Guarantor's
benefit, which are subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee, debtor in
possession, receiver, custodian or any other party under any bankruptcy law,
common law or equitable cause, then, to such extent, the Obligations or part
thereof intended to be satisfied shall be revived and continue as if such
payment or proceeds had not been received by Lender.
14.5. Indemnity. Borrower shall indemnify Lender from and against any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses and disbursements of any kind or nature
whatsoever (including, without limitation, fees and disbursements of counsel)
which may be imposed on, incurred by, or asserted against Lender in any
litigation, proceeding or investigation instituted or conducted by any
governmental agency or instrumentality or any other Person with respect to any
aspect of, or any transaction contemplated by, or referred to in, or any matter
related to, this Agreement or the Other Documents, whether or not Lender is a
party thereto, except to the extent that any of the foregoing arises out of the
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<PAGE> 69
willful misconduct of Lender.
14.6. Notice. Any notice or request hereunder may be given to Borrower
or to Lender at their respective addresses set forth below or at such other
address as may hereafter be specified in a notice designated as a notice of
change of address under this Section. Any notice or request hereunder shall be
given by (a) hand delivery, (b) overnight courier, (c) registered or certified
mail, return receipt requested, or (c) telecopy to the number set out below (or
such other number as may hereafter be specified in a notice designated as a
notice of change of address) with telephone communication to a duly authorized
officer of the recipient confirming its receipt as subsequently confirmed by
registered or certified mail. Any notice or other communication required or
permitted pursuant to this Agreement shall be deemed given (a) when personally
delivered to any officer of the party to whom it is addressed, (b) on the
earlier of actual receipt thereof or three (3) days following posting thereof by
certified or registered mail, postage prepaid, or (c) upon actual receipt
thereof when sent by a recognized overnight delivery service or (d) upon actual
receipt thereof when sent by telecopier to the number set forth below with
telephone communication confirming receipt and subsequently confirmed by
registered, certified or overnight mail to the address set forth below, in each
case addressed to each party at its address set forth below or at such other
address as has been furnished in writing by a party to the other by like notice:
(A) If to Lender, at: BNY Financial Corporation
1290 Avenue of the
Americas
New York, New York
10104
Attention: Anthony Viola
Telephone: (212) 408-4096
Telecopier: (212) 408-4313
with a copy to: Hahn & Hessen, LLP
350 Fifth Avenue
New York, New York 10118
Attention: Steven J. Seif, Esq.
Telephone: (212) 736-1000
Telecopier: (212) 594-7167
(B) If to Borrower, at: Cold Metal Products, Inc.
8526 South Avenue
Youngstown, Ohio 44514
Attention: Allen R. Morrow
Telephone: (216) 758-1194
Telecopier: (216) 758-2705
with a copy to: Cohen Swados Wright Hanifin
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<PAGE> 70
Bradford & Brett, LLP
Seventy Niagara Street
Buffalo, New York 14202-3467
Attention: Douglas G. Kirkpatrick, Esq.
Telephone: (716) 856-4600
Telecopier: (716) 856-5228
14.7. Severability. If any part of this Agreement is contrary to,
prohibited by, or deemed invalid under applicable laws or regulations, such
provision shall be inapplicable and deemed omitted to the extent so contrary,
prohibited or invalid, but the remainder hereof shall not be invalidated thereby
and shall be given effect so far as possible.
14.8. Expenses. All costs and expenses including, without limitation,
reasonable attorneys' fees and disbursements incurred by Lender (a) in all
efforts made to enforce payment of any Obligation or effect collection of any
Collateral, or (b) in connection with the entering into, modification,
amendment, administration and enforcement of this Agreement or the Other
Documents or any consents or waivers hereunder and all related agreements,
documents and instruments, or (c) in instituting, maintaining, preserving,
enforcing and foreclosing on Lender's security interest in or Lien on any of the
Collateral, whether through judicial proceedings or otherwise, or (d) in
defending or prosecuting any actions or proceedings arising out of or relating
to Lender's transactions with Borrower, or (e) in connection with any advice
given to Lender with respect to its rights and obligations under this Agreement
and all related agreements, may be charged to Borrower's account and shall be
part of the Obligations.
14.9. Injunctive Relief. Borrower recognizes that, in the event
Borrower fails to perform, observe or discharge any of its obligations or
liabilities under this Agreement, any remedy at law may prove to be inadequate
relief to Lender; therefore, Lender, if Lender so requests, shall be entitled to
temporary and permanent injunctive relief in any such case without the necessity
of proving actual damages.
14.10. Consequential Damages. Neither Lender nor any agent or attorney
for Lender shall be liable to Borrower for consequential damages arising from
any breach of contract, tort or other wrong relating to the establishment,
administration or collection of the Obligations.
14.11. Captions. The captions at various places in this Agreement are
intended for convenience only and do not constitute and shall not be interpreted
as part of this Agreement.
14.12. Counterparts; Telecopied Signatures. This Agreement may be
executed in any number of and by different parties hereto on separate
counterparts, all of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute one and the same agreement. Any signature
delivered by a party by facsimile transmission shall be deemed to be an original
signature..
14.13. Construction. The parties acknowledge that each party and its
counsel have
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<PAGE> 71
reviewed this Agreement and that the normal rule of construction to the effect
that any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement or any amendments, schedules or
exhibits thereto.
64
<PAGE> 72
Each of the parties has signed this Agreement as of the day and year
first above written.
COLD METAL PRODUCTS, INC.
By: /s/ A. R. MORROW
-----------------------
Its: Vice President
SEAL:
Address: 8526 South Avenue
Youngstown, Ohio 44514
BNY FINANCIAL CORPORATION
By: /s/ ANTHONY VIOLA
------------------------
Its: Vice President
Address: 1290 Avenue of the Americas
New York, New York 10104
ACKNOWLEDGED AND AGREED:
COLD METAL PRODUCTS, LIMITED.
By: /s/ JAMES R. HARPSTER
- ---------------------------
Its: President
65
<PAGE> 73
STATE OF Ohio )
ss.
COUNTY OF Mahoning )
On this 27th day of March, 1998, before me personally came Allen R.
Morrow, to me known, who, being by me duly sworn, did depose and say that he is
the Vice President of COLD METAL PRODUCTS, INC. the corporation described in and
which executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the board of directors of said corporation,
and that he signed his name thereto by like order.
/s/ TONI MAULE
---------------------
Notary Public
STATE OF Ohio )
ss.
COUNTY OF Mahoning )
On this 27th day of March, 1998, before me personally came James R.
Harpster, to me known, who, being by me duly sworn, did depose and say that he
is the President of COLD METAL PRODUCTS, LIMITED. the corporation described in
and which executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the board of directors of said corporation,
and that he signed his name thereto by like order.
STATE OF NEW YORK )
ss.
COUNTY OF NEW YORK )
On this 30th day of March, 1998, before me personally came Anthony
Viola, to me known, who, being by me duly sworn, did depose and say that he is
the Vice President of BNY FINANCIAL CORPORATION, the corporation described in
and which executed the foregoing instrument and that he signed his name thereto
by order of the board of directors of said corporation.
/s/ WYNANDA ROSENBERG
------------------------
Notary Public
66
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to incorporation by reference in Registration Statements No. 33-82818
and No. 33-82992 of Cold Metal Products, Inc. on Form S-8 of our report dated
May 8, 1998, appearing in the Annual Report on Form 10-K of Cold Metal Products,
Inc. for the year ended March 31, 1998.
/s/ Deloitte & Touche
- -----------------------
Cleveland, Ohio
June 22, 1998
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,140
<SECURITIES> 0
<RECEIVABLES> 36,546
<ALLOWANCES> (550)
<INVENTORY> 53,703
<CURRENT-ASSETS> 93,973
<PP&E> 80,583
<DEPRECIATION> (33,203)
<TOTAL-ASSETS> 150,381
<CURRENT-LIABILITIES> 37,200
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> 35,634
<TOTAL-LIABILITY-AND-EQUITY> 150,381
<SALES> 289,213
<TOTAL-REVENUES> 289,213
<CGS> 264,799
<TOTAL-COSTS> 264,799
<OTHER-EXPENSES> 16,019
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 4,624
<INCOME-PRETAX> 3,771
<INCOME-TAX> 1,438
<INCOME-CONTINUING> 2,333
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,333
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
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